PROPERTY SPECIAL INTEREST GROUP
CONTRIBUTION
Speakers:
James Deacon, Beachcroft LLP
Luke Exford, VRS Vericlaim
Case Study 1
Policy Cover
Policy A: Tenant
Sum insured £50,000.00
Excess £500.00 Subject to Average
Policy B: Landlord
Sum insured £75,000.00
Excess Nil Subject to Average
Loss
£25,000.00
VAR £100,000.00
Notes:
1) Differing rights and interests
2) calculate each Insurer's independent
liability
Two Methods of Calculation
• Maximum liability method – sum insured
• Independent liability method – actual independent liability basis
Policy Type
• Average applies
• Concurrent
• Non Concurrent
Application
• Where average applies – independent liability method
• No average – maximum liability method
Clauses
• Pro rata average
• Rateable proportion
• Excess
• Escape / Non contribution
Policy A: Independent Liability
SI £ 50,000 x loss £ 25000 = £12,500.00
VAR £ 100,000
Less excess £500.00
Total £12,000.00
Policy B: Independent Liability
SI £ 75,000 x loss £ 25000 = £18,750.00
VAR £ 100,000
Less excess
Nil
Total £18,750.00
Total of Independent liabilities
£12,000.00 +
£18,750.00
£30,750.00
Policy A pays:
£ 25,000 x independent liability of A - £ 12,000
total ind liabilities - £ 30,750
Policy B pays
= £9,756.10
£ 25,000 x independent liability of B - £ 18,750
total ind liabilities - £ 30,750 = £15,243.90
£25,000.00
Issues
The ABI rules on contribution are to be terminated.
Source: ABI Property Group. (Date yet to be issued.)
Other Trade Agreements
Personal Effects Insurance Contribution Agreement.
The Theft/Impact Claims Agreement
Case Study 2
A Insurance Plc insures Yellow Box Plc (Yellow Box), a national storage
company. Big Fireworks Ltd (Big Fireworks) frequently store surplus stock at
Yellow Box's Coventry facility. Big Fireworks is insured by Z Insurance Plc,
including cover for stock held outside their own premises up to a limit of
£100,000 and with an excess of £5,000. A’s policy covers goods for which
Yellow Box are responsible up to a limit of £200,000, with an excess of
£20,000. It is however subject to a condition purporting to exempt insurers
from liability in the event of there being another policy covering the same loss.
Z’s policy contains the same provision.
Over the new year holiday, a fire broke at the Coventry facility, destroying all of
Big Fireworks' stock held on those premises and causing significant damage to
Yellow Box's facility as well.
Loss adjusters for both insurers have agreed the value of the destroyed
fireworks stock at £150,000. A query has however been raised as to whether
the sprinkler warranty was complied with by Yellow Box.
What is the position on contribution? What is the position on recovery?
Yellow Box
(Bailee)
A Insurance Plc
Primary Liability
Big Fireworks
(Bailor)
Z Insurance Plc
Answer:
• This is a bailment scenario. Yellow Box is the bailee/Big Fireworks
the bailor. There is therefore no double insurance as the two policies
cover different insureds in respect of different interests.
• The key authority is North British and Mercantile Insurance
Company v The London Liverpool and Globe Insurance Company
(1877), often known as the Kings & Queens Granaries case.
• What this means is that Yellow Box is entitled to secure an
indemnity from A of £130,000 (ie £150,000 less £20,000 excess).
Big Fireworks is entitled to secure an indemnity from Z of £95,000
(ie their £100,000 limit less £5,000 excess).
• Neither is entitled to a contribution from the other at common law
(though subrogation rights may afford a different route for Z to
recover its outlay).
• If Z pays out before this primary liability is fulfilled, they could bring a
subrogated claim in the name of Big Fireworks against Yellow Box,
in whose possession the goods were when they were destroyed
(subject to the terms of the contract under which the goods were
stored).
• However, if Yellow Box or A fulfil the primary liability and pay the
value of the goods destroyed before Z have paid out, Big Fireworks
has no claim upon Z as it will then have suffered no loss.
• It is worth noting that any such payment by A would be under the
material damage section of their policy, the public liability section
being likely to have an exclusion for goods in their custody or
control. Since the goods do not belong to Yellow Box, they would
hold the proceeds of A’s policy on trust for Big Fireworks and would
have to account to Big Fireworks for the proceeds. Big Fireworks
cannot be indemnified twice for their loss, so they, in turn, would
have to account to Z, if they had already paid out.
