Coronavirus and Business Interruption Insurance 2

Specified illness and Public emergency cover

It is unlikely that business interruption policies will cover the closure of a business where the cover is conditional upon there having been damage to the premises caused by an insured peril and that there is insurance cover in place for that damage (the material damage proviso).

There are, however, extensions to the basic cover which may, depending on how the cover is defined, provide cover for businesses affected by the response to the Cornonavirus.

Specified illness cover

Some policies provide additional cover for loss caused by the outbreak of a specified disease either at the premises or in its vicinity. The policy will give an exhaustive list of the specified diseases. A typical list includes acute encephalitis, acute poliomyelitis, anthrax, chickenpox, cholera, diphtheria, dysentery, leprosy, leptospirosis, malaria, measles, meningococcal infection, mumps, opthalmia neonatorum, paratyphoid fever, plague, rabies, rubella, scarlet fever, smallpox, tetanus, tuberculosis, typhoid fever, viral hepatitis, whooping cough and yellow fever. Unfortunately, however, as Coronavirus and Covid19 are new they are unlikely to feature in any list of specified illnesses.

Public Emergency/Government or Local Authority action cover

An extension to the basis cover which may respond to the present circumstances is cover for loss resulting from the actions or advice of the government or local authority.

One example of such cover insures loss resulting from prevention of access to the premises due to the actions or advice of a government or local authority due to an emergency which is likely to endanger life or property. The government ordered the closure of restaurants, cafes, bars and public houses for the consumption of food and/or drink on the premises, although they were permitted to open access for the sale of food and/or drink for consumption off the premises. The question that may then arise is whether access to these premises, by being denied to a certain category of customer, was prevented within the meaning of the policy.

Another example of public emergency cover insures loss resulting from the actions or advice of a government or local authority due to an emergency likely to endanger life or property in the vicinity of the premises which prevents or hinders the use of or access to the premises. The scope of this cover is rather wider than the first example as it covers circumstances where the use of the premises is hindered even if access is not actually prevented..

Calculation of the loss

Nearly all businesses which involve some element of public access have now been ordered to close (the exception being those on the list of businesses supplying essential services) and restrictions placed on personal movement. Even if the businesses had not been ordered to close and had remained open, they could only have been visited by members of the public acting unlawfully in breach of the order only to leave home for exercise, or for shopping for essential items, for medical and caring needs and for travel to work where working from home is not possible. The loss of business could be argued to be as much due to the restrictions on the general movement of the public as to the actual closure of the business.

Adjustment of Standard Turnover

Business interruption policies allow for adjustments to be made to the standard turnover (the turnover during the interruption period in the previous financial year and which is used for comparison with the turnover during the interruption period in the calculation of the loss) to reflect the trend in the business and the influence of other uninsured effects on turnover. The adjusted standard turnover is the turnover that the business would have achieved but for the insured event. The impact of the Coronavirus crisis on the general level of economic activity is bound to have had an effect even if businesses had remained open.

Scrutiny of business interruption policies and expert advice would seem to be essential prerequisites to the submission of a business interruption claim.


Coronavirus and Business Interruption Insurance


Coronavirus and Business Interruption Insurance

The compulsory closure of many shops and businesses and the inevitable impact of the requirement to work from home if at all possible on other businesses will have many directors, managers and sole proprietors looking to claim on their business interruption insurance cover.

At their most basic level, business interruption policies cover the loss of profit or additional expenses incurred during the period in which the business is affected by damage or destruction of its premises caused by a specified peril (fire, storm, flood etc). Cover is conditional on the premises being insured against the same peril and liability under that other policy being admitted (known as the material damage proviso). It is unlikely that such policies would cover the interruption of business caused by the government ordering a business to close or by staff being required to work from home to reduce the transmission of the coronavirus.

Some policies may extend to interruption of the business when access to the premises is denied, perhaps for safety reasons when a nearby building has been damaged or because the premises have been ordered to be closed because of the outbreak within the premises of a notifiable disease. Such cover may operate where a business has been ordered to close because someone of the premises was diagnosed with the coronavirus. Even where cover is available for such an occurrence, if the business is one of those which were subsequently ordered to close it is likely that the insurers will try to restrict the period of interruption to the date on which the business would have been ordered to close in any event.

