Barbara Parker & Michael Parker v The National Farmers Union Mutual Insurance Society Ltd [2012] EWHC 2156 (Comm)

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1 September 2012 Fraud: joint and composite policies Barbara Parker & Michael Parker v The National Farmers Union Mutual Insurance Society Ltd [2012] EWHC 2156 (Comm) Mrs Parker owned a property known as Crossfield. On 6 December 2009 it burnt down as a result of arson. The property had been Mrs Parker's matrimonial home with her first husband and she was the sole owner at the time of the fire. She had insured it with the defendant insurance company. Subsequently (but before they married) even though she and Mr Parker lived at Mr Parker's house, and even though he had no legal interest in the property, she added him to the policy as a co-insured. The claimants married a short while after the fire. After the fire Mr and Mrs Parker claimed on the insurance policy with the NFU for the loss of the property and rent (it had been tenanted at the time of the fire) and some contents. The NFU refused to pay out on four grounds: 1. Mr Parker had made a fraudulent insurance claim for the loss of an expensive watch on a policy with the NFU in Mr and Mrs Parker had made a fraudulent claim on a travel insurance policy with the NFU in Mr Parker was responsible for the arson which had destroyed Crossfield. 4. Mr and Mrs Parker had failed to comply with a policy warranty by refusing to provide copies of bank statements to corroborate Mr Parker's claim that he had sufficient funds to replace Crossfield. After a meticulous examination of the evidence the judge found grounds one to three to have been made out by the defendant. However, he also held that Mrs Parker had not been party to, or had knowledge of, either fraud or the arson and therefore her claim on the policy would only fail if it was a joint policy rather than a composite policy. The judge had reference to a number of authorities on this issue but focused on General Accident v Midland Bank [1940] 3AER 252. In that case the then Master of the Rolls, Sir Wilfred Greene, held that a policy of insurance is only a joint policy (notwithstanding the wording used in the policy itself) if the interests of the insureds are the same. In that case the insureds were the freeholder of a building, the tenant and a bank as a holder of a floating charge. The Court of Appeal held that as each of these insureds had a different interest in the building the policy was a composite policy with the result that fraud on the part of one of them did not taint the policy claim by the others. By reference to the claim by Mr and Mrs Parker the judge found that their interests were not joint but different as Mr Parker did not have a legal interest in Crossfield. Therefore Mrs Parker s insurance claim was not tainted by Mr Parker s fraud or arson. 1

2 However, he went on to reject Mrs Parker s claim as well as she and Mr Parker had refused (through their solicitors) to provide bank statements requested by the NFU so that it could consider the insurance claim contrary to a condition precedent to policy liability. The question of whether a policy is joint or composite will usually be academic but it will be very important in the event of fraud or arson (or other behaviour which negatives the policy) on the part of some but not all the insureds. The fact that the policy itself is described as a joint policy or that the insureds are described as joint insureds will not be the defining factor. Peter Fitzpatrick Partner Fires causation and contributory negligence Trebor Bassett Holdings Ltd & Cadbury v ADT Fire and Security Plc [2012] EWCA 1158 Property insurance review, November 2011, reported on this TCC decision which arose out of a fire in a confectionary factory. The trial judge held that the defendant was liable for its failure to properly design the carbon-dioxide fire suppression system, which failed to extinguish an initial fire that led to a second catastrophic fire. The conduct of the claimant did not amount to an intervening act sufficient to break the chain of causation, although the absence of fire segregation and a sprinkler system led to a large reduction of 75% for contributory negligence. The claimant appealed on the basis that the duties owed by the defendant in contract went beyond the analogous tortious duty to exercise reasonable skill and care in carrying out the design of the suppression system, and thus no deduction for contributory negligence ought to be made. The Court of Appeal (CA) held that while such a submission may have been persuasive for the purchase of an off the shelf suppression system, on the facts of this case, the defendant s breach was one of design (the component parts were not defective ); the statutorily implied duties that the suppression system would be of satisfactory quality and fit for purpose did not apply. As a result, the claimant remained liable for contributory negligence. The defendant also cross-appealed, arguing that the claimant s operatives unsuccessful attempts at stamping out the first fire was the true cause of the major fire; therefore, the chain of causation between its breaches and the major fire was broken. The CA rejected this argument as the operatives actions were entirely foreseeable and the spread of the fire was held to be one seamless development. The CA s ruling confirms that a defendant must overcome a relatively high hurdle to show that a claimant s unreasonable conduct has broken the chain of causation. Neither the question of the claimant s fault nor the level of reduction for contributory negligence were appealed, so the first instance decision remains an interesting example of where a court makes a significant reduction for failure to install protective systems. Defendants should seek disclosure of risk reports or correspondence as evidence of recommendations to install such systems, and a failure to take heed. The mere absence of such protective systems is unlikely to be sufficient there must be a culpable failure to follow risk protection advice. However, even if this can be established, the court will only have the power to make a reduction for contributory negligence where the duties in contract and negligence are co-existent (as in this case). Edwin Millburn Solicitor 2

