Court of Appeal distinguishes between conditions precedent and representations under the Insurance Act 2015

This Court of Appeal decision in highlights some of the difficulties in distinguishing between conditions precedent, warranties and pre-contractual representations. Although the 2015 Act has limited the ability of insurers to rely on conditions precedent and warranties, they are still of considerable use to insurers when properly applied.  As the Scotbeef decision demonstrates, these clauses have to be clearly drafted and distinguished from representations if they are to remain effective. 

In Scotbeef the Court of Appeal handed down one of the first reported decisions on the Insurance Act 2015 (the 2015 Act).  It is an accolade to the drafting of that legislation that so little reported litigation has occurred.  However, the decision in Scotbeef highlights some of the difficulties in distinguishing between conditions precedent, warranties and pre-contractual representations. 

Although the 2015 Act has limited the ability of insurers to rely on conditions precedent and warranties, they are still of considerable use to insurers when properly applied.  As the Scotbeef decision demonstrates, these clauses have to be clearly drafted and distinguished from representations if they are to remain effective.

Background

Scotbeef stored a considerable quantity of meat with D&S Storage Ltd between 2017 and 2019.  At the end of that period of storage, the food was found to be unfit for consumption and Scotbeef brought a claim against D&S Storage for the loss of its product.  Scotbeef successfully argued, at a preliminary hearing, that D&S Storage had taken no steps to incorporate its standard contract terms into its relationship with Scotbeef. 

D&S Storage entered liquidation and so Scotbeef brought a direct claim against Lonhams, the liability insurers of D&S Storage under the Third Parties (Rights Against Insurers) Act 2010).

The issues

D&S Storage’s liability was insured with Lonhams.  That liability insurance contained a number of conditions and representations about the contract terms on which D&S Storage should trade with its customers and the steps that D&S Storage should take to incorporate such terms into its insurance contracts.  Such conditions are very common in liability policies where insurers wish to ensure that the liability of the insured (which, of course, is the risk insured) is limited.

The central clause provided as follows:

DUTY OF ASSURED CLAUSE

It is a condition precedent to the liability of Underwriters hereunder:-

1. that the Assured makes a full declaration of all current trading conditions
2. at inception of the policy period;
3. that during the currency of this policy the Assured continuously trades under the conditions declared and approved by Underwriters in writing;
4. that the Assured shall take all reasonable and practicable steps to ensure that their trading conditions are incorporated in all contracts entered into by the Assured. […]

Lonhams argued that, as Scotbeef had so successfully demonstrated, D&S Storage had taken no steps to incorporate their contract terms into that relationship.  That being the case, Lonhams repudiated liability under the policy by referring to the Duty of Assured Clause.

The decision

At the first instance hearing, the judge considered that the three conditions precedent within the “Duty of Assured Clause” were dependent on each other.  They all related back to the first obligation of the insured to make a declaration of the trading conditions in place at the inception of the policy (sub-clause (i)).

The judge found, and the Court of Appeal agreed, that although sub-clause (i) was expressed as a condition precedent, it was in fact a representation about the insured’s trading position at the inception of the Policy.  That being the case, it fell to be considered under Part 2 of the 2015 Act which deals with the fair presentation of the risk.  

Section 9 of the 2015 Act expressly prohibits the policy from converting a representation into a warranty (and a condition precedent will be treated in the same way as a warranty for these purposes).

Lonhams had not based their defence on a breach of the duty of fair presentation and had not claimed any of the proportionate remedies (such as part reduction in the claim) which Section 8 of the 2015 Act allows.  As such, Lonhams could not rely on sub-clause (i) to repudiate liability.

However, whilst the judge at first instance considered that sub-clauses (ii) and (iii) of the Duty of Assured Clause were dependent on the declaration under sub-clause (i) and should be treated in the same way, the Court of Appeal disagreed. 

The Court of Appeal unanimously found that these were conditions precedent which governed the trading relationship of the insured during the course of policy cover and which did not depend on the representation in sub-clause (i).  Sub-clauses (ii) and (iii) required the insured to enter into contracts based on the agreed contract terms and to continue trading on those contract terms throughout the period of cover.  They were independent of the representation in sub-clause (i).

As these two sub-clauses were considered to be conditions precedent in the true sense (and thus treated as warranties under the 2015 Act), the position was governed by Part 3 of the 2015 Act.  The insured (D&S Storage) remained in breach of the warranties (albeit, expressed as conditions precedent) at the time of the loss.  As such, the appropriate remedy was that prescribed by Section 10 of the 2015 Act – namely, that insurers have no liability for the loss.

Lonhams were, therefore, entitled to avoid liability under their policy for the claim presented by Scotbeef.

Comment

The case is significant given the lack of judicial comment to date on the interpretation of the 2015 Act.  The decision provides useful guidance on the approach of the Courts to the use of conditions precedent.   

The Court of Appeal recognised the obvious need for insurers to be able to assess their liability (so that they can properly consider and rate a risk) by requiring an insured to trade subject to certain terms.  In the logistics and warehousing industry, such contract terms are widespread and essential for controlling liability where the value of goods stored or carried is usually unknown and may be considerable. Insurers rely heavily on policy terms which require their insureds to incorporate contracts which limit liability and impose time bars on claims.

Nevertheless, insurers should also take note of the decision insofar as it acts as a warning to all insurers to ensure that, if they wish to rely on warranties or conditions precedent to control their potential liability, such terms must be drafted so as to avoid falling into the trap of converting representations into warranties.

Christopher Chatfield of Kennedys was instructed by the successful insurers who were represented by Stewart Buckingham KC and Mr Michael Proctor, both of Quadrant Chambers.