Insurer's Right to Decline a Policy for Non-Compliance with a Condition Precedent Conflicts with New Insurance Provisions in the UK
In the recent case of Kelly Builders (Rosemount) Limited v HCC Underwriting Agency Limited(1) the Irish High Court ruled that the defendant insurance company was entitled to avail of a breach of condition precedent to decline cover under a policy of insurance between the parties (the “Policy”). It is interesting to note that if this case were to be determined by the English courts after the Insurance Act 2015 (the “UK Act”) comes into force on 12 August 2016, it is likely that a different decision would be reached.
In this case, a fire on a building site caused substantial damage. A condition precedent of the Policy was that a “fully charged” fire extinguisher had to be to hand at all times. However, it was accepted by the insurer that even if a “fully charged” fire extinguisher had been available, it would not have prevented the damage. Nonetheless, the High Court determined that a condition precedent must be complied with, even where there is no link of causation between the non-compliance and the damage suffered.
The High Court did acknowledge that it might seem unfair that an insurer could avoid liability for non-compliance with a condition that was irrelevant to the resulting damage. However, the High Court cited with approval Cornhill Insurance plc v DE Stamp Felt Roofing Contractors Limited(2), which held that non-compliance by the insured with a condition precedent absolves the insurer of liability even if the non-compliance does not in any way cause the loss. The High Court noted that this position is “eminently logical”, because a condition precedent is one which must be complied with before the contractual obligation to indemnify takes place.
This judgment runs contrary to new provisions in the UK Act regarding conditions precedent. In particular, Section 11 of the UK Act states that insurers cannot rely on non-compliance with conditions precedent to “exclude, limit or discharge” their liability, provided that the policyholder is able to show that compliance would not have decreased the loss which actually occurred. Section 11 introduces a causation-type requirement, ensuring that a breach of a policy term must be related to the particular loss in question before an insurer can decline a claim. The intention of this provision is to prevent insurers from relying on irrelevant policy terms to defeat claims. Non-consumer parties can contract out of Section 11 of the UK Act if the relevant term is clear and is brought to the specific attention of the insured.
The case highlights the importance of an insured party complying with all conditions precedent. There have been few cases in Ireland that consider the impact of conditions precedent and this decision demonstrates that even where the lack of compliance with a condition precedent did not result in the loss, an insurer may nonetheless decline the claim. Once Section 11 of the UK Act is in force, however, it is unlikely that a similar decision would be reached in the United Kingdom.