A recent Privy Council decision considered situations where failure to comply with a clause in a contract stipulating payment by instalments could amount to repudiatory breach.
This serves as a useful reminder of situations in insurance and reinsurance contracts where failure to comply with a premium payment clause can entitle the insurer to treat itself as discharged from liability or the contract as terminated.
The Privy Council was considering a case where one of the contracting parties had failed to pay an agreed instalment of the purchase price of shares in a company. They concluded that:
(a) the contract in question did not make time for payment of the instalment “of the essence”;
(b) there were two ways in which breach of the clause could entitle the seller to terminate the contract. The first was where the seller served a notice making performance within a stipulated period of time “of the essence”. The second was where the seller could show that the buyer had evidenced an intention not to perform the obligation under the contract; and
(c) in this case, the seller was entitled to treat the buyer’s failure to pay as a repudiatory breach on either basis.
This is the same for breach of premium payment clauses in insurance policies.
An insurance policy may contain a term designating payment of premium within a particular time period as being "of the essence". The most common way is by providing a premium payment clause in the form of a warranty. This will, upon breach, entitle the insurer to treat itself as discharged from liability. Alternatively, it may be phrased a condition precedent to cover or to liability.
Absent such a term, a premium payment term is considered an innominate term. Theoretically, where the breach is sufficiently serious in that it deprives the insurer of substantially the whole benefit under the contract, this entitles the insurer to treat the contract as terminated. In reality, there have been several relatively recent cases in which the courts have confirmed that failure to comply with a premium payment term that is not a warranty/condition precedent should hardly ever (if at all) amount to a repudiatory breach.
In such a case, insurers are entitled to terminate a contract for late payment in the two situations identified above:
(a) the insurer can show that the insured does not intend to perform its contractual obligation (to pay the premium) at all; or
(b) the insurer serves a notice on the insured requiring payment within a stipulated time period and making time of the essence (either by using this phrase or preferably by setting out the consequences if payment is not received within the time period). In reality, if an insurer is faced with an insured who has breached a premium payment clause, this is likely to be the most effective way of requiring payment within a time period and of allowing the insurer to terminate the contract, if payment is not paid within that time.
Otherwise, an insurer would be entitled only to claim for the premium due (plus damages, which would usually amount only to interest on the premium that should have been paid).
Further reading: Sentinel International Ltd v Cordes [2008] UKPC 60
