Insurance: waiver of breach of condition precedent 2

The Court of Appeal has recently decided that an Insurer did not waive its rights to deny cover for breach of a condition precedent to liability. The Insurer had taken over conduct of the case without at the same time raising a reservation of rights. Nonetheless, the Court held that there had been no waiver. Although this decision does not alter the need for Insurers to protect their position by reserving rights wherever there is concern or doubt, it does provide welcome clarification on the law in this area.

In a recent case the Court of Appeal considered the issue of waiver of breach of conditions precedent.

The Insurer issued a public liability policy which contained a condition precedent to liability requiring immediate written notice of the occurrence of any injury or damage. Notice was not given for over a year. The Insured argued that the Insurer had waived the right to rely on this breach of condition precedent. Soon after the notification had been received, the Insurer wrote to the Insured and separately to the underlying claimant against the Insured effectively indicating that it would take over conduct of the claim, pursuant to a claims control clause in the policy. The Insurer did not reserve its rights at that time. Rather, the reservation of rights was made around four weeks after the notification and a couple of weeks after this exchange of correspondence.

At first instance the Commercial Court found that the insurer had waived the insured’s breach of the notification clause. For more detail on the first instance decision click here.

In its judgment the Court of Appeal essentially considered two types of situation where an Insurer might be precluded from relying on its strict legal rights under the contract.

The first of these is waiver by election. This is where the Insurer is faced with a choice between two inconsistent rights or remedies, and elects which right or remedy it will pursue. The party making the election must have knowledge of the facts giving rise to the choice, and a clear and unequivocal communication of the choice to the other party. There is no need for the other party to rely on this choice.

The second is waiver by estoppel. This requires a clear and unequivocal representation that the Insurer will not rely on a right or remedy. The representation must be relied on by the Insured to its detriment. But the Insurer need not be aware of the facts giving rise to the right or remedy.

The Court of Appeal held as follows.

1. Where an Insured has breached a condition precedent to a claim, there is no scope for it to argue that the Insurer has waived by election the right to rely on this breach. This is because the breach of condition precedent automatically allows the Insurers to refuse the claim. There is no “election” to be made. This means that an Insured can only rely on waiver by estoppel.

2. In this case, the Insurer had not clearly and unequivocally represented that it would not rely on the breach of condition precedent, whether through representing specifically that it would not rely on the breach, or by saying that it was accepting liability under the Policy. Crucially, the Court of Appeal concluded that relying on the Claims Control clause was not, of itself, enough to preclude the Insurer from relying on the breach of condition precedent. In particular, the Insurer had asked several questions of the Insured about the underlying incident which remained unanswered during the period prior to the reservation of rights.

3. The Insurer was, in any event, entitled to a reasonable period in which to consider its position before either type of waiver could apply. This was a factor in determining whether or not there was a clear and unequivocal representation by the Insurer.

This means that in general terms, for an Insured to show that an Insurer is precluded from relying on a breach of condition precedent, it must show: first a clear and unequivocal representation that the Insurer will not rely on the breach; and secondly that the Insured relied on that representation to its detriment. The exercising of control under a claims control clause will not necessarily amount to such a representation.

All that said, this dispute would probably never have arisen had the Insurer reserved its rights when the notification first came in. The Court of Appeal recognised, in this case, the undesirability of effectively forcing the Insurer into an overhasty reservation of rights. But the fact remains Insurers are best protected by issuing a reservation of rights at least when they are concerned that there may be a breach of policy term or may have been a pre-contractual misrepresentation, non-disclosure or breach of warranty. This is so even if the Insurer is not, at that stage, fully aware of all of the key facts.

Further reading: Kosmar Villa Holidays Plc v Trustees of Syndicate 1243 [2008] EWCA Civ 147.