The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #17 (The Ugly). Diab v. Regent Insurance Company

Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.

Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.

#17 (The Ugly): Diab v. Regent Insurance Company Ltd [2006] UKPC 29

This Privy Council decision considered whether a policyholder, whose insurer has declined cover, is nevertheless still bound by the claims conditions in the policy.

Background

This case arose from a fire which destroyed a shop owned by the policyholder, Mr Diab, as well as all its contents. Mr Diab made a claim under his material damage policy with Regent Insurance Company Limited (“Regent”).

A meeting (“the Meeting”) took place ten days later at Regent’s offices between Mr Diab and Regent’s Managing Director, Mr Flynn.  Mr Flynn made it clear that, if Mr Diab made a claim under the policy, it would be rejected because Regent believed that he had started the fire.

About four weeks after that, Mr Diab’s solicitor sent a letter to Regent persisting with a claim for indemnity and setting out the amount of his loss.

Regent declined the claim. It asserted that:

a) Mr Diab had breached a condition precedent (“the Condition”) requiring that any claim should be notified in writing forthwith and that particulars of the loss be provided in writing within 15 days, and that any oral notice given by Mr Diab at the Meeting was thus insufficient; and

b) and in any event the claim was fraudulent because Mr Diab had started the fire.

Mr Diab duly sued Regent.

At the trial, Regent dropped its allegation of fraud and relied solely on the alleged breach of the Condition.

Regent was successful in that regard, with the trial judge rejecting Mr Diab’s argument that the representations made by Mr Flynn at the Meeting had constituted a waiver by Regent or an estoppel by representation, relieving him of the need to comply with the Condition.

Mr Diab appealed, eventually to the Privy Council, the central issue being the construction and effect of the Condition, namely whether it remained binding even where Regent had told Mr Diab that it would not pay the claim. Mr Diab’s position was that a repudiation of liability by an insurer relieved the policyholder of the need to comply with any outstanding procedural requirements under a policy. In other words, Mr Diab was relieved of the obligation to comply with the Condition given what Mr Flynn had said at the Meeting.

The Decision

The Privy Court dismissed Mr Diab’s appeal.  It held that, while Mr Diab had been entitled to take what was said by Mr Flynn to be a repudiation of liability by Regent, Mr Diab had not accepted it or treated it as putting an end to the insurance contract. The obligations owed by each party under the policy therefore continued.

Put another way, a policyholder who is asking an insurer for an indemnity under a policy will ordinarily remain bound by the terms of that policy – unless he can show that the insurer has lost its right to rely on the term in question because it is estopped from doing so; and an estoppel in this situation will usually require both a clear representation by the insurer that it is waiving the condition and the policyholder relying on that representation to his detriment.

Comments

In our view this decision is problematic for policyholders for the reasons set out below.

Policyholders should be aware that, where an insurer has denied a claim, this is not on its own enough to ‘tear up the contract’ and therefore policy conditions must continue to be observed. Although in certain circumstances a policyholder may be able to establish that an estoppel means that the insurer has lost its rights to rely on a condition, that is by no means straightforward.

When faced with a denial of cover by insurers, a policyholder must decide whether to accept that denial as a repudiatory breach of the policy.  The practical effect of that would be that both parties are discharged from further performance of the contract. This can be problematic for a policyholder either if the policy is still running or if there are other claims which have been made under the policy. If the repudiatory breach is accepted, a policyholder will be entitled to claim damages for the breach (the purpose of which will be to put the policyholder in the position it would have been in had the breach not occurred).

If the denial of cover is not accepted as a repudiatory breach, the policyholder is obliged (for example) to continue to provide information and co-operation and to observe the other claims conditions in the policy. Failure to do so may result in insurers successfully relying on the technical argument raised in the Diab case. While it may seem unfair that an insurer can hold a policyholder to the conditions in the policy even when cover has been declined, this decision still represents the law on this point and we do not suggest that it was wrongly decided. We therefore categorise it as “Ugly”.

Serena Mills is an Associate at Fenchurch Law.