Key Takeaways

  • The English Court of Appeal provides rare guidance on the application of key aspects of the Insurance Act 2015.
  • Differentiating between warranties and representations crucial to assessing the extent of policy cover.
  • Reminder of insurers’ ability to control risk with carefully worded Duty of Assured clauses, without contravening the provisions of the Insurance Act 2015.

Background

Earlier this year saw the Court of Appeal hand down judgment in Scotbeef Ltd v D&S Storage Ltd & Lonham Group Ltd [2024] EWHC 341 (TCC), overturning the earlier decision of the High Court in Scotbeef Ltd v D&S Storage Ltd (In Liquidation) [2024] EWHC 341 (TCC).

Scotbeef Ltd (Scotbeef), a UK-based meat supplier, used refrigeration facilities provided by D&S Storage Ltd (D&S) to store its meat products. A consignment of meat owned by Scotbeef became contaminated while stored at D&S’ warehouse, prompting Scotbeef to issue a claim for damages.

D&S sought to defend the claim on the basis that the contract between D&S and Scotbeef incorporated the “Terms & Conditions” of the FSDF trade association (the FSDF terms).

D&S held an insurance policy with Lonham Group Limited (Lonham), which contained a ‘Duty of Assured’ clause’ and the following “conditions precedent to liability”:

  1. Sub-clause (i): D&S must declare all trading terms on inception of the policy. The declared terms were stated to be the FSDF terms.
  2. Sub-clause (ii): D&S must continuously trade under the declared terms.
  3. Sub-clause (iii): D&S must take all reasonable and practicable steps to ensure that their trading conditions were incorporated in all contracts.

Scotbeef sought to pursue Lonham for an indemnity. The core issue was whether D&S had any right of indemnity against Lonham under the insurance policy which could be enforced by Scotbeef following the liquidation of D&S.

The Insurance Act 2015

Before considering the outcome of the court cases, a quick reminder of some of the key provisions of the Insurance Act 2015 (the Act):

  • Duty of Fair Presentation of Risk (section 3): Policyholders must either disclose every material circumstance which they know, or they ought to know, or give the insurer sufficient information to put a prudent insurer on notice that it needs to make further inquiries for the purpose of revealing those material circumstances.
  • Abolition of “Basis of the Contract” clauses (section 9): The Act abolished clauses that converted pre-contractual information provided by the policyholder into warranties, thus preventing insurers from avoiding liability for minor inaccuracies.
  • Suspension of liability (section 10): An insurer’s liability is suspended, not discharged, in the event of a breach of warranty, allowing for liability to resume if and when the breach is remedied.
  • Terms not relevant to actual loss (section 11):  Insurers are prevented from avoiding liability for losses unrelated to a breach of warranty.
  • Contracting out and transparency (section 16 and 17): The Act restricts insurers’ ability to contract out of its provisions, requiring appropriate transparency and clarity for any “disadvantageous terms” that put a policyholder “in a worse position”

The High Court ruling

In Scotbeef Ltd v. D&S Storage Ltd, the High Court ruled that the FSDF terms had not been incorporated into the contract, as D&S had failed to provide reasonable notice of their incorporation to Scotbeef.

Lonham argued that D&S’s failure to incorporate the FSDF terms breached the Duty of Assured clause, (principally sub-clause (ii)) and it was therefore entitled to avoid the policy. Finding in favor of Scotbeef, the High Court held that sub-clauses (i), (ii), and (iii) of the Duty of Assured Clause must be read together and noted as follows:

  • Sub-clause (i) is a pre-contractual declaration and is incapable of being a warranty or condition precedent (pursuant to section 9 of the Act).
  • Sub-clause (iii) places D&S “in a worse position” and so has no effect (pursuant to section 16 of the Act).
  • Sub-clauses (i)-(iii) fail to satisfy section 17 of the Act (transparency requirements for “disadvantageous terms” – particularly that D&S would be in breach of sub-clause (iii) if it does not take all reasonable and practicable steps, even if the FSDF terms have in fact been incorporated).
  • Sub-clauses (i)-(iii) are representations and so within the fair presentation of risk provisions in section 3 of the Act.

The Court of Appeal judgment

The issue at the heart of Lonham’s appeal went to the proper characterisation of sub-clauses (ii) and (iii), and whether they were warranties and conditions precedent, not representations (and thus not subject to the fair presentation of risk provisions in the Act). Additionally, it was argued by Lonham that the judge had erred in applying the transparency requirements of section 17.

The Court of Appeal found that the High Court was wrong to construe the three sub-clauses together and noted as follows:

  • Sub-clause (i) is a pre-policy representation.
  • Sub-clauses (ii) and (iii) are ‘future warranties’ (dealing with trading conditions after the inception of the policy and during the policy period) and also conditions precedent (due to the clear wording of the policy), not representations.

Under the 2015 Act, if the insured breaches a warranty, the insurer’s liability is suspended until the breach is rectified (if possible). Sub-clauses (ii) and (iii) were therefore outside the scope of the fair presentation of risk provisions in section 3 of the Act.

As the FDSF terms had not been incorporated into the contract between D&S and Scotbeef, D&S was found to be in breach of the warranties in sub clauses (ii) and (iii). Section 10(2) of the Act explicitly provides that the insurer has no liability for any loss after a warranty has been breached but before it has been remedied; therefore, Lonham was entitled to avoid liability under the policy to indemnify D&S for the losses claimed by Scotbeef.

As to the transparency requirements in sections 16 and 17 of the Act, it was held that they do not apply as there was no attempt to contract out of the Act’s provisions – the policy expressly stated it was subject to the 2015 Act, and there was no disadvantageous term that put the insured in a worse position.

Commentary

The ruling stresses the importance of precise drafting of policies, including properly defining the nature of terms as warranties or representations. It is crucial for policyholders (not just their brokers) to review their policy wordings thoroughly, understand the representations or warranties made to their insurers, and ensure compliance with any warranties throughout the policy period.  This is especially the case when policies are renewed annually and business practices evolve. The ruling also flags to insurers the importance of ensuring that terms are clear and comply with the Insurance Act 2015 to manage potential liabilities effectively.