Warranties Revisited

A C Ward & Sons Ltd v. Catlin (Five) Ltd & Ors [2009]
Commercial Court, 3 December 2009

This case was the latest in a number of recent decisions concerning breach of warranty in insurance contracts. The claimant was a member of the Booker Group of companies, operating (amongst other things) a warehouse in West Thurrock, Essex. During the weekend of 17 and 18 March 2007, a quantity of cigarettes and alcohol was stolen from the warehouse by burglars, who had cut through the first floor level of the building, leading them to a mezzanine level where the stock was stored.

The Claimant was insured by the Defendants under a "Multiline Commercial Combined Policy" of insurance ("the Policy") containing both a Protection and Maintenance Warranty ("the P&M Warranty") and a Burglar Alarm Maintenance Warranty ("the Alarm Warranty"). The P&M Warranty stipulated that:

The Alarm Warranty read as follows:

Initially, the insurers sought summary judgment against the claimant on the grounds of breach of the above warranties. The alarm system in place at the time of the theft was not fully operational, which insurers contended was enough on its own to defeat the claim. Although no specific burglar alarm had been stated in the schedule to the Policy, they argued that any burglar alarm or other manner of security protection installed at the warehouse, whether in existence at the time of inception or subsequently, was required to be in full and effective operation at all times when the warehouse was unattended, failing which the entire policy would be automatically discharged. This would also be true, argued insurers, even if the fact of the defect was unknown to the insured and could not reasonably have been known to them. The requirement for compliance, on insurers' case, was strict.

In a judgment issued by the Commercial Court in December 2008, insurers' application for summary judgment was rejected, a decision affirmed by the Court of Appeal in September 2009. In giving its reasoning, the Court of Appeal described insurers' argument as "draconian"; it said that the insured had a real prospect of arguing successfully for what it described as "a more reasonable commercial meaning" of the warranties, in other words that the "protections provided for the safety of the insured property" were to be limited to those actually identified in the original proposal form, and similarly that the burglar alarm system referred to in the Alarm Warranty meant only the system as specified in the Schedule (of which, in fact, there was none). The Court of Appeal was also unattracted by insurers' argument that breach of the warranties could arise even where the defects were unknown to the insured, and not reasonably capable of being within the knowledge of the insured or its agents.

Accordingly, these and other matters were referred back to the Commercial Court for trial on the merits, upon which the Commercial Court gave its judgment on 3 December 2009. Having heard all the evidence, the Commercial Court concluded that the P&M Warranty was not limited to the particular "protections" specified in the proposal form, nor was the Alarm Warranty confined to such alarm system as might have been identified in the schedule. As a matter of commercial common sense, the warranties referred to whatever protections or alarms actually existed, whether identified in the policy documentation or not. However, the court added that the warranties could only relate to such facilities as existed at the time of inception. New or improved systems installed after inception would not be subject to the warranty.

As to knowledge, the Commercial Court adopted the view heralded by the Court of Appeal on the summary judgment application. It said that a breach of warranty could occur only in the event of a defect of which the insured was, or should reasonably have been, aware, and which it had then failed to remedy promptly. On the evidence, the Court rejected insurers' argument that the insured was aware of the defects. It also rejected the insurers' case that one of the insured's employees had in fact colluded in the theft.

On breach of warranty, therefore, insurers' case failed. Ultimately, however, the dispute was determined in favour of insurers on an entirely different ground, namely non-disclosure or misrepresentation. The decisive point, in the end, centred on an endorsement that had originally been imposed as part of the policy terms, by which it was:

On the terms of this endorsement, the claim clearly would not have been recoverable, since at the time of the theft the stolen goods were stored within a wire mesh cage located on the mezzanine floor. Prior to the theft, the underwriters had agreed to remove the endorsement and to allow cigarettes and alcohol to be stored in the cage, upon an assurance from the insured that additional movement detectors had been installed in the mezzanine area, along with "vibration inertia detectors" (ie. guardwire) on the walls and ceiling of the mezzanine. In fact, so the court found, there were no movement detectors additional to those already installed, and the guardwire had been installed along only two of the four walls of the cage. The statements were therefore incorrect and they amounted to misrepresentations which the court found to be material to insurers' decision to waive the endorsement.

Accordingly, the court held that insurers were entitled to avoid the agreement to waive the endorsement, with the effect that it became reinstated to the policy terms from inception. The effect of this was to take the loss outside the terms of coverage.

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