Reasonable precautions conditions – what do they really mean?
Conditions which require insureds to exercise ‘reasonable precautions’ are a staple of insurance policies. However, there is often a misunderstanding as to their meaning and effect, and what an insurer must show in order to rely on a breach to decline the claim. In this article we take a look at the applicable principles.
Reasonable precautions in a Professional Indemnity policy
Professional indemnity (“PI”) insurance is designed to protect an insured which has incurred a civil liability to a third party arising from negligence.
PI policies almost always require insureds to take reasonable care or reasonable precautions not to cause loss or damage to a third party. If “reasonable care”, in this context, had the same meaning as a tortious duty of care, the policy would be deprived of any real value, since that would effectively exclude the very liability that the policies are intended to cover.
To overcome that issue, the Courts have consistently held that an insurer can only rely on a reasonable precautions clause where it shows recklessness by the insured. In particular, in Fraser v Furman [1967]1 WLR 898, the Court held that it must be “shown affirmatively that the failure to take precautions … was done recklessly, that is to say with actual recognition of the danger and not caring whether or not that danger was averted”. Therefore, acting carelessly will not be sufficient; the requirement is that the insured must be reckless and not care about its conduct.
Reasonable precautions in a property policy
Over time, reasonable precautions clauses have become more commonplace in property and other first-party insurance policies (such as travel or motor insurance); but what does a requirement to take reasonable precautions in a property policy mean? Can an insurer decline a claim if an insured fails to take reasonable care? Does negligence suffice?
The Court of Appeal has confirmed that the recklessness threshold applies equally in property insurance. So, in Devco Holder Ltd v Legal and General Insurance Society [1993] Lloyd’s Rep 567, where a driver deliberately left his keys in the ignition for a few minutes whilst visiting his place of work, the Court of Appeal found that the driver breached the reasonable precautions condition in his policy because he was “deliberately courting a danger”. On that basis, the driver was not entitled to recover under the Policy.
The Court of Appeal in Sofi v Prudential Assurance Company [1993] 2 Lloyd's Rep. 559 reaffirmed the decision in Devco Holder that mere negligence will not suffice. So, in order to prove recklessness, it must be shown that the insured appreciated the risk (and that appreciation will be assessed subjectively). If it can be shown that an insured appreciates the risk but simply didn’t care or ignored it, he will be found to be reckless.
On the basis that a reasonable care clause is intended to exclude liability, the burden is on the insurer to prove recklessness.
In which situations might reasonable precautions conditions be relevant?
The drafting of reasonable precautions conditions is usually broad. For example, the clause may require an insured to “take all reasonable precautions to prevent or diminish damage or any occurrence or cease any activity which may give rise to liability under this Policy and to maintain all Property insured in sound condition.”
The general actions expected from insureds to diminish or reduce danger are likely to vary on a case by case basis and therefore not readily summarised; however, examples in a property context would include locking all doors and windows when the premises are empty (so as to minimise the risk of theft); taking precautions against fire or alerting the fire brigade promptly in the event of a fire; and adhering to guidance from professionals such as surveyors.
It is perhaps more illustrative, by comparison, to consider the sorts of actions which have been found to constitute a breach i.e. where an insured has acted recklessly. In particular:
- Lambert v Keymood Ltd [1990], in which an insured continued to set bonfires at its premises, despite being warned about the dangers of doing so;
- Limit (No.3) Ltd v Ace Insurance Ltd [2009], where an insured took no steps to repair a building, notwithstanding the fact that it was warned that it might collapse;
- Grace Electrical Engineering Pte Ltd v EQ Insurance Co Ltd [2016], where an insured ignored advice regarding cooking operations taking place in the basement of its premises.
There is however an important distinction to be drawn between reasonable precautions and positive obligations under the policy which require insureds to take specific actions, such as hot works conditions, unoccupied buildings conditions, and security conditions. In Aspen Insurance v Sangster & Annand Ltd, the Court commented that the recklessness threshold will not apply where there is “a highly defined and circumscribed set of particular safeguards which have to be put in place” which involved a detailed hot works condition clause with which the insured had failed to comply.
