The importance of compliance with condition precedents

In contract law, a condition precedent is a term in a contract which provides that the agreement or certain parts of the agreement will only come into force if and when certain conditions are satisfied. This requirement must be met before the contracted parties will be required to complete their obligations.

In relation to insurance contracts, a breach of a condition precedent to risk or liability will likely lead to an insurer rejecting a claim (regardless of whether prejudice is suffered) or to decline cover entirely.

As a result, it has always been in a policyholder’s best interests: (i) to ensure that conditions precedent are kept to a minimum; and (ii) where conditions precedent are necessary, to identify such terms expressly and to understand the potential consequences of any breach.

Types of condition precedents

Condition precedents can be onerous and commonly require an insured party to take specific actions within specified time frames. Typically, an insurance policy will include terms that dictate when a claim, or potential claim, should be notified to the insurer on risk. For example, a policy may contain an ‘immediate’ notification clause (‘as soon as practicable’ in the circumstances) which applies to all claims, as well as any impending prosecutions or inquests. Failure to do so could result in the insurer not admitting the claim or not providing an indemnity in respect of the insured event.

Another common condition precedent is the requirement that an insured party must notify the insurer of any material change in risk (frequently known as ‘Alteration to Risk’).

Condition precedents can be more specific depending on the type of policy. For example, under property policies, an insured party may be required to e.g. notify an insurer immediately where there is a change in occupancy of any occupied/unoccupied building covered by the policy or maintain a minimum level of security at the properties covered by the policy.

Section 11 of the Insurance Act 2015

Section 11 of the Act provides that an insurer may not rely on a policyholder’s breach of a risk mitigation term to reject a claim if the breach could not have increased the risk of the loss. This could include a breach of a condition precedent. For example, a policy may include a condition precedent that the insured install a burglar alarm to its property, which it fails to do. The policyholder’s property is subsequently damaged by flood. Section 11 essentially states that if the policyholder can show that its failure to install a burglar alarm could not have increased the risk of flood, it will still be entitled to an indemnity under the policy, despite not complying with that specific condition precedent.

However, section 11 does not apply to terms which define the risk as a whole. Policyholders should therefore be on the lookout for attempts to frame policy provisions, including condition precedents, in a way that increases their chance of being found to apply to the risk as a whole, thereby falling outside the scope of section 11.

It is therefore crucial that companies consider each of their insurance policies to establish the specific condition precedents that apply, and to ensure they are complied with. If not, it risks invalidating the policies and exposing the insured to significant risk.