Note: this decision has been overruled by the Court of Appeal. For a note on the Court of Appeal decision, click here

DMC Category Rating: Developed

This case note is based on an Article in the November 2005 Edition of the ‘(Re)insurance Bulletin’, published by the Insurance and Reinsurance teams at the international firm of lawyers, DLA Piper Rudnick Gray Cary. DLA Piper is an International Contributor to this website.

Background
The claimant, Shinedean, was the owner of premises in Sydenham, Kent, UK. It contracted with an associated company, Xen Ltd, to develop the site and Xen contracted with the insured, Alldown, to carry out demolition and excavation work.

On 24 April 2002, after Alldown had excavated a large hole on site, the flank wall of the neighbours' building began to collapse. Emergency measures were undertaken to stabilise the site and Shinedean had to carry out further work on its own premises and a redesign of the development, all of which delayed completion.

Alldown notified its insurer, AXA, on 25 April 2002, but on 2 September 2002, it went into creditors' voluntary liquidation. On numerous occasions from April 2002 until June 2003, the insurer's loss adjusters requested documents from one of Alldown's directors, but nothing was received. In June 2003, some drawings were provided, but none of the other documents that had been asked for. That same month, AXA declined the claim on the ground that Alldown had failed to comply with the claims control clause in the policy.

The neighbours' claim against Shinedean was settled in October 2003 for £110,000, including interest and costs. In April 2004, Shinedean began these proceedings against Alldown, obtaining a default judgment in June 2004 for an amount to be decided by the court. Prior to the assessment hearing, AXA was added as a party to the proceedings and Shinedean amended its claim to include a direct claim for an indemnity under the Third Party (Rights Against Insurers) Act 1930.

The insurance policy
Alldown's insurance policy covered public liability and contractors' all risks. The general conditions, (which did not apply to the public liability cover), provided at section 3:

"3(1) In the event of any loss destruction or damage or event likely to give rise to a claim under this Policy the Insured shall:

3(2) No claim under this Policy shall be payable unless the terms of this condition have been complied with".

Under General Condition 15, observance of policy terms was made a condition precedent to insurer's liability.

Special Condition 1 in the public liability section of the policy contained a similar clause making observance of policy terms a condition precedent to insurer's liability. Special Condition 4 provided:

"4. In the event of any occurrence which may give rise to a claim under this Section the Insured shall immediately:
(a) give notice with full particulars to the [insurer]
(b) forward to the [insurer] upon receipt every letter, claim, writ summons or process".

Special Condition 5, headed "Claims Control" provided that the insured "shall give all information and assistance the [insurer] may require".

Condition precedent?
On the facts, the judge found Alldown had breached the claims control clause. Technically, after Alldown went into liquidation in September 2002, the requests for information should have been made to the liquidators not to an ex-director, but the liquidators had had similar difficulties in obtaining any documents from the defunct company, so this would have made no difference.

But what was the nature of the clause? The claimant, Shinedean, argued that the general "observance of conditions" clauses were too wide and could not apply to all the clauses in the policy. The claims control clauses were too ambiguous to be conditions precedent and should be construed against the insurer.

Judgment
The judge disagreed. Clause 3(2) and 15 of the General Conditions and Special Condition 1 in the public liability section were sufficiently clear. The insurer would not be liable to pay a claim unless the insured has complied with the relevant conditions.

No time limit
Neither of the two claims control provisions imposed a time limit for providing information to the insurer. In order to give business efficacy to the clauses, the judge found that there was an implied term that the insured would provide the information within a reasonable time.

What was reasonable would depend on the facts of each case, but should be interpreted generously in favour of the insured, so far as it was reasonable to do so. A reasonable time in a case where litigation was underway or imminent, for instance, would be shorter than where the threatened claim was dormant.

Prejudice
The judge accepted Shinedean's submission that one of the factors to be taken into account in judging reasonableness was whether any prejudice had been caused to the insurer.

AXA argued it had been prejudiced because it had been unable to take an early view of liability. Had the information been supplied, it might have been able to resolve the third party claim more easily. It accepted, however, that the settlement had been reached in good faith and that Shinedean was entitled in principle to recover from Alldown its reasonably incurred costs of dealing with the third party action.

The documents eventually came to the knowledge of AXA in late 2004/early 2005. But, in the judge's view, any prejudice suffered by AXA (over and above the fact that it was unable to close its books on the claim) was minimal. Since no real prejudice had been caused, the documents had been provided within a reasonable time, and the conditions precedent had not been breached.

Comment
In normal circumstances, provided a clause is clearly worded as a condition precedent and sets out what will happen in the event of a breach, the court will uphold it, whether or not the insurer has suffered any prejudice.

In this case, because the claims control clauses failed to specify a time limit, the judge re-introduced the concept of prejudice through the back door in his assessment of what was reasonable. The end, and perhaps rather disturbing, result was that documents provided two or three years after the event - and after judgment in default had been entered against the insured - were found to have been supplied within a reasonable time.

Back to Top