Reminder for brokers and policyholders – a health warning
In order to avoid the risk of insurers seeking to decline the policy for a breach of reasonable precautions conditions, it is important for brokers and policyholders to be fully aware of their continuing obligations throughout the duration of policy.
Failure to warn the insured about such policy conditions may result in a broker being held liable in the event that indemnity is declined due to breach of a reasonable precautions or other specific condition - RR Securities & Ors v Towergate Underwriting Group Ltd [2016]. In this case, following a fire caused by arson, the insurer sought to decline the claim due to failure to comply with the minimum-security standards and failure to take reasonable precautions to avoid the loss. The Court found that the insured had not been reckless and therefore there had been no breach of the reasonable precautions condition. However, the broker was found to be liable to the insured for failing to bring the onerous security conditions to the insured’s attention.
Whilst we see insurers seeking to rely on reasonable precautions conditions in circumstances where the insured has merely been careless or negligent, equally care should be taken to ensure that policyholders are fully aware of their obligations and to distinguish between reasonable precautions conditions and other more onerous requirements defined in the policy. In short:
- Where the policy contains a reasonable precautions clause, the insured must not act recklessly or against advice where it appreciates that a risk exists which might cause a loss; and
- Where the policy contains specific obligations, such as a hot works condition or unoccupied buildings condition, the reckless threshold does not apply – the insured must therefore take extra care to fully comply with those obligations or avoid a declinature of a claim at a later date.
Say hello, waive goodbye – waiver in insurance disputes
Waiver involves a party abandoning some or all of its rights under a contract. The concept is broad, and arguments about its application arise frequently in insurance disputes, in relation to both the creation and operation of a policy.
This article will outline situations where waiver arguments most commonly occur.
Waiver of disclosure
Under the Insurance Act 2015 (“the Act”), an insured must make a fair presentation of the risk. This requires disclosure of every material circumstances which the insured knows or ought to know, and in a manner which would be reasonably clear and accessible.
An insurer’s failure to ask questions has always risked being treated as a waiver of the insured’s duty of disclosure. That situation is now codified in s3(4)(b) of the Act, which confirms that it is only necessary for an insured to disclose “sufficient information to put a prudent insurer on notice that it needs to make enquiries for the purpose of revealing those material circumstances.” The insurer therefore has a duty to make enquiries when it requires further information – it cannot simply sit on the disclosure provided and ask questions only once a claim is made.
Absent enquiry by the insurer, the Act provides that an insured does not need to disclose a circumstance if, amongst other things, it is something about which the insurer waives information. This can happen expressly, or impliedly.
Express waiver
Numerous forms of agreement can be reached between an insurer and an insured whereby the latter’s duty of fair presentation is restricted. This may be by way of agreement which restricts materiality to knowledge held by specific individuals. Alternatively, they may agree that specific types of information need not be disclosed.
Implied waiver – asking limited questions in a proposal
An insurer may, in some circumstances, be taken to have waived the scope of disclosure by asking a limited question in a proposal. By way of example; suppose an insurer asks a proposer, “have you been made insolvent during the last 5 years?” which the proposer correctly answers “no”. Then, following the making of a claim, the insurer refuses to pay on the basis that the insured failed to disclose that it entered into administration 8 years ago. On those facts, there is an unanswerable argument of waiver. The insurer could easily have asked the proposer about insolvencies occurring more than 5 years prior, and by not doing so indicated that it had no interest in those insolvencies. These types of argument are fact-sensitive, and will depend on the proper construction of the proposal as a whole. The question to be asked, as MacGillivray says, is:
“Would a reasonable man reading the proposal form be justified in thinking that the insurer had restricted his right to receive all material information, and consented to the omission of the particular information in issue?”
If the answer to that question is “yes”, an insurer cannot subsequently use that non-disclosure as a reason to avoid paying a claim.
