Does alleging fraud prevent an insurer from taking a policy point?

Judgment in Super Chem Products Limited -v- American Life and General Insurance Company Limited and Others was delivered by the Lords of the Judicial Committee of the Privy Council on 12th January 2004 following an appeal from the Court of Appeal of Trinidad and Tobago.

The case concerned whether an insurer is entitled to resist a claim on alternate bases involving an allegation of fraud on the one hand and breaches of policy conditions on the other. The Privy Council held that as a matter of business common sense, an insurer should not be required to choose and is entitled to run both defences. We summarise below the key findings and the implications for insurers.

The Facts

Super Chem Products Limited ("SCPL") manufactured detergents, shampoos, disinfectants, adhesives and other chemically based products at its business premises at Plaisance Park, Pointe-a-Pierre, Trinidad. American Life and General Insurance Company Limited ("AL") agreed to insure SCPL's premises under the terms of two Collective Fire and Special Perils Insurance Policies. The first policy (the "stock policy") provided cover against loss and damage to stocks and stores at the premises. The second policy (the "consequential loss policy") provided cover against business interruption and other losses consequent upon the loss of, or damage to, stocks and stores at the premises.

Condition 11 of the stock policy provided for SCPL to give notice to AL on the happening of any loss or damage. Condition 11 further provided that SCPL must at all times and at its own expense produce, procure and give to AL all such further information as may be reasonably required by or on behalf of AL. Condition 13 allowed for all benefits under the stock policy to be forfeited if the claim was fraudulent or if the claim was made and rejected by AL and no action or suit was commenced within 3 months of the rejection by SCPL. Condition 19 provided that AL would not be liable for any loss or damage after 12 months from the happening of the loss or damage unless the claim was the subject of a pending action or arbitration.

Condition 4 of the consequential loss policy provided that in the event of a claim, SCPL must at its own expense deliver to AL a written statement setting down the particulars of the claim within 30 days or such further time as AL may in writing allow. Condition 5 of the consequential loss policy mirrored Condition 13 of the stock policy.

A fire occurred at the premises of SCPL in April 1990 destroying large parts of the insured's factory, stock, equipment and offices. SCPL presented claims under both the stock policy and the consequential loss policy. The claims were rejected by AL. SCPL issued proceedings for the sums allegedly due under both policies.

The Issues

AL denied liability on the grounds that (1) the fire was caused by arson of, or with the connivance or complicity of, SCPL; (2) the action under the stock policy was not issued within 12 months of the happening of the loss or damage as per Condition 19; (3) the action under the consequential loss policy was not issued within 3 months of AL rejecting the claim as per Condition 5; (4) SCPL did not comply with the 30 days' notice provision as per Condition 4 of the consequential loss policy; and (5) SCPL was in breach of the claims co-operation provisions of both policies.

SCPL argued that, once AL alleged that the claims were fraudulent, AL could no longer also rely on any conditions in either policy to deny liability. SCPL contended that the allegation of fraud amounted to a repudiation of the contracts of insurance and precluded reliance by AL on any conditions precedent to liability in the contracts of insurance. In support of this argument, SCPL relied on the speech of Viscount Haldane LC, in Jureidini -v- National British and Irish Millers Insurance Company Limited [1915] AC 499, at 505, in which he said that, where there is a repudiation which goes to the substance of the whole contract, those setting up that repudiation should not be entitled to insist on a subordinate term of the contract still being enforced. As far as the policy conditions were concerned, SCPL admitted that they had not complied but sought to rely on waiver and failure to incorporate arguments.

Judgment at first instance dismissed SCPL's claims under both policies as Sealey J rejected the arguments based on the Jureidini point and waiver or estoppel. Sealey J however held that the limitation conditions of the consequential loss policy had not been incorporated into the consequential loss policy because neither SCPL nor its brokers had actual knowledge of the conditions. SCPL appealed to the local Court of Appeal, which by unanimous decision dismissed the appeal. The Court of Appeal held that the decision in Jureidini and orthodox contractual analysis did not support SCPL's contention that by alleging fraud AL was precluded from relying on the conditions of the policies by way of defence to the claims. SCPL appealed to the Privy Council.

The Privy Council's decision

The Privy Council considered the following issues in reaching their decision:

1. Whether the decision at first instance that the limitation conditions in the consequential loss policy were not incorporated was correct.
2. Whether AL's assertion of fraud precluded it from relying on the limitation conditions (and whether the Jureidini case could be relied upon).
3. Whether SCPL could successfully plead waiver or estoppel to defeat the limitation conditions.
4. Whether the decision at first instance that there were breaches of the claims co-operation conditions in both policies was correct.

1. Although this was not a ground of appeal, the Privy Council considered that in order to deal with the other issues this point had to be revisited. The Privy Council concluded that the judge wrongly adopted a subjective approach to the formation of the consequential loss policy and held that in agreeing to the contract in standard form, the brokers committed SCPL to all the terms irrespective of their actual knowledge. The limitation conditions were therefore validly incorporated.
2. The Jureidini case involved disputed liability arising out of a fire on the grounds of fraud and arson which was proved to be unfounded at trial. Subsequent to the trial the insurer further resisted liability on the grounds that the insured was in breach of the arbitration clause which applied "if any difference arises as to the amount of any loss or damage". In that case, the House of Lords held that the insurer could not rely on the arbitration clause. The Privy Council held that the Jureidini point did not apply in the present case for the following reasons: (i) AL's defence of arson was based on the policies and was not a repudiation; (ii) obligations under a contract survive a repudiatory breach until the breach is accepted by the innocent party as terminating the contract (SCPL did not accept the breach); and (iii) the Jureidini point is of no assistance as the limitation and claims co-operation conditions were in existence before AL rejected the claim in October 1991. The Privy Council then considered whether Viscount Haldane's comments represent good law. They concluded that his comments were either wrong or needed to be so qualified as to leave them with virtually no useful content. The Jureidini case should not be regarded as an authoritative decision on insurance law or general contract law.
3. The Privy Council rejected SCPL's plea of waiver or estoppel on the grounds that it failed to establish that there was a clear and unequivocal representation by AL to SCPL that it would not rely on the limitation conditions.
4. The Privy Council accepted that the issues in respect of claims co-operation were entirely factual in nature and concluded that none of the arguments advanced by SCPL during the course of the appeal gave rise to question the correctness of the factual findings by Sealy J or the Court of Appeal. The Privy Council therefore confirmed that the breaches of the claims co-operation conditions by SCPL provided AL with complete defences under both policies.

SCPL's appeal was dismissed.

Conclusion

This decision confirms that the Jureidini case is not an authoritative decision on insurance law or general contract law. An insurer will not be required to choose between alleging fraud, thereby abandoning the right to involve other conditions of the policy, or to rely on those provisions and give up the right to allege fraud. As a matter of business common sense, an insurer is entitled to resist a claim on alternate bases. It also serves as a reminder for insureds to ensure compliance with policy conditions, irrespective of any allegations of fraud which may have been advanced by insurers.

For further information, please contact Poju Adedeji at [email protected] or on +44 (0)20 7367 3440 or Belinda Schofield at [email protected] or on +44 (0)20 7367 3053