Climate Risks Series, Part 2: Flood and Storm Risk: Keeping Policyholders Afloat
Introduction
Extreme rainfall and storms have become increasingly prevalent in the UK. Figures from the Association of British Insurers (“ABI”) show that storms and heavy rain have contributed to driving up property insurance payouts to the highest level in 7 years.
During floods in September 2024, several areas of the UK experienced significant property damage. This included AFC Wimbledon’s grounds, where a sinkhole caused the football pitch to collapse, after a nearby river burst its banks due to the excessive rainfall.
This article will discuss:
- The coverage issues that policyholders could face in relation to cover for damage caused by flood and storm.
- How stakeholders can increase resilience to floods and storms.
Coverage Issues
Where policies do not clearly define what constitutes a “flood” or a “storm”
Extreme weather comes in various forms and severities. In the absence of a clear definition of “flood” or “storm”, insurers may seek to rely on metrics such as the Beaufort wind force scale, ABI definition of storm, or previous case law, to support arguments limiting the scope of policy cover depending on the particular facts.
Recent decisions from the US have held that flood exclusions did not apply to: water damage from backed-up drainage following Hurricane Ida (GEMS Partners LLC v AmGUARD Ins Co (2024), in the New Jersey district court); and water accumulating on a parapet roof after a severe storm (Zurich v Medical Properties Trust Inc (2024), in the Massachusetts Supreme Court); based on the meaning of “flood” and “surface waters” in the relevant policy wordings.
In FCA v Arch Insurance Limited [2021] UKSC 1, the UK Supreme Court confirmed that, when looking at the construction of a policy, it is necessary to consider how a reasonable person would understand the meaning of the words used, in light of the commercial context. Therefore, policyholders should ensure, prior to inception, that the policy contains appropriate and clear definitions of “flood” and/or “storm”, to prevent ambiguity in the event of a claim.
Where the weather event is a combination of “flood” and “storm”
Where a weather event may appear to be a combination of both a flood and a storm, identifying the proximate cause of the loss, i.e. the dominant cause, may be difficult without meteorological expert evidence. This can raise two separate issues.
Firstly, policies contain different sub-limits for flood or storm damage. For example, if “flood” has a lower sub-limit compared to “storm” perils, a policyholder would likely seek to argue that storm damage has occurred, to maximise cover under the policy.
Secondly, if a policy excludes either flood or storm damage, the principles derived from Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corp Ltd [1974] QB 57 and The Miss Jay Jay [1987] 1 Lloyd's Rep 32 may apply. This means that where two concurrent proximate causes operate together to bring about a loss, if one is insured under the policy and one is excluded, the loss will not be covered. If one concurrent proximate cause is an insured peril and the other is not insured, but not excluded, the loss will be covered.
Flood management measures
After the damage to its pitch, AFC Wimbledon was reportedly exploring ways to improve its flood management and infrastructure, to reduce the risk of future floods. It is likely that insurers will seek to introduce more conditions within property insurance policies, requiring certain flood management measures to be in place as a prerequisite to cover.
Flood resistance measures aim to “resist” or reduce the amount of water that enters a property. This can include the installation of flood gates or airbrick covers. Flood resilience measures purely mitigate the level of damage to property. This would include having concrete floor tiles, as opposed to carpets, and placing plug sockets away from entrances close to water.
Some property policies will contain a stillage condition precedent to liability. This will state that a policyholder will not be covered for loss caused by a flood, storm or escape of water, if it does not keep stock or other items a certain distance above floor level.
Furthermore, insurers could potentially restrict cover offered to policyholders whose buildings are situated in areas at a higher risk of flooding, or where businesses do not have mechanisms in place to deal with potential flood damage.
Why is Climate Change causing more Floors and Storms?
It is thought that the increase in the number of extreme weather events is a result of climate change.
Climate change contributes to more floods and storms because the increase in greenhouse gases in the atmosphere has allowed carbon dioxide to trap the sun’s rays. This has resulted in an increase in the planet’s temperature and the level of moisture that is held in the atmosphere. The warmer the atmosphere, the quicker the water can evaporate and fall, resulting in more intense and voluminous rainfall.
