Loyaltrend v Brit (March 2010):
Implications for brokers and
underwriters
Victoria Sherratt
Partner
Barlow Lyde & Gilbert LLP
Presentation to LBIA - 1 November 2010
Factual Background
 Insured – Clothing business.
 Shop in Notting Hill – occupies as a tenant.
 Insured against MD and BI under a series of 4 annual policies.
 The policies are underwritten by a coverholder on behalf of different insurers for
three of the four policy years.
 The policies covered:
 MD to trade contents, tenants’ improvements and stock as a result of a number of
perils, including subsidence, and
 BI in the event of damage covered under the MD section.
 The building is insured separately by the Landlord.
 Shop suffers subsidence
The Claim
 Initially against all three Insurers.
 The Insured settled with Creechurch and Catlin.
 Claim is pursued against Brit under the second policy which ran 11 December
2003 to 10 December 2004 on the basis that this is when the “substantial”
damage occurred and the business was affected as a result of the damage.
 The buildings insurers had repaired the building and paid the claim in relation to
damage to the interior of the Shop.
 Minimal MD claim - £10,000
 BI claimed for an 18 month period from October 2004: £300,000
 Settlement attempts failed.
Issues
1. Was there cover under Brit’s policy in respect of the claim for
material damage to Tenant’s Improvements?
2. Interpretation of the BI insuring clause.
3. When did the BI indemnity period start to run: date of damage or
when the business is effected?
4. The scope of cover under the denial of access extension.
5. Was Brit entitled to avoid liability in respect of the claim for failure
to comply with the notification requirements under the policy?
1.
Was there cover under Brit’s policy in respect
of the claim for material damage to Tenant’s
Improvements?
BI Insuring Clause:
• not the standard ABI wording.
• BI insuring clause read:
“In the event of Damage for which the Insurers are liable under
Sub-Section 1 of this [policy]… the Insurers will indemnify the
Insured against any loss of Gross Profit due to (1) reduction in
takings and (2) additional expenditure.”
• unless Insured could establish it had a material damage claim
they had no BI claim.
The Material Damage Insuring Clause:
“The Insurers shall indemnify the Insured as a result of Damage
by any peril defined herein… to stock, Tenants Improvements,
Trade Contents… whilst within or attached to any building at the
Premises used in connection with the Business [during the
Period of Insurance.]”
Insurers’ position
 The majority of damage had occurred prior to inception of Brit’s policy.
 In order for Brit’s cover to respond, the Claimant had to establish that
material damage occurred and first occurred during Brit’s policy period
 Any claim therefore fell to be covered by Creechurch with whom they
had settled.
 Even if there was cover in relation to additional damage whilst Brit were
on cover, they were not liable in respect of damage which occurred prior
to inception or after expiry of the policy, as per: WASA -v- Lexington
[2009] HL.
Insured’s position:
 That every time there was damage as a result of subsidence this
was new damage and the Court should treat it as a new loss.
 As long as they could show that they had suffered some damage
in Brit’s year, there was cover.
 Not necessary for the Claimant to precisely identify what damage
occurred when.
Judge’s Finding of Fact on the Evidence
 Damage started in 2003. Significant damage of 12mm before
Brit came on risk. That damage required repair.
 There was some material damage during Brit’s period but it was
limited (2mm) and less than occurred in Catlin’s period (7mm).
 Preferred the contemporaneous documentary evidence to
witness evidence on the basis that it was more reliable.
JUDGMENT
 Judge chose not to make a ruling on this point. However he did
express the following views:
 An increase in width of existing cracking constituted “damage”.
 Commented that “it would be surprising if Brit, “it would have
been surprising if Brit, who insured only the middle of the three
years over which the relevant events occurred, was liable for the
entirety of the loss sustained.”
 The burden of proof was on the insured to show when the
relevant damage occurred.
 NB: Potential non-disclosure point, subject to inducement.
 The broker accepted on cross examination that the August 2003
cracking ought to have been disclosed to insurers prior to
inception
Points to note – Insurers/Adjusters
Upon notification:

Vital to obtain evidence as to when the damage first occurred at the outset

Contemporaneous documentary evidence crucial – often given more weight than witness
evidence.

Unless you can establish that the damage occurred outside of your policy period, likely that a
Court would apportion between insurers. That is consistent with the approach in MMI v Sea
Insurance CA [1998] Lloyd’s Rep.I.R. 421

Immediate inspection of damage

Request copies of maintenance records/reports and obtain a full history of the property in
question.

