National Farmers Union Mutual Insurance Society Limited v HSBC Insurance (UK) Limited
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On 27th October 2007, a fire damaged the Old Hall in Rutland, 17 days after the trust that owned the property had exchanged contracts for its sale.
Under clause 2.3 of the contract, the risk of damage to or destruction of the property passed to the buyers on exchange. Completion was scheduled for 7th November.
Shortly before exchange, the buyers took out their own buildings insurance with the NFU. The sellers were insured by HSBC.
After the fire, the buyers were unwilling to complete the sale but, following service of a Notice to Complete, did so at the full purchase price. Ultimately, the sellers suffered no loss and made no claim on their HSBC policy. The buyers claimed on their NFU policy and received payment in settlement.
The NFU now sought a contribution from HSBC, on the basis that the HSBC policy also provided cover to the buyers and that this was a case of double insurance. HSBC. however, said that on a proper construction of the HSBC policy, the buyers were not covered, so the question of double insurance did not arise.
Section one of the HSBC policy covered the property against physical loss or damage. In addition, it stated, "anyone buying your home will have the benefit of section one until the sale is completed or the insurance ends, whichever is the sooner… We will not pay … if the buildings are insured under any other insurance".
Under claims condition 2, which applied to the whole policy not just the buildings cover, it stated:
"We will not pay any claim if any loss, damage or liability covered under this insurance is also covered wholly or in part under any other insurance except in respect of any excess beyond the amount which would have been covered under such other insurance had this insurance not been effected".
The general conditions in the buyers' NFU policy provided: "If when you claim there is other insurance covering the same accident … we will only pay our share."
The judge agreed with HSBC that this was not a case of double insurance.
When exchange of contracts takes place, common law will generally assume the buyer takes on the risk of any damage, subject to any terms to the contrary. In this case, the contract confirmed that position.
On exchange, the buyer gains an equitable interest in the property and can take out his own buildings insurance to protect that interest. But, unless the contract requires it, this is not obligatory. If the buyer does not take out his own insurance and something happens to the property, he will still be liable for the full purchase price.
The seller, however, retains an insurable interest in the property because he still has legal title and there is always a risk that the buyer will not complete. In some cases, the parties can arrange for the seller's existing insurance to be extended to cover the buyer but, again, this is not obligatory.
If there is such an extension but the buyer also takes out his own insurance, there is likely to be some duplication of cover and questions of double insurance may arise.
Double insurance is where the same party is insured with two or more insurers in respect of the same interest in the same subject matter against the same risk.
The general rule is that, subject to any contract terms and limits of indemnity, the insured may recover the whole of its loss from either insurer. The insurer who pays the claim is then entitled to recover a contribution from the other insurer and they share the liability on a pro rata basis. This right to a contribution can be varied or excluded, either by agreement between the insurers or, more usually, by terms in the insurance contract with the insured.
In this case, the HSBC cover still covered the sellers at the time of the fire. The policy also granted an extension of cover to anyone buying the property, but not if the property was insured under any other insurance.
In the judge's view this qualification was very clear. If the buyers had taken out their own buildings insurance, the extension would not apply. If they had not arranged their own cover, however, the extension would be triggered, enabling them to complete the purchase and thus benefitting HSBC's own insureds, the sellers.
The judge was satisfied that the qualification took precedence over the claims condition, which provided that in cases of double insurance the policy would only respond in excess of the amount covered by the other policy. The qualification was a special clause that applied specifically to the buildings cover, whereas the claims condition was of general application.
The only relevant provision in the NFU policy stated that the policy would respond on a pro rata basis if, at the time of the claim, there was another insurance covering the same damage. No other insurance covered the buyers against the same damage because the extension in the HSBC policy had not been triggered. NFU was liable to the full extent of the claim.
As a matter of construction, this was not double insurance. But the judgment provides a useful analysis of the battle that can take place between competing insurance policies when both seek to limit their insurer's liability if another policy is in place.
An "escape" provision in a policy purports to exclude liability altogether in the event of double insurance. The qualification in the HSBC policy was a form of escape provision.
A "rateable" provision (as seen in the NFU policy) limits the insurer's liability to a pro rata amount. An "excess policy" provision (seen here in HSBC's claims condition 2) effectively turns the policy into an excess policy that will only respond if and when the other insurance is exhausted.
According to case law, if two insurance policies both contain an escape provision, the provisions cancel each other out. Subject to any other applicable terms, the general double insurance rule applies. Both policies respond in full to the claim but, ultimately, liability will be shared between them via contribution.
The position becomes more complicated if different provisions compete. If, for example, one policy contains a rateable provision and the other an excess policy provision, the judge thought the policy with the rateable provision would be liable up to its indemnity limit. The rateable proportion provision would apply, but the proportion would effectively be 100% because the policy with the excess provision would only respond once the other policy limit had been used up.
There have been conflicting decisions on the various possible combinations, however, and the judge thought there was limited value in trying to extract any clear consensus that would be helpful to this case.