Contracts for insurance or other services which provide for automatic renewal at the end of the initial term can be a trap for the unwary.

An example from one of our clients

Our client consulted us regarding an annual insurance policy providing for the policy to roll forward automatically to a second year in the event that the insured did not expressly indicate to the insurer that the insured did not want to enjoy a second year’s cover.

Our client had failed to read the small print and had not noticed this clause. Near the end of the term for the first year’s cover, our client received confirmation from the insurer of what the premium was to be for the second year. It was double the first year’s premium. Our client considered that it was free to look elsewhere for cover which is what it did. Our client sourced an alternative policy with a premium that was less than even the first year’s premium. Our client agreed to this alternative quotation and simply ignored the renewal slip from the initial insurer. Subsequently, our client received a final demand for the second year’s premium from the initial insurer.

Our advice

We had to advise our client that the insurer was entitled to rely upon such a clause in general terms and that a contract of insurance for a second year had been validly entered into. Commercial parties to a contract are generally able to agree to bind themselves to whatever terms they wish without fear of a court interfering with such an agreement. An exception to this general rule is the penalty or liquidated damages clause. Typically, such clauses provide that if the contract is breached, a specified sum will be payable. If the stipulated penalty is a genuine pre-estimate of the anticipated losses which are likely to be suffered, the penalty clause is likely to be acceptable. If however, the level of the stipulated penalty is simply punitive, it will be likely to be struck out by a court.

Contact us

For advice on issue related to contract by inertia, please contact our team on 0345 872 6666 or fill in our contact form.