Bonfire Night – Is Your Business Fully Insured For Fire Damage?

30/10/2016

The 5^th November is fast approaching, meaning fireworks, bonfires and all other manner of pyromania will be used by ordinary, everyday folk around Britain.  Every year, somewhere around the country, a fire gets out of control and someone’s business premises burns down.

Such a terrible event can be highly disruptive and may interrupt the ability of a business to operate normally. But if you find out you do not have full insurance coverage, or your insurance company refuses to pay out, a business fire is catastrophe.

In 2015 the insurance regulator, the Financial Conduct Authority, undertook a thematic review of insurance claims made by small and medium-sized enterprises. As a result, it found that there were, “a significant number of instances where the sum insured was insufficient to cover the loss’. In one case, it identified following a serious fire, the sums insured for contents, buildings and business interruption amounted to only 25 per cent of the total cost of putting right the damage – a complete disaster for the business concerned.

The months leading up to November are the perfect time of year for business owners to check their insurance policies to determine that they are up to date and meet the needs of the organisation as it is today rather than in the past when the policy was taken out. 

Be diligent when completing application forms

Insurance companies base their price for cover on the amount of risk involved.  Therefore, if following a claim, it turns out that what was at risk exceeded the amount an organisation has paid to be insured against its loss, the insurer can rightly decide to pay out only for the proportion of the damage that has been paid for.

Taking a laissez-faire approach to filling in insurance policies can lead to unforeseen, devastating consequences.  For example, if the insurer requires the insured to name all of its locations and this is not done, a fire at premises which were not been named on the policy will not be covered by the insurer.

To ensure your business is fully covered disclose everything to your insurer.  If in doubt, don’t leave it out.

Notification periods

It is imperative that insurers can have assessors on-site as soon as possible following a fire so the causes of the blaze can be ascertained, the damage assessed and appropriate action taken to minimise further loss. Almost all insurance policies will include a clause to the effect that notification of any claim must be made within a certain time period.

If an insurer is denied the opportunity to investigate the incident because of late notification, it can claim ‘extreme prejudice’ as was the case in Milton Keynes Borough Council v Nulty [2011] EWHC 2847 (TCC). This claim related to fires at a recycling centre in April 2005. There were two parallel actions – one being brought by the Council against Mr Nulty, a self-employed electrical engineer, who the Council alleged had caused the fires, and a second being brought by Mr Nulty’s insurer, NIG, against him on the basis that he had breached the policy by not giving prompt notice of any circumstances likely to give rise to a claim.

The Court confirmed that, 

“to decline cover to an insured is a very serious matter” 

and therefore not an action that would be taken lightly.  It was stated that, 

“a cold trail always puts an investigator at a disadvantage”; 

however, NIG had not fully shown that the delay in notification of the fires had impaired its opportunity to investigate.

It was held that the prejudice suffered by NIG was to be measured as a “loss of chance” that was more than nominal. The case of Friends Provident Life v Sirius International [2005] 2 Lloyd’s Rep 517 was recited in which Lord Justice Mance (as he then was) said in the context of a claim by an insurer for damages for breach of a claims notification clause, 

“If they can prove serious consequences, then these will often be capable of quantification, in one way or another, even if only as losses of chance or opportunity, and ….where an insured’s breach has caused difficulty, courts should incline towards quantification favourable to insurers”.

Although there was no logical formula for calculating an appropriate percentage, the prejudice, in the form of its loss of opportunity to secure a different result, was assessed at 15%. The insurer was therefore entitled to set-off £300,000 against the limit of indemnity of £2m.

Nulty demonstrates that the courts are continuing the trend towards finding in favour of the insurer in respect of late notification provisions, even where they cannot be viewed as condition precedents. Indeed, it appears that the court may now be willing to go further than just awarding nominal damages, even where the insurer is unable to prove that the outcome of any litigation would have been different had the provision been complied with.

Make sure you update your insurance policy

A growing business often demands of all your time and it is easy to let years slip by without looking at your existing insurance needs.  However, to ensure you are fully protected you need to routinely asses the following:

• does your Business Interruption Insurance adequately reflect how long it would take to recover your current trading position?          

• how much stock and cash do you hold on-site?          

• what is the current value of your assets and materials?

Failure to regularly re-value and update your policy could result in you finding your organisation is grossly under-insured if a fire-related disaster does strike.

In summary

As the weather draws in and Bonfire Night approaches, perhaps it is a good time to find a few spare minutes to check that the insurance policies which cover you for disastrous events are up-to-date.

When it comes to your organisation’s insurance cover, it is definitely better to be safe than sorry.