Welcome clarification on claims conditions

Claims Conditions

The recent decision of the TCC in Milton Keynes Council v Nulty & NIG has provided some welcome clarification to the insurance industry on the effect of claims conditions which are not conditions precedent.

In short:

•Where an insured breaches a claims condition that is not a condition precedent, the insurer is entitled to make a counterclaim against their insured for damages calculated on the loss of a chance basis.
•This counterclaim would then be set-off against any indemnity payable to their insured and would be calculated on a percentage basis.
•If the insurer puts their case on loss of a chance by reference to the prospects of achieving a successful defence of the claim against their insured, the maximum percentage reduction which could be achieved will be 50%.

The facts

NIG were the liability insurers of Mr Nulty, a self-employed electrician responsible for causing a fire at a recycling centre owned by Milton Keynes Borough Council. Mr Nulty did not notify NIG of the fire until some 18 months afterwards (when he received a letter of claim) and NIG therefore reserved rights and ultimately declined indemnity for breach of a condition requiring immediate notice of circumstances which could give rise to a claim.

Milton Keynes BC issued proceedings against Mr Nulty which NIG elected to defend in their own name as an interested party. NIG in turn issued declaratory proceedings against Mr Nulty and Milton Keynes BC seeking a declaration that they were not liable to indemnify Mr Nulty in respect of any liability on his part to Milton Keynes BC by reason of his breach of a claims condition.

The problem

The claims condition on which NIG relied was not a condition precedent. If it had been, then NIG’s remedy would have been clear – they would have been automatically off risk from the date of breach.

The position in relation to claims conditions which were not conditions precedent, however, was far murkier, due to a lack of relevant legal authorities and some rather confusing about-faces by the Court of Appeal:

It had been suggested in BAI v McAlpine [2000] that such conditions might be “innominate” terms, whereby a “sufficiently serious” breach might entitle insurers to decline indemnity to the insured altogether.

Five years later, however the Court of Appeal had to look at the point again in Friends Provident v Sirius [2005] at which point it decided that innominate terms were dead in the water.

Unfortunately for insurers, the Court of Appeal, having killed-off the innominate term theory, did not then determine (because it did not have to) how claims conditions worked. In fairness, however, Mance LJ in Friends Provident did express the view that insurers’ remedy was restricted to a claim for damages for loss of a chance but that view was “obiter” (i.e. persuasive but not legally binding).

This left liability insurers somewhat unclear as to whether they had any effective remedy at all in the case of breach of a condition which was not a condition precedent, and if so what that remedy was, and how they went about enforcing it.

The answer according to Milton Keynes v Nulty & NIG

In its declaratory proceedings NIG ultimately had to abandon its claim for a declaration that it was not liable to indemify Mr Nulty and instead substituted a claim that, by virtue of the late notice, it had suffered prejudice in investigating the circumstances of the fire, and, to that extent, in defending the claim against Mr Nulty.

This was put on the basis of a “loss of a chance” i.e. that, because of the late notice, it had lost the chance, in the event that Mr Nulty was found liable to Milton Keynes Council of carrying out its own investigations which might have led to a different outcome. Somewhat surprisingly, this loss of a chance was pleaded by NIG at up to 100% of any indemnity payable to Mr Nulty.

At trial the judge found that Mr Nulty was liable to Milton Keynes Council, and despite rejecting much of NIG’s evidence as to what it would have done if it had been notified sooner, assessed NIG’s loss of a chance at 15%.

It seems that, in reaching this finding of 15%, the judge was influenced in part by the obiter comments of Mance LJ in Friends Provident where he suggested that if there is any doubt as to whether the insurer has suffered prejudice, the insurer should get the benefit of that doubt.

Significantly the judge rejected outright the idea that NIGs’ claim for loss of a chance could ever have been greater than 50% on the basis that:

•NIG’s claim for a loss of a chance would only arise if Mr Nulty was found liable to the Council for causing the fire.
•In that situation, however, the Court would have to have found, on the balance of probabilities, that it was more likely than not that Mr Nulty had caused the fire (i.e. that the chances were greater than 51% that he was at fault)
•The essence of NIG’s claim for a loss of a chance was the chance of obtaining a different outcome at trial in relation to the claim against Mr Nulty. If this loss of a chance was assessed at greater than 50%, that would be inconsistent with the finding of liability against Mr Nulty without which the claim for a loss of chance would never arise.

For future reference

The assessment of the loss of a chance at 15% in this case depended on the particular facts. In particular, the Court appears to have taken account of the fact that NIG was apparently looking for ways to decline cover, rather than investigate the underlying liability. In different situations it should be possible for insurers to achieve larger reductions if they could show genuine efforts to investigate the claim following notice, which efforts were substantially hindered, not by their own actions, but by the passage of time.

In order to get more than 50% however, it would be necessary to plead the loss of a chance claim on a different basis. One such situation might be where, as a result of the delay in notification, insurers have lost the chance to make a reinsurance recovery or to make a subrogated claim, in the name of their insured, against a third party. In such situations it is possible that the value of the lost chance might be up to 100% (although, as far as the author is aware, there are only three reported English cases in which damages have been assessed on a loss of a chance basis at 100%).

Alternatively where the late notice has caused identifiable extra expense to insurers (e.g. in tracing and contacting a witness who has moved to Australia between the occurrence of the incident and the notice) that extra expense could be included as an additional claim (or an alternative) to a claim for loss of a chance.

Finally, it should be noted that in any situation where an insurer wishes to prove that it has suffered a loss of a chance due to breach of a claims condition, the individuals responsible for handling the claim may well have to give evidence and be cross-examined by reference to their actual handling of the claim once notified. For obvious reasons that may not always be an attractive option.

This article was written by Fishburns LLP (part of DWF) and has been reproduced with their permission (professional advice should always be sought where assistance is required in specific areas of law; Fishburns LLP do not accept responsibility for any action based on this article). Fishburns LLP offer dispute resolution and claims management services for the insurance sector. For more information please visit www.dwf.co.uk.