The Court of Appeal has made an important ruling on when insurers can waive their rights to decline liability
In a welcome decision for insurers, the Court of Appeal decided earlier this month in Kosmar Villa Holidays v Trustees of Syndicate 1243 that insurers had not lost their right to decline liability where they had started to deal with a claim without first reserving their rights.
The insurers provided public liability insurance to Kosmar, a tour operator. On 22 August 2002, a serious accident occurred when a client of Kosmar dived into the shallow end of a swimming pool. Kosmar was immediately aware of the accident but did not inform its insurers until 4 September 2003, over a year later. It was a condition precedent to insurer's liability that Kosmar provide immediate written notice of any injury.
Although insurers were aware of the breach of condition, they entered into correspondence with Kosmar (and the injured client's solicitors) and did not reserve their rights until 30 September 2003. The trial judge took the view that the handling of the claim in the meantime amounted to an election to waive compliance with the requirement of immediate notification and to accept liability for the claim.
The Court of Appeal accepted that a breach of a condition precedent to liability would automatically discharge insurers from liability. Although insurers had started to deal with the claim, insurers had not said that they were waiving the need for immediate notification or that they were accepting liability under Kosmar's policy. Accordingly, the communications in September were far from unequivocal. The insurers were entitled to a reasonable time to investigate the late notification and were entitled to decline liability for the claim on 21 October 2003.
The Court of Appeal recognised that it is in everyone's interests for a considered decision to be made on policy coverage issues. Insurers should not be pushed into over-hasty reliance on their procedural rights. Having said that, the Court of Appeal warned that insurers cannot equivocate for long, while giving the plain impression that they are treating a claim as covered by their policy, without running the risk that they will be treated as having waived their right to avoid it.
Although not needed in the circumstances of this case, the court acknowledged that an express reservation of rights to preserve a situation may be practical and wise.
A prompt decision on policy coverage will reduce the risks and a reservation of rights maintains a sensible safeguard while coverage is being investigated.
Marcus Campbell is a partner in the Professional Risks Group at national commercial law firm, Beachcroft.
