Reinstatement re-stated
In its recent judgment in Endurance Corporate Capital v Sartex (05/03/20), the Court of Appeal confirmed that, absent any contractual provision to the contrary, the appropriate basis of indemnity in a property policy is the reinstatement basis - ie, the cost of repairing/replacing the damaged/destroyed building. The only exception is is where, at the time of the loss, the policyholder had been planning to sell the building, rather than continuing to use it.
The Court of Appeal rejected the Insurer’s case that, in order to be entitled to the cost of reinstatement (rather than merely the decrease in market value, where that was lower), the policyholder needed either to have already carried out the reinstatement itself or at least - as per Great Lakes v Western Trading (CoA, 11/10/16) - to have held a “fixed and settled intention” to do so. In a blow to property insurers, the Court of Appeal ruled that this requirement only applied in the very rare situation where the flood, fire, etc had increased the value of the building - as had occurred in the Great Lakes case (see https://www.fenchurchlaw.co.uk/ordinary-measure-indemnity-great-lakes-reinsurance-uk-se-v-western-trading-limited/).
In a further blow to property insurers, the Court of Appeal held that they cannot apply a blanket percentage discount (in practice, often as much as 30-35%) to the cost of reinstatement, to represent the alleged betterment where an old building was replaced using modern materials. A deduction for betterment will be permitted only where insurers can prove and quantify the lower running costs of the new building or, in the case of new plant & machinery, its greater efficiency.
https://www.bailii.org/ew/cases/EWCA/Civ/2020/308.html
Jonathan Corman is a partner at Fenchurch Law
Fenchurch Law expands property coverage disputes team
Fenchurch Law, the leading UK firm working exclusively for policyholders and brokers on complex insurance disputes, has appointed Nicola Bowen as an associate in its Property Risks practice group.
Nicola has spent a number of years working in insurance litigation with a specific focus on property related matters. She has acted for leading insurers on first party and liability claims disputes and complex defendant matters. She has also acted jointly for insurers and their insureds in a number of large subrogated recovery actions.
Nicola joins Fenchurch Law from BLM, where she was a solicitor in their property damage team and was previously a property damage solicitor with DAC Beachcroft.
Joanna Grant, partner and head of the Property Risks group practice at Fenchurch Law, said: We are delighted to welcome Nicola whose dedicated property damage litigation experience expands the coverage disputes capabilities the team can offer our clients.”
Nicola Bowen is an associate at Fenchurch Law
Young v Royal and Sun Alliance PLC
The Court of Session found that an insurer had not waived disclosure under the Insurance Act 2015 (“the Act”). The case is the first to be decided under the Act.
Background
A fire occurred at Mr Young’s property (“the Property”) causing extensive damage. Mr Young then claimed an indemnity from his insurers, Royal and Sun Alliance PLC (“RSA”).
RSA declined Mr Young’s claim on the basis that he had failed to disclose material information pursuant to section 3(1) of the Act. Mr Young denied making a material non-disclosure, and, in any event, argued that RSA had waived disclosure of that information, pursuant to section 3(5)(e) of the Act.
The Market Presentation
Mr Young’s insurance was arranged by his broker by way of a 20-page Market Presentation (“the Presentation”). The Presentation was completed using the broker’s software, and identified the insured as Mr Young and Kaim Park Investments Ltd (“Kaim”).
The “Details” section of the Presentation contained the following passage, which the judge referred to as the “Moral Hazard Declaration”:
“Select any of the following that apply to any proposer, director or partner of the Trade or Business or its Subsidiary Companies if they have ever, either personally or in any business capacity:”
The Moral Hazard Declaration required the proposer to select from seven options in a drop-down menu. The answer selected was “None”.
RSA emailed the broker on 24 April 2017 in response to the Presentation (“the Email”). The Email contained a heading titled “Subjectivity”, and stated as follows:
“Insured has never
Been declared bankrupt or insolvent
Had a liquidator appointed
…”
The Parties’ positions
RSA asserted that Mr Young failed to disclose that he had been a director of four insolvent companies (“the Insolvency Information”), and, had he done so, it would not have entered into the insurance “on any terms”.
