UK: Unfair Terms and Insurance Contracts – Has Anything Changed?

As a consequence of the Regulations, an insurer cannot in certain circumstances rely on "unfair terms" in an insurance contract issued to an insured consumer i.e. a private individual rather than a business. This potentially therefore provides an insured with an additional argument when faced with the declinature of a claim by their insurer.

The Regulations apply:

• "to any term in a contract concluded between a seller or supplier and a consumer where the said term has not been individually negotiated" (i.e. primarily industry standard or pro forma wordings) (s.3(1)).

The Regulations are however subject to the following limitation. More particularly:

• "provided a contractual term is in plain, intelligible language, and defines the main subject matter of the contract or concerns the adequacy of the price" then any such term cannot be assessed for "unfairness" (s.3(2)).

An "unfair term" is one which contrary to the requirement of good faith "causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer" (s.4(1)). Further, when assessing good faith, regard is to be had to:

(d) the extent to which the seller or supplier has dealt fairly and equitably with the consumer." (Schedule 2)

Mr South purchased holiday insurance for a trip to Cyprus in July 1997. The policy (which he apparently did not read) contained an exclusion for liability for accidents "involving your ownership or possession of any … motorised waterborne craft". While driving a jet ski, Mr South was involved in a collision with a third party. The third party was seriously injured and issued proceedings against Mr South. Mr South did not notify his insurer (Bankers Insurance) of the claim until 6 months after the proceedings were served, which was in turn three and a half years after the accident.

Bankers Insurance sought a declaration that it was not liable to indemnify Mr South on the grounds of the exclusion set out above. In the alternative and/or in addition, Bankers Insurance relied on his breach of conditions (d) and (e) of the policy, which provided that any payment under the policy was contingent upon Mr South:

Buckley J concluded that the wording of the exclusion was written in plain, intelligible language, that it clearly extended to a jet ski and that this would have been understood by any reasonable insured who had troubled to read the policy. Further, as the exclusion related to the definition of the subject matter of the contract (s.3(2) of the Regulations above), no assessment could be made of its fairness. This finding alone was sufficient to determine the proceedings but, and in case he was wrong on that finding, the Judge also saw fit to consider the claim notification conditions under the policy.

It was common ground that the Regulations applied to the notification conditions.

The Judge concluded that:

• the plain and ordinary meaning of the words in conditions (d) and (e) was sufficient to make them conditions precedent to Bankers Insurance’s liability; however, at the same time, the Judge also concluded that Bankers Insurance’s entitlement to rely on any breach was subject to their establishing prejudice, as in the absence of such prejudice, a technical procedural breach of Conditions (d) and (e) alone, which entitled the insurer to deny liability, was arguably unfair as it caused a significant imbalance to the insured’s detriment.

This left the Judge in an interesting position – although the terms were conditions precedent, so as to entitle the insurer to decline the claim, the terms were on their face unfair and therefore not binding on the insured.

In the interests of fairness, the Judge concluded that a balancing exercise should be carried out between the seriousness of Mr South’s breach and the prejudice caused to Bankers Insurance.

The Judge held that tangible prejudice was in fact established. In terms of delay, the breaches by Mr South were manifestly serious – Bankers Insurance lost three and a half years in investigating the claim. Further, significant costs would be required to investigate the claim following such a delay, and would involve trying to trace witnesses, including the Cypriot police who investigated the accident and bystanders who had actually witnessed the accident.

The application of the Regulations to insurance contracts is important. Insurers must be aware of the potential for insureds to challenge the declinature of a claim irrespective of the strict policy terms, if such terms are deemed to be unfair. An important consideration will be the prejudice suffered by Insurers as a result of the breach of any term. At the same time, Regulation 3(2) provides some comfort in removing from any assessment of fairness any term that either defines the main subject matter of the insurance (primarily the insuring clause and operative exclusions) or concerns the adequacy of the contract price or remuneration payable. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.