Court of Appeal landmark Insurance Act 2015 guidance on conditions precedent, representations and warranties

The Court of Appeal’s decision this month in Lonham Group Ltd v. Scotbeef Ltd [2025] EWCA Civ 203, partially overturned the 2024 decision in the lower court and provided some vital guidance on conditions precedent, warranties, and pre-contract representations.

Background

Scotbeef Limited, a manufacturer of beef-based food products, contracted with D&S Storage, a storage and transport services provider. D&S, members of the Food Storage & Distribution Federation (FSDF), would incorporate FSDF's recommended terms into their contracts, those terms including a liability limit of £250 per tonne for defective meat.

A dispute over spoiled meat led to a legal battle about whether these FSDF terms were incorporated into the contract. After D&S went into liquidation, Scotbeef added D&S’ insurer, The Lonham Group, as a defendant under the Third Parties (Rights against Insurers) Act 2010. Lonham denied liability to indemnify D&S, claiming D&S breached the “Duty of Assured” clause by not incorporating the FSDF terms in their contract with Scotbeef, which it said was a condition precedent to liability.

“It is a condition precedent to the liability of Underwriters:

1. that the Assured makes a full declaration of all current trading conditions at inception of the policy period;
2. that during the currency of this policy the Assured continuously trades under the conditions declared and approved by Underwriters in writing;
3. 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”. [There were then various examples of what constitutes “reasonable and practicable steps” to incorporate acceptable terms]

The policy then went on to say: 

“… If a claim arises in respect of a contract into which the Assured have failed to incorporate the above-mentioned conditions, the Assured's right to be indemnified under this policy in respect of such a claim shall not be prejudiced, providing that the Assured has taken all reasonable and practicable steps to incorporate the above conditions into contracts; … [Our emphasis in bold]”

Contradicting the above, two pages later the policy further stated: 

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

The lower court decided that:

• The subclauses in the “Duty of Assured” clause had to be read together, not separately
• Subclause 1 was a representation at policy inception and converting it into a warranty was prohibited under Section 9 of the Act
• Subclause 3 was onerous and ambiguous, failing the transparency requirements of the Insurance Act

The insurer didn't meet the transparency requirements as there was no evidence that they highlighted the disadvantageous subclauses to their insured.

The lower court concluded that D&S misrepresented the incorporation of FSDF terms and breached the duty of fair presentation. However, since Lonham didn't prove the misrepresentation was deliberate or reckless, or that it would not have offered terms at all, Scotbeef was allowed to pursue its claim against the insurer.

The Appeal

The Court of Appeal focused on whether sub-clauses (ii) and (iii) were warranties. It was decided that the lower court had erred in treating all three sub-clauses (i), (ii), and (iii) as either all warranties or all representations.

The Court of Appeal found:

1. Sub-clause (i): Dealt with existing contracts at policy inception.
2. Sub-clause (ii): Is a warranty that covers future business operations during the policy period, requiring D&S to trade on agreed terms.
3. Sub-clause (iii): Is a warranty covering future new business relations, also a future warranty, ensuring trading conditions are incorporated into new contracts.

Each sub-clause addresses different business scenarios, all requiring D&S to trade on standard terms. The only exception being if D&S took all reasonable steps to incorporate these terms but failed.

The Court of Appeal noted that D&S controlled how it conducted its business. For any contract to be covered by the policy, D&S had to comply with sub-clauses (ii) and (iii). Unlike sub-clause (i), these didn't involve pre-policy representations.

The Court of Appeal decided that sub-clauses (ii) and (iii) were warranties that had to be followed during the policy period, regardless of the representation in sub-clause (i).

Since these sub-clauses were treated as warranties under the Act, D&S’ breach of these warranties meant that Lonham had no liability for the loss via the remedy under Section 10 of the Act; an insurer has no liability for a loss suffered after a warranty has been breached but before it is remedied.

It was, therefore, found that Lonham was not liable to indemnify D&S under its policy for Scotbeef's claim.

Transparency

The lower court mistakenly found that the transparency requirements in Part 5 of the Act were not met. This was based on the incorrect assumption that sections 2 and 3 applied to sub-clauses (ii) and (iii). However, these sub-clauses were warranties, not representations, so section 16(1) didn't apply.

The main question was whether the policy terms contracted out of the limitation on remedies contained in sections 10 and 11 of the Act. In this case, there was no such attempt. Sub-clauses (ii) and (iii) didn't put the insured in a worse position than they would be under the Act.  

What does this mean?

Insurers are still likely to impose terms on their insureds that require them to trade in a certain manner, including on industry standard terms. It will remain in both the insurers and insured's interest to contract on terms, particularly in certain industries such as logistics and storage/warehousing, that limit liability and/or provide additional protection through contracted reductions to the time limits for claims to be brought.

The decision underscores the need for insurers to draft their policies with precision and clarity, ensuring that all terms are properly categorised and communicated to the insured to avoid potential disputes and liabilities.

The key takeaway for insurers is the importance of the terms of the insurance policy clearly distinguishing between representations and warranties. In particular, to avoid the potential for representations being inadvertently converted into warranties. This is especially important where those terms control an insured’s potential liability, and therefore insurer’s potential liability. Likewise, policyholders must make sure they understand and adhere to those terms to ensure they are entitled to an indemnity.

The terms of the insurance policy must be clear and unambiguous. Insurers should also take sufficient steps to draw the insured's attention to any disadvantageous terms before the contract is entered into. This helps avoid disputes over whether the insured was adequately informed about the terms and conditions.

We can't stress enough the importance of using clear and concise English without ambiguity so as to prevent challenges further down the line.

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