3 Watertight record keeping: a lesson from a flood claim Brit Inns Limited & Ors v BDW Trading Limited [2012] EWCH 2143 (TCC) A lack of supporting documentation and poor record-keeping saw a substantial reduction in damages awarded for a subrogated insurance claim. The claimants undertook an ultimately ill-fated venture to construct a ground-floor bar and a basement restaurant following the demolition of a pub previously owned by the directors of the claimant company. They engaged the defendant contractor to commence works which were completed by May 2006 and then took charge of the fitting-out works, which were largely completed by December Misfortune immediately struck in the form of a flood in the basement, for which Thames Water accepted responsibility and compensated the claimant. During remedial works a second flood occurred in January 2007 and liability was admitted by the defendant on this occasion. Following further fit-out works, the restaurant opened in October 2007 but was shortly after plagued by foul odours a problem which was ultimately attributed to negligence on the part of the defendant s sub-contractor, who had punctured a soil vent pipe. The crux of the case before Mr Justice Coulson was the issue of quantum. Significant sums for material damage and business interruption claims had been paid to the claimants by their insurer but the subrogation action brought to light a plethora of errors. The claimants insurer s loss adjusters had failed to appoint surveyors to check the reinstatement works and further, records of works undertaken and relevant invoices were not available to justify the scope of works by a considerable margin. It was held that only slightly over one third of the original material damage payment was recoverable in light of the above; in fact, Mr Justice Coulson went as far as to state that this element of claim was wholly exaggerated. It also became apparent that the business interruption element of the claim had been inappropriately calculated and was therefore re-calculated on the basis that the relevant figures were those of actual profit and loss in the period in which the restaurant was operating, namely October to December 2007 (notwithstanding the odour problem the judge found that the claimant had experienced the highest turnover in this period). Adopting a similar approach to the directors claim for uninsured losses relating to increased insurance premiums, Mr Justice Coulson termed the same fundamentally flawed. Although it is common that assessment by an experienced loss adjuster is presumed reasonable, this case highlights to insurers that proper investigation must take place into insurance claims to dispel any potential issues with recoverability. The exercise of caution in keeping payments to a minimum and ensuring that all items claimed are properly justified by way of supporting evidence and clear record-keeping is incumbent upon both the insurer and its loss adjuster and further, its importance is particularly highlighted in the context of subrogated claims, given that these are routinely challenged. Emma Rowley Solicitor Fires caused by the electrical network s equipment Smith v South Eastern Power Networks, Shaheen v The London Power Networks, etc [2012] EWHC 2541 A recent decision by Mr Justice Akenhead in the Technology and Construction Court looks at a regular concern for property insurers in relation to house or other fires where the fire results from resistive heating in the cut-out assembly in the electricity network s supply equipment which brings the power into the property. Occasionally, such equipment has deteriorated to the state where it can, and does, cause a fire. The dilemma for network providers is the cost and commitment of inspecting the cut-out assembly in all homes to prevent this happening. 3