• As a separate issue, if there had been double insurance, the two
‘escape’ clauses would effectively cancel themselves out so that
there would be double insurance, as it would be absurd if someone
with two policies covering a risk obtained no indemnity. The
authority for this is Weddell v Road Traffic and General Insurance
Co (1932).
• There is however yet another consideration before contribution can
be considered, namely the breach of warranty and the issue of
whether A’s policy can be said to be capable of responding as at the
date of the loss.
Case Study 3
The Newbys agreed to buy the Old Hall for £1.8million from the Halls in October 2007. The contract
provided that the risk of loss was on the Newbys as purchasers as from the date that contracts were
exchanged. Seven days later, after exchange of contracts and prior to completion, the building was
seriously damaged by fire. The Newbys paid the full price for the building and recovered an indemnity
from their insurers, NFU. That policy contained a rateable proportion clause stating that:
"if when you claim there is other insurance covering the same accident…..we will only pay our share".
NFU then claimed a contribution from the Hall's insurers, HSBC, the sellers having a policy that
covered both vendors and purchasers between exchange and completion. The HSBC policy stated:
"WHAT IS COVERED
The buildings for physical loss or physical damage….the insurance also covers anyone buying your
home until the sale is completed.
WHAT IS NOT COVERED
We will not pay….if the buildings are insured under any other insurance.”
The HSBC policy also contained an excess of loss provision in the General Claims Conditions.
What is the position on contribution?
House Sale
Halls
Newbys
HSBC
NFU
Answer:
• There is no double insurance. Both policies covered the same
policyholder (the Newbys) between exchange of contracts and
completion. However, the qualification of cover in the HSBC policy
is triggered so that the Old Hall is therefore only covered by the NFU
policy. These are in the main the facts from the 2010 High Court
case of National Farmers Union Mutual Insurance Society Ltd v
HSBC Insurance (UK) Limited.
• There was therefore no need to consider the interplay between an
excess and a rateable proportion clause. However, the judge
indicated that the rateable proportion policy should pay to the extent
of its limit, above which the excess policy would pay. There is
contradictory authority in Austin v Zurich (1944) which says that the
two clauses should cancel each other out, just as in Weddell. Whilst
the NFU case does not overrule this decision, it is likely that NFU
will be followed in the future.
Case Study 4
A rather elderly and confused property owner has taken out two
buildings policies, one with Alpha and another with Omega, both with
rateable proportion clauses. His property is subsequently damaged
following a fire. He contacts Omega and asks them to deal with the
claim and on being informed that he also had a policy with Alpha,
Omega contacts them. Alpha refuse to contribute as they are trying to
investigate a non disclosure (which very soon afterwards is dropped by
Alpha as not worth pursuing). The loss adjuster for Omega, who has
received confirmation of policy cover from Omega, is concerned that
payment should be made immediately, both to rectify the elderly
owner's position and to avoid any bad publicity for Omega, as the
owner's son is threatening to involve the national press.
What is the next step?
Property
Owner
Alpha
Omega
?
Answer:
• The one thing that Omega cannot do is pay the whole sum insured
and then seek to battle it out with Alpha afterwards. If Omega pays
more than their rateable share of the loss, it will be seen as paying
as a volunteer as it had no legal liability to pay the extra 50%.
• There is a string of Court of Appeal cases on this topic. In Legal and
General Assurance Society v Drake Insurance (1992), it was held
that Legal and General could not obtain a contribution as their
obligation only extended to paying 50% of the loss.
• However, the Court of Appeal in Drake v Provident (2004) provides
a possible solution. It was held that Drake could recover here, in
identical circumstances to Legal and General v Drake, as crucially it
had made it clear to Provident that it was paying the claim in full
under protest and without prejudice to their right to claim a
contribution.
• This decision has been followed this year in SHC Capital v NTU
Income Insurance Cop-operative Ltd. The Claimant had sought to
persuade the Defendant insurer to pay but had been faced with a
total refusal and therefore had made payment as a matter of
"practical necessity", dealing with the claim expeditiously and
avoiding damage to its business reputation.