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Coverage issues – ensuring early preservation of policy
points
Kosmar Villa Holidays plc –v- Trustees of Syndicate 1234 -
Court of Appeal, 29 February 2008
6 March 2008
The Court of Appeal has ruled supportively for underwriters in
this important case about the taking, investigating and waiving of
policy points.
Background
Kosmar, a specialist travel operator, had arranged public
liability insurance for its business over the period 2001-2002. In
August 2002, one of Kosmar's customers ('the claimant') suffered
very serious injuries after diving into the shallow end of the
swimming pool at a resort in Kavos. Significantly, Kosmar did not
notify its underwriters about this incident until over a year
later, at the beginning of September 2003.
This delayed notification led to some involved litigation. A
General Condition within the relevant insurance policy provided
that:
"The insured shall immediately after the
occurrence of any Injury or Damage give notice in writing with full
particulars thereof to insurers."
At the High Court trial, it was accepted by all concerned that
condition precedent status attached to this requirement for
'immediate' notification. However, had underwriters effectively
waived compliance with the condition precedent by corresponding
with Kosmar and the claimant's solicitors, during mid-September
2003, in the manner that they did?
The evidence revealed that, during the middle part of September
2003 ('the September dealings'):
(a) Underwriters' wrote to Kosmar with 25
background questions concerning the incident generally
(b) Underwriters also wrote to the
claimant's solicitors to inform them that they were Kosmar's
liability insurers and to advise that they were investigating the
matter with a view to providing their views on liability. They also
asked about the claimant's current position and any plans to obtain
medical evidence
(c) Underwriters had initially written to
Kosmar, without applying any reservation of rights at all to
observe that: "We should probably win this case…". They
also added that they had decided not to deny liability just yet (in
respect of the claimant's claim) and that they proposed to
"await [Kosmar's] reply to [underwriters'] various
requests…"
Some two weeks later, on 30 September 2003, Underwriters wrote
again to Kosmar, now reserving their position on grounds of the
General Condition and the issue of late notification.
It is relevant to say that there was something of a history
between the individual underwriters in this case (who had dealt
with Kosmar's business for some years through different
cover-holder schemes) and Kosmar's legal manager and broker. The
parties had tried to streamline claims handling procedures so that
Kosmar could improve its claims record and drive down premiums. The
underwriters, too, were keen to secure Kosmar's business. It was
recognised that it would be unduly burdensome for Kosmar to have to
give immediate notification of every occurrence, whether minor or
not and in response, underwriters agreed that only cases that were
not 'clear cut' on liability would have to be referred through
immediately.
In the period before the key September 2003 notification, there
had been 16 other claims notified through to underwriters by
Kosmar. Interestingly, all of those carried with them a delay of
2-5 months after the incidents in question had happened.
Underwriters had not, however, rejected any of those prior claims
on grounds of late notification or otherwise.
High Court
At first instance trial, Kosmar argued that the prior claims
history (before September 2003) had effectively estopped
underwriters from taking the condition precedent point, on the
subject case, for late notification. The Judge decided that
underwriters' treatment of those other claims evidenced that they
were taking no more than a case-by-case approach. In short, it was
decided that the payment of some prior claims, irrespective of
Kosmar's non-compliance with the notification provision, could not
be said to give Kosmar carte blanche for the future.
The trial Judge had then turned to underwriters' conduct in
relation to the September dealings. Could this amount to an
'unequivocal communication' of underwriters' election to waive
compliance with the condition precedent requiring immediate
notification. He found for Kosmar on this point, deciding that the
relevant communications demonstrated "objectively or
unequivocally the making of an informed choice by
[underwriters] to deal with [the claimant's]
claim."
The Judge also ruled for Kosmar on the issue of underwriters
'knowing all they needed to know' by the point of first
notification in September 2003 and therefore, a reasonable time to
make their election had passed by the point of their taking up the
September dealings.
Finally, at trial, the Judge looked at whether underwriters'
behaviour - after first notification in September - could
constitute an estoppel and/or an affirmation. Kosmar's arguments
were, however, rejected on both of these bases.
So, the Judge decided Kosmar was entitled to an
indemnity from Underwriters but only on the footing that there had
been a waiver of the policy point by election, coupled
with an unequivocal communication of a decision to deal with the
claimant's claim (and thereby, they accepted liability for it, the
Judge found).
Court of Appeal
The Court of Appeal decision contains a very lengthy academic
discussion on the doctrine of waiver by election contrasted with
waiver by estoppel.
On appeal, underwriters contended that the Judge had been wrong
at trial to rule that a breach of condition precedent was something
different to a breach of promissory warranty in the present
context.
Underwriters also maintained that their September dealings were
not unequivocal and that being seen to 'handle' a claim for a short
period of time was not necessarily inconsistent with a repudiation
of liability.
