Denso Manufacturing UK Ltdv Great Lakes Reinsurance (UK) plc  EWHC 391 (Comm)
Zurich Insurance plc v Maccaferri Ltd  EWCA Civ 1302
Two recent cases on conditions precedent – one in favour of the insurer and one against – illustrate that arguments over the meaning of key insurance terms will continue against the backdrop of the Insurance Act 2015.
A condition precedent is a contract term which, if breached, will entitle an insurer to avoid cover irrespective of whether any prejudice has been suffered.
Zurich v Maccaferri
In Maccaferri, the Court of Appeal considered whether the insured (M) had breached a condition precedent to notify the insurer (Z) ‘as soon as possible after the occurrence of any event likely to give rise to a claim’. Such notification clauses are common place in liability policies, though the precise wording does vary.
The case was fact sensitive. The underlying claim under the policy involved personal injury claim in which the Claimant injured himself using a tool hired from M. M found out shortly after the accident that there had been an incident involving the use of the tool though the reports were short on detail and there was little to indicate that the accident was due to a fault with the tool, as opposed to other reasons. At a further point between the accident in September 2011 and the claim being brought against M in July 2013, M received further information that gave it a more concrete suspicion that a claim might be brewing.
The Court found that M had not breached the condition in failing to report to the insurer immediately following the accident. ‘Likely to give rise to a claim’ meant there should be at least a 50% chance that a claim would be made. The subject knowledge of the insured was important and, taking that into account, the threshold had not been met.
Z then sought to argue that subsequent information obtained at a later time meant that a claim should have been considered more than likely. Z relied upon the phrase ‘as soon as possible’ to argue that M had a duty to notify as soon as their fears became (or should, through reasonable enquiry, have become) sufficiently concrete to pass that 50% threshold. The court disagreed. Such an interpretation of the clause was strained and any ambiguity should be decided in favour of the insured. The clause in question did not impose a requirement to carry out a continual reassessment of the likelihood of a claim arising. It merely referred to the state of play immediately following the incident. Of course, if a claim was subsequently made, the insured would be separately obliged to report it immediately under the terms of the policy.
Denso v Great Lakes
In Denso, the court considered conditions precedent in an After the Event (“ATE”) policy. The policyholder Mploy went into liquidation following the outcome of a largely unsuccessful claim against Denso (D) in which it was ordered to pay the bulk of Denso’s costs (having failed to beat a Part 36 offer). Denso exercised its rights under the Third Parties (Rights Against Insurers) Act 1930 to step into Mploy’s shoes and recover its costs from the insurer Great Lakes (GL). In turn, GL refused indemnity on the basis that various ‘claims co-operation’ provisions had been breached, most notably concerning timely reporting of offers and provision of key information/correspondence.
The first issue was whether the conditions were capable of being conditions precedent. There was a general roll up provision that: “due observance of and compliance with the terms… insofar as they relate to anything to be done or complied with… shall be conditions precedent”. The claims co-operation provisions, of their nature, required the insured to actively do certain things.
The Judge had little difficulty in deciding that the claims co-operation provisions were indeed conditions precedent when considering the commercial purpose they were aimed at. The Judge had in mind the nature of an ATE policy and in particular the fact that an insurer had no direct role to play in the underlying litigation and was therefore heavily reliant upon the insured to provide information. This was particularly the case once litigation had concluded and the insured (the losing party) might have little ongoing incentive to actively participate, yet the insurer’s liability remained very much at large.
The Court went on to hold that the conduct complained of (failing to report in a timely manner upon offers and subsequently the notice of commencement of detailed assessment proceedings) did amount to breaches and that GL was entitled to refuse indemnity.
Denso did attempt to rely upon the decision in Maccaferri (as the liquidation gave rise to issues concerning subjective knowledge) but such arguments were given short shrift by the Judge.
The differing fortunes of the insurers illustrate that Courts, as they should, will look at individual clauses of a policy on their own merits. Both decisions were grounded in commercial common sense and by weighing up the prejudice insurers would suffer by breach of an obligation as against the obligations that an insured should reasonably be expected to bear.
The wording of the clause is and remains key to interpretation. Z lost its argument because the clause was not sufficiently clear to impose an obligation to continually reassess knowledge of an incident. A different wording may have seen a different result. Furthermore, notification clauses commonly set the bar at reporting matters that ‘may’ rather than ‘is likely to’ give rise to claim. Had that been the case, M may very well have breached such an obligation for failing to report what it knew immediately following the accident.
Maccaferri is just one example of a case where the insurer failed to defend its decision to decline cover and the situation is rarely as clear-cut as the insurer maintains. Policyholders should seek specialist guidance in circumstances where an insurer is seeking to rely upon a condition precedent or other grounds to decline cover. For every case that reaches Court, countless others can be resolved with the right assistance and a clear strategy.
If you wish to discuss the issues in these cases, or any dispute over the scope of cover under an insurance policy, please contact Alistair Stewart.