Conditions Precedent and Other Terms of The Insurance Contract

Conditions Precedent And Other Terms Of The Insurance Contract

1. Conditions Precedent

Conditions precedent are frequently used in insurance policies. A condition precedent is classically a clause which imposes an obligation on the assured as a condition precedent to the insurer’s liability. If the condition precedent is not complied with, the insurer will by the terms of the contract cease to be liable under the contract. Conditions precedent may be such that the very existence of the contract (as opposed to the insurer’s liability) depends on the condition being fulfilled (Zeus Tradition Marine Ltd v Bell (The Zeus)). However, in the context of insurance policies, the condition precedent is more likely to be such that the insurer’s liability – not the contract – is subject to the assured’s complying with the condition.

If the policy uses the term ‘condition precedent’, it will often be construed as a condition precedent to the insurer’s liability, unless the term is used indiscriminately to apply to compliance with all terms of the policy, as opposed to specific or important terms. (George Hunt Cranes Ltd v Scottish Boiler and General Insurance Co Ltd, HLB Kidsons v Lloyd’s Underwriters).

The condition precedent on its construction may be such that a breach will discharge the insurer from all liability under the policy or only discharge the insurer from liability of a particular claim. The operation of the condition precedent will depend on its purpose. If the condition precedent is concerned with the risk being insured (such as effected by a ‘basis clause’), any breach is more likely to discharge the insurer from all liability, whereas a condition precedent concerned with a particular claim is more likely to result in the discharge of the insurer from liability in respect of that claim if the condition precedent is breached. 

Conditions precedent are frequently concerned with the procedure for making an insurance claim, for example, notifying the insurer when loss or damage occurs as soon as practicable or within a specified period of time after the loss or damage occurs or supplying the insurer with information and documents in respect of the claim. Such provisions are designed to ensure that the insurer is apprised of the loss or damage quickly so that the insurer may, if he or she wishes, take such action as may be necessary to investigate the cause of the loss or damage or mitigate the loss or damage.

Whether or not a term of the contract is a condition precedent depends on the language used by the parties (although this is not determinative). If compliance with the provision is important and the phrase ‘condition precedent’ is used in respect of particular provisions, instead of indiscriminately with respect to all of the provisions in the contract, the term is more likely to be a condition precedent. 

2. Innominate Terms

Terms other than conditions or conditions precedent are likely to be either terms, whose breach results in the innocent party only claiming damages, or ‘innominate’ or ‘intermediate’ terms.

Under the law concerning ordinary contracts, an innominate term is one which may be breached in circumstances which produce serious and minor consequences for the insurer. In such cases, it would be disproportionate to allow the innocent party to terminate the contract in the event of any breach no matter how slight, so the law allows the innocent party to terminate the contract only if the breach is such as to deprive the innocent party substantially of the whole benefit of the contract or if it produces serious consequences for the innocent party.

This type of innominate term will apply to insurance contracts as well. For example, the term requiring the payment of premium is probably such an innominate term (compare Figre Ltd v Mander, where the notion of a repudiatory breach of a term requiring the payment of premium is discussed).

However, in Alfred McAlpine plc v BAI (Run-off) Ltd, the Court of Appeal surprised the insurance market by holding that there was another type of innominate term, namely one where the insurer was entitled to decline a claim, rather than terminate the entire contract, if the breach of the term either intimated an intention on the part of the assured not to pursue the claim or produced serious and irremediable prejudice to the insurer. Forexample, a term in a liability policy which required the assured to notify the insurer of any legal proceedings brought against the assured may be an innominate term because its breach might result in the insurer being deprived of an opportunity to defend the proceedings on behalf of the assured. As another example, the term in a marine policy may require the assured to notify the insurer as soon as practicable if the insured vessel is damaged and may be an innominate term because its breach would deprive the insurer of an opportunity to investigate the cause of the damage if the vessel sinks after the damage should have been notified.

This decision was applied in subsequent decisions of the Court of Appeal. However, the existence of an innominate term whose breach would entitle the insurer to decline the claim as an independent type of term of an insurance contract was cast into doubt, if not overruled, by the Court of Appeal in Sirius International Insurance Corporation v Friends Provident Life & Pensions Ltd.

This state of the law has created considerable confusion twice. The first occasion was when this new notion of innominate term was identified by the Court of Appeal, such a term being previously unknown to the insurance market. Then, again, when the Court of Appeal disavowed the existence of such a term in circumstances where the Court of Appeal had in the meantime proceeded on the assumption that such a term existed. Whether the Court of Appeal in 2005 had the power to depart from its previous decisions is uncertain.

2. Other Terms

Apart from warranties, conditions precedent or innominate terms, there are other types of term in an insurance contract. 