4 Some people have suggested that it is cheaper for them to face fire liability than institute an inspection regime. In Smith, which was heard with a number of other similar cases, the home owners insurers ultimately failed in their negligence case against various network suppliers. The judge held that the suppliers were in breach of duty in failing to instigate an inspection regime or consider the need to institute one but that even a reasonably careful visual inspection would not have revealed signs of imminent failure and put an inspector on notice of impending problems. In addition, although the claimant concluded that once every 25 years was the right period for routine replacement, it was held by the court that the period should be more like 50 years. This judicial indication of the position is valuable guidance for property owners thinking of pursuing a claim on the basis of failing to inspect such installations routinely. Although it is common for there not to be a routine regime of inspection, the real difficulty is showing that such an inspection would have highlighted the problem which caused the fire. Catherine Hawkins Partner Project management and liability The Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Limited [2012] EWHC 2137(TCC) The claimant school, appointed the defendant to project manage construction of new boarding accommodation. The contractor proceeded under letters of intent and the contract remained unsigned. The works themselves were satisfactory; however, there was significant delay. The contractor claimed extensions of time and additional payments and the claimant counter-claimed liquidated damages for delay. The underlying dispute was directed to mediation and the parties settled on terms where neither party would recover anything. The terms of the building contract were finally agreed at the mediation but crucially the provision relating to liquidated damages was excluded. The claimant subsequently claimed against the defendant for loss of chance to recover liquidated damages from the contractor under an executed contract. It argued that whilst it was reasonable to commence works under a letter of intent, the defendant should have taken reasonable steps to finalise the contract and advised the claimant on the implications of not having an executed contract in place. The court found that whilst the defendant was not under an absolute duty to ensure the contract was executed, it failed to take reasonable steps to get the contract in place. A letter of intent was appropriate to commence the works but it negated some of the contractual terms until the contract was signed which could then apply retrospectively. Execution of the contract was fundamental. If the contract had been executed, the claimant would have been likely to recover a negotiated settlement. Allowing a reduction to reflect the chance that the contractor would not have executed the contract, the claimant was awarded 226,667. Those insuring construction professionals should note that whilst a project manager is under no absolute duty to ensure a contract is executed, he or she is generally under a duty to take reasonable steps to do so. By analogy, any loss of chance to the claimant arising from the contract not being signed could theoretically be pursued against the project manager. In a wider context, this case acts as a reminder of the additional disputes that can arise from a failure to execute a contract for construction on insured property. For example, if the construction caused damage to the works and/or existing structures, an unsigned contract (where there is no clear agreement between the insured and the contractor on insurance provisions) may lead to dispute over which entity is required to undertake insurance of the 4

5 works/existing buildings. In such circumstances the scope of a project manager s duties will become increasingly scrutinised for potential liabilities. Nicholas Bond Associate Tree root nuisance Berent v Family Mosaic Housing & London Borough of Islington [2012] EWCA Civ 961 This Court of Appeal (CA) judgment is an important reminder about a property owner s potential liability for property damage caused by tree root subsidence. The decision will be welcomed by local authorities, tree owners and their insurers alike, and includes wider guidance for property damage cases. This began as a typical case. Mrs Berent claimed that subsidence damage had been caused by three trees under the control of the first and second defendant. At first instance the court held that both defendants trees were an effective and substantial cause of the damage. The majority of damage had, however, occurred in 2003/2004 with the first defendant being notified of the damage in 2005 and the second in The court held that the defendants were not in breach of their respective duties until they had been notified of the claim and then failed to act within a reasonable period of time. The majority of the damage had occurred before notification and therefore the claimant was only awarded a modest sum for distress and inconvenience. On appeal, the main issue for the court was whether the trial judge s conclusions on reasonable foreseeability and breach of duty were correct. The CA found that they were. The court emphasised that there must be a real risk of damage, not a mere possibility. Whilst it was accepted that the ground in the area consisted of London clay, and therefore potentially susceptible to subsidence, there was nothing to suggest that this was a hotspot or problem area. Removing all the trees in the area was clearly out of proportion to the risk and the defendants had no reason to consider that there was a real risk of the trees causing damage. It followed that the defendants were not in breach of duty in failing to remove the trees. The decision of the trial court was upheld. This is welcome relief to local authorities and insurers who defend tree root claims. Historically, such cases are presented as almost strict liability claims, the argument being that if a tree was large, within close proximity of the property, and situated on shrinkable soil then that was sufficient to suggest liability. The CA makes it clear this is not enough. The claimant has to show that damage was reasonably foreseeable and that there were reasonable steps which should have been taken to eliminate or minimise the risk. Property owners should ensure that notification of any possible encroachment is given at the earliest opportunity. Helen Westran Associate Life after Berent - who has to give notice? Robbins v London Borough of Bexley [2012] EWHC 2257 (TCC) This is the first decision to consider the judgment in Berent. The distinguishing factor in this case was that Poplar trees had given rise to several claims against the London Borough of Bexley by other property owners in the vicinity. In those circumstances, the court considered that it was 'reasonably foreseeable' that these trees would cause damage to other properties and that the risk of damage to the Robbins' property was clearly foreseeable from 1998 onwards. The council ought to have done more to prevent 5

