Restaurant Fire: Average Clause and Two Undisclosed Facts
A restaurant owner insures stock, fittings and kitchen equipment under a commercial property policy with a single sum insured of $400,000. The policy includes an 80% average (coinsurance) condition, a $250,000 contents limit and a $5,000 deductible. At the time of a fire, an independent valuation puts the replacement value of the insured property at $520,000. The fire began in a storage room where staff had been using a portable propane heater. The proposal form stated that the premises had 'no heating appliances other than installed HVAC equipment'. The owner says he told his broker about the heater, but the broker's file contains no record. Investigators also find that the owner began a weekend catering business six months before the fire, using the same kitchen and increasing stock levels. The fire destroyed insured property valued at $180,000. The insurer has reserved its rights and is investigating both the average condition and possible non-disclosure.
1. Calculate the contents indemnity if the average condition is applied, ignoring for now any non-disclosure defence. Show each step and state any assumptions.
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Apply the average condition first, without prejudice to the non-disclosure defence. The required sum insured is 80% x $520,000 = $416,000. The actual sum insured is $400,000, so the insured is $400,000/$416,000 = 0.9615 (96.15%) of the required amount. The adjusted loss is $180,000 x 0.9615 = $173,076.92. The $250,000 contents limit is not reached. Subtract the $5,000 deductible once for the event: $173,076.92 - $5,000 = $168,076.92. Assumptions: the valuation is accepted as the correct value at risk; the average condition applies to the whole sum insured and not separately to sub-limits; the loss is otherwise covered; and no other deductible or limit applies. If the policy applies average separately to contents and tenant improvements, the calculation must be redone using the contents value at risk, because a single combined calculation would be wrong. The insurer cannot simply apply the percentage to the sum insured. Also state that the result is before any reduction for misrepresentation or non-disclosure.
2. Assess whether the insurer can avoid the policy for non-disclosure of the propane heater and the catering business. Identify the facts that matter and the tests a court or ombudsman would apply.
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The two undisclosed facts are the portable propane heater and the weekend catering business. Materiality is tested by whether a prudent insurer would want to know the fact in assessing the risk, not by whether the insured thought it unimportant. Both facts are likely material: the heater affects fire risk, and the catering business affects stock values, foot traffic, and business interruption exposure. But materiality alone is not enough. The insurer must show inducement: that it would have declined, imposed an exclusion, or charged a higher premium had it known. The broker's oral notice is important. If the broker was the insured's agent, telling the broker does not automatically fix the insurer with knowledge unless the broker was authorised to receive the information or the insurer held the broker out. If the broker completed the proposal, the insurer may be affected by the broker's knowledge in some jurisdictions. The 'no heating appliances' answer may be a misrepresentation. If fraudulent, avoidance is likely. If innocent or negligent, the remedy depends on the applicable insurance law: avoidance, proportional reduction, or a defence only if the insurer would have acted differently. The insurer should not be allowed to rely on a fact it already knew or ought to have known.
3. What practical steps should the insured and broker take now to protect the claim and challenge any avoidance?
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Preserve the heater, service records, the proposal form, and the broker's file. Notify the insurer and ask it to identify the precise question, the answer relied on, and the underwriting evidence it says it would have used. Do not let the broker 'correct' the file retrospectively. Obtain the broker's notes and any emails about the heater. Ask whether the insurer's underwriter had actual or imputed knowledge through the broker. In parallel, quantify the claim with and without average. If the insurer avoids or reduces, consider a complaint to the regulator or ombudsman and a professional negligence claim against the broker if the broker failed to record or pass on a material fact. Check whether the policy has a misrepresentation clause or a proportionate remedy. Advise the insured not to sign a full release while the non-disclosure issue is unresolved. Keep the catering records separate, because the business income and stock may be outside the policy even if the fire claim survives.