Property Risks

Climate Risks Series, Part 3: Aloha v AIG – Liability Cover for Reckless Environmental Harm

Aloha v AIG - Liability Cover for Reckless Environmental Harm

Increasing numbers of claims are proceeding around the world alleging that the public were misled about the risks associated with climate change, resulting from fossil fuels and greenhouse gas (“GHG”) emissions.

A recent decision in the Supreme Court of Hawaii, Aloha Petroleum Ltd v National Union Fire Insurance Co. of Pittsburgh and American Home Insurance Co. [2024], held that an “occurrence” in this context included the consequences of reckless conduct, and GHG emissions were a “pollutant” for purposes of a pollution exclusion under a commercial general liability policy.

Background

The Appellant, Aloha Petroleum Ltd (“Aloha”), was insured with two subsidiaries of AIG under a series of liability policies, in respect of its business as one of the largest petrol suppliers and convenience store operators in Hawaii.

The counties of Honolulu and Maui sued several fossil fuel companies, including Aloha, claiming that the defendants knew of the effects of climate change and had a duty to warn the public about the dangers of their products. It was alleged that the defendants acted recklessly by promoting climate denial, increasing the use of fossil fuels and emitting GHGs, causing erosion, damage to water infrastructure and increased risks of flooding, extreme heat and storms.

Aloha sought indemnity under the policies and AIG refused to defend the underlying claims, alleging that the harm caused by GHGs was foreseeable and therefore not “accidental”; and alternatively, seeking to rely upon an exclusion to cover for losses arising from pollution.

Aloha issued proceedings seeking a declaration that the policies would respond, and the District Court of Hawaii referred the following questions to the Supreme Court, to assist with determining the parties’ motions for summary judgment:

• Does an “accident” include recklessness, for purposes of the policy definition of “occurrence”?
• Are greenhouse gases “pollutants” within the meaning of the pollution exclusion?

Policy Wording

The policies provided occurrence-based coverage, with two different definitions of “occurrence” for the relevant periods:

• “an accident, including continuous or repeated exposure to substantially the same general harmful conditions”, or
• “an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured”

The pollution exclusion clauses varied across the policies, but the differences were immaterial for purposes of the issues before the Supreme Court.

The 2004-2010 policy excluded cover for:

“Bodily injury” or “property damage” which would not have occurred in whole or part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants” at any time.

. . . .

“Pollutants” [mean] “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

Is Reckless Conduct Accidental?

Aloha argued that it was entitled to indemnity, as the allegations of recklessness were sufficient to establish an “accident” and therefore an “occurrence” under the policies. Aloha relied on Tri-S Corp v Western World Ins. Co. (2006), which held - in the context of unintentional personal injury resulting from proximity to high voltage power lines - that reckless conduct is accidental, unless intended to cause harm, or expected to with practical certainty.

AIG claimed that Aloha understood the climate science, and the environmental damage was intentional, not fortuitous. It relied on AIG Hawaii Ins. Co. v Caraang (1993), which held - in the context of torts involving obvious physical violence - that an “occurrence” requires an injury which is not the expected or reasonably foreseeable result of the insured’s own intentional acts or omissions.

The Supreme Court agreed with Aloha, ruling that:

“when an insured perceives a risk of harm, its conduct is an ‘accident’ unless it intended to cause harm or expected harm with practical certainty … interpreting an ‘accident’ to include reckless conduct honors the principle of fortuity. The reckless insured, by definition, takes risk.” 

Are GHGs “Pollutants”?

Aloha argued that GHGs are not pollutants, because they are not “irritants” (applicable in the context of personal injury, not property damage) or “contaminants”. The drafting history was said to indicate that the exclusion should be limited to clean-up costs for traditional pollution caused by hazardous waste from the insured’s operations, not liability resulting from its finished products.

The Supreme Court held that a “contaminant”, and therefore “pollutant” for purposes of the exclusion, is determined by whether damage is caused by its presence in the environment. Although a single molecule of carbon dioxide would not be viewed as pollution, a fact-specific analysis is required, and the Supreme Court was satisfied that Aloha’s gasoline production is causing harmful climate change. This approach was supported by the regulation of GHG emissions in Hawaii and the federal Clean Air Act.

