Insurer's declinature upheld in face of Unfair Contract Terms Regulations

Bankers Insurance Company Limited v South and Gardner

On 7 March 2003, the High Court handed down Judgment in favour of the Claimant Insurers in connection with a dispute over the interpretation of a travel policy which they had underwritten. The Judgment deals with the interpretation of exclusions and notice provisions, as well as the application of the Unfair Terms in Consumer Contracts Regulations, under which the Court has power to declare that certain provisions in policies are unfair and not binding on insureds.

The claim arose from an accident in Ayia Napa in 1997, in which the third party, a Mr Gardner, had sustained serious injuries (including brain damage) when a jet ski he had hired collided with another jet ski hired by the Insured, a Mr South. The Insured did not report the accident or send any subsequent correspondence to Insurers until over three years later following the service of proceedings by Mr Gardner.

In the absence of any resolution of the coverage dispute, Insurers sought a declaration that they were not obliged to provide indemnity, having regard to both a specific exclusion in the policy and a breach of the notice provisions by the Insured.

The "Conditions" section of the policy provided that:

"The payment of claims … is dependant on you observing the following in respect of all sections...

d. Reporting in writing to us as soon as reasonably possible, full details of any incidents which may result in a claim under the policy.

e. Forwarding to us immediately upon receipt, every writ, summons, legal process or other communication in connection with the claim".

There was a policy limit of £2 million in respect of legal liability, subject to, inter alia, the following exclusion:

"For each Person-Insured we will not pay for:

...compensation or other costs arising from accidents involving your ownership or possession of any:

...mechanically propelled vehicles and any trailers attached thereto, aircraft, motorised waterborne craft or sailing vessels or windsurfing" (emphasis added).

The Judge rejected the Defendants' submissions and granted Insurers the declaration sought. He held that:

• the description of a "motorised waterborne craft" encompassed a jet ski and would have been understood to do so by any reasonable insured who read the policy wording. Whilst the Judge derived limited assistance from dictionary references, various regulations and manufacturers' documents obtained from the internet illustrated the extent to which the word "craft" had been used in different contexts and had thus acquired a broad meaning in ordinary usage. Moreover, the observations of Sheen J in Steedman v Schofield (1992) suggested that he was (albeit in a different context) using the word "craft" in a very general sense and one wide enough to contemplate a jet ski;
• the exclusion helped to define the cover provided and since its wording was in "plain and intelligible language", no assessment fell to be made of its "fairness" pursuant to Regulation 3(2) of the Unfair Terms in Consumer Contracts Regulations 1994. In any event, there was nothing unfair about the exclusion;
• the notice provisions were, on a proper construction, conditions precedent to Insurer's liability (albeit that they were not described as such). This was the plain and ordinary meaning of the introductory words under the "Conditions" section and to hold otherwise would involve a strained and unhelpful approach to construction. As conditions precedent, however, the terms fell foul of the Unfair Terms Regulations on the grounds that the draconian effect of a breach (which allowed Insurers to repudiate a claim in the absence of any prejudice) gave rise to a significant imbalance in the parties' obligations to the detriment of the Insured;
• the notice provisions were not binding as conditions precedent but, subject thereto, the Insurers were entitled to rely upon them. On the particular facts, the Insured's lengthy delay in making a claim was a serious breach and he had manifested an intention not to seek indemnity. Accordingly, Insurers were able to rely upon the principles enunciated by Waller L J in McAlpine v B A I (Run-Off) (2000);
• there had been no waiver or estoppel. Once Insurers sought legal advice, their solicitors had fully and effectively reserved the position on policy liability.

The Judgment raises some interesting points and has a number of broader implications:

• it reflects the Court's distaste for conditions precedent in consumer contracts;
• it illustrates the potential benefits of internet searches when seeking to establish the meaning of particular terms or descriptions;
• the Judge was prepared to "carve out" that part of the notice provisions which he regarded as unfair and give effect to the balance of the provisions; he was prepared to accept that the alternative – deleting the clause as a whole – would have produced an unfair result for Insurers;
• although Insurers were successful on all issues, the Judgment underscores the need to revisit policy wordings from time to time. This is particularly so in the context of the Unfair Terms Regulations and the much greater flexibility which the Courts now have to disapply provisions which they regard as unfair in consumer contracts of insurance.

CMS Cameron McKenna acted on behalf of the Insurers in the action.

For further information, please contact Peter Maguire at peter.maguire@cms-cmck.com or on +44 (0)20 7367 2893 or Robin Clover at robin.clover@cms-cmck.com or on +44 (0)20 7367 2885.