Improving Industry Resilience to Floor and Storm
The increase in natural disasters such as earthquakes, floods and hurricanes has led to some insurers pulling out of international catastrophe insurance markets. This is because of the unpredictable nature of these events and the severity of the losses suffered. This has resulted in limited options and more expensive premiums for catastrophe policies available to policyholders.
Similarly, insurers in the UK are becoming more reluctant to provide cover for damage caused by storm and flood, as the number of these types of claims increases, giving rise to the risk of a protection gap for policyholders.
Parametric Insurance
One of the tools available to help mitigate this effect is parametric insurance. This is a type of insurance cover where claims are paid on a predetermined basis. For example, cover for a storm would have parameters such that, if there is damage to property and a certain wind-speed or water depth is reached, then the policy would be triggered.
Traditional insurance policies are based on the actual loss that is sustained by the policyholder, whereas parametric insurance policies are triggered by the occurrence of an event and when certain parameters are reached. One of the main benefits of parametric insurance is the greater certainty of insurers paying out. This is especially important where there is a need for an urgent financial resource, allowing for a quicker payment to be made to policyholders.
Flood/Storm specific reinsurance schemes
For flood damage in the UK, there is a scheme in place for homeowners known as Flood Re. This scheme operates in a way where insurers can pay a premium to reinsurers and they would have access to a “pool” of indemnity when a claim arises. If the pool is exhausted, then the government can step in to pay the remainder of any losses.
The scheme is expected to provide cover until 2039 as Flood Re anticipates there will then be a “free market” for flood risk insurance. However, one can argue that this is unlikely if we see a similar pattern in the increase in extreme weather events and insurance claims over the next decade. Therefore, an alternative scheme may be needed, for businesses as well as homeowners, to ensure all policyholders have a safety net in the event of claims arising out of floods and storms.
Broader Risk Management
Increased industry resilience is likely to come from broader risk management. Currently, the UK does not have a robust plan in place to tackle flood risk. It is the responsibility of organisations such as the Environment Agency, the UK Climate Change Committee and DEFRA to collaborate and mitigate flood risk.
There have been calls for the Government to set specific flood risk targets as a result of climate change and the increase in extreme weather events. This would be an example of an initiative where input from a variety of organisations could help to reduce the risk of property damage and lead to increased resilience.
Conclusion
With the rise in extreme weather events, insurers will look to mitigate exposures and robustly defend claims arising from flood and storm damage, leaving policyholders in a potentially vulnerable position.
A collaborative response is needed to ensure that the insurance industry can adapt to emerging risks and ensure that appropriate cover is available for policyholders, in the event of floods and storms.
Author
Ayo Babatunde, Associate
Lithium Battery Fires – Not so Lit?
Introduction
Lithium batteries (also known as lithium-ion batteries) have become commonplace in devices such as mobile phones, cameras, laptops, e-cigarettes, tablets and e-bikes. They are popular because, unlike alkaline batteries, they are rechargeable and can be used multiple times, making them a comparatively sustainable energy source.
This article will outline the key risks and coverage issues associated with lithium batteries for policyholders.
Why are Lithium Batteries so dangerous?
The London Fire Brigade has said that lithium battery fires are the fastest growing cause of fires in London in 2024. That is because of the phenomenon of ‘thermal runaway’, which occurs when flammable materials within lithium batteries break down. This is usually due to manufacturing defects or when the battery cells overcharge, which can lead to the release of a cloud of flammable gases which, in turn, can cause vapour cloud explosions. The vapour cloud explosions exacerbate the ignition of the battery and the speed at which a fire spreads.
Lithium battery fires can be unpredictable, and it is common for batteries to reignite days after the initial ignition. That is why they can cause such large fires, as seen at the Suez Recycling Centre in July 2024, where the most likely cause of the fire was thought to be the improper disposal of a lithium battery, which ignited in a pile of waste of around 100sqm (and it took 15 fire engines and 100 firefighters to quell the blaze). As a further example, a fire was allegedly caused at a home in Wales in September 2024, by a mobility scooter that was charging. Firefighters were present at the blaze for more than 12 hours.
