The Warehouse, the Thinner and the Unasked Question
Chief Adeyemi insures his Lagos warehouse under a fire policy with a sum insured of ₦90 million. The proposal form asks: 'Are any flammable liquids or hazardous goods stored on the premises?' He ticks 'No'. In fact his tenant keeps 300 litres of industrial thinner in a locked annexe that forms part of the same building and shares the same roof. Six months later a pump motor in the annexe sparks and fire destroys the building. The loss adjuster assesses damage at ₦85 million and discovers the thinner. The insurer writes to avoid the policy from inception and refunds the premium. Chief Adeyemi argues that the annexe was the tenant's space, nobody explained the question to him, and the fire would have happened anyway because the pump was faulty. The policy contains no proportionate-remedy clause.
1. Can the insurer avoid the policy? Apply the duty of disclosure, materiality and inducement to these facts.
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Step 1 - Is there a duty? A fire policy is a contract of utmost good faith. The proposer must disclose every fact material to the risk and must answer proposal questions truthfully. The duty is the insured's, not the tenant's, and it is not displaced because the space was let.
Step 2 - Materiality. The test is whether a prudent insurer would regard the fact as influencing its decision on acceptance, terms or premium. 300 litres of thinner in a building sharing one roof with the insured property plainly increases fire load and ignition risk. It is material.
Step 3 - Inducement. The insurer must show it was actually induced by the answer. The direct 'Yes/No' question, answered falsely, gives a strong inference of inducement. If the underwriter can show the risk would have been declined, surcharged or made subject to a hazardous-goods warranty, inducement is established.
Step 4 - The insured's defences fail.
- 'I was not told it mattered' - no explanation is required; the question spoke for itself.
- 'The fire would have happened anyway' - causation of the loss is irrelevant to the avoidance remedy. The test is what the insurer would have done at underwriting, not what caused the fire.
- 'It was the tenant's annexe' - the annexe was part of the insured building and within the risk.
Conclusion: if inducement is proved to the civil standard, the insurer may avoid ab initio, retain no premium beyond what is due and refuse the ₦85 million claim in full. If inducement cannot be shown, the insurer's remedy largely disappears, whatever the untruth.
2. The insurer's underwriter admits she would still have written the risk, but only at a 40% higher rate with a hazardous-goods condition. How does that change the analysis, and what practical options remain?
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Effect on the remedy. Avoidance depends on inducement. If the underwriter would have written the same risk on different terms, the insurer cannot say it would not have contracted at all. The classic common-law remedy for non-fraudulent non-disclosure is still avoidance, but a court may be reluctant where the insurer would plainly have accepted the risk; the honest answer is that the legal position is uncertain and the commercial answer is a negotiated settlement.
Options, strongest to weakest:
- Rescind on terms - treat the policy as written at the correct rate and condition, and settle the claim after deducting the additional premium that would have been charged. This reflects the counterfactual and is defensible commercially.
- Proportionate reduction - if the shortfall in premium can be calculated (e.g. the additional 40%), reduce the ₦85 million settlement by the same proportion. There is no statutory proportionality in Nigeria, so this is a settlement, not a strict entitlement.
- Resist on a policy condition - look for a 'change in risk' or 'hazardous goods' condition. If storage constituted a breach of condition, the insurer may decline from the date of breach, but only if the wording is clear and is a true condition precedent.
- Full repudiation - risky if inducement is weak; a court or NAICOM could treat it as a technical repudiation and damage the insurer's position.
Practical point: the underwriter's admission must be recorded in the claim file. If the insurer later pleads it would have declined, that evidence will be tested and the contradiction will be fatal.
3. Suppose the policy had instead contained a warranty: 'Warranted that no flammable liquids are stored on the premises.' Would that improve the insurer's position?
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Yes, materially. A warranty is a term whose breach discharges the insurer from liability from the date of breach, whether or not the breach is material and whether or not it caused the loss. On these facts the warranty was breached from the day the thinner arrived - long before the fire - and the insured cannot argue that a faulty pump caused the loss.
Difference from non-disclosure:
- Non-disclosure requires materiality plus inducement and gives avoidance ab initio.
- Breach of warranty gives automatic discharge from the date of breach and no refund of premium for the unexpired period, unless the policy or the law says otherwise.
Cautions:
- The wording must be a true warranty, not a mere description. A 'basis of the contract' clause converts answers into warranties; Nigerian courts construe such clauses strictly against the insurer.
- The insurer should still check whether the annexe fell within the warranted 'premises'. If it did not, the warranty is not engaged and the insurer falls back on non-disclosure.
- Regulatory expectations increasingly discourage insurers from using technical warranty breaches to defeat consumer claims; the insurer should be prepared to justify its position to NAICOM.
Conclusion: the warranty strengthens the insurer's hand considerably, but the drafting and the scope of 'premises' still decide the case.