The sum payable – the measure of indemnity

The sum payable is usually the sum produced by applying the rate of gross profit to the amount by which the turnover during the period of interruption (known as the indemnity period) falls short of the turnover that would have been achieved in but for the incident (known as standard turnover). There is usually a maximum indemnity period of twelve months or sometimes longer.

Gross profit is the sum of net profit plus fixed costs during the financial year prior to the loss. The rate of gross profit is the percentage which net profit plus fixed costs bore to turnover during that previous financial year. So if fixed costs and net profit was 40% of the business’s turnover of £80,000 in the last year, and the turnover during the during the interruption period was reduced by £50,000, then the sum to be paid by the insurer will be £20,000.

Cover also extends to the increased costs of working incurred in order to avoid or reduce the reduction of turnover, provided that those costs do not exceed the sum produced by applying the rate of gross profit to the loss of turnover that was avoided.

Special circumstances clause

Most policies include a term permitting the calculation of standard turnover (the turnover that the business would have earned but for the loss) to be adjusted to reflect the trend in the business or special circumstances which would have affected the business in any event. It remains to be seen to what extent insurers will try to argue that all businesses would have suffered a reduction on turnover as a consequence of the downturn in economic activity caused by the coronavirus.

Rent insurance

Landlords with rent insurance policies may also find that their cover does not extend to loss of rent caused by tenants being unable to pay because of the compulsory closure of their business. Most loss of rent policies only cover loss of rent caused by their building become untenable after destruction or damage by an insured peril and the inability of the tenant to pay rent because of the impact of the coronavirus on its business would not be covered.

It is essential that anyone with business interruption insurance scrutinises the policy carefully and takes expert advice before submitting a claim.



The Renos and Constructive Total Losses revisited

I am very grateful to Maria Carolina de Franca for her assistance in writing this post.

The Renos was on a voyage in the Red Sea in August 2012 when a fire broke out in the engine room. In 2018 (see our previous post on Constructive Total Losses) the Court of Appeal upheld the High Court decision that the Notice of Abandonment (NOA), in which the owner claimed that the cost of repairing the damage was more than the repaired value of the vessel and that the vessel was a constructive total loss (CTL), was served with reasonable diligence after receipt of reliable information of the loss, and that certain costs relating to the recovery of the ship and charges payable to the salvors to prevent or minimise environmental damage (SCOPIC charges) should be included in the calculation of the repair costs.

The insurers’ appeal to the Supreme Court on the issues of the inclusion of recovery costs and SCOPIC charges within the CTL calculation was partially successful. Unanimously, the Supreme Court found that recovery costs incurred before service of the NOA should be included in the CTL calculation, but that SCOPIC charges should not be.

Section 60(1) of the Marine Insurance Act 1906 provides that there is a CTL where the vessel cannot be preserved from actual total loss “without an expenditure which would exceed its value when the expenditure had been incurred” and section 60(2)(ii) provides that a ship is a CTL where “the cost of repairing the damage would exceed the value of the ship when repaired”. Lord Sumption rejected the insurers’ argument that the term “would” in both of these sections meant that only future expenditure should be included in the calculation. The loss occurs at the moment of the casualty (in the case of The Renos at the time of the fire) and not when the full extent of the damage is discovered or the actual cost of repair is determined. This rule applies even where the loss develops after the time of the casualty, unless there is another intervening cause that breaks the chain of causation. When the NOA is served the loss dates back, retrospectively, to the date of the casualty. Thus the cost of repairing The Renos in the CTL calculation included all the reasonable costs of salving and safeguarding the ship from the time of the fire onwards, together with the prospective costs of repair.

On the other hand, however, SCOPIC charges are not part of the costs of repair. SCOPIC charges are additional costs payable to the salvor to reflect the additional cost to the salvor of complying with its duty to prevent or minimise environmental damage. Costs, such as temporary repairs and recovery costs, which are not spent directly on reinstatement but where the objective purpose is the repair of the vessel, can be part of the CTL calculation. The objective purpose of SCOPIC charges, however, is not the repair of the ship but the protection of the owner from potential liability for environmental damage.

