The Sprinklers That Weren't Mentioned
A £30m property damage and business interruption policy on a distribution warehouse was placed in the London subscription market: Syndicate 9012 at 30% as leader, two Lloyd's syndicates at 20% each, a third syndicate at 10% and a company-market insurer at 20%. The policy contains a condition that the insured 'shall maintain the sprinkler system in good order' and a claims agreement clause under which the subscribing insurers agree to accept the leader's claim settlements. On 12 February fire destroyed the main warehouse and the claim is £9m. The loss adjuster reports that, at inception, the insured's risk manager knew the sprinkler system had been isolated for five months after a pump failure and did not mention it; the broker's placing presentation said only 'fire protection as per schedule', but no schedule was attached to the slip.
1. Was there a qualifying misrepresentation under the Insurance Act 2015, and what remedies are available to the insurers?
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Two questions: was the information material, and was the duty of fair presentation breached?
A sprinkler system isolated for five months is plainly material to a warehouse fire risk - a prudent underwriter would want to know and it affects rate and terms. The presentation also failed the 'clear and accessible' requirement: 'fire protection as per schedule', with no schedule attached, tells an underwriter nothing. The insured's risk manager knew the true position.
The remedy turns on state of mind:
- Deliberate or reckless - the manager knew and stayed silent for a better rate - each insurer may avoid the policy, refuse all claims and keep the premium.
- Careless - the remedy is proportionate: reduce the claim to what the insurer would have paid had it known the facts, or avoid if it would not have written at all on any terms.
This is assessed insurer by insurer, because each one's hypothetical underwriting differs.
2. How does the 'maintain the sprinkler system in good order' condition affect the claim, and how does it interact with the misrepresentation remedy?
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First classify the term.
If the slip makes it a warranty, breach no longer avoids the policy: under section 10 of the Insurance Act 2015 cover is suspended for the period of the breach and revives when it is remedied. A fire occurring while the sprinklers were isolated is not covered; later losses would be.
If it is a condition precedent to liability, the insurer must show the breach defeated the claim under the wording.
If it is neither, section 11 applies: for a term that tends to reduce the risk of loss of a particular kind, at a particular place or time, the insurer may rely on the breach only if the insured's non-compliance put it at a disadvantage - and then liability is reduced proportionately, not refused outright.
The two strands must not be double-counted: the insurer takes the proportionate reduction once, applying whichever remedy most appropriately reflects the prejudice. Any residual gap for the insured may be a claim against the broker for the missing schedule.
3. How will the claim decision be reached across the subscription market, and can a dissenting follower refuse to pay its share?
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Syndicate 9012 leads: it appoints the adjuster, sets reserves and negotiates. Followers are carried by the claims agreement clause, so they accept the leader's settlement on coverage and quantum within the agreement's parameters and pay their proportions - 20%, 20%, 10% and 20%.
A follower can step outside only where the decision falls outside that agreement: an unresolved coverage dispute, fraud, or sanctions. Here the misrepresentation and warranty points are coverage issues, so the leader should in practice seek the followers' concurrence on the coverage position - for example a proportionate reduction of 40%, leaving £5.4m payable - rather than presenting a settled figure as a fait accompli.
If a follower still refuses, the insured can enforce against that insurer for its own several share; the leader–follower disagreement is dealt with in the market's dispute process, not by withholding the whole claim.