Waiver of the insurer’s remedy for breach of the duty of fair presentation
This type of waiver is known as waiver by election. In short, where an insurer discovers that there has been a non-disclosure entitling it to avoid the policy, it has a choice between two inconsistent rights: it can either affirm the policy (i.e. treat it as continuing), or it can avoid it. If the insurer, having knowledge of those inconsistent rights, makes an unequivocal representation that it will affirm the policy, the right to avoid will be lost.
For example; suppose an insurer, during the course of its investigations following a claim, discovers that the insured had failed to disclose that it has an unsatisfied CCJ. If the insurer expressly affirm cover, it cannot go back on that choice.
That example can be contrasted with implied affirmation i.e. where the insurer’s conduct amounts to an unequivocal communication that it has chosen to affirm the policy. Such conduct might include the actual payment of a claim under a policy, or accepting future premiums.
Waiver of the insurer’s remedy for breach of condition
Where an insured breaches a policy condition, the only form of waiver available is waiver by estoppel (Kosmar Villa Holdings PLC v Trustees Syndicate 1243 [2008] EWCA Civ 147).
As with waiver by election, waiver by estoppel rests on an unequivocal representation that a party will not rely on its rights; however, the insured must also show detrimental reliance i.e. that it has relied on the insurer’s representation, such that the insurer’s withdrawal of that representation would be unjust.
As an example; say there is a fire at an insured’s premises, and the insurer then discovers that the insured had breached a condition precedent regarding the storage of combustible materials. Ordinarily, no liability would attach to the insurer for the claim, as the condition precedent was breached. However, in this case the insurer chooses to act in a manner only consistent with it having waived the insured’s breach, by asking the insured to provide information about the repair costs. If the insured can show that it relied on the insurer’s representation to its detriment (e.g. by starting to repair the premises), the insurer will be estopped from relying on the breach.
Estoppel by silence?
Recent case law has raised the potential for the court to find, in some circumstances, that an insurer’s silence or acquiescence may give rise to an estoppel.
The case in question, Ted Baker v AXA Insurance UK plc [2017] EWCA Civ 4097, concerned a claim by the clothing retail company, Ted Baker, following a theft. AXA refused to pay the claim because, amongst other reasons, Ted Baker had breached a condition precedent in the policy requiring it to produce certain information.
Ted Baker argued that AXA was estopped from relying on its breach, because AXA had known that Ted Baker believed, albeit mistakenly, that the obligation to produce the information had been “parked”. Although Ted Baker’s claim failed on other grounds, the Court of Appeal agreed that Ted Baker was entitled to expect AXA, acting honestly and responsibly, to speak up if it regarded the information as outstanding, and if it realised that Ted Baker had wrongly believed otherwise.
Summary
Waiver arguments arise in a number of different guises in insurance disputes, and are likely to be hotly contested. Although the availability of any waiver argument will be fact-specific, relevant considerations include the conduct and knowledge of the insurer, and whether the insurer had reserved its rights.
If an insured is able to establish that the insurer has waived its rights, the law will hold the insurer to its choice, and any alternative choice will be lost.
Endurance Corporate Capital Limited v Sartex Quilts & Textiles Limited [2020] EWCA Civ 308 – Indemnity on the Reinstatement basis
In its decision earlier this year, the Court of Appeal confirmed that, absent a contractual provision to the contrary, an insured does not need to show a genuine, fixed and settled intention to reinstate in order to recover on the reinstatement basis under a property policy.
Background
Sartex Quilts & Textiles Limited (“Sartex”) was the owner of a factory at Crossfield Works, Rochdale (‘the Property’), from which it had manufactured textiles.
A serious fire occurred at the Property in 2011 destroying it and the plant and machinery it contained. Sartex was insured by Endurance Corporate Capital Limited (“Endurance”).
Endurance accepted liability for Sartex’s claim, but the parties disagreed as to the basis on which Sartex was entitled to indemnity. Specifically, Sartex claimed that it was entitled to the cost of reinstating the Property to the condition that it was in immediately before the fire, whereas Endurance argued that Sartex was only entitled to (significantly lower) sums representing the diminution in market value of the Property as a result of the fire.
