Representation or warranty?

Representation or warranty? Court of Appeal construes marine liability policy 

Lonham Group Ltd -v- Scotbeef Ltd & another [2025] EWCA Civ 203

There is little case-law on the Insurance Act 2015 (IA 2015), which significantly changed English law on non-consumer insurance contracts and, in particular, the Marine Insurance Act 1906.

This Court of Appeal decision dealt with a dispute under a marine liability policy. It is particularly noteworthy as the first appellate authority that addresses the way in which the English Court will decide whether information provided by an insured to their insurer prior to conclusion of the insurance contract constitutes a representation or a warranty. The significance of the distinction is that different provisions in the IA 2015 - and different rights and obligations vis-a-vis insurer and insured - apply depending on how the information is categorised. 

The High Court had found that the insurers were liable under the policy. The Court of Appeal has reversed that decision, concluding that there was no right of indemnity because the insured was in breach of warranty.

The background facts

D & S Storage (DS) provided chilled and frozen storage in warehouse facilities. From June 2016, Lonham Group Ltd (Lonham) was DS’s liability insurer, providing insurance cover for warehousekeepers’ legal liability subject to the terms and conditions of the policy. 

From February 2017, Scotbeef Ltd (Scotbeef) had an agreement with DS to freeze and store Scotbeef’s meat products at DS’s facilities. There was no written contract between them but the invoices sent by DS to Scotbeef stated that they were trading on specific trade association standard terms and conditions (STCs). 

As the Court of Appeal subsequently highlighted, Lonham had no control over the many different contracts that DS would enter into with different customers. Therefore, Lonham required DS to trade under certain recognised trade body STCs or similar. Such STCs usually incorporated limitation/exclusion clauses and time limits for notification of claims.

After some of the meat it stored with DS was found to be contaminated with mould, Scotbeef issued proceedings against DS seeking damages for their loss. Among other things, DS relied on a liability cap, as well as a time bar provision, in the contractual STCs.

At a preliminary hearing, the Court decided that the STCs had not been effectively incorporated into the contract with Scotbeef. Therefore, neither the liability cap nor the time-bar provision in those STCs applied and the claim was not time-barred.

Thereafter, DS went into liquidation. Scotbeef applied successfully to have Lonham joined to the proceedings. Scotbeef then sought to be indemnified for its losses by Lonham, relying on the Third Parties (Rights against Insurers) Act 2010 (Act 2010).

Lonham denied the claim on the basis that DS had failed to comply with a condition precedent in the policy by failing to contract with Scotbeef on approved trade STCs as required under the policy. Accordingly, Lonham argued that it was entitled to avoid the policy and Scotbeef could not enjoy the benefit of the indemnity through the operation of the Act 2010.

The policy

Under ‘Warehousekeeper Liability Conditions’, the policy stated that Lonham would indemnify DS for liability in respect of loss or damage to goods in accordance with specified trade association trading conditions or DS’s own trading conditions and/or other conditions as may be approved by Lonham in writing.

Cover was expressly stated to be subject to ‘General Conditions Exclusions and Observance Terms.’

Under ‘General Conditions’ was the “Duty of Assured Clause” which provided in relevant part as follows:

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

(i) that the Assured makes a full declaration of all current trading conditions at inception of the policy period;

(ii) that during the currency of this policy the Assured continuously trades under the conditions declared and approved by Underwriters in writing;

(iii) 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..."

The policy also provided that:

"The effect of a breach of a condition precedent is that Underwriters are entitled to avoid the claim in its entirety."

IA 2015

Duty of fair presentation of risk

Under Part 2 s.3 of the IA 2015, before entering into an insurance contract, the assured will be required to disclose: 

(i) every matter which they know or ought to know that would influence the insurer in deciding whether to insure the risk and on what terms; or 

(ii) sufficient information to put the insurer on notice that it needs to make further inquiries about potentially relevant circumstances.

If the assured breaches its duty of pre-contractual disclosure and if the insurer would not have entered the insurance contract if there had been no breach or would have entered it on different terms, there are a range of remedies available to the insurer depending on the severity of the breach.

Warranties

Prior to the IA 2015, a ‘basis of the contract’ clause could convert a representation into a contractual warranty. Breach of a warranty would discharge the insurer from liability for all the risks covered by the insurance contract from the time of the breach, even if the warranty had no bearing on the risk.

Under clauses 9 to 11 in Part 3 of the IA 2015 (‘warranties and other terms’), instead of discharging liability, a breach of warranty now means the insurance cover will be suspended so long as the breach continues but will be reinstated once the breach is rectified.

Transparency

S.17 deals with transparency. Effectively, an insurer must take sufficient steps to draw any disadvantageous term in the policy to the assured’s attention before the insurance contract is entered into.

The High Court decision

The Court read sub-clauses (i) to (iii) of the ‘Duty of Assured Clause’ together rather than categorising and dealing with them separately. It found that the sub-clauses did not satisfy the transparency requirements of s.17 IA 2015. 

The Court further held that any breach of the sub-clauses had to be viewed in the context of the duty of fair presentation of risk. The breach was not said to be deliberate or reckless, such that the insurer could avoid the contract and refuse the claim. Furthermore, Lonham could not show that but for the breach, they would not have entered into the contract on any terms.

Lonham was, therefore, required to indemnify DS in respect of the claim that was brought by Scotbeef.

The Court of Appeal decision

The Court of Appeal disagreed with the High Court’s “all or nothing” approach to sub-clauses (i) to (iii). It should have read them as separate clauses because they dealt with different and distinct matters:

• Sub-clause (i) dealt with the existing state of affairs as at commencement of the policy period. This was a present warranty.

• Sub-clause (ii) dealt with existing and new customers because it covered present and future business operations. It constituted a future warranty.

• Sub-clause (iii) was plainly aimed at new business relations. This was also a future warranty.

On that interpretation, sub-clause (i) was a pre-contractual representation and contained obligations regarding pre-policy disclosure but sub-clauses (ii) and (iii) did not. Rather, they regulated the conduct of the assured during the policy term. Sub-clauses (ii) and (iii) constituted warranties and, on the wording of the policy, were clearly conditions precedent. As expressly stated in the policy, breach of a condition precedent allowed the insurer to avoid the whole claim.

The Court of Appeal clarified that the categorisation of sub-clauses (ii) and (iii) as warranties meant that they did not fall under Part 2 s.3 IA 2015 (fair presentation of risk) but under Part 3, ss 9 to 11. None of the exceptions to the avoidance of liability under those clauses applied. 

As to the transparency requirements, the Court of Appeal found that sub-clauses (ii) and (iii) did not put the assured in a worse position than it would have been anyway. That was a prerequisite for s.17 to apply. 

In conclusion, Lonham were not liable to indemnify DS.

Comment

The decision is significant for the entire insurance industry and important to both underwriters and assureds. 

All those entering into insurance contracts should carefully review the wording of their policies to ensure that the scope and effect of contractual provisions is as intended.

It remains to be seen whether leave to appeal to the Supreme Court will be sought.