Construction of condition precedents in a property insurance contract
Wheeldon Brothers Waste Limited v Millennium Insurance Company Limited [19.04.18]
This case concerns the interpretation of condition precedents to liability in a property insurance policy, following an insurer’s refusal to indemnify its insured in respect of a fire at its premises. The Technology and Construction Court considered the wording of the condition precedent, specifically the meaning of the terms “storage” and “combustible”.
Wheeldon Brothers Waste Limited (Wheeldon) owned a waste processing plant, which sorted and treated materials to produce “solid recovered fuel”. The process involved waste being fed through a number of conveyors, one of which led to a rotating sieve (a ‘trommel’), which was designed to segregate combustible and non-combustible material.
In June 2014, a fire broke out on one of the conveyors and spread through the building. Wheeldon made a claim for the damage under its property insurance policy. Millennium Insurance Company Limited (Millennium) declined to indemnify Wheeldon on the basis that it had breached warranties and a condition precedent to liability, which required combustible materials to be stored at least six metres from fixed plant and machinery.
The court accepted Wheeldon’s evidence on causation. It found that the fire started as a result of a failed bearing, which caused the conveyer to become misaligned to the trommel, creating a void. Combustible materials which would have otherwise passed into the trommel, became stuck in the conveyor housing or dropped below into the void. The friction caused by the misalignment led to hot fragments being deposited on the waste, eventually igniting it.
The Insurance Act 2015 did not apply to this case. As such, there was no requirement for there to be a causative link between the breach of the condition precedent and the loss to absolve Millennium of its liability to indemnify the insured. Millennium just needed to show that there had been a breach.
The court accepted the following principles of interpretation:
- Any ambiguities in the policy wording should be interpreted against the insurer (the ‘contra proferentum’ rule).
- Condition precedents are treated by the courts as onerous or draconian terms and it is therefore for the insurer to clearly spell out the insured’s obligations.
- The assumption is that underwriters are familiar with the trade that they insure.
It was for the court to interpret the wording of the policy by reference to the ordinary and natural meaning of the words objectively considered.
The court considered the meaning of the terms “storage” and “combustible” and commented that:
- “Storage” requires a “degree of permanence and a deliberate decision to designate an area to place and keep material”. It is not simply an area where materials are kept or placed as part of the usual plant processes.
- “Combustible” material in scientific terms is anything that can burn or smoulder when ignited. However, the court determined that materials such as diamonds and metals, which although combustible from a scientific perspective, would not be considered combustible by a layperson.
The material removed by the trommel (referred to as ‘trommel fines’) were not combustible within the meaning of the policy and there was therefore no need for them to be stored at least six metres away from plant and machinery. Combustible material in the void had fallen rather than been “stored”. As such, there was no breach.
Since the implementation of the Insurance Act 2015, insurers are no longer able to wholly exclude liability as a result of a breach of a condition precedent if the breach did not increase the risk of loss which actually occurred. However, as the issues in dispute here were related to the loss claimed, insurers should still be mindful of the practical implications of this decision, including:
- If an insurer wishes to include condition precedents in a policy, it should ensure that the conditions being imposed on the insured are clearly articulated, failing which it risks the term being interpreted against it.
- Interpretation of policy wording is an objective, not a scientific, test. The wording of the policy should be considered from the perspective of the ordinary layman.