This case acts as a reminder to insurers that they must take steps to reserve their rights in respect of an insured’s claim immediately following notification and pending further investigations into whether the claim is covered under the policy.
This is especially so in circumstances where, on notification, insurers have knowledge of a potential policy defence (in this case a breach of condition precedent to liability) yet fail to reserve their rights until nearly a month later and then only after communicating with the insured in a manner which the court in this case ruled gave rise to a waiver by election. In making its decision, the court rejected insurers’ submission that the insured’s failure to comply with the condition precedent was a breach of promissory warranty, which automatically discharged insurers from liability. Instead, the judge concluded that insurers remained free to choose whether to accept or reject the claim. There was therefore scope for the doctrine of election to apply.
The claimant tour operator, Kosmar, took out a combined liability policy with the defendant insurer, Euclidian Direct Limited, which incepted on 10 December 2001 (“the policy”). The policy ended on 9 December 2002. On 22 August 2002, whilst on a holiday organised by Kosmar, James Evans (a 17 year old boy), dived into a swimming pool and fractured his spine. The apartment block in which he was staying was used exclusively by Kosmar, although they did not own it. Mr Evans issued and served proceedings against Kosmar. At the liability trial on 15 December 2006, the court entered judgment in favour of Mr Evans, with contributory negligence assessed at 50%. Following the judgment, Kosmar’s liability was estimated to be in the region of £1m.
Kosmar sought an indemnity from Euclidian in respect of Mr Evans’ claim in accordance with the terms of the policy, which provided that:
“Insurers will indemnify the Insured against all sums which the Insured shall become legally liable to pay as damages consequent upon accidental injury to any person….occurring during the period of insurance, in connection with the business.” However, the policy was subject to a series of general conditions, one of which, General Condition 7 (sub-paragraph numbering added) stated:
7.it is a condition precedent to Insurers’ liability under this insurance that:
 The Insured shall immediately after the occurrence of any Injury or Damage give notice in writing with full particulars thereof to insurers……..
It was broadly agreed between the parties at the outset that (i) compliance with General Condition 7 constituted a condition precedent to Euclidian’s liability under the policy; and (ii) that Kosmar failed to comply with GC 7 , in that notification of Mr Evans’ accident on 22 August 2002 was not given to Euclidian immediately (it was eventually given on 4 September 2003, over a year later).
Euclidian denied Kosmar an indemnity in respect of the claim on the grounds that Kosmar failed to satisfy the condition precedent at GC 7 .
In response, Kosmar contended that, despite their non compliance with GC 7 , they were entitled to an indemnity on the grounds that Euclidian had either waived its right to rely upon the clause and/or was estopped from relying on it.
In support of its position, Kosmar relied on:
(i) The history of dealings between individuals at Euclidian and Kosmar The material people who negotiated the December 2001 Euclidian policy were known to each other and had previously done business together (albeit not necessarily whilst working for Euclidian and Kosmar). It is not necessary for the purposes of this article to dwell on the details of that historical relationship. It is sufficient to say that Kosmar had public liability insurance with the Independent in December 1998 and 1999 and with St Paul for the year commencing December 2000 and in each of these policies there was a similar clause to that contained in GC 7 . During the course of witness evidence it became clear that this clause had not previously been enforced by the Euclidian personnel whilst they were at the Independent.
(ii) 1 March 2002 meeting between Kosmar and Euclidian By the time St Paul took over the insurance in 2000, it was agreed to streamline the claims handling process and the brokers Devitts (acting as cover holder) gave authority to Ms Alliston of Travel Advice Centre (TAC) to decline liability on Kosmar’s behalf, without reference to insurers, if she considered Kosmar had sufficient grounds to do so. In cases where Ms Alliston denied liability, she was to forward her letter and the file to TPG, for onward transmission to Devitts, within six weeks of declining liability. This claims handling authority was adopted by Euclidian when they came on risk in December 2001.
At the 1 March meeting, the above claims handling process was confirmed except that, where Ms Alliston denied liability on behalf of Kosmar, the St Paul’s requirement that she forward her files to TPG for onward transmission to insurers within six weeks was dropped.
This meant that, in cases such as the Evans case, the files would never be sent to Euclidian.
