On 29 February 2008, the Court of Appeal handed down its decision in Kosmar Villa Holidays v Trustees of Syndicate 1243 (2008). The Kosmar case concerned waiver by election and whether insurers can, by taking some step, lose the right to rely on a "late notice" defence.
Kosmar was a tour operator which held liability insurance with Euclidian. On 22 August 2002, one of Kosmar's holiday guests suffered serious injuries following an accident. Yet, in breach of a general insurance policy condition which required immediate notification to the insurer of any injury, Kosmar failed to notify Euclidian until over one year later, on 4 September 2003, following receipt of a letter from the injured party's solicitors dated 14 August 2003.
Correspondence followed between Euclidian and Kosmar in relation to the claim. On 19 September 2003, Euclidian wrote to the injured party's solicitors noting their interest and raising a number of queries. On 30 September 2003, Euclidian wrote to Kosmar and formally reserved their rights, for the first time asking why immediate notice of the accident had not been given. On 21 October 2003, Euclidian formally declined liability by reason of breach of the condition precedent. Kosmar challenged Euclidian's position.
At first instance, Mr Justice Gross held that by dealing with the claim, Euclidian had lost the right to rely on the breach of the condition precedent. The decision of Gross J was interesting, not only because of the relatively short time he considered was reasonable for Euclidian to consider its position but, more importantly, because it had been commonly thought that as soon as there was a breach of condition precedent, insurers were automatically discharged from liability.
Euclidian appealed to the Court of Appeal. Rix LJ, delivering the judgment of the Court of Appeal, re-confirmed that the position in the "GOOD LUCK" (1992) applied also to conditions precedent to liability. In the "GOOD LUCK", the House of Lords had confirmed that where there is a breach of warranty, in accordance with section 33(3), Marine Insurance Act 1906, "the insurer is discharged from liability as from the date of the breach of warranty". This discharge is automatic. Therefore, when Kosmar breached the condition precedent, Euclidian were automatically discharged from liability in respect the injured party's claim.
Following the decision of Gross J, insurers considering whether to rely on a breach of a condition precedent would be wise to issue reservation of rights as soon as they became aware of the breach and not to take any steps which were inconsistent with declining liability. Insurers in a marine context are commonly faced with tight deadlines and complex liability claims, very often in foreign jurisdictions. Where prompt action is required to respond to a third party claim, issuing a reservation of rights - even if only to preserve the status quo on coverage - can appear hostile to an assured and can impact adversely on co-operation.
Of course, where an insurer is aware of a potential defence, great care should still be taken and insurers should be prompt and clear in their dealings with the assured. However, the Court of Appeal recognised that "knee jerk" reservations of rights may not be immediately required in all cases and insurers are afforded an opportunity to ask questions.
Thus, the slightly more insurer friendly regime which applies in the context of claims conditions does not, on this latest Court of Appeal decision, apply where insurers are faced with decisions on whether cover continues or not. In those circumstances, the courts may be more ready to infer that conduct by an insurer amounts to a waiver by election
The full article on the Kosmar case appears in the Maritime Risk International, May issue.
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.
