Know the game before you play it

Our case studies are based upon our experience of cases of which we have knowledge and/or with which we have been associated and are produced for the benefit of our readers. 

In 2010 a company with over twenty years successful trading behind it found itself uninsured for a loss in excess of £1m because of the managing director's interpretation of a proposal form question.
The case demonstrates why it is important to understand how the insurance industry deals with claims and appreciate the complex relationship between market practice, procedures and law. In this case study we show how insurers interpreted answers in a proposal form and left the company uninsured.

The claim concerned fire damage and business interruption costs caused by a fire at the factory premises of a furniture manufacturer in 2009. 

The background circumstances are an important factor in the case. The owner had built up the company from scratch over a period of twenty-six years. In 2007 the company's turnover was down for the first time in more than twelve years. The economic collapse in 2008, combined with intense overseas competition, caused the owner to decide to sell the business and retire, which he did in 2009. 

The company was sold in early 2009 to a competitor who intended to develop the premises and invest in new, more modern, machinery.

A fire occurred at night seven months after the sale to the new owner. Insurers investigated the claim, with rigorous thoroughness, for almost a year without confirming or denying coverage for the claim under the policy. This put the company in danger of collapse because it was unable to continue to trade until the claim was paid and the machinery and plant could be reinstalled. Despite the company's strong representations to their broker to get the claim paid nothing happened; the broker was powerless to influence the lawyers and loss adjusters advising the insurer. 

Eleven months after the fire the insurers denied liability for the claim. They sought to rely upon a question in the proposal form that they argued was incorrectly answered. 

Have you or any of your partners or directors personally or in connection with any business with which you / they have been involved:

Ever been declared bankrupt or are the subject of any current bankruptcy  proceedings or been the director of any company which went into liquidation administration or receivership or is currently undergoing any voluntary or mandatory insolvency or winding-up procedures?

The answer given was "No".

The managing director, who had signed the proposal form, believed this to be a true statement. Insurers argued to the contrary, alleging that, at the time he signed the proposal, the managing director knew that the predecessor company had been in financial difficulties at the time of the sale and that the sale was by way of a voluntary winding-up procedure. Accordingly, they argued, the answer to the question ought to have been "Yes" and had the answer been "yes" they would have asked for further information in order to assess their terms, if any.

The company counter-argued that:

There was no "voluntary winding up" it was merely a sale of a company that was losing money.  In anticipation of a sale, the owner did not take steps to reinvest money in order to compete:

There was no "voluntary winding up" it was merely a sale of a company that was losing money.  In anticipation of a sale, the owner did not take steps to reinvest money in order to compete.


In any case, the circumstances of the company's finances at the time had no bearing upon the fire or resultant loss. Loss adjusters had also confirmed there were no suspicious circumstances surrounding the fire, which had been caused by an electrical fault.

Insurers did not accept the company’s explanation and instead countered by referring to the Declaration clause at the end of the proposal form by which the proposer had signed a declaration of truth:

I/We declare that to the best of my/our knowledge and belief, all the statements and particulars made with regard to this proposal are true and I/We have not withheld any material facts.

I/We understand that non-disclosure or misrepresentation of a material fact will entitle the insurer to avoid any insurance granted (a material fact is one likely to influence acceptance or assessment of this proposal by an insurer).

Accordingly, insurers argued, whether or not the answer to the question concerning liquidation or winding-up was material to the claim the answer was wrong (it should have been yes) and therefore the declaration of truth was, in fact, untrue. 

A breach of a warranty of truth gives an insurer the right to cancel the insurance ab initio (from its inception) and simply return the premium to the insured.

After eleven months of just responding to insurers enquiries and waiting for their responses the company found itself without insurance. 

The outcome

  • The bank, upon learning of the difficulty with the insurance claim, withdrew all loan and credit facilities. 
  • The company was advised by the bank to sue its brokers, who had known the company for many years under the predecessor's ownership.
  • The company was uncertain of its ability to continue to exist without any sales revenue and without insurance monies or any bank facilities to support it.

What went wrong?

  1. The matter was allowed to drag on for too long (i.e. for eleven months) without proper challenge by the company or any professional adviser.
  2. The company was compromised by communicating its opinions in answer to questions: 
    a. without properly understanding what was behind the questions
    b. without taking precautions to protect their position in law.
  3. In this case the brokers recognised, at an early stage after the fire, that insurers were seeking to deny liability. They continued to relay the insurers' questions and the company’s answers between the parties but said they were unable to offer any "legal" advice.

Potential defence
The insurers' arguments for not paying the claim were challengeable but the company had no knowledge of what to challenge or how to go about it. 

The implication behind the insurer's position was that they suspected, but could not prove, that the company had allowed a fire to take hold in order to use insurance monies to buy new machinery for the factory. By alleging that the company knew of the financial circumstances of the predecessor company immediately prior to sale and alleging that the sale was in fact a voluntary winding-up procedure (in fact, two separate allegations) they sought to test the company's resolve to fight the refusal to pay the claim.  This "negotiating position" was not recognised by the company for what it was.

In this case the company was alleged to have misled insurers.  No proof was offered to support this allegation and it would necessitate a careful and professional investigation into the facts to determine whether or not the company had intentionally, or unintentionally, misled the insurers. 

If a question in a proposal form is ambiguous or unclear in its intention then a court can construe it in favour of the company.

The prospects for a successful challenge to the insurer's allegations would have been good if the investigatory questions had been challenged at an earlier stage.

Lessons learned
It is important to communicate with insurers regularly, on a timely basis and with an understanding of the implications of the insurers strategy in the course of any negotiation of a claim. If negotiations appear to be taking a long time or are becoming difficult and obstructive it is time to take independent advice from an experienced  insurance professional.

Sometimes a broker is conflicted from giving this special advice because of the agency contracts and business relationships between it and the insurers. If there is a conflict of interest the broker should say so.
In the current economic conditions insurers look at every condition, exclusion and statement of fact to evaluate their liability to pay a claim. Loss adjusters are engaged by insurers to investigate the details of the loss and solicitors are engaged to examine the policies against the facts of the loss for relevant exclusions of cover and for breach of policy terms and conditions. 

In these situations a company ideally needs an equal level of professional advice and guidance to steer it through the complex maze of insurance practice and law. This is the specialist role of the Insurance Claims Advocate who is ideally placed to guide the company in its options and the cost / benefit of each.

In this case we were not consulted about the matter until after insurers had denied coverage. Our eventual advice constituted reparations after the damage was done. The insurers had not only refused to pay the claim but had declined to offer any further insurance for the remaining factory premises and stores and so "reconstruction" advice was needed together with considerations for recovery of the loss from other sources.