Scotbeef: Insured’s Duties on Representations and Warranties

Insurance Act 2015 (fair presentation and warranties)

In Lonham Group Ltd v Scotbeef Ltd & Anor the Court of Appeal considered an insured's duties in relation to representations and warranties in a policy, and the application of the Insurance Act 2015.

Summary

In Lonham Group Ltd v Scotbeef Ltd & Anor the Court of Appeal held that Insurers were not liable under the Third Parties (Rights Against Insurers) Act 2010 (the 2010 Act) to indemnify a third party where the original insured had breached warranties in its insurance policy. 

The judge was found to have erred in her construction of certain clauses, and in construing all three as representations rather than warranties, as a result then applying the wrong sections of the Insurance Act 2015 (IA 2015).  Insurers had no liability to indemnify their own insured, nor by extension the relevant third party seeking indemnity under the 2010 Act. 

Background

Our article considering the first instance judgment sets out the background and the judge's findings, but we have summarised these briefly again below for ease of reference:

• D&S (the insured under a marine liability policy, the Policy) was a storage company.

• Scotbeef claimed losses in relation to damaged meat products which D&S had been storing for Scotbeef.

• With D&S in liquidation, Scotbeef sought an indemnity directly from D&S's liability insurers (the Insurers) under the 2010 Act.

• The Insurers declined cover, on the basis of breach by D&S of conditions precedent or warranties in 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, namely the Food Storage & Distribution Federation (FSDF) conditions.

• 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 ....

• Condition (ii) - ...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. ...

The Policy 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 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".

Judgment in the Court of Appeal

As we anticipated, 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 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 being in summary that: a) Conditions (i) to (iii) were to be read together, as representations (so falling within the duty of fair presentation and Part 2 of IA 2015); and b) Conditions (ii) and (iii) did not satisfy the "transparency requirements" set out in Sections 16 and 17 of IA 2015.

Disagreeing that Conditions (i) to (iii) were to be read together, 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".

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". 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 IA2015, 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)". 

Conditions (ii) and (iii) do not contain any pre-Policy representations nor seek to regulate pre-policy disclosure by the insured, and were properly construed as future warranties and conditions precedent to indemnity under the Policy. They seek to "regulate the conduct of the assured during the Policy term", 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 contract.  

Given the binding finding that the FSDF conditions had not been incorporated by D&S into its contract with Scotbeef, D&S had breached warranties in the Policy.

The Policy expressly states that if there is a breach of a condition precedent the Insurers are entitled to avoid the whole claim. The Court of Appeal considered the application of Part 3 of IA 2015, holding that sub-section 10(2) of IA 2015 applied. This section expressly states that the Insurers have no liability for any loss after a warranty has been breached but before it has been remedied, as was the position here.  Further, that the possible exceptions in IA 2015 Act for avoidance of liability in the event of breach of warranty do not apply.

The "transparency requirements" at sections 16 and 17 of IA 2015 provide 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 proper characterisation of Conditions (i) to (iii) was the key issue on appeal. The transparency requirements at sections 16 and 17 of the IA 2015 come into play if they are representations, whereas sections 9 and 10 of IA 2015 apply if they are warranties (and conditions precedent).

The Court of Appeal held that the transparency requirements in s. 17 did not arise. First, because it is the operation of section 10(2) of IA 2015 itself which relieves insurers of their duty to indemnify, and second, because Conditions (ii) and (iii) don't in any event put D&S in any worse a position than it would otherwise have been in.

Comment

This is the first matter to go before the Court of Appeal on questions of the application and operation of IA 2015 in relation to representations and warranties in a Policy. As we made clear in our earlier piece the first instance judgment was problematic for a number of reasons, and the Court of Appeal has now provided welcome clarity.

As stated previously, however, although the Court of Appeal felt that the Duty of Assured clause here was clear and unambiguous in its operation, it is always important both to be mindful of the provisions of IA 2015, and to draft as clearly as possible - particularly any conditions precedent or warranties - to minimise the risk that wordings will be construed in a surprising and/or unusual way. The restrictions on insurers' right to contract out of IA 2015, including the transparency requirements, are an important consideration.  If in any doubt, insurers should draw any relevant clause to the insured's attention, expressly setting out the consequences of breach.