IEHC 50, has prompted interesting deliberations as to the likely interpretation and approach of the courts, should they have occasion to examine the requirement of a payment of an excess by an insured, as a condition precedent to liability.
The express conditions in any policy are categorised as follows;
- Conditions precedent to the validity of the policy. Failure by the insured to observe and fulfil such conditions will result in the policy being deemed void ab initio, meaning the policy will be treated as invalid from the outset.
- Conditions subsequent to the policy. Relating to matters after the formation of the contract and breach of which gives the insurer the right to void the policy from the date of the breach.
- Conditions precedent to liability of the insurer. Relating to matters arising after a loss has occurred. Failure to comply with these conditions entitles the insurer to repudiate liability for the loss, but not to void the policy, meaning a contract of insurance will remain in place between the insurer and the insured.
In London Guarantee Company v Fearnley  5 App. Cas. 911, the court noted as per Lord Watson,
When the parties to a contract of insurance choose in express terms to declare that a certain condition of the policy shall be a condition precedent, that stipulation ought, in my opinion, to receive effect, unless it shall appear to be so capricious and unreasonable that a court of law ought not to enforce it, or to be sua natura incapable of being a condition precedent.
The court’s observations above raise an interesting point as to the nature of a payment of excess and whether it can be construed as a condition precedent to liability. The payment of the excess, frequently occurs at or around point of settlement or once a court order for damages has been made. The insurer will discharge the portion of the settlement/award for which they are responsible and it will be matter for the insured to discharge their excess, for which the insurer tends to have no responsibility generally.
‘Ordinary Excess’ v ‘Up front Excess’
In considering the validity of a condition precedent in respect of an excess, a distinction should be drawn between what may be termed for convenience an ‘ordinary excess’ and an ‘upfront excess’. It is arguable that an ordinary excess, i.e. one payable at the conclusion or settlement is not, by its very nature, a condition which could be interpreted as a condition precedent to liability and is by its nature more readily interpreted as a condition subsequent under the policy,
as payment of same takes place at the time where liability is established at the very end of the claim.
Conversely, the type of excess in existence in Duleek, namely an ‘upfront excess’, is by its very nature a condition which could be seen as a valid condition precedent to liability, as the payment is required within a short time frame following the loss.
Yun Bing Hu v Duleek Formwork Limited (In Liquidation) & Anor,  IEHC 50
The plaintiff was suing his employer for an injury sustained during employment as a result of his employer’s negligence. One of the conditions precedent to liability included in the policy, was the payment of an ‘upfront excess’ of €1,000. The employer had not discharged the excess payable on the policy. Aviva, repudiated liability for the claim on the basis that the aforementioned condition precedent had not been met. The plaintiff then sought to join Aviva, insurer of the employer, as a co-defendant to the proceedings.
The plaintiff sought to pay the excess payment of €1,000 himself but the court quite correctly ruled that the plaintiff did not enjoy privity of contract to be able to
validly do so on behalf of the insured employer and, in those circumstances, no finding could be made against Aviva. The plaintiff was effectively left without recourse as indemnity was not available against Aviva and the employer was in liquidation. The court therefore concluded that no monies were payable under the contract of insurance.
Mr Justice Peart did make remarks during the course of his judgment that it would be fairer if the excess payment, if unpaid by the insured, were to be deducted from any payment that may be made to a third party claimant. Ultimately, Aviva were able to rely on the breach of condition precedent at the outset of the claim rather than at the point of potential settlement.
Whilst this decision has been interpreted in some circles as an approval of the classification of the non-payment of the excess constituting a valid condition precedent, in reality, this was not the matter upon which the court ruled directly.
Further considerations of public policy are also worthy of a mention. Insurance is required first and foremost for reasons of protecting the public against the loss which they may suffer from the negligence of the insured. Policies which necessitate the payment of an upfront excess as a condition precedent to liability, may be struck down as being contrary to public policy by the courts,in circumstances where such excesses result in a plaintiff receiving no compensation for injuries
suffered at the hands of the insured, simply because an excess was not paid by the insured. However, it is important to note that such a public policy argument may well stand up to scrutiny in cases of compulsory insurance policies, but would be less likely to do so in cases of non-compulsory insurance policies.
The courts will look to the nature of the condition in an insurance contract in determining whether or not they consider it to be a valid condition precedent. For
this reason, it could be argued that the payment of an ordinary excess would not be upheld as a valid condition precedent by the courts. However, the position with respect to what has been termed an up-front excess may be quite different. As stated, by its very nature, it is capable of being construed as a condition precedent and may well be upheld accordingly as a valid contractual term. Unfortunately, there has been no definitive pronouncement on the matter by the courts to date, and it may well be a matter of awaiting a definitive pronouncement from the courts as to whether a condition precedent in the form of an upfront excess will be upheld in due course.
An insurance policy may require payment of an excess upon a notification of a claim or claim being made on the policy. If this excess is not paid can insurers avoid liability for paying the claim on the basis that payment of the excess is a condition precedent?