Mr Young, in response, argued that the Presentation contained no misrepresentation, as neither he, Kaim, nor any director of Kaim had ever been insolvent. Further, by referring to “the insured” in the Email, Mr Young said that RSA had waived any entitlement to disclosure of prior insolvencies or bankruptcies experienced by anyone other than the insured themselves.
RSA denied that it had waived disclosure of the Insolvency Information, as the Email did not set out any questions for Mr Young to respond to. As a result, Mr Young’s failure to disclose the Insolvency Information was unconnected to the Email. Further, RSA said that it had no knowledge of Mr Young’s prior breach of the duty of fair presentation, and, since there must be knowledge of the right before it can be waived, there had been no waiver here.
The decision – was there a waiver?
The Judge firstly referred to the pre-Act case law, which established that an assured seeking to establish waiver would need to show a “clear case” (Doheny v New India Assurance Co Ltd [2005] Lloyd’s Rep I.R. 251). This could be done in one of two ways: (1) where an insured submitted information which contained something which would prompt a reasonably careful insurer to make further enquiries, but the insurer fails to do so; and (2) where an insurer asks a “limited” question such that a reasonable person would be justified in thinking that the insurer had no interest in knowing information falling outside the scope of the question. This case concerned the latter.
In considering the issue, the Judge noted that the term “any business capacity” was capable of including other entities with which the insured was involved. The difficulty for RSA, however, was that the Moral Hazard Declaration was incomplete; although RSA had seen the answer of “None”, it did not know what the “None” referred to.
The Judge held that the Email was aimed at clarifying Mr Young’s answer to the Moral Hazard Declaration, which it achieved by stipulating the specific moral hazards that needed to be addressed. Further, the judge held that the reference to “the insured” in the Email was not limited to Mr Young and Kaim, but also covered the longer formulation contained in the Moral Hazard Declaration. So, read in this context, the judge was satisfied that no reasonable reader would have understood the Email as waiving the part of the Moral Hazard Declaration relating to “any business capacity” in which Mr Young might have acted. Accordingly, the judge held that there was no waiver.
Comments
A number of themes arise in the judgment which are of relevance to policyholders and brokers.
Firstly, the judgment illustrates the potential drawbacks of using bespoke software to place insurance. Here, it was to Mr Young’s detriment that RSA were not using the same software as the broker, the result being that RSA were unable to determine the full extent of what was being disclosed, absent further information being provided.
The judgment also demonstrates that formulations such as “any business capacity”, may, in some circumstances, be broad enough to extend to any company with which an individual insured was involved. However, it is unclear whether that same analysis would apply where insurance is taken out by a business only.
Finally, although the judgment sheds light on what is required to establish waiver, it did not consider issues of materiality or inducement, and so the question of whether RSA can make good their assertion that it would not have written the risk “on any terms” remains to be decided.
Alex Rosenfield is a senior associate at Fenchurch Law.
Dalecroft Properties Limited – v – Underwriters
Dalecroft Properties Limited – v – Underwriters subscribing to Certificate Number 755/BA004/2008/OIS/00000282/2008/005
[2017] EWHC 1263 (Comm)
This recent decision by the Commercial Court provides a neat recap of the applicable law pre the Insurance Act 2015, which still applies to many claims brought by policyholders today.
The Claimant, Dalecroft Properties Limited (‘Dalecroft’), owned a property in Margate (‘the property’). The property was a mixture of commercial and residential parts, and was insured with the Defendants (‘the Underwriters’).
The property was a five-storey building, and included a restaurant, a charity shop and an amusement arcade, the upper floor of which had previously been used as a discotheque (‘the disco building’).
The brief insurance history is as follows:
- On 1 August 2007, Tristar (the Underwriters’ Agents) issued Dalecroft with a schedule for the period 1 August 2007 – 31 July 2008 (‘certificate 001’).
- Shortly after, Dalecroft requested an increase to the sums insured. Accordingly, on 16 August 2007, Tristar issued Dalecroft with a new schedule marked CANCEL & REPLACE (‘certificate 002’).
- At the August 2008 renewal, Tristar issued Dalecroft with a schedule for the period 1 August 2008 – 31 July 2009 (‘certificate 003’).
