Consequences of Late Notice Claims In Insurance Contract

What Are The Consequences of Late Notice Claims In Insurance Contract?

Summary: The consequences of late notice claims in an insurance contract depend on whether the notification clause is a condition or a condition precedent. If it is a condition, the insurer must prove that the delay caused them prejudice to reject the claim. However, if the clause is a condition precedent, a late claim can be rejected regardless of whether the insurer suffered prejudice. While courts and the IRDAI have historically taken a lenient view, overturning rejections for justifiable delays, recent Supreme Court judgments emphasize a strict adherence to policy terms. For example, the Supreme Court has ruled that if a policy clearly establishes a notification clause as a condition precedent, compliance is mandatory. This strict approach, however, is not always consistently applied, leading to some legal uncertainty. To ensure a claim is indemnified, an insured party must carefully adhere to all contractual provisions, including timely notification, as a breach of a condition precedent can lead to the denial of a claim even if the loss is covered.

Insurance contracts require that the claims or circumstances of the claims are intimated to the insurer within the time period specified in the policy. This requirement may be expressed as a condition or a condition precedent to the insurer’s liability under the policy, and the consequences of non-compliance will, to some extent, depend upon whether the notification clause is expressed as a condition or condition precedent.

If the notice clause is a condition, the insurer will have to show that it suffered prejudice on account of the delayed notice, but if the clause is a condition precedent, then in theory no prejudice is required to be shown for placing reliance on the clause.

Until recently, however, irrespective of whether the notice clause is expressed as a condition or condition precedent, courts previously have stated that the condition relating to notice should not prevent settlement of genuine claims when there is a delay in intimation or in submission of documents owing to unavoidable circumstances. This is the position that the Indian insurance regulator (the Insurance Regulatory and Development Authority (IRDAI)) has also recommended in its circulars, where insurers were directed not to reject claims unless and until the reasons for delay are specifically ascertained and recorded, and the insurers are satisfied that the delayed claims would have been rejected even if they had been reported in time.

Courts and consumer fora have also followed the view that clauses limiting the period for notification of claims are not to be construed strictly and have often overturned the rejection of a claim when the delay was reasonably justifiable.

The IRDAI also recommends that insurers should incorporate additional wording in the policy documents that suitably highlights that a delay in intimating a claim or submitting the relevant documents to the insurer will be condoned if the delay is proved to be for reasons beyond the control of the insured.

The Supreme Court of India has passed judgments enforcing the agreed terms and conditions between parties. In Export Credit Guarantee Corp of India Ltd v Garg Sons International 2013 (1) SCALE 410, the court allowed a claim to be rejected on grounds that timely intimation of claims was under a credit insurance policy. The court further ruled that the terms and conditions of a contract should be strictly followed: ‘. . . it is not permissible for the court to substitute the terms of the contract itself, under the garb of construing terms incorporated in the agreement of insurance. No exceptions can be made on the ground of equity. The liberal attitude adopted by the court, by way of which it interferes in the terms of an insurance agreement, is not permitted.’

In the recent judgment of Sonell Clocks v The New India Assurance Co Ltd AIR 2018 SC 4146, the Supreme Court has held that if the wording of the policy was such as to make the wording of the intimation clause a condition precedent, compliance with such a clause by the insured would be necessary to maintain a valid claim.

Despite this ruling of the Supreme Court, this approach is not always followed, and further clarification on the issue is necessary to settle the legal position.

WHAT ARE CONDITIONS

In an insurance context, a condition is either a contractual term obliging the insured to act in a certain way, or a contingency upon which the validity of a policy or a claim may depend. The nature and types of insurance conditions vary widely as do the consequences of breach. Conditions typically relate to the commencement of the risk (including the date at which premium must be paid), the conduct of the insured during the currency of the policy and the claims procedure.

Conditions can be divided into the following classes:

• Conditions precedent to the validity of the contract and the attachment of risk (such as the payment of premium).
• Conditions precedent to the insurer’s liability. Such conditions are often concerned with the claims process such as notification of a claim within a specified time.
• Bare conditions or conditions subsequent. These are usually concerned with the insured’s conduct during the currency of the policy.

CONDITION PRECEDENT MEANS; A condition precedent is a contractual term which, if breached, may entitle an insurer to reject a claim (regardless of whether prejudice is suffered) or may mean that cover never attaches.

Conditions precedent are contractual terms often found in insurance contracts. It is important to distinguish conditions precedent from bare conditions (also known as conditions subsequent) as the consequences following breach of each are different. A breach of a condition precedent in an insurance contract may allow insurers to avoid paying out under a claim regardless of whether they have suffered any prejudice as a result of the breach. Alternatively it may mean that cover never attaches in the first place so that the insurer is never in risk.

CONSEQUENCES OF A BREACH OF A CONDITION OR A CONDITION PRECEDENT

The consequences of a breach of condition depend on the type of condition.

(i) Condition precedent to risk – If a condition precedent to risk is not fulfilled then the insurer never comes on risk and the insurance contract will be treated as having never come into existence. Any contractual obligations which have been fulfilled under the contract may be reversed. For example, if the insured has paid a portion of the premium he is entitled to have it returned.

(ii) Condition precedent to liability – Generally speaking, failure to comply with a condition precedent to liability will prevent the insured from making a claim. A breach in relation to one claim will not prevent the insured’s right to pursue a separate claim under the policy if all the relevant conditions are complied with. So, for example, if a term of the insurance policy requires as a condition precedent the insured to notify the insurer of a third party claim against it within a defined period of time and the insured fails to do so, his right to claim an indemnity in respect of that claim may be lost. However, his right to pursue other claims under the policy is preserved.

