Law of Compulsory Motor Vehicle, The

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CHAPTER 7 Control of policy terms

Insurer v third party victim

7.1 With regards to the enforceability of policy conditions that aim to either restrict or limit the coverage provided by the insurance contract, first of all, the focus should be on the claimant who is making a claim against the insurer. The compulsory MTPL insurance scheme does not permit a number of terms to be contended against the third party victim where those terms aim either to exclude or limit the insurer’s liability. On the other hand, such restrictions may be effective in the contractual relationship between the assured and the insurer so that the latter, after compensating the third party victim’s loss, may recoup against the former. This would mean that towards the third party the insurance cover is provided although the insurer has a contractual defence, and that defence would be the basis of the claim against the assured. The insurer had compensated the third party because the compulsory MTPL insurance scheme requires the insurer to do so, so that the third party victim is not prejudiced because of such clauses in the insurance contract. On the other hand, since the insurer would have been entitled to argue those clauses towards the assured, now, the insurer can rely on them in a claim for reimbursement from the assured.

Domestic law

7.2 The Road Traffic Act 1988 section 148 contains provisions on “Avoidance of certain exceptions to policies or securities.” This section has the effect of nullifying provisions in a certificate of insurance that purport to restrict the insurance of the person(s) insured by the policy in respect of eight identified conditions relating to the vehicle or its condition, which are set out in section 148(2). If an insurer has to pay out a sum in respect of any person by virtue of the fact that section 148(1) renders ineffective certain exclusions in the policy (as set out in section 148(2)), then, by virtue of section 148(4) the insurer can recover that sum from the person who would have been insured but for the exclusion. 7.3 Similarly, section 148(5) renders ineffective (so far as liabilities covered by section 145 are concerned) conditions in a policy entitling an insurer to avoid or cancel a policy upon the event of certain specified things being done or not being done. Again, under section 148(6) the insurer’s contractual right (if any) to recover back from an insured any sums which the insurer has become liable to pay under the policy (because the avoidance or cancellation provision has been made ineffective by the Act) is preserved.

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Conditions identified under section 148(2)

7.4 An insurer is not permitted to argue the following policy defences towards a third party victim of a traffic accident for whose injury the user of the vehicle is liable.1

(a) the age or physical or mental condition of persons driving the vehicle,
(b) the condition of the vehicle,
(c) the number of persons that the vehicle carries,
(d) the weight or physical characteristics of the goods that the vehicle carries,
(e) the time at which or the areas within which the vehicle is used,
(f) the horsepower or cylinder capacity or value of the vehicle,
(g) the carrying on the vehicle of any particular apparatus or
(h) the carrying on the vehicle of any particular means of identification other than any means of identification required to be carried by or under the [Vehicle Excise and Registration Act 1994].

7.5 Since exclusions in relation to the above conditions may not be argued against the third party victim, the insurer will have to meet the claim. However, the insurer’s right of recourse against the person who is liable for the loss is retained under subsection (4). 7.6 At first sight it is arguable that the inference to be drawn from section 148 was that exceptions other than those listed under subsection 2 remain operative.2 Whether this statement still stands after the most recent CJEU decisions on the MTPL insurance scheme will be explored later in this chapter.

Passengers

7.7 The RTA 1988 s 149 invalidates any restriction of liability to or acceptance of the risk of negligence on the part of a passenger. For the purpose of section 149 the agreement between the user and the passenger must be entered before the liability arises. This follows a question of whether an agreement to this effect and entered into after the liability arose is enforceable. 7.8 The CJEU ruled that the EU law governing compulsory motor vehicle insurance liability insurance may not exclude “personal injuries to persons travelling in a part of a motor vehicle which has not been designed and constructed with seating accommodation for passengers.”3 7.9 The question remains whether that provision may be relied on against a body such as the MIB. 7.10 The Directives do not permit a derogation on the basis of the family relationship between the driver or the insured person and the persons injured as a result of the accident. The family members, in other words, are not to be treated any differently to any other

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third party victim.4 Further, whether or not passengers were being carried free of charge is irrelevant for the purposes of the protection provided for the traffic accident victims.5

Passenger’s contribution to the accident

7.11 Where a national law disallows a claim against the insurer where passengers contributed to the accident the enforceability of this provision will be subject to the “proportionality” assessment. In Candolin v Vahinkovakuutusosakeyhtiö Pohjola 6 the CJEU ruled that a domestic legislation that disallowed passengers to seek compensation where they should have noticed the driver’s drunken state prior to the accident was held to be incompatible with the Directives. In Candolin at the time of the accident the vehicle that R was driving was carrying four passengers. As a result of a road accident one of the passengers died and others were seriously injured. Paragraph 7(3) of the law on motor vehicle insurance as amended by Law 656/1994 in Finland disallowed the passengers to seek compensation because R and all the passengers were drunk at the time of the accident. The CJEU found that such a restriction allows the insurer to reject liability in a disproportionate manner on the basis of the passenger’s contribution to the injury or loss he has suffered.

