Property insurance policies almost invariably contain a clause requiring notification of a material change in circumstances. What constitutes such a change was recently examined by the Court of Appeal in Qayyum Ansari v New India Assurance Limited [2009] EWCA Civ 93. The court held that the Insured’s statement in his proposal form that the premises were protected by an automatic sprinkler system meant a properly functioning sprinkler system that was ready to operate in the event of a fire, and not merely that the system was capable of functioning. Although turning off the sprinkler system temporarily, for maintenance or repairs, or to prevent damage from a leak, would not mean that the premises ceased to be protected by a functioning system within the meaning of the statement in the proposal form, turning off the system indefinitely constituted a ‘material’ change that needed to be notified. To read the judgment, click here.

Ansari v New India: Mr Ansari owned a commercial property, which he leased to his friend, Mr Asim. Mr Asim ran a warehouse business (Lava (UK) Limited) from the premises. Mr Khan was the warehouse manager. Mr Ansari insured the property under a Commercial Property Owners’ Insurance Policy. The list of insured perils included fire. In the proposal form, Mr Ansari responded ‘Yes’ to the question ‘Are the premises protected by an automatic sprinkler installation?’ Although that was true at the time, Mr Khan later turned off the sprinkler system, by closing the isolation valve and placing a filing cabinet against the control handle on the valve, so as to prevent it being opened. He said this was because the sprinkler system had previously leaked, causing damage to the warehouse contents, but there was no reliable evidence to support this. As a result, when a fire broke out on 7 September 2005, the sprinkler system was inoperable. Even if the valve had not been closed, the system would not have operated, as water services to the building had been cut off the previous month (August 2005) for non-payment of water charges by Mr Asim.

Insurers accepted that ‘the statements made in the proposal form related only to the state of affairs as they existed at the date of the original contract and were not in any sense a representation as to what the future position might be.’ In other words, there was a sprinkler system at the time the proposal form was signed but no warranty was given as to the state of affairs continuing in the future. That left the Insurers having to rely on General Condition 2, which provided as follows:

‘2. 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.’

The court accepted that conditions in insurance policies dealing with an increase of risk have a long history and that the common law severely limits the right of an insurer to avoid liability for an undisclosed increase in the risk of damage that occurs after the grant of cover: ‘Absent nondisclosure of material facts, it is for the insurer to assess the likelihood of future risk on the basis of the proposal and to calculate the premium accordingly.’ The court noted, however, that the common law distinguishes between an increase of risk and cases where the nature of the subject matter insured has changed. In the latter category, it will be easier to treat the new risk as falling outside the scope of the cover.

Here, however, the condition was drafted in terms limited to a material change in the facts stated in the proposal form. In the court’s view, this would include ‘the physical state of the building and the use made of it both of which could have been highly relevant to the underwriter’s assessment of risk at the time when the existing cover was granted…Turning off that sprinkler system does more in my judgment than merely to increase the risk of damage by fire. It constitutes a material alteration of the nature of the subject matter of the insurance. The existence of a working sprinkler system was on any view material to the proposal. A properly functioning system which protects the premises affects the safety of those premises and risk insured. The absence of such a system was by the same token a material change in the facts stated in the proposal.’

The Court of Appeal agreed, noting that the purpose of an automatic sprinkler system is to extinguish outbreaks of fire promptly, to prevent their taking hold. Such a system forms an integral part of the building and is intended to function permanently, in the sense of being constantly ready to operate in the event of fire without the need for human intervention. The disablement of such a system, for whatever reason and even for a short period of time, would significantly increase the risk of damage to the building by fire.

That does not mean that, whenever the system is turned off, there has been a change in the facts stated in the proposal form. But where, as here, the system has been rendered inoperative with a view to its remaining in that condition for an indefinite period, that amounts to a change of facts stated in the proposal form, because while the system remains out of service the premises cannot properly be described as being protected by a properly functioning automatic sprinkler system.

Material’ in this context does not bear the same meaning as that given in Pan Atlantic v Pine Top but rather, in the context of Condition 2, refers to ‘alterations or changes in facts of a kind that take the risk outside that which was in the reasonable contemplation of the parties at the time the policy was issued.’