(iii) If the condition precedent does not relate to a specific claim but is of general application (such as an ongoing obligation to pay a premium) a breach may suspend the insured’s right to make any claim under the policy until they have complied with the obligation.

(iv) Policyholders should particularly beware if the consequences of a breach of condition precedent are suspensory in a general sense as this will prevent the insured from being able to bring any claim under the policy even when conditions in relation to specific claims have been complied with.

(v) Where there is a breach of a condition precedent to liability, the insurer will not normally be entitled to damages. One qualification to this is in cases where the insurer has suffered loss as a result of the insured’s failure to comply with a condition precedent, for example in cases where the insured has failed to pay a premium. The insurer can make a separate damages claim for the premium.

(vi) Bare conditions – Where a bare condition is breached the insurer is not entitled to avoid liability for the claim. Instead he is merely entitled to damages for any loss which he might have suffered as a consequence of the insured’s breach.

CREATING A CONDITION PRECEDENT

Terms which are intended to constitute conditions precedent to risk or liability tend to be described expressly as being conditions precedent.

The use of the words condition precedent are not determinative; nonetheless, labeling the clause as a condition precedent normally means it will be construed as such unless the term is used indiscriminately.

By the same token, the absence of the label condition precedent is not determinative. It may be that the consequences of the breach are spelt out in such a way that indicates that the term is meant to operate as a condition precedent.

For example, a clause may contain wording which shows that it is intended to operate as a condition precedent such as “No claim…shall be payable unless the terms of this condition shall have been complied with”.

Equally, there may be a general condition precedent clause (also known as a “sweeping up” clause) which states that compliance by the insured with all of the obligations placed on him under the policy is a condition precedent to the insurer’s liability to pay the claims.

These types of conditions precedent should be avoided if possible as the consequence may be that a breach of any term of the policy may result in the insurer being able to avoid liability for a claim.

Sometimes general condition precedent clauses apply not only to the terms of the policy but also to the representations made in the proposal form. Such a clause may look like a basis clause and is normally a declaration made by the insured acknowledging that each of the representations in the proposal form as well as the policy will be treated as a condition precedent to the insured’s liability.

Any ambiguity in the wording will normally be construed against the insurer which may provide some protection for the insured from having to comply with uncertain obligations. However, since the consequences of a breach of condition precedent are far more serious than for a breach of condition, policyholders should make sure they are aware of how clauses in their insurance policies are likely to be classified.

COMMON TYPES OF CONDITION PRECEDENT

It is important to remember that the examples given below will not always be conditions precedent. The nature of the clause will depend on the wording used.

Policyholders should ensure they are aware of whether the clause in question is a condition precedent or a bare condition as, as has already been discussed, the consequences for breach of each vary considerably.

Examples of clauses which may be conditions precedent to risk are as follows: • Delivery of a policy as a condition precedent.

• Provision of further information by the insured.
• Absence of overlapping insurance.
• Initial payment of premium.
• Satisfactory disclosure of all material facts or “fair presentation of the risk”.
• Survey of the insured subject matter and confirmation that there has been compliance with any recommendation set out in the survey.
• The implementation of security measures.

Examples of clauses which may be conditions precedent to liability are as follows:

• Ongoing payment of premium.
• Notification clauses. Generally these require the insured to give notice of a claim or loss to the insurer within a specified time.
• A clause requiring the provision of certain information by the insured to the insurer (e.g. monthly trading returns for the purpose of calculating the premium payable).
• An obligation to take all reasonable steps to avoid or mitigate damage for which a claim is being made under a policy.
• It may also be a general condition precedent in cases of co-insurance that one insurer will not face liability until co-insurers have also accepted liability.

CONCLUSION:

• The duty of the insured to notify your insurer of a potential claim is a term of the contract of insurance. If this term is breached, the insurer’s rights to avoid paying the claim will depend upon the wording of the term itself.
• Regardless of the use or absence of any descriptive words, if the term requiring notification is classed as a “condition precedent” (ie: an event which must take place before a party to a contract must perform their part), then late notification automatically entitles the insurer to refuse payment.
• If just a simple warranty or an innominate term, the insurer may not be able to avoid the claim.

Policies have varying conditions as to their reporting requirements. The precise conditions of each individual policy need to be considered carefully, as their interpretation is essential when assessing an insured’s duty to the insurer and whether they can refuse indemnity.

Even slightly different wording can have a fundamentally different effect.

A breach of a condition by the insured gives the insurer a potential right to refuse indemnity or even to void the policy from its start.

IMPACT OF LATE NOTIFICATION

As seen above, insurers may seize upon late notification of a claim on the basis that there has been a breach of the insurance contract.

If indemnity is withdrawn, the insurer may not cover the loss being claimed or the legal costs associated with it. The courts have tended to take a strict view of non-compliance as being sufficient grounds for an insurer to deny liability for the claim in its entirety, even where there has been no prejudice resulting from the late notification.

ENSURING YOU ARE INDEMNIFIED

Assuming your policy covers you for the claim, you must satisfy the contractual provisions under the terms of your insurance policy to ensure that your insurer indemnifies you, including the need to notify the insurer of any relevant claim made against you under the policy.

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DISCLAIMER: the article presented here is only for information and knowledge of readers. The views are personal. Do consult with professionals in case of necessity.