The effect of warranties and conditions precedent to liability has recently been the subject of great scrutiny and will be reformed when the Insurance Act 2015 (the Act) comes into force in 2016. The recent Court of Appeal decision, that Milton Furniture Ltd (M) was not entitled to an indemnity under its property insurance policy because it had breached conditions precedent that required M to use a burglar alarm at all times when the premises were left unattended and/or out of business hours, is a case that was decided on the current law, of course, but it provides a useful opportunity to test the application of sections 10 and 11 of the Act, and show that the judge’s decision would not have changed on the basis of these sections.
In April 2005, while two of M’s employees slept on M’s premises, the majority of M’s stock held there was destroyed by a fire which was started deliberately by unknown persons. The stock was insured under M’s policy with Brit Insurance Ltd (B). The employees were woken by the fire alarm and were unharmed. The relevant terms considered by the judge at first instance were the “PW1 Intruder Alarm Warranty” (PW1) and “General Condition 7” (GC7).
PW1 stated that it was a condition precedent to liability in respect of loss or damage caused by theft or attempted theft that the burglar alarm was put into full and proper operation when the premises were left unattended.
GC7 provided that all protections including any burglar alarm shall be in use at all times out of business hours or when the premises were left unattended, and the protections could only be withdrawn or varied to underwriters’ detriment with their consent.
At first instance the judge found that GC7 was a condition precedent to B’s liability, but that it was qualified by PW1 in that M was only required to set the burglar alarm if the premises had been left unattended, which he said they had not been. However, the judge held that M had breached the second limb of GC7 because the company responsible for monitoring the burglar alarm had stopped doing so as a result of M failing to pay its invoices.
M appealed on four issues:
- That GC7 was not a condition precedent.
- That PW1 did not qualify GC7.
- That the presence of two of M’s employees on the premises meant they were attended.
- That M did not breach GC7 by causing or permitting the withdrawal of the burglar alarm monitoring service.
The Court of Appeal dismissed the appeal. In her leading judgment, Lady Justice Gloster said that on issue (1) while the language of GC7 and PW1 overlapped to some extent, GC7 was a condition precedent and the two clauses were not inconsistent. GC7 applied to all claims whilst PW1 applied only to claims of theft or attempted theft. On issue (2), GC7 was clear: it required the whole of the protections provided by the burglar alarm to be in place at all times out of business hours and/or when the premises were left unattended. With respect to (3), the premises could not be considered as being “attended” because M’s employees were asleep in separate areas of the premises and were not able to observe an attempt by anyone to interfere with the premises. Because M had been obliged to set the burglar alarm, it was not necessary to determine issue (4), and Lady Justice Gloster said that GC7 imposed a strict obligation on M.
The Insurance Act 2015
It is interesting to assess whether the court would have reached the same conclusion had these facts applied under a policy issued after the Insurance Act 2015 comes into force. Section 11 of the Act ensures that an insurer will not be discharged from liability by breach of condition precedent to liability where the insured can show that breach of the term could not have increased the risk of the loss which actually occurred in the circumstances in which it did occur.
However, any such arguments by the claimant would likely have failed. At first instance the judge had found that the fire was started by someone either hiding within the building prior to it being secured, or by someone with legitimate access to the premises. The judge noted that the burglar alarm had a wider protective function than protecting against risk of intrusion, and cited section 9(2) of the Theft Act 1968, defining the criminal offence of burglary, which refers to the doing of any damage to the building or to property within it. The judge also found that activation of the burglar alarm would likely have prevented the fire because the arsonist would have set it off long before the fire alarm went off, and the burglar alarm would also have detected smoke before the fire alarm did. For these reasons, it is unlikely that section 11 of the Act would have saved the insured, since he could not have shown that breach of PW1 and GC7 could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.
Section 10 of the Act makes a breach of warranty suspend the insurer’s liability until the breach is remedied, rather than discharging it automatically. Since the losses occurred during the breaches of GC7 and PW1, the insured would not have benefitted from this provision.