professional information for CILA members
TB 16 August 2003
The following article appeared in Herbert Smith's Insurance Update Newsletter (May 2003) and they have kindly given permission for it to be circulated to CILA members.
Policy conditions: legal classification and consequences of breach
On at least three occasions last year the Court of Appeal considered the issue of the interpretation and status of conditions where insurers were seeking to rely upon terms to obtain a declaration of non liability for a particular claim. In any policy, determining the status of a contractual term is vital to establishing the insurer's rights ...view middle of the document...
Whether or not a breach of such a condition gives the insurer the right to set aside the policy in its entirety, refuse to indemnify an insured with regard to a single claim or simply seek damages for any loss incurred as a consequence of the breach, will be influenced by whether the policy specified the effect of breach of that term or not. In the absence of any express term outlining the effect of breach, the question will be whether a breach of the term in question can be said to go to the heart of the contact and is in effect fundamental to the entire risk, or whether it is clear that the term is of a minor nature and will not affect the existence of the policy. In the former case the insurer will cease to be liable for any losses arising under the policy after the date of the breach, whilst in the latter insurers will remain responsible for losses accruing after the date of the breach, and will only have a right to seek damages if the breach of that condition has resulted in any actual loss.
Breach of an innominate term
It is possible that the status of the condition cannot actually be established at the outset of the policy, and in such cases it will be treated as an "innominate" condition. As such it is necessary to look at the consequences of the breach of that condition before determining whether or not the insurer can set aside the policy or seek damages. It is evident, however, following Alfred McAlpine plc v BAI (Run Off) Ltd. ( Lloyds Report IR 352) that the Court of Appeal (obiter) has established a third possible remedy for insurers, namely that if an insurer can show that in linking the condition to the particular claim the breach was of such a serious nature that it in effect repudiated that claim, then the insurer can reject that claim, whilst the policy and risk in respect of other claims remain unaffected.
In light of the severe consequences to an assured of a breach of a condition precedent, issues as to the identification and status of these terms are often raised in Court. The following cases highlighted how difficulties can arise, and in turn demonstrate the Court of Appeal's reiteration of the well established principle that whilst it is open to insurers to express a term to be a condition precedent to liability or to risk, in doing so they should ensure that the condition so expressed is drafted in clear and unambiguous language because if there is any ambiguity, the condition will be interpreted in favour of the assured.
In George Hunt Cranes v Scottish Boiler and General Insurance Co Ltd ( Lloyds Rep IR 178) the defendant insurer agreed to indemnify an engineering company against all sums for which it would become legally liable to pay under any contract of hire for compensation in respect of loss and damage to plant hired to it. The claimant's crane had been hired to the company and suffered damage whilst in its possession. The company subsequently went into...