6 the damage from occurring, such as a regular programme of pruning. Having failed to do so the defendant was held to be liable for the claimant's damage. Edwards-Stuart J emphasised that "there are no special principles of law that relate to tree root cases: they are subject to the general law of negligence and nuisance." Crucially, like with other settled principles of law, reasonable foreseeability will depend on the facts of the case. The is a good reminder that there is nothing inherently different about the law in its application to tree root cases. It is also helpful authority that defendant tree owners only need to be on notice of the potential risk of encroachment and that such notice does not have to be supplied by the claimant. If there has been delay in providing notice to a potential defendant then it may be worth seeking specific disclosure of documents relating to the management of nearby trees in case a defendant was in fact on notice as a result of extraneous events. Helen Westran Associate Part 36 in need of re-fashioning Ted Baker Plc & Ors v AXA Insurance UK Plc & Ors [2012] EWHC 1779 (Comm) (29 June 2012) The claimants were successful at a trial of certain preliminary issues and sought their costs of around 660,000. Eder J was required to decide whether he should make an immediate order for costs, or await determination of further issues. He held that he was entitled to make a costs order as the preliminary issues were entirely discrete, but acknowledged that there are "real problems" with CPR 36.13(2). This rule prohibits the parties from informing the judge that a Part 36 offer has been made 'until the case has been decided'. Eder J considered it would "stretch the present wording beyond its proper limit" to hold that the case had been decided after a hearing of preliminary issues. Therefore, at this stage, the court could not be informed whether a Part 36 offer had been made and Eder J was conscious that such offers might well affect the decision of the court as to costs. He made a contingent order for the defendants to pay the claimants' costs, subject to any offers of settlement that might have been made. At present, the court is left in a difficult position when dealing with the costs of preliminary issues or split trials. It can either make an immediate order in ignorance of any Part 36 offers or defer a decision until the determination of the case. The former option requires the court to make a decision without all relevant information, whilst the latter potentially leaves a successful party out of pocket of a significant sum until the conclusion of the case (although this can be mitigated by an award of interest). A deferred order also goes against the CPR's philosophy of dealing with costs on a 'pay as you go' basis. Echoing Henderson J in AB v CD [2011] EWHC 602, Eder J considered that Part 36.13(2) should be reviewed to deal with the current difficulties the rule causes. It is understood that the Civil Procedure Rule Committee is to consider the issue. Interestingly, Eder J commented that the parties are not prohibited from telling the court that a Part 36 offer has not been made. It should also be remembered that the rule only applies to Part 36 offers and a party who has made a non-part 36 offer can waive privilege and inform the court of the offer. John Lambert Solicitor 6

7 O:\PUBLICATIONS\7 BLM PUBLICATIONS\E-BULLETINS AND STATS\PROPERTY INSURANCE REVIEW\SEPTEMBER 2012\ARTWORK\PROPERTY INSURANCE REVIEW_SEP12.DOC Editor Warren King Berrymans Lace Mawer LLP 2012 Disclaimer This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to clients of Berrymans Lace Mawer. Specialist legal advice should always be sought in any particular case. Information is correct at the time of release. 7