The 85% average condition, late notification and unreinstated rebuilding
Meridian Retail Ltd insures its hardware shop under a commercial combined policy: buildings sum insured £500,000, stock £80,000. The policy contains an 85% average condition, a reinstatement memorandum requiring rebuilding works to be completed within 12 months, and a condition precedent requiring notification within 30 days of the loss. A fire on 3 February 2025 destroyed the stockroom. The loss adjuster measures fire damage to the building at £200,000 and destroyed stock at £50,000. The insured's 2024 renewal declaration stated a rebuild cost of £800,000 and maximum stock value of £80,000, but the buildings figure had not been revised since 2019 despite a £180,000 rear extension completed in 2022. Notification reached the insurer on 20 March 2025, by which time the insured's contractor had cleared the site. Salvage bids for undamaged stock total £4,200, and a supplier has agreed to credit £6,000 for stock returned to it. The policy excess is £1,000 each and every loss.
1. Calculate the indemnity payable for the building and stock damage, explaining each step of your reasoning, including whether average applies.
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Step 1 – test the sums insured against value. Buildings: £500,000 insured against an £800,000 rebuild cost = 62.5%. Stock: £80,000 insured against an £80,000 maximum value = 100%.
Step 2 – apply the average condition. The 85% clause is a waiver threshold, not the averaging fraction. Because 62.5% falls below 85%, average bites and the settlement is calculated on the full fraction: £200,000 × (500,000 ÷ 800,000) = £125,000. Read the exact wording before applying this: some clauses average against 85% of value (£200,000 × 500,000 ÷ 680,000 = £147,059), and the difference is a £22,000 decision. Do not apply average to stock, which is fully insured.
Step 3 – reinstatement. The memorandum lets the insurer pay the indemnity (diminution) value first and the balance only when reinstatement is complete within 12 months. If the insured does not rebuild, the £125,000 falls away to the much lower site-value loss. Confirm the 2022 extension is within the risk and that rebuilding is genuinely intended; carry the reinstatement figure in the reserve but note the conditional element.
Step 4 – stock. £50,000 loss, less £4,200 salvage (the insurer pays the loss and takes the salvage) and less the £6,000 supplier credit (the insured has suffered no loss to that extent, and paying it would create betterment). Net £39,800.
Step 5 – deduct the £1,000 excess once and record the business interruption element as a separate reserve.
2. Notification arrived 45 days after the loss, breaching the 30-day condition precedent, and the site was cleared before the insurer could inspect. Advise on the effect on the claim and how the decision should be made and communicated.
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Start with the wording, because the answer turns on construction, not on sympathy.
- Is it a condition precedent? 'No liability shall arise unless…' makes notification a condition precedent; clear words are needed. Otherwise it is an innominate term, and the insurer can only decline if the breach deprived it of a substantial benefit (prejudice).
- Prejudice here is real: the contractor cleared the site before the insurer could inspect, so the cause and extent of the fire damage and any subrogation evidence against a third party are lost. That fact pattern is what turns an innominate term into a defence.
- Statutory overlay. The Insurance Act 2015 limits reliance on terms not relevant to the actual loss, and the Enterprise Act 2016 implies a term that the insurer pay within a reasonable time - a declinature does not pause that clock. FCA rules (ICOBS 8) require a clear, fair and timely explanation, not a technical repudiation used as an easy exit.
- Practical conclusion. On these facts the insurer probably has a defensible position, but it should not decline on the 10-day overrun alone. It should ask whether the site would have been cleared anyway, whether the contractor's records and photographs exist, and whether the insured was ever told of the deadline. Document the reasoning, tell the insured in writing with the wording and the prejudice relied on, and treat any response as a complaint with DISP timescales.
3. The insured says the average condition is unfair and that its broker should have updated the sum insured after the extension. Explain how you would handle the complaint and any recovery against the intermediary.
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Treat the complaint and the coverage decision as two separate tracks.
The complaint. Average is a contractual term, agreed at renewal and reflected in premium. The insured's assertion that it is 'unfair' is not a coverage argument, but the complaint must still go through DISP: acknowledge promptly, respond within eight weeks, and give FOS referral rights. The FOS looks at whether the term was drawn to the insured's attention and applied as written, so produce the renewal documentation and the policy schedule.
Broker liability. The stronger argument is against the intermediary. If the broker was instructed to arrange adequate cover and failed to update the buildings figure after the 2022 extension, or completed the renewal declaration without reasonable care, the insured may have a negligence claim for the shortfall - here £75,000 of the £200,000 building loss plus any uninsured extra. Check whether the broker acted as agent of the insured (usually for placement) and keep the correspondence.
The insurer's route. Settle the policy claim as calculated, then take an assignment of the insured's rights against the broker (or support the insured's claim) to recover the uninsured balance, rather than paying it voluntarily. Any recovery is shared so that the insured is first made whole for its excess and uninsured loss, with the insurer taking the balance up to its outlay.