The Faisalabad Yarn Godown: Average, a Sprinkler Warranty and an Undisclosed Claim
Rashid Traders insures a cotton-yarn godown in Faisalabad with a private general insurer for PKR 80 million on a reinstatement-value basis: building PKR 30 million, stock PKR 50 million. The proposal form asks for the value of stock and records 'no claims in the last five years'. In fact a small 2022 fire claim of PKR 1.5 million was paid and was not disclosed. The policy carries a protective-safeguards warranty that the sprinkler system is maintained in working order, and an excess of PKR 0.5 million each and every loss. Before the March fire the sprinklers had been switched off for three weeks for pipe replacement; the insured says the contractor told him it was 'safe enough'. The surveyor confirms an electrical short circuit started the fire and values the stock at risk at PKR 120 million. Stock damage is PKR 60 million and building damage PKR 8 million. The building is adequately insured.
1. Ignoring for the moment any defence based on the warranty or the non-disclosure, calculate what the insurer would pay for the stock and building damage. Show each step and explain any assumption that affects the answer.
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Step 1 – Value at risk. Stock sum insured PKR 50m; stock value at risk (indemnity/market value at the date of loss) PKR 120m. Building sum insured PKR 30m equals its value, so no average applies to the building.
Step 2 – Average on stock. The underinsurance ratio is 50 ÷ 120 = 41.67%. Admissible stock loss = PKR 60m × 41.67% = PKR 25.0m.
Step 3 – Building loss. Full PKR 8.0m, subject to the reinstatement condition.
Step 4 – Gross admissible. 25.0 + 8.0 = PKR 33.0m.
Step 5 – Deductible. One deductible of PKR 0.5m 'each and every loss' = PKR 32.5m payable.
Qualification. The building is on reinstatement value. Most wordings pay the reinstatement cost only after the insured has actually reinstated, otherwise the indemnity (depreciated) value is paid and the balance held back. The surveyor must also confirm the PKR 120m figure is the correct basis of valuation used by the policy for stock (indemnity, not selling price). The PKR 32.5m is the maximum before the insurer considers the sprinkler warranty and the non-disclosure, either of which could reduce the payable amount to nil.
2. Analyse how the sprinkler warranty and the undisclosed 2022 claim affect the insurer's position, and identify what the agent should have done at proposal stage and at renewal.
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Sprinkler warranty. A warranty is a strict condition. If it was breached when the fire started, the insurer may decline the claim and, depending on the wording, treat the policy as avoided from the date of breach. The insured's defence that the contractor said it was 'safe enough' does not help: a warranty cannot be waived by a workman, and the insured carried the duty to maintain the protection. The file should be checked for waiver or estoppel – for example, if the insurer knew of the shutdown and renewed or accepted premium without objection.
Non-disclosure. A paid fire claim is material to a fire risk. If the omission was deliberate or reckless, the insurer may avoid the policy from inception and refuse all claims; if innocent or negligent, the remedy may be cancellation or a reduced settlement. Under the Insurance Ordinance 2000 and general insurance law the duty of disclosure sits with the insured, but an agent who completes the proposal shares responsibility for its accuracy.
What the agent should have done. Record the 2022 claim on the proposal; explain the average clause and set sums insured against realistic values; confirm the insured understood the protective-safeguards warranty; at renewal, re-check values, ask about changes to fire protection and re-declare claims history. The agent should never complete or sign a proposal without verifying the answers.
3. State the practical steps the agent should take in the first 48 hours after the fire, and explain why each matters to the claim outcome.
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- Notify the insurer immediately in writing, using the policy's notice clause. Late notice can be a condition precedent and gives the insurer a prejudice argument.
- Do not admit liability or discuss fault with the contractor or neighbours; admissions can be used against the insured and may prejudice subrogation against the electrical contractor.
- Preserve the scene and records – stock registers, purchase invoices, the sprinkler maintenance log and the contractor's work order. The average calculation depends entirely on proving the value at risk, and a weak stock record usually pushes the surveyor to the insurer's figure.
- Mitigate the loss – arrange salvage, protect undamaged stock, and record salvage value separately, because salvage is deducted from the gross loss.
- Prepare a timeline of the sprinkler shutdown – dates, contractor identity, and any written communication. This is the key factual issue if the insurer relies on the warranty.
- Cooperate with the surveyor and disclose the 2022 claim rather than let the insurer discover it later; a second concealment converts an innocent non-disclosure into a fraud allegation.