Hampsons Insurance Industry Update No. 3

When may insurers avoid liability for failure of timely notification of claims?

Recent developments in the law favour insurers

1. Timely notification of a claim is generally of great importance for insurers. It enables insurers to make enquiries and obtain evidence while memories are fresh and documents are available. For this reason the insured is under a general duty to notify insurers of claim within a specified time limit, or if none is stipulated, within a reasonable time. In liability insurance such as an all-risks policy, it is not uncommon for a term to require the insured to give notice to the Insurers of the occurrence not only of a claim but of an event that is “likely to give rise to a claim”1.

2. It is always preferable for an insurer to be able to rely upon an express policy condition which is clear rather than upon the general or common law duty.

3. An issue which arises with some frequency for insurers is “when and to what extent may Insurers rely on a policy condition requiring timely notification by the insured of the loss, claim, or issuance of proceedings?” In the Cayman Islands such notification provisions typically arise in the context of claims for indemnity under contractors’ or employers’ public liability, or workers compensation type policies and (albeit less frequently) in the case of collision/comprehensive motor vehicle coverage claims.

4. This update will consider policy conditions requiring the insured to provide the insurer with timely notice of the loss or occurrence leading to a claim. Such conditions typically call for notice of the loss, claim, receipt of writ etc. to be provided by the insured to the insurer “immediately” and/or no later than a fixed number of days, i.e. 7 days, 30 days etc. These “notice conditions” are generally set out in the insurer’s “General Conditions” to which the policy is subject. They may be in the form of a general requirement calling for notification within a particular period of time or they may be in the form of a “condition precedent” to coverage. The latter is of far greater benefit to insurers and this article will consider recent law in relation to such conditions.

5. Although notice clauses require compliance by the insured, the courts nevertheless tend to construe them strictly against the insurer. Recent case law points to an “insured friendly” approach being adopted by the courts. As an example, in Alfred McAlpine plc v BAI (Run-Off) Ltd [2000] 1 Lloyds Reports 437 the Court of Appeal in England held that a condition requiring notice of the claim “as soon as possible” fell short of a condition precedent. Waller LJ explained that the clause was not so fundamental that its breach amounted to a repudiation of the whole contract.

6. For this reason it is essential that insurers have regard to and be guided by legal counsel experienced in insurance claims both in relation to the drafting of such clauses in the insurers’ policies and their application in the event of a late notified claim.

Motor vehicle insurance claims

7. As insurers will appreciate, notice conditions have limited application to motor vehicle accident personal injury claims in the Cayman Islands since the provisions of the Vehicle Insurance (Third Party Risks) Act (i.e. s.5 of the Act) limit the ability of the motor vehicle insurer to rely on such provisions in respect of third-party claims for personal injury or death. However, an insurer who would be entitled to avoid the policy because of late notification by the insured but who nevertheless is statutorily forced to compensate/indemnify the third party would be contractually entitled to recover from the insured what it had paid to the third party.

Notice conditions - conditions precedent

8. The consequences of non-compliance can depend on whether the time notification provision is a condition precedent to the insurer’s liability under the policy, or a bare condition under the policy. If it is a bare or simple condition, failure to comply will be a matter only for damages, which in most cases are likely to be trivial. A notice condition merely requiring compliance will allow the insurer to escape liability only if it is a fundamental condition and, as shown by the Alfred McAlpine decision above, courts are loathe to hold such conditions as fundamental. For that reason it is of the greatest importance that compliance by the insured with any notice condition be made a condition precedent to the insurer’s liability to indemnify the insured under the policy. The condition precedent clause should be stated absolutely clearly (preferably in bold print) in the policy’s General Conditions or within the General Conditions themselves. It is essential that the clause is properly drafted as a fundamental condition precedent to liability.

9. The importance of the notice condition being a condition precedent to the insurer’s liability, follows from the consequences of a failure to comply with that condition – the insurer is entitled to avoid liability under the policy As set out below, insurance law textbooks tend to underestimate the importance of such a condition.

10. Typical language comprising such condition precedent clauses is as follows:

“The due observance and fulfillment of the Conditions of this Policy in so far as they relate to anything to be done or not to be done by the Insured ................shall be conditions precedent to any liability of the Company to make any payment under this Policy.”

11. It is important to understand that such notice provisions when incorporated into a liability policy as a condition precedent are not forfeiture clauses (and therefore cannot be avoided by the insured) but rather are conditions precedent to the insurer’s liability. As Colinvaux’s Law of Insurance states:

“A claims condition is not a forfeiture clause. Accordingly, the English courts do not have any equitable jurisdiction to relieve the assured of his obligation to comply with a claims condition.”

