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The Commercial Court has ruled that a hotel’s insurer is not liable for losses claimed under the hotel’s buildings insurance policy following a fire as the hotel owners had failed to ensure an electrical inspection was carried out, rendering the policy invalid.
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The hotel owners had taken out a new buildings insurance policy from the insurer to cover the hotel for one year. After the hotel was destroyed by fire, the owners attempted to claim under the policy but the insurer refused payment on the basis that no electrical inspection had been carried out within the 5-year period before the policy began.
The insurer’s argument was based on the following key clause contained in the policy:
“Electrical Installation Inspection Warranty: It is warranted that the electrical installation be inspected and tested every five years by a contractor approved by the National Inspection Council for Electrical Installation Contracting (NICEIC) and that any defects be remedied forthwith in accordance with the Regulations of the Institute of Electrical Engineers.“
The insurer held that the hotel had breached this warranty by not having had an electrical inspection carried out in the 5-year period immediately prior to the policy beginning. The hotel owners argued that they believed the clause only meant they needed to carry out an electrical inspection within 5 years of the policy’s start.
The Court ruled in the insurer’s favour, finding that the clause amounted to a ‘suspensive condition’. This is the name for a term or clause in a contract that must be met in order for the contract (in this case the insurance policy) to come into force. If the condition is not met, the contract is considered void (or ‘suspended’).
By ruling that the “Electrical Installation Inspection Warranty” amounted to a suspensive condition, the Court effectively rendered the insurance policy void. For the policy to have been valid, the hotel owners should have ensured that an electrical inspection was carried out either in the 5 years before the policy began or immediately upon it beginning.
A key point of the Court’s ruling was that the insurer’s interpretation was the only one that made commercial sense. Given the policy was only for one year, it would not have made sense for the clause to be requiring an electrical inspection within 5 years of the policy starting as the policy would have ended by then. Likewise, the ‘Warranty’ was clearly intended to minimise the risk from fire by ensuring regular electrical inspections were taking place and having the policy begin with no guarantee a recent inspection had been carried out would not fit with this intention.
Because the policy covered the period from December 2009-December 2010, the Insurance Act 2015 did not apply. However, the insurer may have been able to escape liability even if it had applied. Section 11 of the Act sets out that, where there is non-compliance with a term included in a policy with the intention of reducing the risk of loss, insurers may not be liable to make payment on the policy, unless the insured can show their non-compliance "could not potentially have increased the risk of the loss which actually occurred in the circumstances in which it occurred".
Because the Warranty was intended to reduce the risk of fire and the hotel was destroyed by fire, the hotel owners may have struggled to prove that their non-compliance did not increase the risk of fire to the building. This could then also have rendered the policy void with respect to a claim for losses due to the fire.
This case demonstrates the importance of business owners carefully reading any contracts they enter into, including insurance policies, and making sure they comply with all of the required conditions. It also shows the value of making sure that contracts are clearly written and unambiguous to reduce the risk of disputes over their terms in the future.