The matter originally came before David Railton QC, sitting as a Deputy High Court Judge, in May 2019. He concluded that Sartex had a genuine intention to reinstate the Property, and that accordingly, reinstatement was the appropriate measure of indemnity. The Deputy Judge also rejected Endurance’s argument that there should be a discount for betterment.
The Appeal
Endurance appealed the decision on the basis that the Deputy Judge was wrong to assess damages on the reinstatement basis, when Sartex had not demonstrated a genuine intention to reinstate. In this regard, it asserted that Sartex’s ongoing failure to achieve reinstatement, 8 years after the fire, showed that it had no such intention.
Further, if Endurance failed on its primary case, it argued that the Deputy Judge was wrong not to make a deduction for betterment.
The Court’s decision
The measure of indemnity
Leggatt LJ observed that in indemnity insurance, damages were intended to put the insured in the same position it would have been in had the loss not occurred. What an insured actually intended to do with the damages was generally irrelevant.
There were two bases on which the court could award damages: (a) the cost of repair; or (b) the reduction in the market value of the property. Endurance argued that the latter applied, and relied on the decision in Great Lakes Reinsurance (UK) SE v Western Trading [2016] EWCA Civ 1003, in which a listed building was destroyed by a fire. Unusually in that case, the value of the property increased following the fire because its listed status was revoked, thereby improving its development potential. In Great Lakes, Clarke LJ commented that the basis of indemnity was “materially affected by the insured’s intentions in relation to the property”. He went on to say that “the insured’s intention need to be not only genuine, but also fixed and settled. And that what he intends must be at least something which there is a reasonable prospect of him bringing about (at any rate if the insurance money is paid)”.
The Court of Appeal in Sartex said that these comments did not assist Endurance. It was only in rare cases such as Great Lakes, where the property had gone up in value, that there was a need to demonstrate a fixed and settled intention to reinstate. No such issue arose in this case. Therefore, to put Sartex in an equivalent position as if the fire had not occurred, it was necessary to award it the cost of repairing the buildings and buying replacement plant and machinery.
Betterment
Endurance asserted that a percentage deduction should be applied to any award of damages, representing the alleged betterment arising from the replacement of the original building with modern materials. The Court of Appeal agreed that a deduction could, in principle, be made for savings if the building or the new machinery would have generated lower running costs; however, it was incumbent upon the insurer to identify and justify those savings. In this case, Endurance had made no attempt to do so, and simply advanced notional deductions for betterment that were unsupported by evidence. Therefore, absent any evidence, the Deputy Judge had been right to reject Endurance’s argument.
Implications of the decision
The decision in Sartex is good news for property owners, who, subject to any alternative provision in a policy, will not be required to show an intention to reinstate in order to recover on the reinstatement basis. The insured’s intentions will only be relevant in exceptional circumstances, which did not apply on the facts.
As to betterment, although property owners may, in some instances, be required to give credit for savings made as a result of reinstatement, the “blanket percentage” approach will be impermissible. A deduction will only be allowed where insurers can prove and quantify the lower running costs of the new building or the greater efficiency of the new plant and machinery.
Alex Rosenfield is a Senior Associate at Fenchurch Law
Unoccupied Buildings conditions – a trap for the unwary
Properties become unoccupied in a number of different scenarios. In a residential context, this might be because the home is not the policyholder’s main residence, or because the policyholder is going on an extended holiday. Similarly, for buy-to-let landlords, a property may become unoccupied for lengthy periods between tenancies.
This short article will explore the requirements that insurers impose where a property is left unoccupied, and how those requirements have been interpreted by the courts.
Home insurance
Standard home insurance policies exclude claims where properties are left unoccupied for extended periods. The rationale is simple: an unoccupied home represents a greater risk as it is more likely to attract thieves, vandals or squatters. Equally, there is a greater chance of structural damage in an unoccupied home because no one is available to deal with, say, a burst pipe or a fire. For those reasons, home insurance policies usually require policyholders to tell their insurers if the property is/becomes unoccupied.
