16th August 2010
“There is no requirement that an insurance policy is reasonably intelligible in terms of content and there is no requirement that it be especially legible.” “ Birds’ Modern Insurance Law ” 6 th Edition 2004
This quotation, from Bird’s Modern Insurance Law, sets out, very well, one of the difficulties that face an Insured when buying insurance. The law has attached meanings to terms and phrases that the courts will use in interpreting the application of any contract of insurance.
The quotation states the legal position before the introduction of FSA regulations and so it remains to be seen how the impact of the regulations, which now require contract certainty and treating your customer fairly will influence the drafting of future wordings. However, this is outside the scope of this guide.
It is necessary first to consider the different types of Conditions and then relate these to the needs of the buyer to have in mind when negotiating a policy.
The policy’s Conditions regulate the manner in which the policy operates. There are several types of condition each having specific powers that give the underwriter the opportunity to limit their liability to pay a claim. The following Conditions are typically found in a modern PI policy.
The policy will usually contain a section entitled “Conditions” or “General Conditions”.
Parts of a policy that must be complied with by one party or the other. Conditions may be implied by law or expressed, i.e. set out in the policy. The effect of a breach by the insured depends upon whether it relates to a condition precedent (things to be done before the contract is concluded, e.g. utmost good faith); a condition subsequent (things to be done during the policy term, e.g. maintaining certain standards); a condition precedent to liability (things to be done before the insurer is liable for a particular loss, e.g. proper notification).
Reproduced Courtesy of Chartered Insurance Institute
These may include clauses that are more properly described as:-
- Simple Conditions
- Conditions Precedent to Liability,
- Conditions Precedent to the bringing of a Claim,
- Clauses descriptive of risk.
Each type of Condition has particular features that determine the insurer’s ability to reject a claim or avoid a policy.
As a general rule the Burden of Proof is upon the Insurer to prove a breach of a Condition. There are exceptions, for example: if the clause states that compliance must be proved to the Insurers’ satisfaction. Typically this appears in the Innocent Non-Disclosure clauses.
Innocent Non-Disclosure Clause
The Insurer will not exercise its right to avoid this policy on the grounds of any alleged non-disclosure or misrepresentation of facts or alleged untrue statements in any information supplied to it, provided that the Insured shall establish to the Insurer’s satisfaction that such alleged non-disclosure, misrepresentation or untrue statement was free of any fraudulent conduct or intent to deceive.
There are several types of Conditions that are typically included in a PI Policy but two broad categories exist.
- Conditions that impose an obligation or procedure upon you; for example Claims Notification Conditions, and
- Conditions setting out the rights of the Insurer; often these simply restate the existing legal position.
Retroactive Clauses and Retroactive Cover Limitation clauses.
These clauses are important and need to be understood.
Retroactive Cover limitation Clause.
This clause states that the insurer will not be liable for any claims you knew about or ought to have known about before a specified date, usually the inception of the policy.
This clause states that there will be no cover for any claim that relates to an occurrence prior to that Retroactive date.
If the “neglient” act took place prior to the Retro Active Date then there is no cover even if the claim is only made during a current period of insurance. As it usually takes between 6 and 18 months for a claim to emerge this can be a very significant limitation.
A Clause that is “Retroactive Date Inception” provides almost no cover for the first six months of the policy. The Retroactive Date should be not less than six years or the date at which Insured firm started trading if that is less than six years.
A condition that must be complied with literally. A breach precludes the Insured from recovering under his policy, although the loss may not have been affected by the warranty. Insurance warranties may consist of undertakings that certain things shall be done (waste removed from premises daily) or things shall not be done (certain changes in risk factors) or a declaration whereby the Insured affirms or negatives a certain state of affairs, e.g. representations in a proposal form.
A warranty which by law is tacitly understood to be binding and does not have to appear in the policy.
A warranty whereby the Insured promises that a state of affairs will exist for the duration of the policy.
Courtesy of Chartered Insurance Institute
There are two main types of Warranty:
- Warranties of past or present fact,
- Continuing Warranties
One legal text book on this subject states that “warranties tend to be promises on your part that the insurers will rely upon”.
