The Court of Appeal has held that insurers were not liable for a claim under a commercial combined liability policy where the insured was in breach of a condition precedent.  The decision raises the question of whether the result would have been the same under the Insurance Act 2015, which will come into force in August 2016.

Background

The claimant submitted a claim under its commercial combined insurance policy for losses suffered as a result of a fire started by an intruder at its premises. The policy contained a provision, identified as General Condition 7 (GC7), which stated “The whole of the protections including any Burglar Alarm provided for the safety for the premises shall be in use at all times out of business hours or when the Insured’s premises are left unattended and such protections shall not be withdrawn or varied to the detriment of the interests of Underwriters without their prior consent”. 

The claimant’s intruder alarm was not active or monitored when the fire broke out by reason of the claimant’s failure to pay its invoices. The defendant insurers declined the claim on the basis of a breach of GC7, which they identified to be a condition precedent to cover.  The claimant sued its insurers for failure to pay its claim under the policy and, after losing at first instance, took the matter to the Court of Appeal.

Decision

GC7 was held to be a condition precedent to cover, and on the facts, the claimant was held to be in breach of the provision.  The breach amounted to a withdrawal/variation of building protections in such a way as to create “a real risk” of detriment to the interests of the insurers.  Had the intruder alarm system been active and monitored, it would have detected the intruder or the fire, thus reducing the damage suffered by the claimant.

Comment

The Insurance Act 2015 will come into force on 12 August 2016, bringing with it sweeping changes to UK insurance law.  

Section 11 of the Act sets out new provisions relating to terms, compliance with which would tend to reduce the risk of loss of a particular kind, at a particular location, or at a particular time.  If a loss occurs and the term has not been complied with, an insurer may not rely on the non-compliance to exclude, limit or discharge its liability where the insured can show that non-compliance with the term could not have increased the risk of the loss which actually occurred, in the circumstances in which it occurred.  The full impact of this provision (and the Act as a whole) remains to be seen, but the clear aim is to reduce insurers’ ability to decline cover for claims where an insured is in breach of a policy term, but where that breach was not capable of having any bearing on the loss claimed.  As such, section 11 of the Act threatens to severely curtail insurers’ reliance on the current legal concept of a condition precedent, where any breach, however ‘technical’, can provide insurers with a route to escape liability. 

The decision in the present case hinged upon the courts’ findings as to the status of GC7 as a condition precedent, and its breach by the claimant. Under the current law, a breach of a condition precedent to cover provides an insurer with a complete defence to a claim, regardless of whether the breach was the (or even a) cause of the loss being claimed.  

Under the Act, the decision would instead have hinged upon the courts’ findings as to whether the absence of an active intruder alarm system could have increased the risk of damage by fire.  If the claimant had succeeded in showing that the absence of an operational intruder alarm system would have made no difference to the risk of loss that occurred, then, under the Act, insurers would not have been able to rely upon the ‘technical breach’ of GC7 to decline cover, even if they succeeded in persuading the court that GC7 was a condition precedent.  

Before the Act comes into force next year, insurers seeking to protect the current effect of their policy wordings will need to carefully consider those wordings against the language of the Act and the common types of loss claimed thereunder.  Going forward, a breach of a condition precedent to cover will only provide an insurer with a complete defence to a claim where the insured cannot demonstrate that its breach could not have increased the risk of loss sustained.

Further reading:

Milton Furniture Ltd v Brit Insurance Ltd [2015] EWCA Civ 671

Insurance Act 2015