Can insurers refuse to indemnify a policyholder in breach of the policy, even though no prejudice to the insurer was caused by the breach?

Perhaps surprisingly, until the recent Court Appeal case of Shinedean v Alldown Demolition & AXA [2006] EWCA Civ 939, there had been no authority on the question of when insurers are entitled to refuse indemnity for a failure to provide information within a reasonable time.  While there is a clear line of authority to suggest that an insurer could refuse indemnity where there has been a failure to notify a claim, there was no authority concerning a failure to co-operate.

In this case there had been a clear failure to co-operate but the Defendant did not assert that it had been prejudiced as a result.  Was it still entitled to refuse indemnity?

Alldown Demolition was employed by Shinedean to carry out demolition and excavation works at a house.  Alldown’s negligent work caused a wall in the adjoining house to collapse.  Shinedean had to pay considerable sums in damages to the owners this house, and also suffered its own losses because of the increased development costs.  Shinedean issued proceedings and obtained judgment against Alldown, but because they had became insolvent Shinedea sought damages under both heads from Alldown’s insurers, AXA, by claiming an indemnity under the Third Parties (Rights Against Insurers) Act 1930.  Shinedean could only succeed against AXA if AXA would have been liable to Alldown under its policy.

The policy provided that as a condition precedent to payment under the policy, the insured should both notify the insurance company of any loss destruction or damage likely to give rise to a claim, and provide to the company all information and assistance that it required.  It was agreed by the parties that where the insurer reasonably required relevant information, it should be delivered within a reasonable time.  In this case, although the judge found as a fact that the insured had relevant information available to it at an early stage of the claim, it was not in fact supplied to the insurer until two and a half years later, when litigation was well under way.

Because of the delay, AXA refused indemnity to Alldown.  However, the judge found that only ‘miniscule’ prejudice had been caused to AXA, in not being able to close its books earlier.  In the circumstances, he held that there had been no breach of the reasonable time obligation to provide information and assistance.  Accordingly, AXA had not been entitled to refuse indemnity to Alldown, and Shinedean could recover damages from AXA.  AXA appealed.

The appellant, AXA, argued that the judge was wrong in law to find that actual prejudice to the insurer was material in deciding whether the insured was in breach.  The purpose of the clauses was to enable insurers to investigate claims at the earliest opportunity, to be able to control and negotiate their disposal.  The question of time cannot be divorced from this.  It was said that if prejudice was material, neither party would know whether or not there was a breach, even if on the face of it, the delay was enormous and there had been little or no co-operation.  On the judge’s approach, whether or not there had been a breach could not be decided without the benefit of hindsight and full information. 

Shinedean said that the condition precedent with an implied reasonable time limit is to assist the insurer to protect his position, but the parties cannot have intended the condition precedent clause to act as a penalty in favour of the insurer, where the insurer’s ability to deal with the claim is materially unaffected.  It was submitted that the judge was right in concluding that prejudice to the insurer was one of the tests for judging reasonableness.

The appeal was allowed.  Giving the leading judgment, May LJ agreed with AXA that on any view, if the matter of hindsight prejudice was left out, a delay of two and a half years in providing the information was a breach.  He also indicated that he was inclined to disagree with the judge’s description of the prejudice in this case as miniscule, although this was not necessary to his conclusion.  As to the question of whether or not prejudice should be relevant to the question of a breach, he said as follows:

‘In my judgment, there are two potential conflicting principles in play here.  On the one hand, it is commonplace that if you have to judge what is a reasonable time you take all relevant circumstances into account.  Whey then is not eventual prejudice to the insurer a relevant circumstance?  On the other hand, there are other considerations than just whether eventually there is prejudice.  Insurers are entitled to have co-operation and relevant information in good time to be able to assess that potential liability and to take appropriate action.  Appropriate action could, importantly in some cases, including deciding to take control of the defence of the case.’

The policy held that the insurers were entitled to refuse to indemnify the insured if they had not had co-operation and relevant information in good time.  If they do so, they are entitled to know whether they are correct in taking that action.  If prejudice were a determinative factor in that question, then it would also be a factor which delays and causes uncertainty.  As May LJ said, it could not be right that an insured who has been refused indemnity could have an answer to his failure to supply information in reasonable time by suggesting that it may turn out, if the information were to be provided in 18 months’ time, that the insurer was not in the end prejudiced by the delay, and therefore there had not been a breach.

The decision favours the need for both parties to know where they stand at the outset.  However, ultimately, the case does not set any hard and fast principle.  There is no absolute principle which includes or excludes prejudice as relevant to the question of what is a reasonable time in these circumstances.  What does seem clear it that where in some cases prejudice may well be a factor to consider, it is unlikely in any circumstances to be the determining factor. 

It is perhaps of note that the question of prejudice as a determinative factor has been considered in some recent decisions about costs, specifically in respect of Conditional Fee Agreements.  In Garrett v Halton Borough Council [2006] EWCA Civ 1017 where a solicitor had breached the Conditional Fee Agreements Regulations 2000, the Court of Appeal held that the question of whether or not his client had suffered actual prejudice as a result, was not relevant to the question of whether or not the solicitor had breached a condition.  Similarly, in Connor v Birmingham City Council, an unreported case from March 2005, the Court held that a failure to comply with a mandatory requirement of the Civil Procedural Rules could not be overcome merely by showing a lack of prejudice.  While that was a factor to consider, it was not the determinative factor in the case. 

In these cases, there were clear breaches of mandatory rules.  As in the Shinedean case, where breach of the contractual condition was clear, it perhaps makes sense that such a breach cannot be overcome merely by the illustration of prejudice.  But where a statute or the Civil Procedure Rules specifically lays down prejudice as a criterion for applying relief following a breach, it is of course likely to be given more weight in all the circumstances.

Joanna Vincent

19 September 2006

12 King’s Bench Walk

Temple
London EC4Y 7EL