Not all of the policies contained a pollution exclusion clause, however, and the question of whether AIG is required to indemnify Aloha for that policy period (covering 1986 to 1987) will now be considered by the District Court.

Impact On Policyholders

The finding that reckless conduct is covered by liability policies in the context of climate harms is highly significant and will be welcomed by energy companies.

While the issues are yet to be fully explored in European jurisdictions, it is interesting to compare the UK Supreme Court decision in Burnett v Hanover [2021], where merely reckless conduct was insufficient to engage a ‘deliberate acts’ exclusion in a public liability policy; and the recent decision in Delos Shipping v Allianz [2024], confirming that a defence based on lack of fortuity requires the insurer to establish that consequences of the insured’s actions were inevitable, i.e. “bound to eventuate in the ordinary course”.

The precise wording of any pollution or climate change exclusion should be carefully considered prior to inception of the policy period. The causative language used can significantly alter the scope of coverage and prospects of indemnity (see, for example, Brian Leighton v Allianz [2023]). 

Authors:

Amy Lacey, Partner

Ayo Babatunde, Associate

Climate Risk Series:

Part 1: Climate litigation and severe weather fuelling insurance coverage disputes

Part 2: Flood and Storm Risk – Keeping Policyholders Afloat

by Fenchurch Law

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:

1. The coverage issues that policyholders could face in relation to cover for damage caused by flood and storm.
2. 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

by Ayo Babatunde

Terrorism Law Reform: Compliance and Coverage for Property Owners

The Terrorism (Protection of Premises) Bill was confirmed by the King’s Speech on 7 November 2023 for the legislative agenda in the year ahead.  Also known as ‘Martyn’s Law’ in tribute to Martyn Hett, who was tragically killed in the Manchester Arena bombing in 2017, the proposals are aimed at enhancing security and mitigating risks of terrorism in public venues such as music halls, stadiums, theatres, festivals and shopping centres.

Mandatory requirements would be imposed on operators of crowded premises throughout the UK to prepare for and seek to prevent terrorist attacks, overseen by a regulator with powers to issue enforcement notices and impose fines or criminal sanctions.  The new measures focus on risk assessment, planning, mitigation and security protection training, with the level of duty depending on the type of premises:

• Venues with capacity of 100 individuals or less fall outside the scope of the Bill. However, these premises are encouraged to adopt the spirit of the legislation and implement voluntary measures to reduce the risk (which may be relevant in the context of licensing applications).
• Venues with capacity over 100 people are ‘standard tier’ premises, required to undertake basic security measures including staff training, public awareness campaigns and development of a preparedness plan.
• Venues with capacity of 800 or more are ‘advanced tier’ premises subject to additional requirements including: notification to the regulator of the premises or event, and its designated senior individual, where the responsible person is a company; taking all reasonably practicable steps to reduce the risk of terrorist attacks or physical harm occurring, for example, bag searches and metal detectors in appropriate cases; and maintaining a security document evaluating the risk assessment and planned response, for submission to the regulator.
• Venues with capacity over 5,000 or hosting specific types of activities, such as major sporting events or concerts, will be subject to more stringent requirements covering the risk assessment and security planning process.

Government consultation is continuing with industry stakeholders on the scope of duties reasonably deliverable for standard tier locations, to strike a fair balance between public protection and the need to avoid excessive burdens on smaller premises.

The Home Affairs Select Committee raised concerns about proportionality, and the impact on small businesses or voluntary and community-run organisations.  Implementation costs of £2,160 for standard tier premises and around £80,000 for enhanced premises were estimated by the Home Office, over a ten year period, but these figures have been queried amid concern that costs will escalate.  The idea of staged implementation focusing initially on enhanced tier venues has been suggested by some commentators, whilst others believe this would increase the threat to smaller locations and put lives at risk.

Critics argue the draft Bill is not fit for purpose to adequately reduce terrorism risk, which may vary significantly based on the event or persons attending rather than the size of venue, especially since most provisions are directed towards mitigating the consequences of attacks, rather than preventing them from happening.  Jonathan Hall KC, the Independent Reviewer of terrorism legislation, said that most attacks since 2010 would be outside the scope of the Bill; and campaigners argue current exemptions for outdoor Christmas markets and mass sporting events, such as marathons, should be lifted.  Further improvements are recommended in areas including mandatory life-saving training, statutory provision for security to be considered in the design of new public buildings, and improved systems for procurement and training of security staff.

