Is notification of a circumstance a condition precedent to policy coverage?

It is clearly in Insurers' interests to receive details of any potential claim against an Insured at the earliest possible opportunity, not least because this enables the Insurer to carry out any investigation that is required to assess the Insured's liability and to take whatever steps may be necessary to ensure that no prejudice is caused. Indeed, most insurance policies contain a condition stating that the Insured must notify Insurers of any circumstance that may, or is likely to give rise to a claim. Moreover, this condition is usually described as a condition precedent. What is less certain, however, is whether compliance with this condition will actually operate as a condition precedent to policy coverage. Breach of a condition precedent will entitle the Insurer to refuse cover for the claim. Breach of a mere condition means that the Insurer can only claim damages to reflect the extent Insurers position has been prejudiced by the late notification. This is obviously a question close to the heart of Insurers and Insureds alike.

It is important for Insurers to note, however, that simply labelling a condition a "condition precedent" does not automatically mean that it will be construed as such. The general approach taken by the courts is that breach of a condition will only give the innocent party a right to terminate the contract if that condition "goes to the substance of the contract" (Wallis, Son & Wells v. Pratt & Haynes [1910] 2 K.B. 1003, 1012). What this means, in practice, is that the breach must be so fundamental to the operation of the contract that it can be equated with a failure to perform the contract at all.

The courts have provided no definitive answer as to whether a condition requiring prompt notification of a circumstance should constitute a condition precedent. The position remains determinedly hazy. In the recent case of George Hunt Cranes Ltd v Scottish Boiler & General Insurance Company Ltd [2001] EWCA Civ 1964, the Court of Appeal held that a condition requiring prompt notification of a circumstance is "unlikely" to be held a condition precedent to policy coverage. Its function is to put the Insurer on notice that a claim may be forthcoming, and it is not a necessary indication to the Insurer that it is time to investigate. Accordingly, the requirement to notify a circumstance (as opposed to a claim) does not go "to the substance of the contract". In reaching this conclusion, the Court acknowledged that Insurers should have sufficient opportunity in which to carry out investigations necessary to protect their position, but concluded that the notification of a claim (rather than a "circumstance") provided Insurers with ample time in which to do so.

In short, a condition whereby a claim should be promptly notified is likely to be construed as a condition precedent, but a condition requiring notification of a circumstance is less likely to be so. Importantly, and interestingly, the Court confirmed the comments made in the earlier cases of Stoneham v. The Ocean Railway and General Accident Insurance Company [1887] 19 QB 237 and Re Bradley and Essex and Suffolk Accident [1912] 1KB. In these cases it was suggested that merely labelling a clause a condition precedent does not automatically mean that it will be considered as such. It was noted, however, that where some clauses are clearly and unequivocally labelled condition precedents, and others are not, then it is much more likely that the former will be construed to be so. Conversely, referring to a number of different terms as a condition precedent is unlikely to convince the Court that the parties to the insurance contract genuinely intended that each and every term should operate as such. In these circumstances, the Court will look to the genuine intention of the parties, and may well find in favour of the Insured.

The clause in dispute in George Hunt Cranes was not, in fact, described as a condition precedent and this issue was not therefore one on which the Court had to give judgment. It follows that the comments of the Court of Appeal, whilst interesting, do not create any legal precedent. Furthermore, they do not sit happily with the views of Mr Justice Rix in the influential case of J Rothschild Assurance Plc v Collyear and others [1998] All ER (D) 431. In this case it was suggested that notification of a circumstance should be a condition precedent in order to allow the Insurer sufficient opportunity to assess a potential claim and adopt whatever steps are considered necessary to minimise the potential loss. The difficulty with this approach, however, is the subjective nature of "awareness" and the tricky task of pinpointing the precise moment at which the Insured became "aware". Who is to say, with any degree of accuracy, at what moment the Insured became aware of notifiable circumstances and, thereafter, to judge at what stage notification should have taken place? It seems unduly onerous that one Insured should be denied cover, whereas another (less optimistic?) Insured might notify the circumstance more promptly and be entitled to an indemnity in respect of any claim that results.

The comments in Rothschild v Collyear were also not directly relevant to the precise issues in that case. Accordingly, there is, as yet, no definitive comment from the Court. However, Insurers can draw a valuable lesson from the judgments referred to above. The uncertainty surrounding this issue means that, if it is genuinely intended that a policy clause is to operate as a condition precedent, Insurers should ensure that the individual clause is clearly and unequivocally labelled as such. They should not rely on an all-encompassing statement attaching the label of condition precedent to a number of different terms. In McAlpine v BAI [2002] Lloyds Rep 437 it was held that these types of all-encompassing statements could be effective in some situations, but it is clear that they certainly will not guarantee that a term will be construed as a condition precedent. If Insurers want the notification of a circumstance to operate as a condition precedent, the prudent approach would be to expressly describe the condition as such. Even then, however, it is far from certain that the courts will regard it as a condition precedent, and it may be that Insurers will still be unable to avoid payment of an indemnity to the Insured.

For further information please contact Sophie Ferguson at [email protected] or on +44 (0)117 930 7841 or Peter Mansfield at [email protected] or on +44 (0)117 930 7838.