In Bluebon Limited (in liquidation) and (1) Ageas UK Limited (2) Aviva Insurance Limited (3) Towergate Underwriting Group Limited [2017] EWHC 3301 (Comm) the High Court considered whether a term in an insurance policy was a warranty or a condition precedent to liability.
The Claimant insured owned a hotel that was destroyed by fire. The insurers were the First and Second Defendants and the brokers were the Third Defendants. The policy contained a term, described as an Electrical Inspection Warranty (“EIW”), that required the electrical installation to be inspected and tested every five years. It was agreed that the electrical installation had not been tested within the five years prior to policy inception or at any time since.
The insurers contended that the EIW was a warranty and that the breach entitled them to declare the policy void from inception. Alternatively, they contended that the term was a suspensive warranty and that cover was suspended from inception until the electrical installation was inspected. In practical effect there was no difference of outcome whether the EIW was a ‘true’ or a ‘suspensory’ warranty as there was no dispute that the electrical installation had not been inspected post-inception. Under both a true and suspensory warranty the insurers were entitled to declare the policy void from inception and refund the premiums paid, less an amount paid for an earlier burst pipe claim.
The insured and their brokers contended that the compliance with the EIW was a condition precedent to the insurers’ liability for a fire caused by a fault in the electrical installation. Unless the fire was caused by a fault in the electrical installation then the insurers were liable. The construction of the EIW was tried as a preliminary issue and the cause of the fire was not considered.
The Honourable Mr Justice Bryan considered that the description of the EIW in the policy as a warranty was not necessarily conclusive, not least because, as Mr Justice Mackinnon observed in Roberts v Anglo Saxon Insurance Company [1927], the word warranty “is often used with the greatest possible ambiguity in insurance policies”. The consequences of a breach, that the policy would be null and void from inception, were not spelled out and the policy’s general conditions provided that due observance and fulfilment of the policy terms, which included the EIW, were conditions precedent to the liability of the insurers to make any payment.
Instead the judge applied the three-stage test identified by Mr Justice Rix in HIH Casualty & General Insurance v New Hampshire Insurance Co. [2001] (“HIH”). The first question was whether the EIW was a term that went to the root of the contract. Here the purpose of the EIW was to ensure that, as far as possible, the electrical installation was sound and without defect and thereby the risk of fire was reduced. It was clear, therefore, that the EIW went to the root of the contract.
The second question was whether the EIW was descriptive of or had a material effect on the risk of loss. Fire was an insured peril under all sections of the policy and therefore the test was satisfied.
The third question was whether, in the event of breach by the insured, damages would be an unsatisfactory and inadequate remedy for the insurer. Damages would be a suitable remedy if the insurers could reduce or extinguish their liability to the extent that a fire was caused by a fault in the electrical installation that would have been discovered and remedied through compliance with the EIW. The judge considered that it might be impossible to establish whether a fire was caused by a defect in the electrical installation, particularly in the event of destruction in a particularly fierce fire. Damages were not, therefore, a satisfactory or adequate remedy for the insurer.
The three tests in HIH were satisfied and so the EIW was a warranty and not a condition precedent to liability. The judge, however, preferred the construction of the EIW as a suspensive rather than a true warranty (although it made no practical difference in the circumstances of this claim). He considered that the EIW should reflect the intention of the parties by reference to what a reasonable person having all the background knowledge of the parties would understand it to mean. The EIW clearly contemplated that if there had not been an inspection within the last five years then one was to be undertaken immediately, and that cover would be suspended until it took place. It would be wrong to say that if an inspection was outstanding at the time of inception, but one was undertaken shortly afterwards, the policy would nevertheless be null and void.
The significant point to note from the decision is that the judge did not consider the description in the policy of the EIW as a warranty to be conclusive. Care should be taken when drafting terms that an insurer wishes to rely on as warranties that the consequences of a breach are made clear and that they are consistent with the general policy conditions.
Graham Bartlett, Barrister 