The application of notice conditions – the prejudice and futility points

12. The application and interpretation of notice conditions, which are incorporated into indemnity policies as conditions precedent to coverage, have been the subject of judicial debate and development in the common law over recent years and has generated some confusion for insurers.

13. The discussion has revolved around two issues, the prejudice point, and the futility point – where courts have allowed an insured to avoid the effect of the clause. The arguments are as follows:

• for the insurer to be able to rely on a notice condition, is it necessary for the Insurer to be able to demonstrate some prejudice to it, flowing from the failure of timely notification by the insured of the loss or the claim (the “prejudice point”)?; and
• where the insurer is aware of the loss or claim, (via a third party for example) such that further notice by the insured to the insurer of the loss would be pointless or futile does the clause cease to have effect (the “futility point”)?

14. Some recent helpful and authoritative decisions, have provided clarity and resolved both questions in favour of insurers, grounding those decisions on fundamental contractual principles, rather than equitable considerations.

Lickiss v Milestone Motor Policies at Lloyds

15. The relevant line of cases starts with Lickiss v Milestone Motor Policies at Lloyds [1966] 2 All ER 972. In that case an insured had failed to comply with a condition under a motor vehicle insurance policy requiring him to forward to the insurers any notice of prosecution arising from an accident. The policy provided that compliance with the policy conditions was a condition precedent to the liability of insurers. The insurer was informed by the police of the pending prosecution but not by the insured. In the County Court, the judge held that the insurers were entitled to deny liability because the insured had not complied with the notice condition. The Court of Appeal disagreed. Lord Denning MR (with whom Danckwerts LJ agreed) gave three reasons for his decision. First, since the insurers had all the relevant information, the insured was absolved from doing more (i.e. the futility point). Lord Denning put the matter as follows:

“Seeing that they had received the information from the police, it would be a futile thing to compel the [insured] to give them the self-same information. The law never compels a person to do that which is useless and unnecessary.”

16. The second reason given by Lord Denning was that the insurers had by their subsequent conduct waived the right to rely on the assured’s breach. On this point all three members of the court were in agreement. Apart from these reasons, Lord Denning added that, as the condition had been inserted for the protection of insurers so that they should know in good time about the accident and any consequences, and since they had the information from another source (the police) so that they were not prejudiced by the failure of the assured to tell them, they could not rely on the condition to defeat the claim (i.e. the prejudice point).

Pioneer Concrete v National Employers Mutual

17. However, in Pioneer Concrete v National Employers Mutual, [1985] 2 AER 395 Bingham J considered a notice condition contained in a public liability policy, which required as a condition precedent to coverage, that the insured give notice of any claim “immediately”. The insured failed to give the insurer notice of the issuance of the writ although the insurer was aware of the claim and that proceedings were to be issued. The insured relying on Lickiss sought to argue that if there was a breach of the notice condition, the insurer had to show that the lack of timely notice caused them prejudice. Bingham J. differed with Lord Denning and the Court of Appeal in Lickiss. He observed:

“On ordinary principles of contract, it would seem to me that the Insurer could rely on this breach of condition whether the breach caused him prejudice or not and whether the refusal of payment in those circumstances was in general terms meritorious or unmeritorious.”

18. He went on to reject the reasoning of the Court of Appeal in Lickiss, in requiring the insurer to establish prejudice, stating:

“I find no support in any later authority for the requirement of prejudice and, as a matter of general contractual principle, it appears to me that this cannot be required of an Insurer before he relies on a breach of a condition precedent in the policy.’’

19. There have been a number of decisions generally agreeing with the Court of Appeal in Lickiss but until recently, few following Bingham J in Pioneer. Some textbooks still assert that the law as stated in Lickiss is correct.

The recent decisions

20. In Motor and General Insurance Co. Ltd. v Pavy [1994] 1 WLR 462 the Privy Council, on appeal from the Court of Appeal of Trinidad and Tobago, considered a condition precedent in a motor vehicle insurance policy which required the insured to give notice to the insurer “immediately” of the receipt of any writ. The insured failed to give notice of the writ to the insurer, however the insurer was informed of the issuance of proceedings by the plaintiff in accordance with the provisions of the Trinidad and Tobago motor vehicle insurance statute.

