Insurance Contracts CP - Law Reform Commission

Street Dublin against the embezzlement of the takings of the tavern by an employee. A claim was made
and in its defence the insurer argued that a clause requiring the insured to prosecute the suspected
wrongdoer with diligence had not been observed and that this was a condition precedent to liability. The
Court of Appeal in Ireland found that this was not a condition precedent but this decision, (Selborne LC
dissenting) was reversed by the House of Lords. Despite Lord Blackburn‘s observation that the case
revolved around ―the construction of an ill-penned instrument,‖ there is no indication that the majority of
the House of Lords subjected this contract to anything other than a very benign process of construction
that favoured the insurer. Should the language used be held to be ambiguous the insurer will be held to
have a remedy in damages only for the insured‘s breach of promise. Collateral promises may be held to
exist unless the court finds that such a conclusion would not provide the insurer with appropriate reliefs,
the primary reasons why the majority of the House of Lords in Fearnley held that the insured‘s failure to
prosecute was a breach of a condition precedent was because it was prejudicial to the company.
10.104 The argument is made that many of the difficulties that arise are a consequence of the view
that contractual terms are either conditions, or warranties, in the Sale of Goods Act 1893 sense. A fairer
result, on a case by case basis, could be afforded by eschewing this a priori classification in favour of
holding all terms to be, or potentially be, innominate terms. The appropriate remedy would be
determined, at the date of breach, according to the merits of each case.
10.105 Despite the flexibility of the innominate term mechanism – the court does not have to
characterise the term as being either a condition or a warranty but may decide that the parties intended
the breach of the obligation would give the injured party a right to rescind depending upon the
seriousness of the breach – it has been cirticised in the context of insurance law. In Friends Provident
Live and Pensions Ltd v Sirius International 111 a claims notification (as distinct from a separate general
notice condition precedent) was held in the English Court of Appeal not to be an innominate term. Lord
Justice Mance, departing form the view of earlier English courts, 112 gave compelling reasons why such a
development is undesirable. Apart from the criticism that the innominate term approach is uncertain and
requires the party seeking to establish serious consequences in fact, Mance LJ pointed out that if an
insurer wants to obtain a right to avoid a policy, the onus should rest upon the insurer to draft the contract
accordingly. Mance LJ accepted that insurers are in a difficult position when attempting to quantify
potential losses when a policy is being negotiated but
―the difficulty is anyway no justification for the introduction, whether as an implied term or as a
rule of law or by a previously unknown extension of the doctrine of repudiatory breach or on
any other basis, of a novel form of protection for insurers. If insurers consider that they want or
need such protection, they can and should try to express it in their insurance contracts and see
if insureds and the broking market will accept it….[e]nglish insurance law is strict enough as it
is in the insurer‘s favour. I see no reason to make it stricter.‖ 113
10.106 The Commission favours the reasoning of Mance LJ on this point and do not recommend
either the statutory or judicial expansion of the innominate term into insurance law to be worthy of
consideration.
110
111
112
113
(1879) LR 5 App Cas. 911; see however Aspen Insurance Co v Pectel Ltd [2008] EWHC 2804 (Comm).
[2005] Lloyd‘s Rep. 517: see Lowry and Rawlings [2006] LMCLQ 135.
Alfred McAlpine plc v BAI (run-Off) Ltd [2000] 1 LI. R 437; K/S Merc-Skandia XXXXII v Certain Lloyd‟s
Underwriters (The Mercandian Continent) [2001] 2 LI R 563; Bankers Insurance Co v South [2003] EWHC 380
(QB).
At para. 33 of Mance J‘s judgment.
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