CHAPTER 8

CLAIMS

INTRODUCTION

A loss has occurred. What steps must now be taken by the insured in order to
make a claim on the policy and if he is successful in making the claim how is
the value of the loss assessed? A number of distinct topics are dealt with in
this chapter: causation, claims procedures, fraud and quantum.

CAUSATION

Although X may have a policy and X has suffered a loss, it may be that the
policy does not cover that particular loss. This may be due to the fact that the
policy does not extend to that particular loss. In the highly competitive world
of insurance, consumers should heed the warning that ‘cheapest may not be
the best’. Motor insurance premiums vary enormously, but so too does the
policy wording. Whether or not the policy extends to the type of loss suffered
will largely depend on the construction of the policy wording and this was the
subject matter of the last chapter. With regard to the burden of proof, it is for
the insured to prove that his loss comes within the policy wording. In
appropriate cases, it will then be for the insurer to prove that an exception or
exclusion relieves him from liability on the policy (Appendix 8.1).
The leading case is the House of Lords decision in Leyland Shipping Co v
Norwich Union Fire Insurance Society [1918] AC 35. A ship was insured against
perils at sea but the policy excluded ‘all consequences of hostilities or warlike
operations’. The ship was torpedoed by the enemy, but managed to reach a
French port. She was ordered to a particular berth by the harbour authorities.
The berth was too shallow and the ship eventually sank. Was the loss due to
the attack or due to the consignment to an inadequate berth? If the answer
was due to the first reason then the loss was excluded by the policy, if it was
caused by the berthing decision then it was a peril at sea and the insurers
would be liable. Section 55(1) of the Marine Insurance Act 1906 somewhat
unhelpfully states, in part, ‘the insurer is liable for any loss proximately
caused by a peril insured against, but … he is not liable for any loss which is
not proximately caused by a peril insured against’. In Leyland, Lord Shaw
explained:
In my opinion, my Lords, too much is made of refinements upon the subject.
The doctrine of cause has been … one involving the subtlest of distinctions …

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To treat proxima causa as the cause which is nearest in time is out of the
question. Causes are spoken of as if they were distinct from one another as
beads in a row or links in a chain … The chain of causation is a handy
expression, but the figure is inadequate. Causation is not a chain, but a net …
What does ‘proximate’ here mean …? The cause which is truly proximate is
that which is proximate in efficiency. That efficiency may have been preserved
although other causes may meantime have sprung up which have yet not
destroyed it, or truly impaired it, and it may culminate in a result of which it
still remains the real efficient cause to which the event can be ascribed.
Thus, applying the ‘real efficient cause’ test, it was held that the loss was due
to the torpedoing and therefore the insurers were not liable on the policy.
Reference can also be made to In re Etherington and Lancashire and Yorkshire
Accident Insurance Co [1909] 1 KB 591 (Appendix 7.13) where the insured fell
heavily while hunting, but rode home suffering from shock and exposure. The
following day he went to work but developed pneumonia and died a week
after the fall. His accident insurance policy stated that it would pay out if his
death was directly caused by an accident. The policy also stated that it would
not pay out ‘where the direct or proximate cause is disease or other
intervening cause, even although the disease or other intervening cause may
itself have been aggravated by such accident, or have been due to weakness or
exhaustion consequent thereon, or the death accelerated thereby’. The Court
of Appeal were of the opinion that the phrase was ambiguous and found
against the insurer. The pneumonia was considered to be a consequence of the
accidental fall. For the insurers to avoid the liability it would have been
necessary to show that there had been a new and intervening cause that had
led to the insured’s death.
It is convenient here to mention two other topics. The first involves the
timing or coverage of the policy period. A problem may arise where a
policyholder changes insurers, usually at renewal time. This might be done
because a more competitive premium has been quoted by another insurer or
another insurer’s policy coverage is wider than the former insurer’s policy.
What happens if loss or damage spans the two policy periods? What happens,
particularly in professional indemnity insurance, if a negligent act occurred in
1995, but was not discovered until 1997, by which time insurers had changed?
A similar difficulty can also arise in a case of injuries that take many years to
manifest themselves such as asbestosis or a drug related injury. Insurers
greatly dislike uncertainty. They like to be able to calculate annually their
profit or loss and recalculate premiums accordingly. Insurers, therefore, prefer
what is referred to as a ‘claims made’ basis of liability, rather then a ‘claims
occurring basis’. By opting for the ‘claims made’ formula, the insurer will only
be liable for claims notified during the policy period and he will thus avoid
the possibility of long tail exposure. One of the major problems of the
asbestosis claims was that they were written on a claims occurring basis and
thus insurers were forced to meet claims decades later.

