A Matter of a Visual Heat Detection System
A recent case involved Top Waste Management (TWM) – we have changed the name for the purposes of this case study.
Top Waste Management suffered a serious fire at its premises in January 2022. The business included the short-term storage of waste, pending recycling. Some of the waste stockpiles were located inside the Insured’s building; other stockpiles were stored outside, especially for piles of green waste with their potential for internal combustion.
On this occasion, fire had broken out in one of the internal stockpiles overnight, while the premises were closed for business. It was estimated the cost to reinstate the damage would be in the region of £750,000.
The claim was reported to insurers but it was repudiated. Lawyers for the insurer cited the policy’s ‘Shut Down’ procedure, shown below.
“A thermal check of all internal waste stockpiles is to be conducted 30 minutes post cessation of processing. Fire-watch to include use of thermal imaging/probes or visual heat detection system.”
The insurers’ lawyers raised a number of objections to the broker’s representations but the heart of the matter was this: what was meant by the term ‘visual heat detection system’?
Said the Insurer: “…a visual heat detection system had to include some kind of detection equipment.” That came as a surprise to the Insured!
Said the Insured: “…an established procedure that principally relied on its highly-trained staff to use their human senses of sight and smell was a perfectly adequate system.” That came as a surprise to the insurer! Insurers were unmoved. It was a large claim and there was a deadlock and so we interviewed the Insured and its staff to establish just how rigorous was the system they employed.
We then entered into detailed correspondence, via the insurer’s lawyers, setting out the several reasons why we would say, as experts, that the actual system and process adopted by the Insured and known by the insurers for several years fits nicely within the wording of the policy’s ‘Shut Down’ endorsement and that in our opinion insurers would not succeed in court on this occasion.
We summarised our position as follows:
- The Insured had a longstanding and well-documented ‘visual inspection system’ that has been known to the insurer, and its appointed surveyor, and both had apparently accepted it since the insurance was placed seven years previously;
- It could not be proven in practice that the physical ‘visual’ inspection by the Insured’s trained personnel would be an insufficient system to comply with the policy condition.
Insurers were not immediately persuaded but they nevertheless agreed that Flaxmans could meet face to face with underwriters’ lawyers in London to discuss the merits of the respective positions. It was agreed that there would be a serious costs-risk in pursuing litigation and this acted as a spur for a a negotiated settlement.
The meeting was constructive and the lawyers were instructed to offer a settlement, which after due consideration and further upward negotiation we were able to recommend to the insured.
The Insured eventually accepted the payment. It was by no means the full loss but it still represented a substantial improvement compared with the insurer’s initial refusal to pay anything at all.
Lessons to be learned
There are three principal lessons in this example.
- We had two opposing views of what was meant by ‘visual heat detection system’. Good policy drafting could have avoided the dispute, and so this inevitably places the onus on the insurer to be absolutely clear about what is expected. If a physical device/ equipment was required as part of the shut-down procedure, it should have been plainly stated as to what equipment the insurer had in mind and how and when to use it. That is the standard that would be required in a litigation dispute.
- Another feature in this case is that the insurer arranged for annual inspections of the Insured’s premises. The Insured regarded each visit as ‘passing the insurer test’. Each year, the Insured would be shown the wording of the condition and simply asked, “Do you comply with this?” without there ever having been a discussion about exactly what was meant. No opportunity should be lost for those carrying out annual inspections to explain policy wordings rather than simply ticking a box that indicates compliance.
- We strongly advocate that Insurers should test their wordings against the understanding of their clients and the brokers that rely upon them, to make sure there is no evident ambiguity and the intention and purpose of the Condition, is properly understood.
Misunderstandings between insured and insurer should always be anticipated and it is up to us all, in the insurance industry, to do what we can to explain the complex words we sometimes use.
Do write and send us examples of confusing wordings. We are keeping a collection; and do get in touch if you are in need of a translation!