“Unoccupied” is typically defined as: “not being lived in.” The case law suggests that this means actual use as a dwelling. So, in Simmonds v Cockell [1920] 1K.B. 843, a warranty requiring a property to always be occupied did not mean that there would always be someone present, but rather that it would be used as a dwelling house.
Most policies say that the cover will cease if the property is not being lived in “for more than [30] consecutive days” (although the precise number of days will vary from policy to policy). As long as the property is regularly being occupied, temporary unoccupancy will not invalidate the cover. Therefore, in the case of Winicofsky v Army & Navy General Assurance [1919], a condition requiring premises to remain “occupied” was not breached where the policyholder sought temporary refuge in a shelter during an air raid.
Once an insurer is told that a property is unoccupied, it will, if the change is accepted, be entitled to vary the premium and terms, and may raise a small administration charge for the variation. If the change is not accepted, the policyholder will need to arrange specialist unoccupied property insurance.
Commercial insurance
In commercial insurance, unoccupied buildings conditions take on a different character. Commercial policies usually impose a number of obligations, some of which may be quite onerous, which must be complied with if cover is to remain in force despite the property becoming unoccupied.
For example, landlords may be required to ensure that an unoccupied property, or a part of it, is inspected once a week (often with a requirement that a record of the inspection is kept), secured against illegal entry, kept free of combustible material, and disconnected from any mains services. The consequence of a failure to comply with the condition depends on whether it is expressed as a condition precedent to the insurer’s liability. If it is, the condition must be complied with absolutely, and any breach will entitle the insurer to deny liability for the claim. If it is not, the position will turn on whether the insurer has suffered prejudice.
A common scenario is that a property becomes unoccupied without the policyholder’s knowledge. This might occur in a landlord’s policy, where, say, a tenant vacates the property without giving notice. Commercial policies usually cater to that scenario by including “non-invalidation clauses”. These are terms which provide that cover will not be invalidated in the event of any act, omission or alteration which is either unknown to the policyholder or beyond its control. To gain the benefit of those clauses, the policyholder will be required to notify its insurer immediately of the act, omission or alteration.
Application of Section 11 of the Insurance Act
Section 11 of the Insurance Act is intended to prevent an insurer from disputing a claim for non-compliance with a term which is unconnected to the actual loss. The Law Commission has said that a causation test is not required; rather, the test is simply whether there is a possibility that the non-compliance could have increased the risk of loss.
Since Section 11 is capable of applying to Unoccupied Buildings conditions, how might it apply in this context?
Let us suppose that a landlord owns a property which has two floors, and the upper floor is unoccupied. A fire then starts on the ground floor, which spreads to the upper floor. Insurers then discover that the landlord breached the Unoccupied Buildings condition by failing to keep the building free of combustible materials, and refuse to pay the claim. There are not yet any authorities on the meaning and application of Section 11.
On an orthodox interpretation of section 11, it would not be open to the policyholder to argue the upper floor would have caught fire in any event, even if the condition had been complied with. However, on a non-orthodox interpretation, section 11 should arguably come to the policyholder’s rescue: the fire started on the ground floor, which was occupied, and compliance with the condition would not have made a difference to the loss.
Conclusion
Almost all property owners, whether acting as private homeowners or in a commercial context, will need to consider the implications of unoccupied buildings conditions at some point.
We would recommend that policyholders check the fine print of their policies in order to understand (a) when they need to notify their insurers if a property becomes unoccupied; and (b) the steps which need to be taken in order to comply with Unoccupied Buildings conditions. A failure to do so may be the difference between an insurer paying, or refusing to pay, a claim.
Alex Rosenfield is a Senior Associate at Fenchurch Law
Appeal Courts Triumph for Structural Defects Policyholders: Manchikalapati v Zurich
Leaseholders of flats in a development in Manchester have secured a major victory against Zurich Insurance under a standard form defects policy, in a case with significant implications for new build home owners affected by inadequate construction works. Following a long running Court battle over claims first notified in 2013, policyholders have been awarded approximately £11 million to rectify failures by the insolvent developer to comply with technical requirements and building regulations.
