In Bluebon Ltd (in liquidation) v Ageas (UK) Limited, Aviva Insurance Ltd and another, the Commercial Court has provided a useful reminder about how to construe warranties and their effect.
The Claimant bought the Star and Garter Hotel in December 2007 and it was insured by the Defendant insurers for the first time for the 2009/10 policy year. The hotel was destroyed by fire during this period of cover and losses claimed amounted to almost £1.75 million.
In the Policy Schedule, under Special Conditions and Endorsements, there were various 'Warranties' listed, including an Electrical Installation Inspection Warranty which stated:
"It is warranted that the electrical installation be inspected and tested every five years by a contractor approved by the National Inspection Council for Electrical Installation Contracting and that any defects be remedied forthwith in accordance with the Regulations of the Institute of Electrical Engineers."
There had been an inspection of the electrical installation in September 2003, but there was no evidence of any further inspection or testing.
Insurers argued that the Insured was in breach of the Warranty with the effect that the policy was void from the outset. In case they were wrong about that, they argued that cover was suspended from the date of inception and the policy would therefore still not respond to the claim. In other words, insurers' fallback position was that if the Warranty was not a 'true' warranty, it still operated as a suspensive warranty/condition.
In response, the insured asserted that the five years in the Warranty ran from the inception of the policy so that there was no breach. Further, the insured argued that the Warranty was not a true warranty, or even a suspensive warranty/condition, but rather a risk specific condition precedent to liability, requiring compliance before insurers would pay out for a claim arising from electrical defects (the cause of the fire not being agreed to be electrical in origin).
The Court decided that the five year period for inspecting the electrical installation ran from the date of the last inspection and that the term was in fact a suspensive condition, with breach resulting in all cover being suspended from inception of the policy until the condition was complied with.
Interpretation of the five year testing requirement
In relation to the five yearly testing requirement, the term was interpreted in light of the five factors listed by Lord Neuberger in Arnold v Britten (2015):
1.The natural and ordinary meaning of the clauseThe reference to electrical inspections being required every five years in a 12 month policy could only mean that the five year period ran from the date of the last inspection; not from inception of the policy.
2.Any other relevant provisions in the policyThere were a number of other 'warranties' in the policy (such as waste warranties and deep fat frying warranties), all of which helped identify the commercial purpose behind this group of terms, namely to reduce the risk of fire occurring.
3.The overall purpose of the clause and policyThe overall purpose of the clause was clearly to ensure that the risk of fire was minimised.
4.The facts and circumstances known by the partiesA reasonable person having all the background knowledge would know that inspections of electrical installations should be undertaken on a regular basis and that there were regulations which applied to such inspections, requiring no more than a five year gap between them. They would also know that the electrical inspection clause would be of no use if the measures which it required to reduce the risk of fire could never occur within the period of insurance.
5.Commercial common senseAny other construction (namely that the five year inspection period would start to run from inception of the Policy) would render the clause meaningless in a 12 month policy.
Nature of the term – remedies available to insurers
The Court started by applying the three tests in HIH Casualty & General Insurance v New Hampshire Insurance Co (2001) to determine whether the electrical inspection clause was a true warranty:
1.Does the term go to the root of the contract?
2.Does it bear materially on the risk of loss?
3.Would an award of damages to the insurer for a breach of the term be an unsatisfactory remedy for insurers?
While it was strongly arguable that all of these tests could be said to be satisfied, the Court decided that the clause was in fact a suspensive condition.
Others terms within the Policy were also described as warranties, which would not satisfy the above tests. So, the Court did not place too much reliance on the fact that insurers had used the word 'warranty' to describe the electrical inspection endorsement.
The Court decided that the term contemplated that if no inspection had been carried out in the last five years, an inspection would have to be undertaken immediately (with no cover in place until such inspection had taken place). Therefore, the intended consequence of there being a gap of more than 5 years between inspections was not that the policy would be void from inception with the Insured being given no chance to remedy the situation, but rather that all cover would be suspended until the clause had been complied with. Such a consequence was not consistent with the term being a true warranty, but rather a suspensive condition. The Court's primary view was that all cover was suspended whilst the term was not being complied with (not just cover for fire claims), but that even if it was wrong in that interpretation, the clause must have been intended to suspend cover for fire claims (irrespective of whether they were electrical in origin). The clause was not a risk specific condition precedent. As a consequence the insurers had been right to refuse indemnity.
Insurance Act 2015
It is worth noting that the Policy in this case was issued before the Insurance Act 2015 came into force. Whilst the Court's decision reflects the suspensive nature of warranties as they are now to be interpreted under the 2015 Act, it does not address the Act's approach to terms which are designed to reduce loss of a particular kind (as clearly this type of electrical inspection condition is). Section 11 of the Insurance Act provides that an insurer cannot rely on this type of condition to refuse to pay a claim if the policyholder can show that its breach did not increase the risk of the loss which occurred in the circumstances in which it occurred. So, under the new regime, if a policyholder can show that the circumstances of a fire are such that its failure to comply with an electrical inspection requirement could not have increased the risk of that fire occurring, insurers would have to meet the claim. Moreover, if the policy incepted after 4 May 2017, insurers who refuse to pay a claim for breach of a warranty or condition of this type (where the breach did not increase the risk of the loss) would be likely to find themselves faced with a supplementary claim for damages for late payment of an insurance claim.
Finally, this case also serves to remind insurers to review not only policy wordings but their suites of endorsements, to ensure that they set out as clearly as possible what risk control measures mean, so that there can be no dispute as to what the policyholder is required to do and what the consequences are if it fails to comply. Now is the time to review wordings with fresh eyes.