Loyaltrend v Brit (March 2010): Implications for brokers and underwriters

1. Loyaltrend v Brit (March 2010):Implications for brokers and underwriters Victoria Sherratt Partner Barlow Lyde & Gilbert LLP Presentation to LBIA - 1 November 2010

2. Factual Background • Insured – Clothing business. • Shop in Notting Hill – occupies as a tenant. • Insured against MD and BI under a series of 4 annual policies. • The policies are underwritten by a coverholder on behalf of different insurers for three of the four policy years. • The policies covered: • MD to trade contents, tenants’ improvements and stock as a result of a number of perils, including subsidence, and • BI in the event of damage covered under the MD section. • The building is insured separately by the Landlord.

3. Shop suffers subsidence

5. The Claim • Initially against all three Insurers. • The Insured settled with Creechurch and Catlin. • Claim is pursued against Brit under the second policy which ran 11 December 2003 to 10 December 2004 on the basis that this is when the “substantial” damage occurred and the business was affected as a result of the damage. • The buildings insurers had repaired the building and paid the claim in relation to damage to the interior of the Shop. • Minimal MD claim - £10,000 • BI claimed for an 18 month period from October 2004: £300,000 • Settlement attempts failed.

6. Issues • Was there cover under Brit’s policy in respect of the claim for material damage to Tenant’s Improvements? • Interpretation of the BI insuring clause. • When did the BI indemnity period start to run: date of damage or when the business is effected? • The scope of cover under the denial of access extension. • Was Brit entitled to avoid liability in respect of the claim for failure to comply with the notification requirements under the policy?

7. 1. Was there cover under Brit’s policy in respect of the claim for material damage to Tenant’s Improvements?

8. BI Insuring Clause: • not the standard ABI wording. • BI insuring clause read: “In the event of Damage for which the Insurers are liable under Sub-Section 1 of this [policy]… the Insurers will indemnify the Insured against any loss of Gross Profit due to (1) reduction in takings and (2) additional expenditure.” • unless Insured could establish it had a material damage claim they had no BI claim.

9. The Material Damage Insuring Clause: “The Insurers shall indemnify the Insured as a result of Damage by any peril defined herein… to stock, Tenants Improvements, Trade Contents… whilst within or attached to any building at the Premises used in connection with the Business [during the Period of Insurance.]”

10. Insurers’ position • The majority of damage had occurred prior to inception of Brit’s policy. • In order for Brit’s cover to respond, the Claimant had to establish that material damage occurred and first occurred during Brit’s policy period • Any claim therefore fell to be covered by Creechurch with whom they had settled. • Even if there was cover in relation to additional damage whilst Brit were on cover, they were not liable in respect of damage which occurred prior to inception or after expiry of the policy, as per: WASA -v- Lexington [2009] HL.

11. Insured’s position: • That every time there was damage as a result of subsidence this was new damage and the Court should treat it as a new loss. • As long as they could show that they had suffered some damage in Brit’s year, there was cover. • Not necessary for the Claimant to precisely identify what damage occurred when.

12. Judge’s Finding of Fact on the Evidence • Damage started in 2003. Significant damage of 12mm before Brit came on risk. That damage required repair. • There was some material damage during Brit’s period but it was limited (2mm) and less than occurred in Catlin’s period (7mm). • Preferred the contemporaneous documentary evidence to witness evidence on the basis that it was more reliable.

13. JUDGMENT • Judge chose not to make a ruling on this point. However he did express the following views: • An increase in width of existing cracking constituted “damage”. • Commented that “it would be surprising if Brit, “it would have been surprising if Brit, who insured only the middle of the three years over which the relevant events occurred, was liable for the entirety of the loss sustained.” • The burden of proof was on the insured to show when the relevant damage occurred.