Insurers’ liability to the assured where policy contains s 148 limitations

7.12 Traditionally English law permitted insurers to deny or limit liability under the insurance contract on the basis of the form of the relevant policy terms. Before the Insurance Act 2015 (IA 2015) came into force, remedy for breach of a contractual term used to be determined on the basis of the classification of the relevant term. If the term breached was a warranty the insurer was discharged from liability automatically at the time of the breach and the risk terminated at that moment.7 If the term was a condition precedent to policy the policy never came into existence until the condition was satisfied, and if the term was a condition precedent to the attachment of the risk, the risk did not attach until the condition was satisfied.8 If a contractual term was classified as a condition precedent to insurer’s liability, the insurer was discharged from liability from the moment of the breach but only with regards to the claim that was tainted by the breach.9 Breach of a mere condition did not permit the insurer to deny liability unless the breach created such serious circumstances that went to the root of the contract.10 If the insurer was prejudiced as a result of the breach of mere condition the insurer was permitted to make a deduction from the insured indemnity.11

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7.13 The IA 2015 reformed this area of law. With regards to warranties, by its section 10, the IA 2015 introduced a new type of remedy. Accordingly, if the warranty of a consumer or business insurance contract is breached, the insurer is not liable for the loss that occurs during the period that the assured’s breach of warranty continues. Whilst at the pre-IA 2015 era the law did not allow the assured to reinstate the insurance cover by remedying the breach of a warranty, the IA 2015 enables the assured to remedy the breach so long as it is possible.12 Hence, the insurer is not liable for the loss that occurs from the moment the assured breached the warranty until the breach is remedied. Once the assured complies with the warranty again, the cover that was suspended from the moment of the breach is lifted. Moreover, the IA 2015 s 10(2) provides that the insurer is not liable for any loss that is attributable to the happening of an event that occurs during the period that the cover is suspended because of the breach of a warranty. 7.14 With regards to conditions and conditions precedent, section 11 was introduced by the IA 2015. What has to be noted here is that the scope of section 11 is not limited to conditions or conditions precedent only, as section 11 applies to insurance contract terms irrespective of their technical classifications. Hence, with regards to remedies for breach of an insurance condition, references should be made to section 11 of the IA 2015 and the common law. In relation to breach of a warranty, references will be made to section 10 and section 11 of the IA 2015.13 7.15 The abovementioned rules are irrelevant so far as the third party victim’s claim is concerned. However, whether the insurer may recoup against the person insured after compensating the third party victim, in other words, if the relevant restrictions may be argued against the assured14 depends on the application of sections 10 and 11 of the IA 2015.

Terms that are not relevant to actual loss (IA 2015 s 11)

7.16 With regards to terms that do not define the risk as a whole but aim at reducing the risk of loss as identified under section 11, the Act introduced some novel law reforms with respect to insurers’ ability to reject or limit liability on the basis of a breach of a contractual term. Sections 10 and 11 of the IA 2015 apply to consumer as well as business insurance policies. Moreover, these sections may not be contracted out to the detriment of a consumer assured.15 If the transparency requirement under sections 16–17 of the IA 2015 is satisfied, sections 10 and 11 of the Act may be contracted out in favour of the insurer in respect of a business assured. 7.17 The traditional position mentioned above could operate stringently against the assured and might be described as disproportionate at times; however, the pre-IA 2015 connection between the classification of a particular term and the remedy attached to such categorisation used to provide clear-cut remedies. The IA 2015 did not abolish this firmness entirely. However, in certain defined circumstances set out in s 11, the IA 2015

