INSURANCE – DON’T GET CAUGHT OUT

When it comes to insurance, it is all too easy to get it wrong. It is important to understand that where the insured is a business, rather than a consumer, the courts have very little in the way of wriggle room. Generally, they have no choice but to apply the terms of the policy as they stand. There is no principle of fairness or reasonableness.

A recent case provides a good illustration. The claimant, AK, was a wholesaler of plasma TVs. AK’s premises were burgled, the thieves getting away with goods valued in the region of £195K. There was also damage to AK’s premises. On the night the burglary was to take place, there was a problem with the burglar alarm. AK’s MD had attended the premises. He contacted the police, BT and the company responsible for maintaining the alarm system. Unable to resolve the problem, the MD left the premises. As subsequently became apparent, the burglars had previously cut the telephone line.
AK made a claim against Norwich Union (NU) under its insurance policy. NU denied liability. The policy covered two categories of loss which were relevant, namely:

• Theft involving violence or threat of violence to directors or employees;

• Damage to buildings caused by theft involving violent entry to the premises.

However, the second category of loss was subject to a condition (“the Alarm Condition”) that there had to be a working intruder alarm or, a keyholder on, the premises, unless NU agreed otherwise in writing.
AK argued its claim in three ways, all of which failed to impress the Judge:

• Threat of Violence – Firstly, AK argued that the loss it was claiming fell within the first category, which was not subject to the Alarm Condition. It was argued that the burglars had used violence in disabling the alarm system and, furthermore, the MD had been under a “threat of violence” whilst in the premises alone. The Judge ruled, however, that the loss fell more appropriately into the second category. In his view, the first category was designed to cover the situation where a person was subject to a specific threat, of which the threatened person was aware at the time. That had not been the case here.


• Incorporation of the Alarm Condition – AK’s second line of attack was to argue that the Alarm Condition was never incorporated as a term of the contract. With regard to standard contract terms, the more onerous and out-of-the-ordinary the term, the greater is the duty on the party seeking to rely on the term to show that the term was, in fact, incorporated as a term of the contract. One judge famously said that some terms he had seen were so onerous that they would have only been effectively incorporated had there been a drawing of a red hand pointing to the term. The Judge did not question these principles but held that they did not apply. The Alarm Condition had not been so onerous so as to require a “red hand”. AK had known that the cover was subject to standard terms but had neglected to find out what those terms said. The Alarm Condition had been effectively incorporated as a term of the contract.


• Implied Terms – Lastly, AK argued that it was an implied term either that AK would not unreasonably refuse to agree otherwise under the Alarm Condition or that the MD had been entitled to leave the premises unoccupied rather than face the risk of personal danger. The Judge ruled that there was no need to imply the terms being argued for here as the contract was workable without them, and provided for a clear allocation of risk. There was an implied term that in deciding whether or not to agree otherwise, NU would act in good faith. However, NU had not breached that implied term.

With a degree of regret, the Judge dismissed AK’s claim.

The obvious moral of this tale is that insurance policies need to be read carefully and properly understood. Particular care needs to be taken on renewal of policies, which needs to be entrusted to a responsible person within an organisation. Insurers often seek to introduce new terms and conditions on renewal. In any case, it needs to be remembered that businesses and circumstances change, and what was previously appropriate may no longer be so.

If you would like to know more about the implications of this case, please contact Caroline Wilton or Nick Crook

Filed: 26/10/2007 16:28:54