UK: The Taylor Wessing Insurance and Reinsurance Review of 2010

Property insurance

Fraudulent claims and the burden of proof

Yeganeh v. Zurich Insurance Co [2010]¹

London Mercantile Court, 24 May 2010

This case concerned a claim under a buildings and contents insurance policy following a fire at the insured property.

The policy provided that, in the event of the insured pursuing a claim that was "fraudulent or false in any way, we will not make any payment and all cover will end", although it was common ground that, on the present facts, this clause added little to the common law position².

In defence of the claim, the insurer alleged fraud or misconduct by the insured in two respects, either of which it was said would defeat the claim:

1. that the fire was caused deliberately, by or at the behest of the insured;

2. that the insured had sought to inflate the contents claim, in particular by falsely alleging the destruction of a quantity of high value clothing, the alleged evidence for which had in fact – so insurers contended - been planted after the fire.

Cause of the fire

Dealing firstly with the cause of the fire, the court noted the long established common law position on the question of burden of proof. Where an insurer alleges that the insured property has been lost by the deliberate act or with the connivance of the insured, the onus is on the insurer to prove it, but to what standard of proof? Although based upon the civil test of the "balance of probabilities", the courts have held that a higher degree of proof is in fact required in these cases, something approaching the criminal standard, in order to reflect the gravity of the accusation. The position was summarised by Neil LJ. in Continental Illinois National Bank & Trust Co v. Alliance Assurance Co (The Captain Panangos DP) [1989]³ thus:

Difficulties arise, however, where the court is presented with alternative theories, none of which it finds attractive on its own. In the present case, the only theory put forward, other than deliberate ignition, was an accident involving a halogen heater, the likelihood of which the judge considered to be "remote" on the evidence. Was the judge then compelled to find in favour of the only other theory in play, namely arson by the insured?

The answer to that question is to be found in Rhesa Shipping Co SA v. Edmunds (The Popi M) [1985] 1 WLR 948 HL. In that case, Lord Brandon declined to apply what he called the "dictum of Sherlock Holmes", namely that "when you have eliminated the impossible, what remains, however improbable, must be the truth". The correct position, he said, was this:

The judge concluded that the present claim was just such a case. In the absence of having shown any discernible motive for the insured to burn down the property, the insurers had not done enough to discharge their burden of proving deliberate act as the cause of the fire.

Inflated claim

The court then turned to the allegedly inflated claim. On this, the judge was able to make a much more definitive finding on the evidence available, concluding that the insured was, in this matter, clearly "the sort of person who is casual about the truth". On the basis of the factual statement of the two loss adjusters involved, the judge concluded that the insured had indeed planted clothing on the premises after the fire, in a bid to restore the integrity of an inflated contents claim that had by then been demolished by the insurer's investigations. Applying the principle in Axa v. Gottlieb [2005], the result was that the entire claim failed.

Result: Judgment for the insurer.

Business interruption and the "but for" test

Orient-Express Hotels v. Assicurazioni Generali SpA (UK Branch)⁵

Commercial Court, 27 May 2010

The case concerned a claim under a combined property policy covering physical damage and business interruption in respect of the Windsor Court Hotel, a 23-storey property in the central business district of New Orleans.

The property suffered significant physical damage from wind and water in the course of Hurricane Katrina, and it was closed throughout September and October 2005. The Hotel reopened on 1 November 2005, albeit not fully repaired and with its services and amenities not fully operational. The insured sustained significant business interruption losses.

The basic insuring clauses in the policy were in fairly standard terms. Specifically, the insurers agreed to indemnify:

a) under the Material Damage and Machinery Breakdown Sections "against direct physical loss destruction or damage except as excluded herein to Property as defined herein...;"

b) under the Business Interruption Section against loss due to "interruption or interference with the Business directly arising from Damage and as otherwise more specifically detailed herein..."

As to the adjustment of BI losses, the policy also contained a "Trends Clause" as follows:

The central issue concerned the business interruption claim, and in particular, whether and how far it could be said that the claimed BI losses were in fact "directly arising" from the physical damage to the hotel. It was common ground that the hotel was indeed severely damaged, to an extent necessitating its closure for a time, but the same was also true of the wider vicinity. A curfew had been imposed throughout New Orleans shortly after the hurricane and the city remained effectively closed to all but emergency services until early October 2005. Thereafter, business remained slow for some time due to the difficulty of access and loss of attraction.

Properly speaking, therefore, the insured's BI claim was the result of concurrent causes, namely the physical damage to the hotel on the one hand, and the wider damage to the vicinity on the other. In cases where more than one factor contributes independently to the loss, it is common to apply the "but for" test to determine which is the effective cause; in other words a given cause, act or circumstance will be said to be the effective cause if the relevant loss or damage would not have occurred without it.

The difficulty for the insured in this case was that the premises would clearly have remained closed, due to the curfew and the closure of the city, even if the hotel itself had escaped with no physical damage at all. It could not be said that the BI loss would not have occurred "but for" the physical damage to the hotel, and hence the claim failed the test. Consequently, the arbitration Tribunal found in favour of insurers on this point, against which decision the insured appealed to the Commercial Court.