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now restricts the insurer’s power to deny liability against the assured in reliance only of the form of the relevant term of the insurance contract. 7.18 Section 11 of the IA 2015 entails an analysis that consists of several stages to find out whether or not the insurer can argue the express contractual defence against the assured. The very first step is to identify the purpose of the term in the policy and this will be done on the basis of two different criteria: Does the term define the risk as a whole; and if not, does the term tend to reduce the risk of loss under the categories enumerated by s 11(1)? Two initial, but very crucial, outcomes flow from this distinction. First, if the contractual clause in question is of a type that defines the risk as a whole, the s 11 assessments are not carried forward, as that category of terms falls outside the next stage of the application of section 11. In such a case, the insurer will return to the consequences of the breach of contract determined by s 10 of the IA 2015 or, by the common law, or by contract, as the case may be. Second, if the relevant clause is construed as risk-mitigating but not risk defining as a whole, the s 11 assessments continue, and the assured may take the opportunity of proving what s 11(3) entails, namely that the non-compliance with the term of the policy could not have increased the risk of loss in the way the risk has occurred. This exercise is fundamentally important: if the assured satisfies the burden of proof as set out under s 11(3), the insurer will be prevented from denying liability for the assured’s non-compliance with the term in question. 7.19 The category of terms that are listed under s 11(1) as those that are subject to the s 11(3) assessments is clauses which, if complied with, would tend to reduce the risk of one or more of the following:

(a) loss of a particular kind;
(b) loss at a particular location;
(c) loss at a particular time.

7.20 The facts of Dawsons v Bonnin 16 would be a suitable analogy to explain how section 11 would operate under the circumstances that Dawsons was discussed. The assured declared in Dawsons that the insured lorry would be garaged at 46 Cadogan Street, but, in fact, it was garaged in the assured’s premises on the outskirts of Glasgow. The application of strict technical rules created an outcome that was in favour of the insurer at the time. However, under the IA 2015 s 11, the Court would ask if the statement in relation to where the vehicle was to be garaged is a term that defines the risk as a whole. The answer is most likely to be that it is not. Following that the relevant term is to be classified as aiming to reduce the risk of loss as stipulated by s 11. The fact that the assured’s premises on the outskirts of Glasgow was a safer place than Cadogan Street to keep the vehicle would lead to an outcome in favour of the assured. It would be because section 11(3) of the IA 2015 entitles the assured to claim under the insurance contract, if non-compliance with the risk mitigating term did not increase the risk of loss in the way that the loss has occurred. Consequently, the assured’s non-compliance clearly cannot be argued against the third party, but, because of section 11(3), the insurer will not be able to recoup against the assured for the compensation for the third party victim’s loss either.

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7.21 The technical classification of the restriction, whether as a warranty or condition, in the insurance contract is irrelevant so far as section 11(3) applies to the facts in question. If the relevant contractual term falls outside section 11(3) because the term defines the risk as whole, the remedy against the assured as available either under IA 2015 s 10, or, if the Act is contracted out, the remedy as determined either by the contract or by the common law will still be arguable. Consequently, the insurer may recoup against the assured for compensating the third party’s loss.

Suspensory conditions

7.22 Some attempts by the judges to overcome the harsh consequences of the application of the pre-determined remedies to contractual breaches were observed in the pre-IA 2015 era.17 One of the obvious illustrations of this was seen in Farr v Motor Traders’ Mutual Insurance Society 18 where the assured insured his two taxicabs against accidental external damages by declaring as the basis of the contract that the two insured vehicles were to be used for public hire and that each vehicle would be used in one shift only. The two taxicabs had been in operation as declared, but one of the taxicabs was used for two shifts whilst the other was under repair. An accident occurred after the repair was completed, and the non-compliance with what had been declared pre-contractually had no relevance to the actual loss. The Court found that the insurance cover was suspended during the days that the taxi was used for two shifts but the suspension was lifted when the two cabs were again used for one shift each.19 7.23 In Farr v Motor Traders’ Mutual Insurance Society the difficulties with the remedy applicable arose because the assured’s declaration in the proposal form in respect of the number of shifts that each vehicle to be used at was made as the basis of the contract by the policy of insurance. The basis of the contract clauses was capable of rendering the statements made in the proposal form as warranties.20 The clauses of that type were abolished in consumer21 as well as in business22 insurance contracts. Moreover, it is not possible to contract out of the statutory provisions that rendered the basis of the contract clauses unenforceable in insurance contracts.23 7.24 As well as abolishing the basis of the contract clauses, the IA 2015 ss 10 and 11 have overcome the difficulties such as those observed in Farr. However, it should always be remembered that the application of s 11, as discussed above, will largely be subject to the Courts’ interpretation of what constitutes “a term that defines the risk as a whole.” Whether a term defines the risk as a whole may be determined by asking if “what is intended by that term is to define the risk which the insurer is prepared to accept by way of the insurance contract.” If the answer is in the positive, section 11(3) will not

