The recent case of Zurich Insurance Plc v Coralpeak Ltd [2016] CSOH 43 highlights the importance of complying with the contractual provisions of an insurance contract.

Following a fire that destroyed the Glasgow Steiner School on 25 March 2013, the Insured (Glasgow Steiner School Ltd) submitted a claim under their insurance policy with Zurich Insurance Plc (Zurich). Zurich refused to indemnify on the basis that the Insured had breached clause 3 of their policy (as set out below) by not acting on two fire risk assessments carried out in 2006 and 2011.

Shortly after the refusal to indemnify, the Insured entered liquidation and in 2014 Coralpeak Ltd (Coralpeak) bought the school from the liquidators. Coralpeak was granted an assignation of the terms of the Insured’s policy. They disagreed with Zurich’s decision to decline indemnity.

Zurich therefore raised an action at the Court of Session seeking declarator (an order from the court) that the Insured had failed to comply with a condition of the policy and accordingly, Zurich were right not to indemnify.

The two conditions of the policy which Zurich sought to rely on were:

“3. REASONABLE PRECAUTIONS

The insured will comply with all regulations imposed by any competent authority and take all reasonable precautions to prevent or minimise accident, injury, loss or damage. In addition the insured will comply with makers recommendations made in respect of plant and machinery wherever reasonably practicable.

12. OBSERVANCE

The due observance and fulfilment of the terms and conditions of this Policy by the insured so far as they relate to anything to be done or complied with by the insured will be a condition precedent to any liability of the insurer to make any payment under this Policy.”

In Zurich’s view, read alongside clause 12, clause 3 was clearly a ‘condition precedent’. A condition precedent means the clause must be complied with before a liability to indemnify will trigger.

A hearing on the legal arguments took place before Lord Docherty in the Court of Session, Edinburgh and his opinion was issued on 16 March 2016. This hearing was principally to determine whether clause 3 was indeed a condition precedent although Zurich was also looking to have decree (judgment) granted in their favour on the basis that Coralpeak’s defence was not legally relevant.

It was held that clause 12 was “clear and unambiguous in its terms” and clause 3 was a condition precedent.

Both parties had also included in their pleadings reference to the cause of the fire, but Lord Docherty pointed out that the cause of the fire would be irrelevant if it was established that clause 3 had been breached. Therefore, regardless of the cause of the fire, if the Insured had breached clause 3 then Zurich was entitled to refuse indemnity and that was an end to the matter.

Nevertheless, Lord Docherty was not willing to grant decree in Zurich’s favour at this stage and said there would still need to be an enquiry in to the facts (a proof/trial) to determine whether clause 3 had, in fact, been breached. So Zurich is not over the line yet.

This case should serve as a reminder to businesses to know the terms of their insurance policy and to ensure full compliance with the contractual terms, or risk severe financial consequences.