If necessary, notify other insurers. Talk sensibly.

Remind Insured that the burden is on it to establish what damage occurred in the relevant
period and what losses flowed from that damage.
2.
Interpretation of the BI Insuring Clause
BI insuring clause read:
“In the event of Damage for which the Insurers are liable under Sub Section 1 of this [policy], the
Insurers will indemnify the Insured against any loss of Gross Profit due to (1) reduction in Takings
and (2) additional expenditure calculated as follows:
(1)
In respect of reduction in Takings – the sum produced by applying the Rate of Gross
Profit to the amount by which the Takings during the Indemnity Period shall in
consequence of Damage fall short of the Standard Takings
(2)
In respect of additional expenditure – the additional expenditure necessarily and
reasonably incurred for the sole purpose of avoiding or diminishing the reduction in
Takings which but for that expenditure would have taken place during the Indemnity
Period in consequence of Damage but not exceeding the sum produced by applying
the Rate of Gross Profit to the amount of the reduction thereby avoided
less any sum saved during the Indemnity Period in respect of charges and expenses payable
out of Gross Profit as may reduce in consequence of Damage.”

Compare this wording to the ABI recommended form of wording 1986 which provides:

“the Insurer agrees … that if any building or other property used by the Insured at the
Premises for the purpose of the Business be accidentally lost, destroyed or damaged during
the period of insurance and, in consequence, the Business carried on by the Insured at the
Premises be interrupted or interfered with then the Insurer will pay to the Insured in respect of
each item in the schedule the amount of loss resulting from such interruption or interference
provided that:(1)
at the time of the happening of the loss, destruction or damage there shall be in force
an insurance covering the interest of the Insured in the property at the Premises
against such loss, destruction or damage; and that
(i) payment should have been made but liability admitted therefor,
or
(ii) payment would have been made or liability admitted therefor but for the operation
of a proviso in such insurance excluding liability for losses below a specified amount…
Insured’s Argument:
 Once the MD section had been triggered, i.e. there was any
damage covered under the policy, the Insured was entitled to all
BI losses as a result of the subsidence.
 The BI losses did not need to relate to the material damage
losses.
Insurer’s Position
 The Insured only entitled to recover the loss of profits as a result
of damage to stock/trade contents/fixtures and fittings.
 As a matter of fact, BI suffered as a result of damage to the
building.
Judge’s Conclusion
 The policy only provided cover in respect of BI which arose as a
result of material damage:
“The trigger for business interruption loss is not the subsidence
but the material damage.”
(see paragraph 33 of the Judgment)
3.
When does the BI Indemnity Period
start to run?
• Definition of Indemnity Period:
“period beginning with the occurrence of Damage and ending
not later than [12] months thereafter, during which the results of
the Business shall be affected in consequence of Damage”
• “Damage” defined as “loss, destruction or damage.”
The Problem:
 Damage first noticed in August 2003.
 Year 1 had a 12 month indemnity period.
 The Insured’s claim was based on the premise that the business
was affected from October 2004.
Insurer’s Position
 Indemnity period ran from the date that the damage was first
noticed.
 August 2003.
 12 month indemnity period in Year 1.
Insured’s Argument:
 Indemnity period runs from date of occurrence of the “relevant”
damage, i.e., damage which causes the business interruption.
 “Relevant” damage occurred in October 2004.
 Year 2 had an 18 month indemnity period.
 Asked the Court to look for an alternative construction as
otherwise the Insured would be placed in invidious position of not
having any cover when business affected by downturn.
Outcome
 Not required to reach a finding.
 BUT Judge was highly critical of the Insured’s legal team for
using the start date of October 2004.
Possible ways to address this problem
 Agree a 36 month indemnity period
 Revise the definition of indemnity period to:
“period commencing with the date of Damage or interference” as
per Coromin v Axa Re. [2007].
 Revise the wording to provide for a deferred period to allow for a
period of investigation, such period to be agreed with Insurers.
4.
Scope of the Cover under the Denial
of Access Extension
The insurance provided under the policy was extended to include:“Loss resulting from interruption of or interference with the Business
as a consequence of Damage as insured by this Sub Section to
property in the vicinity of the Premises which shall prevent or hinder
the use thereof or access thereto whether the Premises or the
property of the Insured therein shall be damaged or not”.
“Premises” was defined as 227/229 Westbourne Grove.
This address relates to the shop only not the building as a whole.
Insured’s Argument
 Damage in the flat roof was damage “in the vicinity of the
premises”.
 That damage hindered the use of the premises.
 Entitled to all BI loses as a result of the water ingress.
Insurer’s Position