- On 19 November 2008, Dalecroft’s brokers requested that “the property should be registered in the name of Dalecroft Properties Ltd’. On 20 November 2008, Tristar issued Dalecroft with a new schedule marked CANCEL & REPLACE (‘certificate 004’). The period of insurance ran from 19 November 2008 to 31 July 2009, and the premium was stated to be £0.00.
- On the same day, Dalecroft’s broker noted that Tristar had failed to correct Dalecroft’s name on the policy and so, on 21 November 2008, Tristar issued a further schedule marked CANCEL & REPLACE (‘certificate 005’). Again, the insured period ran from 19 November 2008 – 31 July 2009, and the premium was stated to be “£0.00.”
A fire occurred on 16 May 2009, which required the property to be demolished and rebuilt. Dalecroft then made a claim on the policy, which the Underwriters sought to avoid.
In the subsequent proceedings, Dalecroft claimed an indemnity from the Underwriters for its losses arising from the fire. The Underwriters counterclaimed for a declaration that they were entitled to avoid the policy on the grounds of misrepresentation/non-disclosure, and a breach of warranty.
In all but one of allegations of misrepresentation, Dalecroft denied that what it said was untrue. It also said the matters complained of by the Underwriters did not induce the making of the contract, as the relevant contract was not made until 2008, by which point the Underwriters had issued a revised certificate headed “Cancel and Replace.”
The issues to be decided were:
a) Which was the relevant policy?
b) Did Dalecroft misrepresent any matters to the Underwriters?
c) Were there any breaches of warranty?
d) Was the risk divisible into commercial and residential parts?
Which was the relevant policy?
Dalecroft submitted that the relevant policy was contained in certificate 005, this being the policy in force at the date of the fire.
The Underwriters, by contrast, submitted that correct policy was certificate 003 i.e. the policy issued at renewal in August 2008.
The Judge, Mr Richard Salter QC, agreed with the Underwriters. He accepted that certificates 004 and 005 were marked CANCEL & REPLACE; however, neither certificate was a new policy.
Misrepresentation/Non-Disclosure
The Underwriters relied on the following misrepresentations/non-disclosures in the August 2008 Proposal/Statement of Fact:
a) That the residential units were vacant for refurbishment;
b) That the property was in a good state of repair;
c) That the property had no flat roof;
d) That the property had not been subject to malicious acts or vandalism;
e) The non-disclosure of the fact that the property had been the subject of an Emergency Prohibition Order (‘EPO’) dated 6 June 2008.
Apart from point (a), the Underwriters made out their case in respect of each alleged misrepresentation/non-disclosure.
There was compelling evidence that the property had suffered from broken windows, leaking and drainage issues (amongst other issues). Accordingly, Dalecroft had misrepresented that the property was in a good state of repair.
As regards the status of the roof, the Judge noted the experts’ views that the flat proportion of the roof comprised 50.43% of the entire roof area. As such, the representation that there was no flat roof was also incorrect.
As to the alleged malicious acts of vandalism, the Judge found that there was a history of “continual disturbances of vandalism and drug taking”, together with at least one further specific incident where a police officer was assaulted. Therefore, this too had been misrepresented.
Finally, the Judge accepted that the EPO had been misrepresented. There was a long list of defects to the property (which significantly increased the risk of fire), and nothing to suggest that the issues had been remedied. In the circumstances, the Judge found that this was a matter about which a prudent insurer would have wished to know.
The Judge found that each of points (b) – (e) were material, and that the Underwriters had made out their case on inducement. Accordingly, Dalecroft’s claim had to fail.
Although not strictly necessary, the Judge went on to consider the remaining issues.
Were there any breaches of warranty?
The Underwriters alleged that Dalecroft breached a Commercial Unoccupancy Condition in the policy (‘the Condition’) in that it had failed to ensure that:
a) The Basement and disco building were free of combustible materials;
b) The charity’s letterbox was sealed;
c) The Charity Shop and the Basement were properly secured;
On the evidence, the Judge was satisfied that Dalecroft was in breach of the Condition. In particular, it was clear from the available photographs that there were loose combustible materials in the disco building, and that neither the charity shop nor its letterbox were secured against unauthorised entry.
Was the risk divisible into commercial and residential parts?
