TECHNICAL & LEGAL PROPERTY & BUSINESS INTERRUPTION. Recent court decisions involving catastrophic fire losses explained

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Jasper James
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1 TECHNICAL & LEGAL RISK PRACTICE NEWSLETTER NOVEMBER 2015 IMPLICATIONS FROM THE VNUK Implication on motor and public liability insurance PROPERTY & BUSINESS INTERRUPTION Recent court decisions involving catastrophic fire losses explained EXCHANGE RATE FLUCTUATIONS Impact of currency fluctuations on insurance programme Page 3 Page 4 Page 5 Claims notification When is an event likely to give rise to a claim? Insurance policies often contain provisions which oblige the policyholder to provide full details of any event which is likely to give rise to a claim as soon as possible. The consequences of a policyholder failing to do so could lead to an insurer denying the claim. In this article we explore a recent claim in the case of MacCaferri Ltd v Zurich Insurance plc 1 which resulted in the courts revisiting the question of when is an event likely to give rise to a claim. An employee sustained an eye injury when using a Spenax gun during the course of his employment and consequently sued his employer. Various claims ensued including a claim against the company that had hired the gun to the employer; MacCaferri. MaCaferri received a solicitors letter almost two years after the accident informing them that a claim was to be brought against it. This prompted MacCaferri to notify its public and product liability insurer Zurich, a few days later. Zurich declined to provide an indemnity arguing that the insured had failed to comply with the following claims condition precedent: The insured shall give notice in writing to the insurer as soon as possible after the occurrence of any event likely to give rise to a claim with full particulars thereof. Continued on page 2 1 MacCaferri Ltd v Zurich Insurance Plc [2015] EWHC 1708 (Comm) (19 June 2015)

2 RISK PRACTICE Technical & Legal November 2015 Continued from page 1 Zurich argued that the insured should have given notice to the insurer much earlier.

2 2 RISK PRACTICE Technical & Legal November 2015 Continued from page 1 Zurich argued that the insured should have given notice to the insurer much earlier. The insurer also argued that the use of the words as soon as possible indicated that the obligation to notify arises when an insured could discover that an event was likely to give rise to a claim. The insurer argued for an extended meaning to the words as soon as possible which would import an obligation on the insured to be proactive or would imply a duty of inquiry. JUDGMENT The court rejected the insurer s arguments and found there had been no failure by the insured to comply with the condition precedent. The insurer was therefore obliged to indemnify the insured under its public and product liability policy. Meaning of as soon as possible The court held that this simply referred to the promptness with which notice was to be given once there had been an event likely to give rise to a claim. The words did not indicate an implied duty of reasonable inquiry as the court held that there was no room for a continuing or rolling assessment of claim likelihood to be required of a policyholder when the policy does not provide for it. Meaning of likely to give rise to a claim The court relied on previous authority and confirmed that this described an event with at least a 50% chance that a claim against the insured would eventuate. On the facts of this case, there was not a 50% chance that a claim against the insured would eventuate. It had been a Various claims ensued including a claim against the company that had hired the gun to the employer possibility that the accident had involved a fault in the gun, but it was also possible that there had been a fault in the use of the gun, or no fault at all. The insured had not been blamed at the time. The Court also found that reference to the likely involvement of the Health & Safety Executive or to forensic testing on the gun after the accident did not indicate anything more than that a claim was a possibility; but this still fell short of it being likely. The Court broadly accepted the principle that a claim might still be likely even if it was a bad and vexatious claim, but on the facts of this case this did not aid the insurer. Though the circumstances which gave rise to the trial were unfortunate, the decision of the court is welcome. It serves to underline how crucial the claims notification clause can be and highlights the practical implications of claims notification provisions. JLT Specialty recommends that clients should always contact their Claims or Account Executive whenever there is any doubt in this area. By taking a cautious approach and keeping their broker updated, clients avoid the risk of falling foul of claims notifications provisions.

