UK: Property Insurance: Non-Disclosure and Breach of Warranty

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


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 their 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]1, 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:

i) 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?

ii) 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.


1. [1995] a AC 501

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.

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