Property insurance: conditions precedent and interpretation of terms in policy wording

United Kingdom

In the context of a property insurance policy, the court has interpreted the meaning of the terms ‘storage’ and ‘combustible’ and held on the facts that there had not been breaches of conditions precedent or warranty by the insured. The policy was governed by the pre-Insurance Act 2015 regime and the court noted that (as in the case of breach of warranty) there was no requirement for the breach of a condition precedent to be causally linked to the loss.

Background

The case involved a fire in June 2014 at a waste processing plant and the subsequent claim for indemnity made to the insured owner’s property insurer. The insurer refused to indemnify the insured on the grounds of breach of various conditions precedent within the policy. The insured sought declaratory relief and damages.

The plant received and processed various types of waste in order to produce fuel. The process removed non-combustible material from the waste inputted, and outputted Solid Recovered Fuel (SRF). The process involved the waste passing through a trommel, a large rotating sieve, and passing along two conveyor belts.

In March 2014, as part of the policy placement process, surveyors visited the plant to undertake a risk assessment. On 8 April 2014, the policy commenced. On 20 April 2014, the surveyors issued a report to the insurer, identifying various risk requirements. On 30 April 2014, an endorsement was issued to the policy, referring to the risk requirements in the report.

On 22 June 2014, a fire broke out at the factory, resulting in much of the roof of the plant collapsing or being demolished by the fire brigade. The fire, and resultant losses, were notified to the policy. On 23 and 24 June 2014, a forensic investigator was sent to the site on behalf of the insurer. On 15 August 2014, the insurer declined cover for losses arising from the fire on the grounds of various breaches of policy terms and conditions.

The Policy

Endorsement 1 to the policy (CE1) required compliance with the risk requirements in the surveyors’ report, including the requirement to store combustible material 6m away from fixed plant and machinery outside of operating hours.

General Condition 6 of the policy confirmed that “The due observance and fulfilment of the Terms Exceptions and Conditions of this Policy insofar as they relate to anything to be done or complied with by the Insured and the truth of the statements and answers in the Proposal and declaration shall be conditions precedent to any liability of the Insurer to make any payment under this Policy.

The insurer argued that cover was subject to the various conditions precedent and warranties in the policy, including the requirement for combustible materials to be stored at least 6m from fixed plant/machinery at times outside of normal operating hours, and that the insured had breached the said conditions precedent and warranties. The insured denied any such breach.

Issues before the High Court

The Judge’s approach was first to consider the causes and development of the fire, to make findings in relation to the causes and development of the fire and, finally, to interpret the conditions in the policy in order to consider whether or not they defeated the insured’s claim. On the facts, the Judge preferred the insured’s case with regard to the cause of the fire, being that a failed bearing in the conveyor belt caused misalignment of the belt and a small gap to open up into which combustible material could collect and/or fall through to the area beneath the conveyor. The friction caused by the failed bearing created smouldering of the combustible material which ultimately caught fire. In turn, the conveyor caught fire which ignited the fabric of the building, including the roof.

In his analysis of the legal position, the Judge noted that it was common ground that “the effect of a condition precedent to liability is that if there is a breach of the condition precedent, the insurer is under no liability to indemnify the insured. That is so whether or not the breach of a condition precedent is relevant to the cause of loss or not”. The insurer did not have to prove that any particular breach caused the loss, just that there had been a breach. The issue before the Court was twofold: (1) as a matter of construction, what was required by the conditions precedent; and (2) as a matter of fact, had there been compliance by the insured.

The Judge went on to consider various established principles of interpretation, including the principle (commonly known as the contra proferentem approach) that ambiguity should be resolved in favour of the insured on the basis it is usually the insurer who drafts the policy (referring to MacGillivray on Insurance Law) and that courts generally treat conditions precedent as onerous or draconian terms. It is therefore incumbent on the insurer to clearly spell out any such terms or the insured will not be bound by them (referring to Royal & Sun Alliance v Dornoch (2005)).

When considering whether the conditions precedent in the policy had been breached, in particular the positive obligation to store materials more than six metres from fixed plant and machinery, the Judge considered the meaning of the words ‘storage’ and ‘combustible’. ‘Storage’, the Judge concluded, denoted a “degree of permanence and a deliberate decision to designate an area to place and keep material” rather than an incidental placing of material during the waste process. The Judge therefore accepted that the combustible material which fell through the misalignment of the conveyor was overspill, rather than ‘storage’ of material.

The meaning of ‘combustible’ was not agreed between the parties. From a scientific perspective, a combustible material is anything that burns when ignited, including materials that can smoulder. However, there are some materials which are scientifically combustible but which a layperson would not consider to be, for example diamond or metals. The insured’s case was that the only fuel in the process was the final SRF outputted from the process. The insurer argued that all of the waste inputted to the system had a combustible element, in strict scientific terms. Consistent with the authorities referred to, the Judge rejected the insurer’s argument and concluded that, if the underwriters had intended ‘combustible’ to have a meaning other than that understood by a layperson interpreting the policy, it had been for underwriters to make that express in the policy. Therefore the use of ‘combustible’ in the policy was interpreted as the meaning as understood by a layperson.

Considering each area of the plant where waste was stored in turn, and using the terms as per his interpretation of the wording, the Judge concluded that there was no area where combustible material had been stored within six metres of fixed plant.

Decision

The Judge found on the facts that there had been no breach by the insured of the conditions precedent or warranties contained within the policy.

Comment

Whilst the Judge’s application of the contra proferentem approach to interpreting the meaning of the relevant condition precedent is not new, it stands in contrast to recent decisions, such as Crowden v QBE Insurance (Europe) Ltd (2017), which have cast doubt on the relevance of the principle when interpreting exclusions in insurance policies. To read our Law-Now on the decision in Crowden click here.

Following the changes made by the Insurance Act 2015, and the prohibition of basis clauses, there is likely to be more focus on the use of conditions precedent in insurance policies. This case underlines the need for these clauses to be clearly drafted in order to avoid any dispute as to whether they are ambiguous or not.

Further Reading

Wheeldon Brothers Waste Ltd v Millenium Insurance Co Ltd [2018] EWHC 834 (TCC).

Crowden v QBE Insurance (Europe) Ltd [2017] EWHC 2597 (Comm).

Dornoch Ltd v Royal and Sun Alliance Insurance Plc [2005] EWCA Civ 238.