For example, there may be a ‘condition’ as understood by the ordinary law of contract, namely an important provision whose breach will allow the insurer to elect to terminate the insurance contract prospectively. Such provisions are normally terms which are important to the operation of the insurance contract and should be distinguished from conditions precedent, as the latter operate automatically to result in the discharge of the insurer’s liability (as is the case with warranties). 

Most other terms of the insurance contract will impose obligations on one or other of the assured or insurer and whose breach will allow the innocent party to claim damages for any loss caused by the breach but not to terminate the insurance contract. Indeed, breaches of conditions and innominate terms will allow the innocent party to claim damages whether or not the innocent party elects to terminate the contract.

However, breaches of condition precedent generally will not allow the innocent party to claim damages for its breach. 

In addition, it should be remembered that there are provisions of the MIA which impose implied conditions or terms or warranties in the contract of insurance (sections 36, 39, 40, 41, 42) or which merely provide that the insurer will be discharged from liability in certain circumstances (sections 45, 46, 48).

Finally, there will be other terms of the insurance contract which do not impose obligations on the parties but whose purpose are to define the scope of the insurance coverage afforded by the policy, namely the insuring clause and the exceptions.

4. Construction

Insurance contracts are subject to the same approach to contractual construction as other commercial contracts, namely that the words of the contract will be interpreted to divine their contextual meaning consistently with the commercial sense and purpose of the policy, even if that is at odds with the literal meaning of the contract. 

There is one rule of construction applicable to ordinary contracts which applies with particular force in the context of insurance contracts, namely that verba chartarum fortius accipiuntur contra proferentem (i.e. where the contractual provision is ambiguous, the provision will be construed against the person who drafts or puts forward the provision, which in many cases will be the insurer). 

The construction of contractual terms ‘against the insurer’ is not limited to cases where the insurer has produced the wording. If the insurer seeks to rely on a provision, such as a condition precedent, warranty or an exclusion, so as to extinguish or reduce his or her basic obligations of indemnity, the Court will resist such a construction unless the contractual terms are clear.

5. The Institute Clauses

The Institute Clauses impose various types of term which should be considered by way of example:

a) There are provisions which allow one or both parties to terminate or cancel the insurance contract prospectively or which automatically terminate the insurance contract (i.e. from the time of the termination or cancellation so that the insurer remains liable for any losses which have been sustained before that time): see, for example, clause 5 of the Institute Time Clauses Hulls (1/11/95); clause 9 of the Institute Cargo Clauses (1/1/82) and (1/1/09).

b) There are provisions which allow the assured to be ‘held covered’ in the event of breach of warranty or in the event of a breach of other terms or in the event of the insurer otherwise being dischargedfrom liability: see, for example, clause 3 of the Institute Time Clauses Hulls (1/11/95); clause 10 of the Institute Cargo Clauses (1/1/82) and (1/1/09); clause 2 of the Institute Voyage Clauses (1/11/95).

c) There are provisions which operate as conditions precedent to the insurer’s liability such that any breach seeks to discharge the insurer from liability in respect of a claim: see, for example, clause 13 of the Institute Time Clauses Hulls (1/11/95); clauses 43 and 45.3 of the International Hull Clauses 2003; clause 11 of the Institute Voyage Clauses (1/11/95).

d) There are provisions which are described as ‘conditions’ of the insurance: see, for example, clause 18 of the Institute Cargo Clauses (1/1/82) and (1/1/09).

6. Insurance Act 2015

Section 11 provides that an insurer will not be entitled to rely on a breach of a term of the insurance contract in certain circumstances (see para.93 of Explanatory Notes).

1. The insurer cannot rely on a contractual term in order to exclude, limit or discharge liability under the insurance contract if the following conditions are satisfied:

a. the term must be a contractual term compliance with which would tend to reduce the risk of (i) loss of a particular kind, (ii) loss at a particular location, or (iii) loss at a particular time. See para 94 of Explanatory Notes

b. the contractual term must not define the risk as a whole

c. the assured must show that non-compliance with the term ‘could not have increased the risk’ of the loss which actually occurred in the circumstances in which it occurred.

2. However, a direct causal link between the breach and the ultimate loss is not required in order to engage section 11. That is, the relevant test is not whether the non-compliance actually caused or contributed to the loss which has been suffered.

With one exception, it is open to the parties to the marine insurance contract to contract out of the provisions of the Insurance Act 2015 with respect to warranties and other terms.

1. Under section 16(1) of the 2015 Act, it is not permissible to contract out of the prohibition against basis clauses.

2. Other than in respect of basis clauses, under sections 16–17 of the 2015 Act, where the relevant contractual term puts the assured in a worse position as regards warranties or other terms, that contractual term will be of no effect, unless, having regard to the characteristics of the assured and the circumstances of the transaction:

a. the term is clear and unambiguous as to its effect, and

b. either (i) the insurer takes sufficient steps to draw the term to the assured’s attention before the contract or variation, or (ii) the assured (or its agent) had actual knowledge of the term.

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