The Overlooked Exclusion in a Home Extension
Priya owns a semi-detached house insured under a standard buildings and contents policy. In March she had a two-storey rear extension built, increasing the floor area by about 30%, and the build cost was £95,000. She did not tell her insurer. In August a pipe in the new upstairs bathroom burst overnight, causing £28,000 of water damage: £19,000 to the extension structure and finishes, £6,000 to furniture and flooring in the original part of the house, and £3,000 to a neighbour's ceiling below (the extension shares a party wall). The policy has a buildings sum insured of £250,000, an accidental damage section, and a condition requiring notification of 'any material change in risk, including alterations or extensions to the buildings'. Priya says the extension is clearly part of the house and she assumed it was automatically covered.
1. Advise whether the insurer can decline the whole claim, part of it, or must pay in full, and explain the reasoning.
Read the worked answer
The starting point is that the duty of fair presentation (Insurance Act 2015) and the policy condition both bite here. Adding a 30% extension and a new bathroom is a material change in risk a prudent insurer would want to know about - it changes rebuild exposure, adds escape-of-water risk, and may breach any 'uninhabited/unoccupied' or alteration warranties.
So the insurer is not obliged to treat the extension as automatically covered. But the analysis does not stop at 'no cover':
- Is the non-disclosure/misrepresentation relevant to the loss? Under s.8 and Schedule 1 of the 2015 Act, if the insurer would not have entered the contract at all, it may avoid; if it would have entered on different terms, the remedy is proportionate - e.g. it may have charged more premium or imposed a condition. The remedy for a deliberate or reckless breach is harsher than for an innocent or negligent one.
- Severability: The £6,000 damage to the original house is arguably a loss under the original risk. If Priya's failure was negligent rather than dishonest, the insurer may still be liable for that part, subject to a proportionate reduction.
- The neighbour's ceiling (£3,000) falls under the policy's property owner's/third-party liability section, which is a separate cover and generally unaffected by a buildings sum-insured issue.
The realistic answer: the insurer can decline the £19,000 extension damage (uninsured risk / material change), and may apply a proportionate remedy to the £6,000 original-house element depending on whether the breach was deliberate or negligent. It should not simply decline everything without considering severability and the liability section. Priya should be advised to disclose the extension, pay any additional premium, and consider whether the sum insured of £250,000 is now adequate given the £95,000 build cost.
2. If the insurer decides to apply a proportionate remedy, what factors determine the size of the reduction?
Read the worked answer
The remedy must put the insurer in the position it would have been in had the risk been fairly presented (s.8, Insurance Act 2015). Relevant factors:
- What the insurer would have done: declined the risk, charged a higher premium, imposed an extension/bathroom condition, or required a survey.
- The premium differential: if it would have charged, say, an extra £300, the reduction is broadly the proportion the actual premium bears to the premium that would have been charged.
- Causation: whether the omitted information actually increased the likelihood or size of this loss (a new bathroom directly increases escape-of-water risk, so it is causally relevant).
- Nature of the breach: deliberate/reckless breaches allow the insurer to avoid and keep premium; negligent breaches attract the proportionate remedy; innocent breaches are treated more leniently.
The insurer must document its underwriting decision ('we would have done X') - it cannot invent a remedy after the event.