 Flat roof is part of the premises itself so the extension does not
apply.
Judge’s View
“It is argued that since there was also damage to the flat above the
shop, this affects “property in the vicinity of the Premises” and gives
the Claimants the right to recover all the damage which they claim.
This argument … does not survive even a literal reading of the
clause, let alone a proper construction of it.”
Lessons
 Perfect example of the Insured trying to fit the wording to the facts
 This approach will not work
 Courts approach is to look at the strict literal meaning
 The test is: what is the ordinary meaning of the words used
 Market practice is irrelevant:
“The fact that that is how they usually apply does not mean on their proper
construction that they do not cover something else.”
Transcript Day 4
 Starting point – always look at the wording, then apply the facts to that wording.
5. Was Brit entitled to avoid liability in respect of the claim for
failure to comply with the notification requirements under the
policy?
 Notification provision:
“The Insured shall give immediate notice to the Insurers on the
happening of any Damage in consequence of which a claim is or may be
made under this Policy … and shall, at their own expense, within 30
days after the happening of such: Damage deliver to the Insurers in
writing such details or particulars and proofs as the Insurers may
reasonably require.”
 Due Observance clause:
“The observance and fulfilment of the terms and conditions of this Policy
by the insured insofar as they relate to anything to be done or complied
with by the Insured shall be a condition precedent to any liability of the
Insurers to make any payment under this Policy.”
Issues:
AGREED:
•
No issue as to the meaning of immediate
•
Agreed that the clause was a condition precedent by virtue of the
due observance clause based on the line of authorities in the
liability cases: Kidson; Laker Vent; Aspen v Pectel.
IN DISPUTE:
•
When did notification take place?
•
When should it have taken place?
1. When did the notification take place?
• Notification clause does not specify what form the notification should
take
• Broker asserted verbal notification taken place in August 2004
• No note on broker’s file
• Broker subsequently passed away
• Other broker gave evidence he remembered the call
• Relied on a subsequent exchange of emails in November 2004
 Email from Broker to underwriter 26th November 2004:
“Notting Hill – they are still having problems here with the
possible subsidence claim on the buildings which Mr U has told
you about previously. If you need any of your adjusters to look at
the building then let me know but, obviously, this will mainly affect
the landlord’s insurance.”
 The underwriter annotated the email:
“No previous mention with Claims or me. Action? Is there a
claim or not?”
 Underwriter to broker - 6 December 2004 asking:
“Subsidence issue at Notting Hill – what is this all about?”
 No reply to email
 4 days later Brit’s policy expired.
 Broker to claims handler - 15 August 2005:
“As regards the client’s Notting Hill premises, he is currently involving
solicitors as there would appear to be subsidence problems which he
has asked his solicitors to pursue with the landlords.
The question I have at this stage is if the situation deteriorates to such
an extent that he is unable to trade, please confirm any loss of gross
profit would be covered under the policy subject to production of relevant
accounts, etc.
Could you please confirm and advise if, at this stage, you wish the
Insured to complete a Claim Form. But, in any event, note your file
(although I seem to recall I mentioned this to you way back when so you
may already have made a note).”
 There is then an exchange of correspondence between the claims handler and
the broker regarding scope of cover.
 Claims handler to broker 30 August 2005:
“I note what you say and agree that the schedule does show that there is
subsidence cover in force. However, this does not alter the fact that for a valid
claim to exist under the Business Interruption section of the policy, we need to
have accepted a claim under the Material Damage section of the policy first.
With this in mind, as we are not actually insuring the Buildings, I fail to see how
the subsidence at the property would affect the Insured’s contents or stock.
As such, and in the absence of a valid claim under the Material Damage section
of the policy, I regret to advise that we are unable to consider any claim for loss of
gross profit in this instance.”
 No further communications until April 2006 when the broker
writes formally notifying a claim and enclosing a loss adjusters’
report which refers to damage to the Insured’s Tenant’s
Improvement and stock.
Insurer’s position
 Notification did not take place until April 2006
 This was the first time that the Insured informed Insurers that
there was damage to the Tenant’s Improvements and interior of
the property which might give rise to a claim.
 If there was any doubt as to whether notice was given, the
benefit of the doubt should be given to Insurers.
 Was verbal notification sufficient?
 Notification in August 2004?
 November 2004?
 August 2005?
 April 2006?
JUDGMENT
 No notice in August 2004.
 No fair reading of those documents supports the argument that
notice given in November 2004.
 Notification in August 2005.
