Insurance Contract Law Issues Paper 2 Warranties - Law Commission

4.12 The “innominate term” classification was welcomed as providing greater flexibility
in the remedies available. 19 However, a recent Court of Appeal judgment, Friends
Provident Life and Pensions v Sirius International Insurance, has cast doubt on
the reasoning in the BAI case. 20
4.13 In Friends Provident, the insured had failed to notify the excess layer
underwriters that a potential claim for pensions mis-selling may exceed the
amount insured under the primary layer. This was a breach of Clause 5 of the
policy. Clause 5 was not worded as a condition precedent; nor did it suggest that
a breach would absolve the insurers from liability for the claim. However, the
insurers argued that it was an “innominate term”. The breach should be regarded
as sufficiently serious to absolve the insurers from liability to meet the claim.
4.14 Lord Justice Mance disagreed. He pointed out that breach of an innominate term
would only entitle an insurer to repudiate the contract as a whole; it would not
entitle an insurer to merely reject one specific claim. And it “was not easy to
conceive” that a breach of an ancillary term could be fundamental to the contract
as a whole. The argument that a serious breach of a notice clause would
discharge an insurer from liability to pay that particular claim would introduce a
new doctrine of “partial repudiatory breach”. No such doctrine existed and there
was no reason to introduce it.
4.15 Lord Justice Mance argued that if the insurers had intended Clause 5 to operate
as a condition precedent to liability for a particular claim, they should have
worded it in those terms. As they had not done so, their remedy lay in damages
only. Where insurers failed to draft notification clauses as conditions precedent,
they did not require additional protection:
English law is strict enough as it is in insurers’ favour. I see no reason
to make it stricter. 21
Sir William Aldous agreed, though Lord Justice Waller dissented
4.16 It is true that if insurers do not draft clauses as conditions precedent to liability,
then the decision that their remedy lies in damages only favours policyholders.
The problem, however, is that the Friends Provident decision will encourage
insurers to draft every ancillary provision as a condition precedent. And if the
term is clearly a condition precedent, the courts will be required to interpret it as
such, however minor and unimportant the breach. This could import an untoward
element of technicality and rigidity into the law, whereby claims are denied for
minor breaches by policyholders that cause no real prejudice to insurers.
4.17 Although the case law on notification clauses is not directly applicable to
warranties, these cases illustrate some of the weaknesses of the construction
approach. First, the law is uncertain, and is likely to cause further litigation.
Secondly, each case depends on the particular words used. Insurers are likely to
respond to unfavourable decisions by attempting to achieve the desired effect
with different words.
19 Macgillivray 10-13.
20
[2005] 2 Lloyd’s Rep 517; [2005] EWCA Civ 601.
21 Above, at para 33.
21