The decision relates to the differences between pre-contractual representations and warranties, and the construction of conditions precedent.

This judgment joins a small number of decisions post-implementation of the Insurance Act 2015.

Background

Scotbeef Limited produced and distributed meat. It used refrigeration facilities provided by D&S Storage Limited. In October 2019, six pallets of meat were transferred from D&S to Scotbeef. They were found to be contaminated with mould and were considered unfit for consumption either by human or by animal. As such, the meat was destroyed. Scotbeef brought a claim against D&S for the value of the destroyed meat and, following its insolvency, continued its claim directly against its insurer, Lonham Group Limited, under the Third Parties (Rights against Insurers) Act 2010.

The claim was in the sum of £395,588. D&S argued that its liability was limited in value to around £25,000 due to incorporation of the Food Storage and Distribution Federation terms referenced within D&S' invoices on a weekly basis from 15 May 2017 until 4 February 2019. Thereafter, D&S' invoices did not refer to the FSDF Terms, including the relevant invoice under which the contaminated meat was being refrigerated.

The Court found that the FSDF terms were not, in fact, incorporated into the contract, such that Scotbeef's claim was not limited in value as per the FSDF terms.

Following this decision, D&S went into liquidation. The claim continued against its Insurer. The Insurer defended the claim on the basis that D&S had failed to comply with a condition precedent within the insurance policy.

The Policy

A number of provisions within the insurance policy were relevant to the Insurer's defence, but the critical one was the Duty of Assured Clause, which read as follows:

1. Duty of Assured Clause

"Conditions

General Conditions, Exclusions, and Observance…

DUTY OF ASSURED CLAUSE

It is a condition precedent to liability of [the Insurer] hereunder:-

(i) that [D&S] makes a full declaration of all current trading conditions at inception of the policy period;

(ii) that during the currency of this policy [D&S] continuously trades under the conditions declared and approved by [the Insurer] in writing;

(iii) that [D&S] shall take all reasonable and practicable steps to ensure that their trading conditions are incorporated in all contracts entered into by [it]. Reasonable steps are considered by [the Insurer] to be the following but not limited to… [various examples relating to incorporation of terms and conditions were set out]…"

2. Claims Condition

A number of unrelated conditions followed the heading "IMPORTANT INSTRUCTION IN EVENT OF LIABILITY CLAIM", after which the following term appeared:

"The effect of a breach of condition precedent is that [the Insurers] are entitled to avoid the claim in its entirety"

The High Court Decision

The High Court had surprisingly found that sub-clauses (i) to (iii) of the Duty of Assured Clause had to be read together as one and were therefore either all representations of fact or warranties.

The court concluded that sub-clause (i) (which states that it was a condition precedent that the Insured declare all trading conditions at policy inception) was designed to have "the effect of turning [a pre-inception] representation into a warranty, regardless of how [the] representation is described".

Therefore, on the High Court's analysis, meant that sub-clauses (ii) and (iii) had to be classified similarly. 

The High Court went on to say that the appropriate approach was to consider whether D&S had made a fair presentation of the risk and whether the Duty of Assured condition was an attempt to contract out of the provisions of the Insurance Act. The court also found that the condition breached the prohibition on policy provisions which purport to convert pre-contractual representations into warranties. As a consequence the Insurer's defence failed.

The Court of Appeal Decision

The Insurer appealed.

Classifying Sub-clauses of Duty of Assured Clause

It was not in dispute that sub-clause (i) (which stated that the Insured had made a full declaration of its trading conditions at inception) was a representation of existing facts. But sub-clauses (ii) and (iii) were different. 

The Court of Appeal found that different duties were imposed on the Insured at differing times under the three limbs of the Duty of Assured Clause. It said that "the way they are grouped together in the policy does not justify… the “all or nothing” collective approach that was adopted by the judge." Sub-clause (i) was a pre-contractual representation, whereas sub-clauses (ii) and (iii) (which required the Insured to incorporate particular terms into its trading contracts) "regulate the conduct of the [Insured] during the Policy term". So, each of the sub-clauses dealt with different and distinct things, albeit there was some overlap as they all dealt with D&S' contract terms. As a matter of interpretation "each of sub-clauses (i), (ii) and (iii) deal with all of the different permutations upon which [D&S] has traded and will trade in the future."

The Court of Appeal found that sub-clauses (ii) and (iii) "are warranties… They are also clearly conditions precedent… The clear wording of the policy states they are."

Sub-clauses (ii) and (iii) as Warranties

Having categorised sub-clauses (ii) and (iii) as warranties, Section 10(2) of the Insurance Act states that "An insurer has no liability under a contract of insurance in respect of any loss occurring, or attributable to something happening, after a warranty (express or implied) in the contract has been breached but before the breach has been remedied."

Since the High Court had found that the FSDF terms were not, and never were, incorporated into the contract between Scotbeef and D&S, D&S was in breach of the warranties contained in sub-clauses (ii) and/or (iii), which absolved the Insurer from liability.

Sub-clauses (ii) and (iii) as Conditions Precedent

The Court of Appeal also held, in short order, that sub-clauses (ii) and (iii) also took effect as conditions precedent because: "the clear wording of the policy states that they are". Thus, breach of these conditions meant that the insurance claim was not payable.

Contracting Out and the Transparency Requirements

The Court of Appeal said that the Duty of Assured Clause was not an attempt to contract out of the Insurance Act for two reasons:

1. The Insurance Act states that the Insurer has no liability in respect of a loss occurring after a warranty has been breached but before it is remedied. The Duty of Assured Clause stated that it was subject to and incorporated the Insurance Act, which was " directly contrary to the type of wording that would be necessary to achieve any contracting out."

2. Further, sub-clauses (ii) and (iii) did not place the Insured in a worse position than it would have been in under the Insurance Act. Even under the Insurance Act, the Insurer is entitled to decline indemnity for breach of a warranty which has not been remedied.

Therefore, the Court of Appeal did not need to consider the requirement to be clear and transparent when contracting out of the Insurance Act, as there was no attempt to contract out of the Act in the first place.

Comment

This is a welcome decision from the Court of Appeal which deals with issues of classification of terms, and the construction of warranties and conditions precedent under the Insurance Act.

Following the High Court's decision, drafting conditions precedent in policy wordings had arguably become more problematic.

It is helpful that the Court of Appeal has returned a sense of normality to policy wordings. It stated that the policy wording was clear on the classification of its terms, pointing to the following:

1. The condition precedent was included under the heading "General Conditions, Exclusions and Observance".

2. The heading of the clause included the word "duty", which is synonymous with an ongoing responsibility, obligation, and burden.

3. The policy made it clear in no uncertain terms that compliance with the clause "is a condition precedent to [liability]".

4. Further, the policy contained the following wording: "The effect of a breach of condition precedent is that [the Insurers] are entitled to avoid the claim in its entirety" – it was immaterial that this appeared two pages later than the Duty of Assured Clause.

The Court of Appeal's decision provides welcome reassurance that the Courts will generally respect the wording of policies in terms of the effect of breaches. It also provides a salutary reminder to those drafting policies to ensure they spell out the intended effect of a breach of a policy term.