14. NB: Potential non-disclosure point, subject to inducement. • The broker accepted on cross examination that the August 2003 cracking ought to have been disclosed to insurers prior to inception

15. Points to note – Insurers/Adjusters Upon notification: • Vital to obtain evidence as to when the damage first occurred at the outset • Contemporaneous documentary evidence crucial – often given more weight than witness evidence. • Unless you can establish that the damage occurred outside of your policy period, likely that a Court would apportion between insurers. That is consistent with the approach in MMI v Sea Insurance CA [1998] Lloyd’s Rep.I.R. 421 • Immediate inspection of damage • Request copies of maintenance records/reports and obtain a full history of the property in question. • If necessary, notify other insurers. Talk sensibly. • Remind Insured that the burden is on it to establish what damage occurred in the relevant period and what losses flowed from that damage.

16. 2. Interpretation of the BI Insuring Clause BI insuring clause read: “In the event of Damage for which the Insurers are liable under Sub Section 1 of this [policy], the Insurers will indemnify the Insured against any loss of Gross Profit due to (1) reduction in Takings and (2) additional expenditure calculated as follows: (1) In respect of reduction in Takings – the sum produced by applying the Rate of Gross Profit to the amount by which the Takings during the Indemnity Period shall in consequence of Damage fall short of the Standard Takings (2) In respect of additional expenditure – the additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the reduction in Takings which but for that expenditure would have taken place during the Indemnity Period in consequence of Damage but not exceeding the sum produced by applying the Rate of Gross Profit to the amount of the reduction thereby avoided less any sum saved during the Indemnity Period in respect of charges and expenses payable out of Gross Profit as may reduce in consequence of Damage.”

17. Compare this wording to the ABI recommended form of wording 1986 which provides: • “the Insurer agrees … that if any building or other property used by the Insured at the Premises for the purpose of the Business be accidentally lost, destroyed or damaged during the period of insurance and, in consequence, the Business carried on by the Insured at the Premises be interrupted or interfered with then the Insurer will pay to the Insured in respect of each item in the schedule the amount of loss resulting from such interruption or interference provided that:- (1) at the time of the happening of the loss, destruction or damage there shall be in force an insurance covering the interest of the Insured in the property at the Premises against such loss, destruction or damage; and that (i) payment should have been made but liability admitted therefor, or (ii) payment would have been made or liability admitted therefor but for the operation of a proviso in such insurance excluding liability for losses below a specified amount…

18. Insured’s Argument: • Once the MD section had been triggered, i.e. there was any damage covered under the policy, the Insured was entitled to all BI losses as a result of the subsidence. • The BI losses did not need to relate to the material damage losses.

19. Insurer’s Position • The Insured only entitled to recover the loss of profits as a result of damage to stock/trade contents/fixtures and fittings. • As a matter of fact, BI suffered as a result of damage to the building.

20. Judge’s Conclusion • The policy only provided cover in respect of BI which arose as a result of material damage: “The trigger for business interruption loss is not the subsidence but the material damage.” (see paragraph 33 of the Judgment)

21. 3. When does the BI Indemnity Period start to run? • Definition of Indemnity Period: “period beginning with the occurrence of Damage and ending not later than [12] months thereafter, during which the results of the Business shall be affected in consequence of Damage” • “Damage” defined as “loss, destruction or damage.”

22. The Problem: • Damage first noticed in August 2003. • Year 1 had a 12 month indemnity period. • The Insured’s claim was based on the premise that the business was affected from October 2004.

23. Insurer’s Position • Indemnity period ran from the date that the damage was first noticed. • August 2003. • 12 month indemnity period in Year 1.

24. Insured’s Argument: • Indemnity period runs from date of occurrence of the “relevant” damage, i.e., damage which causes the business interruption. • “Relevant” damage occurred in October 2004. • Year 2 had an 18 month indemnity period. • Asked the Court to look for an alternative construction as otherwise the Insured would be placed in invidious position of not having any cover when business affected by downturn.

25. Outcome • Not required to reach a finding. • BUT Judge was highly critical of the Insured’s legal team for using the start date of October 2004.

26. Possible ways to address this problem • Agree a 36 month indemnity period • Revise the definition of indemnity period to: “period commencing with the date of Damage or interference” as per Coromin v Axa Re. [2007]. • Revise the wording to provide for a deferred period to allow for a period of investigation, such period to be agreed with Insurers.

