Partner, Head of Financial Services
Out-Law Guide 5 min. read
11 Jan 2010, 12:11 pm
A C Ward & Sons Limited v Catlin (Five) Limited & Others
The insured owned and operated a wholesale distribution warehouse in Essex. Over the weekend of 17th/18th March 2007, thieves broke in and stole cigarettes and tobacco worth just under £433,000.
The goods had been stored in a caged area on the mezzanine floor. After the theft, it was discovered that a guardwire protecting the area was disconnected and so had failed to set off the intruder alarm. Service engineers had omitted to reconnect the wire after work was carried out to improve security on the mezzanine.
In addition, motion detectors in the warehouse were wrongly angled and the ADSL line operated by BT, which enabled the remote monitoring of CCTV cameras, had been disconnected for some weeks before the theft due to a muddle over bill payments.
The judge found that the motion detectors had probably been left that way by the security engineers. As for the ADSL line, it had been reconnected before the break-in, but an intermittent fault on the line prevented the theft from being detected via CCTV.
The insured claimed under its policy. The insurers, however, said the insured had breached warranties concerning the burglar alarm and protection systems. Alternatively, they claimed that the insured’s misrepresentation or material non-disclosure had led to the lifting of a relevant policy exclusion. They also alleged that one or more of the insured’s employees had colluded with the thieves
Cover under the policy was subject to a protection maintenance warranty which provided that "the whole of the protections provided for the safety of the insured property shall be maintained in good order… and shall be in full and effective operation at all times when the insured's premises are closed for business…"
Such protections were not to be withdrawn or varied without insurers' consent" and "all defects occurring in any protections must be promptly remedied".
There was also a burglar alarm maintenance warranty, which said that the premises were fitted with the alarm system "stated in the schedule" which had been approved by insurers and that no variation or alterations would be made without insurers’ consent.
In addition, the warranty provided that "the burglar alarm shall have been put into full and effective operation at all times when the insured's premises are closed for business" and “maintained in good order throughout the currency of this insurance…". Lastly, "all defects occurring in any protections must be promptly remedied".
The schedule that would normally specify the make and type of burglar alarm simply stated "not provided". The insured had confirmed there was an alarm but failed to provide details, despite insurers regularly chasing for this information.
The insurers said neither warranty was being complied with at the time of the theft.
They initially argued the warranties were "suspensive", meaning that cover would be suspended for as long as the insured was in breach. An earlier court hearing, however, held that these were normal, promissory warranties which, if not strictly complied with, would automatically terminate insurers' liability. This decision was not challenged.
The insurers now claimed their liability had been automatically terminated as from the date of the breach, regardless whether the insured could have been aware there was anything wrong with the system or whether the problems had been rectified.
Surveys of the premises carried out in May and July 2006 led to insurers drawing up a list of risk improvements, including the building of a caged area on the mezzanine floor for cigarettes and tobacco and the installation of additional motion detectors.
In the meantime, insurers imposed an endorsement removing theft cover for cigarettes and tobacco if the theft took place outside business hours, unless the stock was kept within a special secure store on the ground floor.
The insured built a security cage and asked the insurers to lift the endorsement on the basis that all the improvements had been carried out. The endorsement was removed on 20th February 2007.
After the theft, it turned out that the additional motion detectors had not been installed and that the guardwire ran along only two walls of the cage.
Insurers argued that the insured had misrepresented that it had complied with all their requirements (or had failed to disclose that it had not done so). This information was material and had induced insurers to vary the cover by lifting the endorsement.
The judge found no evidence of collusion in the theft. The question whether there had been a breach of warranty depended on the construction of the wording. In this case, there had been no breach.
Breach of a warranty in an insurance policy automatically releases the insurers from liability as from the date of the breach. The harshness of this consequence means that courts require warranties to be clearly expressed. If there is any ambiguity in their meaning, they will be construed against the insurer.
As a matter of commercial common sense, these warranties applied to whatever protections or burglar alarm system the insured had in place at the time the policy came into force.
There was nothing in the wording to suggest the protection maintenance warranty applied to protections the insured might subsequently install. And the fact that the insured had not specified the type of alarm did not prevent the burglar alarm warranty from applying to the system which was already in place.
The courts have recognised a distinction between warranties that require an alarm “be” in efficient order as opposed to “be kept” in efficient order. “Be kept” implies that the insured must be aware of a defect and have an opportunity to repair it before there could be a breach.
These warranties used different wording, but both were qualified by the sentence requiring the insured to remedy any defects promptly. In the judge’s view, this meant the insured would only be in breach if there was some fault of which the insured was (or should reasonably have been) aware but failed to remedy in good time.
The judge was satisfied that the insured had no means of knowing that the security engineers had disconnected the guardwire or had repositioned the motion detectors. The ADSL line had been reconnected before the theft and the insured could not have known there was a continuing fault. In any event, the line had been installed after the policy came into effect and so was not covered by the protections maintenance warranty at all.
However, the judge found that there had been a material misrepresentation and non-disclosure in relation to the security improvements. By representing to insurers that the risk improvements had been completed, the insured via its broker implicitly represented that the additional detectors had been installed and that there was guardwire on all the walls of the cage.
These were material misrepresentations that induced the insurers to lift the endorsement. Consequently, the insurers were entitled to avoid the variation, which meant the endorsement remained in place. Since the cigarettes and tobacco were stolen from the mezzanine floor, there was no theft cover and the insured’s claim failed.
The decision highlights how words in a maintenance warranty implying action, like “kept” or “put into”, can significantly change its effect. But such words are not the only way to qualify a warranty. In this case, it was the sentence about remedying defects that did it.
Interestingly, the judge also suggested that, even without the qualification, the insured may not have been in breach because of the very nature of maintenance warranties.
The maintenance warranties imposed express obligations on the insured to maintain its security systems in good order. The judge thought that an insured could hardly be in breach if he maintained the system but, unbeknown to him, there was some latent defect. It was not necessary to decide the point, however, because of the effect of the sentence requiring the insured to remedy defects.
Partner, Head of Financial Services