RECENT COURT DECISION HIGHLIGHTING CONDITION PRECEDENT ENFORCEMENT DIFFICULTIES FOR INSURERS AND NO REMEDY FOR BREACH OF DUTY OF FAIR PRESENTATION
May 2024The Judgment in Scotbeef Limited v (1) D&S Storage Limited (In Liquidation) and (2) Lonham Group Ltd [2024] EWHC 341 (TCC) interest to insurers and insured entities because the Judge considered two issues at the heart of many coverage disputes: (1) inducement of the underwriter when there had been a breach of duty of fair presentation and (2) whether a condition precedent failed the test of transparency under Section 17 of the Insurance Act 2015.
Background
At all material times and since 2017 the Claimant, a meat producer, had a contract with D&S Storage Limited (“D&S”) to freeze and store its meat. In April 2020 a batch of meat stored by D&S was found to be unfit for human or animal consumption. In July 2020 the Claimant made a claim. There was a dispute as to whether the contract between the parties was subject to the Food Storage & Distribution Federation (“the FSDF”) standard terms and conditions which included a limit of liability of £250 per tonne. Following a preliminary hearing to determine if the FSDF terms were incorporated into the contract, it was decided in a Judgment dated 14 October 2022 that the FSDF terms were not, and had never been, incorporated into the contract.
Following the Judgment, by which time D&S was in liquidation, the Claimant made a claim to recover its losses from the 2nd Defendant who were D&S’s Insurers (“Insurers”). The Insurers had provided insurance to D&S on an annual basis since June 2016.
Policy Terms
The terms of the relevant policy for the 2019-20 period of insurance contained the following terms and/or representations:
“Term/Condition
TRADING CONDITIONS: FSDF Terms and Conditions at £250 per tonne. [Page 1]
…
DUTY OF ASSURED CLAUSE [Page 9]
It is a condition precedent to the liability of Underwriters hereunder:-
- that the Assured makes a full declaration of all current trading conditions at inception of the policy period;
- that during the currency of this policy the Assured continuously trades under the conditions declared and approved by Underwriters in writing;
- that the Assured shall take all reasonable and practical steps to ensure that their trading conditions are incorporated in all contracts entered into by the Assured. Reasonable steps are considered by Underwriters to be the following but not limited to the same ….
If a claim arises in respect of a contract into which the Assured have failed to incorporate the above mentioned conditions the Assured’s right to be indemnified under this policy in respect of such a claim shall not be prejudiced providing that the Assured has taken all reasonable and practical steps to incorporate the above conditions into contracts;
- …
IMPORTANT INSTRUCTIONS IN THE EVENT OF A CLAIM .. [Page 10]
The Assured shall as a condition precedent to their right to be indemnified under this policy give to the Underwriters immediate notice in writing:- …
[Page 11]
The effect of a breach of a condition precedent is that the Underwriters are entitled to avoid the claim in its entirety.”
Judgment
The Judge determined, having regard to the 2022 Judgment, that D&S had represented that it traded on FSDF terms although this was not true and moreover that D&S had not taken all reasonable and practical steps to incorporate the FSDF terms into its contracts. D&S had therefore breached its duty to give a fair presentation of the risk (although the Judge held that this was neither deliberate nor reckless) and, it would appear, that it was also in breach of the condition precedent at clauses (ii) and (iii) on page 9 of the policy.
a) Breach of Duty of Fair Presentation and Inducement
The Judge heard evidence from the Underwriter of the Insurers who dealt with the renewal of the policy in 2017 and 2018 (but, perhaps significantly, not in 2019). The Underwriter explained the importance to Insurers of ensuring that D&S traded on its own conditions or the standard conditions of one of the major industry organisations. The Judge did not accept that this evidence proved that Insurers would not have entered into the insurance contract on any terms. In support of this conclusion she noted that (i) Insurers had insured D&S over a period of years during which it had stated that it had changed its terms from one industry body’s terms and conditions to another, (ii) Insurers were prepared to accept D&S trading on FSDF terms event though it did not at the material time know what those terms were, and (iii) in so far as any specific terms were important to Insurers, they could have incorporated these terms into the insurance contract itself.
b) Breach of Condition Precedent – transparency
Section 17 of the Insurance Act 2015 (“the Act”) requires any “disadvantageous term” in the insurance contract to be “clear and unambiguous as to its effect” and that Insurers must take sufficient steps to draw it to the Insured’s attention before the contract is entered into. The Judge held that neither obligation was complied with. In particular, she held that:
- There was no evidence that Insurers had drawn D&S’s attention to clauses (ii) and (iii), both of which she said were disadvantageous terms, before the contract was entered into;
- It was not sufficient that D&S had insured with Insurers on the same terms in previous years to demonstrate that the disadvantageous terms had been brought to its attention;
- Clause (iii), and we assume she also meant clause (ii), on page 9 of the policy was not “clear and unambiguous”, because, although it was expressed to be a condition precedent, it was followed by a statement explaining that, providing the Insured had taken all reasonable steps to incorporate the relevant terms and conditions into its contracts, its right to an indemnity under the policy would not be prejudiced. This, she said, was inconsistent with the statement two pages later that a breach of condition precedent would entitle Insurers to avoid the claim in its entirety.
- Clause (iii) in particular, was a disadvantageous term and did not satisfy the transparency requirement of the Act because it appeared to entitle Insurers to avoid indemnifying a claim even if the loss was unrelated to the breach – ie in circumstances where the Insured did not take reasonable steps to ensure that its trading conditions were incorporated into all contracts but in fact, for other reasons, the relevant terms were incorporated.
Comment
The Judgment is potentially limited to its own facts and may not be directly analogous to other policy wordings. It is possible that a Commercial Court judge would not adopt the same reasoning as the Judge in this case. However, the Judgment is a useful reminder of the difficulties that Insurers can have:-
- in persuading a court that a breach of the duty to give a fair presentation of the risk to insurers induced the underwriter to offer terms in circumstances where, had a fair presentation of the risk been given, no terms would have been offered; and
- demonstrating that a condition precedent meets the transparency requirements of the Insurance Act 2015. In the present instance the Judge held that clause (iii), which we venture was intended to provide a benefit to the Insured, was a “disadvantageous term” and Insurers had failed to explain its effect to the Insured in advance of the Insured entering into the contract.
