When a fire caused damage at a waste processing plant owned by the Claimant, Wheeldon Brothers Waste Limited (“Wheeldon”), the Defendant insurer, Millennium Insurance Company Limited (“Millenium”), declined an indemnity on the grounds that, among other things, Wheeldon had been in breach of conditions precedent to liability. Judgment in favour of Wheeldon’s claim for declaratory relief, and indemnity and/or damages (liability only) was given by Jonathan Acton Davis QC sitting as Deputy High Court Judge.
The case serves as another reminder of the principles applicable to contractual construction and the operation of conditions precedent to liability in insurance contracts. The Court’s decision is considered by Paul Fisher of 4 New Square.
The purpose of Wheeldon’s waste treatment facility was to segregate non-combustible and combustible material from the variety of waste that it received to produce “Solid Recovered Fuel”. The process involved feed stock being introduced to segregating machinery by way of a series of conveyers. One of those conveyers led to the trommel – described as “a large rotating sieve”. The “non-combustible” materials removed by the trommel were generally referred to in the judgment as “trommel fines”. The remaining waste would then pass along a second conveyer (“the M&K Conveyer”), which was the seat of the eventuating fire.
Wheeldon’s property insurance policy commenced on 8 April 2014 (“the Policy”). On 11 April 2014, a bearing located on the free spinning roller at the bottom end of the M&K Conveyer collapsed, the consequence of which was the misalignment of the conveyer belt. A report was subsequently compiled by Secon, surveyors for Millennium’s agents, which identified various risk requirements to address the prospect of future misalignment (“the Secon Report”) and partially successful remedial measures were undertaken. Contract Endorsement No. 1 (“CE1”) was issued on 30 April 2014. It referred to the Secon Report, including its Risk Requirements and deleted two memoranda to the original Policy, including Memorandum 6 (see below).
Memorandum 6 stated as follows: “It is a condition precedent to the liability of the Insurer that combustible wastes must be stored at least 6m from any fixed plant.” CE1 made a confusing reference to the replacement of Memorandum 6 by Risk Requirement 9 (“RR9”), which provided no obligations relating to the segregation of waste.
Crucially, Risk Requirement 4 of the Secon Report (“RR4”) required combustible materials to be stored 6m from fixed plant and machinery.
The waste processing facility caught fire on 22 June 2014. It was considered likely by the court that a further failure of the bearing had occurred the day immediately prior to the fire.
Before engaging with the legal questions in the dispute, the Court was called upon to make a finding of fact as to the cause of the fire. The two alternative causes of the fire both involved the misalignment of the conveyer. Wheeldon’s expert contended that the misalignment caused a void in and around the housing of the conveyer such that materials which would otherwise have passed through the trommel became lodged in the enclosure housing the bearing or dropped below the conveyer. The friction caused by the failing bearing lead to hot fragments being deposited on the built-up materials, which were predominantly “combustible”, in contrast to trommel fines, which were not generally combustible, causing smouldering and the subsequent fire. On the other hand, Millennium’s expert was of the opinion that whilst heat by way of friction and/or hot bits of metal was caused by the bearing failure, trommel fines were ignited and led to the fire. The expert was of the view that, at the time of the fire, trommel fines engulfed the left stanchion of the trommel and were buried at the foot of the conveyer. The judge accepted the evidence of Wheeldon’s expert, meaning that the cause of the fire was unrelated to the proximity of the trommel fines to fixed plant and machinery.
Conditions Precedent to Liability
C’s primary argument was that the deletion of Memorandum 6 by CE1 meant that there was no active obligation under the Policy relating to the segregation of waste. The Court was not prepared to accept this proposition for reasons that included its determination that RR4 was expressly incorporated into the contract. Instead, it was found that the reference to RR9 was a ‘simple mistake” and should be replaced by RR4 (Arnold v Britton  AC 15 1619).
The next question for the court to consider was the effect of those policy provisions requiring combustible material to be stored 6m from fixed plant and machinery.
The Court applied long-standing authorities on the interpretation of contractual terms and particularly conditions precedent. Both parties were agreed that a breach of a condition precedent means that the insurer has no liability to indemnify the insured (subject to a rather novel argument regarding the operation of a co-insurance clause detailed below). Where such breach occurs, the court reconfirmed the basic principle that “there is no requirement for there to be a causative link between the breach and the loss” (quoting MacGillivray on Insurance Law (13th Edition), paragraph 10-040).
At a general level, the task of the court was to construe the wording of the Policy by reference to the “ordinary and natural meaning of the words objectively considered” (Arnold v Britton; Wood v Capita Insurance Services  2 WLR 1095). This would, of course, require consideration of “what the reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean” (Chartbrook Ltd v Persimmon Homes Ltd  AC 101). That would take on significance when interpreting words such as “combustible” and ‘storage” in RR4.
