Kosmar Villa Holidays Plc v The Trustees of Syndicate 1243 (2007) EWHC 458 (Comm) is an important reminder of how crucial it is for insurers to reserve their rights as soon as they are notified of any claim or circumstance which could involve a breach of condition by the insured, or other issue with potential to impact upon indemnity entitlement.
Background
Kosmar is a specialist tour holiday operator. On 22 August 2002 one of its holidaymakers was involved in a tragic accident in a swimming pool at one of Kosmar's apartments (the "Accident"). The holidaymaker fractured his spine and suffered incomplete tetraplegia. Proceedings were issued against Kosmar and damages in the region of £1m were awarded to the holidaymaker. Kosmar sought an indemnity from its public liability insurers.
Due to a failure of Kosmar's internal reporting procedures, the Accident only came to the attention of its claims team when a letter of claim arrived on 4 September 2003, more than a year later. On the same day, Kosmar telephoned its insurers to explain that a serious incident had occurred in August 2002, which the claims team had only just found out about.
On 17 September 2003, the insurers e-mailed Kosmar to request additional information and expressing its opinion on prospects. The e-mail did not contain any reservation of rights. On 19 September, the insurers wrote directly to the claimant's solicitors asking them to "note our interest in this matter and ensure that all future correspondence is sent direct to us …". Finally, on 30 September the insurer e-mailed Kosmar reserving its rights for the first time. On 21 October 2003 solicitors appointed by insurers wrote to Kosmar purporting to avoid the claim in view of the breach of condition precedent.
The relevant policy wording was: "It is a condition precedent to insurer's liability under this insurance that the insured shall immediately after the occurrence of any injury or damage give notice in writing with full particulars thereof to insurers."
It was common ground that this clause constituted a condition precedent to the insurer's liability under the policy. It was also common ground that Kosmar failed to comply with the requirements of the condition precedent in that notification of the Accident was not given to insurers "immediately". Insurers denied liability on the grounds that Kosmar had failed to satisfy a condition precedent. For its part, Kosmar contended that the insurer had waived its right to rely on a condition precedent or was estopped from relying thereupon.
Decision
The Judge approached the case on the basis that the insurer had all the information it required to reserve its rights from the date of the first telephone conversation with the Kosmar claims team on 4 September 2003. Kosmar's first argument was that the insurer was estopped by convention or representation from relying on its failure to comply with the condition precedent. To support this, it relied upon the insurer's payment of several claims notified in the period between the Accident and final notification on 4 September 2003 which were all notified between 3 and 5 months late. The Judge found against Kosmar on this submission because the other claims dealt with by insurers during the interim period were of a much more minor nature. Accordingly, a common assumption had not arisen.
Kosmar's best argument concerned waiver by election. The Judge summarised the relevant principles, which are worth recapping. Election involves an informed choice made with sufficient knowledge of the facts giving rise to the right to avoid so that the party ought to realise that he has the right, but it is unnecessary to know all aspects of the case.
The Judge held that insurers knew all it needed to know following the initial telephone notification. Thereafter, the Court determined that it had no need to investigate either the facts surrounding the Accident, the late notification, or the contractual position. Insurers had had a reasonable time in which to decide its stance, but failed to reserve its rights until nearly 4 weeks after it had sufficient information to do so. Insurers' communications following notification prior to its reservation of rights were all inconsistent with rejecting Kosmar's claim for indemnity and any reservation of rights.
The Court disposed of the arguments put forward on behalf of insurers as follows:
- The Court accepted that in breach of warranty cases insurers were automatically discharged from liability as from the date of the breach, but held that the same consequences did not apply to non-performance of obligations relating to the procedure for making claims contained in a condition precedent.
- The Court rejected the argument insurers had not issued an unequivocal communication of the election because the insurer's communications following notification were prepared in the knowledge that Kosmar had not complied with the condition precedent, but gave the impression that it was dealing with the claim in the usual way, without any reservation of rights. The Judge found that such communications were only consistent with an election to accept the notification.
- The Court did not accept that the insurer had issued the reservation within the reasonable time available to it. The Court found that if insurers had been minded to support Kosmar provisionally, at least while awaiting an explanation for the late notification, its subsequent communications could have been despatched in the same terms with the "obvious and elementary addition of a reservation of rights".
Conclusion
It is disappointing that the Court did not take the opportunity of clarifying what it would have considered to be a "reasonable time" for underwriters to consider their position before issuing the reservation of rights. Whilst the Court held insurers received sufficient information during the first telephone call, it is likely the outcome would have been different if insurers had communicated a reservation of rights a day or two later, before or at the same time as making any initial observations about the case.
The danger is that the case will encourage "knee-jerk" reservations, which, if wholly unnecessary, risks aggravating brokers and policyholders. However, as this case demonstrates, a general reservation issued at the outset arguably outweighs any such risk.
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