The decision of Cockerill J, sitting as a Commercial Court judge, on 14 September 2021, highlights the importance and operation of conditions precedent in insurance policies, in this instance a public liability policy. An insured’s failure to comply with the notification condition of a policy (treated by the insurers as a condition precedent) was considered in Arch Insurance (UK) Ltd v Philip McCullough.
This short judgment of Cockerill J demonstrates some of the inherent challenges and tensions between insurers and insureds in relation to many policies of liability insurance. What causes those tensions? On the one side, most insureds are not insurance specialists and apply what appears to them to be common sense (but might not be enough to comply with the policy). On the other, insurers are underwriting possible losses that they have no control over and so it is perfectly reasonable for them to expect as much information as possible as fully and quickly as possible. Therein lies the tension.
In summary, in this matter, the insurers issued a Part 8 claim for a declaration of non-liability which was granted. This followed a long period when the insured was aware of possible circumstances, but apparently honestly believed that they would not materialise. Notification was 11 months late. As a result, the court concluded that the notification provision had been breached, that this provision was a condition precedent and that, as a result, the insurers were not under any obligation to indemnify the insured.
Whilst not changing the legal position, the decision is instructive. Had the insured recognised the risk of a claim and notified promptly to insurers or had the condition not been clearly identified as a condition precedent, the insurers would not have been able to avoid cover.
The practical implications of a breach of condition precedent to liability is that it enables the insurer to deny liability for the claim without proof of suffering any prejudice. If it is not a condition precedent, the obligation on the insurer to provide cover remains (Friends Provident Life & Pensions Ltd v Sirius).
There are a number of markers and reminders for insured and insurer that flow from this decision.
For the insured:
- Open communication is key. The insured should take precaution not to retain any information and to keep insurers updated.
- By notifying the insurers, it will enable them to conduct investigations within a reasonable time frame (Friends Provident).
- The insured needs to be mindful of the circumstances which require communication with the insurer. If in doubt, tell insurers.
- The insured should be aware of whether the notification is a condition precedent to liability, something which brokers should be advising insureds about.
- Despite any informal communications with a claimant, this does not mean a claim will not be made. The insured needs to think about a realistic worst-case rather than a hopeful best-case scenario.
- The insured need to assess whether the risk of a claim being brought is “real” or merely “fanciful” (Aspen Insurance Ltd v Pectel Ltd).
For insurers:
- The clear expression of a notification condition as being a condition precedent is very important.
- Keep the policy wording of the notification condition simple so it is not subject to interpretation and to avoid ambiguity.
- Insurers should maintain records of all correspondence and documentation with the insured around notification.
- Ideally, insurers should keep a record during policy renewal and related discussions as this may serve to demonstrate the insured’s awareness of the terms clearly stated.
Clear communication between insurers and the insured is essential to lessen the chance of costly litigation, and to avoid any detrimental impact to the commercial relationship between the parties.
With thanks to Jessica Moss, trainee solicitor at Kennedys, for her contributions to this post.