The Wider Problem
The unpredictable nature of lithium battery fires may result in some building and property insurers declining and restricting cover for fires caused by them, or charging additional premium to cover this risk.
Further, it may be more difficult for companies whose businesses rely heavily on lithium batteries, such as those in the manufacture, supply and retail of products which utilise lithium batteries to obtain cover from their product liability insurers.
The legal climate around lithium batteries is changing, as we have seen with the introduction of the Lithium-ion Battery Safety Bill which aims to regulate the safe storage, use and disposal of lithium batteries in the UK. However, as we have seen with other emerging risks such as climate change, further discussion may be required between the relevant stakeholders to ensure that lithium battery risks do not become “uninsurable”.
The following section sets out some of the key coverage issues that may arise.
Coverage Issues for Policyholders
Breach of the duty of fair presentation
Policyholders are required to make a fair presentation of the risk under the Insurance Act 2015 (“the Act”). To make a fair presentation, a policyholder must disclose all “material circumstances” to the insurer that the policyholder knows or ought to know. Failing that, an insured can satisfy the duty by giving the insurer sufficient information to put it on notice that it needs to make further enquiries for the purpose of revealing those material circumstances (section 3(4)(b) of the Act). A circumstance or representation is ‘material’ if it would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms. The duty is not limited to answering questions asked by the insurer in a proposal form.
So, for example, say a policyholder deliberately discloses to an insurer that it has a sophisticated strategy in place for mitigating the risk of fire due to the high number of products containing lithium batteries at its premises when, in fact, the position is otherwise. In that situation, an insurer would probably be entitled to refuse to indemnify the policyholder for a claim on the basis that, had the true position been disclosed, it would have provided insurance on different terms, if at all.
A more difficult position may arise when an insurer does not ask any specific questions about the extent to which lithium batteries are used in an insured’s business, and an insured inadvertently fails to disclose the true position on inception or renewal. Is the use or storage of products which contain lithium batteries itself a material circumstance? If so, will disclosure of the type of products supplied or stored be sufficient to put the insurer on notice and discharge the duty owed under section 3(4)(b), or will an insured have to spell out that the products contain lithium batteries?
It should be borne in mind that not all lithium batteries necessarily pose a fire risk. In that regard, the Fire Protection Association has provided guidance that each fire protection and mitigation strategy should be assessed on a case-by-case basis. That will include a consideration of the battery type, the Battery Energy Storage System (“BESS”) and layout.
Breach of Condition Precedent to Liability
Insurance policies frequently contain terms known as ‘conditions precedent to liability’. Subject to certain provisions in the Act, such terms must be complied with strictly, otherwise there is no cover for the claim.
In Wheeldon Brothers Waste Limited v Millennium Insurance Company Limited [2018] EWHC 834 (TCC), the policy contained a condition precedent that combustible waste had to be stored at least 6m from any fixed plant. On the evidence, the court found there was no breach of the condition precedent, and that “storage” meant a degree of permanence and a deliberate decision to designate an area to place and keep material.
Guidance from the Fire Protection Association states that the BESS should be (a) located in non-combustible containers or enclosures, (b) placed at least 3 metres from other equipment, buildings, structures and storage, and (c) the distance should only be reduced when there is a suitable-fire barrier, where exposed surfaces and fire-resisting, or where BESS enclosures have fire-resisting walls and roofs. If insurers impose conditions relating to storage in compliance with this guidance, the decision in Wheeldon is potentially relevant as to what “storage” means.
It is open to a policyholder to rely on section 11 of the Act and show that the breach could not have increased the risk of loss which occurred in the circumstances in which it occurred. For example, if there was a fire at a policyholder’s premises, and it had breached a condition requiring it to store lithium batteries in a particular way, to escape the consequences of breach, the policyholder would need to prove, in effect, that compliance would not have impacted the general risk of fire.
