UK: Coverage Issues – Ensuring Early Preservation Of Policy Points

Last Updated: 12 March 2008
Article by Nik Carle

Kosmar Villa Holidays Plc-V-Trustees Of Syndicate 1243 (Court of Appeal, 29 February 2008)

The Court of Appeal has ruled supportively for Underwriters in this important case about the taking, investigating and waiving of policy points.

Kosmar, a specialist travel operator, had arranged public liability insurance for its business over the period 2001-2002. In August 2002, one of Kosmar's customers ('the Claimant') suffered very serious injuries after diving into the shallow end of the swimming pool at a resort in Kavos. Significantly, Kosmar did not notify its Underwriters about this incident until over a year later, at the beginning of September 2003.

This delayed notification led to some involved litigation. A General Condition within the relevant insurance policy provided that:

"The insured shall immediately after the occurrence of any Injury or Damage give notice in writing with full particulars thereof to insurers."

At the High Court trial, it was accepted by all concerned that condition precedent status attached to this requirement for 'immediate' notification. However, had Underwriters effectively waived compliance with the condition precedent by corresponding with Kosmar and the Claimant's solicitors, during mid-September 2003, in the manner that they did?

The evidence revealed that, during the middle part of September 2003 ('the September dealings'):

  1. Underwriters' wrote to Kosmar with 25 background questions concerning the incident generally;
  2. Underwriters also wrote to the Claimant's solicitors to inform them that they were Kosmar's liability insurers and to advise that they were investigating the matter with a view to providing their views on liability. They also asked about the Claimant's current position and any plans to obtain medical evidence;
  3. Underwriters had initially written to Kosmar, without applying any reservation of rights at all to observe that: "We should probably win this case...". They also added that they had decided not to deny liability just yet (in respect of the Claimant's claim) and that they proposed to "await [Kosmar's] reply to [Underwriters'] various requests ...".

Some 2 weeks later, on 30 September 2003, Underwriters wrote again to Kosmar, now reserving their position on grounds of the General Condition and the issue of late notification.

It is relevant to say that there was something of a history between the individual Underwriters in this case (who had dealt with Kosmar's business for some years through different cover-holder schemes) and Kosmar's legal manager and broker. The parties had tried to streamline claims handling procedures so that Kosmar could improve its claims record and drive down premiums. The Underwriters, too, were keen to secure Kosmar's business. It was recognised that it would be unduly burdensome for Kosmar to have to give immediate notification of every occurrence, whether minor or not and in response, Underwriters agreed that only cases that were not 'clear cut' on liability would have to be referred through immediately.

In the period before the key September 2003 notification, there had been 16 other claims notified through to Underwriters by Kosmar. Interestingly, all of those carried with them a delay of 2-5 months after the incidents in question had happened. Underwriters had not, however, rejected any of those prior claims on grounds of late notification or otherwise.

High Court

At first instance trial, Kosmar argued that the prior claims history (before September 2003) had effectively estopped Underwriters from taking the condition precedent point, on the subject case, for late notification. The Judge decided that Underwriters' treatment of those other claims evidenced that they were taking no more than a case-by-case approach. In short, it was decided that the payment of some prior claims, irrespective of Kosmar's non-compliance with the notification provision, could not be said to give Kosmar carte blanche for the future.

The Trial Judge had then turned to Underwriters' conduct in relation to the September dealings. Could this amount to an 'unequivocal communication' of Underwriters' election to waive compliance with the condition precedent requiring immediate notification. He found for Kosmar on this point, deciding that the relevant communications demonstrated "objectively or unequivocally the making of an informed choice by [Underwriters] to deal with [the Claimant's] claim."

The Judge also ruled for Kosmar on the issue of Underwriters 'knowing all they needed to know' by the point of first notification in September 2003 and therefore, a reasonable time to make their election had passed by the point of their taking up the September dealings.

Finally, at trial, the Judge looked at whether Underwriters' behaviour - after first notification in September - could constitute an estoppel and/or an affirmation. Kosmar's arguments were, however, rejected on both of these bases.

So, the Judge decided Kosmar was entitled to an indemnity from Underwriters but only on the footing that there had been a waiver of the policy point by election, coupled with an unequivocal communication of a decision to deal with the Claimant's claim (and thereby, they accepted liability for it, the Judge found).

Court Of Appeal

The Court of Appeal decision contains a very lengthy academic discussion on the doctrine of waiver by election contrasted with waiver by estoppel.

On appeal, Underwriters contended that the Judge had been wrong at trial to rule that a breach of condition precedent was something different to a breach of promissory warranty in the present context.

Underwriters also maintained that their September dealings were not unequivocal and that being seen to 'handle' a claim for a short period of time was not necessarily inconsistent with a repudiation of liability.

