Risk management and insurance: a cautionary tale in Niramax v Zurich

Summary

Following extensive fire damage to plant at a recycling facility, Zurich declined a claim notified to a contractor’s all risks mobile plant policy, on the basis of a breach of the duty of utmost good faith. The Insured, Niramax, had failed to adhere to risk requirements imposed by its building insurers, misrepresented the true position on proposal forms and omitted to disclose the same to its plant insurers, Zurich.

Commercial businesses that maintain broad insurance programmes must take extra care when insurers impose risk requirements. This judgment demonstrates that a lackadaisical approach to risk management could jeopardise an insured’s claim under an unrelated policy.

Background

The Insured provided waste collection and recycling services from multiple sites across the UK. During the decade preceding 2012, the waste and recycling sector had experienced significant losses caused by fire-related incidents. Accordingly, the mainstream property insurance market began to phase out its exposure to recycling waste risks, with many insurers no longer agreeing to write cover for fixed plant.

The Insured maintained all risks cover with Zurich for loss or damage to both owned mobile plant and hired mobile plant (the Plant Policy). The Insured also maintained a continuing programme of building insurance with Millennium. Following a risk survey, Millennium imposed a number of risk requirements for immediate attention, which included the installation of a fire suppression system (the Risk Requirements).

When the Insured failed to confirm that it had implemented the Risk Requirements, Millennium imposed special conditions from 22 October 2014 onwards, including an increased deductible per claim (the Special Conditions).

In December 2014 the Insured renewed its Plant Policy with Zurich on identical terms, subject to an increased premium. The Insured sought quotes from other buildings insurance providers at around the same time. Responding to questions in proposal forms, the Insured stated that no insurers had in the last five years imposed any form of special condition. Accepting this, a market led by Aspen offered the Insured terms for a new buildings policy, which were accepted on or around 25 March 2015 (the Buildings Policy). Eventually, the fire suppression system was installed on 30 May 2015, as per Millennium’s Risk Requirements.

Expecting delivery of new fixed plant in August 2015 (the Eggersmann Plant, book value around £4.3m) the Insured asked Zurich for an extension of the Plant Policy. Zurich extended the Plant Policy in September 2015 (Mid Term Adjustment). Just three months later, the Eggersmann Plant (amongst other equipment), was destroyed by fire.

When the Insured then sought to claim an indemnity under the Plant Policy for its loss and damage arising from the fire, Zurich declined the claim on the basis that the Insured had failed to disclose material facts and/or misrepresented material facts both at renewal in December 2014 and prior to the Mid-Term Adjustment.

Non-disclosure

Under the Marine Insurance Act 1908, an insurer is entitled to avoid a policy where an insured has failed to disclose every material circumstance which it knows (or ought to know), which would influence the judgment of a prudent insurer and which induced the insurer to provide cover. More often than not, material non-disclosures will directly relate to the risk being covered by the policy in question. They would not usually include unrelated facts and matters (such as risk requirements historically imposed by other insurers, which had eventually been addressed).

In this case, Zurich argued that the Insured had not only failed to comply with the Risk Requirements imposed by Millennium, and failed to disclose their existence to Zurich, but had also misrepresented the true position in relation to the Special Conditions to Aspen when taking out the Buildings Policy.

Reviewing the evidence, the Court found the Insured to have demonstrated a lackadaisical approach to addressing the Risk Requirements. The evidence demonstrated that the Insured was unwilling to spend the money required to address its Insurer’s concerns, and this unwillingness led to a “state of drift”. At trial, the respective underwriting experts broadly agreed that a failure to comply with the Risk Requirements was material, and it was therefore only necessary for Zurich to demonstrate inducement.

In that vein, Zurich argued that had the relevant non-disclosures/misrepresentations not been made, the acting underwriter would have had to refer the risk to the Head of Engineering Risks (a Mr Penny) at the December 2014 renewal. The Court concluded that whilst it is likely the renewal terms would have been accepted in return for a higher premium, the later Mid-Term Adjustment (which would also have been referred to Mr Penny), wouldn’t have been granted by Zurich.

Persuasively, Mr Penny had issued guidance to his underwriters in July 2014 which explicitly stated “no fixed plant on waste risks.” As such, it was highly unlikely that he would have extended the cover to the Eggersmann Plant (and therefore gone against his own guidance), had the Risk Requirements/ Special Conditions been disclosed as part of the Mid-Term Adjustment.

Comment

This decision demonstrates that an Insured’s general approach to risk management can give rise to disclosable material facts which would influence the judgment of a prudent insurer. Of course, as the dispute fell within the pre-Insurance Act 2015 regime, it was not incumbent on Zurich to demonstrate that the Insured’s breach of its duty of utmost good faith was in any way related to the loss. Here, for example, the fire suppression system had been installed in advance of the Mid-Term Adjustment, and wasn’t required to protect the Eggersmann Plant itself (ie. the main loss claimed by the Insured).

The ‘new’ regime introduces the duty of fair presentation and a series of remedies depending on the nature and severity of the breach. Although insurers are still able to avoid policies in certain circumstances under the Insurance Act 2015, they must be able to establish the requisite causative link.

Not only this, but unless an insurer can demonstrate that their insured’s breach was either deliberate or reckless, it is less likely to be able to avoid the policy and, instead, will be limited to treating the contract as if it had been written on different terms. This will however be a question of fact. In our view, the Insured’s actions in this case would amount to a negligent (if not, reckless) breach of the duty of fair presentation. The Insured’s lackadaisical approach, combined with a reluctance in the market to write fixed plant risks and Mr Penny’s July 2014 guidance, mean that Zurich’s declinature would probably also have been upheld by the Court under the Insurance Act 2015s regime.