Warehouse fire: average, the missing survey and a subrogation waiver
Ravensworth Foods Ltd insures its warehouse under a commercial property policy with a buildings sum insured of £1,200,000, a £10,000 excess and an 85% average condition: 'If at the time of loss the sum insured is less than 85% of the value at risk, the amount payable shall be reduced in the proportion that the sum insured bears to 85% of that value.' The excess is deducted from the loss before average is applied. Cover is on an indemnity basis. At the time of the May fire the reinstatement cost of the building is £2,000,000 and its indemnity value is £1,500,000. Building damage is £400,000. Damaged machinery, insured separately without average, is a £60,000 loss and its salvage realises £12,000; stock and business interruption are separately insured and not disputed. Two years earlier the insured paid £9,000 for a reinstatement survey valuing the building at £2,100,000 but never sent it to the insurer. The fire began when a contractor stripping paint with a hot-air gun ignited insulation. The construction contract includes a mutual waiver of subrogation and requires the contractor to hold £2,000,000 public liability cover, which it does.
1. Calculate what is payable for the building damage and explain each step.
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Work through the condition in order.
Basis: the policy is indemnity, so the comparison is with the indemnity value of the property at risk, £1,500,000, not the reinstatement figure of £2,000,000. Using the wrong basis is the commonest error.
Threshold: 85% × £1,500,000 = £1,275,000. The sum insured of £1,200,000 is below it, so the condition applies.
Factor: £1,200,000 ÷ £1,275,000 = 0.9412 (94.12%).
Loss: £400,000 less the £10,000 excess (the policy applies the excess first) = £390,000.
Payable: £390,000 × 0.9412 = £367,059, rounded. The insured bears about £22,941 of the loss through the operation of average - a direct consequence of the £75,000 gap between the sum insured and 85% of value.
Then the other sections. The machinery claim is £60,000 less salvage £12,000 = £48,000, subject to its own sum insured and excess but not to average, because that section has no average condition. Salvage belongs to the insurer, so it is credited rather than ignored. Stock and business interruption are settled under their own sections; check the indemnity period and whether stock is declared on a declaration-linked basis, because that produces a different calculation.
Show the arithmetic to the insured. Average is far better accepted when the working is transparent.
2. The insured had a reinstatement survey showing £2,100,000. What difference does that make to this claim and to the insurer's position at renewal?
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Less than it appears for this claim. The average condition is applied to the value at risk on the policy basis, and the survey is a reinstatement figure, so it does not alter the indemnity calculation above. Nor is there a general duty to keep the insurer updated during the policy period: the duty of fair presentation operates at inception and at renewal, not continuously.
Where it does matter is renewal. The directors knew from the survey that reinstatement would cost over £2m against a buildings sum insured of £1.2m. At renewal, a fair presentation requires disclosure of material circumstances, and an obviously inadequate sum insured is material. If the insurer can show it would have increased the rate, imposed a margin clause or required a professional valuation, the alternative-terms remedy would apply to a future claim. The insurer should also check whether its renewal questions about values were clear; the Act does not require the insured to volunteer what a well-drafted question would have captured, but it does require a reasonable search of what the business knows.
Do not try to use the survey to defeat this settlement. The mechanism for this claim is average, not concealment. Write to the insured now, explain the shortfall, recommend an updated professional valuation and record the position on the renewal file.
3. Can the insurer recover the fire loss from the contractor? Explain the effect of the waiver and of section 10 of the Insurance Act 2015.
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Subrogation puts the insurer in the insured's shoes and gives it only the rights the insured had. Here the insured had agreed a mutual waiver of subrogation with the contractor. If that waiver was given before the fire, the insured had no claim against the contractor for this damage, so the insurer has nothing to pursue. The contractor's £2m public liability policy is irrelevant to the property loss unless the waiver is narrower - limited, for example, to damage to the works themselves or to the contractor's own property.
Check three things. First, timing: a waiver granted after the loss, or granted in breach of a policy condition requiring the insurer's consent, may give the insurer a claim against the insured for prejudicing its rights, but it must prove the loss caused. Second, scope: if the contractor's negligence falls outside the waiver, recovery may still be available. Third, the policy wording: many commercial property policies permit the insured to waive subrogation against contractors before loss, precisely because construction contracts are drafted that way. If the policy allows it, the underwriting answer is to price for it.
If the insurer tried to rely on a breach of a consent-to-waive condition, section 10 of the Insurance Act 2015 limits its ability to deny the claim for breach of a term that is not relevant to the actual loss - so the fire claim itself stands. The realistic outcome is no recovery from the contractor, with a note on the file for renewal.