The recent case of Forrest & Sons Ltd v CGU Insurance Plc considered the interpretation of an "increase in risk" clause in the context of a material damage and business interruption policy. The interpretation of such clauses remains a difficult area but Forrest appears to provide some welcome assistance for insurers.

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The recent case of Forrest & Sons Ltd v CGU Insurance Plc considered the interpretation of an "increase in risk" clause in the context of a material damage and business interruption policy. The interpretation of such clauses remains a difficult area but Forrest appears to provide some welcome assistance for insurers.

This is the latest case to consider the construction and application of what is often described as an "increase in risk" clause, which are commonly found in all risk property forms. The case is of interest as it appears to place a more insurer-friendly gloss on the interpretation of such clauses than the last reported case in this area, the Court of Appeal decision in Kausar v Eagle Star Insurance [1996].

Turning first to Kausar. After a property damage cover had been renewed by the insured, his tenant threatened malicious damage to the insured property. A short time later a shop window at the premises was broken. The policy contained the following clause. "You must tell us of any change of circumstances after start of the insurance which increases the risk of injury or damage. You will not be insured under the policy until we have agreed in writing to accept the increased risk." The Court of Appeal decided that the clause did not operate. They held that it simply re-stated the common law position, namely that there had to be an alteration in the subject matter of the insurance for the clause to respond. Here there had simply been an increased chance of damage. To allow insurers to succeed would mean that "the appearance of a hurricane on the weather broadcast or a fire spreading down the street, would bring cover to an end". Commentators considered this to be a harsh decision since the Court’s decision made the clause in that policy meaningless.

The facts of the Forrest case are as follows.

The Claimant was a family-owned company which manufactured pet food. At the relevant time it had in place with CGU a single policy indemnifying it for material damage and business interruption losses caused by fire damage. In 1996/7, the Claimant used a gas-powered deep fryer situated in an annexe to deep fry bones. In June 1997 there was a fire in the annexe caused by a gas leak in the fryer. The damage was made good and the Risk Improvements required by the Insurer were carried out, which included full-time attendance whilst frying.

In September 1997 the Claimant purchased an enclosed oven which was installed in the main building of the factory to do the same job as the fryer. The oven was defective and it led to an incident described as "almost a fire". The supplier of the oven carried out some remedial works which proved ineffective so proceedings were commenced against them. The Claimant continued to use the oven but it was fitted with a "temperature policeman" to shut down the oven in the event of overheating.

The policy was renewed in 1998 and in 1999 "subject to survey". The survey, which was undertaken in May 1999, stated that although the bone rendering was now carried out by oven rather than the fryer (and therefore could be expected to be safer), the oven used was inefficient, and its location in the main building (rather than the annexe) meant that the risk of a total loss was greater.

In July 1999 the Claimant notified the Insurer that the oven had been disconnected. The Claimant reverted to frying/rendering in the former location in accordance with the Risk Improvements referred to after the original (June 1997) fire. In November of either 1999 or 2000 the oven was brought back into use. The Insurer was not informed of this decision. The policy was renewed again in April 2001 "subject to survey". At that time the position was, so far as the Insurer was aware, that the oven was no longer in use and the Claimant was frying in the annexe where the original fire had occurred, but subject to the Risk Improvements.

On 1 November 2001 a fire occurred at the Claimant’s premises. The oven was the cause of the fire. The Claimant duly made a claim under its policy for losses sustained. The policy contained an increase in risk clause which provided:

"This policy shall be avoided with respect to any part thereof in regard to which there may be any alteration after the commencement of this insurance.

(c) …. whereby the risk of loss, destruction, damage, accident or injury is increased…."

Judge Kershaw QC held that the insurer could rely on the clause. He was satisfied that for the clause in the case to operate there had to be an increase in the risk not simply of a fire starting, but also of an increase "in risk of loss". He was referring directly to the particular clause. The increase in risk (i.e. the risk of the extent of any damage being greater due to the location of the oven) was to be evaluated between the risk existing immediately after and immediately before the alteration, as opposed to the risk at an indeterminate time before alteration. The relevant comparison was between the use of the fryer in the annexe with the Risk Improvements being followed and the use of a defective oven in the main part of the building.

While there was plainly an increase in risk (the extent of damage resulting from the fire starting was greater because the baking operations were taking part in the main building and not the annex) it is not entirely clear following Kausar that the increase here changed the subject matter of the insurance.

HHJ Kershaw did not refer to the Kausar judgment. It is possible that he distinguished the cases given the different wordings used in the clauses. That said, it is perhaps a little surprising that he made no comment. We can speculate that either the judge was satisfied that the increase in risk was so significant that it did change the subject matter of the risk, or he concluded that the relevant clause operated to change the common law position as set out in Kausar, so that only "increase in risk" had to be demonstrated. The judgment is unclear.

In conclusion therefore:

  • The common law position is that if there is a fundamental change to the nature of the risk then the insurer is discharged from liability.
  • Forrest suggests that the common law position may be altered by the agreement of the parties (i.e the policy terms).
  • Check the increase in risk clauses carefully in all your policies.

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The original publication date for this article was 07/06/2006.