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intervene, and the remedy available under section 10 of the IA 2015 or by the common law will apply. The restriction discussed in Farr v Motor Traders’ Mutual Insurance Society 24 would be of a risk defining type as the Court held in that case that the relevant restriction described and therefore limited the risk to be run. This, however, does not mean that the assured in Farr is in a worse position than he was before the IA 2015. What the IA 2015 provides now is, when a term defines the risk as a whole, the insurer may rely on either s 10 of the IA 2015 or, if the IA 2015 is contracted out, may seek the contractual or the common law remedy, as the case may be. Hence, under the IA 2015 the assured in Farr is entitled to have the same outcome but this time not by way of the Court’s interpretation but under the statutory rules of the IA 2015. 7.25 Similarly, revisiting Provincial Insurance Co Ltd v Morgan & Foxon 25 would ensure that the above analysis is the correct interpretation of the law. In Provincial the assured stated in the proposal form that the vehicle would be used to carry coal. On the other hand, one day only, it was loaded of some timber as well as coal. After delivering timber and on the way to delivery of the coal the lorry was involved in a collision. The assured was held to recover under the policy but the focus was, due to the technical application of the remedy for the breach, on the parties’ intention which, according to the Court, was not expressed as clearly as required. 7.26 Under the IA 2015, a case as such will be regarded as outside the scope of section 11(3) as the insurer defined the risk as a whole, as carriage of coal only. However, the assured would still succeed his claim against the insurer, because of the new remedy available under section 10 of the IA 2015. Accordingly, since section 11(3) is not available for the assured, the insurer, in theory, can rely on section 10. However, section 10 provides that the cover is suspended until the assured complies with the warranty again. The accident in Provincial occurred after the breach was remedied by the assured. Unless the insurer proves that the loss is attributable to something that happened during the time that the assured breached the warranty, the insurer is liable for the loss. 7.27 In this respect, for instance, a policy exclusion covering “any accident loss or damage caused or sustained while any motorcycle in respect of which indemnity is granted under this policy is carrying a passenger unless a sidecar is attached”26 would be inoperative against a victim; however, with respect to assured against insurer, this term is to be interpreted as a term that defines the risk as a whole. This is because the insurer agreed to insure the risk only when a sidecar is attached. At the time the RTA 1930 was in force, in Bright v Ashfold 27 this clause was interpreted as circumscribing the operation of the policy from the beginning and leaving the claim uninsured. An accident occurred whilst a motorcycle was on a road with another person sitting behind him as a passenger on the pillion without a sidecar being attached to the motorcycle. Lord Hewart CJ held that there was no policy of insurance against third party risks at all in force in relation to the use of the motorcycle by the respondent, where a passenger was being carried otherwise than in a sidecar. The policy wording is unlikely to be interpreted today as affecting the policy from the outset rendering the user uninsured; however, in any case,

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the restriction can be argued against the assured without intervention of section 11 of the IA 2015 because of its risk defining nature.

Conditions and conditions precedents after the IA 2015

7.28 As mentioned above, the IA 2015 section 11 applies to insurance contracts irrespective of the technical classification of the contractual terms. Therefore, breaches of conditions or conditions precedent, remedy of which used to be determined by the common law or by the contractual clauses, are now to be assessed by s 11 of the IA 2015.28 7.29 Claims provisions are of a different category than the terms that are addressed by section 11. The effect of breach of a claim provision will be discussed later in this chapter.

Restrictions referred to under the RTA 1988 s 148(2)

7.30 For each restriction it should be asked whether, by that term, the parties intended to define the risk that the insurer is prepared to accept by way of the insurance contract. 7.31 Under the abovementioned test, the age limitations (s 148(2)(a)), against the assured, would fall outside the scope of section 11 as that restriction tends to describe the risk as a whole rather than falling under the risk mitigation clauses listed under section 11(1) of the IA 2015.29 On the other hand, again, under subsection 2(a), fitness of driver to use vehicle, clauses in relation to alcohol and drugs would be regarded as risk mitigating.30 7.32 The Law Commission’s guidance in respect of the scope of section 11 of the IA 2015 was that (un)roadworthiness of the vehicle would not be of a type that describes the risk as a whole.31 Therefore, s 148(2)(b)) would be subject to section 11(3) assessment in the relationship between the assured and the insurer. 7.33 Restrictions with regards to persons that the vehicle carries (s 148(2)(c) and (d) are likely to be assessed as risk mitigating. 7.34 A clause exempting the insurer from liability for damage caused or arising whilst the car was “conveying any load in excess of that for which it was constructed” was disputed in Houghton v Trafalgar Insurance Co Ltd 32 where the claimant was involved in an accident when there were six persons in the vehicle. The insurer argued that the load here was in excess of that for which the car was constructed, in that one passenger was seated on the knees of another and the seating accommodation was all occupied. The Court stated that if it was desired to exclude the insurance cover by reason of the fact that there was at the back one passenger more than the seating accommodation, that should have been stated more clearly so that the assured would have it drawn to his particular attention. The Court noted in Houghton that this clause was more apt to a situation where there was a weight load specified in respect of the motor vehicle, whether a lorry or van.

