The duty on investors and other owners to notify building insurers and keep them updated of all material circumstances should not be under-estimated. Failure to do this may result in cover being prejudiced.
An unusual case that reached the Court of Appeal earlier this year made us think about whether property investors have got more to disclose to their buildings insurers in this market. They probably have.
First of all, the case: Ansari v New India Assurance Ltd. The facts are unlikely to be repeated, but a less extreme set of facts could cause a similar problem.
- The building owner took out insurance declaring that the building had a sprinkler system
- The occupier turned the sprinkler system off to avoid water damage to his goods, and ‘fixed it’ by jamming a filing cabinet under the control handle so it could not be turned back on
- The water supply to the building was later cut off
- The owner saw the building at regular intervals
- The use of the building changed from the storage of kitchenware to mini-motorbikes without the insurers being made aware
- The building was damaged by fire
- The owner claimed on the insurance
- The insurers rejected the claim and cancelled the policy
- The Court of Appeal agreed with the insurers. The owner was not entitled to any compensation for the fire damage.
As ever with insurance, the insurer has to be provided with all material facts that might influence its decision to insure or the amount of the premium. There was a clause in the insurance policy obliging the owner to notify the insurer of any change to the facts stated in the proposal form, and to give notice to the insurer if it became aware of any act or neglect that increased the risk of destruction or damage.
The owner did not notify the insurers about the new use or the non-functioning sprinkler system.
How is this relevant to well-organised property investors in this market? Insurance contracts containing these clauses are common. Sadly, we are seeing an increase in the number of tenants vacating premises as businesses go under in this economic climate. Sometimes the leases are brought to an end in an orderly way, but often there is a legally untidy situation where no tenant occupies or pays the rent, but the landlord is not in control of the premises. Landlords would need to notify the insurers that the property had been vacated, as this could increase the risk of damage to the building by trespassers.
How many landlords are checking that no other material changes need to be notified once premises are vacant, like the disconnection of a water supply to a sprinkler system by a tenant who has failed to pay its water bills (as well as the rent)?
Agents inspecting properties on behalf of landlords need to provide their clients with clear reports of any issues that need reporting to the insurers. Investors need to ensure that they know enough to do this.
Where leases remain, even though the tenant is not in occupation, the landlord may think it can rely on the lease clause requiring the tenant to notify them of anything that could invalidate the insurance. But the tenant may be away from the property for a long time, may not know themselves, and ultimately may not be worth suing for any loss that their landlord suffers if the insurer fails to pay out.
- Do make sure the tenants you have know what they need to notify you about to keep the building insured
- Brief your agents to notify you of any concerns they have following inspections
- If in doubt, notify the insurers of what you think might be a material change in circumstances