The events (re)insurance market is likely to see increased demand for terrorism-specific policies, or extensions to existing property programmes.  It will be easier in future to identify whether operators of premises affected by terrorist attacks took reasonable steps to minimise risk, and respond appropriately to such events, judged against the new mitigation guidelines.  Insurers will be apprehensive at the prospect of enhanced duties and liabilities, during the initial period whilst changes are introduced and understood, which may lead to increased casualty pricing or restricted terms of coverage.  The scope of management liability insurance should also be considered for businesses operating in this sector, to cover potential mistakes by directors and officers tasked with implementation of additional controls.

There have been 14 terror attacks in the UK since 2017, representing a complex and evolving risk affecting a broad range of locations.  Subject to fine-tuning during the process of detailed scrutiny through both Houses of Parliament, the new legislation is broadly welcomed as raising the bar on public safety, helping leisure, entertainment and retail premises to be better prepared and ready to respond to security threats.

Amy Lacey is a Partner at Fenchurch Law

by Amy Lacey

Challenging times for Zurich: insurer ordered to pay out on Covid 19 claim

World Challenge Expeditions Limited v Zurich Insurance Company Limited [2023] EWHC 1696 (Comm)

The court has held that, having operated a business travel policy in a certain way for nearly four years, Zurich was estopped from denying that it provided cover on that basis.

An estoppel by convention had arisen such that it would be inequitable for Zurich to resile from the common assumption between the parties as to the operation of the policy.

As such, the successful policyholder, World Challenge (represented by Fenchurch Law), was entitled to an indemnity of almost £9m, being the amount of refunds paid to its customers following the cancellation of its global programme of expeditions necessitated by the pandemic.

The court further criticised Zurich for its handling of the claim and the time that it taken to clarify its position.  This was a matter of utmost importance and urgency in circumstances where it was critical to World Challenge’s business and customer relations that it was able to confirm whether it had a covered claim.  Mrs Justice Dias commented that: “This is not an impressive performance even in the difficult circumstances of early 2020 and ordinary policyholders might well be appalled to think that a reputable insurance company could treat a long-standing and supposedly valued customer in this way”.

A full copy of the judgment can be found here.

Background

The policyholder, World Challenge, provides adventurous, “challenging” expeditions worldwide for secondary school students, or “challengers”.  As a result of the pandemic it was obliged to cancel nearly all of its booked expeditions for 2020.

The insurer, Zurich, provided World Challenge with wide ranging cover including cover for cancellation of trips by the challengers.

Prior to the pandemic, Zurich had handled and approved more than one hundred cancellation claims since 2016 in the amount of the refund paid to challengers. The amount of the refund, less an administration fee, was recorded against the aggregate deductible in the event of a trip cancellation. Prior to the onset of Covid-19, that aggregate deductible was never exhausted.

When the pandemic struck in early 2020, Zurich faced substantial claims for refunds to challengers for trips that would be cancelled in the coming months, and which would significantly exceed the aggregate deductible. World Challenge’s position was that Covid-19, and the mass trip cancellations which could eventuate, was precisely the type of ‘black swan’ event that it thought it had insurance cover for.  It sought confirmation of that cover from Zurich prior to cancelling the relevant trips and exposing itself to the millions of pounds of refunds to its customers that it would need to make as a result.

In light of the significant losses it now faced, Zurich, after an extended period of delays in confirming its position, in a complete volte-face sought to depart from the “common assumption” of cover for refunds and instead informed World Challenge that it only had cover (and only ever had cover) for irrecoverable third party costs (for example, hotel or airline costs which World Challenge had paid out and was unable to recover).

The claim

The issue before the court was the correct construction of the policy and whether Zurich was precluded by estoppel or collateral contract from denying that the policy provided the cover that World Challenge thought it had.

Mrs Justice Dias concluded that, although the policy in fact only covered irrecoverable third party costs,  Zurich’s previous conduct in agreeing claims in the amount of the refunds and setting them against the deductible had clearly conveyed to World Challenge that they shared its assumption as to the scope of cover and World Challenge was strengthened and confirmed in its own reliance on that assumption.

Zurich’s argument that the subjective understanding of its claims handlers was insufficient to establish any assumption on the part of the company was rejected.

