Aspen Insurance UK Limited and Others v Pectel Limited
The insured is a specialist contractor experienced in the removal of asbestos from commercial and government property. In 2004, it was engaged by AMEC as a sub-contractor to work on BT's deep level tunnel facility in Manchester.
In March 2004 the insured began preparatory work on a crossover section where two tunnels meet. On Friday 26th March, work was stopped because there has been no pre-start meeting. In the early hours of Monday 29th March, a fire broke out in the crossover section.
In the following months, AMEC took statements from the insured's employees and made various requests for information from the insured, including details of staff who had worked on site, copies of method statement confirmation sheets and a list of materials used.
The insured's operations director cooperated with these requests. He was also aware that AMEC had arranged for sample materials to be fire-tested.
On 12th January 2007, AMEC wrote to the insured stating that BT was intending to claim against AMEC and recommending that the insured advise its own insurers.
On 6th March, AMEC wrote again, enclosing BT's letter of claim which alleged that AMEC, by the actions of its subcontractor (the insured) was liable for the fire.
BT said the fire had been caused by a fluorescent light fitting or cable that had been damaged during the preparatory work. It also claimed that materials used by the insured were easily ignitable and did not meet the required specification. It claimed damages of about £15 million.
The insured notified its liability insurers on 22nd March 2007. Insurers denied the claim on the grounds that the insured had breached a notification clause that was a condition precedent to their liability.
Condition 4(a) of the policy required the insured to give insurers "immediate written notice with full particulars of … any occurrence which may give rise to indemnity under this insurance".
Condition 13 entitled "Observance" stated that "the liability of Underwriters shall be conditional on …. the Assured paying in full the premium demanded and observing the terms and conditions of this insurance".
It was agreed that "immediate" meant with all reasonable speed in the circumstances. There was also no dispute that the phrase "may give rise to indemnity under this insurance" meant there had to be a real risk of insurers having to indemnify the insured. This was an objective test, taking into account the extent to which the insured was aware of occurrences which may give rise to an indemnity (Kidsons v Lloyd's underwriters [2008]).
The issue was whether compliance with the notification clause was a condition precedent to insurers' liability. If not, insurers' only remedy would be to counterclaim for damages, provided they could show they had been prejudiced by the breach.
Insurers said condition 13 made the notification clause a condition precedent. The commercial purpose behind it was to ensure early notification so that insurers could take any appropriate steps to minimise liability and take charge of any proceedings against the insured.
The insured, however, argued that condition 13 did not have this effect. Where the parties intended a clause to be a condition precedent they said so expressly, as they had in one of the endorsements. A clause that made all conditions in the policy, even purely administrative ones, condition precedent to insurers' liability would be draconian.
On the evidence, the judge was satisfied that an occurrence should have been notified in March or April 2004.
A reasonable man in the insured's position would have realised that there would be an investigation into the cause of the fire and that this investigation would inevitably focus on the work done by the insured's employees in the crossover tunnel a few days beforehand. He would have concluded from this that there was a real possibility that the insured would have to make a claim on its liability insurance.
But was it a condition precedent that the insured notify the occurrence immediately? The judge held it was.
Most modern policies specifically state at the beginning of each clause the effect of that clause, but a general provision that purports to make compliance with all obligations in the policy a condition precedent to insurers' liability can still be effective. It is not essential that the words "condition precedent" are used, as long as the effect of a breach of the condition is made clear.
In the judge's view, condition 13, when read in conjunction with the notification clause, made it clear that the parties intended there to be a conditional link between the insured's obligation to give notice and insurers' obligation to pay the claim.
The objective commercial purpose underlying the requirement justified it being a condition precedent. It was of great importance to insurers that they be given notice of a potential claim promptly so they could investigate the occurrence properly.
This same purpose did not necessarily lie behind all the conditions in the policy. If insurers sought to rely on another clause, the court would have to decide whether the objective commercial purpose behind the clause made it appropriate that insurers' liability should be conditional on the insured's compliance.
In this case, the insured was in breach of a condition precedent and insurers were entitled to decline liability.
The decision is very much in insurers' favour and may have been influenced by the three-year delay in notifying what was clearly a serious fire. The insured appears to have waited for confirmation that a claim would be made against it, forgetting that the focus of the notice requirement was on the occurrence itself.
The judge was careful not to suggest that a general provision such as condition 13 will have a blanket effect on all conditions in the policy, even the relatively unimportant ones.
But leaving it to the court to decide whether the commercial purpose behind a particular clause justifies it being treated as a condition precedent introduces an element of uncertainty into policies with general "sweep-up" clauses like this one.
The position for insured and insurer alike is much clearer if the status and effect of each condition is clearly stated.