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Timing - The Significance of Prompt Notice of Claim or Circumstance
London & Bermuda Newsletter
In recent times, the status of “procedural” policy provisions has exercised the English commercial courts considerably. The difference in status between procedural conditions which are conditions precedent to claims, and those which are not, is important. Failure to comply with a condition precedent may entitle insurers to decline a claim. A mere “condition” is toothless; breach does not affect the validity of the claim, and insurers’ only remedy is damages for prejudice – something notoriously difficult to establish.
Three recent cases cast substantial light on issues key to this topic. These issues are: the status of deeming provisions in claims made policies concerning notice of circumstances; how much care insurers must take to preserve rights for breach; and the approach the court takes in determining whether a procedural provision is a condition precedent.
Notifying circumstances - claims-made or occurrence?
Does it matter when the insured notifies the circumstances? Deeming clauses about circumstances seldom actually say that they are conditions precedent to claims. Does that mean they are mere conditions, so that insurers’ only remedy for late notice is compensation for prejudice? The issue is crucial to the very structure of claims-made policies. The Court of Appeal recognised this in Kidsons and gave full effect to the structure.
Details of the “circumstances” in Kidsons appear above. Kidsons notified the circumstances to the following market three months after policy expiry and almost 11 months after first presentation to the lead. This was not “as soon as practicable”, but what was the effect of that default?
The policy incorporated “Minimum Approved Wording” stipulated by the Institute of Chartered Accountants (ICA) which, the policy provided, took “precedence over any terms conditions exclusions or limitations contained herein which are less favourable to the Assured”. The ICA wording stated that insurers’ only remedy for breach was damages. In other words, breach did not entitle insurers to decline a claim, only set off any prejudice caused.
Kidsons argued the claims were covered regardless of whether they notified “as soon as practicable”. Notice of circumstances, at any time, meant future claims would attach. Insurers might be entitled to compensation, but they couldn’t decline claims.
The Court of Appeal upheld the first instance judge’s decision that insurers could decline claims for late notice of circumstances. An obligation in a claims-made policy to notify circumstances “as soon as practicable” has to be a condition precedent. If it were not, the basis of cover would change: notice years after expiry would cause claims to attach, just because circumstances were known during policy period. That typifies an occurrence basis of cover; it conflicts fundamentally with a claims-made basis. The saving provisions in the ICA wording could not undermine this.
Waiving rights under notification provisions
How careful must an insurer be to preserve rights to decline a claim for breach of a procedural condition precedent? At one stage, a popular view held it was easier for insurers to lose rights arising from breach of a notification condition precedent, than to lose rights for, say, breach of warranty or conditional precedent concerning payment of premium. For the latter, the insurer has to do something spectacular – unequivocally represent to the insured it does not intend to raise a defence. However, a procedural right (the view went) is more fragile. Essentially, the insurer need only conduct itself as if the claim was covered – known as waiver by “election”. Two recent decisions have exploded that distinction.
Kosmar concerned an occurrence-based policy which required immediate notification of injury as a condition precedent to cover. A holiday-maker sustained serious injury in 2002 and sought to hold the tour operator, Kosmar, liable. Kosmar failed to notify insurers of the injury until 4 September 2003. The insurer began initial claims handling correspondence with the insured, but then issued a reservation of rights on 30 September 2003 on the basis of breach of condition precedent.
The Court of Appeal held that procedural conditions precedent are just like other conditions precedent and / or warranties: breach discharges the insurer from liability automatically. Nothing short of an unequivocal representation by the insurer that it does not intend to rely on the breach, and reliance by the insured to its detriment, can preclude the insurer from raising the defence.
In spite of the comfort this might afford, it is generally prudent to reserve rights in relation to potential breaches of procedural conditions at the earliest opportunity.
Kosmar Villa Holidays Plc v. Trustees of Syndicate 1243 ([2008] Lloyd’s Rep IR 43)
Notifying occurrences – when is a condition a condition precedent?
There is seldom any cast-iron guarantee that a provision is a condition precedent rather than mere condition. This is entirely a matter of construction by the court or arbitration panel. Labeling the provision as a condition precedent is a good means of achieving the effect, but carries no certainty of success. But whatever the precise wording, the tribunal is far more likely to find a provision is a condition precedent where there is a clear commercial purpose for its being so. The recent Commercial Court decision in Pectel is a useful illustration of this.
The facts in Pectel
Pectel was a contractor specialising in the removal of asbestos from commercial and government property. In March 2004 it was engaged in works related to British Telecom’s (BT) deep tunnel facility in Manchester, acting as subcontractor to AMEC. A fire occurred, for which blame was subsequently alleged by BT and AMEC to attach to Pectel.
Pectel had liability insurance with Aspen. Clause 4(a) of the conditions in the policy provided that the assured should give the nominated broker “immediate written notice with full particulars of any occurrence which may give rise to indemnity under this insurance.” There was a further relevant clause, condition 13, which stated that “the liability of Underwriters shall be conditional on the Assured paying in full the premium demanded and observing the terms and conditions of this insurance.”
Notice of the claim was not given until March 2007, following receipt by Pectel of a letter of claim dated 6 March 2007. The insurers argued that (i) Pectel had not complied with Clause 4(a), and (ii) compliance with the clause was a condition precedent to liability.
Meaning of ‘immediate’
The parties accepted that “immediate” in the context of notice meant “with all reasonable speed considering the circumstances of the case”. In light of this, the court found a reasonable person would have appreciated the fire was an occurrence which carried a real risk that a claim would be made, probably by April 2004, but at the latest by November 2004. Therefore Pectel had breached Clause 4(a).
Condition precedent
Did such breach entitle insurers to refuse an indemnity? The court found it did. Having reviewed the authorities, Teare J. said it was not necessary that a policy provision should contain the words “condition precedent” for it to have that status, provided the clause (read in the light of the whole policy) was apt to make that effect the clear intention of the parties. There had to be a “conditional link” between the assured’s obligation to give notice and the underwriters’ obligation to pay the claim.
Condition 13, read in conjunction with Clause 4(a), was apt to make clear the parties intended there to be such a conditional link between indemnity and the giving of “immediate” notice. Furthermore, the commercial purpose underlying Clause 4(a), which was to enable the underwriters to investigate the potential claim at the earliest opportunity, was further justification for a finding the condition was one precedent to liability, notwithstanding in some circumstances there might be uncertainty as to whether there had been failure to comply.
Conclusion
Whilst this decision is a cautionary one for assureds, it does also demonstrate for insurers (once again) the desirability of the most clear and precise language if there is an intention to make a policy term a condition precedent to liability. In spite of the courts’ concern to give effect to commercial purpose, the courts will not strive to find that a term amounts to such a condition if there is any doubt on the question. This is particularly so where the term is a “procedural” one involving notice, co-operation with insurers, or payment of premium.
Aspen Insurance UK Limited and Others v. Pectel Limited ([2008] EWHC 2804 (Comm))
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