Third Party Rights Against Insurers – complying with claims conditions

In Makin v Protec & QBE the court considered a claim against insurers by a third party pursuant to the Third Parties (Rights Against Insurers) Act 2010 (the 2010 Act).

The court concluded that the original insured had failed to comply with notification conditions in the relevant policy. On their true construction, those Claims Conditions were conditions precedent to Insurers' liability, who had therefore been entitled to refuse to indemnify the third party in the same way they could have refused to indemnify the original insured.

Background

The claimant, Mr. Makin, claimed damages for his injuries arising from an incident in August 2017 at a bar, in which door staff employed by Protec had physically restrained him in a headlock. Mr Makin had walked away from the incident at the time, but had subsequently suffered a stroke at home which resulted in serious neurological injury. In a previous judgment, HHJ Sephton KC had found as a preliminary issue that the claimant's stroke and subsequent injury were the result of the door staff's assault, and that Protec was vicariously liable as the employer of the door staff.

The third defendant insurers insured Protec for the relevant period under a "Security & Fire Protection" Policy. The Policy covered, inter alia, "liability to pay damages including interest and claimants costs recoverable from you as a result of bodily injury or damage in respect of criminal acts of ...assault... by your employees... in connection with a contract with a customer".

On the insolvency of the insured, Mr Makin joined Insurers to his claim. Insurers declined to indemnify the third party on the basis of a breach of the claim notification clause in the Policy.

The 2010 Act

The 2010 Act allows third parties to step into the shoes of an insolvent insured to claim against the insurer. This is subject to any defences the insurer might have against the insured, had the insured made the claim itself. As the court observed, the third party's rights are no better than those of the insured.

Where the policy requires an insured to fulfil a policy condition, the third party can take steps to fulfil the condition instead, and those steps will be treated as if done by the insured. Where, however, the original insured has already breached a policy condition, the third party cannot retrospectively remedy that breach where the insured could not have done so.

Breach of Notification Condition

The Claims Conditions (breach of which "will entitle us to refuse to deal with the relevant claim") within the Policy included:

• An instruction in Claims Condition 2 not to respond to "...any letter, writ or summons or other document sent to you in connection with any accident, incident or occurrence that may relate to any claim under your policy or which may give rise to a claim under any Section of your policy." but to send documents "immediately" and unanswered to Insurers.

• a requirement in Claims Condition 3 to inform Insurers:
  "3.1 immediately you have knowledge of any impending prosecution, inquest or inquiry in connection with any incident..., which may be the subject of claim, give notice in writing and give us any further information and assistance we may require, …

  3.5 within as soon as practical but in any event within thirty (30) days in the case of any other damage, bodily injury, incident, accident or occurrence, that may give rise to a claim under any your policy ….”

The incident took place in August 2017. A Letter of Claim issued in June 2020 to Protec was only brought to Insurers’ attention when sent on by email from Mr Makin’s own solicitors in July 2020. Insurers declined cover based on breach of both Clause 2 and Clause 3 of the Policy.

Condition 3

The court concluded that an incident in which police were involved, where there were allegations that Protec’s employees had caused a serious injury to someone, was one which "may give rise to a claim" under the policy, and therefore that should have been notified to Insurers “as soon as practical” but in any event within 30 days.

Protec explained in evidence that they had not notified Insurers immediately after the incident because a police investigation had cleared Protec’s employees of any wrongdoing, and “…no claim or further action was identified at the time”. The further delay in notifying once it had received a Letter of Claim was explained as being due to Protec having no recollection of the incident and needing to investigate.

The court accepted arguments that at the time of the incident or its immediate aftermath “no reasonable insured” could be expected to have formed the view that it involved circumstances that “may give rise to a claim” under the Policy. As noted by the Court in Aspen v Pectel, determining when there is a real risk that an incident may give rise to a claim “ …involves the identification of the objective risk of a claim being made, fixed not at the time of the incident itself but when the insured comes into possession of knowledge relevant to the incident”. Here, once Protec’s sole director knew that police wanted to interview members of his staff in respect of the incident, a covered claim against the insured was likely to follow. Failure to notify insurers at this point amounted to a breach of Claims Condition 3.

Condition 2

The court held that the only sensible construction of this provision required Protec to forward on to Insurers, immediately and unanswered, any letter (etc.) in connection with any accident, incident or occurrence which may give rise to a claim. Accordingly, in not having forwarded on the Letter of Claim within 4 weeks of receipt, Protec had not done so “immediately” so had breached Claims Condition 2 as well.

Conditions precedent?

Construing the statement that breach of the Claims Conditions “will entitle us to refuse to deal with the relevant claim”, the court held that compliance with the Claims Conditions is a condition precedent to liability, and Protec’s non-compliance with Claims Conditions 3.5 and 2 entitles Insurers as of right to refuse indemnity under the Policy. Use of the word “will” meant that there was no true ambiguity in the wording, and it does “an injustice to that language to conclude that non-compliance with the Claims Conditions gives the insurer merely a discretion to decline indemnity.”

Commentary

This judgment underscores the critical importance to insureds of adhering to notification conditions in insurance policies. For both insurers and insureds, as ever, the wording of the policy is key. For insurers, the two key takeaways are:

• the clearer the drafting of any clause the insurer may wish to treat as a condition precedent the better. Using the label is hugely helpful even if, ultimately, the question is one of substance; and
• where exercising a discretion, an insurer will need to demonstrate that it has acted in a lawful and rational manner, as well as in good faith and consistent with the contractual purpose of the discretion.

The key starting question was: are these terms conditions precedent? To recap, the key phrase was: "will entitle us to refuse to deal with the relevant claim". The court rejected arguments that this gave rise to a contractual discretion rather than a condition precedent. Much clearer language could have been used to identify the legal status of the conditions. In Cuckow v AXA Insurance UK Plc, the court considered the labelling of the conditions as conditions precedent as important: "the labelling on the tin matched the contents of the tin".

In Makin, the court did not have the benefit of that labelling, although the provisions were substantively similar. Looking at the substance of the language used, the court was prepared to construe the clause as a condition precedent. This was despite the language being framed as an entitlement rather than an automatic right and despite the fact that the label “condition precedent” was not used (but was used elsewhere in the Policy). One of the factors in favour of the insurers’ interpretation was the (albeit non-binding) precedent value of the judgment in Cuckow and the commercial certainty that flowed from reaching the same decision as was reached in that case.

The court also did not consider it necessary to revert to the contra proferentum rule, whereby in the case of ambiguity that the term will be construed against the person relying on the clause. Rather, the clause was not ambiguous.

The court considered the position if, contrary to its conclusion, the clause had given the insurers a discretion to decline the claim. Although obiter, the court accepted the submission that the exercise of any discretion is to be judged in accordance with the so-called Braganza duty (from Braganza v BP Shipping Ltd). This means that wherever an insurer – and this is a particular consideration for claims handlers - has a contractual discretion, any decision taken must be lawful and rational, as well as made in good faith and consistent with its contractual purpose. An insurer exercising discretion must evaluate all of the material and come to a rational conclusion on the issue. This means ensuring that a proper procedure is followed to reach all decisions, taking all relevant factors into account and not acting on the basis of irrelevant factors or ulterior motives. It also helps greatly if the rationale for the declinature (and therefore the exercise of the discretion) is documented.