Underinsurance, average and non-disclosure at a bakery
Ridgeway Bakery Ltd runs a single bakery and café. Its commercial property policy, arranged through a broker, insures buildings and contents on a reinstatement basis for a sum insured of £180,000. The policy contains an average (underinsurance) condition and a £500 excess. In March a fire started in a proofing oven and caused £60,000 of damage. At the time of the fire the true reinstatement cost of the buildings and contents was £240,000. The insurer has also discovered that, at renewal eight months earlier, the directors had not mentioned that a second-hand gas-fired oven had been installed without building-regulations approval. The proposal form asked whether any heating or cooking equipment had been installed or altered in the past three years; the directors answered 'no'. The insurer says it would have required a qualified engineer's certificate and charged an additional £1,200 premium had it known. The annual premium was £3,600. The bakery is a small company with 14 employees and £900,000 annual turnover.
1. Calculate the payment under the average condition before any non-disclosure remedy. Show each step.
Read the worked answer
Average is a basis-of-settlement condition, not a penalty. Because the sum insured (£180,000) was less than the reinstatement value at the time of loss (£240,000), the insurer applies the proportion:
- £180,000 ÷ £240,000 = 0.75 (75%).
- £60,000 × 75% = £45,000.
- Less the £500 policy excess = £44,500.
So the payment before any non-disclosure remedy is £44,500. Two qualifications matter. First, this assumes the bakery reinstates the property; if it does not, the insurer may settle on an indemnity basis (reinstatement cost less depreciation), which would produce a lower figure. Second, average applies to the whole loss, including any debris removal or professional fees if those are within the sum insured; the facts do not separate them, so the calculation uses the £60,000 total. The excess is deducted once, not per item. The average condition is not a warranty and is not subject to the Insurance Act 2015 remedies for breach of warranty; it is the agreed method of adjusting an underinsured claim.
2. What remedy can the insurer apply for the non-disclosure, and what is the likely final payment?
Read the worked answer
The policy is non-consumer: the insured is a limited company with 14 employees and £900,000 turnover. The Insurance Act 2015 therefore governs the non-disclosure. The insurer must show that the fact was material, the question was clear, and it was induced. The oven question was specific and the answer 'no' was wrong, so materiality and inducement are likely. The remedy depends on the directors' state of mind. There is no evidence of deliberate or reckless disregard; they appear to have forgotten, which is negligent. Under Schedule 1 to the Act, where the insurer would have entered the contract on different terms, the contract is treated as if those terms applied; where it would have charged more, the claim is reduced in proportion. Here the insurer says it would have required an engineer's certificate and charged £1,200 more. The premium proportion is:
- Premium paid £3,600 ÷ premium that would have been paid £4,800 = 75%.
- Claim after average £45,000 × 75% = £33,750.
- Less £500 excess = £33,250.
If the insurer could show it would have declined outright, it could avoid the contract and retain the premium, but it has not said that. If the non-disclosure were deliberate or reckless, avoidance would be available. On these facts the proportionate remedy is the likely outcome, producing £33,250. The insurer should also apply the certificate condition prospectively if it would have imposed it.
3. Would the analysis differ if the insured were a consumer? Explain the practical effect.
Read the worked answer
Yes. A consumer is protected by the Consumer Insurance (Disclosure and Representations) Act 2012, not the 2015 Act. The insurer must ask clear questions, and the consumer must take reasonable care to answer honestly and accurately. For a careless misrepresentation, the insurer's remedies are to reduce the claim proportionately, impose different terms, or treat the contract as if it had been entered at a different time. Avoidance is available only for deliberate or reckless misrepresentation. The average condition would still apply if it is in the policy, but the FCA's consumer protection rules and the Financial Ombudsman Service would also be relevant. The practical difference is that a consumer's slip is less likely to lead to avoidance, and the insurer must be able to show that its question was clear. The bakery cannot claim consumer status because it is a company insuring business property, so the 2015 Act analysis stands.