3 Technical & Legal 3 The Vnuk implications on motor insurance Recently the European court handed down a judgment which could have wide ranging implications for motor insurance and public liability policies. CASE OVERVIEW In 2007 a farmworker in Slovenia, Mr Vnuk, was injured when a tractor which was reversing a trailer on private farmland struck the ladder which Mr Vnuk had climbed causing him to suffer injuries. Mr Vnuk brought a claim against the insurance company which had insured the tractor. Initially the claim failed because the Slovenian courts found that the insurance did not cover the tractor when used as a machine or propulsion device. In the Vnuk case 2 the Court of Justice of the European Union (CJEU) considered the meaning of a European Union Directive relating to the compulsory duty to insure motor vehicles. The UK currently implements the relevant Motor Insurance Directive through the Road Traffic Act 1988 (RTA 1988) and various Motor Insurance Broker Agreements. The compulsory duty to insure under the RTA 1988 applies to the use of a motor vehicle on a road or other public place. Section 185 of the RTA defines a motor vehicle as being "a mechanically propelled vehicle intended or adapted for use on a road. CJEU RULING The court ruled that the relevant EU Directive must be interpreted to extend to any use of a vehicle that is consistent with the normal function of that vehicle. This is much broader than the UK regime as it does not take into consideration where the vehicle is being used (i.e. either on private property or on a public road). The court found that the EU compulsory insurance regime extended to the manoeuvre of a tractor in the courtyard of a [private] farm Conceivably other previously uninsured vehicles such as sit-on lawnmowers /machinery, forklift trucks etc could be treated in the same way by the CJEU and thus require some form of RTA insurance. This ruling has further highlighted the potential conflict between the UK legislation and the relevant EU Directive and will add huge weight to the need for the government to amend the Act. Until the RTA 1988 is amended (following a review and consultation process), a claimant who is deprived of damages because the accident happened on private land or the vehicle was not intended or adapted for use on a road could commence an action against the Department for Transport (DfT) for failing to implement the EU Directive. It is possible that in light of this, UK courts may read additional wording into the RTA 1988 in order to interpret the UK law in line with the EU directive. However many legal commentators believe that this is unlikely given the clear words used in the RTA JLT Specialty will continue to consult with the DfT on this and other motor related issues and will keep our clients updated in order to be prepared for the evolving challenges in this area. 2 Damijan Vnuk v Zavarovalnica Triglav C 162/13

4 RISK PRACTICE Technical & Legal November 2015 Property and Business Interruption Case Updates In this article we explore the implications of two recent court decisions involving catastrophic fire

4 4 RISK PRACTICE Technical & Legal November 2015 Property and Business Interruption Case Updates In this article we explore the implications of two recent court decisions involving catastrophic fire losses to companies with property damage and business interruption insurance policies. MILTON FURNITURE V BRIT INSURANCE 2015 The recent Court of Appeal decision in the case of Milton Furniture v Brit Insurance 1 highlights the potential for confusion in relation to the insured s obligations under the policy. The policy wording at the heart of this case contained a variety of restrictive and potentially overlapping conditions precedents. In this case a fire engulfed the policyholder s warehouse and destroyed all of their stock. The policyholder contended that because certain restrictive terms overlapped as they dealt with the same issue of security and protection precautions, some aspects of these restrictions ceased to apply (and could be ignored). The Court of Appeal confirmed that each exclusion, condition precedent or other restrictive term must be complied with fully even if there are other provisions relating to the same issue. Ultimately the insurer was able to deny the claim because the policyholder was in breach of two conditions precedent contained within the policy and therefore not entitled to be indemnified. This case serves as a reminder that policyholders must appreciate the existence and the consequences of all restrictive clauses in a policy irrespective of whether they appear to conflict with any other restrictive clause. When restrictive clauses are too onerous or not relevant to the safeguarding of the risk, these should be removed. When there is ambiguity as to the potential application of restrictive clauses, advice should be sought and ambiguous clauses should be deleted or redrafted immediately. WESTERN TRADING V GREAT LAKES REINSURANCE 2015 In the case of Western Trading v Great Lakes Reinsurance [2015] 2 the defendant insurer mounted a range of policy defences at trial. In deciding in favour of the claimant, the court considered the claimant s insurable interest in the property damaged, explored whether there was any misrepresentation/non-disclosure of the risk and confirmed the circumstances of when an insurer should provide a declaration to the insured that they are entitled to the costs of reinstatement. The claimant company existed in order to hold and manage its owner s, Mr Singh s, property portfolio. Following a catastrophic fire, the claimant sought a declaration that it is entitled to be indemnified for the cost of reinstatement. LACK OF INSURABLE INTEREST AND MISREPRESENTATION The insurer relied on the allegation that the policyholder had misrepresented the occupancy of the property as it was alleged that it was empty for over ten years preceding the loss. The insurer also alleged that the policyholder did not actually pay regular rent to its legal owner, Mr Singh, and therefore, never had an insurable interest in the property. In rejecting this defence the judge stated that despite the structure of Mr Singh s business arrangements, it seems to me obvious that the claimant has an insurable interest 4 in the damaged property. The court also found that there was no material misrepresentation. 1 Milton Furniture Ltd v Brit Insurance Ltd [2015] EWCA Civ 671 (07 July 2015) 2 Western Trading Limited v Great Lakes Reinsurance (UK) Limited [2015] EWHC 103 (QB) 3 Mackie J at para 10 of Western Trading v Great Lakes 4 Mackie J para Mackie J, ibid para 60

