Supreme Court abandons distinction between primary-coverage clauses and preventive-warranty clauses. Good riddance?

Legal framework

Under Dutch law, reliance on contractual clauses may be prevented if it is considered unacceptable (“onaanvaardbaar”) on the basis of the restrictive standard of reasonableness and fairness (Article 6:248(2) of the Dutch Civil Code). Under the Supreme Court’s case law preceding its decision addressed in this blog, ‘overriding’ a contractual clause in an insurance policy on which the insurer relies to reject coverage was precluded, in principle, if the clause qualified as a primary-coverage clause (in essence a clause describing which loss events the insurer is willing to cover). The justification for this peculiarity of insurance contract law was the protection of the insurer’s freedom of contract. It is up to the insurer to decide the scope of what it will and will not cover, without having to fear that scope will be exceeded against its wishes on the basis of the standard of reasonableness and fairness.

In practice, it can be hard to distinguish primary-coverage clauses from preventive-warranty clauses (in essence clauses imposing a particular condition or rule that the insured must respect in order to be covered). This distinction was important. For the latter clauses, invoking the restrictive standard of reasonableness and fairness to ‘override’ an insurer’s rejection of coverage was not precluded. Contrary to primary coverage clauses, ‘overriding’ a preventive warranty condition ‘only’ results in the insurer being forced to provide coverage for a loss event that it was willing to cover in principle (albeit subject to a condition whose non-fulfilment was not causally related to the damage). It will come as no surprise that heated debates may occur about the qualification of clauses as one or the other – as was also the case here.

The case: riding in the woods

The background of the Supreme Court’s decision was a dispute between a riding school and its liability insurer. During a supervised horseback ride through the woods, the horses stampeded due to a mountain biker cycling close by them. The employee tried to stop the horses, but they threw off their riders anyway. A participant who was seriously injured instituted proceedings against the riding school, which then started indemnification proceedings against its insurer. The insurer refused to provide coverage on the grounds of failure to comply with the ‘rental clause’ in the insurance policy: contrary to this clause, neither the employee nor the injured participant had had the required diplomas. In response, the riding school invoked the restrictive standard of reasonableness and fairness, arguing that reliance on the rental clause was unacceptable as the failure to comply with it was irrelevant in terms of causation. Even if the employee and participant had had the required diplomas, that would not have prevented the accident. In turn, the insurer argued that there was no room for applying this standard because the rental clause should be qualified as a primary-coverage clause. 

The Court of Appeal disagreed with the insurer, qualified the rental clause as a preventive- warranty clause and accepted the riding school’s argument. The insurer had to provide coverage despite the failure to comply with the rental clause.

Supreme Court's decision

The insurer appealed to the Supreme Court, arguing that the Court of Appeal should have qualified the rental clause as a primary-coverage description and therefore should not have considered the riding school’s argument. The Advocate-General agreed in his advisory opinion. He also noted that the distinction between the two types of clauses was not so easy to make, referring to the fact that the Court of Appeal (but different judges) in parallel proceedings had qualified the same rental clause as a primary-coverage clause. 

The Supreme Court took a more radical approach: it abandoned the "in practice not always easy to make" distinction between the primary-coverage description and the preventive-warranty condition all together. Qualifying clauses as a primary-coverage description or a preventive-warranty condition is no longer necessary and relying on the standard of reasonableness and fairness to override an insurer's refusal to provide coverage is in no case precluded in advance. 

The Supreme Court referred to three (non-exhaustive) factors that must be taken into account:

1. the extent to which the clause limits the risks to be covered in a general sense (for instance temporally, geographically or through a coverage limit);
2. the extent to which the clause requires the insured to take preventive measures to reduce the risk or scope of damage; and 
3. the extent to which the clause relates to other interests (such as preventing evidential problems).

The Supreme Court also agreed with the insurer that the Court of Appeal had decided too easily that the horse-riding school could successfully invoke the restrictive standard of reasonableness and fairness in this case. The Court of Appeal should have paid more attention to the insurer's contentions that, among other things, the riding school knew that the insurer was not willing to insure horse rides outside the riding school in the event of non-compliance with the rental clause. The Court of Appeal should furthermore have considered the insurer's causation counterargument that the accident would not have occurred if the parties involved had had the required diplomas.

Good riddance?

The judgment raises the question: good riddance? This is one way of looking at it: it probably saves discussions on the qualification of clauses in insurance policies. On the other hand, the question is whether the Supreme Court's ruling makes much difference from a substantive perspective. The balancing of on the one hand the insurer's freedom to determine what it is willing to and, in short, the insured's interest in not being uninsured remains a question of principle. In light of factors (i) and (ii) that must be taken into account, the question whether a clause should be considered a primary-coverage clause or a preventive-warranty clause will probably continue to play a role.