Both insurers and insured are well aware of an insurer’s right to decline coverage for a claim where the insured has breached a condition of the policy that is a condition precedent to the insurer’s liability under that policy. However, a recent decision of the Commercial Court in England – Kosmar Villa Holidays plc v Trustees of Syndicate 1234 (judgment 4 April 2007) – emphasises the need for insurers to issue a formal reservation of rights letter to the insured as soon as it believes it might have grounds on which to reject a claim for breach of a condition precedent.
The Kosmar case involved a catastrophic injury to a Mr James Evans, then aged 17 , who dived into a swimming pool at a holiday complex in Corfu and fractured his spine. Kosmar, a specialised tour operator, had the exclusive use of the complex in question. As a result of the incident, Mr Evans was rendered tetraplegic. The injury occurred on 22 August 2002 but Kosmar (the insured) did not notify Euclidian (its insurers) of Mr Evan’s injury until 4 September 2003 – the same day that Euclidian received a letter of claim from Mr Evans’s solicitors.
The policy contained the following condition: “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.”
Everyone agreed that this condition constituted a condition precedent to Euclidian’s liability under the policy and that Kosmar had failed to notify Euclidian “immediately” of the injury to Mr Evans. What was in issue, however, was whether Euclidian, by its conduct, had elected to waive reliance on the condition precedent.
On 4 September 2003, it was immediately apparent to Euclidian that there had been a breach of the condition precedent. However, instead of rejecting the claim or at least reserving its right to do so for breach of the condition precedent, Euclidian wrote to Kosmar asking for further information.
The Euclidian witness who gave evidence at the trial accepted that this correspondence gave the appearance that the insurers were dealing with the claim and that, as at 29 September 2003, it would have been fair to assume that Euclidian was not concerned about the late notification of the occurrence. In the event, Euclidian only reserved its rights on 30 September 2003, when it wrote to Kosmar asking for an explanation of the delay in notification. Thereafter, lawyers became involved; Euclidian repudiated Kosmar’s claim under the policy; proceedings were issued; and the case proceeded to trial.
The Kosmar decision
The trial judge – Mr Justice Gross – reviewed the authorities and concluded that the September 2003 communications (prior to the 30 September reservation of rights letter) clearly demonstrated that Euclidian had made an informed choice to deal with Mr Evans’ claim, despite Kosmar’s failure to comply with the condition precedent.
Euclidian argued that it was entitled to a reasonable period of time to consider its position but the difficulty here was that, on the unusual facts of the case, Euclidian knew from the outset that there had been a breach of the condition precedent. It could have reserved its rights while it considered its position but chose not to do so. Consequently, Kosmar was entitled to an indemnity on the ground that, following notification to Euclidian of Mr Evans’s claim, Euclidian had chosen to accept liability for it rather than decline to pay it.
Lesson for insurers
The implications for insurers are obvious: in such circumstances, insurers should either reject the claim immediately or, if further information is required before making such a decision, issue an immediate reservation of rights letter pending the completion of their inquiries. Any delay may well prejudice the insurer’s ability to rely on the insured’s breach of a condition precedent.