Warranties of past or present fact
These Warranties are usually found at the foot of the Proposal Form for example
I declare that the statements and particulars made in this Proposal Form are true and that I have not misstated or suppressed any material facts.
This clause is self explanatory, but it is important to understand that the proposer is promising that the facts are true. This is not the same as “True to the best of my knowledge and belief.” Any inaccuracy in the proposal form will be a breach of Warranty and discharge the Insurer from his obligations under the policy.
Nearly all Professional Indemnity Policies have a clause that incorporates the proposal form into the policy and by doing so this declaration becomes a Warranty.
Continuing Warranties are promises made by you that a certain fact will or will not prevail in the future. Examples of these include:
- warranties that certain personnel will not be allowed to undertake work without supervision of a qualified person.
- all Cover Notes to be signed by a Director.
Conditions Precedent can appear either:-
- as a result of a specific statement in a clause such as “Itis a Condition precedent to Underwriters’ liability that…” or,
- as a result of a blanket statement, for example, “All conditions are conditions precedent to Underwriters’ liability”.
Conditions Precedent can come in two forms:
- “Conditions Precedent to Liability” and
- “Conditions Precedent to the Bringing of a Claim.
Conditions Precedent to Liability have to be satisfied before any liability can attach to the Insurer.
Conditions Precedent to the Bringing of a Claim In this case failure to satisfy the condition will only allow the insurer to reject the claim after liability has attached; as such they are procedural in nature and the Insurers’ remedy could be damages rather than rejection.
Some conditions cannot be Conditions Precedent to Liability as they can only be applicable once liability has attached. An example of such a condition is the requirement to provide all assistance to Insurers in pursuing subrogation rights.
This is important in that Underwriters may attempt to rely on a Condition Precedent to Liability when it is not in fact such a condition. This would be a matter for legal advice in the event of a claim.
Conditions descriptive of Risk
Sometimes clauses that appear to be Warranties are found to be Clauses Descriptive of the Risk, possibly because the language was not strong enough to create a Warranty. This can be important in that the insurer cannot void the policy for a breach but he can deny a claim that occurred while the condition was being breached.
For example: in a case involving a claim against a broker there was a term as follows.
“Warranted named persons operate underwriting authorities as listed in schedules 1(named Persons) and 2 (Named underwriting authorities), respectively, as attached..”
The Insured received a claim involving risks bound under an underwriting authority and it was found that the perpetrator of one of the errors giving rise to the claim was not a named person in the Schedule 1 but an assistant of a named person. Underwriters attempted to repudiate the policy on the grounds that a continuing warranty had been breached with the first breach and thereby avoid all claims. It was decided that the warranty was not a Warranty in the full sense but merely descriptive of the risk so the policy was “suspended” until the clause was complied with. It did not say that only named persons are allowed to operate the underwriting authority. It says that the underwriting authorities are operated by named persons.
It is almost certain that insurers had not intended the clause to be interpreted in this way but it is reported by some lawyers that the courts are becoming reluctant to support insurers who rely upon warranties where there has been no damage or relevance to the claim.
POINTS to CONSIDER
The wording should be read with a view to identifying, in particular:
- promises that you have made to the Insurer,
- duties that the insurers are imposing on you,
- procedures that you must follow
- extensions of the insurers’ rights under the contract.
- changes to the way th risk is insured that differ from the norm or your expectations.
- critical dates such as retro active limitations – are they correct?
NB There may be more than one of these in any single clause.
Policy Conditions are often the least interesting clauses in the policy and are often skipped over when reading the policy document. However, they have considerable power and lawyers acting on behalf of insurers are skilled in understanding and applying the conditions rigorously.
If a Condition is difficult to understand or to see how it will work in practice then you should seek clarification of its intention and how it will operate from your broker or advisor. If you do not understand it then it is probably unclear or ambiguous; in which case you are advised to get clarity and certainty before you buy. There will not be an opportunity at the time of a claim.