Bakery fire: underinsurance, late notice and a post-loss repair
Northfield Bakery supplies cafés from a single leased warehouse. Its commercial property policy has a combined buildings and stock sum insured of £600,000, an 85% average condition and a £2,500 excess. At renewal the owner declared the rebuild cost and stock value at £600,000. At the date of a fire, an independent valuation puts the rebuild cost and stock replacement value at £800,000. The fire destroyed stock with a replacement cost of £90,000 and caused £210,000 of building damage. The fire investigator finds the cause was a faulty extension lead. Two weeks before the fire an electrician had repaired a different, minor fault; the insured did not tell insurers. The insured was abroad and notified the claim ten days after the fire, although the policy requires immediate notification. A loss adjuster has been appointed but has not yet visited. The insured asks for an interim payment because it needs to pay staff.
1. Calculate an indicative indemnity settlement for the building and stock damage, explaining how the average condition and excess operate.
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Step 1: test the average condition. The sum insured is £600,000 and the value at risk is £800,000, so the sum insured is 75% of value (£600,000 ÷ £800,000). The policy requires at least 85%, so the average condition is triggered. On the common proportional wording the rate is the ratio of sum insured to value, capped at 100%; here it is 75%. The adjuster must read the exact clause, because some 85% conditions use 85% of value as the denominator rather than full value.
Step 2: apply the rate to each loss. Building damage: £210,000 × 75% = £157,500. Stock: £90,000 × 75% = £67,500. Total before excess = £225,000.
Step 3: deduct the excess once. £225,000 − £2,500 = £222,500. This is indicative only: the adjuster must check the policy basis (replacement or indemnity), whether buildings and stock have separate sums insured, and whether any stock salvage reduces the figure. If separate sections applied, the average calculation would be done separately for each section. The insured should be told the basis of settlement clearly, because the gap between the gross loss and the net figure is caused by underinsurance, not by the excess.
2. The insurer is considering declining for late notification and for the undisclosed electrical repair. Advise whether either ground is sustainable and what the insurer should do next.
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Late notification. The clause is a condition, but a court or the Financial Ombudsman would expect the insurer to show that the ten-day delay caused prejudice, or that the term is enforceable under the Insurance Act 2015. The owner was abroad; an adjuster has been appointed; there is no sign that evidence has been lost. Declining solely on ten days would be a weak position and commercially risky. The insurer should ask for the notification timeline, reserve its rights in writing, and continue investigating. If prejudice emerges, it can revisit the point.
The electrical repair. This happened after inception and was a different fault. It is not a non-disclosure at proposal unless the policy asked about subsequent alterations and the insured failed to notify a material change. It is not causative because the fire investigator blames the extension lead. The insurer should not use it to decline; it may be relevant only if the policy has a risk-improvement condition.
Next steps. Interview the insured, obtain the fire report and maintenance records, and consider an interim payment for the undisputed property damage. Staff wages are not insured unless a business interruption section applies. Do not make a final payment before the average calculation and salvage position are clear.
3. Identify the salvage and subrogation issues and the evidence the adjuster should secure.
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Salvage. The damaged stock may have scrap or residual value. The insurer should establish the salvage value, decide whether to take it, and deduct it from the stock settlement if the insured retains it. The policy may give the insurer the right to salvage. The adjuster should list and photograph damaged stock before disposal.
Subrogation. If the extension lead was defective, the insurer may have rights against the manufacturer, supplier or installer. Those rights depend on the policy wording and any waiver of subrogation. The insurer should preserve the lead and its packaging, obtain purchase invoices, batch numbers and any recall notices, and check whether the insured has signed a contract that limits the supplier's liability. It must not prejudice the claim by destroying evidence.
Evidence. The adjuster should secure the fire brigade report, electrical inspection, photographs, stock records, valuation evidence, repair estimates, and statements from staff about the lead. The insurer should also check whether the insured has other insurance covering the same loss, because contribution may apply. A reservation-of-rights letter should mention salvage and subrogation expressly.