Introduction
In this fifth of our series of monthly practice guides for claims managers in 2022, we consider certain key principles associated with certain terms commonly used in commercial insurance contracts, including warranties, suspensive conditions. and also “simple” (or “naked”). ) conditions 1. The legal consequences of non-compliance with each of these types of terms are very different.
Therefore, claims managers are advised to know how these terms are handled by the courts, including possible remedies available in the event of any qualifying breach. Below are examples of these typical policy terms. We also address the abolition of “contract basis” clauses in non-consumer insurance contracts made under the Insurance Act 20152 (the Act).
The effect of the Insurance Act of 2015
The Act introduced significant changes to the legal effect of certain conditions in insurance (and reinsurance) contracts. This followed the opinion of the Legal Commission that certain aspects of the insurance law had become obsolete since the Marine Insurance Act of 1906 (the MIA) was passed almost 120 years ago.
The opinion of the Legal Commission had been that, before the Law, certain key terms of the insurance contract worked to favor the insurers over the insured. For policies entered into on or after August 12, 2016 (including renewals, amendments, and approvals of policies entered into before August 12, 2016), the Act has materially affected the meaning and effect of some key terms3.
Although several commentators predicted that there would probably be a wave of litigation between policyholders as a result of the Act, so far it has not materialized. However, insurers should be aware of future court decisions related to the terms and conditions of the policy, as many of the issues we address in this article will benefit from additional consideration by the courts.
Of course, while investigating a claim, insurers have the right to reserve their rights, subject to the provisions of the Act and the law in general. We have considered the subject of the (p) reservation of rights in detail in our third edition of this series.
The different types of policy terms
‘Basis of the contract’ clauses
Pursuant to Article 9 of the Law (Guarantees and Representations), the use of the “basis of the contract” clauses has been removed and the parties are not entitled to contract outside of Article 9. In the regime above, a pre-contractual statement could be made. converted into a guarantee using the “contract basis” language. These clauses were frequently used by insurers to convert all responses to the proposal form into guarantees, with the effect that any inaccuracy in the proposal form would relieve insurers of all liability under the policy from the outset.
For contracts that fall within the scope of the Act, the position now is that any representation made by the policyholder in relation to a “proposed” policy can no longer be turned into a guarantee by any term of the policy. , or the proposal.
Guarantees
The MI (which remains a good law unless its provisions are replaced or amended by the Act) defines a “guarantee” as a term “by which the insured agrees that something in particular will be done or not, or that a condition must be fulfilled, or that it asserts or denies the existence of a particular state of affairs. ”The Act has not redefined any guarantee. of the assurance that something will be done – or will not be done – or that there is – or not – a specific situation.
Prior to changes made by law, if a policyholder breaches a warranty, the policyholder will automatically terminate the policy, regardless of whether the breach resulted in any loss or damage to the insurer. The insurer’s liability under the policy was released with immediate effect, and no recourse was available to the policyholder for whom he or she was entitled to correct such breach4.
Following the review by the Legal Commission, it was recommended that a policyholder be able to repair a breach of warranty. As a result, the law has been softened to the effect that if the policyholder takes the appropriate steps to rectify the breach, breach of warranty no longer automatically relieves the insurers of liability. In contrast, an infringement only suspends the liability of insurers, unless the policyholder solves it5.
In summary, the Act has brought about the following key changes:
- Insurers have no liability for any loss that occurs or is attributable to something as long as the policyholder continues to breach a warranty.
- Any breach will be deemed remedied when the policyholder ceases to breach the breach, or if the risk becomes the same as initially anticipated by the parties.
- When the non-compliance is resolved before the loss is suffered, insurers must pay the claim, subject to any other relevant policy conditions.
For example, if the policyholder guarantees that a burglar alarm is running, the insurer will not be at risk during the period during which this commitment is not met because the alarm has stopped working, e.g. but it will be at risk again. once the alarm is repaired. If the policyholder breaches a guarantee to take a certain step at a certain time, he will have remedied the non-compliance for the purposes of the Law once the step has been taken6. A guarantee may also be subject to section 11 of the Act (Conditions Not Relevant to Actual Loss), which we consider below.
It is important to note that insurers will not be liable for any breach of a guarantee in the following circumstances:
- The warranty is no longer applicable due to a change in circumstances.
- If the fulfillment of the guarantee is illegal by later law.
- The insurer waives the default7.
What constitutes a change of circumstances has yet to be proven in court and therefore remains an open question.
‘Mere’ conditions -v- suspensive conditions
Conditions can be subcategorized into “previous conditions” and “months” (or “nudes”). English law has traditionally held that breach of a “precedent” condition in a policy deserved very different consequences compared to breach of a “mere” condition.
“Months” (or naked) conditions.
Typically, a policy includes many terms that are “mere” conditions. They are usually concerned about the policyholder’s conduct during the policy period. In most circumstances, and in fact only when insurers can prove that they have suffered harm, breach of a “mere” condition will only entitle the insurers to compensation for damages to the extent that they can prove that they have been harmed. suffered actionable losses as a result. of non-compliance with the condition.
Precedent conditions
A policy may also contain different types of suspensive conditions. One type that can be found is a prerequisite for the validity of the contract. In this case, the condition must be met before the risk is incorporated or adhered to (e.g., the obligation to pay the premium before the insurer moves into coverage). A second and more common type of suspensive condition is a condition precedent to the liability of the insurer under the policy, where the condition must be met before the insurer is liable for a claim. The latter type of suspensive condition often refers to the claims process (for example, the notification of a claim within a specified time frame or in connection with the policyholder’s obligations to cooperate).
The attribution of suspensive condition status to a policy term will depend on a number of factors, such as whether:
- A term is expressly labeled as a condition precedent.
- Any other terms are expressly labeled as suspensive conditions.
- There is a general term that makes compliance with all conditions a precondition for liability (or words in this sense).
No single factor is decisive and, in accordance with the general principles applicable to contractual interpretation, the courts shall interpret the policy as a whole to determine the appropriate meaning of a particular clause in its broader contractual, factual and commercial context. .
As an example, in the case of Aspen Insurance UK Ltd & ors. v Pectel Ltd [2008] EWHC 2804 (Comm), which referred to a clause requiring notification of a claim, the court held that the time-limit considered was equivalent to a condition precedent due to a general provision stating that the liability of insurers was subject to compliance with the terms and conditions of the insurance. The court considered that, by its very nature, the commercial purpose of the provision of the notice (which allowed the investigation of the claim) justified that compliance was a precondition for the liability of insurers. In addition, the court held that it did not matter that the clause in question did not expressly state that it was a condition precedent.
Appeals for breach of the condition precedent
For policies that were taken out before August 12, 2016, in principle, a policyholder’s breach of a suspensive condition automatically gave the insurer the right to deny a claim outright, regardless of whether non-compliance with the condition precedent was in any way related to the loss or claim.
For policies that have been in place since August 12, 2016, when the Act came into force, the position is now more nuanced and potentially more uncertain. This is due to the effect of Article 11 of the Law, which introduced new rules that require, in certain cases, that there be a certain relationship between the breach by the policyholder of a condition precedent, of on the one hand, and the risk of loss as a result of the breach, on the other hand, before an insurer can deny a claim as a remedy for the breach.
Section 11 generally applies to terms that are not relevant to actual loss and may therefore apply to guarantees and conditions alike, and also applies to …