Notice of Abandonment of a Constructive Total Loss

In The Renos [2018] EWCA Civ 230 the Court of Appeal considered the financial implications of expensive repairs to a merchant ship. In August 2012 the MV Renos was on a laden voyage in the Red Sea when a fire broke out in the engine room causing extensive damage.

Under section 60(2) of the Marine Insurance Act 1906 (“the MIA”) a vessel is a constructive total loss (“CTL”) if the cost of repairing the damage exceeds the value of the ship when repaired. Where there is a CTL an owner may abandon the vessel to the insurer by issuing a Notice of Abandonment (“NOA”) under section 62 of the MIA. The NOA must be given with reasonable diligence after receipt of reliable information of the loss.

The parties agreed that if the repair costs were US$8 million or more the vessel would be a CTL. Between August 2012 and January 2013 various quotations were obtained, ranging between US$2.8 million and US$ 9.6 million. On 1 February 2013 the owners served a NOA which was rejected by the insurers on the grounds that it was “given far too late”.

In the High Court Knowles J ruled that the owners were not too late. He also rejected the insurers’ arguments that the vessel was not a CTL due to the inclusion of certain recovery costs in the CTL calculation that had been incurred before the NOA was issued. The insurers appealed.

In deciding the appeal on the issue of whether the NOA was served with reasonable diligence, Hamblin LJ addressed three questions:

  • Did the owners receive “reliable information of the loss”?

What is to be regarded as reliable information will vary according to the circumstances. In this case the repair costs were on the cusp of making the vessel a CTL and therefore greater detail and accuracy were required for there to be reliable information of the scope and cost of repair. When conflicting information on costs was received from experienced sources, the owners could not be regarded as having reliable information. As Knowles J had put it: “it was not realistic to take one source in isolation; the presence of conflicting information from other sources threw the reliability of any one source into question”. The conflicting information meant that the information of the loss remained “doubtful”.

  • Did the owners act with reasonable diligence once they had reliable information?

The insurers argued that reasonable diligence required the NOA to be given almost immediately. The case, however, had a long and complex history and the owners were entitled to take time to consider their position when the final reports on the repairs and costs were received. They had also acted reasonably in requesting a meeting with the insurers to seek their views on those reports, a request which the insurers declined.

  • Did the owners exceed the reasonable time to make enquiry?

The reasonable time was not exceeded because the enquiry was made more complex and slower by the insurers putting forward figures that would not support a CTL and creating an alternative repair specification, thereby making it harder to get a reliable figure.

On the issue of pre-notice recovery costs, the insurers’ argument that the vessel was not a CTL because the calculation included recovery costs incurred prior to the date of the NOA, and that only post-notice costs of recovery should be included was rejected. The insurers’ case was that a prudent shipowner would assess whether the costs of recovery made a vessel a CTL before incurring those costs and thus the NOA had to be given before recovery costs were incurred. Hamblin LJ said that it can be necessary for an owner to recover a vessel, and incur the costs of doing so, in order to be able to ascertain the repair costs and establish whether the vessel is a CTL.

I am very grateful for the assistance of Maria Carolina de França of Vieira Rezende in Rio de Janeiro for her assistance in writing this article.


Causation and insurance broker professional negligence

The issue of causation and its application in professional negligence claims against insurance brokers was one consequence of a fire at a waste recycling facility in Widnes, Cheshire in October 2012.

In Dalamd Limited v Butterworth Spengler Commercial Limited [2018] EWHC 2558 the Claimant was the assignee of the causes of action of the operators of the waste recycling facility. The operators had arranged insurance through the Defendant, an insurance broker. The Claimant alleged that the Defendant had failed to advise the operators of the need to disclose information regarding the restructuring of the business following the insolvency of one of its companies and of the importance of compliance with an External Storage Condition (“ESC”). The ESC required combustible materials stored outside to be kept at least 10 metres away from any building.

The operators’ claim following the fire was rejected by the insurers. The policy was avoided on the grounds of non-disclosure of the restructuring and misrepresentation of the operators’ financial history. The fire claim was avoided because bales of combustible processed polythene were being stored outside in close proximity to a building site and in breach of the ESC.