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7.35 It appears in Houghton that the Court held that the restriction did not apply to the facts in question, but it would have applied if the issue had focused on a weight load specified in respect of the motor vehicle. Under the IA 2015, whether with regards to the number of passengers or weight load specifications, the link between breach of a term similar to that in Houghton and the loss will be analysed under section 11(3) of the IA 2015. 7.36 The time at which or the areas within which the vehicle is used (s 148(2)(e)) may or may not be risk defining depending on the wording of the contract. The time restriction is likely to fall under section 11 and therefore subsection (3). However, the geographical limitation tends to describe the risk as whole.33 7.37 Terms in relation to the horsepower or cylinder capacity or value of the vehicle (s 148(2)(f)) would describe the risk as a whole. 7.38 Terms in relation to the carrying on the vehicle of any particular apparatus (s 148(2) (g)), and the carrying on the vehicle of any particular means of identification other than any means of identification required to be carried by or under the [Vehicle Excise and Registration Act 1994] (s 148(2)(h)), depending on their wording, are likely to be classified as a risk mitigating term.

Conditions in relation to driving license

7.39 Where injuries caused by a driver who does not hold a driving licence is excluded from the insurance cover, such an exclusion will be ineffective against the victim under section 151(3), but the insurer may, after having compensated the victim, recoup against the person who caused the injury.34 This will be a term that defines the risk as a whole under section 11. It should nevertheless be noted that unless otherwise expressly stated, the condition that the driver is to hold a valid driving licence is complied with in the case the driver is holding a provisional licence.35

Claims provisions

7.40 It should be borne in mind that one area that the IA 2015 left unscathed is claims provisions. Claims provisions are not written as a warranty. Therefore, they are outside the scope of section 10 in any event. They are neither risk defining, nor risk mitigating for the purposes of section 11. Claims provisions, which appear either in the form of a claim co-operation or a claims control clause, tend to apply after the insured risk has occurred. They may be classified contractually either as a mere condition or condition precedent. Since they fall outside the scope of sections 10 and 11 of the IA 2015, the common law remedies as established for mere conditions and conditions precedent apply as mentioned above and the insurer may recoup against the assured after compensating the third party’s loss. 7.41 Section 148(5) renders ineffective remedies for breach of claims provisions so far as liabilities covered by section 145 are concerned. This means that an insurer may not argue either the prejudice that the insurer suffered as a result of the breach of a claim

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provision by the assured or may not claim that he was discharged from liability automatically for the loss that the third party claimed because the assured failed to comply with a claim provision. However, under subsection 6, section 148 reserves the insurer’s right to enforce a policy term towards the assured to the effect that the insurer, after compensating the third party’s loss, may seek the contractual remedy towards the assured by way of recoupment for the amount paid to the third party victim. 7.42 Rendering due observance of terms of an insurance contract to be a condition precedent to insurers’ liability is not uncommon.36 Whether or not a breach of a policy term will entitle the insurer to recoup against the assured depends on the function of the term in the insurance contract. If it is a risk defining warranty, section 10 of the IA 2015 will apply; if it is a risk defining condition precedent, the common law remedy or contractual remedy will apply; if it is a risk mitigating term, section 11(3) will be considered. The only area where this above-mentioned clause will be effective without considering the IA 2015 is if the term breach of which is disputed is a claim provision. As claims provisions are left intact by the IA 2015, the common law remedy will apply. This wording creates a condition precedent to insurer’s liability, and the insurer will be discharged from liability automatically for the loss that is tainted by the breach.37

Notification provisions

7.43 A typical example of a claims provision may be in the following words:

The insured or his legal personal representatives shall give notice in writing to… the company as soon as possible after the occurrence of any accident and/or loss and/or damage with full particulars thereof. Every letter claim writ summons and/or process shall be notified or forwarded to the company immediately on receipt. Notice shall also be given in writing to the company immediately. The insured or his legal personal representatives shall have knowledge of any impending prosecution or inquest in connection with any accident for which there may be liability under the policy.

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