Two policies, one fire and a signed waiver
Harlow Retail Ltd owns a shop and insures its stock under two separate policies, each containing a rateable proportion clause. Policy A with Alpha Insurance has a sum insured of £300,000. Policy B with Beta Insurance has a sum insured of £200,000. Both cover fire damage to stock. An electrical fault arising from work by Volt Electrics started a fire that destroyed stock worth £180,000. Before the fire, and after both policies had incepted, Harlow signed a collateral warranty with Volt waiving all rights against Volt for any loss, and did not tell either insurer. Alpha has paid £108,000 and Beta has paid £72,000. Alpha has now instructed solicitors to pursue Volt in subrogation. Harlow's finance director says the waiver was 'just standard procurement paperwork' and that the insurers have already paid, so the matter is closed. Alpha's policy also contains a condition requiring the insured not to prejudice the insurer's subrogation rights.
1. Calculate how the £180,000 loss should be borne between Alpha and Beta, and explain the principle of contribution.
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Principle. Contribution arises where there is double insurance: the same insured, the same interest, the same risk and the same loss are covered by two or more policies. Each insurer is liable to indemnify, but the insured cannot recover more than the loss. The insurers share the loss rateably, either under an express rateable proportion clause or under equitable principles (and, for marine insurance, s.80 of the Marine Insurance Act 1906).
Calculation. Total sums insured: £300,000 + £200,000 = £500,000.
- Alpha's share: £300,000 ÷ £500,000 = 60% × £180,000 = £108,000.
- Beta's share: £200,000 ÷ £500,000 = 40% × £180,000 = £72,000.
The payments already made match this calculation. If one insurer had paid the whole loss, it could recover contribution from the other. Contribution is separate from subrogation: it operates between insurers, while subrogation operates against third parties.
2. Can Alpha recover from Volt by subrogation? What effect does the collateral warranty have, and what remedies may Alpha have against Harlow?
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Subrogation. On paying the claim, Alpha is subrogated to Harlow's rights against the party responsible for the loss. It can generally pursue Volt in Harlow's name, and it cannot recover more than it has paid. The right depends on Harlow having a subsisting claim against Volt.
Effect of the waiver. The collateral warranty was signed before the fire and before Alpha paid. It extinguished Harlow's rights against Volt before Alpha's subrogation rights arose. There is therefore nothing for Alpha to step into, and a subrogation claim against Volt is likely to fail. The position would be different if the release had been given after Alpha's rights had arisen; in that case the release may not defeat the insurer's rights, and the insurer may be able to proceed despite it.
Alpha against Harlow. The 'no prejudice' condition is engaged. Alpha should consider:
- Whether the term is a condition precedent to liability. If it is, Alpha may have a defence to the claim, although it has already paid and would need to recover the money.
- Whether Alpha can claim damages for breach of the condition, measured by the loss of the subrogation recovery.
- Section 11 of the Insurance Act 2015: the term is not relevant to the actual loss (the fire), so Alpha must show prejudice. Here the loss of the right against Volt is real prejudice, so Alpha can rely on the breach.
Non-disclosure point. If the waiver had existed before inception, it would have been a material circumstance for the fair presentation of the risk. It arose after inception here, so the claim is for breach of the subrogation condition rather than non-disclosure.
3. If the loss had been £260,000 and Alpha's policy contained a 75% average (underinsurance) condition with a value at risk of £500,000, calculate Alpha's net payment.
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Rateable share first. Alpha's proportion of the loss remains 300 ÷ 500 = 60%: £260,000 × 60% = £156,000.
Average. The sum insured (£300,000) is only 60% of the value at risk (£500,000), so the average condition applies. The claim is reduced in the proportion that the sum insured bears to the value at risk: £156,000 × (300,000 ÷ 500,000) = £156,000 × 0.6 = £93,600.
Who bears the shortfall? Beta's rateable share is £260,000 × 40% = £104,000. The insurers therefore pay £93,600 + £104,000 = £197,600, and Harlow bears the uninsured balance of £62,400. That balance reflects both the underinsurance under Alpha's policy and the operation of the rateable proportion clause.
Caveat. The precise order of the average and contribution calculations can be argued, and Beta's liability may be affected if Alpha's policy is treated as providing a different level of cover. The key exam point is that underinsurance reduces Alpha's payment and the insured bears the shortfall; the insurer should set out its calculation clearly and consistently with the policy wording.