Mr Justice Teare's recent judgment in the case of Aspen Insurance and others v Pechtel Limited  EWHC 2804 (Comm) emphasises once again the importance of strict compliance with notification provisions in insurance policies. In this regard it provides consideration of what amounts to an occurrence "likely to give rise to a claim" which is thereby an occurrence notifiable under the policy. The decision also concludes that a "catch all" provision in a policy which seeks to make liability of the insurer conditional on compliance with all terms and conditions will be effective where there is sufficient policy justification for the term or condition in question to be regarded as a condition precedent to liability.
The Defendant ("Pechtel") is a specialised construction contractor with expertise in the removal of asbestos from commercial property. In 2004 Pechtel was engaged as a sub-contractor to AMEC who had been contracted by BT to work on BT's tunnel facility in Manchester. Pechtel started work on the South Tunnel in February 2004 and preparatory work on the North Tunnel was commenced on Monday 22 March 2004 in the crossover section where both tunnels met. On the morning of Monday 29 March 2004 there was a serious fire in the crossover section of the tunnels.
Mr Murray of Pechtel was informed of the fire on the morning of Monday 29 March 2004. He visited the site shortly after and gave consent to witness statements being taken from Pechtel employees. At that time Mr Murray also discussed the fire with Mr Dhanda of AMEC who told Mr Murray that he did not know the cause of the fire but that there was nothing for Pechtel to be concerned about. On various subsequent occasions between April and November 2004 AMEC contacted Pechtel to ask various questions in connection with its investigation of the fire. On 12 January 2007 AMEC sent a letter to Pechtel stating that BT was intending to make a claim against AMEC in connection with the fire and recommended that Pechtel inform its insurers. On 6 March 2007 AMEC sent to Pechtel a copy of a letter from BT's solicitor in which it was alleged that, by reason of Pechtel's actions, AMEC was liable for the damage caused by the fire.
Pechtel had combined liability insurance cover with the Claimant insurers (the "insurers"). The insurance policy contained the following terms:
"The Assured shall give….immediate written notice with full particulars of any occurrence which may give rise to indemnity under this insurance" (Condition 4(a))
"The liability of the Underwriters shall be conditional on the Assured paying in full the premium demanded and observing the terms and conditions of this insurance" (Condition 13(i))
Pechtel first notified the insurers of the possibility of a claim under the policy in relation to the fire on 22 March 2007. In 2007 the insurers started proceedings seeking a declaration that they were entitled to deny cover under the policy on the grounds that (i) Pechtel had failed to comply with condition 4(a); and (ii) condition 4(a) was a condition precedent to the insurers being liable to indemnify Pechtel in respect of liability arising out of the fire.
Date when the fire ought to have been notified
Mr Murray of Pechtel was aware on 29 March 2004 that a serious fire had occurred in the vicinity of the crossover area of the north and south tunnels. He was aware that employees of Pechtel had been working in the crossover area the week before and he gave his consent to witness statements being taken from these employees in this regard at the end of March 2004. In light of these circumstances Mr Justice Teare considered that a reasonable man would appreciate that BT and/or AMEC were likely to investigate the cause of the fire and such investigation would inevitably focus on the work done in the crossover section the week before. Mr Justice Teare concluded that
"In circumstances where the reasonable man was not aware of the cause of the fire having been identified he would be unable to dismiss as fanciful the possibility that the cause of the fire was in some way connected to the work of [Pechtel's] employees"
The reasonable man would therefore apprehend that there was a real possibility that a claim might be brought against Pechtel in connection with the fire. Mr Justice Teare considered that the confirmation given by Mr Dhanda was not enough to displace this conclusion since Mr Murray was aware that, at this stage, the fire had not been investigated.
Mr Justice Teare went on to hold that, even if he was wrong about notice being required at this stage, it should have been given in November following the various enquiries by AMEC in the course of its investigation into the cause of the fire. At the very latest notice should have been given in January 2007 following AMEC's letter.
