Partner, Head of Financial Services
Out-Law Guide 4 min. read
10 Mar 2009, 11:51 am
Ansari v New India Assurance Limited
The insured owned premises which he let to a friend for business purposes. In September 2005, the premises were damaged by fire. The insured claimed against his insurers, but they denied liability on the ground that there had been material changes to the information provided in the proposal form.
In that form, the insured was asked "are the premises protected by an automatic sprinkler system?" to which he answered "yes," but did not give the further details requested.
Following the fire, it came to light that the sprinkler system had been turned off for some time and a filing cabinet pushed against the control handle.
Insurers relied on general condition 2 of the policy, which stated:
"This insurance shall cease to be in force if there is any material alteration to the Premises or Business or any material change in the facts stated in the Proposal Form or other facts supplied to the Insurer unless the Insurer agrees in writing to continue the insurance".
A non-invalidation clause provided that the interest of a lessor (among others) would not be prejudiced by any act or neglect that increased the risk of damage to the property, provided the lessor notified insurers as soon as he became aware of it and paid any reasonable additional premium.
The judge found on the evidence that the tenant's manager had at some point turned the sprinkler system off indefinitely and that, in any event, the water supply to the building had been cut off since August 2005 for non-payment of charges.
The judge concluded that the protection of the premises by a properly functioning sprinkler system was clearly something that was material to insurers. Turning it off indefinitely did more than merely increase the risk of damage by fire: it constituted a material alteration of the nature of the subject matter of the insurance. The absence of an automatic sprinkler system was a material change in the facts stated in the proposal form.
The judge also found that the insured knew the system had been turned off, so he could not rely on the non-invalidation clause. The insured appealed.
The Court of Appeal upheld the decision. The statement that the premises were protected by an automatic sprinkler system meant that the system was ready to operate at any time, not merely that it was capable of operating.
An automatic sprinkler system, once installed, forms an integral part of the building. Unlike, say, an intruder alarm, it is intended to function permanently, in the sense of being constantly ready to operate in the event of a fire without the need for human intervention.
The Court of Appeal considered that a short period out of service for maintenance or repair would not mean that the premises ceased to be protected by a functioning sprinkler system within the meaning of the statement. But in this case, it had been turned off indefinitely. That amounted to a change in the facts.
Was this a material change? Under the common law, an insurer agrees to insure a particular risk. If that risk differs from the risk he insured, he is not liable. But the alteration must be such that it takes the risk outside anything that would have been within the contemplation of the parties when they entered into the contract.
In this case, however, insurers relied on an express contractual provision. Breach of the provision meant the policy ceased to be in force altogether.
The Court of Appeal concluded that condition 2 was clearly intended to protect insurers from material alterations to the premises or material changes in the facts that had a significant bearing on the risk itself.
A reasonable person in the position of the parties would have understood "material" to refer to alterations or changes in facts that would take the risk outside the reasonable contemplation of the parties. Turning off the sprinkler system indefinitely was just such a material change. An insurer would not regard a building fitted with a functioning automatic sprinkler system as presenting the same risk as one without.
On the facts, the judge had been satisfied that the insured was aware that the sprinkler system had been turned off. Since he had failed to give notice of this change to insurers, the insured could not rely on the non-invalidation clause. The appeal was dismissed.
The Court of Appeal applied a similar test for a material post-contractual change under condition 2 as for an alteration in risk under the common law.
In both cases, the court held the change must be something so significant that it takes the risk outside what would have been in the parties' contemplation when they entered the contract. This is not the same as something that merely increases the chances of an insured risk happening.
Nor is it the same as the test for materiality applied to the insured's pre-contractual duty of disclosure, where a circumstance is material if it would have influenced the judgment of a prudent underwriter in deciding whether or not to take the risk and on what terms. Post-contract, a material change must be something fundamental.
The Appeal Court also drew a distinction between the automatic nature of the sprinkler system and, say, a burglar alarm which has to be activated.
The insured's confirmation that the building was protected by an automatic sprinkler system would lead insurers to understand the system was permanently in a state of readiness. A statement that premises were fitted with an intruder alarm, on the other hand, would not, on its own, contain a continuing warranty that the alarm would be maintained and put into operation whenever the premises were left unattended.
Partner, Head of Financial Services