Insurance: difficulties for insurers when raising coverage defences

In the recent decision in Western Trading Limited v Great Lakes Reinsurance (UK) the court found that a defence of lack of insurable interest is unlikely to succeed in most cases particularly where no element of fraud has been made out, as not only is it perceived to be a technical defence, but the courts are reluctant to find the absence of an insurance contract after a premium has been paid. The decision also highlights some of the practical problems faced by insurers when raising coverage defences, particularly with regard to evidence.

Background

Western Trading Limited (the insured) was owned mainly by Mr Singh, with his wife as company secretary, and was used to manage Mr Singh’s property portfolio. Mr Singh received rent from Western Trading Limited and used the company to pay out rates to the Council and manage the properties. A claim was made to Great Lakes Reinsurance (the insurer) under the company’s insurance, after a fire on 24 July 2012 destroyed various buildings, including a listed landmark. The properties destroyed were owned by Mr Singh personally, whilst others in his portfolio were owned by Western Trading Limited.

Great Lakes rejected the claim on a number of grounds, including that Western Trading had no insurable interest and that there had been material misrepresentation concerning the occupancy of the premises.

Decision

Insurable Interest

Insurers’ argument that Western Trading had no insurable interest relied on their submission that the company did not own the properties or have a tenancy, and therefore it had no interest in the maintenance of the building, or any loss in the event of damage. Evidence was submitted by both parties regarding the occupancy of the properties, with the judge finding for Western Trading, that a property company (Property Link) had occupied one building with the second being used by Western Trading and Property Link for storage. Rent was paid to Mr Singh for both properties by Western Trading.

The court found, however, that as Western Trading was an integral part of Mr Singh’s business and was at the heart of the structure used, it did have an insurable interest. The business framework was often used by similar businesses and the claimant paid rent to Mr Singh and managed the properties. The court therefore found that it was “obvious that the claimant has an insurable interest”.

The judge was critical of the breach of insurable interest argument, noting that it is generally unusual for insurers to raise the question of insurable interest, unless there is an indication of fraud. Insurers appeared neither to have taken an interest in (nor alerted the insured to the perceived importance of) the issue of insurable interest at the time that the proposal form was completed, and it was not until a claim was made that the defence was mentioned. The judge commented that the rationale for the requirement that an insured must have an insurable interest is to preclude the possibility of gambling by the insured. However, this was clearly not applicable in this case and the defence failed.

Misrepresentation

Although there was evidence that a representation that there had been three tenants of the premises was incorrect, the judge found that to the limited extent that matters had been misrepresented this had been neither material nor had it induced the writing of the insurance contract. A survey of the premises had been commissioned after the proposal form was submitted and “the survey was in truth the only matter relied on”.

The judge was critical of the underwriting evidence, stating that “it did not survive cross examination” as the underwriter did not remember what they were thinking at the time of writing the risk, and provided no support that there had been any inducement with regard to the representations made by the insured. In cross examination the underwriter accepted that parts of her witness statement were “a bit misleading”.

Although the individual underwriter had been an honest and clear witness, “with the wisdom of hindsight it seems that both she and the defendant’s solicitors should have spent more time completing and testing her statement. The result is that I do not place any reliance on the paragraphs in her statement which are not merely factual as it is clear that they did not receive the careful attention they should have done.”

Reinstatement of the Property

The right to reinstate damaged property, which Western Trading were claiming, was argued by insurers to be dependent upon actual reinstatement, as per the policy terms. They therefore argued that as Western Trading had not taken firm steps towards redevelopment of the properties, no reinstatement had been carried out, and therefore no relief could be claimed.

Western Trading responded that the requirement on the insured to reinstate cannot arise until the insurer has confirmed that the loss will be indemnified. This relies on the fact that an insured would not be able to afford to pay for reinstatement without the benefit of indemnity, which the insurer was wrongfully withholding.

The judge found that reinstatement did indeed rely on confirmation of indemnity by the insurer and therefore granted a declaration that the claimant had an express right to be indemnified for reinstating the properties.

Comment

This case provides further guidance on the courts’ reluctance to find that there is no insurable interest once a premium has been paid. Insurers should therefore be wary when raising this defence, unless elements of fraud are suspected.

In addition, where there are allegations of misrepresentation insurers need to remain aware of the need for strong evidence from underwriters regarding the materiality of any representations made and whether this induced them to underwrite the risk. The decision also serves as a reminder to lawyers regarding choice of witnesses and evidence.

Further Reading: Western Trading Limited v Great Lakes Reinsurance (UK) Plc [2015] EWHC 103 (QB)