27. 4. Scope of the Cover under the Denial of Access Extension The insurance provided under the policy was extended to include:- “Loss resulting from interruption of or interference with the Business as a consequence of Damage as insured by this Sub Section to property in the vicinity of the Premises which shall prevent or hinder the use thereof or access thereto whether the Premises or the property of the Insured therein shall be damaged or not”. “Premises” was defined as 227/229 Westbourne Grove. This address relates to the shop only not the building as a whole.

28. Insured’s Argument • Damage in the flat roof was damage “in the vicinity of the premises”. • That damage hindered the use of the premises. • Entitled to all BI loses as a result of the water ingress.

29. Insurer’s Position • Flat roof is part of the premises itself so the extension does not apply.

30. Judge’s View “It is argued that since there was also damage to the flat above the shop, this affects “property in the vicinity of the Premises” and gives the Claimants the right to recover all the damage which they claim. This argument … does not survive even a literal reading of the clause, let alone a proper construction of it.”

31. Lessons • Perfect example of the Insured trying to fit the wording to the facts • This approach will not work • Courts approach is to look at the strict literal meaning • The test is: what is the ordinary meaning of the words used • Market practice is irrelevant: “The fact that that is how they usually apply does not mean on their proper construction that they do not cover something else.” Transcript Day 4 • Starting point – always look at the wording, then apply the facts to that wording.

32. 5. Was Brit entitled to avoid liability in respect of the claim for failure to comply with the notification requirements under the policy? • Notification provision: “The Insured shall give immediate notice to the Insurers on the happening of any Damage in consequence of which a claim is or may be made under this Policy … and shall, at their own expense, within 30 days after the happening of such: Damage deliver to the Insurers in writing such details or particulars and proofs as the Insurers may reasonably require.” • Due Observance clause: “The observance and fulfilment of the terms and conditions of this Policy by the insured insofar as they relate to anything to be done or complied with by the Insured shall be a condition precedent to any liability of the Insurers to make any payment under this Policy.”

33. Issues: AGREED: • No issue as to the meaning of immediate • Agreed that the clause was a condition precedent by virtue of the due observance clause based on the line of authorities in the liability cases: Kidson; Laker Vent; Aspen v Pectel. IN DISPUTE: • When did notification take place? • When should it have taken place?

34. 1. When did the notification take place? • Notification clause does not specify what form the notification should take • Broker asserted verbal notification taken place in August 2004 • No note on broker’s file • Broker subsequently passed away • Other broker gave evidence he remembered the call • Relied on a subsequent exchange of emails in November 2004

35. Email from Broker to underwriter 26th November 2004: “Notting Hill – they are still having problems here with the possible subsidence claim on the buildings which Mr U has told you about previously. If you need any of your adjusters to look at the building then let me know but, obviously, this will mainly affect the landlord’s insurance.”

36. The underwriter annotated the email: “No previous mention with Claims or me. Action? Is there a claim or not?”

37. Underwriter to broker - 6 December 2004 asking: “Subsidence issue at Notting Hill – what is this all about?” • No reply to email • 4 days later Brit’s policy expired.

38. Broker to claims handler - 15 August 2005: “As regards the client’s Notting Hill premises, he is currently involving solicitors as there would appear to be subsidence problems which he has asked his solicitors to pursue with the landlords. The question I have at this stage is if the situation deteriorates to such an extent that he is unable to trade, please confirm any loss of gross profit would be covered under the policy subject to production of relevant accounts, etc. Could you please confirm and advise if, at this stage, you wish the Insured to complete a Claim Form. But, in any event, note your file (although I seem to recall I mentioned this to you way back when so you may already have made a note).”

39. There is then an exchange of correspondence between the claims handler and the broker regarding scope of cover. • Claims handler to broker 30 August 2005: “I note what you say and agree that the schedule does show that there is subsidence cover in force. However, this does not alter the fact that for a valid claim to exist under the Business Interruption section of the policy, we need to have accepted a claim under the Material Damage section of the policy first. With this in mind, as we are not actually insuring the Buildings, I fail to see how the subsidence at the property would affect the Insured’s contents or stock. As such, and in the absence of a valid claim under the Material Damage section of the policy, I regret to advise that we are unable to consider any claim for loss of gross profit in this instance.”

