William Jones explains how important it is for insurers to validate claims within a set time, or they could face a breach of policy terms
Insurers considering claims involving a breach of policy terms by an insured should take note of the recent case of Kosmar Villa Holidays v The Trustees of Syndicate 1243 .
In Kosmar the insurers were held liable to indemnify their insured in respect of a substantial claim notwithstanding a clear breach of a term of the policy entitling them to decline indemnity. This was despite the fact that the insurer had purported to reserve its rights then repudiated the claim within a relatively short time of learning about it.
After a liability-only trial Kosmar, a tour operator, was found liable to a holiday-maker, James Evans, for potentially substantial damages for injuries suffered in an accident at an apartment rented out by Kosmar.
Kosmar sought an indemnity from the syndicate which was the successor to its public liability insurer, Euclidian.
The policy contained a condition precedent requiring immediate notification of occurrences. However, Kosmar did not give Euclidian notice of Evans’ accident until 4 September 2003, over a year after it had happened.
On 17 September 2003 Euclidian informed Kosmar that it had “taken the view… not to deny liability yet”. It then advised Kosmar on tactics and corresponded with Evans’ solicitor. That correspondence was copied to Kosmar.
However, on 30 September 2003, Euclidian emailed Kosmar reserving its rights in respect of the claim. Finally, on 21 October 2003 Euclidian’s solicitor wrote to Kosmar purporting to repudiate liability under the policy for late notification.
Kosmar relied upon three lines of argument in alleging that Euclidian was estopped from relying on the notification clause. These were based, first, on a history of pre-inception dealings between the individuals concerned at Euclidian and Kosmar whereby a similar notification clause in a policy issued by a different insurer, for whom the Euclidian employees had worked at the time, had routinely been overlooked.
Second, an agreement reached at a meeting in March 2002 that claims in which liability was denied would not be sent to Euclidian, and third, Euclidian’s treatment of at least 16 other claims between March 2002 and September 2003 where it had not relied on breaches of the clause.
These arguments were all rejected, the court holding, first, that the history of dealings between Kosmar and the previous insurer could not found an estoppel in respect of the Euclidian policy. Second, there could be no estoppel arising from the March 2002 meeting since no discussion on notification of occurrences had taken place.
Finally, Euclidian’s acceptance of earlier claims which had been notified late simply showed that it took a case-by-case approach to indemnity and no common assumption or representation was created to hold that the clause could be ignored in the future.
Kosmar’s other argument was that Euclidian’s conduct after receiving notice of Evans’ claim constituted an election to waive its right to rely on the failure to comply with the policy conditions. This argument succeeded.
It was held that, while Euclidian did not know the reason for the delay in notification, it certainly knew by 4 September 2003 that there had been a delay, which was all it needed to know to justify declining liability.
Further, it was found that the September communications would have objectively and unequivocally conveyed to a reasonable person that Euclidian had made an informed choice to deal with the Evans claim.
“There is a balance to be struck between reserving rights at every sniff of impropriety by an insured and risking losing the chance to take the point when it is valid to do so
Moreover, unless accompanied by a reservation of rights, there was no reason for the recipient of the communications to assume that Euclidian would have been dealing with the claim unless it had chosen to accept liability for it under the policy.
Consequently, it was held that Euclidian had made an election to deal with the claim and that there had been an unequivocal communication of that election.
There seems little controversey in the finding that anyone considering Euclidian’s correspondence with Kosmar would reasonably conclude that Euclidian was dealing with the claim and, therefore, in the absence of any indication that it was reserving its rights, accepting liability to meet the claim under the policy.
What will be of more concern to insurers is the relatively short period which seems to have been allowed for Euclidian to make its decision. This was one of the points raised by Euclidian itself, as it argued that it was entitled to a reasonable time to consider its position before reserving its rights.
The judge clearly had some sympathy with Euclidian, commenting that, since Kosmar had taken so long to notify it, Euclidian should have ample time to consider its position. However, when looked at objectively, what Euclidian was arguing for was a period of grace in which, despite knowledge of the breach giving it the right to repudiate the claim, it could proceed in a way consistent with accepting it before deciding whether to reserve its position.
This proposition was rejected by the judge who found that by the time of the 17 September correspondence, Euclidian had a more than reasonable time to decide either to deny liability or to reserve its rights while considering its position, since by then it knew all it needed to know about the breach.
To have found otherwise would have been to condone a practice allowing an insurer to lead an insured into believing that cover would be provided only for it later to be denied. That would clearly be inequitable.
There is a balance to be struck between reserving rights at every sniff of impropriety by an insured and risking losing the chance to take the point when it is valid to do so. Euclidian’s problem was that, while it had knowledge of the breach, it was slow to protect its position and in the meantime proceeded as if it were overlooking the clause.
It was consequently regarded as having elected to deal with the claim. The judge held quite rightly that Euclidian had the relevant knowledge as soon as it was notified since the breach was such an obvious one.
However, it is clear that an insurer cannot be held to have waived its rights to deny liability under a policy unless it has actual knowledge of a breach. Acts done before actual knowledge is gained, therefore, should not found either election or estoppel.
Nevertheless, there is a clear warning here that as soon as insurers act in a way inconsistent with exercising their right to deny liability under the policy when they have knowledge of a breach they are at risk of being found to have waived that right.
It would seem to be good practice, therefore, to ensure that insurers reserve their rights as soon as they suspect that there has been a breach. Only then should any steps be taken to investigate or deal with the claim. That way insurers will be protected if the suspicions prove to be well-founded.
A reservation of rights is not binding but it allows insurers more time to analyse the situation before coming to a final decision.
William Jones is an associate at Langleys Solicitors