Liability insurance: licence to confuse
Michael Wilson considers how many homeowners and occupiers may not benefit from the cover they think they do
Liability insurance is often seen by the buyer as something of little importance until the claim comes along. Solicitors’ dealings with liability insurance won’t normally require a detailed analysis of what the policy says – but there can be some unexpected outcomes.
Home insurance: buildings
The liability insurance under a domestic buildings policy will normally be described as below:
‘We will pay… for any one claim… that you or your family become legally liable to pay… arising from:
a) your ownership (but not occupation) of the buildings...’
Home insurance: contents
This will contain similar cover to that described in the buildings policy, except that it will close with the following words:
‘… arising from:
a) the occupation of the home (but not its ownership)’
Also included under a contents policy will be personal liability cover not arising from occupation of the property. It is therefore noted that:
· The buildings policy only provides property owners’ liability cover.
· The contents policy only provides occupiers’ liability cover, along with personal liability cover.
The liability cover required by the policyholder is not always provided by the obvious policy. Consider this example: your client receives a subrogation claim from the insurers of the next-door property; it seems your client’s tree roots have caused damage totalling £250,000.
It would be natural to advise the client they should look to their buildings insurers to defend and, if necessary, pay this third-party claim. But that would be wrong. Any liability here would represent an occupier’s liability and, again, is a matter for a contents policy.
Almost all liability claims relating to property are brought under either of the 1957 or 1984 Occupiers' Liability Acts.
On the basis that a claim being brought against a homeowner and/or occupier will be brought under one of the above Acts, it follows that the insurance required to defend and/or pay such claims is occupier’s liability – and that is normally only found as part of a home contents insurance.
The distinction between owners’ and occupiers’ liability might not present a problem when a policyholder insures both buildings and contents, especially when the cover is obtained under the one policy.
But not all occupiers choose to insure their contents, whether on grounds of affordability or perhaps because they place insufficient value on their contents.
For whatever reason, a homeowner or occupier who is insured under a traditionally-worded policy will, effectively, have no liability cover at all if there is no contents insurance.
Some modern policies no longer contain the paradox and so the problem of no insurance is unlikely to arise with such policies. Furthermore, the problem is unlikely to exist for insurances on let properties, blocks of flats, commercial property and some high net worth covers.
A conveyancing solicitor would normally want to ensure their client insures the bricks and mortar.
At the same time, it would be prudent to ask the client if they intend to insure the liabilities that form part of homeownership.
If they do, they should be advised to insure the contents as that is often the only way to obtain the required liability cover.
Similarly, if embarking on litigation involving a claim against a domestic neighbour, it would be just as well, before incurring costs, to establish if there is a contents insurer before discovering that, possibly, the neighbour is uninsured.
Buildings insurers: occupiers’ liability?
What is to be done when an insured faces a liability claim and there is a buildings policy, but no insurance for contents? Can buildings insurers be forced to deal with occupiers’ liability claims?
There have been cases where a buildings insurer has simply declined to deal with an occupiers’ liability claim, pointing out it is a matter for a contents policy, even though no contents policy exists.
The Financial Ombudsman Service (FOS) has been known to require a buildings insurer to deal with a third-party claim in circumstances where there is no contents insurance.
But this arrangement is far from satisfactory and it is possible that ombudsman determinations on this point would be limited by the prevailing cap on awards.
Voidance for misrepresentation
There are times when an insurer is entitled to void a policy for misrepresentation. But there are some occasions when voidance would clearly be harsh.
As the law stands, an insurer cannot use a breach of warranty or condition to repudiate a claim where the breach is not causative of the loss.
However, where there has been a misrepresentation that is not causative of the loss, the policy may still be voided.
For example, let’s consider a public liability policy. A painter effects public liability with an insurer that wants to avoid claims connected to the application of heat. To achieve its objectives, the insurer can either:
a) Ask a question at the proposal stage, do you carry out any work involving the application of heat, such as using a blowtorch; or
b) Place a warranty on the policy excluding claims arising out of the application of heat, including blowtorches.
The insured is working on a property and causes damage by spilling paint on a carpet. During the investigation of the claim, it is revealed that the insured regularly uses a blowtorch.
Under option a) the insurer might be able to void the policy (assuming the risk would not have been accepted had the underwriters known about the application of heat).
Under option b) the use of the blowtorch was not causative of the loss and so the insured would still be indemnified for any claim it receives for the damaged carpet.
Under both the Insurance Act 2015 and the Consumer Insurance (Disclosure and Representations) Act 2012, the insurer may void a policy for a qualifying misrepresentation. However, this stark option, without reference to what caused the claim that put the insurer on enquiry, seems harsh.
Although an insurer might be entitled to employ the harsh remedy of voidance (even where there has been no link between nondisclosure and the claim itself) many insurers do not. There is sometimes the opportunity to discuss good insurance practice rather than finer points of the law.
Any liability insurance policy will carry stipulations about the timely reporting of claims and circumstances. But what is the position where a matter is reported late? Is the insurer entitled to refuse notification, leaving the insured having to defend a third-party claim without the backing of its insurer?
Under the Insurance Act 2015 a policyholder is, to some extent, protected in the event of the noncompliance of a policy condition or warranty where the breach is not causative of the loss and there has been no prejudice caused to the insurer as a result.
There is much debate within the insurance industry whether, in the event of a delayed notification, the insurer is required to demonstrate prejudice arising from the delay.
If you act for an insurer you would normally say it is not necessary for the insurer to show prejudice, but is this fair and reasonable? This would be something for you to discuss with your principal.
Many within the insurance industry feel it is only right that an insurer should show prejudice before declining the claim; indeed, for many, this would represent good and fair practice. If you act for the insured it would be a point worth pursuing.
Whether you act for the insured or the insurer, consider whether the insurer is being fair and reasonable. Bear in mind that a referral to the FOS might result in an insurer being required to deal with a late-notified claim where there has been no prejudice, because the FOS remit is to decide cases on the basis of what is fair and reasonable.
Michael J Wilson is regional director for Flaxmans insurance advocates flaxmanpartners.co.uk