The Warehouse Fire and the Undisclosed Fuel Depot
At 02:40 on 14 March, fire destroyed the Apapa warehouse of Tidal Foods Ltd. The fire began in an office electrical distribution board; the warehouse stored bagged rice. The policy, renewed 1 January, shows a sum insured of ₦480m, an average (subject-to-average) condition, a ₦2m excess and a warranty that no flammable liquids are stored on site. Tidal Foods' proposal answered 'no' to hazardous storage. Loss adjusters measured the reinstatement value at ₦600m and the loss at ₦310m. They also found 12,000 litres of diesel in an unapproved tank serving a standby generator, and a sub-tenant storing paint thinners in an adjoining bay. Separately, Tidal Foods holds a fire policy with another insurer for ₦300m on the same property; neither insurer was told about the other policy. Underwriting files show the first insurer's guideline requires referral for any fuel storage above 5,000 litres and applies a 25% loading. The claims committee meets on Friday.
1. Should the insurer avoid the policy for non-disclosure? Set out the test you would apply and give a recommendation to the committee.
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Apply the three-part test: was the fact material (would a prudent underwriter have wanted to know it); was it disclosed; and did the non-disclosure induce the terms? Nigerian law does not require the undisclosed fact to have caused the loss, so the electrical origin of the fire does not rescue the insured.
The 12,000-litre diesel tank is plainly material: the insurer's own guideline refers anything above 5,000 litres and loads 25%. The sub-tenant's thinners also matter because an insured ought to know what is stored in its building. The second ₦300m policy is material to both insurers.
Inducement is the weak point. A guideline proves what the underwriter should have done, not what this underwriter would have done. Obtain the underwriter's signed statement, the agent's proposal file and evidence of the diesel quantity.
Recommendation: grounds to avoid exist, but avoidance is drastic and invites litigation and regulatory criticism. Offer to return premium and, if inducement evidence is thin, negotiate a proportionate settlement. Do not repudiate on causation, which is irrelevant to non-disclosure.
2. Assume the committee decides to honour the claim on a compromise basis. Calculate the net amount payable by this insurer, showing average, excess and contribution with the second policy.
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Step 1 - average. Sum insured ÷ reinstatement value = 480 ÷ 600 = 0.8. Indemnity = 310 × 0.8 = ₦248m.
Step 2 - excess. 248 − 2 = ₦246m for the insured's own loss.
Step 3 - contribution. The second policy has a ₦300m sum insured and the same ₦600m value, so its independent liability is 300 ÷ 600 × 310 = ₦155m.
Using the independent-liability method, this insurer's independent liability is ₦246m. Total independent liabilities (₦401m) exceed the loss, so this insurer pays:
246 ÷ 401 × 246 = ₦150.9m
The second insurer pays the balance of about ₦95.1m. Total recovery to the insured is ₦246m - contribution is between insurers and must not produce a windfall.
Disclose the method used. If the excess is applied after contribution the figure is about ₦150.6m; the difference is presentational, not substantive. If the policy is avoided, no contribution arises.