Breach of conditions precedent provides insurer with defence to claim

In Cuckow v AXA Insurance UK Plc [2023] EWHC 701 (KB), the High Court, on appeal from the County Court, considered a claim being brought against the insurers of a bankrupt energy installation company under the Third Party (Rights Against Insurers) Act 1930.

The High Court upheld the first instance decision, that the insured energy installation company (acting via its administrators, Deloitte) had not taken proper steps to preserve relevant documents, and had therefore breached conditions precedent in the policy that required the provision of information to insurers, thus providing AXA with a defence to the Claimant's claim under the policy.

Critically, the insured's obligations in question were not labelled as conditions precedent, but they did spell out the consequences of breach.

BACKGROUND

In September 2012, the Claimant entered into a contract with Mark Group Limited (MGL) for the installation of cavity wall insulation in his house. In 2014, the Claimant noticed damp which he blamed on the cavity wall insulation.

In October 2015, MGL went into liquidation and Deloitte were appointed as administrators. By this time, MGL had begun to receive claims in relation to other defective cavity wall insulation work.

At the time of the liquidation, MGL had 7,517 boxes of documents stored with Stor-a-File (a document storage facility). Deloitte did not inspect these boxes. In discussions in November 2016, Stor-a-File referred to 383 boxes being "available" for collection by Deloitte. It was revealed in cross-examination that the Deloitte team had not asked to look at the remaining 7,135 boxes (which included boxes relating to September 2012) and did not know what had happened to them.

By late 2018, MGL was on the receiving end of a large number of claims (it is understood that over 1,500 claims have been made against MGL to date).

In October 2018, the Claimant sent his letter of claim to MGL, copied to MGL's insurers, AXA, in respect of the alleged defective cavity wall insulation at the Claimant's house. The letter requested copies of relevant contractual and survey documents.

In November 2018, AXA requested copies of the contractual and survey documents from Deloitte and warned them that AXA would decline cover if the documents were not provided.

The relevant AXA policy incorporated various conditions, including the Claims Notification Condition and the Claims Procedures Condition (the Conditions) set out below:

“Policy Conditions

These are conditions of the cover and apply throughout your policy…. If you do not comply with a condition you may lose all right to cover under your policy or to receive payment for a claim.
…

Claims Notification Condition
You must

1. as soon as practical

1. 1. …
   2. give us all information we request
      …

If you do not comply with this condition we have the right to refuse to pay your claim.

Claims Procedures Condition
…

      2. At your expense you must provide us with

1. 1.  full details in writing of any injury, loss or damage and any further information we may reasonably require
   2. any assistance to enable us to settle or defend a claim
      …

If you do not comply with this condition we have the right to refuse to pay your claim.”

Despite this, Deloitte did not contact Stor-a-File to request the documents.

In July 2019, the Claimant obtained judgment against MGL. The claim was not defended and no contribution or indemnity was claimed against any MGL sub-contractors.

The Claimant subsequently sought indemnity from AXA under the Third Party (Rights Against Insurers) Act 1930 (the 1930 Act). The 1930 Act (and its replacement the Third Parties (Rights Against Insurers) Act 2010) (the 2010 Act) assists a third party who has a claim against an insolvent person/entity, where that claim is insured and allows the third party to sue the insurer directly (although under the 1930 Act the third party is required to establish liability against the defendant insured first). AXA's main defence was that MGL had breached conditions precedent in the policy.

A key issue was whether MGL / Deloitte had what the court termed "Knowledge of Importance", i.e. whether MGL / Deloitte had actual or constructive knowledge that the contractual and survey documents that they failed to provide to insurers would be important to (i) AXA’s effective handling of their defence against any future claim which might be brought by the Claimant; and (ii) AXA’s ability to claim a contribution or indemnity against any sub-contractors or materials suppliers, such that AXA would reasonably want to request MGL / Deloitte to provide them.

At first instance, HHJ Richardson held that the documents were lost of or disposed of before November 2018 (when AXA requested them), and there had been a breach by MGL / Deloitte of the Conditions which she construed as conditions precedent, on the basis that there had been a failure to supply the contractual and survey documents to AXA after a reasonable request had been sent (these were documents which MGL no longer had, but had disposed of with Knowledge of Importance). The judge referred to the disposal as unwise and said that good business practice would have involved retaining the documents.

HHJ Richardson did not consider whether there had been what the court termed a "Guilty Disposal", i.e. whether MGL / Deloitte had caused or permitted the loss or disposal of the documents with the requisite mental state (intention, recklessness or fault-based carelessness), when they also had Knowledge of Importance. However, this issue was considered on appeal in the High Court.