(iii) Euclidian’s treatment of claims between March 2002 and September 2003 A schedule was produced at trial which showed that between these two dates at least 16 other claims had been notified by Kosmar to Euclidian in circumstances where there had been a prima facie failure to comply with the provisions of GC 7  in relation to immediate notification of an occurrence. In none of these cases had Euclidian rejected the claim.
(iv) Events of 4 - 30 September 2003
From 4 September (when the Evans claim was first notified by telephone to Mr Armstrong of Euclidian by Ms Souidhou of Kosmar) to 30 September (when Euclidian first reserved their rights), Euclidian had plenty of opportunity in its correspondence of 17,19 or 22 September to reserve its rights in respect of the claim, but did not do so.
In respect of Kosmar’s arguments at (i) and (ii) above, Gross J agreed with Euclidian that there was no estoppel of any description; nor was there any waiver by election arising out of the pre-contractual history or the 1 March meeting, or the two considered together. In this regard, he concluded that the negotiation of the terms of the policy was a commercial transaction and the terms had been agreed by both Kosmar and Euclidian. Therefore, the parties were bound by the clauses agreed, including GC 7 . In short, there was nothing in the parties pre-contract dealings or the 1 March 2002 meeting which resulted in any agreement to alter or waive the terms of GC 7  of the policy.
In respect of (iii) above, Gross J was not persuaded that Kosmar had established estoppel (in whatever form). This is because he concluded that Kosmar had been unable to establish a common assumption or representation to the effect that by paying the claims in the schedule (despite prima facie non compliance with GC 7 ) Euclidian were in some way electing to waive their right to rely upon the clause in the Evans claim. He concluded that all Euclidian was doing was dealing with each case on the schedule on a case by case basis; they were not indicating to Kosmar that in all future cases GC 7  could be ignored.
Kosmar’s final submission at (iv) above involved the events between 4 and 30 September 2003. In his judgment, Gross J looked first at whether Euclidian had waived its right by election. He noted that it was a requirement of waiver by election that the party in question must (or at least must generally) have made an informed choice, with full knowledge of the facts giving rise to the right and probably knowledge of the right to choose. Kosmar submitted that, faced with the choice of accepting or rejecting the Evans claim, Euclidian had elected to accept it, before purporting to reserve its rights on 30 September 2003.
Euclidian argued that the failure to provide immediate notice under GC 7  was a breach of promissory warranty, which if accepted by the court would automatically discharge
Euclidian from liability under the policy and preclude a waiver by election argument.
Gross J, rejecting the Kosmar’s promissory warranty argument, ruled that there was scope for waiver by election on the facts between 4 and 30 September 2003. He cited four main reasons:
1.In the case of breach of a promissory warranty, cover as a whole ceases to be applicable. By contrast, in the event of Kosmar’s failure to comply with GC 7 , there was no question of Euclidian being discharged under the policy as a whole. Kosmar’s failure only impacted on the claim in question.
2.There was nothing in the wording of GC 7  which led to the conclusion that Kosmar’s failure to comply with it automatically discharged Euclidian from liability.
3.Euclidian had provided no evidence or authority to support its proposition that there was no scope for waiver by election.
4.Euclidian’s own case by case approach to the other claims in the schedule supported the notion that there was room for waiver by election here.
Having concluded that waiver by election was appropriate, Gross J went on to say that he was in no doubt that Euclidian had knowledge of all the relevant facts of the Evans case following the initial telephone conversation between Ms Souidhou and Mr Armstrong on 4 September 2003.
Thereafter, he said that Euclidian had no need to investigate the facts or the contractual position further before making a decision on whether to reserve its rights. Accordingly, by 17,19 or 22 September, when Euclidian wrote various correspondence to Kosmar (all of which was inconsistent with rejecting the claim or indeed reserving its rights) it had had a reasonable time within which to decide on its stance in respect of the Evans claim and chose not to reserve its rights.
In conclusion, Gross J ruled that Kosmar was entitled to an indemnity on the grounds that, following notification to Euclidian of the Evans claim, Euclidian elected to accept liability for it rather than decline to pay it or reserve its rights. He went on to say that, given his views on election, it was unnecessary to consider in detail Kosmar’s submissions on estoppel or affirmation. However, he indicated that his initial thoughts on the position were that Kosmar would have struggled to succeed on these arguments.