The Court of Appeal found for underwriters on both of those
issues.
When tackling these sorts of 'procedural' conditions precedent,
the doctrine of election was not appropriate and issues over
handling of a claim, or any unequivocal representation that
underwriters accepted liability, should be decided against the
backdrop of estoppel (and not election) principles. This
is how Lord Justice Rix articulated the point:
"Thus an insurer who begins to deal with a claim, even if,
as I will assume for the moment, he thereby represents that he
views that claim at that time as being, if good, a matter for
indemnity under the policy, is not thereby required for all time to
maintain his dealing with or conduct of the claim. He can leave it
to his insured to conduct a defence, although he may turn out to be
liable at the end of the day to indemnify his insured against both
liability and the cost of defending liability. Moreover, he may
discover matters which lead him to believe that the claim is not
within the policy, and it remains open to him to withdraw his
support for it. None of this fits happily with the idea that some
dealing with the claim is an irrevocable election to accept
liability for it under the policy so far as any procedural defect
in it is known to the insurer."
The Court of Appeal went on to find that the September dealings
were "far from unequivocal". Was it enough that
underwriters had behaved in a manner that gave the impression they
were willing to deal with the claim? On this aspect, the Court of
Appeal noted underwriters had made it clear to Kosmar that –
pending Kosmar's reply to their requests for further background
information – any decision on liability in respect of the
claimant's claim was going to be deferred. It was also made plain
that Kosmar would need to deal with underwriters' queries before
the matter could be moved forward generally.
The Court of Appeal's overview on this can hardly be described
as sympathetic to Kosmar, the policyholder:
"Why should Kosmar objectively be justified in thinking that
its late notification of a serious claim would be accepted, even
though it was in breach of a condition precedent, when Kosmar had
not answered [underwriters] many questions about the
incident, and had not begun to address the question which hung in
the air – even if it was not specifically asked in writing by
[underwriters] until 30 September – as to why so serious an
incident had not been notified for over a year? After all, there
was no urgent need for any decision about the consequences of the
breach of condition precedent. It is not as though
[underwriters] had even begun in any real sense to have
undertaken the conduct of [the claimant's] claim. No
proceedings had yet been issued, and no solicitors had yet been
instructed. Nothing had been taken out of Kosmar's hands. On the
contrary, [underwriters] still remained in Kosmar's hands
for its understanding of the claim."
The Court of Appeal went on to reject the notion that, at the
point of first notification (on 4 September 2003) underwriters
'knew all they needed to know' to take a point on breach
of condition precedent (and that thereafter, they were "…in the
grip of an election if [they] acted inconsistently with a
repudiation of the claim…".
Rather, the fact that underwriters had asked questions of its
policyholder – and that no answers had been provided – demonstrated
that underwriters were "…still in the stage of assimilating the
circumstances of the case…"
Lord Justice Rix then went on to provide some detailed practical
guidance, which is set to be regularly cite in future when coverage
issues do surface between underwriters and their policyholders:
"It would not be good practice for insurers to rush to
repudiate a claim for late notification, or even to destabilise
their relationship with their insured by immediately reserving
their position – at a time when they were in any event asking
pertinent questions about a claim arising out of an occurrence
about which they had long been ignorant in the absence of prompt
notification. Insurers traditionally armour themselves with all
kinds of conditions precedent, but, in a relationship where there
is trust, they are just as likely to forgo their strict rights. If
they did not, the conduct of the insurance market might very well
undergo considerable adaptation. Legal doctrine should not push
insurers into over-hasty reliance on their procedural rights. No
explanation for the very late notification of this serious claim
had been vouchsafed to [underwriters] and I do not see why
any doctrine such as election which is concerned with maintaining a
fair balance between the parties to an insurance should be used to
put insurers, who have been kept in ignorance of a serious
occurrence for a long period of time, into peril of being forced to
accept a claim advanced in breach of condition precedent before
they have been put in a position properly to understand the
circumstances of the accident and of its late
notification."
Lord Justice Rix was quick to apply some limits to this
understanding view of underwriters' position by warning that
he:
"…would certainly not like to give the impression that
insurers can equivocate for long while giving the plain impression
that they are treating the claim as covered by their policy,
especially at a time when a decision might be required, without
running at least the risk that they will be treated as having
waived some requirement of their contract or their right to avoid
it. Moreover, there may well be express options given to insurers
under their policy for the unguarded exercise of which is simply
inconsistent with the right to decline cover."
Comment
Insurers can take some comfort from this decision, which appears
to call for a more contextual analysis to these sorts of waiver
issues. It is clear that, in itself, the asking of relevant
questions about new notifications is always an important "first
response" to employ. Ordinarily, if one can point to a course of
reasonable investigation being started in this way, it will be
difficult for policyholders to argue that insurers have somehow
waived away their policy rights and entitlements.
For more information please contact Nik Carle.