When is an individual a consumer for insurance purposes?
The law distinguishes between businesses and consumers in many areas, with the consumer benefiting from a more favourable regime as a result of their need for greater protection in the commercial market place.
In the insurance arena, consumers can look to a number of statutory and regulatory provisions designed to protect their rights, including those contained in the Consumer Insurance (Disclosure and Representations) Act 2012, the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR), and the Insurance Conduct of Business Sourcebook (ICOBS) rules.
Often the distinction between a consumer and a business will be readily apparent. Occasionally the line is more blurred, and it is recognised that private individuals can act in a number of capacities. A recent Court of Appeal case, Mohammed Ashfaq v International Insurance Company of Hannover plc, has provided guidance on how to ascertain whether an individual is acting as a consumer when taking out an insurance policy.
In that case, the insured was seeking to have set aside a judgment of the Technology and Construction Court dismissing his claim for indemnity following a fire at a property he owned in Huddersfield. He argued that the court should have taken into account his consumer status, and that if it had, it would have reached a different conclusion.
The insured had incorrectly given a negative answer in his online proposal form for residential let property insurance to the question as to whether he had ever been convicted or had any prosecutions pending. The policy contained a ‘basis of contract’ clause as a result of which any incorrect information provided in the proposal form could amount to a breach of warranty. The insured had in fact a pending prosecution for common assault. When this was discovered insurers sought to avoid liability under the policy on a number of grounds including breach of warranty. The insured argued that had the consumer protections contained in UTCCR and ICOBS been taken into account the insurers would not have been so entitled.
The UTCCR defines a consumer as “any natural person who, in contracts governed by these Regulations, is acting for purposes which are outside his trade, business or profession.” ICOBS similarly defines a consumer as “any natural person who is acting for purposes which are outside his trade or profession. Further, where the individual is acting in more than one capacity, ICOBS provides that, if in relation to particular contract of insurance, the customer entered into it mainly for purposes unrelated to his trade or profession, the customer is a consumer.
The insured submitted that his trade or profession was that of a company director of three companies whose business was IT not property ownership or letting. He further submitted that the main purpose of taking out the insurance was to protect his property asset against fire and other risks and the insurance against loss of rent was subsidiary. The main purpose of entering into the contract of insurance was therefore unrelated to his trade or profession and he fell within the definition of a consumer.
The Court of Appeal disagreed.
It was clear from the face of the policy documentation that the purpose for which the insurance was taken out was to protect the property which the insured was using for the business of letting to students for rent, against fire and other risks. The purpose of the insurance was therefore related to the insured’s trade, business or profession of property letting. Further, part of the cover sought was loss of rent for up to 12 months: this was not an application for ordinary domestic house insurance.
The fact that insured was a company director and carried on the trade or profession of company director did not mean that he was not also carrying on the trade business or profession of a building owner letting out property for profit.
This finding is consistent with guidance given by the FCA as to how individuals acting in certain capacities should be categorised. One of the examples it gives of a commercial customer is a person taking out a policy covering property bought under a buy-to-let mortgage.
The judge did not consider whether the appellant would have been considered a consumer under the Consumer Insurance (Disclosure and Representations) Act 2012 which was not in force at the relevant time for the purposes of this case. On the basis that that Act takes a similar approach, defining a consumer insurance contract as one between an individual who enters into the contract wholly or mainly for purposes unrelated to the individual’s trade business or profession, it would seem unlikely that a different conclusion would have been reached.
This case serves as a reminder that a person’s status as a consumer is not synonymous with that of being an individual. Any business activity undertaken, including as an adjunct to that individual’s usual trade or profession, may make them a commercial consumer for insurance purposes.
See Mohammed Ashfaq v International Insurance Company of Hannover plc [2017] EWCA Civ 357.
Joanna Grant is a partner 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
Fenchurch Law strengthens professions insurance disputes capabilities with Rosenfield hire
Fenchurch Law, the UK’s leading firm working exclusively for policyholders and brokers on complex insurance disputes, has announced the appointment of Alex Rosenfield as an associate.
Alex joins Fenchurch Law’s profession team utilising his experience of property damage, business interruption and professional indemnity claims to represent a broad range of professionals including accountants, insolvency practitioners, solicitors, IFA’s and surveyors in claims disputes.
David Pryce, managing partner of Fenchurch Law, said: "Alex brings the team a solid grounding in coverage disputes. His experience both within the Lloyd’s and London market and in acting for policyholders, adds further strength to the capabilities of our professions team.”
Alex joins Fenchurch Law from Elborne Mitchell LLP where he was an assistant solicitor. He trained at Manchester-based BPS Law LLP which provides policyholder coverage representation.