Court finds breach of condition precedent relating to pre-contract misrepresentation unenforceable under Insurance Act 2015

In Scotbeef Ltd v D&S Storage Ltd (In Liquidation) [2024] EWHC 341 (TCC), the court considered the interpretation of various clauses purporting to be conditions precedent to liability in light of the Insurance Act 2015 (the IA 2015). The judgment is one of only a handful of cases to have considered the application of the IA 2015 and considers in particular s.9(2), which prevents representations being converted into warranties (and abolishes basis clauses), and ss.16 and 17, which set out the transparency requirements for parties to contract out of the policyholder protections.  The court found that a misrepresentation by the insured which put the insured in breach of a condition precedent could not be relied on by the insurer because of the application of the IA 2015.

BACKGROUND

The Claimant, a meat producer, contracted with the First Defendant, D&S Storage Limited (the insured), for the blast freezing and storage of its meat products. Quantities of the Claimant’s meat being stored by the insured were found to be mouldy and unfit for human or animal consumption resulting in loss to the Claimant.

At a preliminary issues hearing (Scotbeef Ltd v D&S Storage Ltd (In Liquidation) [2022] EWHC 2434 (TCC)) the court was asked to determine whether the Food Storage & Distribution Federation terms and conditions (FSDF T&Cs) were incorporated into the contract between the Claimant and the insured. The FDSF T&Cs contained key provisions limiting the insured’s liability (to £250 per metric ton). The court found that the FDSF T&Cs had not been incorporated into the contract.

Subsequently, the insured went into liquidation and the Claimant added the insured’s insurer (under a Marine Liability Policy (the Policy)) to the claim pursuant to the Third Parties (Rights against Insurers) Act 2010 (the 2010 Act). By way of reminder, the 2010 Act assists a third party who has a claim against an insolvent entity where that defendant is insured, and allows the third party to sue the insurer directly.

The present case considered whether the insured was entitled to an indemnity under the Policy which the Claimant could recover.

Policy Terms

The Policy contained a number of clauses relating to the trading conditions that the insured had in place. In particular, the Policy contained the following representation:

“TRADING CONDITIONS: FSDF Terms and Conditions at £250 per tonne“

It also contained a “Duty of Assured Clause” which provided:

“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 same:

…

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; …“

Several pages later the Policy stated:

“The effect of a breach of a condition precedent is that the Underwriters are entitled to avoid the claim in its entirety.”

The Policy expressly incorporated the provisions of the IA 2015.

Issues for Determination

The court was asked to determine the proper construction of the “Duty of Assured Clause” and its effect in light of the IA 2015. In summary:

whether each of sub-clauses (i) – (iii) created free-standing obligations or whether they had to be read together;
whether sub-clauses (i) – (iii) stood as warranties or conditions precedent in light of the IA 2015;
whether breaches of sub-clauses (i) – (iii) occurred, and if so what the effect of those breaches was in light of the IA 2015;
whether the insured misrepresented its trading terms to the insurer, and if so what the effect was under the IA 2015; and
whether the insurer complied with the transparency requirements under s.17 IA 2015 (if applicable).

Insurance Act 2015

A number of key provisions from the IA 2015 were relevant when considering these issues. In particular the court considered the following principles:

Duty of Fair Presentation – The insured is required to comply with the duty of fair presentation, as set out in s.3 IA 2015. Where this duty has been breached, the insurer may only avoid the contract and refuse all claims where the breach was deliberate and reckless, or if the insurer can show that in the absence of the breach it would not have entered into the contract on any terms (IA 2015, Schedule 1).
Warranties and Representations – Representations are not capable of being converted into warranties under s.9(2) IA 2015 Act. The judge quoted Chitty on Contracts (34th edition) which notes that the same presumably applies to conversion to conditions precedent (a breach of condition precedent would have the same effect as a breach of warranty, i.e. denying the insured cover).
Transparency Requirements – Policy terms cannot put the insured in a worse position than under the IA 2015 (excluding s.9), unless the “transparency requirements” set out in s.17 have been met. Specifically, the insurer must take “sufficient steps” to draw the term to the insured’s attention or the insured must have actual knowledge of the disadvantageous term; and the disadvantageous term must itself be “clear and unambiguous as to its effect”.

DECISION

Taking the sub-clauses of the “Duty of Assured Clause” in turn, the court found that:

Sub-clause (i) was plainly a representation that the insured was trading on FSDF T&Cs. In view of s.9(2) of the IA 2015, it was not possible for this representation to be converted into a warranty. The misrepresentation therefore went to the duty of fair presentation and it was the remedies for breach of that duty under the IA 2015 that were relevant when considering a breach of this clause.
Sub-clause (ii) was not relevant on the facts as it referred to continuous trading “during the currency of the policy”, whereas the non-incorporation of FDSF T&Cs occurred prior to the commencement of the policy period.
Sub-clause (iii) was a disadvantageous term and did not satisfy the transparency requirements of the IA 2015. The court found it was a particularly onerous clause, as it required the insured to take all reasonable steps to incorporate the FDSF T&Cs into the contract. Indeed, the court noted that the insured might technically be in breach of this clause even if the FDSF T&Cs had been incorporated, if it had not taken all reasonable steps to incorporate them. The effect of sub-clause (iii) was to put the insured in a worse position than under the IA 2015 but the transparency requirements set out in s.17 of IA 2015 had not been met. In particular:

There was no evidence on the facts of the insurer having taken steps to draw the disadvantageous sub-clauses to the insured’s attention (as was required). The fact the term had been included in previous policies was held not to be sufficient to meet the transparency requirements.
Furthermore, the sub-clause was not clear and unambiguous. The Policy stated in relation to breach of sub-clause (iii) that “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” but also stated two pages later that “the effect of a breach of a condition precedent is that the Underwriters are entitled to avoid the claim in its entirety.” The court said it was not possible to reconcile these two clauses and it was therefore unclear what the effect of a breach would be.

The court agreed with the Claimant’s position that sub-clauses (i) – (iii) had to be read together and should be considered in the context of the duty fair presentation. The court found that the insured did misrepresent its trading terms to the insurer because (as per the earlier judgment), the FDSF T&Cs were not incorporated into the contract with the Claimant. Therefore, the insured had breached its duty of fair presentation.

However, the court found that the breach was not deliberate or reckless and on the facts (in particular in view of the witness evidence provided by underwriters) there was insufficient evidence to show that the underwriters would have entered into the Policy on different terms had they been aware of the breach. Therefore, although the court found there was a breach of the duty of fair presentation, the remedies under the IA 2015 could not be invoked and coverage was unaffected. The court ordered the insurer to pay the Claimant’s claim.

COMMENT

Scotbeef v D&S is one of only a handful of cases to have considered the application of the IA 2015 and is therefore of interest to insurers and policyholders alike.

The case confirms that pre-contractual representations made by an insured should be assessed by reference to the duty of fair presentation and the remedies set out in the IA 2015. To the extent an insurer wishes to contract out of this regime, the strict transparency requirements apply.

Notably, the insurer was not able to circumvent these policyholder protections in the IA 2015 in relation to pre-contract warranties by describing a clause as a condition precedent to liability.

The case is also a useful reminder that the remedies for breach of the duty of fair presentation have changed significantly since the pre-IA 2015 position and that the onus is on the insurer to show what they would have done had there not been a breach. In this case although the court found that the duty had been breached, the insurer had no remedy as it did not show that the policy terms would have been altered if the risk had been properly represented.