Case law

Unfair Contract Terms Directive, Article 1, 1. Unfair Contract Terms Directive, Article 5

1. A term excluding accidents causing “waterborne craft” from an insurance claim was in plain and intelligible language and not unfair under the terms of 5(1) Unfair Terms in Consumer Contract Regulations 1994.
2. The fairness provisions of the 1994 Regulations apply to exclusion of liability clauses.

In July 1997, S, G and friends travelled to Ayia Napa on a package holiday which had been booked through Utopia Travel in April 1997, at which time travel insurance was also purchased from Utopia. During the holiday G was seriously injured in a jet-ski collision with S. S did not report the accident to his insurers. Section 9 of the insurance policy stated that accidents arising from the ownership or possession of “waterborne craft” were excluded from compensation. The terms of the policy also stated that payment of claims was dependent upon the holder reporting in writing as soon as possible full details of any accident and forwarding to the insurers all and any communications in respect of the claim.

In June 2000 G sought damages from S in respect of his injuries. S sought indemnification from Bankers, the underwriter of his insurance policy and claimant in this case. Bankers claimed it was not liable to indemnify S as a jet ski was a waterborne craft and thus the accident was expressly excluded from cover. Bankers further argued that S’s failure to notify of his accident claim for several years was a breach of the policy entitling Bankers to defeat the claim.

Defendants’ solicitors argued that the exclusion of waterborne craft was unfair in the terms of the 1994 Unfair Terms in Consumer Contract Regulations, and that the notification conditions were conditions precedent to liability and, since their breach might cause no real prejudice to the insurer, were unfair.

Held: the exclusion of waterborne craft was not unfair; S’s failure to notify of the accident for several years was a serious breach of the policy which would have entitled Bankers to waive liability.

A jet ski was clearly included within the term “waterborne craft”. Regulation 3(2) of the 1994 Regulations provides that “insofar as it is in plain, intelligible language, no assessment shall be made of the fairness” of a term defining the main subject matter of the contract. The insurance contract was subject to the 1994 Regulations and the term at issue defined the main subject matter of the contract. However, the exclusion of “waterborne craft” from the policy was in plain and intelligible language and thus excluded from assessment as to fairness.

The 1994 Regulations applied to conditions in the policy requiring claimants to report accidents in good time and forward communication in connection with the claim. Such conditions, which seek to exclude insurers’ liability to meet a claim notwithstanding that no prejudice has been caused by a breach, could cause a significant imbalance in the parties’ obligations to the insured’s detriment within Reg. 4(1) and render them unfair (authority of House of Lords judgment in Director General of Fair Trading v First National Bank [2001] UKHL 52). However, if such provisions were to be found inherently unfair in the terms of Reg. 5(1) (and therefore were not binding on the insured) a corollary difficulty would be experienced of unfairness to the insurer in having to meet claims when its position had been prejudiced.

Two solutions are possible: (1) to treat the clauses as innominate terms or (2) to hold that it was only the part of the clause which denied recovery, irrespective of the consequence of breach, that was not binding on the insured. This is consistent with the spirit of Reg. 5(2) (“the contract shall continue to bind the parties if it is capable of continuing in existence without the unfair term”).

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