DECISION

Construction of the Conditions as "conditions precedent"

Ritchie J in the High Court agreed with the first instance decision that the Conditions should be construed as "conditions precedent".

It was clear that AXA was intending to frame the Conditions as conditions precedent:

• MGL was warned that if it did not comply with the policy conditions it "may lose all right to recover under [the] policy".
• Both Conditions stated that MGL "must" do various things, alongside a warning that lack of compliance would give AXA the right to refuse to pay the claim.

On considering the commercial significance of the Conditions in relation to the specific request for documentation, Ritchie J considered that the information in the documents was so fundamental to AXA's ability to defend any claim brought and to seek a contribution or indemnity from any sub-contractors, that the Conditions should be construed as conditions precedent. The information in the documentation had the potential to make a considerable commercial difference to AXA's liability and the level of it.

Breach of the Conditions

The Claimant’s case was that on the proper construction of the Conditions MGL was not in breach.

The judge held that the correct construction of the Conditions was that the parties intended that Knowledge of Importance and fault-based loss should be an "inherent part of the determination of whether the Conditions were breached and whether any request was reasonable". The judge agreed with the first instance decision that in this case, MGL / Deloitte did have Knowledge of Importance, because the limitation period was still running for the Claimant's claim, and cavity wall insulation claims had already been made prior to MGL going into administration.

Considering how the Conditions might apply to various scenarios, including those of fault-based loss, the judge held that:

• Documents in the insured's possession: If the documents were in the possession or power of the insured and the insured refused to hand them over to AXA, that would be a clear breach of the Conditions.
• Documents which never existed: If the requested documents never existed, the Conditions would not bite, either because the request would be unreasonable, or because the "must provide" wording could not bite on non-existent documents. It would be commercially absurd to interpret the Conditions as permitting AXA to require the impossible.
• Documents lost innocently: If the documents were lost innocently by the insured (the judge gave the example of an office fire), then again, the "must provide" wording would not bite.
• Documents intentionally destroyed: If the insured intentionally destroyed the documents, the "must provide" wording would bite on the information in the previously held documents, because the excuse for the failure was not a reasonable one.

In this case, the judge considered there to have been a careless disposal, which fell outside the scenarios above. Whilst the judge noted that the position might be different in other circumstances (for example where documents were lost due to innocent carelessness such as a house move or staff member's error), here, Deloitte had done almost nothing in November 2018 to locate the documents, and had not taken proper care to identify, preserve or protect the information prior to that date. The judge noted that the consequences of Deloitte's decision had been "catastrophic" for the Claimant.

The court therefore held that the first instance judge was right to rule that MGL / Deloitte had breached the Conditions by failing to provide AXA with the documents requested. Critically, Deloitte had Knowledge of Importance in relation to the information in the documents requested, and in addition, had effected a "Guilty Disposal" partly due to an intentional refusal to identify and seek the relevant documents in 2018, and partly due to a careless failure to identify, retain or preserve the documents at an earlier date.

COMMENT

As mentioned above, this claim was brought under the 1930 Act. Under both this legislation and the 2010 Act which replaced it, any defences which the insurer could have pleaded against the insured can be used against the third party claimant. Whilst Section 9 of the 2010 Act provides that insurers cannot rely on a condition requiring the insured to provide information or assistance to the insurer if that condition cannot be fulfilled because the insured is a body corporate that has been dissolved (or an individual who has died), this is a narrow exemption which would not have assisted the Claimant in the circumstances of this particular case.

A key takeaway from this ruling relates to the court's approach to considering whether an insurer request for information has been breached. Much will turn on the exact wording of the relevant policy and the factual circumstances but it should not be assumed that a condition to provide information or documents to insurers cannot be breached where documents have been destroyed or lost prior to the date of the request, nor that the careless destruction or loss of documents would not amount to a breach.

The judgment also emphasises the importance of proper document retention generally, and particularly in the face of prospective litigation. The judge was critical of MGL and Deloitte, commenting that the inference from the factual findings was one of "careless failure" to identify, retain and preserve the relevant documents, and that Deloitte's refusal to look for the documents in 2018 was "more stark". As the first instance judge noted, it is good business practice to retain records for at least six years, if not longer in some circumstances.

The case is also a reminder for policyholders is to seek to keep conditions precedent to a minimum in policies and – for both insurers and policyholders – to ensure that clauses intended to operate as conditions precedent are expressly labelled as such so that there is no doubt.