Business premises – Insurance policy – Construction – Appellant stating on insurance proposal form that building having sprinkler system – Appellant claiming under policy for fire damage – Respondent insurer cancelling policy as sprinkler not working at time of fire – Whether failure of sprinkler system amounting to material change of facts – Appeal dismissed
The appellant owned commercial premises that he let to one of his friends for the purposes of his business. The property was fitted with an automatic sprinkler system.
In 2004, the appellant applied to the respondent for building insurance. The proposal form for a Commercial Property Owners Policy required him to provide information on various aspects of the premises. In response to a request for details of the trade or business of any tenants, the appellant described the business carried there as “Tenants (Wholesaleing kitchenware)”, and he responded to the question “Are the premises protected by an automatic sprinkler system?” in the affirmative. However, he did not provide any details of the system, despite being asked to do so. He declared that the statements in the proposal form were true to the best of his knowledge and belief.
The respondent subsequently issued an insurance policy for a period of 12 months from May 2004. It was renewed in March 2005 for a further year with effect from May without any relevant amendments. The policy provided cover, inter alia, against destruction of or damage to the building by fire. General condition 2 provided that: “This insurance shall cease to be in force if there is any material alteration to the premises or business or any material change in the facts stated in the proposal form or other facts supplied to the insurer unless the insurer agrees in writing to continue the insurance.”
In September 2005, a fire broke out in the premises, causing considerable damage to the building and contents. The appellant made a claim under the policy. It was subsequently revealed that the sprinkler system had not been working at the time the fire started, having been turned off at the junction with the main water supply. It was also clear hat the premises contained goods that could not be described as kitchenware; the stock included scooters and mini-motorbikes. Accordingly, the respondent rejected the claim and cancelled the policy. Patten J dismissed the appellant’s claim for damages: see [2008] EWHC 243 (Ch); [2008] Lloyd’s Rep IR 586. The appellant appealed. A question arose as to whether any of the changes were material for the purposes of condition 2 of the policy.
Held: The appeal was dismissed.
The judge had been right to reject the appellant’s claim.
The word “material” had a well-established meaning in insurance law in the particular context of negotiations leading to the formation of a contract. The insurer depended upon the insured to provide it with the information that it needed to assess the risk. That required the utmost good faith, both in respect of disclosure and the description of the facts.
In the instant case, however, the word was used in a different context. Condition 2 was concerned with events that occurred after the contract had been entered into. If “material” were to bear the same meaning as that which it bore in the context of pre-contractual negotiations, the policy would automatically lapse on the occurrence of any new circumstances that would influence to any extent the judgment of a prudent insurer in deciding upon what terms it would accept the risk, whether or not those circumstances would lead it to alter its terms. That would be highly detrimental to the insured, who might not be aware that a particular change of circumstances would be viewed in that way, and would render his position precarious. Moreover, it would give the respondent the right to renew the underwriting exercise every time it was notified of any minor alteration to the premises or any minor change in the facts stated in the proposal, regardless of whether the risk had significantly changed.
That was not how a reasonable insured or a reasonable insurer would read the condition 2. It was intended to protect the respondent against alterations to the premises or changes in the facts upon the basis of which it wrote the policy, that had a significant bearing on the risk. “Material”, in that context, had to be understood in that sense: Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501 distinguished; Kausar v Eagle Star Insurance Co Ltd [2000] Lloyds Rep IR 154 considered.
In the instant case, as the draftsman had chosen particular wording in condition 2, and the correct approach was to give the condition the meaning that reasonable persons in the position of the insured and insurer would understand it to bear. Adopting that approach, and bearing in mind that the effect of condition 2 was that the policy ceased to be in force, “material” had to be understood as referring to alterations or changes in facts of a kind that took the risk outside that which was in the reasonable contemplation of the parties when the policy was issued.
On the evidence, the change in the facts stated in the proposal form, which had been brought about by the sprinkler system having been turned off for an indefinite period, was not something that, on the true construction of the contract, the parties would have contemplated when the contract was made.
Timothy Saloman QC and Jeffrey Terry (instructed by HSK LLP) appeared for the appellant; Jonathan Watt-Pringle QC and Marcus Smith (instructed by Debenhams Ottaway) appeared for the respondent.
Eileen O’Grady, barrister
