Honesty is the best Policy
18 March 2008
Honesty is the best Policy
The recent case of Ansari v New India Assurance Ltd highlights the importance of disclosure when dealing with insurance polices.
The Principle
Insurance contracts are based on a legal principle which requires the person seeking insurance cover to ensure that the insurer has all the information that the insurer requires before entering into the insurance contract. In particular they must:
- refrain from misrepresenting material facts
- disclose material facts even if no question is asked
A material fact is something which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk.
The Facts
Mr Ansari (the owner) let commercial premises to Mr Asim (the tenant).
The proposal form completed by the owner in 2004 in order to obtain insurance cover from New India Assurance Company Limited (the insurer) included the following:
- Details of the tenant’s business. The owner described this as “wholesaling kitchenware”
- A question about whether the premises were protected by an automatic sprinkler installation. The owner had answered “yes” to this question.
It would appear that the questions were probably correctly answered at the time and the insurer accepted the proposal and issued the policy. The following policy condition is relevant for the purpose of this article:
This insurance shall cease to be in force if there is any material alteration to the Premises or Business or any material change in the facts stated in the Proposal Form or other facts supplied to the insurer unless the insurer agrees in writing to continue the insurance (Condition 2)
In 2005, a fire caused significant damage to the building. During the investigation into the fire it emerged that:
- The sprinkler system had been turned off
- The water supply had been disconnected
- A considerable quantity of non-kitchenware goods were on the premises
The insurer cancelled the policy arguing (inter alia) that the change of use of the premises and/or the inoperative sprinkler system meant that Condition 2 of the policy applied. The owner claimed damages from the insurer for refusing to indemnify him in respect of the damage to the premises.
The Decision
The High Court considered the scope of Condition 2. It held that the owner knew that the sprinkler system had stopped working before the fire took place. This amounted to a material change, and a failure to notify the insurer of it meant that the insurer could avoid liability under the policy. (The court also held that the owner was likely to be aware of the change of use; however, as there was little evidence on this point, the court based their judgment on the findings relating to the sprinkler system).
The Lesson
This case reinforces the point that property owners must not only disclose all material facts in the original proposal form, but also ensure that they notify the insurer of all material changes to those facts during the life of the policy. Where the property is let it is important that tenants are under an obligation to notify their landlords of anything (be it changes to the business or the systems on the premises) that may affect the policy.
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