Real estate professionals are wary of including insurance provisions in sale contracts which result in both seller and buyer maintaining buildings insurance for the period between exchange and completion. The concern is that if a claim is made the insurers may seek to argue that the two policies should be read in conjunction with each other and that there is “double insurance” of the property.
The worst-case scenario for the contracting parties in a case of double insurance is that, on damage or destruction to the property between the date of exchange of contracts and completion, each insurer seeks to decline coverage under their own insurance policy, on the basis that another insurer has provided cover in respect of the same risk. This, it may be argued, would render the loss irrecoverable from either insurer, and thus put the insured severely out of pocket.
A recent case, The National Farmers Union Mutual Insurance Society Limited v HSBC Insurance (UK) Limited 1 has again brought to our attention the long held concerns about the risks of double insurance. The case has led us to re-examine the issue and consider whether in fact the concept of “double insurance” should really give real estate professionals cause for concern on the sale and purchase of property.
The facts of the case
The owners of The Old Hall in Rutland contracted to sell The Old Hall for the price of £1.8 million. Prior to and following exchange of the sale contract The Old Hall was insured by the seller under a policy held with HSBC. The sale contract provided that the risk of damage to or destruction of The Old Hall passed to the buyer at the time of exchange. The buyer took out its own buildings insurance, with NFU, in respect of The Old Hall with effect from the date of exchange of contracts. So far, so usual. Between exchange of contracts and the contractual completion date a fire broke out at the property, causing extensive damage. At the time of the fire, The Old Hall was therefore the subject matter of buildings insurance taken out independently by each of the seller and the buyer in respect of their respective interests, with different insurers.
The buyer completed the purchase of The Old Hall, in accordance with the terms of the sale contract. The buyer made a claim under its insurance policy with NFU, and NFU paid out against that claim. NFU subsequently looked to recover a contribution from HSBC.
The HSBC policy covered “the buildings for physical loss or physical damage” and also “anyone buying [the building] who will have the benefit of [the insurance policy] until the sale is completed or the insurance ends, whichever is the sooner.” On the face of it, the buyer therefore – perhaps unknowingly – benefited from insurance cover, as a purchasing party, under the HSBC insurance policy. However, the HSBC insurance policy went on to include an “escape” provision that stated: “we will not pay… if the buildings are insured under any other insurance.”
The NFU policy wording read: “if, when you claim, there is other insurance covering the same accident, illness, damage or liability, we will only pay our share.” There was, however, no absolute “escape” provision enabling NFU to resist paying out under the insurance policy if the risk was covered by another policy of insurance.
Gavin Kealey QC, sitting as a Deputy High Court Judge in this case, had to consider whether, upon a proper construction of the HSBC and NFU policies, the HSBC policy provided insurance cover to the buyers in respect of the fire in circumstances where the NFU policy did the same. This would result in “double insurance” entitling NFU to a contribution from HSBC towards the payment it had made to the buyers under the insurance policy.
On the facts of the case, it was held that because NFU’s policy did not contain a provision entirely excluding coverage in the event that the buyer was otherwise insured in respect of the same risk, there was no issue of double insurance and NFU’s was the only policy covering the buyers for damage to the property between exchange and completion. HSBC was not liable to make any contribution towards the sum NFU had paid under the insurance policy. Its clause was effective to relieve it entirely of responsibility; NFU’s was not.
What if the policies had been worded differently?
Would the buyer have had a problem in making a successful insurance claim if both of the insurance policies contained an identical “escape” provision, along the lines of the HSBC policy, so that each provided that the insurer would not make a payment under a claim in respect of any loss or damage if the same risk was otherwise insured by another insurer. Could the two exclusions together effectively operate to eliminate all cover?
This would certainly be an undesirable, and totally uncommercial, outcome. If an escape clause were a successful means of avoiding making payment under an insurance policy, then insurers could effectively sidestep their contractual obligations, in respect of which the insured has paid premium to receive the benefit, purely because another insurer has agreed to cover the same risk.
Ideally the courts prefer to construe policies that seemingly give rise to double insurance so that a double insurance situation does not in law arise at all. If the wording of one of the insurance policies is not absolute, it makes life a little easier. In the Canadian case of Evans v Maritime Medical Care Inc,2 the claimant was injured in a motor accident, and had in place insurance provided by both a motor insurance policy and a group hospital benefits policy. The motor insurance policy excluded the insurer’s liability for any expenses recoverable under a hospital plan. The hospital plan excluded cover if similar benefits were payable under any other contract. It was held that the hospital plan exclusion was conditional upon payment being available under some other policy, whereas the motor policy’s exclusion was absolute. The “benefits” in respect of which the insured was covered under the hospital plan were defined such that they fell squarely within the exclusion in the motor policy. Therefore, the hospital plan exclusion could have no effect in light of the absolute wording of the motor policy exclusion and the hospital plan was fully liable to meet the insured’s claim.