Further, the court found that the delays in cancelling trips caused by Zurich’s delay in confirming its position on cover caused World Challenge to lose its opportunity to explore other avenues in order to maintain customer goodwill and manage its exposure.

It was therefore inequitable for Zurich to resile from the common assumption. Zurich had every opportunity to correct the error in handling claims, but took no steps to do so until such time as it became apparent that the aggregate deductible would be exceeded.

Conclusion

This judgment provides a welcome reminder to insurers about the importance of handling claims in a timely manner that responds to the needs of its customers, particularly in the face of a devastating loss with significant repercussions for the continued operation of its business.

Also welcome is the confirmation that the conduct of claims handlers in approving or rejecting claims will bind an insurer as they are the people charged with handling the claims on the company’s behalf.

From a legal perspective, in addition to being essential reading for anyone interested in the requirements of a variety of types of estoppel, practitioners will do well to take note of the comments made about the witness evidence and the dangers of putting forward statements that are inconsistent with the contemporaneous documents.  This made for an uncomfortable time for Zurich’s witnesses in the box, and should be a salutary tale, particularly given the spotlight on witness evidence in light of the recent changes to the rules in respect of trial witness statements.

Authors:

Joanna Grant, Partner

Rob Goodship, Associate Partner

Anthony McGeough, Senior Associate 

by Fenchurch Law

Not so peachy – a disappointing Covid-19 decision for policyholders

Bellini (N/E) Ltd trading as Bellini v Brit UW Limited [2023] EWHC 1545 (Comm)

In a month where Covid-19 decisions are coming in thick and fast, policyholders will be disappointed by the most recent judgment concerning a disease wording. A copy of the judgment can be found here.

On this occasion the policyholder, Bellini (N/E) Ltd, was issued with a policy by its insurer, Brit UW Limited, that contained an extension to business interruption cover for business interruption caused by damage arising from a notifiable disease manifested by any person whilst in the premises or within a 25-mile radius.

Disease wordings like these will be familiar to those who are acquainted with the FCA test case and Covid-19 litigation, but in this particular case the quirk is a reference to the defined term “damage” in the introductory paragraph to the extension. Damage within this policy was defined as “physical loss, physical damage, physical destruction”. However, it was common ground between the parties that there had been no physical loss of or damage to the policyholder’s premises or property.

The policyholder argued that policy provided both basic cover for physical damage and also extensions of cover for other matters that would not ordinarily result from or in physical damage. In particular, the provision of a radius clause of 25 miles for the manifestation of disease went beyond the basics of physical damage to the premises or property therein, which the policyholder asserted was reinforced by the court’s analysis of similar wordings in the FCA test case.

Among other arguments on the construction of the policy, the policyholder contended that if the extension only responded to physical damage it would “render any cover it provided illusory, and negate the purpose of the clause in providing cover for a notifiable disease that could manifest itself miles away”.

The court, however, was unpersuaded by the policyholder’s arguments, instead relying upon the “ordinary meaning” of the clause, which provided no cover in the absence of physical loss, damage or destruction. In particular, the court considered it to be significant that the clauses dealt with in the FCA test case were not expressed as to cover interruption caused by damage, and had been recognised as non-damage in that cover was not contingent on physical damage.

The court considered that the policyholder’s arguments effectively required it to re-write the policy contrary to the parties' express agreement and the established approach to contractual construction.

Comment

Recognising that the impact of a notifiable disease will be non-damage related losses, many wordings make it clear that the extension is intended to be triggered in the absence of physical damage, and that is how the clause would be understood to operate.

In circumstances where the parties agreed that a disease at the premises or within 25 miles of the premises does not cause physical damage, it is difficult to see what purpose, if any, can served by a clause that only provides cover for physical damage.

It is therefore difficult to reconcile the court’s attempts to give effect to the wording of the policy with what most policyholders (and we assume those insuring them) would expect to be covered when offering a 25-mile radius clause as part of the policy cover.