5 Technical & Legal 5 REINSTATEMENT The policyholder sought a declaration from their insurers that they would be entitled to be indemnified for the cost of reinstatement under the policy as a result of the fire. One of the insurer s reasons for denying coverage under the policy was based on the contention that any indemnity or declaration depended on actual reinstatement by the claimant. Again, the judge was not swayed by this novel point. He summarised the textbook position that (t)he requirement on the assured to reinstate cannot be read to arise until the insurer has confirmed that it will indemnify. The judge confirmed that it would be reasonable for a business to defer a decision whether or not to reinstate until it knows whether the funding will come from insurers or will have to be diverted from elsewhere. 4 JLT Specialty encourages all of their clients to inform them if there are changes at any insured location which may affect the security precautions required. Though it has in the past been unusual for insurers to raise questions of insurable interest except in the context of fraud 5 policyholders should be aware that insurable interest is not only a theoretical issue. The law commission as part of their review of UK insurance contract law, have recently concluded the consultation stage to their major project on the requirement of insurable interest. Exchange rate fluctuations China s recent currency devaluation and the large exchange rate fluctuations of the Russian rouble and the Swiss Franc in relation to the United States dollar and the Euro at the beginning of this year demonstrated that these currency fluctuations can significantly impact a company s insurance programme and a company s overall profitability. JLT explores the ways in which large exchange rate fluctuations can impact the insurance risk transfer of companies with an international footprint. CLAIMS A fundamental way in which a fluctuation in the rate of exchange can impact a company s profitability is the amount of claims proceeds which can be recovered. When a loss occurs normally the valuation of a claim is based on local accounting numbers and is to be paid in the same local currency. This reduces the exchange rate fluctuation risk. However a significant drop of the exchange rate during a short time period might lead to change of replacement value with complicated methods of calculation and disproportionate results. In the event of a loss policyholders must be mindful that they will suffer a proportionate reduction in their claims settlement when paid in the local currency if a local policy is issued in a hard currency (US Dollar, Euro or British pound) and the local currency is losing value (as against the hard currency). Where the local currency is gaining value (as against the hard currency) policyholders will benefit from an increase in claims settlements. MOVEMENTS OF RUSSIAN RUBLE AGAINST US DOLLAR IN ,87 = maximum peak 15 December ,57 66,75 JLT Specialty has and will play a leading role through the British Insurance Brokers Associations in providing guidance and expertise on the legal and commercial aspects of the current law commission proposals The exchange rate of RUB to USD has been volatile in 2014 growing from 44,87 to 66,75 with maximum peak of 74,57 on December 15th, 2014 (RUB/EUR exchange rate has shown the same level of volatility).

