Warranties in a marine liability policy – the Scotbeef decision

Summary

In Scotbeef Ltd v (1) D&S Storage Ltd (in Liquidation); and (2) Lonham Group Ltd the Court considered a claim under a marine liability policy. This is one of the first decisions in which the application of the Insurance Act 2015 (IA 2015) to conditions precedent and warranties has been considered, and has now become the only case to have gone to the Court of Appeal on these points.

Background

The first defendant (D&S) stored meat for the claimant (Scotbeef). The second defendant insurers (the Insurers) underwrote a marine liability insurance policy under which D&S was insured. Scotbeef secured judgment against D&S, which went into liquidation. Consequently Scotbeef sought an indemnity directly from the Insurers under the Third Parties (Rights Against Insurers) Act 2010. The Insurers declined cover, on the basis of breach of conditions precedent in the policy.

Policy Terms

The Policy contained a clause that identified the “trading” conditions to be used by D&S as being the FSDF terms and conditions, at £250 per tonne. This was a reference to one of the industry standard sets of terms for food storage and distribution, and the reference to £250 per tonne was a reference to the potential liability of the insured to its customers.

The Policy also included the following terms, which were introduced collectively as conditions precedent, in a “Duty of Assured” clause:

(i) The Assured makes a full declaration of all current trading conditions at inception of the policy period (Condition (i)).

(ii) During the currency of the policy, the Assured continuously trades under the conditions declared and approved by underwriters in writing (Condition (ii)).

(iii) The Assured shall take all reasonable and practicable steps to ensure that their trading conditions are incorporated in all contracts entered into by the Assured. This includes the Assured making specific reference to their trading conditions in the job quotations to their customers. If own conditions (i.e. not industry standard trading conditions) are used, a copy of those conditions should be made available to the Assured’s customers at the time of contracting, and the Assured should specify their trading conditions on all invoices and written communications to their customers (together, Condition (iii)).

The Policy then stated that if a claim arises in respect of a contract into which the Assured has failed to incorporate these conditions, the Assured’s right to indemnity in respect of that claim shall not be prejudiced provided the Assured has taken all reasonable and practicable steps to incorporate them into its contracts. It also stated that the Policy was subject to and incorporated the provisions of IA 2015.

The policy also contained a section entitled “Important instructions in the event of a claim”. This section set out claim notification conditions precedent. It also included a clause that stated that the effect of a breach of condition precedent was that the insurers are entitled to “avoid the claim in its entirety”.

The Judgment

The Court concluded that Condition (i) was a representation. Section 9(2) of IA 2015 renders invalid any attempt to convert a statement into a warranty, whether by way of the old “basis of contract clause” or otherwise. Therefore, Condition (i) could not be considered a condition precedent or warranty, because it fell foul of this restriction.

Conditions (ii) and (iii), on the other hand, were not caught within Section 9(2) of 2015. Condition (ii) required the insured to trade under the terms approved by Insurers. Condition (iii) required the insured to take reasonable steps to ensure that the FSDF terms were incorporated into the underlying contracts. In each case, this was not restricted to new contracts entered into after inception of the policy, although failure to have followed these requirements prior to inception could not, itself, amount to breach of either Condition.

However, the Court further held that neither sub-clause satisfied the “transparency requirements” set out in Sections 16 and 17 of IA 2015. These Sections cumulatively state that (a) any attempt to contract out of Section 9 of IA 2015 is of no effect; and that (b) any attempt to contract out of any other requirement is, to the extent it is disadvantageous to the Insured, of no effect unless it is clear and unambiguous as to its effect and is drawn to the attention of the insured, taking into account the characteristics of the insured and the circumstances of the transaction.

The Court concluded that, as a result, the Conditions were of no effect.

In addition, the Court did not accept that Insurers had demonstrated actionable misrepresentation. Therefore, Insurers were obliged to indemnify the insured, D&S, and in turn Scotbeef as the third party claimant under the Third Parties (Rights Against Insurers) Act.

Commentary

This set of conclusions is problematic for a number of reasons.

1. First, the Court held that Condition (iii) could be breached where the Insured failed to take reasonable steps to ensure the FSDF terms were incorporated, even if they were in fact incorporated. This is an odd construction, and it seems to inform at least a large part of the judgment. If the FSDF terms were in fact incorporated, it cannot be right to say that there could still be a breach of that Condition because the Insured had failed to take further steps and exert itself further to try and have these terms incorporated.

2. Secondly, and of more general concern, the Court seems to have conflated a term being disadvantageous to an Insured with a term which disadvantageously seeks to vary or exclude the requirements under IA 2015. The second of these is covered by the transparency requirements. The first is not. There is no obligation in general terms to draw conditions precedent or warranties to the express attention of the Insured.

3. It might be that the answer is found in Section 11 of IA 2015. That Section applies to terms of a Policy other than terms that define the risk as a whole where compliance would tend to reduce the risk of one or more of (a) loss of a particular kind; (b) loss at a particular location; or (c) loss at a particular time. A paradigm example of this would be a smoke alarm warranty in a property policy or a hot works warranty in a property, CAR or public liability policy. If a loss occurs and the term has not been complied with, the Insurer may not rely on breach if the Insured can show that non-compliance did not increase the risk of loss.

It seems to us at least arguable that Conditions (ii) and (iii) do not fall within this Section since they relate broadly to the incorporation of trading terms into the underlying contracts, rather than focussing on losses of a particular type, at a particular location or at a particular time. But unfortunately, the Court did not engage with this point. Whether, therefore, this is the basis of its decision is unclear.

4. The Court was clearly concerned by the fact that the Policy contained a term that stated breach of a condition precedent would entitle Insurers to “avoid the claim” in its entirety and that this could not be “reconciled” with the fact that the Policy stated in an earlier section that the insured’s right to an indemnity would not be prejudiced in the event that it took all reasonable and practicable steps to comply.

It seems to us that the clauses can be reconciled. First, this term appears in the claim notification section. Claim notification conditions precedent are probably not caught by the IA 2015 restrictions. Secondly, the way to reconcile the clauses is to interpret the reasonable care provision as applying to the requirements relating to the underlying terms and conditions of trade, with the Insurers right to avoid the claim in its entirety only being triggered if this reasonable care requirement was not met. In any event, this analysis does not appear in the judgment. Thirdly, the offending clause would be struck out. In this case, that would be the clause that entitled Insurers to “avoid the claim”. But the original condition precedent would remain, and would fall to be interpreted in line with IA 2015. The Court also appears to have merged the duty of fair presentation (not to misrepresent any material matter and to disclose all material matters) and the rights and liabilities that relate to conditions precedent. The two are different.

The appeal of this decision was heard by the Court of Appeal in December. Judgment is expected in the first half of 2025. We think the decision likely to be overturned by the Court of Appeal.

Whatever the outcome of the appeal, it does, though, highlight the need for Insurers to tread carefully and draft as clearly as possible any conditions precedent or warranties to minimise the risk they are construed in a surprising and/or unusual way. The requirement for careful drafting is even starker where an attempt is being made to tighten Insurer’s rights compared to those set out in the Insurance Act 2015. If in any doubt, it is probably prudent to spell out both the requirement(s) and the consequences of breach, and to draw any relevant clause to the Insured’s attention.