21. Lord Lowry in delivering judgment for the Privy Council (of course binding in the Cayman Islands), roundly rejected any requirement that to avoid liability an insurer must establish prejudice arising from breach of the condition precedent, citing with approval the dicta of Bingham J. in Pioneer:

“McMillan J.A. [of the Court of Appeal of Trinidad and Tobago] gave, as one reason for rejecting the Insurers’ case the fact that: “the Insurers have suffered no prejudice since they had due notice of the issue of the writ as required by section 10(2)(a) of the Third Party Risks Act .” The third party persisted in this argument both in their printed case and before the Board. Their Lordships take the opportunity of disposing summarily of this point by reference to the judgment of Bingham J. in Pioneer Concrete (U.K.) Ltd. v. National Employers Mutual General Insurance Association Ltd. [1985] 2 All E.R. 395 , 400G, 403G–J, which in their opinion fully and correctly states the relevant law. The fact that the Insurers’ reliance on the failure of their Insured to comply with condition 1 of the policy was completely devoid of merit is irrelevant. The point, once taken, provides a complete defence to a claim by the Insured to be indemnified under the policy.”

22. This was a motor vehicle insurance case. While the insurer could rely on breach of the condition precedent as against its insured, the insurer was required to indemnify the third party because under the provisions of the Trinidad and Tobago motor vehicle insurance statute, the insurer was (as in Cayman) debarred from relying upon any conditions subsequent in denying the third party’s claim for indemnity.

23. The Pioneer decision has now been upheld in England at first instance and in the Court of Appeal. In Astor Management AG and another v Atalaya Mining plc and others [2019] 1 All ER (Comm) 885, a dispute arose from financing under a commercial mining contract where certain payments termed “Deferred Consideration” by party A to party B were conditioned inter alia upon the securing of a third party loan termed a “Senior Debt Facility” by party B in order to restart the mining operations. As it developed, funding to restart the mining was secured by B by way of inter-group loans and not by a Senior Debt Facility as the contract contemplated, and mining restarted. B argued that because mining had restarted and since there was no longer any need for the Senior Debt Facility, that contractual condition was rendered pointless and unnecessary and should fall away under the futility principle, such that the Deferred Consideration became payable.

24. The Court of Appeal reviewed the authorities including Lickiss and Pioneer, citing with approval Bingham J’s rejection of a requirement that an insurer establish prejudice in order to rely on a condition precedent and went on to consider the futility point. They noted that the futility principle was one of construction and interpretation of the contract and endorsed the judgment of the court below (Leggatt J) in which he said:

“42 Whether a contractual obligation has arisen in any given case in principle depends on what the particular contract says, interpreted in accordance with the ordinary rules of contract interpretation. There is, in my opinion, no principle of law or even interpretive presumption which enables a contractual precondition to the accrual of a right or obligation to be disapplied just because complying with it is considered by the court to serve no useful purpose.”

25. The Court of Appeal in Astor, as in Pioneer, returned to fundamental contractual principles recognizing that a condition precedent in a contract, including a notice condition, is not to be disapplied or disregarded simply because it has become otiose or pointless, e.g. where the insurer has received timely notice of the claim, loss or writ from another source.

Conclusion

26. While Astor is not as widely reported as Motor and General, both decisions following as they do the reasoning of Bingham J. in Pioneer, represent a change in the approach of the courts to the application of conditions precedent including notice conditions in insurance policies, and a rejection of the approach of the Court of Appeal in Lickiss which was prepared to effectively disapply a notice condition in the absence of prejudice to the insurer. Motor and General in particular as a judgment of the Privy Council, the Cayman Islands’ ultimate appellate body, is binding upon the Cayman Islands courts.

27. The current approach to notice conditions is conveniently summarized in Chitty on Contracts, citing Motor and General and Pioneer, as follows:

“Notice of loss
Often the contract stipulates the time and manner in which, and the persons to whom, the assured must notify the event or loss. If drafted precisely the provision will enable the Insurer to escape liability even if the breach occurred through no fault of the assured, or has not even prejudiced the Insurer. This is regularly achieved by the agreement of a notice provision as a condition precedent to the Insurer’s liability to pay a claim.”

28. Surprisingly, McGee, The Modern Law of Insurance 5th Edition 2023 and Lewison on Contractual Interpretation 7th Edition completely ignore Astor and do not even mention the decision. Colinvaux’s Law of Insurance only cites the case at first instance. There is no mention of the decision in the Court of Appeal.

29. Accordingly, following the development of the law in Astor and Motor and General, reinforcing the reasoning of Bingham J in Pioneer, insurers in Cayman should be able to rely with confidence on notice conditions in their policies in denying liability, where those notice provisions are properly and clearly drafted as conditions precedent to liability:

• without any requirement that they establish prejudice following from breach of that notice condition; and
• where compliance with that notice condition might otherwise appear pointless or futile, by reason of notice received by the insurer otherwise than from the insured.