6 RISK PRACTICE Technical & Legal November 2015 JLT Specialty Limited provides insurance broking, risk management and claims consulting services to large and international companies.

6 6 RISK PRACTICE Technical & Legal November 2015 JLT Specialty Limited provides insurance broking, risk management and claims consulting services to large and international companies. Our success comes from focusing on sectors where we know we can make the greatest difference using insight, intelligence and imagination to provide expert advice and robust often unique solutions. We build partner teams to work side-by-side with you, our network and the market to deliver responses which are carefully considered from all angles. Our Risk Practice division provides risk and insurance services to corporate clients. We also have a specialist broking team dedicated to placing business and supporting our industry specialisms. As a division, we focus on providing excellent service delivery, innovation and market shaping solutions for our clients. Our aim is to provide a leading, independent specialist alternative for mid-sized UK companies through to multi-national corporations. In addition, as a global service risk practice we offer specialist insurance and risk consulting solutions to our clients, wherever they operate. CONTACTS If you require any further information please contact: Felix Ukaegbu Partner, Risk Practice felix_ukaegbu@jltgroup.com Graham Terrell Technical Specialist, Risk Practice graham_terrell@jltgroup.com This publication is for the benefit of clients and prospective clients of JLT Specialty Limited. It is not legal advice and is intended only to highlight general issues relating to its subject matter but does not necessarily deal with every aspect of the topic. If you intend to take any action or make any decision on the basis of the content of this newsletter, you should first seek specific professional advice. JLT Specialty Limited The St Botolph Building 138 Houndsditch London EC3A 7AW Lloyd s Broker. Authorised and regulated by the Financial Conduct Authority. A member of the Jardine Lloyd Thompson Group. Registered Office: The St Botolph Building, 138 Houndsditch, London EC3A 7AW. Registered in England No VAT No November PREMIUM Policyholders should also be mindful of the currency fluctuation risks due to the timing of premium payments. Companies which choose to pay their premiums in the local currency instead of the hard currency provided for in the master policy may face exchange rate fluctuation risk if there is a time gap between when payment is requested (in the hard currency) and when the premium is actually paid. This is also the case if the premiums are paid in instalments. REINSURANCE There may also be exchange rate fluctuations between the date of the original premium payment by the Insured (in local currency) and the date of reinsurance premium payment which may be in another currency, (the hard currency). If due to this delay there is a deficiency, reinsurers would be underpaid. Though this is not always under the direct control of the Insured or the broker, it may still jeopardise the successful placement of a large insurance programme which requires reinsurance participation. In order to reduce the impact of exchange rate fluctuations on total insurable values JLT frequently negotiate the inclusion of an escalation or margin clause into the policy wording. Such a clause usually allows for an escalation of between 10% and 15% on an insurance programmes values which also caters for exchange rate fluctuation. Escalation clauses are also recommended in order to supplement annual appraisals which verify the replacement values To ensure that exchange rate fluctuations do not create a gap in the amount budgeted for the premium, JLT strongly recommend that the rate of exchange is fixed and agreed by all parties at the outset of a policy. In addition to the solutions outlined above JLT Specialty has designed and implemented a variety of innovative methods to mitigate currency fluctuation risks in relation to insurance programmes. Our market leading Global Service Team (GST) are able to steer policyholders through the sometimes complex terrain of international insurance programmes and manage the delivery of invoices and local policies. GST also takes a proactive stance to managing premium payments and cash flows between the policyholders captive insurance company and to insurers.

VNUK AN INVOLUNTARY RISK TRANSFER Damijan Vnuk v Zavarovalnica Triglav d.d (Vnuk)

VNUK AN INVOLUNTARY RISK TRANSFER Damijan Vnuk v Zavarovalnica Triglav d.d (Vnuk) RED: BRIEFING RED is a philosophical engine, combining expertise, knowledge and thought leadership to enable BLM to deliver