Dalecroft argued that the risk was divisible, and that, because the alleged misrepresentations/non-disclosures related only to the residential parts, it was entitled to an indemnity for their losses in relation to the commercial part.
The Judge disagreed. The condition broken by Dalecroft was directed at risks which jeopardised the entire property. It followed that the Underwriters were discharged from all liability.
Summary
The Underwriters, on the facts of this case, were entitled to reject all claims made against them. The Judge was keen to emphasise, however, that even if the new law had applied, Dalecroft’s claim would still have failed. In this respect, he was satisfied that Dalecroft made “no real effort” to make a fair presentation, and that Underwriters would still have declined to take on the risk.
Alexander Rosenfield is an associate at Fenchurch Law
Leeds Beckett University – v – Travelers Insurance Co Ltd
A recent decision by the Technology and Construction Court has considered causation issues in the context of a property insurance claim. Was the damage accidental or inevitable?
The insured, Leeds Beckett University (‘the University’), acquired the site of a former brewery on which to build a number of accommodation blocks in 1993. The blocks were completed by 1996.
In December 2011, large cracks appeared in the largest of the buildings (“the building”). Subsequent investigations revealed that the concrete walls below ground-level had turned to mush. The building was then demolished in 2012.
The University insured the building with Travelers, who declined the claim in May 2012. In support of their declinature, Travelers said that the building had been subjected to sulphate attack by ground water beneath, and that the exclusions for gradual deterioration, faulty or defective design, or contamination applied.
The University disagreed, and argued that the relevant damage was “accidental” such that it was caught by the policy’s definition of “damage.” Further, it sought to characterise the damage as “flood” damage, so as to bring it within the meaning of “defined peril.”
The issues to be decided at trial were as follows:
a. Could the damage be characterised as “accidental damage” within the meaning of the policy?
b. If so, was it caught by any of the exclusions which the insurers sought to rely upon?
Was the damage accidental?
The Judge, Mr Justice Coulson, began his analysis by setting out the detailed history of the building and the land upon which it was sited. He referred specifically to the fact that the building was built over an existing watercourse, and to the historic geotechnical reports which raised concerns with the sulphate content of the soil and the damage it might cause. The Judge also made reference to the defective design of the groundwater drainage system, remarking that “this was going to be a difficult site to develop because of the numerous water issues.”
The University tried to deflect these issues, and asserted that the watercourse did not show up on every O/S map, and could not be identified when construction commenced. Further, it said that the occurrence of the damage over the watercourse was just a coincidence. The Judge gave short shrift to these points, and rejected any notion that the damage could be described as “flood damage.”
As to whether the damage was accidental; again, the Judge found against the University. His view was that “accidental simply means an event occurs by chance, which is non-deliberate.” In framing his view, he drew a distinction between the risk of something happening, which would usually be covered by a policy, and the inevitability of something happening (such as wear and tear), which would not.
On the facts, the Judge was left with little doubt that the damage was not accidental or fortuitous, a fact on which both parties’ experts agreed. There was not simply a risk that the concrete walls would fail – it was an inevitability. Accordingly, the University could not succeed on causation, and its claim failed.
Did any of the exclusions apply?
1. Gradual deterioration?
The University argued that, if the damage was accidental, the exclusion could not apply. The Judge disagreed, and concluded that there was nothing in the policy which supported such an analysis. Further, he considered the University’s argument to be ‘contrary to commercial common sense.’
As to the meaning of the words “gradual deterioration”, the Judge concluded that “gradual deterioration can be caused by the interaction between the property insured and the circumstances in which the property exists.” In other words, one had to take a holistic view when looking at gradual deterioration – it was wrong to look at the building itself without considering any external influences i.e. the ground and flowing water.
In the present case, the damage was caused by an inherent defect or weakness of the building, and occurred over a period of at least 10 years. Accordingly, the Judge found that the exclusion applied.
2. Faulty design?
The Judge was satisfied that this exclusion also applied. He made reference to the lack of a suitable drainage system (or rather, the lack of one at all), and the fact that the risks were brought to the University’s attention at an early stage. It followed that the design was unfit for purpose, and the exclusion applied.
3. Contamination?
As above, the Judge found in favour of the insurers. The evidence made it clear that there were ‘probably’ old mineshafts underneath the site (albeit they were never found), which was agreed as being the most likely source of the contaminated water which was discovered in December 2011.