Relying upon the judgment of Lord Nicholls in Kuwait Airways Corporation v Iraqi Airways Co (Nos 4 and 5) [2002]⁶, the insured argued that this was one of those few cases where the "but for" approach was unfair and unreasonable, and that the Tribunal had erred in law by applying such a test to this case. Logically, so the insured argued, the "but for" test could yield no effective cause at all on the facts of this case, because neither the damage to the hotel nor the damage to the vicinity could – independently – satisfy the requirement. Instead, so the insured contended, it was enough that at least one of the concurrent causes was an insured cause, so long as the other was not excluded.⁷

While the Commercial Court Judge, Mr Justice Hamblen, saw "considerable force" in much of the insured's argument, he still had to be satisfied that the Tribunal had gone so far as to err in law by applying the standard test. He concluded that they had not, for three reasons:

1. It was clear from the language appearing elsewhere in the policy that the parties were perfectly comfortable with a "but for" approach. Specifically, the Trends Clause was predicated on calculating the recoverable losses on the basis of what would have happened "had the Damage not occurred" or "but for the Damage";

2. whether "fairness and reasonableness" demanded a departure from the standard test was a question of fact for the Tribunal, rather than a question of law;

3. While there may be issues of fairness associated with the "but for" test, the alternatives were even more stark. The judge surveyed a number of possibilities, none of which he found satisfactory. Among the options considered was allowing the insured to recover for all BI that would have happened "but for the damage to the hotel and the city". However, that would compensate the insured for all business interruption losses howsoever caused, even where those losses were not in any way caused by the physical damage to the hotel. This was clearly not the intention of the insuring clause.

Having so ruled on the applicability of the "but for" test to the main insuring clause, the Judge then turned to the second issue under appeal, concerning the purpose and effect of the Trends Clause. While it was accepted that, under the terms of the clause, a BI loss had to be adjusted to reflect deteriorating (or rising) trends affecting the gross revenue of the business, the insured argued that this should not extend to trends caused by the very same peril that caused the damage giving rise to the BI claim in the first place. The Trends Clause, argued the insured, must be concerned with trends taking place independently of the hurricane, causing its gross revenue to decline (or, indeed, rise).

Again, the Judge found for insurers. Nowhere in the Trends Clause did it state that the relevant "variations or special circumstances" affecting the business had to be something unconnected with the actual damage, in the sense that it had to have a cause independent of that which resulted in the damage. Consequently, in so far as a residual BI claim survived the finding on the main insuring clause⁸, the court held that the claim fell to be adjusted to reflect the declining gross revenues brought about in the wake of Hurricane Katrina.

Result: Judgment for the insurers.

Non-disclosure and breach of warranty

Sugar Hutt Group Ltd v. Great Lakes Reinsurance (UK) Plc & Ors [2010]⁹

Commercial Court, 26 October 2010

This litigation concerned a claim by the owners and operators of four nightclubs under a property insurance policy issued by the Defendant insurers, following a fire at one of the insured premises.

By way of a slip scratched on 24 March 2009, the policy insured various companies within the Sugar Hut Group, including the then holding company and its four subsidiaries through which the clubs were each operated (the "Old Companies"). Soon afterwards, insurers were presented with an endorsement, requesting the substitution of the Old Companies by four new group companies, the Claimants in the litigation. Ostensibly, this amendment was sought merely to reflect a change in the name of the relevant operating companies. The endorsement was duly agreed on 31 March 2009.

The slip contained various warranties concerned with fire and intruder protection, and cover was also expressly subject to receipt of a satisfactory proposal form, in fact provided two weeks after inception.

Non-disclosure

On 13 September 2009 a fire occurred at one of the insured nightclubs. In the course of insurers' investigations into the loss, it emerged that the original insureds (that is, the Old Companies), had gone into administration only a few weeks prior to the insurers agreeing to underwrite the policy, this being the real (but undisclosed) reason for the requested endorsement. Relying upon section 18 of the Marine Insurance Act 1906, insurers contended that these were material facts that ought to have been disclosed, thereby entitling them to avoid the policy.

On the question of materiality, the court had little difficulty in concluding that a reasonable and prudent underwriter would have wanted to know why the Claimant companies had been formed, what had happened to the Old Companies and why they were no longer to be the subject of insurance. There was, as it turned out, much more to the requested endorsement than a mere change of corporate name, and these matters were clearly material to the decision whether to accept the risk and, if so, on what terms.

However, applying the two stage test set down in the well known case of Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995]¹⁰, the court also needed to be satisfied that the particular underwriter in this case had been induced to enter into the contract as a result of the said non-disclosure. On that, the judge asked himself two alternative questions:

1. Was the underwriter so keen to accept the risk, so uninquisitive and so complacent, that he would not have batted an eyelid had the undisclosed facts been disclosed to him?

2. If the underwriter would have batted an eyelid and had called for (and received) the relevant explanations, would he still have proceeded with the insurance contract as arranged?