The operators assigned their rights of action against their brokers to the Claimant. The insurers were not a party to the litigation and their decision to avoid the policy on the grounds of non-disclosure and the claim for breach of the ESC was not explored. The insurers did not give evidence and there was no expert underwriting evidence.

There were other issues before the court, but Mr Justice Butcher found that the Defendant was in breach of its duty to advise the operators of the need to disclose the restructuring of the business to the insurers, but that they had complied with their duty to inform the operators about the existence of and the need to comply with the ESC. The issue then arose whether the operators, and thereby the Claimants, were entitled to recover damages from the Defendant.

Two approaches to the assessment of the Claimant’s loss were advanced. The Claimant argued that they were entitled to damages that reflected the loss of a chance that the insurers would not have been able to rely on the non-disclosure and misrepresentation to avoid the policy and breach of the ESC and would, eventually, have had to meet the claim. If the court found that there was, say, a 50% chance that the insurers would have met the claim, then the Claimants were entitled to an award of 50% of the sum that they would have been entitled to had the claim succeeded in full.

There is a well-established principle in contract law that a Claimant can recover damages for loss of a chance. In Chaplin v Hicks [1911] an actor was awarded £100 damages after her agent breached their contract by failing to advise her of a forthcoming audition. The damages reflected the one in four chance that she would have got the part had she attended the audition.

The Defendant argued that no damages were payable because, on the balance of probabilities, the insurers were entitled to rely on the non-disclosure and misrepresentation and breach of the ESC to reject the claim. In order to succeed with a claim, whether in tort or in contract, the Claimant must prove that, on the balance of probabilities, that the Defendant’s breach caused the loss claimed. In contract law, proving the breach is not enough to be able to recover more than nominal damages. In Fraser v Furman [1967] 1 WLR 898, also an insurance broker professional negligence case, the Court of Appeal dismissed an appeal against the decision of the lower court to award the Plaintiff (Claimant) damages because it was highly improbable that an insurance company (Eagle Star) of high reputation would conceivably take a wholly unmeritorious point.

Mr Justice Butcher preferred the Defendant’s approach and found that it was more likely than not that the insurers’ rejection of the claim would have been upheld had it been challenged. Although the insurers had not been party to the proceedings, there was evidence of the importance they attached to the operators’ financial history and the judge considered that it was more likely than not that had there been disclosure of the withheld financial information then the insurers would, at the very least, have altered the terms of the policy if they had issued it at all. There was, however, also photographic evidence of the bales and their position close to buildings and the judge considered that there was no substantial chance that the insurers would have not relied on the breach of the ESC in order to avoid the claim, and that they would have maintained their position and not have abandoned or compromised it.

Thus even if there had there been full disclosure and the policy had been issued, the insurers would still have been able to avoid the claim. Accordingly, even though the Defendant’s breach of duty to the operators was established, the claim was dismissed because the Claimant had not established that the breach had caused the loss.

Draft Insurable Interest Bill

The Law Commission and Scottish Law Commission have published a draft Insurable Interest bill. The new Bill is intended to rectify perceived shortcomings in the existing law and enable insurance providers to respond to demand for a wider range of life, accident and critical illness cover.

Under the current law a person taking out insurance must be affected by the subject matter of the insurance and must stand to gain a benefit from its preservation or suffer a disadvantage from its loss or damage. Under section 3 of the Life Assurance Act 1774 the amount payable under a life assurance policy is restricted to the value of the insured’s legally recognised interest in the life of the person whose life is insured. These rules on insurable interest are perceived to be unclear, antiquated and restrictive and inhibiting the provision of life, accident and sickness insurance in areas for which there is a demand.

The Bill adopts a new distinction between life and non-life insurance. Previously the distinction had been between indemnity insurance, such as property and liability insurance where the sum payable is assessed at the time of loss and is measured by the insured’s financial loss, and contingency insurance where the sum payable is agreed and fixed at inception. The proposed reform of the law on insurable interest did not fit comfortably with this distinction as accident, sickness and life cover for key employees contains an element of indemnity and some valued property insurance policies provide for payment of a fixed sum.

