Introduction
In this fifth of a series of our monthly Practice Guides for Claims Managers in 2022, we look at some key principles related to certain conditions commonly used in commercial insurance contracts, including warranties, precedents, and “simple “(Or” pure “) conditions1. The legal consequences of non-compliance with each of these types of deadlines vary considerably.
Claims managers are therefore advised to be aware of the way in which courts treat such conditions, including the possible remedies available in the event of a qualified infringement. Below are examples of these typical rule conditions. We are also working on the removal of “contractual basis” clauses in non-consumer insurance contracts, carried out by the Insurance Act 20152 (the Act).
The effect of the Insurance Act of 2015
The law introduced significant changes in the legal force of certain conditions in insurance (and reinsurance) contracts. This followed the opinion of the Legal Commission that some aspects of insurance law have become obsolete since the Marine Insurance Act of 1906 (MoI) was passed almost 120 years ago.
The opinion of the Legal Commission was that before the Act some key insurance contracts acted in favor of insurers before policyholders. For policies concluded on or after 12 August 2016 (including renewals, amendments and approvals of policies concluded before 12 August 2016), the Act has significantly affected the meaning and operation of certain key terms3.
Although several commentators have predicted that a wave of litigation between policyholders / insurers is likely to follow the adoption of the Act, this has so far failed to materialize. However, insurers need to stay alive for future court decisions related to the terms and conditions of the policy, given that many of the issues we address in this article would benefit from further consideration by the courts.
Of course, while investigating a claim, insurers remain entitled to retain their rights, subject to the provisions of the law and the law in general. We discussed in detail the topic of (p) retention of rights in our third edition of this series.
The different types of policy conditions
“Contract basis” clauses.
Pursuant to Section 9 of the Act (Guarantees and Declarations), the use of “basis of contract” clauses has been abolished and the parties are not entitled to enter into a contract outside Section 9. Under the previous regime, a pre-contractual declaration may be converted into a guarantee using the language of “Basis of the contract”. These clauses are often used by insurers to turn all responses in the proposal form into guarantees, with the effect that any inaccuracy in the proposal form will release insurers from 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 connection with a “proposed” policy can no longer be guaranteed as a guarantee by any term in the policy or offer. .
Guarantees
The Ministry of the Interior (which remains a good law, except when its provisions are replaced or amended by law) defines “guarantee” as a term “by which the insured undertakes that something in particular must or will not be done, or that it will be any condition fulfilled, or by which he confirms or denies the existence of a certain factual situation ‘. The law has not redefined a guarantee. In other words, it remains the obligation of the policyholder that something will – or will not – be done, or that a certain state of affairs exists – or does not – exist.
Prior to changes made by law, if the policyholder has breached the warranty, this automatically terminates the policy, regardless of whether the breach resulted in any loss or damage to the insurer. The policyholder’s liability under the policy was extinguished immediately and there was no right of recourse for the policyholder with whom they had the right to remedy this breach4.
Following the review by the Legal Committee, it was recommended that the breach of the guarantee could be remedied by the policyholder. As a result, the law is relaxed by the Law, as a result of which – if the policyholder takes appropriate steps to eliminate the violation – then the violation of the guarantee no longer automatically releases the liability of insurers. Instead, the breach simply suspends the liability of insurers unless and until it is remedied by the policyholder5.
In summary, the Act led to the following key changes:
- Insurers are not liable for any loss incurred or due to anything that occurs as long as the policyholder continues to breach the warranty.
- Any breach will be remedied either when the policyholder ceases to be in breach or if the risk becomes the same as originally envisaged by the parties.
- Where the breach is remedied before the loss is incurred, insurers must pay the claim in compliance with all other applicable policy conditions.
For example, if the policyholder ensures that there is a working burglar alarm, the insurer will not be at risk during the period for which this obligation is not met, because the alarm, say, has stopped working, but they will be back in risk after the alarm has been repaired. If the policyholder is in breach of a guarantee to take a certain step up to a certain point in time, he will have remedied the breach for the purposes of the Act once the step has been taken6. The guarantee may also be subject to section 11 of the Act (Conditions that are not relevant to the actual loss), which we consider below.
It is important to note that insurers will not have a remedy in the event of a breach of the guarantee in the following circumstances:
- The guarantee ceases to be valid due to a change in circumstances.
- If compliance with the warranty is illegal under the following legislation.
- The insurer waives the violation7.
What constitutes a change in circumstances remains to be seen in court and therefore remains an open question.
‘Just’ conditions -v- conditions precedent
Conditions can be subcategorized into “precedent conditions” and “simple” (or “pure”) conditions. English law has traditionally seen the breach of the “precedent condition” in politics as deserving of very different consequences than the breach of the “simple” condition.
“Simple” (or bare) conditions
Politics usually includes many terms that are “just” conditions. They are usually related to the behavior of the policyholder during the policy period. In most cases, and indeed only when insurers can prove that they have suffered damage, a breach of a “simple” condition will entitle insurers to compensation only to the extent that they can prove that they have suffered the loss claimed as a result of violation of the condition.
Precedent conditions
The policy may also contain different types of precedent conditions. One type that can be found is a condition preceding the validity of the contract. In this case, the condition must be met before the risk arises or is linked (eg an obligation to pay a premium before the insurer starts to be covered). A second and more common type of condition precedent is a precedent condition for the policyholder’s liability under the policy, where the condition must be met before the insurer is liable for a claim. This last type of condition precedent often refers to the claims process (eg notification of a claim within a certain period of time or in relation to the obligations of the policyholder).
The attribution of precedent status to the term of a policy term will depend on a number of factors, including whether:
- The term is explicitly designated as a precedent for a condition.
- All other conditions are explicitly marked as precedent conditions.
- There is a general term that makes compliance with all conditions a condition preceding liability (or words to that effect).
No single factor is decisive, and in accordance with the general principles applicable to the interpretation of the contract, the courts will interpret the policy as a whole to determine the correct meaning of a particular clause in its wider contractual, factual and commercial context.
As an example, in the case of Aspen Insurance UK Ltd & ors. against Pektel Ltd. [2008] EWHC 2804 (Comm), which concerns a clause requiring notice of a claim, the court held that the period in question was a precedent due to a general provision according to which the liability of insurers depends on compliance with the terms of the insurance. The Court ruled that, by its very nature, the commercial purpose of the notification provision (allowing the claim to be investigated) justifies compliance as a condition preceding the liability of insurers. Furthermore, the court held that it did not matter that the disputed clause did not explicitly state that it was a precedent.
Remedies in case of violation of the precedent condition
For policies concluded before 12 August 2016, in principle, non-compliance with a precedent condition by the policyholder automatically entitles the insurer to reject the claim in full, regardless of whether the breach of the precedent condition was in any way related to loss or the statement.
With regard to the policies introduced on 12 August 2016, when the Act entered into force, the position is now more nuanced and potentially more uncertain. This is due to the effect of Article 11 of the Act, which introduces new rules requiring in certain cases to have a degree of connection between the violation by the policyholder of a precedent condition, on the one hand, and the risk of loss, as a result of the infringement, on the other hand, before the insurer can reject a claim as a remedy for the infringement.
Section 11 applies in general to conditions that are not relevant to the actual loss, and can therefore be applied to both guarantees and conditions, and also applies …
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