The ‘proviso’ clause
The final issue to be decided was whether the University’s claim was capable of being salvaged by the ‘proviso’ to the exclusion clause. This provided that the exclusion could not exclude subsequent damage from a cause not otherwise excluded.
The nub of the University’s argument was that, whilst the original damage was to the blockwork, the subsequent damage was the cracking and the other damage to the superstructure.
The Judge rejected this argument. The damage to the sub-structure and the visible damage to the superstructure above were all part of the same damage, the cause of which was excluded.
Comments
The judgment is a useful yardstick of how the Courts will resolve claims for property damage which was inevitable rather than fortuitous.
It also provides some helpful commentary as to how exclusion for wear and tear or gradual deterioration will be assessed – namely, by considering the interaction between the insured property and its environment.
Alexander Rosenfield is an associate at Fenchurch Law
The ordinary measure of indemnity: Great Lakes Reinsurance (UK) SE v Western Trading Limited
In the latest in a series of pro-policyholder decisions by the courts, the Court of Appeal yesterday handed down a judgment upholding the trial judge’s ruling that a policyholder was entitled to be reimbursed by its insurers as and when it reinstated its premises (the historic Boak Building in Walsall) which had been destroyed by fire.
The Insuring Clause in the policy merely stated that insurers agreed “to the extent and in the manner provided herein to indemnify the Assured against loss of or damage to the property specified in the Schedule.” However, there was a separate reinstatement clause (“the Memorandum”) which stated that, in the event of damage or destruction, the indemnity was to be calculated by reference to the reinstatement of the property destroyed or damaged but only if the reinstatement was carried out “with reasonable despatch”, failing which only the amount which would have been payable under the policy, absent the Memorandum, would be due.
No reinstatement had occurred by the time of the trial, for the simple reason that the insurers had denied all liability under the policy, relying on various defences in relation to misrepresentation, breach of warranty and insurable interest. These were all rejected by the Judge, and there was no appeal on that score, the Insurers’ appeal being confined to the correct measure of indemnity.
There was disagreement between the parties as to whether the Memorandum could be relied on, and thus the Court of Appeal considered what would be the correct measure of indemnity assuming it were indeed inapplicable.
Insurers argued that, on the facts of this case, the relevant measure of indemnity was the reduction in the building’s value. Its market value just before the fire had been a mere £75,000. That reflected the fact that it was virtually derelict but, since it was Grade II Listed, it was not capable of being economically converted into (say) a block of flats. Ironically, its value had increased after the fire, since it lost its listed status and thus could now be redeveloped. Insurers thus argued that there was no loss, and nothing for them to indemnify.
The Court of Appeal disagreed. It held that, where the policyholder was the owner of the property or, if not, where it was obliged to replace the property (here the policyholder was the lessee of the building and owed the owner an obligation to repair it), the indemnity under the policy was ordinarily to be assessed as the cost of reinstatement. The Court of Appeal recognised that the position would be different if, at the time of the loss, the policyholder was trying to sell the property or intended to demolish it anyway.
The Court of Appeal also recognised, as had the trial judge, that an insurer who paid out the cost of reinstatement would have no redress if the policyholder then decided simply to keep the insurance proceeds. It held that the insurers could be protected if, rather than their being ordered to pay an immediate sum of money, the court instead made a declaration requiring insurers to reimburse the policyholder for the actual reinstatement costs as and when incurred.
Finally, it should be noted that the Court of Appeal held that, where a reinstatement clause required the policyholder to undertake the works of reinstatement “with all reasonable despatch”, it would not be in breach of that requirement unless and until insurers had confirmed indemnity under the policy. That is an obvious victory for common sense, even if it might be thought depressing that the Insurers would really have wished to argue that a policyholder could legitimately be prejudiced by a combination of its own impecuniosity and insurers’ unlawful refusal to affirm cover.
See: Great Lakes Reinsurance (UK) SE v Western Trading Limited [2016] EWCA Civ 1003.
http://www.bailii.org/ew/cases/EWCA/Civ/2016/1003.html
Jonathan Corman is a Partner at Fenchurch Law.