The Good, the Bad & the Ugly: #26 The Good: The Seashell of Lisson Grove Ltd v Aviva

Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

In our view, some cases are bad for policyholders, wrongly decided and in need of being overturned. We highlight those decisions as The Bad.

Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.

#26 The Good: The Seashell of Lisson Grove Ltd & Ors v Aviva Insurance Ltd & Ors [2011] EWHC 1761

Introduction

In the Good, the Bad and the Ugly series, we look at recently decided cases but occasionally – as in this piece – we like to revisit an older decision which frequently crops up in negotiations with insurers.

This High Court judgment from 2009 relates to a Non-Invalidation Clauses (NIC), which are important clauses routinely found in property and construction policies.

Insurers often allege that a policyholder is in breach of a policy term or obligation and that provides them with an entitlement to decline a claim.

In responding, the policyholder and its lawyers will consider all of the usual points: Is the policyholder in fact in breach, what is the status of the term, what are the consequences of breach and the extent to which it may be possible to argue that any breach did not increase the risk of loss which occurred (so that the policyholder is saved by s.11 Insurance Act 2015).

However, even if the prospects are looking gloomy in relation to all of those points, the policyholder’s claim may nevertheless be saved by an NIC.

For these reasons, The Seashell is a very Good case from the policyholder perspective.

The claim arose from a fire at The Seashell Restaurant in Marylebone, London, in 2009. The restaurant operator and trustees of a pension scheme, who held the building’s freehold, claimed against their insurers, Aviva, under two policies. In this article, we consider only the insureds’ claim under the Restaurant Policy, where Aviva denied liability, citing breaches of a Frying Range Warranty.

The Restaurant Policy

The Restaurant Policy contained the NIC below, which is a fairly typical NIC, as well as other relevant clauses as follows:

NIC

“The Insurance by Section A [Buildings] and B1 [Contents] will not be invalidated by any:

1) act; or

2) omission; or

3) alteration

either unknown to You or beyond Your control which increases the risk of Damage.

However, You must:

1. a) notify Us immediately You become aware of any such act, omission or alteration; and
2. b) pay any additional premium required“.

Clause 5(c)

“5. Rights and Responsibilities”

(c) Any Section of this Policy will cease to be in force if after the commencement of this insurance there is any alteration in respect of such Section which results in

(i) the risk of loss damage or injury or disease being increased”

A preliminary issue was whether the NIC protected the insureds in the event they were found to have acted in breach of warranty.

The insureds argued that the “act, omission or alteration” referred to in the NIC could include a breach of warranty, and that “The Insurance” meant the insurance cover in respect of the claim, and not the entire insurance policy. In this regard, the insureds relied on the decision in Kumar v AGF [1999] where, in a different context, a bar on repudiation of “this insurance” was held to apply not only to repudiation of the policy, but also to being discharged from liability for reason of a breach of warranty.

In short, the insureds argued that, if there was a breach of warranty, they would be protected by the NIC.

The insurer argued that the NIC did not ameliorate the effect of a breach of warranty; it was instead only to ameliorate the effect of clause 5(c), such that an alteration which increased the risk of damage – which was unknown to or beyond the insured’s control – would not give the insurer any remedy under clause 5(c).

Findings

The Court agreed with the insureds and found that:

1.  Clause 5(c) was triggered in the event there was an “alteration” which increased the risk of damage, whereas the NIC applied where there was “any act, omission or alteration” which increase the risk of damage. The inclusion of the words “act [or] omission“, in addition to “alteration”, indicated that the NIC’s application was not limited to ameliorating the effect of clause 5(c);

2. The words “act or omission” were capable of applying to a misrepresentation, non-disclosure or breach of warranty. Thus, if the insured was inadvertently in breach of any of these different types of obligation, the NIC might alleviate the consequences of breach. Interestingly, the decision did not mention whether the words “act or omission” were capable of applying to a condition precedent although, in another case with an identically worded NIC where an insured has breached a condition precedent, there is no reason to consider that the NIC may not come to the policyholder’s rescue for the same reasons discussed in The Seashell.

3. The insureds could still rely on the NIC notwithstanding damage had already occurred, provided it notified the insurer immediately on becoming aware of the breach and paid any additional premium required. Whilst not part of the decision in The Seashell, in other cases any discretion that an insurer has to charge additional premium must be exercised in good faith (subject to the wording of the policy), meaning an insurer is unlikely to be entitled to arbitrarily charge exorbitant premium post-damage where an insured seeks the protection under an NIC; any premium charged should bear some correlation to the increase in the risk of damage caused by the act/omission/alteration.

Conclusion

The precise effect of an NIC will, of course, always turn on its interpretation and that of the wider policy. The judgment in The Seashell is a useful decision in showing how the Court interpreted the NIC in that case.

As we say, the wording of the NIC was not untypical of the wordings which we see in many other policies so the decision may assist policyholders in arguing that they are relieved from the consequences of a breach of obligation; potentially any obligation.

In each case, the policyholder will also need to satisfy the constituent factual elements of the NIC in question, e.g. that the policyholder was unaware of the breach or that it was beyond their control, that they provided immediate notification and have paid additional premium.

All of these elements can present difficult challenges to policyholders in their own right.

For example, in relation to the requirement to provide notice on becoming aware of the increased risk, whose knowledge is relevant in the case of a corporate policyholder? If “head office” have no actual or constructive knowledge of an increase in risk, will this trigger an obligation to notify or might it be possible for a policyholder to argue that it is only the knowledge of “senior management” that counts for the purposes of the NIC (relying on what s.4 of the Insurance Act 2015 says about the knowledge of a corporate insured in the different context of the duty of fair presentation).

Further, an obligation to provide “immediate” notice is clearly more onerous than one required “as soon as reasonably practicable” or similar so brokers with the gift of amending policy wordings will want to consider points like this so as to put their policyholder clients in the strongest position when claims arise.

Finally, co-insured lenders to real estate and construction projects will also want to ensure policies include a suitably drafted NIC, which may be the difference between a claim being paid or not, given such parties often have no knowledge or control over increases in risk.

Chris Ives is a Partner at Fenchurch Law