The Refurbishment That Changed the Risk
A commercial landlord insures a 1970s office block for £4.2m on a reinstatement basis with a standard property policy. In March the landlord begins a phased refurbishment: the roof is replaced, three floors are stripped to shell, and hot works are used daily. The policy contains a 'alterations and repairs' condition requiring notification of any work exceeding 10% of the sum insured, and a hot works exclusion unless a permit system is operated. The broker is told about the refurbishment informally by phone but no endorsement is issued. In July a fire starting from a discarded angle-grinder disc destroys two floors, causing £1.1m of damage. The insurer declines, citing non-disclosure and breach of the hot works condition. The landlord argues the broker knew and the works were 'maintenance'.
1. Assess whether the insurer's declinature is likely to be upheld, separating the notification condition from the hot works exclusion.
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The two grounds must be analysed separately because they have different legal mechanics.
Notification condition. This is a condition precedent to liability or a condition affecting cover, depending on wording. If the works exceed 10% of the sum insured (here £420,000; the stripped floors plus roof almost certainly do), the landlord is in breach. The landlord's argument that the broker 'knew' fails unless the broker was authorised to accept the risk on the insurer's behalf - a broker is the insured's agent for disclosure, not the insurer's for granting cover. The key question is whether the insurer can show prejudice. Under the Insurance Act 2015, where a term is not designed to reduce a specific risk, breach may only be relied on if it is relevant to the loss. A refurbishment notification clause is plainly relevant to fire risk, so the insurer likely can rely on it.
Hot works exclusion. The exclusion applies unless a permit system operates. The facts do not say one was. The landlord's 'maintenance' characterisation is weak - a phased refurbishment with stripped floors is not routine maintenance. The exclusion is likely engaged.
Conclusion. The declinature is probably upheld on the hot works ground at minimum, and on the notification ground if the insurer can show the breach was relevant to the loss, which it can. The broker's informal knowledge does not bind the insurer absent authority.
2. What should the broker have done differently, and what is the broker's exposure?
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The broker received material information about a change in risk and failed to act on it. Best practice required:
- Record the call and treat it as a notification of a material change.
- Obtain the refurbishment details - scope, duration, contractor, hot works method statement, fire precautions.
- Submit to the insurer and seek an endorsement, additional premium, or agreed amended terms.
- Advise the client in writing that cover may be affected until terms are agreed, so the client can decide whether to proceed.
The broker's exposure is professional negligence. The client will argue that had the broker done its job, the insurer would either have issued amended terms (with cover) or declined to extend cover, in which case the client could have stopped or insured elsewhere. The measure of loss is the difference between the client's position and the position it would have occupied - potentially the uninsured £1.1m less any premium it would have paid. Contributory factors: the client's own duty to disclose under the 2015 Act and its failure to operate a permit system. A settlement apportioning responsibility is likely.