Reason for finding?
 The change in the way the insured presented its claim:
“If there had been any doubt about the position I would have weighed
heavily against the Claimants [on the basis that] what they are claiming
now about the date of notice and about when the damage was sustained
is not what they claimed when their advisers thought that the path to
payment was different. When the Claimants and their advisers believed
that they would be looking at one Insurer and gave consideration to their
claim, they saw the Spring of 2005 as the point at which the damage
really occurred and August 2005 as the moment when notice was given.
The Court only knows this because the Defendants served a document
summons on Mr T. The Claimants’ failure to give disclosure of their
copies of the relevant documents when asked seems deplorable. The
Court would have been entitled to be very cautious about accepting a
new revised version of events from the Claimants.”
Verbal Notification – will it suffice?
“This Court deals with brokers, not every week but almost every
week … The idea that a broker would not record in writing a
notification for the purpose of a policy is absurd. Your clients are
relying on what, all of a sudden, Mr C seems to remember about
what the late Mr U told him in September or, he said later, August
of that particular year. If there was some meaningful notification
being given, why on earth is it not in writing … so if you are going
to start making submissions to me about the veracity of Mr C and
how I should place reliance on his recollection, I should make it
clear now that this would be a waste of breath, unless you have a
startling submission to make.” [Transcript day 4]
When should notification have taken
place?
Insurer’s Position – January 2004.
Insured’s Position: The duty to notify arose
after August 2004
Why?
 Thought it was the landlord’s problem and the claim would be
under the landlord’s policy.
 Did not know the damage was due to subsidence.
 The damage only became serious in 2004 such that it might a
cause a loss to the business.
 The stock damage fell within the excess.
When does the obligation to notify arise?
 Previously only case law in relation to the duty to notify in liability policies:
Rothschild -v- Collyear [1999]; Aspen -v- Pectel [2008], Kidsons [2008], Laker
Vent [2009].
 In those cases: test objective.
 Notification required where there was a circumstance which when
“objectively evaluated, creates a reasonable and appreciable possibility that it will
give rise to a loss or claim against the Insured …
There need not be a certainty that it will do so; there need not be a probability or
likelihood that it will do so. All that need exist is a state of affairs from which the
prospects of a claim (whether good or bad) or loss emerging in the future are
“real” as opposed to false, fanciful or imaginary. And that is what has to be
notified.”
[Kidsons]
JUDGMENT:
 The test for whether the claim “may be made” is objective.
 So test was: would a reasonable person have recognised that the
damage might give rise to a claim?
 It was clear on the evidence that it was apparent to the Insured’s
engineer and should have been apparent to the Insured that the
damage was serious by December 2003 and could give rise to a
claim.
 The Insured should have notified in December 2003.
Persuasive Factors:
 The involvement of an engineer appointed by the Insured.
 The fact that the Insured notified the landlord’s Insurers in November
2003.
 The existence of correspondence referring the severity of damage from
Autumn 2003.
 The existence of contemporaneous evidence regarding the location and
width of the cracks noted in January 2004.
 Correspondence which showed the dealings with the landlord and its
Insurers which showed that the Insured was clearly worried about the
condition of the building and the adverse affect any necessary repairs
would have on his takings by December 2003.
Lessons to be Learnt:
Insurers

The Courts are more willing to consider these clauses as providing a complete defence to
liability in respect of claims.

Notification points will always be a question of fact.

To take the point, contemporaneous evidence of the occurrence of and degree of damage
and the knowledge of the Insured and/or its agents will be required.

If notification is a potential issue, request full disclosure of the Insured’s records and those of
its agents asap.

NB: The records of the underwriter will be as relevant as those of the claims handler.

Make sure your notification clause requires written notification.

Consider revising notification clause to require notification of all damage even damage falling
within the excess.
Lessons to be Learnt:
Brokers
 If you are dealing with coverholders and there is a change in the Insurer
providing capacity, advise your client and explain the implications.
 If in doubt as to which policy may be affected – notify all.
 Advise the Insured of its notification obligations under the policy.
 Notify even if the insured thinks any damage falls within the excess.
 Don’t wait for the cause of damage to be diagnosed.
 Always document notification of claims.
Conclusion:
 The Insured lost the case because:
- they attempted to make the wording fit the facts rather than
applying the facts to the wording.
- the Insured changed how it put its claim.