Even Consumers Can Forfeit Their Rights For Breach of Policy Conditions

The judgment of Teare J in Parker v National Farmers Mutual [2012] EWHC 2156 (Comm) is worthy of note on a number of fronts, but particularly with regard to the judge's application of ICOBS 8.1, under which an insurer cannot unreasonably reject a consumer policyholder's claim.

The First Claimant (Mrs Parker) owned a house known as Crossfield which was substantially damaged by a fire on 6 December 2009 (the cost of reinstatement was said to be £538,000).   Both she and the Second Claimant (Mr Parker), her husband, were insureds under a home insurance policy underwritten by the Defendant (NFUM).

The judge held that NFUM had no liability to indemnify Mr Parker in respect of the fire because:

• He had made a fraudulent claim under an earlier year of account and had not disclosed that fraud to NFUM prior to inception of the current policy.  NFUM were therefore entitled to avoid his interest in the policy;
• Mr Parker had in any event deliberately "directed one or more persons unknown to set fire to the property".

The judge held that such conduct by Mr Parker could not prejudice Mrs Parker's entitlement under the policy, as the policy was 'composite insurance' and she had not known about the earlier fraudulent claim or Mr Parker's conduct with regard to the fire.  In other words, she was an entirely 'innocent insured'.

Nonetheless, the judge held that NFUM had no liability to Mrs Parker. 

He found she was in breach of a condition precedent, that she should "provide all the written details and documents that [NFUM] ask for" in their investigation of a claim.  In January 2010 Mr Parker provided a witness statement to NFUM in which he said "I've got the money in the bank and demolition [of the property] starts on Monday".  In March 2010 NFUM's solicitors wrote to Mr and Mrs Parker requesting that they provide copies of their bank statements to prove this – ie to evidence that they did indeed have available funds to rebuild the property.  Mr and Mrs Parker's solicitors responded on their behalf, asserting that NFUM were not entitled to see the bank statements.  It does not appear that NFUM challenged this position or re-requested a copy of the statements. 

In other words, there was, at best, a one off failure by Mrs Parker to comply with the clause. 

It is not exactly clear why NFUM had wanted to see the bank statements.  The judge held that the availability of funds to reinstate was relevant to Mr Parker's "motive". However, it is not clear whether NFUM had actually made their suspicions known to Mr and Mrs Parker at that time.

In any event, there was no finding that NFUM had been prejudiced by the fact that the statements were not provided.  Indeed if NFUM had perceived any real prejudice, they would no doubt have chased the statements via their solicitors.

Mrs Parker argued NFUM could not rely on the breach of condition precedent because it was an unfair term in a consumer contract (and therefore not binding upon her pursuant to the Unfair Terms in Consumer Contract Regulations 1999).  The judge rejected this, principally on the basis that under ICOBS 8.1 (discussed below), NFUM could not rely on the clause where it would be unreasonable to do so.

Under, ICOBS 8.1 an insurer must "not unreasonably reject a claim (including by terminating or avoiding a policy)".  ICOBS 8.1.2 further provides: "[a] rejection of a consumer policyholder's claim is unreasonable, except where there is evidence of fraud, if it is for…breach of warranty or condition unless the circumstances of the claim are connected to the breach".

The judge held that the "circumstances of the claim" were "connected to the breach", because NFUM wanted the statements to further their investigations into whether Mr Parker had been involved in the fire.  It seems therefore the judge was interpreting "circumstances of the claim" to mean or to include an insurer's investigation of a claim.  That interpretation may be open to doubt.  Some commentators have suggested that "circumstances of the claim" refers to the facts underlying the loss.  Ie it is a necessary requirement that the breach of condition (or warranty) at least indirectly contributed to the loss (in this case the fire).  

The judge went on to consider whether NFUM's rejection of the claim was reasonable (ie he appears to have accepted that just because the breach related to NFUM's investigation of the claim did not mean it was reasonable for NFUM to have rejected the claim for the breach).

The judge held that NFUM's rejection was reasonable.  This was because, "when making the request for information the NFU's solicitors drew attention, expressly, to the obligation imposed by the policy to provide all the written details asked for by the NFU and reserved NFU's right to treat any failure to provide the information sought as a breach of the policy which would entitle the NFU to repudiate any liability which might otherwise have arisen". 

In other words, because Mrs Parker had been forewarned of the draconian consequences if she did not provide the bank statements, that meant those consequences were not unreasonable.

This logic might also be open to doubt, since the primary consideration ought always to be whether the insurer has suffered any prejudice as a result of the breach of condition.

If, as here, the breach has not caused the insurer prejudice, then the breach is a purely technical one, and, arguably, it would per se be unreasonable for the insurer to reject the claim.  This is the approach adopted by FOS, whose position is that:

"We do not consider it good practice for insurers to decline to pay out where the policyholder’s breach of a policy condition has been only a technical breach that has not prejudiced the firm’s position in any way..." [See issue 34 of Ombudsman News, January 2004].  

Indeed, oddly enough, the judge had earlier in his judgment conceded that "reliance upon a mere procedural transgression which did not prejudice an insurer to reject a claim would be unreasonable and therefore beyond…insurers' powers".  As above, however, the judge made no express finding that NFUM had suffered prejudice as a result of Mrs Parker's failure to provide the bank statements.  The failure will have prevented the insurers from pursuing the line of the inquiry that they required the statements in order to pursue (to assess the veracity of Mr Parker's assertion that he had sufficient money in his bank account to cover any rebuilding costs), but ultimately the failure by Mrs Parker to provide the statements (which on the judge's findings was an entirely innocent one on her part) did not place NFUM in a worse position in terms of the amount of the loss or their ability to decline cover.

Mrs Parker may well not appeal the decision, because the judge also found that in the event NFUM made a payment to her they would immediately be subrogated to her claim against Mr Parker in respect of the loss.