40. No further communications until April 2006 when the broker writes formally notifying a claim and enclosing a loss adjusters’ report which refers to damage to the Insured’s Tenant’s Improvement and stock.

41. Insurer’s position • Notification did not take place until April 2006 • This was the first time that the Insured informed Insurers that there was damage to the Tenant’s Improvements and interior of the property which might give rise to a claim. • If there was any doubt as to whether notice was given, the benefit of the doubt should be given to Insurers.

42. Was verbal notification sufficient? • Notification in August 2004? • November 2004? • August 2005? • April 2006?

43. JUDGMENT • No notice in August 2004. • No fair reading of those documents supports the argument that notice given in November 2004. • Notification in August 2005.

44. Reason for finding? • The change in the way the insured presented its claim: “If there had been any doubt about the position I would have weighed heavily against the Claimants [on the basis that] what they are claiming now about the date of notice and about when the damage was sustained is not what they claimed when their advisers thought that the path to payment was different. When the Claimants and their advisers believed that they would be looking at one Insurer and gave consideration to their claim, they saw the Spring of 2005 as the point at which the damage really occurred and August 2005 as the moment when notice was given. The Court only knows this because the Defendants served a document summons on Mr T. The Claimants’ failure to give disclosure of their copies of the relevant documents when asked seems deplorable. The Court would have been entitled to be very cautious about accepting a new revised version of events from the Claimants.”

45. Verbal Notification – will it suffice? “This Court deals with brokers, not every week but almost every week … The idea that a broker would not record in writing a notification for the purpose of a policy is absurd. Your clients are relying on what, all of a sudden, Mr C seems to remember about what the late Mr U told him in September or, he said later, August of that particular year. If there was some meaningful notification being given, why on earth is it not in writing … so if you are going to start making submissions to me about the veracity of Mr C and how I should place reliance on his recollection, I should make it clear now that this would be a waste of breath, unless you have a startling submission to make.” [Transcript day 4]

46. When should notification have taken place? Insurer’s Position – January 2004.

47. Insured’s Position: The duty to notify arose after August 2004 Why? • Thought it was the landlord’s problem and the claim would be under the landlord’s policy. • Did not know the damage was due to subsidence. • The damage only became serious in 2004 such that it might a cause a loss to the business. • The stock damage fell within the excess.

48. When does the obligation to notify arise? • Previously only case law in relation to the duty to notify in liability policies: Rothschild -v- Collyear [1999]; Aspen -v- Pectel [2008], Kidsons [2008], Laker Vent [2009]. • In those cases: test objective. • Notification required where there was a circumstance which when “objectively evaluated, creates a reasonable and appreciable possibility that it will give rise to a loss or claim against the Insured … There need not be a certainty that it will do so; there need not be a probability or likelihood that it will do so. All that need exist is a state of affairs from which the prospects of a claim (whether good or bad) or loss emerging in the future are “real” as opposed to false, fanciful or imaginary. And that is what has to be notified.” [Kidsons]

49. JUDGMENT: • The test for whether the claim “may be made” is objective. • So test was: would a reasonable person have recognised that the damage might give rise to a claim? • It was clear on the evidence that it was apparent to the Insured’s engineer and should have been apparent to the Insured that the damage was serious by December 2003 and could give rise to a claim. • The Insured should have notified in December 2003.

50. Persuasive Factors: • The involvement of an engineer appointed by the Insured. • The fact that the Insured notified the landlord’s Insurers in November 2003. • The existence of correspondence referring the severity of damage from Autumn 2003. • The existence of contemporaneous evidence regarding the location and width of the cracks noted in January 2004. • Correspondence which showed the dealings with the landlord and its Insurers which showed that the Insured was clearly worried about the condition of the building and the adverse affect any necessary repairs would have on his takings by December 2003.