Parties

Scotbeef Limited ("Scotbeef") pursued a claim against D&S Storage Limited ("the Defendant") and, following the Defendant's insolvency, under the Third Parties (Rights against Insurers) Act 2010, their insurer, Lonham Group Limited ("the Insurer"). 

Background

In 2016, the Defendant took out a policy of insurance with the Insurer. The Defendant represented to the Insurer that that it used the UK Warehousing Association terms and conditions ("UKWA Terms"). Those terms limited the Defendant's liability for loss and damage to £100 per tonne. In February 2017, Scotbeef entered into an arrangement whereby the Defendant would freeze and store meat.  There was no written contract although the Defendant's invoices referred to UKWA Terms.

In May 2017, the Defendant became a member of the Food Storage & Distribution Federation and sought to incorporate its terms and conditions into future transactions by referring to them on invoices ("The FSDF Terms"). The FSDF Terms had an increased liability of £250 per tonne. The Defendant continued to renew with the Insurer. At that time, the policy contained the following relevant terms:

"[Page 9] DUTY OF ASSURED CLAUSE - It is a condition precedent to the liability of Underwriters hereunder:-

(i) that the Assured makes a full declaration of all current trading conditions at inception of the policy period;

(ii) that during the currency of this policy the Assured continuously trades under the conditions declared and approved by Underwriters in writing;

(iii) that the Assured shall take all reasonable and practicable steps to ensure that their trading conditions are incorporated in all contracts entered into by the Assured. Reasonable steps are considered by Underwriters to be the following but not limited to …  [various examples relating to incorporation of terms and conditions] …

If a claim arises in respect of a contract into which the Assured have failed to incorporate the above mentioned conditions the Assured's right to be indemnified under this policy in respect of such a claim shall not be prejudiced providing that the Assured has taken all reasonable and practicable steps to incorporate the above conditions into contracts; …

The policy is subject to and incorporates the provisions of the Insurance Act 2015 and any modification thereof unless such modification has been excluded under the policy. … ("Duty of Assured Clause") …"

[Page 11] "The effect of a breach of a condition precedent is that the Underwriters are entitled to avoid the claim in its entirety".

From February 2019, and despite the requirements of the Duty of Assured Clause, the Defendant's invoices stopped referring to the FSDF Terms. On its face, the Defendant was therefore in breach of the conditions precedent at (i) – (iii). The Defendant renewed with the Insurer on 30 June 2019 on materially similar terms to the prior years (including the Duty of Assured Clause). The Defendant erroneously represented to the Insurer that it continued to use FSDF Terms despite the lack of any reference to these terms, or the UKWA Terms, on its invoices.

The Claim

On 3 October 2019, six pallets of meat were transferred to Scotbeef which were later identified as containing mould. A subsequent investigation in April 2020 identified that 102,355kg of Scotbeef's meat was declared unfit for human or animal consumption.  

Scotbeef issued proceedings on 20 July 2020. The Defence asserted that the FSDF Terms applied and that this limited its liability to £250 a tonne for loss and damage (limiting the value of the claim to c£25,150).

The parties agreed for that matter to be tried as a preliminary issue. On 14 October 2022, judgment was handed down and confirmed that:

1. The FSDF Terms were never incorporated into the contractual relationship between Scotbeef and the Defendant; and
2. No other terms were incorporated into the contractual relationship.

By this point, the Defendant had entered liquidation. The parties consented to the Insurer being joined in the Defendant's stead under the Third Parties (Rights against Insurers) Act 2010.

The Policy Coverage Dispute

In November 2022, the Insurer wrote to Scotbeef to advise that the Defendant had failed to comply with the conditions precedent in the Duty of Assured Clause and therefore cover was not available under the policy.

Scotbeef accepted that there had been a breach by the Defendant of the terms of the policy and that the Duty of Assured Clause stated that this was a condition precedent. The parties agreed for the coverage issues to be determined at a preliminary hearing in the TCC.

Judgment

HHJ Kelly ultimately found against the Insurer and in Scotbeef's favour. The wording of the Duty of Assured Clause was ambiguous and the court was entitled to construe the terms of the policy contra proferentem – i.e. any ambiguity should be resolved in favour of the insured. 

The court found that the Duty of Assured Clause could not be divided into separate conditions precedent, but should be read together. That could be seen by the operation of the 'write-back' in the clause concerning circumstances where an insured has taken "all reasonable and practicable steps" to incorporate the FSDF Terms into its contracts. The requirement for the Defendant to "make a full declaration of all current trading conditions at inception" was a representation and had "the effect of turning the representation into a warranty, regardless of how the representation is described"  .

In addition, HHJ Kelly concluded that:  

1. Nothing in the policy wording led the court to believe that it satisfied the necessary transparency requirements for the parties to contract out of the Insurance Act 2015 (which would enable the Insurer to rely on the condition precedent wording). Fundamental to that decision was: a. the uncertainty arising out of the operation of the write-back and b. the fact that the condition precedent was on page 9 of the policy, with the explanation as to what that meant on page 11;
2. It was not open to the Insurer to argue that sub-clause (iii) in the Duty of Assured Clause was a warranty which had been breached. The drafting was such that "it would permit the [Insurer] to avoid indemnifying an assured in respect of a claim even if the loss was unrelated to the breach". This is not permitted under section 11 of the Insurance Act 2015.

The only remedy available to the Insurer was for a breach of fair presentation. The Insurer did not seek a finding that the breach was deliberate or reckless. Instead, the Insurer sought a determination that it would not have entered into the contract on any terms, entitling it to decline cover.

Witness evidence was provided by the Insurer in relation to the course of action it would have taken had it known about the failure to enter into contracts on FSDF Terms. However, the court was unpersuaded that the Insurer would have refused to write the policy as:

1. The Insurer had already underwritten the Defendant's business when it had changed terms from UKWA Terms to FSDF Terms (even though the latter were not well known or industry standard); and
2. Insofar as specific terms in the FSDF Terms were important to the Insurer, they could have been incorporated into the policy.

Comment

The Insurer may be disappointed by the outcome as the Policy sought to take a reasoned approach to the risk and the court found that a misrepresentation was made to the Insurer prior to inception of the policy.

There are now multiple decisions on the effect of conditions precedent and it is clear that these clauses should be used sparingly and only where appropriate.  If a clause is defined as a condition precedent this should either be a defined term or the effect of breaching the clause should be expressly set out in the clause. If the Insurer oversteps, there is a risk that the court will construe the provision as a representation or a mere condition.

It is not clear from the judgment whether the Insurer argued that it would have charged a higher premium and could therefore reduce the indemnity available. It is possible that this was not raised as it would have been incompatible with the Insurers' position that it would not written the policy on any terms. In any event, it is far from clear that HHJ Kelly would have agreed that a higher premium would have been charged given her eventual determination.

Finally, when assessing the breach of the duty of fair presentation the court did not limit itself to underwriting considerations for the relevant policy year (2018).  The court also considered the underwriting position in the surrounding years (including the Insurer's decision to continue to write the risk following the change from UKWA Terms to FSDF Terms).  One to ruminate on.