It is notable that the courts in the FCA test case grappled with similar difficulties on wordings where the standard form of certain clauses assumed the paradigm case of business interruption by reference to physical damage. The Supreme Court, albeit in the context of trends clauses, came to the view at [257] that the “reference to “damage” is inapposite to business interruption cover which does not depend on physical damage to insured property such as the cover with which these appeals are concerned. It reflects the fact that the historical evolution of business interruption cover was as an extension to property damage insurance. It was held by the court below, and is now common ground, that for the purposes of the business interruption cover which is the subject of these appeals, the term “damage” should be read as referring to the insured peril”. It appears that in the right circumstances the courts are not opposed to manipulating the wording of a policy to give it proper effect, and one might have expected the court in this matter to have taken a similar approach to the 25-mile radius clause.

Undoubtedly the market will be watching this one closely for any signs of an appeal, especially in light of the body of Covid-19 case law that appears to support a disease clause such as the one in dispute here.

Authors:

Anthony McGeough, Senior Associate

Joanna Grant, Partner

by Fenchurch Law

Reinstatement 101 – (rein)stating the obvious?

Reinstatement can be a difficult issue for a policyholder to navigate in the wake of a loss.

The answers to what might seem like obvious questions such as: what is it? who does it? and, do the costs actually have to be incurred? are in actual fact far from straightforward, and have been the subject matter of a number of legal cases in recent years.

This short article summarises some of the key principles that are involved.

What is it?

Reinstatement is the repair or replacement of property so that it is in the same condition or a materially equivalent condition to that which it was in prior to the loss occurring.

Of itself that seems clear enough. However, as ever the devil is in the detail, and the wording of reinstatement clauses varies from policy to policy with very different outcomes for the policyholder.

For example, depending on the precise wording, the policyholder may or may not be entitled to a cash settlement, may or may not be required to rebuild, and may or may not have to rebuild on the same site. Also, many policies give the insurer the option to reinstate.

Who does it?

As might be expected, more often than not the policyholder reinstates. However, many policies give the insurer the option to reinstate at its election. Why might an insurer choose to do so?

There are several reasons why an insurer might elect to reinstate, rather than have the policyholder reinstate or pay them an amount equivalent to the cost of reinstatement. Certainly, one reason identified by the courts is to avoid what other might be “the temptation to an ill-minded owner to set fire to the building in order to pocket the insurance money” (Reynolds v Phoenix Assurance Co Ltd [1978] 2 Lloyd’s Rep 440).

If an insurer elects to reinstate, it must give unequivocal notice to the insured, whether expressly or by conduct. Following a valid election to reinstate, the policy is no longer treated as one under which payment is to be made, and instead stands as if it had been a contract to reinstate in the first place. The consequence of this is that if the insurer fails to perform the contract adequately, it will be liable to the policyholder for damages.

Do the works have to take place?

Whether, and if so, when the reinstatement works have to be carried out, or whether the policyholder is entitled to an indemnity for what the works would cost if carried out, is again going to turn on the precise wording of the policy.

The starting position is as set out in the following extract from the judgment in Endurance Corporate Capital Ltd v Sartex Quilts & Textiles Ltd ([2020] EWCA Civ 308):

“How the claimant chooses to spend the damages and whether it actually attempts to put itself in the same position as if the breach had not occurred – for example by reinstating lost, damaged or defective property – or whether the claimant does something else with the money, is – in accordance with the general principle mentioned earlier – irrelevant to the measure of compensation.”

Therefore, subject to any contrary wording in the policy, a policyholder is entitled to recover the cost of repairing their property, regardless of whether they in fact carry out such repairs, but instead decide, for example, to sell their property or to use the money to build elsewhere on site.

Insurers often look to limit that entitlement, and reinstatement clauses often provide that the work must be commenced and carried out “with reasonable despatch”, and that “no payment is to be made until the costs of reinstatement have actually been incurred”. This presents something of a chicken and egg situation for insureds, since an impecunious policyholder will not have the funds available to pay for reinstatement without first receiving the costs of reinstatement from the insurer.

In Manchikalapati & Others v Zurich [2019] EWCA CIV 2163, the insurer contended that where the policy provided an indemnity for “the reasonable cost of rectifying or repairing damage …”, the term “reasonable cost” should be read as meaning “actual” or “incurred” costs. Therefore, because that cost had not yet been incurred, the insurer argued that its liability under the policy had not been triggered. The court rejected that argument, finding that there was nothing about the wording which indicated that the cost must be incurred before the policyholder was entitled to an indemnity.

