In the recent case of (1) The Seashell of Lisson Grove Ltd (2) Central Tax & Trustee Planning LLP (3) Andre Misso v Aviva Insurance Ltd & Ors [2011] EWHC 1761 (Comm), the Commercial Court considered the construction of certain policy terms upon which the insured sought to rely to avoid the ordinary consequences of a breach of warranty, misrepresentation and non-disclosure.

Background

The Commercial Court was required to determine three preliminary issues relating to the construction of terms in two insurance policies following a fire at a fish and chip restaurant. The Defendants insured the Claimants (the operator of the restaurant and freeholders of the building) under two policies: the Restaurant Policy and the Property Policy (the "Policies").

The Defendant insurers denied liability for the damage caused by the fire alleging breach of the Frying Range Warranty (in relation to the Restaurant Policy) and misrepresentation of and failure to disclose material facts (in relation to both Policies). The Claimants denied these allegations but also sought to rely on certain terms of the Policies to avoid the ordinary consequences of a breach of warranty, misrepresentation and non-disclosure. The construction of these terms was the subject of a preliminary issues hearing.

Issue 1: Clause 6 in the Restaurant Policy

Clause 6 of the Restaurant Policy provided as follows:

"Warranty

Any warranty shall from the time it is applied continue to be in force during the whole currency of this policy.

Failure to comply with any Warranty shall invalidate any claim for loss destruction damage or liability which is wholly or partly due to or affected by such failure to comply."

There was no dispute that the objective aim of Clause 6 was to limit the common law effect of a breach of warranty. Under the common law, breach of warranty is draconian as it discharges an insurer from liability from the date of the breach irrespective of whether there is a causal connection between the breach of warranty and the loss suffered (section 35(2) Marine Insurance Act 1906). The question for the Court was the extent to which the common law was limited by Clause 6. The Defendant insurers argued that so long as there is a link between the breach of warranty and "at least some" of the loss, destruction, damage and liability then the breach of warranty discharges the insurers from liability.

The Court was not persuaded by the Defendants' argument and held that Clause 6 meant that loss, destruction, damage or liability which was not wholly or partly due to or affected by a breach of warranty could still be claimed notwithstanding the breach. A claim for loss would only be denied if that loss had been wholly or partly due to or affected by the breach. The Defendants were, therefore, obliged to indemnify the Claimants for any loss or damage caused by the fire which was not wholly or partly due to or affected by the breach of warranty.

Issue 2: Non-Invalidation clause in the Restaurant Policy

The non-invalidation clause in the Restaurant Policy provided that the insurance would not be invalidated by:

"any act or omission or alteration either unknown to You or beyond Your control which increases the risk of Damage. However, You must (a) notify Us immediately You become aware of any such act, omission or alteration and (b) pay any additional premium required."

The question for the Court was whether this clause amended or limited the scope of or effect of a breach of warranty. The Court held that the words "act or omission" were capable of applying to breach of warranty (and misrepresentation and non-disclosure). This was held to be the case even where damage was caused before the insured learnt of the breach of warranty. However, in cases where the insured knew of the act or omission and did not inform the insurers of it before damage was caused he would be unable to avail himself of the protection afforded by the clause.

Issue 3: Non-Invalidation clause in the Property Policy

The non-invalidation clause in the Property Policy provided:

"This insurance shall not be invalidated by any act omission or by any alteration which increases the risk of Damage unknown to or beyond the control of the Insured provided that the Insured once aware of the increased risk shall give immediate notice to the Insurers and pay an additional premium if required."

The question for the Court was whether the insured could rely on this clause to prevent insurers avoiding the Property Policy for misrepresentation and/or non-disclosure at the time the Property Policy was entered into. Insurers sought to rely on a non-disclosure clause in the Property Policy which provided that:

"Condition 1: This Certificate shall be avoidable in the event of misrepresentation misdescription or non-disclosure in any material particular."

The Court held that the words "any act or omission" in the non-invalidation clause were capable of referring to misrepresentation, misdescription or non-disclosure, notwithstanding Condition 1, because such acts or omission can increase the risk of damage. The non-invalidation clause was, therefore, held to apply where there was an increase in the risk of damage unknown to or beyond the control of the insured; the insurance would not be invalidated where the insured had given notice of the increased risk to insurers once aware of it and had paid any additional premium required.

Comment

The decision in this case follows an increasing trend by the Courts to mitigate, where possible, the draconian effects for an insured of a breach of warranty or non-disclosure or misrepresentation. The case provides a useful reminder of the potential scope of non-invalidation clauses. If insurers wish to limit their intended scope, then clear wording to this effect will be required.