The judge accepted the principles which Wheeldon’s counsel impressed upon him for the purpose of interpreting the condition precedent:
- First, underwriters are presumed to be acquainted with the practice of the trade they insure (Noble v Kennaway  2 Doug 511, 513; Margate Theatre v White  LLRep 93 at ). The parties were expected to have understood that keeping machines and buildings tidy in the recycling industry was not the same thing as doing so within “a shop, fruit processing and/or laboratories”.
- Second, ambiguities should be resolved against the insurer.
- Third, conditions precedent are generally treated by the courts as “onerous or draconian terms” such that it is necessary for the insurer to clearly articulate the obligation if the breach is to exempt the insurer from all liability (Pratt v Aigaion Insurance  1 LL Rep at ; Royal & Sun Alliance v Dornoch  EWCA Civ 238 at ).
Meaning of “combustible” and ‘storage”
The experts agreed that the scientific understanding of the word “combustible” would include any materials that burned when ignited. However, the court determined that the word “combustible” would not be understood by the layman to include materials such as diamonds and metals. The consequence was that the trommel fines were not “combustible materials” within the meaning of the Policy (at ). To the extent that the trommel fines were not combustible within the meaning of the Policy, they need not have been stored 6m from fixed plant and material.
The only exception to this rule was Area G, which was located at the end of the M&K conveyer and at the seat of the fire. The parties agreed that in Area G there were indeed combustible materials within 6 metres of fixed plant and machinery. It was, therefore, important that the Court come to a settled conclusion as to the proper interpretation of the words ‘stored” and ‘storage” within the Policy. The judge determined that the use of the word ‘storage” in RR4 entailed “a degree of permanence and a deliberate decision to designate an area to place and keep material.” He rejected Millennium’s argument that the reference to storage simply alluded to where combustible materials were being kept or placed, whether temporarily or otherwise. That interpretation, the Court concluded, did not do justice to the wording of the Policy.
Effect of Co-insurance
Despite being of no consequence due to his conclusions above, the judge considered a further, and novel, argument deployed by Wheeldon. Memorandum 15 to the Policy was a co-insurance clause limiting Wheeldon’s recovery to 65% of the amount to be assessed “pending completion of the subjectivities…”. There was no dispute that ‘subjectivities” was a reference to the Risk Requirements and that Memorandum 15 was operative at the time of the fire. However, Wheeldon’s position was that the commercial purpose of the co-insurance clause was to reduce the level of cover until various requirements were satisfied. That commercial purpose, it argued, meant that the clause should be interpreted as allowing cover for Wheeldon regardless of breaches of conditions precedent. The court rejected that construction. Memorandum 15 made it clear that “All other terms and conditions remain unaltered.” Instead, the co-insurance operated to limit cover during non-compliance with the Risk Requirements. In the event that a condition precedent was breached during that same period, the breach would reduce the insured’s cover to nil, just as it would if the insurer had agreed to provide 100% cover.
The policy also included warranties requiring: (a) removal of combustible stock when the business was closed (Memorandum 11); (b) Maintenance of equipment and formal records of such maintenance (WA6); and (c) housekeeping at site (WA7). The court determined that each of these warranties had been complied with as a matter of fact.
Three principal points may be drawn from the decision in Wheeldon:
- First, contractual interpretation is not a science and neither should the task be approached with a purely scientific outlook. The judge’s approach effectively recognised that the words “combustible materials” would be understood differently by a layman than by a material scientist. The experts for both parties agreed that the potential spectrum of “combustible materials” was very wide. That spectrum narrowed when viewed through the eyes of the layman.
- Second, Wheeldon is an important reminder that, to the extent that an insurer wishes to impose onerous conditions on the insured, it must use very clear language. In this case, if the insurer’s concern had been with the placing of trommel fines within 6m of fixed plant or machinery (temporarily, accidentally or otherwise), then it should have made this position clear. The word ‘storage” did not have that effect.
- Finally, co-insurance clauses are not to be considered a substitute for the remedial consequence of breach of a condition precedent. Wheeldon’s case was that the limit of 65% recovery represented Millennium’s valuation of the risks arising from non-compliance with ‘subjectivities”: the “whole point of the deal” was that Wheeldon would be entitled to cover even in spite of breaches of conditions precedent. Instead of accepting this proposition, the court reaffirmed that – consistent with the normal operation of a condition precedent – recovery would have been reduced to nil.
Keywords: Conditions precedent, Construction of terms, Property Insurance