Previous form: a couple of recent court judgments may encourage more insurance firms to use the "condition precedent" defence to avoid paying out on claims, warns Simon Hodgson.

AuthorHodgson, Simon
PositionLegal briefing

The insurance market is hardening in response to, and anticipation of, significant losses. Premiums are rising and underwriters are becoming less inclined to take on risk. The lack of readily available credit coupled with a sharp decrease in capital after the credit crunch will also have a demonstrable effect on how insurers respond to claims. As margins are pinched, we can expect to see the increasing use of tighter wording to restrict the generosity of cover.


The issue of what should be treated as conditions precedent--ie, events that must occur before the insurer has to fulfil its contractual obligations--is likely to produce further disputes. A condition is not only regarded as a condition precedent if the policy clearly describes it as such; it will also be treated as one if the courts are satisfied that both parties had intended it to be one.

Insurers may well argue more often that certain terms should be treated as conditions precedent. In the 2008 case Aspen Insurance v Pectel Ltd the notification clause of a policy was adjudged to be a condition precedent by the application of a catch-all policy clause that stated: "The liability of underwriters shall be conditional on the assured paying in full the premium demanded and observing the terms and conditions of this insurance."

The court held that, construing the policy as a whole, the commercial purpose of the notification clause showed an intention by the parties for it to be treated as a condition precedent. Pectel had given notice of the underlying event resulting in its insurance claim--a fire--almost three years after the event. This was held to be a breach of a condition precedent, enabling the insurer to decline liability for any claim concerning the fire. The court may have been influenced by the three-year delay, but it is worth noting both that the policy's notification clause was not described as a condition precedent and that other clauses in the policy were expressly described as conditions precedent. So the parties could have made it clearer that the notification provision was a condition precedent, but they didn't. Neither factor dissuaded the court from ruling that Pectel had been out of time with its notification.

The Aspen case underlines the need for insured parties to understand their obligations and comply with them. The...

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