This recent Commercial Court decision revisits the interpretation of conditions precedent in insurance policies.It also explores the nature of a third party's right under the Third Parties (Rights Against Insurers) Act 1930.
The background is that Denso were sued by Mploy for over £600,000. Mploy took out ATE insurance underwritten by Great Lakes (which had Denso against an adverse Order for costs). Although Denso was held liable to Mploy in the underlying litigation, Mploy failed to beat a Part 36 offer made by Denso. Mploy was awarded c£34k in damages but as it failed to beat a Part 36 Offer that had been made, it was Ordered to pay the Bulk of Denso's costs. Denso told the liquidator that it would accept £210,000 but that unless they received a response they would claim the full amount of the costs incurred. The liquidator failed to pass that information to Great Lakes. Accordingly, Denso commenced a claim for detailed assessment. Its net position, once its costs exposure to Denso under the Part 36 offer was taken into account, meant that Mploy owed Denso almost £300,000 in respect of costs. Denso sought to recover costs direct from Great Lakes under the 1930 Act.
The dispute between Denso and Great Lakes essentially turned on whether Great Lakes could rely on a number of breaches by Mploy/its agents requiring them to cooperate in any claim and to provide information, whether the relevant obligations operated as conditions precedent under the policy and whether Great Lakes could set off unpaid premium from any sums due to the paid to Denso.
Finding in favour of Great Lakes, the court held that Mploy had breached obligations which were conditions precedent, including failing to pass on information relevant to costs "without delay". They were commercially vital. The insurer was exposed to costs, and the policy could not work without the insured's cooperation. Notifying insurers of a Part 36 offer after 2 months did not amount to acting "without delay". In the modern world a delay of more than a few days "was unacceptably slow".
The decision is also instructive as to how the courts approach conditions precedents in insurance policies. Essentially the court adopted a flexible approach. Conditions Precedent and Due Observance clauses are not to be viewed with hostility. Following the approach in Aspen v Pectel, the court must examine whether there is a sufficient conditional link between breach of an obligation and the consequence of repudiation of claims. The court will also ask itself whether there is sufficient commercial purpose to the relevant obligations.
Having upheld the operation of the Due Observance clause, the court nonetheless went on to analyse the various obligations in turn to see whether they should in fact be treated as conditions precedent to insurer's liability to indemnify.
Interestingly, the court also observed that it did not matter that Great Lakes ultimately agreed with Mploy that the Part 36 offer should not be accepted.
Another notable feature of the decision is that the court attached little weight to Denso's argument that Mploy's breach was immaterial because Great Lakes, when informed about the Part 36 offer, did not require a different approach and acquiesced in Mploy's rejection of the offer. This did not matter. What mattered was that the delay had deprived Great Lakes of the opportunity to consider the offer shortly after it was made. It is also worth mentioning that an insurer could not rely on this breach to deny cover, by operation of section 11 of the Insurance Act 2015. Under this provision, an Insured can escape the consequences of non-compliance if it shows that the non-compliance with the term could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.
This case is also of interest since the court considered whether Great Lakes could set off from any sums due to Denso the amount of the unpaid premium. Although strictly unnecessary given the findings made on breach of condition precedent, the court held that legal set off was probably precluded under the scheme of the 1930 Act. The court seemed prepared to consider in principle whether equitable set off might assist Great Lakes, but concluded that as the requisite ingredients for this has not been pleaded and proven, such that the argument would fail. Arguably entertaining an argument of equitable set-off in appropriate cases would be consistent with the premise of the 1930 Act, namely that the third part is in no better position vis-à-vis the insurer than the original insured.
The successor to the 1930 Act, the Third Parties (Rights against Insurers) Act 2010, is based on the same premise.However it is now possible for the third party to seek to comply with obligations breached by the original insured. So a third party could seek belatedly to furnish insurers with relevant information about offers and engage insurers in settlement discussions.Much though may still come down to timing, whether the third party will become aware of the insurance position, and the terms of the policy, in time to shore up its position.