The recent judgment of the High Court in Milton Keynes Borough Council v (1) Michael Nulty, deceased (2) Wing Bat Security Ltd (formerly DBI Support Services Ltd) (in liquidation) (3) National Insurance & Guarantee Corporation Ltd [2011] EWHC 2847 (TCC) provides an interesting example of an insurer's liability being reduced by the measure of its "lost chance" to influence the outcome of litigation where that lost chance had resulted from the insured's failure to comply with the notification provisions of the policy. The case is a rare example of circumstances in which the breach of a policy's claims notification clause was a breach of a 'bare condition' (as opposed to a condition precedent), yet the insurer was able to demonstrate that the resulting prejudice suffered was sufficiently serious to provide it with a quantifiable damages claim against the insured.

Background

The proceedings involved two parallel actions arising out of two fires at a recycling centre which occurred in April 2005. In the first action, the court was concerned to determine the cause of those fires and, in the second action, to decide the extent of an insurance company's liability to indemnify its policyholder in the event that he was held to be responsible for causing those fires. The recycling centre was owned by Milton Keynes Borough Council (the "Council") who brought proceedings in the first action against a former electrical contractor ("Mr Nulty"), contending that he had caused the fires by discarding a cigarette end. Mr Nulty had died in 2010 and his professional liability insurer, National Insurance and Guarantee Corporation Ltd ("NIG"), effectively conducted his defence to the Council's claim. At the same time, NIG sought in the second action to dispute the extent of its liability to indemnify Mr Nulty, arguing that Mr Nulty had breached the terms of his contractor's liability policy (the "Policy") by failing to provide prompt notification of circumstances which could give rise to a claim, and that this had seriously prejudiced NIG's ability to contest the case brought by the Council.

Issues

In the first action, the Council argued that Mr Nulty had caused the first fire by discarding a cigarette end while working at the recycling centre, and that the first fire, not being fully extinguished, had led to the second fire. NIG contended that the fires were caused by an electrical fault or arson. In the second action, NIG argued that Mr Nulty was in breach of the terms of the Policy, which contained a clause entitled "Claims Conditions". The clause provided that "the Insured shall on the happening of any incident which could result in a claim under this Policy immediately notify and send written confirmation to the Company".

Mr Nulty had been interviewed by a fire investigator appointed by the fire brigade on 4 April 2005, the day after the second fire. On 3 February 2006 he was questioned under caution by the police concerning the allegation that it was his cigarette that had started the fire. Some eight months later, on 10 October 2006, Mr Nulty received a letter of claim from the Council's solicitors which asserted that he was responsible for the fire. Mr Nulty forwarded that letter to his brokers, who passed the letter to NIG on 10 November 2006. NIG responded with a reservation of rights citing the "very late reporting of this matter". Following Mr Nulty's failure to respond to its requests to provide documentation, in March 2009 NIG wrote to Mr Nulty refusing him an indemnity on the grounds that he "had failed to comply with the policy requirements to co-operate". In a further letter in October 2009, NIG sought to deny coverage on the basis that immediate notification was a condition precedent of the Policy, and therefore that it was not necessary for NIG to prove it had been prejudiced by the late notification. In fact the Policy did not contain a term imposing a duty upon the insured to co-operate in the event of a claim, and further it was accepted by NIG in the proceedings that the notification obligation in the "Claims Conditions" clause was not a condition precedent to liability. It therefore followed that the extent of NIG's liability to indemnify Mr Nulty could only be reduced if NIG could show that it had suffered prejudice as a result of his failure to provide an immediate notification of circumstances.

NIG argued that had Mr Nulty informed them of the fires, they would have immediately instructed a fire expert to investigate the causes of the blaze. NIG submitted that the 18 month delay in notification had resulted in prejudice to its position in the ensuing litigation, citing factors such as the lost opportunity to examine the premises in the immediate aftermath of the fire and to put contemporaneous evidence to witnesses. NIG contended that as a result, it had lost the opportunity to demonstrate that a cigarette discarded by Mr Nulty was not the probable cause of the first fire, or that the first fire was not the cause of the second fire.

Decision

Mr Justice Edwards-Stuart concluded that Mr Nulty's discarded cigarette was the cause of the first fire and that the first fire had ultimately led to the second fire. Mr Nulty was therefore liable in full for the damage to the recycling centre.