On the facts, the Judge was satisfied that the underwriter was indeed induced. Moreover, the specific questions put (and answers given) in the proposal form about the insureds' trading history did not serve to limit the duty of disclosure or waive the obligation to disclose matters beyond the particular questions raised.

Breach of fire risk warranties

The judge also went on to consider two fire risk warranties in the policy, namely the requirement to keep cooking equipment and ducting "free from combustible materials" and the requirement that extraction ducts be "checked at least once every six months by a specialist contractor". On the first, the experts agreed that there had been contact with combustible materials, but the insured contended that this was not a "true" warranty, so much as merely a suspensory condition, suspending cover during the actual period of breach, but not otherwise. The court disagreed. Taking into account the agreed evidence of the experts of the risk of ignition of the combustible materials, the warranty bore materially on the risk of loss and the insurers were entitled to regard it as an important protection. Moreover, given that all four premises had kitchens at risk of fire, it qualified as a true warranty in respect of all of them, such that breach in one kitchen would entitle insurers to treat the contract as discharged in all four premises, and whether or not the breach had occurred in the premises that actually suffered the fire. As to the question of six monthly inspection, the court was more sympathetic to the argument that this was merely suspensory in nature, but on the facts this approach could not assist the insureds in this case. They were in actual breach of the six monthly inspection requirement at the date of the fire, and hence without cover on either view.

Breach of burglar alarm warranty

Finally, the court also went on to consider the effects of a warranty requiring that "a N.A.C.O.S.S. Central Monitoring Station Alarm is installed and operational", and a corresponding obligation to comply with any risk improvement notices issued by insurers following survey. The court concluded that the express warranty was, again, a true warranty, whereas the need to comply with more detailed risk improvement notices issued from time to time might be suspensory only in effect. On the facts, however, the result here would be the same. The burglar alarm system installed at the fire damaged premises lacked any connection to the police station or to an alarm centre, and as such fell short of a "Central Monitoring Station Alarm", as required by the express warranty. It also failed to meet the standards requested under the risk improvement notices issued by insurers, a breach that remained current on the date of the fire. On either basis, therefore, there would be no cover at the time of the fire.

Result: Judgment for the insurers on avoidance and (in the alternative) breach of warranty.

Double insurance and the "Other Insurance" clause

National Farmers Union Mutual Insurance Society Ltd v. HSBC Insurance (UK) Ltd)¹¹

Commercial Court, 19 April 2010

It is not uncommon for insurance contracts to contain provisions dealing with the situation where the insured has access to more than one policy in relation to the same risk. In many cases, either or both policies may stipulate that they operate only excess to the other, and where both policies contain such a provision then they may cancel each other out. Absent some specific provision as to double insurance, however, an insured covered by two policies may elect to pursue the entire claim under either; it is then incumbent upon the paying insurer to seek an equitable contribution from his co-insurer.

In the present case, the defendant insurance company, HSBC, had provided buildings cover to owners of a property under a policy that expressly extended cover to any buyer of the property until the sale was completed, but subject to the proviso that a buyer would not enjoy such cover "if the buildings are insured under any other insurance".

The HSBC policy also contained a more general "other insurances" clause, as follows:

The owners subsequently agreed to sell the property, and upon exchange the buyers took out their own policy with the Claimant insurers, National Mutual (NF). The NF policy contained the following stipulation:

Between the dates of exchange and completion, a fire broke out at the property, causing extensive damage. The buyers made a claim on their buildings cover with NF in respect of the fire damage and were paid a sum in settlement of the claim. NF then sought a contribution from HSBC for its share, on the basis that, at the time of the fire, the risk was double insured. For its part, HSBC denied liability, contending that the buyers had no cover under the HSBC policy at all, or alternatively that it operated only as an excess policy to that issued by NF.

The court found for HSBC. Under the terms of the HSBC policy, the buyer was simply not insured at all where, as here, it had taken out its own policy. By contrast, the NF policy contained no provision excluding coverage in the event that the buyer was otherwise insured in respect of the same risk. It followed that the only policy covering the buyer for physical loss to the property was the NF policy, and hence the question of a contribution for double-insurance simply did not arise.

Result: Judgment for the Defendant insurer, HSBC.

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Footnotes

1 [2010] EWHC 1185 (QB)

2 To which, see Axa General Insurance v. Gottlieb [2005] EWCA Civ 112

3 [1989] 1 Lloyd's Rep 33

4 See also National Justice Compania Naviera SA v. Prudential Assurance Co (The Ikarian Reefer) [1995] 1 Lloyd's Rep 459

5 [2010] EWHC 1186 (Comm)

6 [2002] 2 AC 883

7 The Miss Jay Jay [1987] 1 Lloyd's Rep 3

8 Under a secondary Prevention of Access / Loss of Attraction extension, which was not the subject of the appeal

9 [2010] EWHC 2636 (Comm)

10 1995] AC 501

11 [2010[ EWHC 773 (Comm)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.