Insurers face record fire claims

May 24th, 2010

The December edition of Insurance Daily reported figures from the Association of British Insurers (ABI) which show that the cost of fire damage in the UK has risen to record levels.

During the first half of 2009, insurers paid out £639 million, or £3.6 million a day for damage caused by fires.  The figure is at its highest ever for a comparable period and follows on the record high £1.3 billion paid out in UK fire losses for 2008. 

The ABI says that insurers have faced a ‘spike’ in property fire damage claims and that customers are using arson to raise cash to ease their money worries during the financial crisis. They say that there has been a ‘suspicious’ jump of more than a fifth in fire payments over the past two years, including a sharp rise in £500,000 plus claims from commercial building fires. Commercial fire claims among ABI members have risen more than 20% to £444m over two years.

In a report entitled “Tackling Fire: A Call for Action” the ABI points out that arson, accounts for half of all commercial fires.  Socially deprived areas and schools are especially vulnerable, with 20 schools per week currently suffering an arson attack.  The study also concludes that an increase in the number of open plan buildings and out of town developments are among factors contributing to soaring fire costs. 

It can be confidently expected that as claims rise insurers will increasingly review their options upon receipt of a claim, in particular a claim arising from a fire caused by arson and the number of repudiations can be expected to increase. Whilst it is of course right that insurers should be alert to the possibility of arson by the insured, it is inevitable that if levels of repudiation increase as a result of this ‘suspicious spike’, a number of perfectly valid claims will be refused.

Random malicious arson is alarmingly common. It is a complex social phenomena which is inexplicable to most of us. The ABI’s apparent assumption that the recent spike is probably down to an increase in self inflicted arson due to financial hardship is far too simplistic and ignores the possibility that random malicious arson attacks may also increase in recessionary times.

A wrongful repudiation by insurers is devastating for any business and leads to the financial collapse of all but the most cash rich of companies. An unfairness of the current law is that if the business has to take action to enforce payment under the policy and is successful, the damages awarded are limited to the amount of cover in the insurance policy. However, by the time a judgement is obtained consequential losses will have increased the claim to a figure well above the insurance limit of indemnity. We shall comment on this unfair aspect of the law in a separate article.

Interpretation of Warranties

April 20th, 2010

The case of Ward & Sons -v- Catlin referred to in our previous article is interesting also because it applied a decision of the Court of Appeal in 2008; Pratt v Aigaion Insurance.

Often a warranty in an insurance policy will appear to give insurers a right to refuse payment if the warranty is construed literally.  In the Pratt case a fishing trawler was destroyed by fire when it was moored in North Shields, near Newcastle.  The Captain and crew of the trawler had just returned from sea, where they had been fishing for prawns, and adjourned to a pub some 200 yards from the trawler for a quick beer, intending to return to the trawler to sleep.  Unfortunately, whilst they were in the pub the trawler was destroyed by fire, possibly caused by a malfunction in a deep fat fryer.

Unfortunately for the owners of the trawler the insurance policy contained a warranty which stated “Warranted owner and/or owner’s experienced skipper on board and in charge at all times and one experienced crew member”.  Insurers refused to pay on the basis that nobody was aboard the boat at the time when the fire started.  Insurers’ arguments succeeded before the High Court in London where the judge decided that the warranty should be construed literally and that since nobody was on board at the time of the fire insurers were not obliged to pay. 

However, the owner of the trawler appealed to the Court of Appeal, who allowed the appeal and ordered the insurance company to make payment in full.  The Court of Appeal said “The meaning which a document would convey to a reasonable man is not the same thing as the meaning of its words.  The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean”.  Having considered the background the Court of Appeal concluded that the purpose of the warranty was to ensure that there should be an experienced skipper on board in order to protect the vessel against navigational hazards, and not for any other reason.  Therefore the warranty only applied when the vessel was being navigated or manoeuvred and did not apply when the vessel was moored. 

Accordingly the Court of Appeal allowed the trawler owner’s claim, even though the literal meaning of the warranty appeared to justify a refusal by insurers.

Allegations of collusion

March 8th, 2010

Insurers frequently suggest or imply that the owner of a building which has burnt down was in collusion with the arsonists. Alternatively it is suggested that one of the owner’s employees colluded with the arsonist (policies often exclude liability for such fires).

However an insurer is required to produce positive proof of such an allegation. It is easy to raise suspicions of collusion when an arsonist has destroyed a building, but proof is an entirely different matter.

A perfect example of this is the recent case of Ward & Sons v Catlin where the judge rejected the insurer’s allegations of collusion. The insurers based their argument on the fact that five motion detectors had been angled upwards.

However the judge concluded that there was a “substantial possibility” that the motion detectors had been left in that position at some stage by service engineers and therefore he held that insurers had not proved their allegations.

Perhaps one of the most upsetting features of dealing with an insurance company when your premises have been destroyed by an arsonist is that insurers will often suspect that the arson was arranged by you. This allegation is easy to make and impossible to disprove.

However, as this case makes clear it is not your responsibility to disprove the allegation. It is for insurers to prove the allegation.