Bluebon Limited v Ageas (UK) Limited plc and others  EWHC 3301 (Comm)
Many commercial property insurance policies contain a term, dressed up as a warranty, requiring the electrical installation to be tested every five years. In Bluebon, Bryan J had to determine whether the five year period started from the date of the last inspection (if any), or from the date on which the policy incepted. He was also required to resolve whether the term was a true warranty, a suspensive condition or merely a condition precedent specific to the risk of a fire started by an electrical fault.
The Insured owned the Star & Garter Hotel in Linlithgow, West Lothian. The hotel was insured for the period 3 December 2009 until 2 December 2010 (and any subsequent period “for which the insurers shall accept a premium at renewal date”) against the risk of fire under a policy placed by Towergate.
The policy included an Electrical Installation Inspection Warranty (the “Electrical Inspection Warranty”) in the following terms:
“It is warranted that the electrical installation be inspected and tested every five years by a contractor approved by the National Inspection Council for Electrical Installation Contracting (NICEIC) and that any defects be remedied forthwith in accordance with the Regulations of the Institute of Electrical Engineers”.
The policy also included a due observance clause in the following terms:
“The due observance and fulfilment of the terms of this Policy insofar as they relate to anything to be done or complied with by the Insured shall be conditions precedent to any liability of the Insurers to make any payment under this Policy”
Prior to inception of the policy in December 2009, the last electrical installation inspection of the hotel was in September 2003, following which a recommendation had been made that there be another inspection within 10 years. The Insured did not commission any inspection either on purchasing the hotel in 2007 or on inception of the policy or at any relevant time thereafter.
In October 2010 the hotel was destroyed by fire. Insurers subsequently rejected any claim on the policy on the basis that the Electrical Inspection Warranty was:
- A ‘true’ warranty and had been breached with the effect that cover under the policy had been void from inception; alternatively
- A ‘suspensive’ warranty so that cover under the policy was suspended from the date of the breach (inception).
The Insured intimated a claim against Towergate for failing adequately to advise the Insured of the existence and consequences of the Electrical Inspection Warranty. Towergate appears to have denied that it was liable to the Insured on the basis that – properly construed – the Electrical Inspection Warranty did not entitle Insurers to reject liability under the policy. The Insured commenced proceedings against both Insurers and Towergate, and the matter came before the Court by way of a preliminary issue as to the construction of the Electrical Inspection Warranty.
THE COMPETING ARGUMENTS
Towergate and the Insured argued that Insurers were liable to indemnify and were wrong to avoid and reject the claim and to contend that the policy did not respond as:
- The start date under the Electrical Inspection Warranty for inspection/testing of the electrical installation was the inception of the policy (and not from the date of the last inspection/test); and
- The Electrical Inspection Warranty was a ‘Risk Specific Condition Precedent’ in that it was neither a ‘true’ warranty or a ‘suspensive’ warranty, but was merely a term of the Policy requiring compliance as a condition precedent to Insurers’ liability to provide cover in respect of risks to which the stipulation related (which the Insured submitted was fire caused by the electrical installation) with the effect of suspending such cover in the event of non-compliance.
- There was no evidence the fire was caused by the electrical installation so that any breach of this term was irrelevant and Insurers were obliged to indemnify.
Insurers contended that on a true construction of the Electrical Inspection Warranty:
- The requisite five year period for inspection/testing ran from the date of the most recent inspection, in the absence of which the inspection needed to be carried out before, or immediately upon inception (with no cover until such inspection had been undertaken); and
- The term was a ‘true’ warranty or a ‘suspensive’ warranty, which meant that until the Electrical Inspection Warranty had been complied with, all cover was suspended from the date of the breach (which in this case was on inception) or at least all cover for losses arising out of any fire.
Accordingly, the key issues to be determined by the Commercial Court were:
- The start date under the Electrical Inspection Warranty for the requisite five year inspection/testing period;
- Whether the Electrical Inspection Warranty was a ‘true’ warranty or a ‘suspensive’ warranty or a ‘Risk Condition Precedent’; and
- Whether Insurers had wrongly repudiated the Policy.
In a cogent and thorough judgment, Bryan J summarised the well-established applicable principles of contractual construction, which also apply to the construction of insurance contracts, set out in Rainy Sky SA v Kookmin Bank  1 WLR 2900, Arnold v Britton  AC 1619 and Wood v Capita Insurance Services Limited  2 WLR 1095. In particular, he emphasised that interpretation was a “unitary exercise, and where there were rival meanings, the court can give weight to the implications of rival contentions by reaching a view as to which construction was more consistent with business common sense”.
The judge analysed the ingredients of a ‘true’ warranty and a ‘suspensive’ warranty (also referred to in older authorities as a ‘risk delimiting clause’) and the different ramifications of breaching the same. In summary:
- A ‘true’ warranty is a term of a policy, which takes effect as a condition precedent to the existence of any cover under it, rather than in relation to any particular risk. Following breach, discharge of an insurer is automatic and not dependent upon an insurer’s decision to treat the contract as at end; and
- A ‘suspensive’ warranty is a suspensory condition whereby the obligation of the insurer is suspended during the period of breach.