Concluding Thoughts
There is no UK specific guidance or legislation to govern lithium battery use, storage or disposal. Policyholders should therefore consult reliable guidance to ensure that fire risk strategies are sufficient on a case-by-case basis, and compliant with the terms of the policy.
If in doubt, policyholders should consult with their brokers on inception and renewal to ensure that they have complied with their disclosure obligations and are able to satisfy the applicable policy terms to maximise the chance of policy coverage in the event of a lithium battery fire.
Ayo Babatunde is an Associate at Fenchurch Law.
No clear mistake and no clear cure – disappointing result in the Court of Appeal for W&I policyholder
A recent decision of the Court of Appeal, Project Angel Bidco Ltd (In Administration) v Axis Managing Agency Ltd & Ors [2024] EWCA Civ 446, provides guidance in relation to the interpretation of exclusion clauses and alleged drafting errors in warranty and indemnity (“W&I”) policies.
Background
The Parties
The Appellant, Project Angel Bidco Ltd (“PABL”), was insured under a W&I policy (“the Policy”).
PABL had purchased the shares in Knowsley Contractors Limited (trading as King Construction) (“King”). The Share and Purchase Agreement (“SPA”) included a number of warranties, listed in a Cover Spreadsheet to the Policy, including in relation to anti-corruption legislation.
King in fact became embroiled in allegations of corruption. It went into liquidation and PABL itself went into administration. PABL had paid £16.65 million for the shares. It claimed that the warranties had been incorrect, such that the true value of the shares was negligible or at most £5.2 million, and accordingly made a claim against the Respondents, Axis Managing Agency Limited and others (“Insurers”), for an indemnity under the Policy.
The Cover Spreadsheet
The Cover Spreadsheet contained a list of “Insured Obligations” which included warranties 13.5 (a) to (h) (“Warranty 13.5”). The spreadsheet contained the following rubric:
“Notwithstanding that a particular Insured Obligation is marked as “Covered” or “Partially Covered”, certain Loss arising from a Breach of such Insured Obligation may be excluded from cover pursuant to Clause 5 of the Policy.”
The Insured Obligations at Warranty 13.5 were all marked as “Covered”.
ABC Liability
The Policy stated that:
“The Underwriters shall not be liable to pay any Loss to the extent that it arises out of…
5.2.15. any ABC Liability” (“the ABC Liability Exclusion”).
ABC Liability was defined as "any liability or actual or alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws”. [Emphasis added.]
The Overarching Issue
This appeal was concerned with the conflict between the “Covered” Insured Obligations at Warranty 13.5 and the ABC Liability Exclusion.
PABL argued that the scope of the Insured Obligations at Warranty 13.5 contradicted the ABC Liability Exclusion, as no loss arising out of a breach of Warranty 13.5 would ever be covered by the Policy. The Court explored the alleged conflict by asking four questions:
- Was there an inconsistency as alleged by PABL?
- If there was inconsistency, did the Policy resolve it?
- Was there something wrong with the language of the ABC Liability Exclusion?
- If a mistake had been made, was there a clear cure?
Was there an inconsistency?
Insurers argued that Warranty 13.5(e) (that the company maintained a record of all entertainment, hospitality and gifts received from a third party) and 13.5(h) (in relation to the award of contracts under the Public Contracts Regulations 2006) fell outside the exclusion. However, the Court of Appeal accepted there was a conflict between the entirety of Warranty 13.5 and the ABC Liability Exclusion.
Did the Policy resolve the inconsistency?
Insurers argued the structure of the Policy meant that the Cover Spreadsheet was subordinate to the ABC Liability Exclusion. This relegated the Cover Spreadsheet to being a “summary document”, purely intended to show which warranties were in scope of the Policy. The Court of Appeal disagreed, noting that the definition of “Insured Obligations” was linked to the Cover Spreadsheet.