The proposal is that for life insurance, which include life, sickness and accident policies, an insured must have an insurable interest in the life of the individual who is the subject of the insurance. That insurable interest is extended from the present legally recognised pecuniary interest to a reasonable prospect of suffering economic loss on the occurrence of the insured event (death, illness of, or injury to, the insured person). The absence of such an insurable interest would render the policy void, rather than illegal, and so premiums paid would have, in the absence of an untrue or misleading statement, to be refunded.

The new law would enable parents to take out travel and health policies for their children and legitimise group life and health insurance policies for employees and their families, which are generally honoured by insurers but not strictly legally enforceable. Key person life assurance could also be legitimately extended to cover the real value of the key person to the organisation, rather than being restricted to the person’s notice period as at present.

The daft bill also includes a non-exhaustive list of situations where an insurable interest will exist. The relationships of natural affection will extend beyond spouses and civil partners to include cohabitants who live with the insured as spouse or civil partner, and children and grandchildren, recognising that parents and grandparent are sometimes economically dependent on their adult children and grandchildren. The bar on offspring having an insurable interest in their parents and grandparents is to continue, for fear of exposing the vulnerable elderly in assisted dying. Children who wish to protect themselves against the consequences of parental care costs would be able to do so under the new, wider economic interest.

The draft bill, along with explanatory notes and the responses to earlier consultations is available at Comments are invited and should be emailed to the Law Commission by 14 September 2018.

Illegality as a Defence

The refusal of the courts to allow the law to be used to benefit parties engaged in serious unlawful activity was illustrated in a High Court appeal against a decision to strike out a claim. Under the Civil Procedure Rules a claim can be struck out if it has no reasonable grounds for being brought.

In Dalvinder Gujra v (1) Balbir Roath (2) Shakti Roath [2018] EWHC 854 (QB) the Claimant’s case was that the Defendants had agreed to pay him £500 to set fire to two of their motorcars and had further agreed that if he was arrested that they would ensure that charges would not be pursued. In accordance with this agreement the Claimant set fire to the cars but the police were called and arrested him. The Defendants did not tell the police that the Claimant had acted with their permission and he was charged with arson. He stood trial and was acquitted.

The Claimant then brought a claim against the Defendants in negligence. He alleged that the Defendants’ failure to tell the police about the agreement was a breach of their duty of care to him which exposed him to prosecution. He claimed damages for the time spent on remand and on bail leading up to his trial.

The Defendants applied to have the claim struck out. They denied that there was any such agreement but argued that if there had been it must have been for the purpose of assisting them in making a fraudulent insurance claim. Such an agreement would have been unenforceable as a contract because a contract is illegal and void if the object, whether directly or indirectly, is the commission of a crime. The negligence claim had no reasonable grounds for being brought because it was founded on the Claimant’s illegality and so the principle that no cause of action arises from an illegal or flagrantly immoral act (known as ex turpi causa) applied. On his own case, therefore, the Claimant’s actions in setting fire to the cars were patently illegal and it would be ‘an affront to public conscience and to the integrity of the legal system for the law to afford the Claimant a remedy’. Master Davison agreed and struck the claim out.

The Claimant’s appeal was dismissed. He advanced a number of arguments, most of which were specific to the particular and peculiar circumstances of the claim. One argument, however, concerned the use of ex turpi causa illegality as a defence. The fact that a claimant was engaged in an illegal activity which brought about his injury does not automatically mean his claim for damages for personal injury must be dismissed and the test for establishing illegality, as set out in the case of Patel v Mirza [2016] UKSC 52, is in three parts:

  • Has there been illegal conduct?
  • Having regard to the nature and circumstance of the illegal conduct, is it in the public interest to deny the relief claimed?
  • Is denial of the relief a proportionate response to the illegality?

Mr Justice Spencer considered that a serious attempted fraud upon an insurance company could not be said to be no more than a minor transgression. The public interest was served by deterring or defeating dishonest insurance claims by denying the Claimant a remedy. The loss of the damages claimed for time spent on remand and on bail was in no way disproportionate to the unlawfulness of the Claimant’s conduct in involving himself in such a serious attempt at fraud.

