While a disappointing outcome for the policyholder, a recent Court of Appeal (“CoA”) decision provides helpful guidance on the interpretation of policy terms and the application of the Insurance Act 2015.

The CoA has overturned the High Court’s (“HC”) decision in its recent judgment of Lonham Group Ltd v. Scotbeef Ltd [2025] EWCA Civ 203, finding that the insurer was not liable to indemnify the policyholder. In particular, it considers the distinction between representations and warranties in an insurance policy and the interpretation of clauses containing a mix of both. Associate Hebe Peck from the Policyholder Disputes team reviews the judgment and its significance.

Background

The underlying claim relates to a contract between a meat producer, Scotbeef Ltd (“Scotbeef”), and the company it contracted to blast freeze and store its meat, D&S Storage Ltd (“D&S”).

In October 2019, over 100 tonnes of Scotbeef’s meat was found to be contaminated with mould and unfit for consumption. Scotbeef claimed against D&S for damages resulting from its spoiled meat. Initially, D&S sought to rely on the Food Storage and Distribution Federation’s terms (“FSDF Terms”) to limit its liability. These terms contained a nine-month limitation period and a per tonne cap on liability.

In the first preliminary issues trial between Scotbeef and D&S, the HC considered whether these terms had been incorporated into the contract. The HC found they had not. Scotbeef and D&S had initially contracted on UK Warehousing Association terms; invoices subsequently referenced the FSDF Terms, but this was not sufficient to incorporate the new FSDF Terms into the contract.

Following the preliminary issues hearing, D&S went into liquidation. Lonham Group Ltd (“Lonham”), D&S’s liability insurer, was joined to the action pursuant to the Third Party (Rights against Insurers) Act 2010, and Scotbeef pursued its claim against Lonham directly.

Policy terms in dispute

A second preliminary issues trial was held in October 2023 to consider whether Scotbeef’s losses would be indemnifiable under D&S’s policy (the “Policy”). The issue of indemnity centred around the interpretation of a “Duty of Assured Clause”, which read as follows:

“DUTY OF ASSURED CLAUSE

It is a condition precedent to the liability of Underwriters hereunder:-

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. Reasonable steps are considered by Underwriters to be the following, but not limited to same:

* the Assured makes specific reference to their trading conditions in job quotations to their customers;

* if “own conditions” are used, i.e. not industry standard trading conditions such as BIFA or RHA, a copy of those conditions should be made available to the insured’s customers at the time of contracting;

* the Assured specifies their trading conditions on all invoices and written communications to their customers.

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 and practicable steps to incorporate the above conditions into contracts;

The Policy schedule described the “Trading Conditions” as “FSDF Terms and Conditions at GPB250.00 per tonne”. As a result of the decision in the first preliminary issue trial, it was common ground that D&S had breached the Duty of Assured Clause The issue in dispute was the effect of the breach and the remedy available to the insurers as a result.

The parties’ key arguments

Claimant: Scotbeef put forward various arguments in support of its claim, including as follows:

• The Duty of Assured Clause was a representation, and pursuant to section 9(2) of the Insurance Act 2015 (the “2015 Act”) could not be converted into a warranty.
• Since the clause contained representations, any breach should be considered in accordance with the rules governing breaches of the duty of fair presentation (as set out in Section 8 and Schedule 1 of the 2015 Act).
• Since D&S’s breach was innocent (not deliberate or reckless), the insurance policy would continue either (1) on the same terms, or (2) on amended terms if Lonham could show it would have contracted on different terms had there been no breach.
• If the clause were a condition precedent, the effect of a breach would be more disadvantageous to the policyholder than the effect of the remedies set out in the 2015 Act. Accordingly, Lonham would be contracting out of the 2015 Act and would need to meet the transparency requirements set out in section 17.

Defendant: Lonham argued that no cover was available as D&S was in breach of the condition precedent clearly set out in the Duty of Assured Clause to trade on FSDF Terms. The requirement to trade on FSDF Terms was a warranty under the policy, and D&S was in breach of warranty when contracting with Scotbeef on alternative terms. Accordingly, Lonham could avoid the claim and no cover was available to the policyholder.

First instance decision

The HC found in favour of Scotbeef.

The HC construed the Duty of Assured Clause as one single clause where subsections (i), (ii) and (iii) each had to be read together. Since subsection (i) was a pre-contractual representation regarding D&S’s trading terms, the clause should be construed as a representation and no part of it was capable of being converted into a warranty (pursuant to section 9(2) of the 2015 Act) or having the effect of a condition precedent.

Accordingly, D&S’s breach should be considered as a breach relating to a representation and the rules around breach of duty of fair presentation would apply. The HC found no evidence that Lonham would have amended the terms of the Policy had D&S’s trading terms been properly presented. Accordingly, D&S’s breach of the duty of fair presentation had no effect, and Lonham was required to indemnify Scotbeef under the policy.

Lonham appealed this decision.

Decision of the Court of Appeal

In its recent judgment, the CoA overruled the HC decision, finding in favour of Lonham.

The CoA disagreed with both the HC’s approach of construing the Duty of Assured Clause collectively and the HC’s conclusion that unless all three subsections could be warranties, none of them would be. It stated this was an “error in law”.

The CoA noted that the clause included “a number of different duties that arise at different times” and held that each subsection should be considered in its own right.

The CoA agreed with the HC that subsection (i) was a representation regarding the trading terms in place at inception of the Policy. In contrast, it held that subsections (ii) and (iii) did not deal with issues for pre-policy disclosure but instead related to future trading conditions and accordingly were “future warranties”.

Further, the CoA held that subsections (ii) and (iii) would have the effect of conditions precedent, with Lord Justice Fraser (in the leading judgment) stating: “In my judgment, they are warranties … They are also clearly conditions precedent. This is for the following simple reason. The clear wording of the policy states that they are.”

Accordingly, as either or both of the warranties had been breached, section 10(2) of the 2015 Act provided that Lonham had no liability to indemnify Scotbeef.

Comment

The decision shows the CoA taking a more straightforward approach to the interpretation of the Duty of Assured Clause. Rather than forcing a combined approach where the majority of the clause is required to fall in line with the minority, the CoA looked at each subsection of the clause on its own merits. It also took a straightforward approach to the application of the condition precedent; the policy stated the clause acted as a condition precedent, so it did.

It is notable that (in a world where there are still very few decisions under the 2015 Act), the CoA’s method of considering each subsection on its own merits differs from that taken by the HC in the recent case of Mok Petro v Argo. In Mok Petro v Argo, the HC held that a warranty with two separable subsections had to be considered as a whole (with a rather unhelpful outcome for the policyholder). It will be interesting to see whether the precedent value of this CoA decision in Lonham v Scotbeef reduces the extent to which Mok Petro v Argo is relied on going forward.

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