Effect of the late notification of a claim

United Kingdom

In May 1991, a workman called Mr O’Malley, fell off some scaffolding erected by the Claimant and sustained serious injuries. Mr O’Malley sued the Claimant and the claim was eventually settled.

The Claimant wished to recover against a sub-contractor, RCCL on the basis, inter alia, of an indemnity in the contract. The Claimant obtained a judgment in default against RCCL, which had gone into liquidation.

In the present proceedings, the Claimant brought a claim against RCCL’s insurers under the Third Parties (Rights against Insurers) Act 1930.

The Defendant insurers were not notified until June 1992, some thirteen months after the accident. They declined liability on the basis of the late notification of the claim. The notification clause in the policy provided as follows:

“In the event of any occurrence which may give rise to a claim under this Policy, the Insured shall, as soon as possible, give notice thereof to the Company, in writing, with full details and as far as practicable there shall not be any alteration or repair until the Company have had an opportunity of inspecting”.

At first instance, the Judge found in favour of the Claimant. The Defendant insurers appealed.

Held:

The appeal was dismissed.

The Defendant insurers contended that the late notification amounted to a breach of RCCL’s duty of utmost good faith. The Court of Appeal disagreed. On the authority of “The Star Sea” [1997] (Insurance & Reinsurance Bulletin Issue 30), the duty of utmost good faith in relation to claims simply means that the insured is under a duty not to make a fraudulent claim. In the present case, there was no allegation of dishonesty. Mere negligence in supplying details of a claim cannot constitute a breach of the duty of utmost good faith.

The Defendant insurers also argued that the failure to comply with the notification clause amounted to a repudiation of the entire contract of insurance, that this repudiation had been accepted, and that, accordingly, there was no liability under the policy. The Court of Appeal rejected this argument. It was not easy to contemplate that a failure to comply with an ancillary provision relating to one claim under a policy could amount to a repudiatory breach of the whole contract of insurance. The payment of individual claims were severable obligations under the contract.

Instead, the notification clause should be construed as an “innominate” term. Accordingly, a serious breach which demonstrated an intention not to continue to make a claim, or which had very serious consequences for insurers, would entitle insurers to reject the claim, but not to repudiate the whole contract.

On the facts, the breach of the notification clause was very limited because the Defendant insurers had sufficient details to enable them to investigate the claim, yet chose not to do so. By the time the Defendants had some details of the claim, they had not suffered any real prejudice.

On that basis, insurers’ only remedy for the late notification was a counterclaim for damages. The counterclaim had been withdrawn during the trial. The Defendants therefore had no defence to the claim.

Note:

Until this decision, there was little authority on the remedy for breach of a “simple” notification clause (that is, one which is not expressed to be a condition precedent to liability). This important decision now establishes that, where a breach is sufficiently serious and prejudicial, insurers will be entitled to repudiate liability for the claim in question. It is very unlikely that repudiation of the entire policy would ever be justified.

At first instance, the Defendant insurers alleged that the clause was a condition precedent to liability. That argument was rejected on the basis that, if the insurers had wanted to create a condition precedent, they could either have inserted words to that effect in the clause or inserted into the policy a general clause requiring compliance with its terms as a precondition to liability. This argument was not raised before the Court of Appeal.

The position remains, however, that if a clause is expressed to be a condition precedent to liability, any breach, however trivial, will entitle insurers to escape liability for a particular claim. It is not necessary for insurers to show they have suffered prejudice as a result of the breach (Pioneer Concrete (UK) Limited v National Employers Mutual General Insurance Association Limited [1985]).

As a practical matter, insurers should ensure, wherever possible, that a notification provision is expressed to be a condition precedent to their liability under the policy.

CMS Cameron McKenna acted for the Claimant (Alfred Mcalpine Plc V Bai (Run-Off) Limited, CA : Judgment 11th February 2000).

For further information on this articles, please contact the co-editors, Peter Maguire at [email protected] or on +44 (0) 20 7367 2893 or Jonathan Wright in Singapore at [email protected] or on +655 534 1711.