The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #17 (The Ugly). Diab v. Regent Insurance Company Ltd [2006] UKPC 29

Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.

Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.

#17 (The Ugly): Diab v. Regent Insurance Company Ltd [2006] UKPC 29

This Privy Council decision considered whether a policyholder, whose insurer has declined cover, is nevertheless still bound by the claims conditions in the policy.

Background

This case arose from a fire which destroyed a shop owned by the policyholder, Mr Diab, as well as all its contents. Mr Diab made a claim under his material damage policy with Regent Insurance Company Limited (“Regent”).

A meeting (“the Meeting”) took place ten days later at Regent’s offices between Mr Diab and Regent’s Managing Director, Mr Flynn.  Mr Flynn made it clear that, if Mr Diab made a claim under the policy, it would be rejected because Regent believed that he had started the fire.

About four weeks after that, Mr Diab’s solicitor sent a letter to Regent persisting with a claim for indemnity and setting out the amount of his loss.

Regent declined the claim. It asserted that:

a) Mr Diab had breached a condition precedent (“the Condition”) requiring that any claim should be notified in writing forthwith and that particulars of the loss be provided in writing within 15 days, and that any oral notice given by Mr Diab at the Meeting was thus insufficient; and

b) and in any event the claim was fraudulent because Mr Diab had started the fire.

Mr Diab duly sued Regent.

At the trial, Regent dropped its allegation of fraud and relied solely on the alleged breach of the Condition.

Regent was successful in that regard, with the trial judge rejecting Mr Diab’s argument that the representations made by Mr Flynn at the Meeting had constituted a waiver by Regent or an estoppel by representation, relieving him of the need to comply with the Condition.

Mr Diab appealed, eventually to the Privy Council, the central issue being the construction and effect of the Condition, namely whether it remained binding even where Regent had told Mr Diab that it would not pay the claim. Mr Diab’s position was that a repudiation of liability by an insurer relieved the policyholder of the need to comply with any outstanding procedural requirements under a policy. In other words, Mr Diab was relieved of the obligation to comply with the Condition given what Mr Flynn had said at the Meeting.

The Decision

The Privy Court dismissed Mr Diab’s appeal.  It held that, while Mr Diab had been entitled to take what was said by Mr Flynn to be a repudiation of liability by Regent, Mr Diab had not accepted it or treated it as putting an end to the insurance contract. The obligations owed by each party under the policy therefore continued.

Put another way, a policyholder who is asking an insurer for an indemnity under a policy will ordinarily remain bound by the terms of that policy – unless he can show that the insurer has lost its right to rely on the term in question because it is estopped from doing so; and an estoppel in this situation will usually require both a clear representation by the insurer that it is waiving the condition and the policyholder relying on that representation to his detriment.

Comments

In our view this decision is problematic for policyholders for the reasons set out below.

Policyholders should be aware that, where an insurer has denied a claim, this is not on its own enough to ‘tear up the contract’ and therefore policy conditions must continue to be observed. Although in certain circumstances a policyholder may be able to establish that an estoppel means that the insurer has lost its rights to rely on a condition, that is by no means straightforward.

When faced with a denial of cover by insurers, a policyholder must decide whether to accept that denial as a repudiatory breach of the policy.  The practical effect of that would be that both parties are discharged from further performance of the contract. This can be problematic for a policyholder either if the policy is still running or if there are other claims which have been made under the policy. If the repudiatory breach is accepted, a policyholder will be entitled to claim damages for the breach (the purpose of which will be to put the policyholder in the position it would have been in had the breach not occurred).

If the denial of cover is not accepted as a repudiatory breach, the policyholder is obliged (for example) to continue to provide information and co-operation and to observe the other claims conditions in the policy. Failure to do so may result in insurers successfully relying on the technical argument raised in the Diab case. While it may seem unfair that an insurer can hold a policyholder to the conditions in the policy even when cover has been declined, this decision still represents the law on this point and we do not suggest that it was wrongly decided. We therefore categorise it as “Ugly”.

Serena Mills is an Associate at Fenchurch Law.


Fenchurch Law covid19

Covid-19 BI Update: Coronavirus, the plague of the 21st Century? Apparently not.

Rockliffe Hall Limited v Travelers Insurance Company Limited [2021] EWHC 412 (Comm)

On 25 February 2021, Mrs Justice Cockerill handed down judgment in the latest Covid-19 BI coverage dispute to come before the Courts. The case was brought against Travellers Insurance Company Limited over a dispute as to the interpretation of the Disease Clause extension of the Policy and whether it would extend to cover Covid-19 losses.

Mrs Justice Cockerill found in favour of the insurer, granting an application to strike out the claim brought by the owners of Rockliffe Hall Limited, a 5-star hotel and resort in County Durham, which like many businesses across the country was forced to close during the pandemic.

The parties’ arguments focused on wording of the Infectious Disease extension to the Business Interruption Section of the Policy. The extension, like many others in use, contained a list of 34 specified diseases, which did not include Covid-19.

The wording and construction of many Business Interruption clauses have of course been considered in detail by the High Court and the Supreme Court in the Test Case brought by the FCA. They did not however, deal with the type of wording which is at the forefront of this dispute.

In this case, the insurer maintained that cover provided by the Disease Clause extends only to loss resulting from one of the 34 diseases specifically listed in the policy wordings. It stressed that this list is “closed and exhaustive” and as Covid-19 was not included on this list, losses resulting from Covid-19 would not be covered.

Rockliffe on the other hand argued that the disease wording was ambiguous as it contained a number of what it termed ‘General Diseases’, which are not attributable to specific causes or pathogens, one of which was “Plague”. The hotel contested the insurer’s position that the list was “closed and exhaustive”, arguing that the definitions of the ‘General Diseases’ should be read widely to include any disease bearing a reasonable similarity, such as Covid-19.

Rockliffe went on to argue that the term ‘Plague’ could have various meanings, one of which is “Any infectious disease which spreads rapidly and has a high mortality rate; an epidemic of such a disease.”

Mrs Justice Cockerill was not convinced. She applied the ordinary principles of construction, in considering what a reasonable reader would have understood the parties to have meant by the language used and concluded that it would be “fanciful in the extreme” to believe that a reasonable reader, would interpret the term “Plague” in that way.

Rockliffe also asserted that Covid-19 could be associated with or cause some of the more specific diseases included in the Disease Clause, such as meningitis and encephalitis as there is evidence of these conditions being associated with and or caused by Covid-19. Again, Justice Cockerill dismissed this argument as an “Alice in wonderland” approach.

The “contra proferentem” rule was also considered briefly, as it was introduced by Rockliffe, in respect of the meaning of the word “Plague” in the context of the Policy. Mrs Justice Cockerill refused to apply the principle as there was no ambiguity, which serves as a useful reminder that the Courts will not invoke the “contra proferentem” rule in the absence of any genuine ambiguity.

The end of the Covid-19 pandemic may be in sight but the subsequent impact and unanswered questions over coverage are likely to linger for some time. Whilst a negative outcome for the policyholder in this case, every judgment that deals with the interpretation of policy wording, assists policyholders and insurers alike as it clarifies the position on these issues and provides consistency.

This case is one example of an issue that has been the subject of some debate over the past year, but is now settled conclusively.

Serena Mills is an Associate at Fenchurch Law.