An insurer can limit its liability to costs actually incurred, provided it uses clear language to that effect. However, absent clear language, or where the clause is neutral as to whether the cost must already be incurred or may be incurred in the future, the courts have made it clear that insurers are no longer able to able to withhold the indemnity pending the works being carried out.

To what extent are intentions relevant?

One thorny issue that has come up time and again in the context of reinstatement is the relevance of a policyholder’s intentions. This first arose in a case where the policyholder intended to sell the property at the time of the fire. In that case, the court found that the indemnity to which the policyholder was entitled was the price at which it was prepared to sell at the time of the fire. This is because a policyholder is entitled to be indemnified for its loss, and in quantifying that loss, an insured’s intentions may impact on an assessment of the value of the property to them.

This issue most recently came before the court in Endurance v Sartex [2020] EWCA Civ 308. The insured, Sartex, claimed an indemnity on the reinstatement basis following a fire at its premises. The insurers asserted that that this was inappropriate because Sartex did not have a genuine intention to reinstate, placing reliance on the fact that Sartex had not carried out reinstatement in the many years after the fire occurred. As such, the insurer said that Sartex was only entitled to the considerably lower sums representing the diminution in market value of the property as a result of the fire. The court found that the question of whether Sartex actually intended to reinstate the buildings was, in most cases, of no relevance to the measure of indemnity.

Standard of repair

Another issue that frequently arises, particularly in the context of older properties, is what happens when the reinstatement results in the property being in a condition better than it was before. This is known as betterment. The principle of betterment requires the policyholder to account to the insurer for the improved or better aspects of the new property.

Sometimes, a policyholder has no practical alternative but to replace the original property with modern, upgraded property. This is known as involuntary betterment, and in those circumstances the policyholder is entitled to the actual replacement cost.

If an insurer does look to apply a discount for betterment, a policyholder would be advised to require the insurer to identify precisely what betterment the policyholder would enjoy and to serve evidence in support, as where an insurer fails to adequality quantify and evidence its case on betterment, no deduction should be applied.

Summary

Reinstatement clauses are intended to place policyholders into a materially equivalent position to that which they would have been in had the loss not occurred. Quite how that works in practice can be a minefield, but recent case law has helpfully cleared up some misconceptions around the policyholder’s intentions and the extent to which the works have to be carried out – both of which will be of assistance to policyholders in getting their claims paid.

Alex Rosenfield is a Senior Associate at Fenchurch Law

by Alex Rosenfield

No Time To Be Without Cover

This short article considers a handful of the possible insurance claims that arise in the latest James Bond outing, No Time to Die, as well as paying homage to Daniel Craig’s brilliant 5-film stint as 007.

Warning: this article contains major spoilers. So, to all those who are yet to see the film, read no further.

Matera – the prologue

The film opens with Mr Bond enjoying some downtime in Matera, Italy, with his beloved Madeleine Swann. It’s an idyllic scene. Glorious weather; a spectacular backdrop; and a stylish cave hotel. What could possibly go wrong here? Quite a lot, sadly.

After visiting the grave of his first (and perhaps one) true love, Vesper Lynd, Bond is attacked by scores of Spectre henchmen. There’s then a frantic car chase through Matera’s ancient streets, before Bond casually disposes of said henchmen by turning the headlights of his Aston Martin DB5 into revolving machine guns. Very cool.

Sadly, the Aston Martin takes quite a battering, and presumably is no longer road-worthy. That’s a fairly chunky insurance claim, which gives rise to some non-disclosure issues. At inception of the Policy, Mr Bond’s insurers would have most likely asked: “have you or any person who will drive the motorhome had any accidents, claims, damage, theft or loss involving any vehicle during the past 5 years”.

Unfortunately for Bond, he’s had his fair share of rotten luck behind the wheel. In particular, if one assumes that the events of Skyfall and Spectre were within the last 5 years, the following incidents come to mind: –

• Aston Martin DB5 – destroyed at the end of Skyfall, after a fist-fight with Raoul Silva (estimated damage of £850,000);
• Aston Martin DB10 – sank at the bottom of the River Tiber in Spectre, after Bond is chased by one of Blofeld’s henchmen (estimated damage of £2.6m).

Given the above, a failure to disclose these incidents would probably be treated as a deliberate breach of Bond’s duty of fair presentation under the Insurance Act. Insurers would invariably avoid the Policy, refuse all claims and keep the premium. Bond could always try arguing that it wasn’t a qualifying breach, because Insurers would have written the Policy anyway, but that seems speculative.