Secondly, Insurers argued that the ABC Liability Exclusion was a heavily negotiated term and therefore more significant than the Cover Spreadsheet. The Court of Appeal accepted this, since the definition of ABC Liability was “detailed and wide ranging”, whereas the classification of warranties as “Covered”, “Excluded” or Partially Covered” was much broader.
Thirdly, Insurers argued the rubric in the Cover Spreadsheet showed that the ABC Liability Exclusion would take precedence, and the Court of Appeal agreed.
Was there something wrong with the language?
The Court of Appeal emphasised that, in order to correct an alleged error in a contract, it has to be clear there has been a mistake. In the first instance decision, the Judge had interpreted the ABC Liability Exclusion as follows:
“As drafted the definition would appear to cover three different species of ABC liability being:
- i) Any liability … in respect of Anti-Bribery and Anti-Corruption Laws;
- ii) Any … alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws; and
iii) Any … actual … non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws.”
PABL objected to this interpretation on the grounds that a reasonable reader would expect the word “liability” to be used in the sense of liability “for” something, suggesting that the word “or” had been included by mistake and the ABC Liability definition should be interpreted as "any liability [f]or actual or alleged non-compliance …”.
The Court of Appeal concluded that, although liability would often be referred to in the context of responsibility “for” something, it would not be unusual to refer to liability “in respect of”, “arising from” or “in connection with” an excluded peril. Therefore, despite the apparent contradiction, there was nothing wrong with the language of the ABC Liability Exclusion and no drafting error could be established.
Was there an obvious cure?
For completeness, the Court of Appeal went on to consider whether there was a “clear cure” for the alleged mistake. Assuming that there was a contradiction between the ABC Liability Exclusion and Warranty 13.5 because of a drafting mistake, Insurers had a coherent and rational reason for wanting to avoid liability for loss arising out of ABC Liability, and it was unclear whether any supposed error was in the drafting of the ABC Liability exclusion or the Cover Spreadsheet. It was held therefore that no clear cure existed for the alleged mistake.
The Decision
In summary, the Court of Appeal by majority (Lewison LJ, with whom Arnold LJ agreed) found in favour of Insurers and the appeal was dismissed.
In a dissenting judgment, Phillips LJ found in favour of PABL, concluding that there was a “fundamental inconsistency” between the ABC Liability Exclusion and Warranty 13.5. This was highlighted by the fact that the Policy exclusion did not define “liability” and losses arising from non-compliance were excluded.
Impact on policyholders
The decision illustrates the importance of careful drafting of policy wordings to avoid ambiguity, with particular attention to the interaction of potentially overlapping insured and excluded perils. The scope of coverage may be significantly impacted by minimal changes to punctuation or connecting words.
The English Courts are likely to uphold the literal effect of contract terms even in the face of apparent inconsistency, in the absence of compelling evidence for a clear cure in respect of an obvious drafting error.
Ayo Babatunde is an Associate at Fenchurch Law
Establishing Liability under the TPRIA 2010
A recent decision of the Scottish Court of Session (Outer House), Scotland Gas Networks plc v QBE UK Limited & QBE Corporate Limited [2024] CSOH 15, gives helpful guidance on the operation of the Third Parties (Rights against Insurers) Act 2010 (“the 2010 Act”).
Background
Scotland Gas Networks plc (“SGN”) operated a pipeline running adjacent to a quarry, operated by D Skene Plant Hire Limited (“Skene”). A landslip occurred at the quarry, causing damage to part of the pipeline. SGN claimed the damage was a result of quarrying operations carried out by Skene. It had to divert the pipeline away from the quarry and incurred costs in doing so.
SGN brought a claim against Skene for £3 million for damage to the pipeline. A decree by default was granted against Skene, as a result of failing to appear at a procedural hearing.
Skene was insured under a public liability policy (“the Policy”). SGN claimed against the defendants (“Insurers”) under Section 1(4) of the 2010 Act (which gives third parties rights against insolvent persons) as Skene was in liquidation.
The TPRIA
Under Section 1(2) of the 2010 Act, the rights of a “relevant person” (i.e. the insolvent insured party) are transferred to the third party who has suffered loss for which the relevant person is liable.
