In Lonham Group Ltd v Scotbeef Ltd & Anor the Court of Appeal held that insurers were not liable to indemnify an insured which had breached warranties in a marine liability policy.
Summary
Insurers were not liable under the Third Parties (Rights Against Insurers) Act 2010 (the TP(RAI)A 2010) to indemnify a third party where the original insured had breached warranties in its insurance policy. As we previously predicted, the Court of Appeal held that the judge had erred in her construction of certain clauses, and in construing all three as representations rather than warranties. She had applied the wrong sections of the Insurance Act 2015 (the IA 2015) as a result. Insurers had no liability to indemnify their own insured, nor by extension the relevant third party seeking indemnity under the TP(RAI)A 2010.
Background
Our article considering the first instance judgment sets out the background and the first instance judge's findings. We have summarised these briefly again below for ease of reference.
The first respondent (D&S) was a storage company, against whom the second respondent (Scotbeef) had claimed in relation to damage to meat products which D&S had been contracted to store for Scotbeef.
The appellants (the Insurers) were D&S's liability insurers. With D&S in liquidation, Scotbeef sought an indemnity directly from the Insurers under the TP(RAI)A 2010. The Insurers declined cover, on the basis of breach by D&S of conditions precedent or warranties in its insurance policy (the Policy).
The Policy contained a "Duty of Assured" clause, setting out requirements as to the use by D&S of standard industry trading conditions in its business dealings. In the Policy Schedule, the trading conditions were stated as being the "FSDF Terms and Conditions at GBP250.00 per tonne". This meant the Food Storage & Distribution Federation (FSDF) conditions with a maximum liability of £250 per tonne.
A trial of preliminary issues had previously resulted in a decision that the FSDF conditions were not incorporated into the contract between Scotbeef and D&S.
Policy Terms
The Duty of Assured clause required that:
Condition (i) - The Assured makes a full declaration of all current trading conditions at inception of the policy period.
Condition (ii) - During the currency of the policy, the Assured continuously trades under the conditions declared and approved by underwriters in writing.
Condition (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.
The Policy then stated that the Assured's right to indemnity for a claim in respect of a contract into which the Assured has failed to incorporate these conditions shall not be prejudiced, provided the Assured has taken all reasonable and practicable steps to do so. It also stated that the Policy was subject to and incorporated the provisions of the IA 2015.
A section of the Policy entitled "Important instructions in the event of a claim" set out claim notification conditions precedent. It also included a clause that stated that a breach of condition precedent gave insurers the right to "avoid the claim in its entirety".
The Court of Appeal Judgment
As we had predicted, the Court of Appeal took a different view to the judge at first instance, finding that the judge had erred in her construction of the Duty of Assured clause, and applied the wrong parts of the IA 2015 as a result.
At first instance, in Scotbeef Ltd v (1) D&S Storage Ltd (in Liquidation); and (2) Lonham Group Ltd, the judge found that the Conditions in the Duty of Assured clause were of no effect, with her reasoning in summary being that:
Conditions (i) to (iii) were to be read together, as representations (so falling within the duty of fair presentation in the IA 2015);
The Policy modified the law under the IA 2015 to the Insured's detriment through Conditions (ii) and (iii). These did not satisfy the "transparency requirements" set out in Sections 16 and 17 of the IA 2015. Therefore they were of no effect.
The key issue on appeal was the proper characterisation of Conditions (i) to (iii) and in particular whether sub-clauses (ii) and (iii) were continuing warranties rather than pre-contractual representations.
The duty of fair presentation is governed by different sections of the IA 2015 from those that relate to ongoing warranties. If the Conditions were pre-contractual misrepresentations, Insurers had not satisfied various requirements (for example to prove inducement of the actual underwriter). If, however, they are warranties, then subject to the application of the transparency requirements in the IA2015, they would provide a full defence to the claim.
The Court of Appeal found that, as a matter of construction, each of sub-clauses (i), (ii) and (iii) are to be considered separately. These Conditions deal with "all of the different permutations upon which [the insured] has traded and will trade in the future".
While agreeing that Condition (i) was properly construed as a pre-contract representation, to be viewed in the context of the duty of fair presentation under the IA 2015, the Court of Appeal held that the status of sub-clause (i) as a representation "... has no effect whatsoever upon the separate requirement in sub-clause (ii)". Condition (i) deals with "a representation of existing fact as at the date of inception, in terms of fair duty of presentation of risk, namely the terms upon which it has already contracted with customers".
Conditions (ii) and (iii), by contrast, do not contain any pre contractual representations or seek to regulate pre contractual disclosure by the insured, but (as submitted for Insurers) they seek to "regulate the conduct of the assured during the Policy term". Conditions (ii) and (iii), respectively requiring the insured to trade continuously under trading conditions approved by insurers, and to take reasonable steps to ensure incorporation of such terms into any new contracts, were properly construed as future warranties and conditions precedent to indemnity under the Policy.
Given the binding finding of fact that the FSDF conditions were not incorporated by D&S into its contract with Scotbeef, D&S had breached warranties in the Policy. The Court of Appeal considered the application of Part 3 of the IA 2015, holding that sub-section 10(2) of the IA 2015 applied. This section expressly states that the insurer has no liability for any loss after a warranty has been breached but before it has been remedied, as was the position here.
The Court of Appeal considered that the provisions in the IA 2015 that restrict Insurers' ability to contract out of the IA 2015 did not apply. The "transparency requirements" at sections 16 and 17 of the IA 2015 provide that: (a) any attempt to contract out of Section 9 of the IA 2015 (which abolished basis of contract clauses and other attempts to turn pre-contractual representations in to warranties) 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 of Appeal held that the transparency requirements in s. 17 did not arise. There was no attempt to contract out of the IA 2015. Rather, the Policy simply reflects the law as set out in the IA 2015.
Comment
This is the first matter to go before the Court of Appeal on questions of the application and operation of the IA 2015 in relation to warranties in a Policy.
As indicated in our earlier piece the first instance judgment was, in our view, problematic in a number of respects. The Court of Appeal has now provided welcome clarity.
In particular, it is noteworthy that:
The Court will continue to recognise ongoing warranties that govern behaviour during the Policy period. The IA 2015 does not operate to convert them into pre-contractual representations nor are Insurers precluded from relying on them by virtue of the provisions of the Act.
Ultimately, whether a Policy term contains a representation or a warranty is a matter of construction.
The transparency requirement is only triggered if the Insurer has attempted to modify the general legal position to the Insured's detriment. Simply reiterating the law does not meet this requirement.
The IA 2015 significantly changed insurance law in favour of Insureds in various respects. However, it did not render ineffective warranties. Nor did it preclude entirely Insurers from relying upon breach to decline claims in full. Whether this is open to Insurers will depend on the construction of the Policy term, set into the context of the IA 2015 (and the common law).
Whilst Insurers were successful on appeal, and whilst the first instance decision was surprising, it took until the Court of Appeal for this success to be achieved. Insurers should be reassured that the correct construction was ultimately applied, but this draws into focus the benefit of clear drafting. Equally, in some situations it might be more effective simply to refer to the law as set out in the IA 2015 rather than trying to define rights and remedies in the Policy. If the latter is the preferred course, it will be all the more important to draft such terms clearly and unambiguously and to draw them to the Insured's attention, as required under s.17 IA 2015.
