The welding question and the avoided policy
Ridgeway Fabrications Ltd has 40 employees and £6.2m turnover. Its renewal proposal asks: 'Do you or anyone working at your premises carry out hot work (welding, cutting or grinding)?' The managing director ticks 'No'. In fact subcontractors grind and weld in the yard about six times a year; the MD knows this but reasons that 'it's not our own staff, and it's outside the building anyway'. The underwriter later confirms she would have charged £16,000 rather than the £12,000 charged, and would have added a hot-work condition. Fourteen months into the policy, sparks from a subcontractor's grinder ignite paint thinners and cause £310,000 of damage. The insurer writes: 'The policy is avoided from inception; no premium is returnable.'
1. How should the MD's answer be classified, and what remedies are actually open to the insurer under the Insurance Act 2015?
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Rule. Section 3 requires a fair presentation: disclosure of every material circumstance known or which ought to be known, made in a manner sufficiently clear and accessible to a prudent insurer. A fact is material if it would influence the judgement of a prudent insurer in fixing the premium or determining whether to take the risk. Schedule 1 sets the remedies:
- Deliberate or reckless breach - the insurer may avoid, refuse all claims and keep the premium.
- Any other (negligent or innocent) breach - the insurer may not avoid. It may instead (a) treat the contract as containing the terms it would have imposed, (b) reduce the claim proportionately where it would have charged more, or (c) avoid and return the premium where it would not have entered into the contract at all.
Apply. The question was specific and unambiguous, and hot work is obviously material to a fire risk in a fabrication business. The MD knew the true position. His reasoning - that subcontractors' work and outdoor work do not count - is not an honest belief that the fact was irrelevant; it is either reckless (he knew the fact but did not care whether it mattered) or negligent. It is not clearly deliberate, because there is no evidence of an intention to deceive.
Conclusion. The letter is wrong on two counts. Avoidance with no return of premium is available only for a deliberate or reckless breach, and even then the premium must normally be returned unless the insurer would have declined the risk outright. If the breach is negligent, the insurer must choose between imposing the hot-work condition it would have added, and reducing the claim proportionately: £310,000 × £12,000/£16,000 = £232,500. Both remedies can apply together, since the underwriter would have imposed a term and charged more.
2. The policy contains a term reading: 'It is a warranty that all hot work at the premises is carried out under a written permit.' No permit existed. How does this change the analysis?
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Rule. Section 9 of the Insurance Act 2015 abolished 'basis of the contract' clauses, so an answer on a proposal form cannot be turned into a warranty. Section 10 provides that breach of a term designed to reduce the risk of loss of a particular kind, at a particular location or at a particular time suspends the insurer's liability during the period of breach; liability is reinstated once the breach is remedied. The insurer cannot treat the whole policy as at an end.
Apply. The permit requirement is exactly such a risk-reduction term. Breach does not entitle the insurer to avoid the policy or to keep the premium. It suspends cover for hot-work risk while the breach continues - and the fire happened during that suspension, started by grinding without a permit. Section 11 does not rescue the insured, because the term is plainly relevant to the type of loss that occurred: it is aimed at fire from hot work.
Conclusion. The insurer has a defence to this claim on the suspended-cover basis, but the policy continues and any later claim arising in a compliant period would be payable. The pragmatic commercial answer is usually either the section 10 route or the section 8 proportionate remedy, not both - the insurer should not recover more than it would have received had it been told the truth.
3. If the breached term had instead required the intruder alarm to be maintained, and the loss had been the same fire, what would the insurer have to prove?
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Rule. Section 11 of the Insurance Act 2015: where a term is designed to reduce the risk of loss of a particular kind, at a particular location or at a particular time, the insurer has no defence to a claim for loss of the kind, at the location or at the time in question if the insured shows that non-compliance with the term could not have increased the risk of that loss in the way it occurred.
Apply. An alarm-maintenance term is aimed at intruder loss. It has no bearing on ignition sources, housekeeping or fire loading in the yard. The insured can readily show that a non-working alarm cannot have increased the risk of a fire started by a subcontractor's grinder.
Conclusion. Section 11 would bar the insurer from relying on the alarm term against a fire claim entirely - there would be no suspension and no defence. This is the practical asymmetry the exam likes: proximity between the term and the loss decides whether the insured is in trouble or the insurer is.