Court of Appeal gives key Insurance Act 2015 judgment in Lonham v Scotbeef

The Court of Appeal has overturned a High Court judgment in Lonham v Scotbeef¹ and given some guidance on the application of s9 and s10 of the Insurance Act 2015, which relate to warranties. As there has been relatively little case law so far on the Act, this judgment is of interest.

Background

The insurer provided warehouse keeper legal liability cover for the insured annually. The insurance relevant to this matter was taken out on 30 June 2019. 

The insured agreed to freeze and store meat for a meat producer, Scotbeef, at its warehouse. In October 2019, some of the meat was found to be contaminated with mould and Scotbeef then brought a claim for contractual damages against the insured. The insured argued in that damages claim that the Food Storage and Distribution Federation (“FSDF”) terms had been incorporated into the contract with Scotbeef, and this was relevant because the FSDF terms contained limitations of liability and a time bar on claims. However, a court found that the FSDF terms had not been incorporated and the insured’s liability was not limited.

At issue in this claim was whether the insurance responded to the claim against the insured by Scotbeef². The policy provided cover for the insured’s legal liability for physical loss or damage to goods in accordance with the National Association of Warehousekeepers Association³ conditions or the insured’s own trading conditions or other conditions approved by underwriters in writing. 

Policy

The most relevant policy clause read:

“Duty of Assured Clause:

“It is a condition precedent to the liability of Underwriters hereunder:-

1. that the Assured makes a full declaration of all current trading conditions at inception of the policy period;
2. that during the currency of this policy the Assured continuously trades under the conditions declared and approved by Underwriters in writing;
3. that the Assured shall take all reasonable and practicable steps to ensure that their trading conditions are incorporated in all contracts entered into by the Assured. …. [followed by examples of what insurers would consider reasonable steps]…….”

Later on in the policy it also stated, “The effect of a breach of a condition precedent is that Underwriters are entitled to avoid the claim in its entirety”.

The insurer denied liability on the basis that the insured had given the insurer information that it traded on standard trade terms, but it had not in fact done so and had not taken all reasonable steps to incorporate such terms. 

High Court judgment

The High Court found that:

• Sub-clause (i) was a pre-contractual representation and that all of the sub-clauses (i) – (iii) should be read together. 
• Pursuant to s9(2) of the Act, any provision purporting to convert a pre-contractual representation into a warranty (by means of a basis clause or otherwise) is of no effect. Section 9(2) it was found, applied to the whole clause, and therefore no part of the clause was an effective warranty. 
• The failure to disclose that the insured was not trading on approved conditions must therefore be considered under the provisions relating to whether the insured had made a fair presentation. The breach by the insured had not been deliberate or reckless (as the insured had thought it was trading on FSDF terms) and so to avoid liability the insurer would have needed to show it would not have entered into the policy on any terms, and the evidence did not demonstrate this.
• It was also held that the clause put the insured in a worse position than the Act and that the transparency requirements in section 17 of the Act had not been complied with.

Therefore, there was cover for the claim.

Court of Appeal judgment

Fraser LJ gave a unanimous judgment allowing the appeal. 

The Court noted that there was limited authority on the Act. However, it was clear when the exercise of construction of the insurance was undertaken that, contrary to the High Court decision, each of the sub-clauses in the relevant clause were dealing with different and distinct things:

1. Subclause (i) related to trading terms with existing customers at the time of inception of the policy and dealt with an existing state of affairs at commencement of the policy period.
2. Subclause (ii) related to future business of the insured from existing and new customers from the date of inception going forwards and was a future warranty. It was a promise that the trading in which the insured engaged during the policy period would be on the conditions the insurer agreed.
3. Subclause (iii) was aimed at new business relations and also related to the period after the inception of the policy, requiring the insured to take reasonable and practicable steps to ensure that their trading conditions were incorporated into all new contracts. This too was a future warranty.

The first instance judge had been incorrect to find that the subclauses must be read together, instead, they were dealing with different permutations upon which the insured traded.

Whilst sub-clause (i) contained pre-policy representations, sub-clauses (ii) and (iii) were future warranties and also conditions precedent, as the clear wording of the policy stated that they were conditions precedent. The two sub-clauses were described as conditions precedent and this matched their status within the policy. The policy, construed as a whole, expressly stated that if there was a breach of a condition precedent insurers were entitled to avoid the whole claim.

As a result of these findings, the relevant parts of the term were not governed by the part of the Act that considered fair presentation of risk, but the sections that apply to warranties: 

• Section 9(2) of the Act was not relevant as this provision states that representations are not capable of being converted into warranties, by means of a basis clause or otherwise (and subsections (ii) and (iii) were not representations).
• Section 10(1) -(2) of the Act were relevant. These provisions abolish the rule that a breach of warranty results in the discharge of an insurer’s liability and instead sets out that insurers have no liability for any loss after a warranty has been breached but before it is remedied. Here the FSDF terms and conditions were never incorporated into the contractual relationship with Scotbeef, and so the insured was in breach of the warranties in (ii) and (iii). 

The insurers therefore were not liable to indemnify.

The Court rejected submissions that subclause (ii) and (iii) did not meet the transparency requirements. Section 16 of the Act states that a term of an insurance contract that would put the insured in a worse position is of no effect unless the transparency requirements in section 17 are met – i.e. that sufficient steps are taken to draw the term to the insured’s attention and that it is clear and unambiguous in its effect. The Court held that this did not apply because the two sub-clauses were warranties, and there was no question of the insurer attempting to contract out of the provisions in respect of fair presentation of the risk, or attempting to convert representations into warranties.

In conclusion the appeal was allowed, and there was no cover under the policy.

Conclusion

This Court of Appeal judgment is a reminder of the importance of characterising terms of a policy correctly, in order to determine how the Act applies.

Footnote

1. [2025] EWCA Civ 203
2. The insured had gone into liquidation and the claim was brought against the insurer under the Third Parties (Rights Against Insurers) Act 2010.
3. As it was known at that time now the UK Warehousing Association