Supreme Court Abandons Distinction Between Primary-Coverage Clauses And Preventive-Warranty Clauses. Good Riddance? - Trials & Appeals & Compensation

17 May 2024

by Wouter Den Hollander and Miranda Van Eekelen - Atema

Stibbe

To print this article, all you need is to be registered or login on Mondaq.com.

The Dutch Supreme Court handed down an important decision (ECLI:NL:HR:2024:258) on 16 February 2024 onthe restrictive standard of reasonableness and fairness withrespect to insurance policies. The Supreme Court backtracked on itsearlier distinction between clauses that cannot be set aside on thebasis of this standard (known as primary-coverage clauses) andclauses that can (known as preventive-warranty clauses). From nowon, this standard may be relied on in both cases, but the thresholdfor this to succeed is still high.

Legal framework

Under Dutch law, reliance on contractual clauses may beprevented if it is considered unacceptable("onaanvaardbaar") on the basis of therestrictive standard of reasonableness and fairness (Article6:248(2) of the Dutch Civil Code). Under the Supreme Court'scase law preceding its decision addressed in this blog,'overriding' a contractual clause in an insurance policy onwhich the insurer relies to reject coverage was precluded, inprinciple, if the clause qualified as a primary-coverage clause (inessence a clause describing which loss events the insurer iswilling to cover). The justification for this peculiarity ofinsurance contract law was the protection of the insurer'sfreedom of contract. It is up to the insurer to decide the scope ofwhat it will and will not cover, without having to fear that scopewill be exceeded against its wishes on the basis of the standard ofreasonableness and fairness.

In practice, it can be hard to distinguish primary-coverageclauses from preventive-warranty clauses (in essence clausesimposing a particular condition or rule that the insured mustrespect in order to be covered). This distinction was important.For the latter clauses, invoking the restrictive standard ofreasonableness and fairness to 'override' an insurer'srejection of coverage was not precluded. Contrary toprimary coverage clauses, 'overriding' a preventivewarranty condition 'only' results in the insurer beingforced to provide coverage for a loss event that it was willing tocover in principle (albeit subject to a condition whosenon-fulfilment was not causally related to the damage). It willcome as no surprise that heated debates may occur about thequalification of clauses as one or the other – as was alsothe case here.

The case: riding in the woods

The background of the Supreme Court's decision was a disputebetween a riding school and its liability insurer. During asupervised horseback ride through the woods, the horses stampededdue to a mountain biker cycling close by them. The employee triedto stop the horses, but they threw off their riders anyway. Aparticipant who was seriously injured instituted proceedingsagainst the riding school, which then started indemnificationproceedings against its insurer. The insurer refused to providecoverage on the grounds of failure to comply with the 'rentalclause' in the insurance policy: contrary to this clause,neither the employee nor the injured participant had had therequired diplomas. In response, the riding school invoked therestrictive standard of reasonableness and fairness, arguing thatreliance on the rental clause was unacceptable as the failure tocomply with it was irrelevant in terms of causation. Even if theemployee and participant had had the required diplomas, that wouldnot have prevented the accident. In turn, the insurer argued thatthere was no room for applying this standard because the rentalclause should be qualified as a primary-coverage clause.

The Court of Appeal disagreed with the insurer, qualified therental clause as a preventive- warranty clause and accepted theriding school's argument. The insurer had to provide coveragedespite the failure to comply with the rental clause.

Supreme Court's decision

The insurer appealed to the Supreme Court, arguing that theCourt of Appeal should have qualified the rental clause as aprimary-coverage description and therefore should not haveconsidered the riding school's argument. The Advocate-Generalagreed in his advisory opinion. He also noted that the distinctionbetween the two types of clauses was not so easy to make, referringto the fact that the Court of Appeal (but different judges) inparallel proceedings had qualified the same rental clause as aprimary-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 thepreventive-warranty condition all together. Qualifying clauses as aprimary-coverage description or a preventive-warranty condition isno longer necessary and relying on the standard of reasonablenessand fairness to override an insurer's refusal to providecoverage is in no case precluded in advance.

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

the extent to which the clause limits the risks to be coveredin a general sense (for instance temporally, geographically orthrough a coverage limit);
the extent to which the clause requires the insured to takepreventive measures to reduce the risk or scope of damage; and
the extent to which the clause relates to other interests (suchas preventing evidential problems).

The Supreme Court also agreed with the insurer that the Court ofAppeal had decided too easily that the horse-riding school couldsuccessfully invoke the restrictive standard of reasonableness andfairness in this case. The Court of Appeal should have paid moreattention to the insurer's contentions that, among otherthings, the riding school knew that the insurer was not willing toinsure horse rides outside the riding school in the event ofnon-compliance with the rental clause. The Court of Appeal shouldfurthermore have considered the insurer's causationcounterargument that the accident would not have occurredif the parties involved had had the required diplomas.

Good riddance?

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

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.

POPULAR ARTICLES ON: Litigation, Mediation & Arbitration from Netherlands

Supreme Court Abandons Distinction Between Primary-Coverage Clauses And Preventive-Warranty Clauses. Good Riddance? - Trials & Appeals & Compensation - Netherlands (2024)

Legal framework

The case: riding in the woods

Supreme Court's decision

Good riddance?