Edwards-Stuart J held that given the absence from the Policy of a claims co-operation clause, a duty upon Mr Nulty to co-operate with NIG in the event of a claim might be implied, but not so as to make it a condition precedent. Therefore NIG's declinature of liability in March 2009 had no valid basis. Further, he noted that it was accepted by NIG that the "Claims Conditions" clause in the Policy was not in fact a condition precedent to liability. NIG was therefore required to prove that it had suffered prejudice as a result of the breach of that clause.

Edwards-Stuart J stated that, in his opinion, NIG's submissions on the issue of the prejudice suffered were not particularly convincing. He found that NIG would not have instructed a fire expert as quickly as they had alleged, the evidence demonstrating that NIG were more concerned with saving costs or avoiding altogether the obligation to indemnify Mr Nulty than in defending a potential claim against him. However, Edwards-Stuart J stated that "it is self evident that a cold trail always puts an investigator at a disadvantage" and Mr Nulty's delay in notification had denied NIG the opportunity to investigate, in particular in respect of the cause of the second fire. While he found that, on the balance of probabilities, the second fire was caused by the first, it was not possible to exclude the possibility that a prompt investigation might have led to an alternate finding. It followed that NIG had suffered a loss of a chance (that chance being more than nominal) to achieve a different outcome in the litigation with the Council. Edwards-Stuart J referred to the case of Friends Provident Life & Pensions Ltd v Sirius International Insurance Corp [2005] 2 Lloyd's Rep 517, and in particular the dicta of Lord Justice Mance, as authority for the principle that a lost chance or opportunity occasioned by late notice might be quantifiable in financial terms and thus the measure of that lost opportunity may be set-off against the claim for an indemnity. Edwards-Stuart J admitted that valuing NIG's lost opportunity to contest the Council's claim and secure a different result in the litigation was "fraught with difficulty" as there was no logical way of arriving at an appropriate percentage. Looking at the circumstances of the case as a whole he assessed the lost chance at 15%. Given that the Council's claim against Mr Nulty was likely to exceed the £2 million limit of indemnity of the Policy, NIG was liable to indemnify Mr Nulty only to the extent of £1.7million.

Comment

The case serves as a useful reminder of the fundamental difference between policy terms which are a "condition precedent" to liability and those which are "bare conditions". Had the "Claims Conditions" clause been a condition precedent, the policyholder's failure to satisfy that condition precedent would have meant that no liability attached to the insurer in respect of the claim. The fact that the "Claims Conditions" clause was not a condition precedent meant that the insurer had an action in damages only against the insured for the breach of that condition, and further the insurer had to prove it had suffered loss as a result of that breach.

The above highlights the importance of distinguishing a condition precedent from a bare condition. The policy wording will determine whether or not a particular clause is a condition precedent, either through express words to this effect, or on a proper construction of the clause in the context of the policy as a whole. The well publicised authority of HLB Kidsons (a firm) v Lloyd's Underwriters subscribing to Lloyd's Policy Number 621/PK1D00101 and Others [2008] EWCA Civ 1206 provides an example of a case in which the 'proper construction' approach was applied to identify a notification clause as a condition precedent.

There is a dearth of reported cases in which insurers have successfully argued, in the context of a notification clause, for damages resulting from a lost chance of successfully defending proceedings. Edwards-Stuart J cited a passage from Jackson and Powell on Professional Liability dealing with negligence claims brought against solicitors by clients who have been deprived of the opportunity to defend proceedings. He recognised that this was a "fairly exiguous authority" on which to conclude that NIG's claim for damages should be assessed on the basis a loss of a chance. Nevertheless, he found the analogy sufficiently close to allow NIG some measure of relief from the prejudicial consequences of the late notification. It is notable that merely because the lost chance to influence the outcome of the proceedings was less than 50% did not mean that it was nominal, or too intangible to sound in damages. This principle is likely to offer some reassurance to insurers under policies where the claims notification provisions are not framed as conditions precedent. Similarly an insured cannot assume that merely because a notification clause is a bare condition that insurers will be left with no practical remedy should notice be late or inadequate. Regardless of whether a notification clause is a condition precedent or a bare condition, insureds should make certain that they have appropriate processes in place to fulfil any notification obligations contained in their policies, in order to avoid the potential for coverage disputes.