Whether condition 4(a) was a condition precedent to liability
Mr Justice Teare found that condition 13(i) expressed a clear intention that it was a condition of the insurers being liable that the insured observed the terms and conditions of the insurance; one of which was condition 4(a). In addition there was an important objective commercial purpose in condition 4(a) which was to enable the insurers to investigate the potential claim at the earliest opportunity, to take appropriate steps to minimise liability under the policy and take charge of any proceedings against the insured. This underlying commercial purpose of condition 4(a) justified compliance with this condition being a condition precedent to liability and therefore it was construed as such.
Two important issues in construing the conditions in this way were raised by Pechtel and addressed by Mr Justice Teare. The first issue was that on a literal reading of condition 13(i) (if it was to operate as insurers asserted) breach of clause 4(a) would relieve insurers of all liability under the policy not just liability in respect of the particular claim. Mr Justice Teare concluded that a purposive approach should be taken to the construction of condition 13(i) when read in conjunction with condition 4(a). The purpose of the operation of these two conditions was to allow insurers to promptly investigate the particular claim not to enable insurers to deny liability in respect of any other occurrence which may give rise to a claim. Condition 13(i) should therefore be construed accordingly to read "the liability of the underwriters to indemnify the assured in respect of a claim for an indemnity shall be conditional upon the assured observing the terms and conditions of the policy with regard to that claim". The second issue was that, if condition 13(i) was interpreted as asserted by insurers, breach of much more minor conditions would provide insurers with a defence to liability. Mr Justice Teare again took a purposive approach to the construction of condition 13(i) and considered that, in the event that insurers sought to deny cover on the basis of the breach of a different term or condition, it would have to be considered whether the objective commercial purpose underlying that condition justified compliance with it being regarded as a condition precedent to liability. The judge provided little further guidance in this regard.
On the facts of this case there were clear and repeated failures on the part of the insured to notify circumstances "immediately" as required by the terms of the policy and therefore the conclusion of the judge in this regard was somewhat predictable. Nonetheless it once again emphasises the need for insureds to comply strictly with notification provisions not just in relation to claims received but also in relation to circumstances that might reasonably be considered to give rise to a claim in the future. It also emphasises that a statement of comfort from a potential claimant that there is no intention to bring a claim against the insured will not necessarily prevent circumstances being such that they are considered likely to give rise to a claim and are therefore notifiable.
The judge commented in his judgment at paragraph 51 that the likely reason for the failure on the part of the insured to notify in this case "was that Mr Murray's responsibilities did not extend to insurance matters and that Mr Brown who was responsible for insurance matters did not consult the terms of the Defendant's insurance policy or seek advice from [the broker] as to what action was appropriate". This comment highlights the importance of all managers involved in a construction contract being aware at least in general terms of the company's insurance obligations so that important information is communicated to the right people. It also highlights the importance of ensuring that the individual charged with dealing with insurance matters has a sufficiently detailed knowledge of the policy terms and conditions.
The finding that the notification provisions in this policy were a condition precedent by virtue of condition 13(i) should also be noted by insureds. Conditions similar in wording to that contained in condition 13(i) are often included in policy wordings as "sweep up" clauses in an attempt by insurers to make cover conditional on compliance with all terms and conditions. Clearly in the event of the inclusion of wording to this effect insureds should be particularly vigilant in respect of compliance with notification provisions. The decision in this case goes further than this, however, and suggests that a clause along the lines of condition 13(i) can make any condition a condition precedent to liability in circumstances where there is sufficient policy justification for the condition in question to be considered a condition precedent. Other than in respect of notification clauses it is unclear from the judgment the type of condition that would provide the necessary justification and it is bound to be difficult to work out where the line should be drawn. Whilst the courts endeavour to draw this line the best advice to insureds must be to guard against the inclusion of such "sweep up" wording and to seek to make it clear how each policy term is to be categorised so that the effect of breach of any of the terms is clear from the outset. In circumstances where insurers insist on including a "sweep up" clause of this nature, until more guidance is given by the courts, insureds are advised that policy terms and conditions should be complied with to the letter.