Section 1(3) of the 2010 Act states that an injured party can bring proceedings against an insurer without first establishing the insured’s liability.
For the purposes of Section 1(4) of the 2010 Act, liability is proven only if the existence and amount of liability are established by way of a judgment or decree, arbitral award, or binding settlement).
The main issues explored in this case were:
- Whether the decree by default “established” Skene’s liability?
- Whether SGN’s claim against Skene was excluded by terms of the Policy?
Did the decree by default “establish” Skene’s liability?
Insurers’ Argument
Insurers argued that the granting of a decree by default did not establish liability under the Act. This was on the basis that the decree granted to SGN established the loss suffered, but did not establish the actual liability of Skene. Insurers relied on case law applicable to the Third Parties (Rights against Insurers) Act 1930 (“the 1930 Act”) suggesting that it is necessary to show how Skene was liable to SGN. In addition, Insurers argued that establishing liability must take into consideration the merits of the dispute.
SGN’s Argument
SGN argued that Insurers’ position did not take into account the innovations of the 2010 Act and the effect of Section 1(3), which meant that proceedings could be brought without liability being established. Under the 1930 Act, the insured’s liability to a third party had to be established by judgment, arbitration or agreement before proceedings could be brought. By contrast, Section 1(4) of the 2010 Act already addresses how that liability is established. Sub-section 1(4)(b) confirms that this can be established by a decree and therefore the old case law referred to by Insurers was irrelevant.
The Decision
The Court noted that there are two elements to Section 1(4) when considering the establishment of liability:
- Firstly, the existence of liability and the amount; and
- Secondly, how the existence and amount of liability is established.
Both these elements were satisfied based on the existence of Skene’s liability in the amount of £3 million, established by decree.
Therefore, it rejected Insurers’ arguments that “establish” requires a consideration of the merits and instead concluded that “establish” does not require any additional elements apart from those contained in Section 1(4).
Was SGN’s claim against Skene excluded?
Clause 3.1.1 of the Policy provided that Insurers would indemnify the policyholder for loss resulting from damage or denial of access.
Insurers’ Argument
Insurers argued that liability founded upon a decree by default was not covered; and that the decree effected a “judicial novation” which meant that the rights SGN were enforcing against Skene through litigation were replaced with the right to enforce the decree, which did not fall within Clause 3.1.1. Further, Insurers argued that the pipeline had not suffered “damage” as defined under the Policy, and that instead SGN was claiming for pure financial loss. Clause 7.11 of the Policy contained an exclusion for financial loss not consequent upon bodily injury or property damage.
SGN’s Argument
SGN argued that the terms of the decree were “in full satisfaction of the summons” and this meant that the liability which the decree created fell under Clause 3.1.1 of the Policy. The requirements for Section 1(4) had been satisfied and this superseded the judicial novation. Insurers were wrong to say that financial loss consequent upon damage to property of a third party fell within the scope of the exclusion, taking into account the express provision for indemnity with respect to denial of access liabilities.
The Decision
The Court concluded that the decree by default “established” Skene’s liability to SGN for purposes of Section 1(4), and that Skene’s liability arguably fell within the scope of the Policy. A decree by default cannot be viewed in isolation, and in this case it was granted in an action brought by SGN against Skene. A judicial novation could not extinguish the underlying liability for the purposes of Section 1(4) of the 2010 Act. The Insurers’ motions for dismissal were rejected and SGN’s overall claim under the Policy was held over to trial.
Impact on Policyholders
The decision is helpful for policyholders in demonstrating that a judgment (or decree, in the Scottish parlance) in default will suffice to establish liability for purposes of a claim under the 2010 Act. The statutory provisions operate as an exception to the general rule that insurers are entitled to ‘look behind’ underlying claims to evaluate policy indemnity based on a merits assessment of legal liability, highlighting the risks faced by insurers where insolvent insureds fail to defend incoming claims in full, or at all.
Ayo Babatunde is an Associate at Fenchurch Law.