Another issue to address is the duty to take reasonable precautions. As many of us will be aware, such provisions mean no more than the insured must avoid reckless behaviour (Sofi v Prudential Assurance [1993] 2 Lloyd’s Rep. 559). So, in order to rely on a breach, Insurers would need to demonstrate that Bond was indifferent about looking after his vehicle. Acting carelessly will not be sufficient. Once again, that poses something of a conundrum for Bond. At the time of the incident, he’s clearly courting danger by inviting Spectre’s goons to shoot at him, and makes very little effort to conduct his affairs in a prudent and businessmanlike manner. All in all, this doesn’t smell like a winner.

Cuba – Bond comes of retirement

Five years after the events in Matera, Bond is blissfully retired in Jamaica. Not before long, one of MI6’s brightest and best shows up, who tells Bond that she now stands in his shoes as the new 007, and has been tasked with recovering a Russian scientist (a subrogated recovery, one might say). Bond, suitably unimpressed, decides to buddy up with the CIA’s Felix Leiter to try and get to the scientist first.

This leads Bond to Cuba, where literally all hell breaks loose. The number of insurance claims that could arise here is mind-boggling. Those include:

• Cuban drinking establishment/Property damage – there’s fairly significant damage here, after Bond gate-crashes a birthday party held in the honour of his arch-nemesis, Ernst Stavro Blofeld;
• Cuban drinking establishment/BI Loss – more hefty losses, one would imagine;
• Cuban drinking establishment/Public Liability – given that all of the attendees meet their maker after being infected by DNA-targeting nanobots (more on that below), this could give rise to another sizeable claim.
• Property damage/boat & helicopter – catastrophic damage to a boat after a terse fist-fight between Bond and Leiter’s duplicitous associate, Logan Ash (Rest in peace, Felix). Presumably the helicopter which Bond pilots to get to the boat is also a write-off.

Lytusifer Safin – he’s been expecting you, Mr Bond

In the film’s third act, we’re properly introduced to Bond’s main adversary, Lyutsifer Safin, played by the brilliant Rami Malek. We’d seen precious little of Mr Safin until this point, but all the familiar Bond-villain tropes are there. He’s creepy as hell, has set up shop on a secret island, and has a name which literally sounds like Lucifer (definitely evil, then).

Mr Safin, it would seem, has had a bit of a chip on his shoulder since Spectre murdered his family as a boy. Having recently wiped out Spectre, thusly achieving his revenge, Safin now wants to conquer the world by using the aforementioned nanobots as a biological weapon. Bond obviously isn’t having any of this, and heroically stops Safin in his tracks; but not, in a surprising and devastating turn, before he’s inflicted with mortal wounds. Sadly, this really is the end for Bond, who shortly afterwards succumbs to his injuries whilst he’s blown to smithereens by a British warship.

We assume that Mr Bond was sensible enough to procure a policy of life insurance before his untimely passing, and that he named Ms Swann as his beneficiary. To make a claim, Ms Swann would need to provide, as a minimum: (i) the name of the deceased (Bond, James Bond); (ii) the Policy number; and (iii) the cause of death.

The price and cover available would depend on a number of factors, which include the nature of Bond’s profession, as well as the fact that he indulges in what some would say is an unhealthy lifestyle i.e. a heavy alcohol intake. One can only imagine how high the premium must have been.

Mr Bond’s estate would also need to satisfy that his death wasn’t the result of reckless or dangerous behaviour. Whether that’s the case here is debateable, but we’d argue that Bond is just on the right side. Indeed, having agreed to cover Mr Bond, the underwriter would be ‘presumed to be acquainted with the practice of the trade he insures’ (Noble v Kennaway [1780]), and therefore should have appreciated that taking on a megalomaniac and his machine-gun wielding disciples was merely an occupational hazard. In circumstances where Bond quite literally saved the world, paying this claim feels like the right thing to do.

Given that Ms Swann is seen happily driving an Aston Martin V8 Vantage at the end of the film, we’re going to assume that the claim succeeded. Happy days for all. Well, apart from Bond, of course. May his memory live on.

Alex Rosenfield is a Senior Associate at Fenchurch Law

by Alex Rosenfield