Applying the above principles to the facts of the case, the judge concluded that:
- The Electrical Inspection Warranty was clear and unambiguous and the ordinary and natural meaning of the requirement (in this annual policy) that the electrical installation “be inspected and tested every five years” was that the five-year period was to be calculated from the date of the last inspection. If there had been no inspection undertaken in the five years prior to inception, such an inspection would need to be carried out immediately and there would be no cover until the Electrical Inspection Warranty had been complied with. Any other construction would not accord with commercial or business common sense;
- Insurers’ case on the start date of the inspection/testing met the commercial purpose of the Electrical Inspection Warranty, namely to reduce the risk of fire (an insured peril) occurring; whereas the Insured’s case made no commercial sense, particularly in the context of an annual policy. The upshot of the Insured’s construction was that it would not be obliged to undertake an inspection/testing during the course of the annual policy, but would have the benefit of the annual policy notwithstanding there had been no testing of the electrical installation within the last five years. Consequently, the Electrical Inspection Warranty would be “meaningless” in the context of the annual policy and would not minimise the risk of fire or reduce the risk of a claim being made under the Policy;
- As to whether the Electrical Inspection Warranty was a ‘true’ warranty or a suspensive condition, the use of the word ‘warranty’ was not conclusive, but was a good indication that it was intended to be a ‘true’ warranty, as per Sugar Hut Group Ltd and Ors v. Great Lakes Reinsurance (UK) Plc and Ors  Lloyds’ Law Rep IR 198. The Electrical Inspection Warranty also went to the root of the contract given that (a) fire was an insured peril and (b) the commercial purpose of the Electrical Inspection Warranty was to ensure, so far as possible, that the electrical installation was sound and without defect and the risk of fire was reduced. The Electrical Inspection Warranty also bore materially on the risk of loss by fire and damages would be an inadequate remedy (particularly as in this case the Insured alleged that the risk to which the Electrical Inspection Warranty was directed at was to be construed narrowly as fire causatively due to defect in the electrical installation). Those matters made it strongly arguable that it was a ‘true’ warranty notwithstanding this was not spelled out in the Policy: HIH Casualty & General Insurance Ltd v New Hampshire Insurance Co  EWCA Civ 735,  2 All ER (Comm) 39;
- However, since the true construction of the Electrical Inspection Warranty was that if there had been no inspection in the last five years it was to be undertaken immediately, with no cover until such inspection has taken place, the envisaged consequence of no inspection having taken place was not that the Policy be void ab initio (which would be the case if it was a ‘true’ warranty) but that there was an obligation to carry out an inspection immediately on inception. This supported the conclusion that the Electrical Inspection Warranty was a suspensory condition and ‘suspensive’ warranty. Accordingly, the Court held that the Electrical Inspection Warranty was a suspensory condition and that the Insured’s breach of the Electrical Inspection Warranty suspended all cover under the Policy from the date of breach (in this case the date of inception) until the Electrical Inspection Warranty had been complied with;
- Even if the Electrical Inspection Warranty were not a suspensory condition suspending all cover under the Policy, the Electrical Inspection Warranty undoubtedly suspended all cover for losses arising out of fire (which was sufficient to determine the preliminary issue). The Court concluded that it make no commercial or business sense to hold that cover was suspended merely in respect of losses arising from defects in the electrical installation: “such a construction would be to slice the insured risks which were covered too thinly”;
- Finally, even if the Electrical Inspection Warranty were a ‘Risk Specific Condition Precedent’ rather than a ‘suspensive’ warranty or a ‘true’ warranty, the risk to which the stipulation related was fire, and not electrical installation. Accordingly, there was no cover in respect of fire (irrespective of its cause) until the Electrical Inspection Warranty term was complied with; and
- Accordingly, Insurers were under no liability to indemnify the Insured and were not in repudiatory breach (or any breach) of the Policy.
Commercial and business common sense plainly militated against the Court finding for the Insured and Towergate on their interpretation of the start date under the Electrical Inspection Warranty. Similarly, the Court’s findings were more consistent with the Electrical Inspection Warranty being ‘suspensive’ rather than a ‘true’ warranty although the distinction was without a difference in this particular case.
If the Insurance Act 2015 had applied, s.11 of the Insurance Act 2015 would potentially have come into play, preventing an insurer from refusing to pay a claim on the basis of the insured’s non-compliance with a term or condition (including a warranty) designed to reduce the risk of a particular loss where the Insured can establish that its non-compliance “could not potentially have increased the risk of the loss which actually occurred in the circumstances in which it occurred”. On the facts of this case, it is unlikely that the Insured would have been able to avail itself of s.11 given the Court’s conclusions as to the purpose of the Electrical Inspection Warranty (to minimise the risk of fire) and the connection between the suspensive warranty and the insured peril.