Scottish Coal v Royal and Sun Alliance

Out-Law Guide | 19 May 2008 | 11:10 am | 4 min. read

A change in risk clause requires a material alteration in the subject matter of the risk, not merely an increase in the risk. By deciding to extend the policy term by one month, insurers also waived their right to avoid the policy for non-disclosure.

The Scottish Coal Company Limited v Royal and Sun Alliance Insurance PLC 

  • [2008] EWHC 880 (Comm)

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Facts

Scottish Coal owned Longannet Mine, the last underground coalmine in Scotland. By 2000, the northern area had been largely worked out and Scottish Coal was planning to close it down and transfer operations to another area of the mine. 

As an interim measure, however, it decided to eke out production from the northern area by mining the residual "panels" of coal between access roadways. The first of these was bisected by another roadway (known as a "cross-cut").

Mining through a cross-cut poses a higher risk of collapse than more conventional mining methods. Scottish Coal obtained specialist advice on the appropriate support system but, as it turned out, did not follow that advice.

In May 2000, the cross-cut collapsed during the mining process. Mining equipment was lost and some 29,000 tons of coal became permanently inaccessible.

Scottish Coal claimed under its property damage and business interruption insurance. Insurers argued that the decision to mine through a cross-cut represented a material change in the risk and that, by not informing them of this, Scottish Coal had also breached a non-disclosure clause in the policy.

Policy terms

Scottish Coal's insurance was due to expire on 23rd December 1999. In November, insurers' risk engineer visited the mine. His report referred to the plan to close down the northern area within 6 months. He also raised concerns and made a number of recommendations about the insured's risk management practices generally.

In light of these comments, insurers included a clause in the slip that gave "provisional notice of cancellation as at 1st April 2000" to enable them to review the situation after a further inspection.

The risk engineer revisited the mine in March 2000. There was a conflict of evidence over what he was shown and told at that meeting, but the result was that insurers withdrew the notice of cancellation.

The policy covered "impact caused by roof fall" as a specified peril. It also included a "change in risk" clause that provided: "In the event of any…material change in the original risk…the policy shall be avoided unless the continuance is agreed by endorsement signed by the company."

In addition, a non-disclosure clause stated that the policy would be voidable at the option of insurers "in the event of misrepresentation or non-disclosure of any facts that would have influenced the company's decision in either accepting or settling the terms of the insurance''. 

A further general condition required the insured to "take all reasonable steps to safeguard the Insured's Property, prevent accidents and minimise loss or damage''. 

Post-collapse

Shortly after the collapse, insurers raised concerns about the apparent change in working practices. The risk engineer said he was unaware of Scottish Coal's' decision to mine through the cross-cut. Had he been told beforehand, he would have been very concerned and would have recommended numerous safety checks.

On 8th August 2000, insurers reserved their position. On 21st November, they said they considered there had been a material change in the original risk and a non-disclosure, but they continued to ask for further details about the claim.

While still waiting for this information, however, they agreed to extend the period of cover for one month from 24th December 2000 to 24th January 2001.

The judgment

Was the decision to mine through the cross-cut a material change in the risk? The judge found it was not.

The mining experts agreed that the method brought a higher risk of collapse and that there was only very limited experience of carrying out this type of operation in the UK.

But in order to be able to rely on the change in risk clause, insurers had to show there had been an alteration in the subject matter of the risk, not merely an increase in the risk. Circumstances had to have changed to such an extent that the new situation was something insurers had not agreed to cover.

In this case, the cover extended to all mining operations. The decision to mine through the cross-cut may well have increased the risk of impact by a roof collapse but it did not change it.

Non-disclosure

The judge, however, found that the decision to mine through the cross-cut should have been disclosed to insurers before they made their decision to withdraw the cancellation notice. On the evidence, he was satisfied that it was not mentioned to the risk engineer during his second visit in March 2000.

There was, however, little evidence put forward as to how this had influenced insurers, particularly those in the following market, and no independent underwriting evidence at all.

In the end, this made little difference because the judge concluded that insurers had chosen to affirm the contract of insurance when they agreed to extend the period of cover.

By mid June 2000, insurers were raising issues of non-disclosure. In August they reserved their position. By November, at the very latest, they had the necessary knowledge of the breach and its implications. Yet against this background, they decided to extend cover until 24th January on payment of a pro-rata share of an increased premium.

There was little or no evidence from insurers to explain this and no indication that the extension was granted against any reservation of rights. In such circumstances, the judge found it difficult to categorise insurers' actions as anything other than an unequivocal election to affirm the contract.

Nor could insurers rely on the prevention of loss clause. A failure to take "reasonable steps" in this context amounts to more than negligence. To be in breach, the insured would have to have been reckless, in that it recognised the danger but deliberately took steps it knew were inadequate.

Although Scottish Coal's preparations had been faulty, its failures fell far short of recklessness. It was entitled to recover under the policy.

Commentary

Waiver by affirmation takes place when an insurer, knowing there has been a breach entitling it to avoid the policy, says or does something that unequivocally treats the contract as continuing, such as accepting premium. In this case the affirmation was the decision in December 2000 to extend the policy term without an express reservation of rights.

Exercising contractual cancellation rights can also amount to a waiver. But in March 2000, when insurers decided to withdraw their cancellation notice, they did not have the requisite knowledge of the breach to be able to affirm the contract.

The case also demonstrates that a material change in risk clause is not always as effective as many insurers perhaps assume.