Ben Nicholson, reinsurance solicitor at Beachcroft Wansbroughs, explains the latest legal developments in the war zone that is claims co-operation and control clauses
In the recent decision of Sirius v Friends Provident, the Court of Appeal has closed a door previously left ajar in Alfred MacAlpine v BAI (Runoff). The court confirmed that unless a claims notification clause is expressed as a condition precedent to insurers' liability, insurers will not be able to reject late-notified claims unless they can show that they have suffered some prejudice.
Where compliance with a condition - such as a claims notification clause - in a (re)insurance contract is a condition precedent to (re)insurers' liability, an insurer is entitled to reject any claim where the insured has failed to comply. The classic example is a requirement for notification of a claim "as soon as reasonably practicable", which is often expressed as a condition precedent to insurers' liability. This proposition is uncontroversial, and is well known to market professionals.
Where a claims notification clause is not expressed as a condition precedent to liability, then in the event of a breach by the insured, the general rule expressed in the case of Alfred MacAlpine v BAI is that insurers must show that they have suffered prejudice before they have any remedy against the insured. Even then, the insurers' remedy is broadly limited to a right to set off against the insured's claim the amount of the prejudice or "damage" suffered by insurers as a result of the late notification.
In many cases, it will be difficult for insurers to establish that they have suffered damage as a result of an insured's breach. In the context of claims notification, the insurer will typically need to show that if had it been notified "on time", then it would have been able to reduce its overall exposure to the claim.
In the BAI case, the Court of Appeal indicated that insurers may also have an alternative remedy as a result of the insured's breach of claims conditions when they are not expressed as conditions precedent. Lord Justice Waller held that the consequences of the insured's breach of a claims notification clause will vary depending on the seriousness of the breach and its consequences.
If an insured's late notice of a claim is sufficiently serious and has "serious consequences" for the insurer, the insurer would be entitled to reject the claim even if unable to prove prejudice. In effect, the Court of Appeal was saying that in cases of "serious breaches with serious consequences", a breach of a condition can have the same effect as a breach of a condition precedent.
It is this proposition that was considered by the Court of Appeal in Sirius v Friends Provident.
The decision in Sirius v Friends Provident
In Sirius v Friends Provident, the Court of Appeal held that the claims notification clause was not a condition precedent to insurers' liability.
This led to the question of whether the insured's breach was sufficiently serious with serious consequences so as to allow insurers to reject the claim as suggested in the BAI case.
The Court of Appeal ruled not only that insurers could not reject this claim for late notice, but also rejected altogether the proposition put forward in the BAI case. It ruled that there was no justification for granting insurers any alternative remedy.
The Court of Appeal stated that if insurers can show "serious" consequences as a result of the insured's breach of the claims notification clause, then those consequences will often be quantifiable (even if only as a loss of a chance). If so, then there is no need to depart from the rule of setting off such damage or "prejudice" against the amount of the insured claim.
If insurers wished compliance with the claims notification clause to be a condition precedent to the insured's rights to an indemnity, then insurers should have provided for this in the contract wording.
What does this mean to you?
If a (re)insured has delayed for a significant period of time before notifying a claim, then it will often be very difficult for (re)insurers to obtain enough evidence to prove that they have suffered "measurable" prejudice as a result of the delay. This point was made by Lord Justice Waller in his dissenting judgment.
The majority of the Court of Appeal did recognise that these difficulties can arise, and suggested that in those circumstances the Court "should incline to a quantification favourable to insurers." In reality, this may be cold comfort to (re)insurers who receive notice of claims at the end of the limitation period, and thus lose the opportunity to investigate a claim or exert any control over its defence.
The message to underwriters coming from the Court of Appeal in Sirius v Friends Provident is that the courts will not allow (re)insurers to rely upon breaches of claims conditions (such as claims notification clauses) unless they are able to show some quantifiable prejudice. If (re)insurers want to make timely notification of claims a condition precedent to liability, they should do so by drafting appropriately worded claims conditions.
Unless conditions are expressed as conditions precedent, then insurers will have to show prejudice.
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