Residents moved into New Lawrence House from 2009 but were forced to leave following a prohibition notice issued shortly after the Grenfell Tower disaster in June 2017, in view of structural deficiencies including missing lifts and balconies, a collapsing roof deck and complete lack of fire stopping measures. The Court of Appeal judgment handed down last week essentially upheld the decision of HHJ Davies, requiring Zurich - through run-off insurers East West - to pay out under the Standard 10 New Home Structural Defects Insurance Policy (the Policy), aside from overturning the maximum liability cap of around £3.6 million applied below.
The development contains 104 flats and the Claimants between them own only 30, with many others left empty. The Policy limited Zurich’s liability for new homes forming part of a continuous structure by reference to “the purchase price declared to Us”, which had been construed as restricting the Claimants’ recovery to the combined sums paid for their own flats. The Court of Appeal disagreed and recalculated the cap based on the total purchase price of all flats in the block, since the Policy enabled a single leaseholder to recover the entire cost of rectifying a danger to the health and safety of occupants and the previous approach would prevent them from doing so. The Policy wording was ambiguous and should be construed “in a manner which is consistent with, not repugnant to, the purpose of the insurance contract”.
Zurich advanced a number of grounds of appeal relating to interpretation of the Policy, all of which were rejected. Lord Justice Coulson found that:
“what [Zurich] suggest as the proper interpretation of the words used in their own policy is, on analysis, nothing of the kind, and is instead a strained and artificial construction (often requiring the interpolation of words not present) with the result that it becomes impossible to see any circumstances in which [Zurich] would ever pay out under the terms of the policy.”
In particular, the Court of Appeal decided:
1. It is not necessary for the costs of rectification work to have been incurred before a claim can be made under the Policy - otherwise insurers could take advantage of leaseholders’ impecuniosity to avoid liability altogether;
2. The fact that funds recovered would in part be used to pay the Claimants’ lawyers and funders was irrelevant. An insured can apply the insurance proceeds as they wish and it would be unjust to hold otherwise, penalising the Claimants merely because they do not have pockets as deep as Zurich’s. The legal and funding costs would never have been incurred had Zurich acknowledged their proper liabilities at the outset;
3. The Policy does not require the insured to sue any third parties against whom the insured might have a possible claim before pursuing Zurich under the Policy;
4. The underground car park and balconies at the development fall within the scope of cover;
5. The condensation exclusion in the Policy does not apply where the condensation which causes damage is caused by a defect. The proximate cause of damage is the defect, not condensation.
6. The trial judge’s application of Policy excess provisions could not be challenged on appeal.
New build developments are usually constructed by single-purpose corporate entities with limited assets, and purchasers of defective properties have restricted rights of recourse against those responsible for the construction or building control approval process in the absence of contractual claims under collateral warranties (Murphy v Brentwood DC [1991] 1 A.C. 398, Herons Court v Heronslea Ltd [2019] EWCA Civ 1423). The decision in this case is an important step forward in protecting the interests of new build home owners, in light of wider concerns about regulatory oversight and industry standards under contractor-led procurement methods.
The Zurich Policy was a standard wording indirectly descended from the original NHBC scheme and widely used across the country at the relevant time, with the intention of providing peace of mind for the purchasers and mortgagees of new build properties. The policyholder-friendly interpretation upheld by the Court of Appeal serves as a welcome reminder of this commercial context, limiting the extent to which insurers can seek to rely upon unrealistic arguments to avoid liability or delay payment for outstanding claims. Home owners with the benefit of structural defects policies should notify potential claims as soon as possible, to maximise the prospects of effective recoveries.
Manchikalapati & others v Zurich Insurance plc & others [2019] EWCA Civ 2163
https://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWCA/Civ/2019/2163.html&query=(MANCHIKALAPATI)
Amy Lacey is a partner at Fenchurch Law
