It is common for insurers to insert provisions into policies requiring increases of risk during the policy to be notified to insurers and terminating cover if notification is not given. The English courts have often given such clauses a narrow construction. However, in Qayyum Ansari v New India Assurance Ltd [2009] EWCA Civ 93, the Court of Appeal upheld the first instance decision that an appropriately worded policy term could widen the basis upon which a change in the risk might provide grounds for insurers to discharge the policy.

Facts  

In May 2004, Mr. Ansari sought insurance from New India Assurance Ltd ("New India") for his factory in Manchester. Mr. Ansari signed a completed Proposal Form by which he applied for a Commercial Property Owners Policy on New India's usual terms. In response to the question “Are the premises protected by an automatic sprinkler system?” he wrote “Yes”. However, he did not give any details of the system, despite being asked to do so. In signing the proposal, Mr. Ansari declared that the statements contained in it were true to the best of his knowledge and belief.

General Condition 2 of the policy ("GC2") provided that:

"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 policy also contained a non-invalidation clause which stated that the "insurance shall not be prejudiced by any act or neglect whereby the risk of destruction or damage is increased without the authority or knowledge of [Mr. Ansari]."

Mr. Ansari let the factory to a tenant. A fire broke out in the factory, which caused considerable damage to the building and contents, and as a result Mr. Ansari claimed under the policy. However, the tenant had isolated the sprinkler system from the mains water supply, thus deactivating the system. Furthermore, the tenant had placed a filing cabinet against the sprinkler system's control handle so as to prevent it being opened and had failed to pay the water charges resulting in the water supply being cut off. As the sprinkler system had not been working at the time of the fire, New India rejected the claim and cancelled the policy.

First instance decision

Mr Justice Patten held that a properly functioning sprinkler system was something that was of concern to New India and accordingly they asked a specific question about it in the Proposal Form. In Kausar v Eagle Star Insurance Co Ltd [2008] EWHC 243, the Court of Appeal held that an insurer could not rely on a term requiring the insured to notify it of changes that increased the risk to avoid liability. However, Patten J distinguished Kausar, drawing a distinction between (i) provisions focussing on changes of circumstances which increased the risk of damage (as in Kausar); and (ii) conditions such as GC2 which operated on a material change in the facts stated in the Proposal Form. Patten J held that turning off the sprinkler system in such a way that meant it was unlikely to come back on was more than an increase in the risk and had amounted to a material change in the facts stated in the Proposal Form. GC2 was not required to be considered in the same way as the (very similar) condition in Kausar.

The question then became whether or not Mr. Ansari could rely on the non-invalidation clause. Since Mr. Ansari had visited the factory several times and had knowledge of the tenant's actions in relation to the sprinkler system, Patten J held that he could not do so.

The Court of Appeal

Mr. Ansari appealed to the Court of Appeal where Lord Justices Moore-Bick, Thomas and Waller unanimously rejected the appeal. The issues for the Court of Appeal were:

  1. What relevant facts were stated in the Proposal Form?
  2. Was there a subsequent change in any of those facts?
  3. If there was a change in the facts, was the change material?
  4. If it was material, did Mr. Ansari have sufficient knowledge of the change?
  1. Moore-Bick LJ agreed with Patten J that the statement in the Proposal Form that the premises were protected by a sprinkler system effectively meant that the sprinkler system “forms an integral part of the building and moreover is one which (unlike an intruder alarm) is intended to function permanently, in the sense of being constantly ready to operate in the event of a fire without the need for human intervention”.  
  2. Moore-Bick LJ held that the sprinkler system was turned off permanently during the currency of the policy. The tenant had deliberately placed a filing cabinet against the sprinkler system’s control handle so that the valve could not be opened. This was further enforced by the fact that the tenant did not pay the water bills for the property and the water supply had been cut off. Moore-Bick LJ drew a distinction between the sprinkler system being permanently inoperative and where it is turned off temporarily. If the latter occurred then this would (as a matter of "common sense") not mean that the premises failed to be protected by a “functioning system”. However, the sprinkler system was permanently out of action and accordingly this constituted a change in the facts as stated in the Proposal Form.  
  3. Moore-Bick LJ considered Kausar and the well known decision in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501. Moore-Bick LJ held that Patten J had been wrong to conclude that the word "material" in the context of GC2 was to have the same well established meaning as in Pan Atlantic, whereby a material fact to be disclosed in pre-contract negotiations was one that would influence the judgment of a prudent insurer in deciding whether and on what terms he would be prepared to accept the risk. That said, it was not clear that Patten J had in fact applied the Pan Atlantic meaning of "material" in its full rigour given Patten J's observation that what was required was a "material alteration in the subject matter of the insurance".

In GC2, the word "material" was used in a very different sense to the Pan Atlantic meaning (which, if correct would lead to unacceptable uncertainty for insureds since virtually any circumstance arising mid term would risk the cover being jeopardised). GC2 therefore had a very similar effect to the condition in Kausar.

The relevant question to ask in relation to what was "material" was whether the changes/alterations took the risk outside that which was in the “reasonable contemplation of the parties at the time the policy was issued”. Moore-Bick LJ observed that whilst New India must be taken to have understood that the sprinkler system might be temporarily turned off for maintenance or repairs, it would not have envisaged that the sprinkler system would be permanently inoperative. A prudent insurer would not regard the risks being the same for a building with a functioning sprinkler system and a building without one. New India underwrote the insurance having specifically asked about a functioning sprinkler system. Therefore, a permanently inoperative sprinkler system constituted a material alteration in the nature of the subject matter of the insurance such that the insurance ceased to be in force.  

  1. Moore-Bick LJ agreed with Patten J that because Mr. Ansari was aware that the sprinkler system was permanently inoperative, he must have understood that the statement in the Proposal Form did not apply anymore. Mr. Ansari did not inform New India that this was the case and accordingly the non-invalidation clause could not protect Mr. Ansari from the effects of GC2.

Comment

The judgment of Patten J at first instance has attracted some criticism on the basis that the addition of the word "material" in GC2 was not apt to distinguish the case from Kausar (such that there was no obligation on the insured to notify an increase in risk). Further, it has been observed that the fact that the sprinkler system was permanently inoperative could not in fact constitute a material alteration in the subject matter given that the common law has traditionally been concerned not with an increased danger of loss but in a complete change of use of premises.

However, the Court of Appeal's judgment indicates that it may be necessary to embark on an altogether more delicate assessment, recognising that certain features of an insured property, such as the existence of a functioning automatic sprinkler system, are themselves descriptive of its use. Inevitably this kind of analysis indicates that the precise questions raised in proposal forms and the nature of the insured's answers will be subject to careful scrutiny to ascertain the nature of the risk which was in the reasonable contemplation of the parties at the time the risk was underwritten. Such analysis will, of course, also need to take into account any express policy terms as to the maintenance of systems designed to protect the property.

It seems unlikely this decision will be the last word on the topic but, in the meantime, prudent insureds will need to pay careful attention to any express ongoing disclosure provisions in their policies to ensure that relevant changes in facts are drawn to their insurer's attention. Furthermore, the increased scope to scrutinise what facts and matters might constitute an alteration in the subject matter of the insurance, as opposed simply to an increase in risk, will doubtless be considered carefully by insurers.