So there is no limit to what a QC can do after all…

In Allianz Insurance plc v Tonicstar Limited [2018] EWCA Civ 434 the Court of Appeal has overturned the decision of Mr Justice Teare to remove a QC as an arbitrator on the grounds that he did not have the requisite experience of insurance or reinsurance. Under clause 15.5 of the Joint Excess Loss Committee Clauses arbitrators had to be persons from the “trade or business of insurance”, and so a QC with more than 10 years’ experience of acting in insurance and reinsurance disputes did not qualify for appointment (see my post “There are some things that even a QC cannot do…” November 15 2017).

Mr Justice Teare felt bound by an earlier unreported decision of Mr Justice Morison in Company X v Company Y (2000) although he indicated that, uninhibited by that authority, he might have decided the case differently. Lord Justice Leggatt in the Court of Appeal was not so constrained and found that Mr Justice Morison’s interpretation of the clause was indefensible and that it did not impose any restriction on how the ten years’ experience was to be acquired.

Counsel for the Respondent did not attempt to support Mr Justice Morison’s interpretation but instead argued that although the QC undoubtedly had considerable more than 10 years’ experience of insurance and reinsurance law, there was no evidence that he had any experience of insurance or reinsurance “itself”. He took as an example a sports arbitration and suggested that having experience of sports law would not be enough to demonstrate experience of sports. Similarly, experience of engineering or telecommunications law was not the same as experience of engineering or telecommunications.

Lord Justice Leggatt rejected this argument. Insurance and reinsurance differ from sports, engineering and telecommunications in that insurance contracts create legal rights and obligations whereas the law regulating sports, engineering and telecommunications is clearly distinct from the activities themselves. Those who work in insurance, whether as brokers, underwriters or in claims, need to have some legal knowledge and understanding. The practical and legal aspects of insurance and reinsurance are intertwined and there is no such thing as insurance or reinsurance “itself” which is separate and distinct from the law of insurance and reinsurance.

Two points: the capability of QCs to do anything and everything is restored, and the crucial importance of the legal elements of the CII and CILA examinations is underlined.

Aggregation of Claims

In Spire Healthcare Ltd v Royal and Sun Alliance Insurance PLC [2018] EWCA Civ 317, the Court of Appeal considered the wording of the schedule and a proviso in a liability policy. The schedule set limits of £10 million for any one claim and £20 million for all claims during the period of cover. The proviso provided that the total amount payable arising out of all claims consequent on or attributable to one source or original cause ‘shall not exceed the limit in the schedule’ without specifying whether that limit was £10 million or £20 million.

The claim arose out of unnecessary and negligent operations performed by a surgeon for which Spire Healthcare Ltd (“Spire”) agreed to pay compensation to the patients. His Honour Judge Waksman QC ruled that the insurer’s liability to indemnify Spire was limited to £10 million as the claims were consequent on or attributable to one source or original cause. Spire appealed.

Spire’s arguments were that the proviso was inconsistent with the schedule and that a reasonable reader would have focused on the schedule. The schedule contained no reference to the proviso and as the proviso did not expressly say that linked claims were to be treated as a single claim it was wrong to assume that they would be treated as such. The wording of the schedule and proviso was ambiguous and applying the contra proferentem rule the construction more favourable to the insured should apply.

In dismissing the appeal, Lord Justice Simon’s starting point was to consider the combined effect of the schedule and proviso without giving greater or lesser weight to either. The approach to the interpretation of the policy of was that of sophisticated insured who is assisted by professional advice and who does not restrict their reading to the limits of indemnity in the schedule. The judge acknowledged that the wording of the proviso could have been clearer (HHJ Waksman QC had said ‘in frequently used, modified and revised policies of insurance, neatness and elegance are often lost’) but also that in some circumstances, for example where there is a deductible or excess, the aggregation of claims might work to the insured’s advantage. There was no real ambiguity in the schedule and proviso when read together and so the contra proferentem rule did not apply.

