In Bluebon Limited v Ageas & Ors, Mr Justice Bryan was tasked with deciding whether or not insurers were liable for cover following a fire at a West Lothian hotel.
The policy incepted on 3 December 2009 and was therefore governed by the Marine Insurance Act 1906 (MIA), rather than the Insurance Act 2015 (IA15). The issue was whether the insured was in breach of a policy term labelled the ‘Electrical Installation Inspection Warranty.’ This required the insured to ensure the “electrical installation be inspected and tested every five years…”
Under the MIA, warranties must be strictly complied with, and any breach results in cover automatically being discharged from the date of the breach whether or not the breach was relevant to the loss. Compare this with the IA15, where all warranties essentially become suspensive conditions. The insurer’s liability is suspended until the insured remedies its breach of warranty (where possible). If the insured remedies the breach before a loss occurs the insurer will remain liable under the policy, unless the loss is attributable to something that happened before the breach is remedied.
The first issue for the court in Bluebon was to construe the proper meaning of the ‘Warranty’. The insurers argued that they required the electrical installation to be inspected and tested every five years from the date of the last inspection, and that if no inspection had been carried out in the last five years, one would have to be done on inception of the policy. It followed that there would be no cover until an inspection had taken place. They argued that as no inspection had taken place since 2003, they were not liable to the insured. The insured, on the other hand, argued that the ‘Warranty’ only required an inspection every five years from the date of the inception of the policy.
The court agreed with the insurers, finding that theirs was an “entirely business-like construction” which met the commercial purpose of minimising the risk of fire.
The court then had to determine the status of the term. The insurers argued that it was a ‘True Warranty’ within the meaning of s.33 MIA, or alternatively that it was a Suspensive Warranty, in that all cover was suspended from the date of breach until the warranty was complied with (and not just cover relating to the loss). The court held that although the clause used the words “warranty” and “warranted that”, and it went to the ‘root’ of the contract and bore materially on the risk of fire, it was not a true warranty but a suspensive condition. This was on the basis that, on a proper construction of the clause, the consequence of there not having been an inspection in the previous five years was that an obligation to undertake an immediate inspection would arise with cover being suspended in the meantime. Accordingly, although insurers were not automatically discharged from liability under the policy, they were not on cover in respect of losses arising from the fire.
What would have happened had IA15 applied to the policy in question? It is possible that the insurers would still not have been found liable. Section 11 of IA15 provides that where there is a breach of a term designed to reduce the risk of loss, the insurer will not be able to rely on a breach of that term where the insured can demonstrate that the breach “could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred”. Arguably, even if section 11 had applied, the insured would not have been able to prove this since, it was held, the purpose of the warranty was to limit the risk of fire and the hotel had been destroyed by the same peril.