Claim provisions in insurance contracts: why they matter

In insurance contracts, claim provisions play a crucial role in ensuring both the assured and the insurer fulfil their obligations effectively. Understanding how these provisions work is essential for navigating the complex landscape of insurance law.

Specialist contract law principles govern insurance contracts. The assured has specific duties toward the insurer at both the pre-contractual and post-contractual stages. During the latter, the assured may be required to perform certain tasks and refrain from certain activities. Additionally, if the assured makes a claim against the insurer because of a loss suffered, the claim process will be subject to conditions expressly set out in the insurance contract. These conditions, known as claim provisions, regulate the circumstances that the assured is required to meet when making a claim.

Types of claim provisions

Claim provisions can be divided into three categories: ‘claim notification’, ‘claim co-operation’, and ‘claim control’ clauses.

A notification clause requires the assured to report an event or loss within a specified timeframe and manner. Policy wordings may ask the assured to give ‘immediate’ notice or ‘notice within 72 hours of the event’s occurrence or being aware of the loss’. A claim co-operation clause may require the assured to co-operate with the insurer, for instance, in chasing a claim against a third party. Co-operation may also be performed by handing over any information that the assured has with respect to a third party’s liability to the assured or the claim the assured can make against a third party. A claim control clause transfers full control of a claim to the insurer, when a claim is made against the assured by the third party.

For example, in a liability insurance policy, a claim notification clause may ask the assured to notify the insurer as soon as practicable after being involved in an accident. If a claim is made against the assured following an accident, a claim co-operation clause would ask the assured to collaborate with the insurer to handle the claim. A claim control clause, however, would require the assured to hand over complete control of the claim process made by the third party.

Consequences of non-compliance with claim provisions

A loss, claim, or event may be reported later than specified in the insurance contract, or the assured may fail to co-operate with the insurer as required. Technically, this constitutes a breach of the insurance contract. A breach of contract typically leads to a remedy, which may have been expressly stated in the contract. If not, the established legal principles will determine the insurer’s rights in response to the breach.

There is no statutory provision in English law setting out remedies for breach of claim provisions. They are therefore determined either by the parties in the contract or in reference to common law, namely case law.

The insurer’s response to the assured’s breach of a claim provision depends on the wording of the relevant obligation. This may be complex for a non-expert, as the insurer’s entitlement depends on the obligation’s classification according to the clause’s wording. Such classifications are examined in the following paragraphs.

Condition precedent

The contract might stipulate that the claim co-operation clause is a condition precedent to insurer’s liability. A condition precedent means that the insurer’s liability will depend on the assured’s compliance with the obligation defined as a condition precedent in the contract. In other words, unless such a condition is satisfied by the assured, the insurer will not be liable for the loss that the assured claims and that is tainted by the breach. Not all claim provisions are written as a condition precedent to insurer’s liability. There is no hard and fast rule requiring the parties to select one classification over another. The parties are free to use the wording they prefer at the outset of the contract. Therefore, a claim provision may be worded as a ‘mere’ condition. If a mere condition is breached, the insurer is not automatically entitled to reject the assured’s claim for the reason of the breach on its own.

Suppose an insurance policy is in place, and a loss has been suffered. The insurer argues that the assured has breached a claim provision. In this case, the first task is to understand what type of obligation the policy imposed on the assured and whether the assured has failed to comply with it. In the case of non-compliance, the next step is to assess if the wording of the clause provided that the obligation set out therein is a condition precedent to insurer’s liability. How can one definitively decide if the clause is a condition precedent to insurer’s liability? The wording may expressly state that, “It is a condition precedent to insurers’ liability under this insurance that: The Insured shall immediately after the occurrence of any Injury or Damage give notice in writing with full particulars thereof to insurers.” Alternatively, the policy, instead of using the words ‘condition precedent’, may clearly state that, “The Underwriters hereon shall control the negotiations and settlements of any claims under this Policy. The Underwriters hereon will not be liable to pay any claim not controlled as set out above.” The words ‘will not be liable’ suffice to state the insurer’s intention not to pay the assured’s loss in the case of the latter’s failure to hand over the forementioned control.

In some policies, one clause may clarify the assured’s obligation, while another may state that the insurer’s liability depends on the ‘observance of all the policy terms of conditions’. The latter wording would then render the assured’s obligations as conditions precedent to insurer’s liability.

A mere condition

Not all claim provisions are written as a condition precedent. They may be a mere condition. If a clause does not fall under any of the categories above, it is considered a mere condition. An example of a mere condition is, “The assured agreed to notify all claims or occurrences likely to involve the insurers within 7 days from the time that such claims or occurrences become known to them.”

The above clause does not contain the phrase ‘condition precedent’, nor does it state that the insurer’s liability depends on the notification. Unless the contract states elsewhere that the insurer’s liability depends on compliance with the policy terms, this clause is regarded as a mere condition.

Significance of form

There is a major difference between a breach of a mere condition and a breach of a condition precedent: In the former, the assured can still make a claim against the insurer despite the breach, whereas non-compliance with the latter automatically releases the insurer from liability for the claim that is tainted by the breach. For the insurer to reject liability for breach of a mere condition, the breach must be so serious that it would be unreasonable for the insurer to continue with the insurance contract.

It is rarely the case that breach of a claim provision results in such severe consequences. Usually, the harm caused by such a breach takes the form of the insurer losing the opportunity to investigate the claim in a timely manner. If the insurer proves this, the indemnity to be paid may be reduced proportionately, reflecting the insurer’s prejudice. For example, with the insurer’s prejudice assessed as 20%, if the assured is entitled to be paid GBP 10,000 for the loss, the insurer would deduct 20% of the payment sent to the assured. However, if the claim provision the assured failed to comply with is a condition precedent to insurer’s liability, the insurer is not required to make any payment at all: the assured loses the entire claim tainted by the breach, irrespective of the insurer’s prejudice.

One must bear in mind that claim provisions are not risk-related terms of the contract. The assured might assume that there are no obligations to comply with once the risk has occurred. However, insurers generally ensure that they also regulate the claim stage by the terms of the insurance contract. As seen above, the matter is quite formalistic, and it is therefore crucial to adhere strictly to the claim provisions for a claim to succeed against the insurer.