The Court of Appeal found for Underwriters on both of those issues.

When tackling these sorts of 'procedural' conditions precedent, the doctrine of election was not appropriate and issues over handling of a claim, or any unequivocal representation that Underwriters accepted liability, should be decided against the backdrop of estoppel (and not election) principles. This is how Lord Justice Rix articulated the point:

"Thus an insurer who begins to deal with a claim, even if, as I will assume for the moment, he thereby represents that he views that claim at that time as being, if good, a matter for indemnity under the policy, is not thereby required for all time to maintain his dealing with or conduct of the claim. He can leave it to his insured to conduct a defence, although he may turn out to be liable at the end of the day to indemnify his insured against both liability and the cost of defending liability. Moreover, he may discover matters which lead him to believe that the claim is not within the policy, and it remains open to him to withdraw his support for it. None of this fits happily with the idea that some dealing with the claim is an irrevocable election to accept liability for it under the policy so far as any procedural defect in it is known to the insurer."

The Court of Appeal went on to find that the September dealings were "far from unequivocal". Was it enough that Underwriters had behaved in a manner that gave the impression they were willing to deal with the claim? On this aspect, the Court of Appeal noted Underwriters had made it clear to Kosmar that – pending Kosmar's reply to their requests for further background information – any decision on liability in respect of the Claimant's claim was going to be deferred. It was also made plain that Kosmar would need to deal with Underwriters' queries before the matter could be moved forward generally.

The Court of Appeal's overview on this can hardly be described as sympathetic to Kosmar, the policyholder:

"Why should Kosmar objectively be justified in thinking that its late notification of a serious claim would be accepted, even though it was in breach of a condition precedent, when Kosmar had not answered [Underwriters] many questions about the incident, and had not begun to address the question which hung in the air – even if it was not specifically asked in writing by [Underwriters] until 30 September – as to why so serious an incident had not been notified for over a year? After all, there was no urgent need for any decision about the consequences of the breach of condition precedent. It is not as though [Underwriters] had even begun in any real sense to have undertaken the conduct of [the Claimant's] claim. No proceedings had yet been issued, and no solicitors had yet been instructed. Nothing had been taken out of Kosmar's hands. On the contrary, [Underwriters] still remained in Kosmar's hands for its understanding of the claim."

The Court of Appeal went on to reject the notion that, at the point of first notification (on 4 September 2003) Underwriters 'knew all they needed to know' to take a point on breach of condition precedent (and that thereafter, they were " the grip of an election if [they] acted inconsistently with a repudiation of the claim ...".

Rather, the fact that Underwriters had asked questions of its policyholder – and that no answers had been provided – demonstrated that Underwriters were "...still in the stage of assimilating the circumstances of the case ..."

Lord Justice Rix then went on to provide some detailed practical guidance, which is set to be regularly cite in future when coverage issues do surface between Underwriters and their policyholders:

"It would not be good practice for insurers to rush to repudiate a claim for late notification, or even to destabilise their relationship with their insured by immediately reserving their position – at a time when they were in any event asking pertinent questions about a claim arising out of an occurrence about which they had long been ignorant in the absence of prompt notification. Insurers traditionally armour themselves with all kinds of conditions precedent, but, in a relationship where there is trust, they are just as likely to forgo their strict rights. If they did not, the conduct of the insurance market might very well undergo considerable adaptation. Legal doctrine should not push insurers into over-hasty reliance on their procedural rights. No explanation for the very late notification of this serious claim had been vouchsafed to [Underwriters] and I do not see why any doctrine such as election which is concerned with maintaining a fair balance between the parties to an insurance should be used to put insurers, who have been kept in ignorance of a serious occurrence for a long period of time, into peril of being forced to accept a claim advanced in breach of condition precedent before they have been put in a position properly to understand the circumstances of the accident and of its late notification."

Lord Justice Rix was quick to apply some limits to this understanding view of Underwriters' position by warning that he:

"... would certainly not like to give the impression that insurers can equivocate for long while giving the plain impression that they are treating the claim as covered by their policy, especially at a time when a decision might be required, without running at least the risk that they will be treated as having waived some requirement of their contract or their right to avoid it. Moreover, there may well be express options given to insurers under their policy for the unguarded exercise of which is simply inconsistent with the right to decline cover."


Insurers can take some comfort from this decision, which appears to call for a more contextual analysis to these sorts of waiver issues. It is clear that, in itself, the asking of relevant questions about new notifications is always an important "first response" to employ. Ordinarily, if one can point to a course of reasonable investigation being started in this way, it will be difficult for policyholders to argue that insurers have somehow waived away their policy rights and entitlements.

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.

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