Construction is a little more difficult if the wording of the clauses of each of the policies is absolute. In this instance, the courts will look at whether the policies contain, as many in practice will do, rateable proportion clauses. In Gale v Motor Union Insurance Co 3 both policies contained clauses, the effect of which was to exempt each insurer from liability in the event of the existence of concurrent insurance, but both policies also contained rateable proportion clauses. Roche J held that each company was bound to pay one half of the loss, on the ground that the rateable proportion clauses explained and qualified the exclusion clauses in the policy.
Even if policies which each contain exclusion clauses do not also contain operative rateable proportion clauses, the courts will generally apply specific rules of construction to judge what was intended. In the case of Weddell v Road Traffic and General Insurance Co Limited 4 the insured allowed his brother to drive the insured’s car. The insured’s policy covered both the insured and any friend or relative authorised by the insured to drive the insured’s car. The brother also had his own insurance policy, which covered him driving his own car and those of other people. Each of the policies contained an exclusion if the driver was able to claim under another policy. The insured’s policy contained a rateable proportion clause, but the policy of the brother did not. Rowlatt J said: “you look at each policy independently and if each would be liable but for the existence of the other, then the exclusions would be treated as cancelling each other out.” So even if there are no operative rateable proportion clauses, both insurers are liable and the insurer who pays out under the insurance policy can claim a contribution from the other.
Insurance on the sale and purchase of property
Most contracts for the sale of commercial real estate now incorporate the Standard Commercial Property Conditions (2nd edition) which can be varied in the main body of the sale contract as the parties may require. The default position under the Conditions is that the risk of damage or destruction to the property occurring between exchange of contracts and completion of the purchase passes to the buyer.
The Conditions also allow for the risk to remain with the seller between exchange of contracts and completion if either the parties have agreed this in the sale contract or if the property is let on terms that require the seller (whether as landlord or tenant) to insure. On the typical sale of a property subject to occupational tenancies, the seller will have a contractual obligation to its tenants, as landlord, to insure the property. This contractual obligation will not pass to the buyer until completion of the sale, so the seller must continue to insure.
In this circumstance, the buyer could simply rely upon the existence of the seller’s insurance policy between exchange of contracts and completion, and only take out its own insurance policy at completion. This is a valid approach and the Conditions include provisions which require the seller to maintain the insurance policy, obtain an endorsement on the policy of the buyer’s interest and pay to the buyer any insurance proceeds that are received as a result of damage to the property occurring between exchange of contracts and completion.
However, a buyer relying upon a seller’s insurance policy would have to be very sure of its terms and availability, having conducted a thorough review of the insurance policy. A seller may be reluctant to disclose the contents of an insurance policy in full to a buyer, particularly if it is a block policy insuring a large number of properties. There may be clauses limiting the cover, or imposing high deductibles or conditions precedent to coverage, such as notice clauses. If the policy limits are exhausted by other claims, the limits may not be adequate. The policy may even be capable of avoidance in the event that the insured misrepresented or failed to disclose material facts to the insurer on inception. There is also the practical issue that the buyer would not necessarily be able to make any claim under that insurance directly, and might well need to enforce the contractual obligation in the name of the seller in order to have standing to make the necessary claim under the insurance.
Institutional investors that purchase property with a view to adding it to their portfolio of assets will often have in place a block policy with an insurer that covers the investor’s entire property portfolio. A buyer of this type will typically prefer to arrange its own insurance between exchange of contracts and completion, so as to avoid relying upon an insurance policy on terms that differ from its own block policy.
A buyer who arranges his own insurance to cover the period between exchange of contracts and completion will have to pay the premium for such insurance out of his own pocket, and will have no recourse against the seller for that premium. A buyer arranging his own insurance will generally see this additional expense as minimal in the context of the overall transaction cost and potential loss if the seller’s insurance cover is inaccessible or just not good enough. A buyer ought to ensure however that his own cover does not contain clauses that are likely to give rise to potential double insurance arguments with concurrent insurers.
what app roach should a buyer take?
We have seen that the courts will strive to construe competing insurance policies so as to avoid the result that the two insurance policies cancel each other out, leaving the insured without cover. The courts have held that it would be absurd if a risk were to be left uninsured as a result of the way in which competing insurance policies are worded.
In practice, it is common for a buyer to take the commercial decision to arrange his own insurance, giving him the comfort that the property is insured on adequate terms with which he is familiar. Buyers rely upon the natural inclination of the courts to construe policies as reasonable people would construe them, so that the likelihood of both the seller’s and the buyer’s insurer evading liability under their respective policy is slim. As ever, the rule is simple: read the policy and if the terms are unclear, check it!