March 2008 

Reinsurance Group E-Alert

Insurer can take over the conduct of a claim, and repudiate liability

Kosmar Villa Holiday Plc v Trustees of Syndicate 1243 (2008)

In a positive move for insurers, the Court of Appeal ("CA") has overturned a first instance decision which suggested that, in the context of a liability policy, once insurers have taken over the conduct of a claim, they may well find themselves bound to indemnify the insured even though there was a clear breach of a condition precedent which insurers were still investigating.

Background

The defendant insurers (the "Insurers") provided public liability insurance (the "Policy") to Kosmar Villa Holiday plc ("Kosmar"), a specialist tour operator focussing on Greek destinations. On 22 August 2002, during the Policy period, a holiday maker dived in the shallow end of a swimming pool and fractured his spine, resulting in incomplete tetraplegia. The claim was notified to the Insurer on 4 September 2003, over a year after the occurrence.

The Policy contained a notification clause, expressed to be a condition precedent to liability, which required notification to insurers "immediately after the occurrence of any Injury…". It was common ground that Kosmar was in breach. The issue in dispute, however, was whether the Insurers had waived their right to repudiate liability for non compliance with the clause. The issue arose because, after they had been notified early in September, insurers had taken over the conduct of the claim, and it is not until six weeks later, on 21 October 2003, that they repudiated liability for breach of the condition precedent. During those six weeks they had communicated with Kosmar on several occasions without reserving their rights (until 30 September 2003), although they had raised a number of queries, including queries on the late notification.

At first instance the judge took the view that the Insurers knew all the relevant facts concerning the late notification (i.e. that the accident had occurred a year earlier and not been notified immediately) when they were first notified. On that basis, he held their decision to conduct the claim was an election to waive compliance with the notification clause. They were bound by this election because they had made an unequivocal representation to Kosmar that they would take over the claim, and this could only be consistent with them accepting liability.

As it happens, the claim against Kosmar failed and therefore Kosmar had not liability to pass on to the Insurers. Kosmar was nevertheless seeking an indemnity for its costs, and Insurers decided to appeal the first instance decision.

The decision

The CA disagreed that the exercise by an insurer of a right to conduct a claim is necessarily an unequivocal election to accept liability. The CA pointed out it remains open to the insurer to withdraw his support if, for instance, information comes to light which suggests the loss is not in fact covered. The CA added that, in its view, the doctrine of waiver by election is ill-fitted to a case like this one. A waiver by election is irrevocable, and it arises when the insurer knows all relevant facts and, though words or conduct, makes an unequivocal representation that he will not enforce a right or remedy.

A waiver, however, can also arise through estoppel. This will be the case if the insured makes an unequivocal representation to the insured that he will not assert a right or remedy, and the insured relies on the representation in a way that would make it inequitable to allow the insurer to enforce his rights at a later stage. Unlike election, a waiver by estoppel may be suspensory only.

The CA held that a breach of a procedural condition precedent can only give rise to waiver by estoppel rather than election, partly because failure to comply with a condition precedent discharges a party from liability at the time of the breach and there is, as such, no "election" to be made as regards a right. The decision for insurers is whether to use the breach as a defence, and failure to do so timeously should not give rise to an irrevocable waiver. In this case, however, no waiver by estoppel had arisen either because the decision by the Insurers to deal with the claim did not amount to a unequivocal representation that the Insurers would accept liability. The Insurers were therefore not liable to indemnify Kosmar under the Policy.

Comments

Whilst turning on its own facts, the decision clarifies the doctrine of waiver and its application to breaches of procedural conditions precedents. More importantly, it provides useful guidance for insurers faced with claims that may raise liability or coverage issues. The CA made it clear it did not want to discourage insurers from working with their insureds by making it difficult for them to protect their rights whilst dealing with their insureds' claims. The CA pointed out insurers should be given a reasonable time to assimilate the circumstances of a case, and insurers are perfectly entitled to take over the conduct of a claim whilst investigating coverage, as long as they do not represent thought words or conduct that they accept liability.

The CA however underlined the decision is confined to the context of a breach of a procedural condition precedent i.e. the CA was not dealing with the issue whether, by exercising a right under the policy (e.g. to deal with claim), insurers may lose the right to avoid the policy on other grounds, such as non disclosure.

The easy way to avoid such difficulties is to include reservations of rights in all communications with the insured. The Insurers in this case would have been well advised to have reserved their rights from the outset. Had they done so, there would have been no argument as to whether they had waived rights, and this lengthy – and no doubt costly - litigation would have been avoided altogether.