Two observations on the case. First, Lord Justice Simon recognised that the insured in a liability policy of this type was a sophisticated reader who read all the policy and was  professionally advised. Second, a lot of time and expense might have been saved if neatness, elegance and a greater degree of precision had been retained in the modification and revision of the policy.

Warranty or condition precedent to liability?

In Bluebon Limited (in liquidation) and (1) Ageas UK Limited (2) Aviva Insurance Limited (3) Towergate Underwriting Group Limited [2017] EWHC 3301 (Comm) the High Court considered whether a term in an insurance policy was a warranty or a condition precedent to liability.

The Claimant insured owned a hotel that was destroyed by fire. The insurers were the First and Second Defendants and the brokers were the Third Defendants. The policy contained a term, described as an Electrical Inspection Warranty (“EIW”), that required the electrical installation to be inspected and tested every five years. It was agreed that the electrical installation had not been tested within the five years prior to policy inception or at any time since.

The insurers contended that the EIW was a warranty and that the breach entitled them to declare the policy void from inception. Alternatively, they contended that the term was a suspensive warranty and that cover was suspended from inception until the electrical installation was inspected. In practical effect there was no difference of outcome whether the EIW was a ‘true’ or a ‘suspensory’ warranty as there was no dispute that the electrical installation had not been inspected post-inception. Under both a true and suspensory warranty the insurers were entitled to declare the policy void from inception and refund the premiums paid, less an amount paid for an earlier burst pipe claim.

The insured and their brokers contended that the compliance with the EIW was a condition precedent to the insurers’ liability for a fire caused by a fault in the electrical installation. Unless the fire was caused by a fault in the electrical installation then the insurers were liable.   The construction of the EIW was tried as a preliminary issue and the cause of the fire was not considered.

The Honourable Mr Justice Bryan considered that the description of the EIW in the policy as a warranty was not necessarily conclusive, not least because, as Mr Justice Mackinnon observed in Roberts v Anglo Saxon Insurance Company [1927], the word warranty “is often used with the greatest possible ambiguity in insurance policies”. The consequences of a breach, that the policy would be null and void from inception, were not spelled out and the policy’s general conditions provided that due observance and fulfilment of the policy terms, which included the EIW, were conditions precedent to the liability of the insurers to make any payment.

Instead the judge applied the three-stage test identified by Mr Justice Rix in HIH Casualty & General Insurance v New Hampshire Insurance Co. [2001] (“HIH”). The first question was whether the EIW was a term that went to the root of the contract. Here the purpose of the EIW was to ensure that, as far as possible, the electrical installation was sound and without defect and thereby the risk of fire was reduced. It was clear, therefore, that the EIW went to the root of the contract.


The second question was whether the EIW was descriptive of or had a material effect on the risk of loss. Fire was an insured peril under all sections of the policy and therefore the test was satisfied.

The third question was whether, in the event of breach by the insured, damages would be an unsatisfactory and inadequate remedy for the insurer. Damages would be a suitable remedy if the insurers could reduce or extinguish their liability to the extent that a fire was caused by a fault in the electrical installation that would have been discovered and remedied through compliance with the EIW. The judge considered that it might be impossible to establish whether a fire was caused by a defect in the electrical installation, particularly in the event of destruction in a particularly fierce fire. Damages were not, therefore, a satisfactory or adequate remedy for the insurer.

The three tests in HIH were satisfied and so the EIW was a warranty and not a condition precedent to liability. The judge, however, preferred the construction of the EIW as a suspensive rather than a true warranty (although it made no practical difference in the circumstances of this claim). He considered that the EIW should reflect the intention of the parties by reference to what a reasonable person having all the background knowledge of the parties would understand it to mean. The EIW clearly contemplated that if there had not been an inspection within the last five years then one was to be undertaken immediately, and that cover would be suspended until it took place. It would be wrong to say that if an inspection was outstanding at the time of inception, but one was undertaken shortly afterwards, the policy would nevertheless be null and void.

The significant point to note from the decision is that the judge did not consider the description in the policy of the EIW as a warranty to be conclusive. Care should be taken when drafting terms that an insurer wishes to rely on as warranties that the consequences of a breach are made clear and that they are consistent with the general policy conditions.