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In Irving and Burns v Stone [1997] CLC 1593, the plaintiffs were a firm of
surveyors who obtained professional indemnity insurance from the
defendants. During the currency of the policy, a writ was issued alleging
negligence against the plaintiffs, but it was not issued or brought to their
attention until after that policy had expired. The Court of Appeal found for
the insurers. The policy was a claims made policy and there had been no claim
communicated to them during the currency of their policy. The judgment
makes no reference to the insurers who presumably took over the plaintiff’s
professional indemnity cover. If there was no claim against the first insurers
notified within their policy period, there would, presumably, be a right of
action on the subsequent policy, subject to its wording. There is, potentially,
great difficulty for the insured, if he knows of a potential claim, but one which
is not formally notified and the renewal date comes round. Good faith would
require him to notify the insurers on renewal, or new insurers – if he is
considering changing insurers. In such circumstances it is difficult to imagine
that a renewal or a new policy would be offered. In reality, insurers have
responded to this situation in marketing policies that attempt to deal with the
problem.
The case of Kelly v Norwich Union Fire Insurance Society Ltd [1989] 2 All ER
888 (Appendix 8.2) illustrates how a privately insured can face great
difficulties in this area. The plaintiff had an external water pipe break and he
had it repaired. He then insured the bungalow. The pipe leaked again. It was
later discovered that the bungalow had suffered damage due to water
leakage. It was not possible to determine which leak had caused what
damage. The Court of Appeal disallowed the insured’s claim. No
apportionment was possible as between damage caused by the pre-policy
leakage and policy leakage, because there was no evidence submitted to
distinguish the damage caused by the two leaks.
The second area of difficulty is that relating to mitigation of loss. The
requirement in the general law of contract that the innocent party should
mitigate his losses is well known. Does this translate to an insurance setting? It
is not unusual for the policy to require efforts to be taken by the insured to
avert or mitigate potential loss, rather like a motor policy or a buildings policy
requiring that the vehicle or building be kept in a good state of repair. The
question is, can the costs incurred be passed on to the insurer?
This question arose in Yorkshire Water Service Ltd v Sun Alliance and London
[1997] 2 Lloyd’s Rep 21. The plaintiffs carried out urgent flood alleviation
work, at a cost of £4.6 m, to avoid extensive damage to neighbouring
landowners. If the surrounding land had been flooded the plaintiffs would
have been liable. They sought to recoup the cost from their insurers. The
Court of Appeal dismissed their claim. Construing the wording of the policy,
sums needed only to be paid when claims had been successfully made against

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the insured and the court was unwilling to imply a term into the contract to
cover mitigation costs. Crucially, the wording of the policy required the
insured, at his own expense, to carry out preventative work. The court was
not influenced by a number of American decisions which go the other way.
Stuart-Smith LJ explained:
… the American courts adopt a much more benign attitude towards the
insured … these notions which reflect a substantial element of public policy are
not part of the principles of construction or contracts under English law [see
Chapter 7, generally, and Appendix 7.19].
After referring to the Yorkshire Water Services decision, MacGillivray, Insurance
Law, 9th edn, 1998, London: Sweet & Maxwell (paras 26–19) states:
The position under a property damage policy is, perhaps, more debatable.
Suppose, for example, a householder insures his house but not his garden
against subsidence and the garden subsides to such an extent that the house
itself [is] in imminent danger of collapse. If the householder then erects a
retaining wall to avert the risk of further subsidence as well as to reduce the
risk of insurers becoming liable under the policy, can he recover the cost of
erecting the retaining well? We submit that he should be so entitled and that
any other result would be manifestly unjust.
This approach would then place English law nearer to that in the United
States. (See the Ombudsman’s view in Appendix 11.2.)

CLAIMS PROCEDURES

Even where the insured may have suffered a loss within the policy wording,
there will be contractual requirements which he must meet in order to present
a valid claim. Such requirements are usually to enable the insurer the
opportunity to investigate the claim, particularly where a third party is
responsible for the loss. A motor collision is an obvious example. Time
periods within which notification has to be given are a normal industry
practice. Such requirements could be conditions precedent to liability and thus
a breach could have dire results for the insured, even though on the facts of
the particular case the inconvenience caused to the insurer might be shown to
be minimal (see Chapter 5). The court will often be astute, however, in
preventing strict use of technicalities by an insurer.
In Verelst’s Administratrix v Motor Union Insurance Co [1925] 2 KB 137, a
motor policy contained a condition precedent that notice should be given ‘as
soon as possible’ following an accident. The insured was killed in India in a
motor accident, but it was not until 12 months later that the policy was
discovered by her personal representatives. The insurers denied liability for
breach of the notification requirement. They argued that knowledge of the

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accident and not knowledge of the existence of the policy should be the
triggering event for the notification period. The court rejected this argument,
finding for the personal representatives. A potentially impossible task would
have faced the claimants if the language of the policy had used an expression
such as, notification must be given within 14 days of the accident. Such set
time periods are by no means uncommon. In consumer contracts, the situation
is somewhat eased by the Association of British Insurers’ Statement of General
Insurance Practice (Appendix 4.10) which calls for the use of the phrase, found
in Verelst’s case 50 years earlier, ‘as soon as reasonably possible’.
Another requirement of making a claim is usually to provide particulars of
the loss. Such particulars will vary depending on the type of claim being
made. In consumer insurance, related to contents insurance, insurers will
usually ask, on the claims form, for receipts relating to items destroyed or
stolen. Failure to provide such receipts on the grounds that they have not been
retained would not be disastrous to the insured’s claim, unless there was a
condition precedent in the policy that certain receipts must be kept. In
consumer policies this would be an unusual step.
Any terms of the policy in a consumer contract would have to meet the
requirements of the Unfair Terms in Consumer Contracts Regulations 1999
(Appendix 7.1).
In 2000 the Association of British Insurers (ABI) introduced a Claims Code
that their members are expected to abide by in relation to consumers’ claims.
(See Appendix 8.14.)
As with other ABI Codes/Statements set out in this book this Code
espouses high standards of customer care. Only close scrutiny by an
independent body will prove whether or not insurer-members achieve the
requisite standards.

FRAUDULENT CLAIMS

(See Appendix 11.2 for the Ombudsman’s views on fraudulent claims.)

Fraud is more likely to take place because of a decision by the insured. Typical
examples would be to bring about the insured event, for example, arson; to
claim for items that were never owned and to overestimate the value of the
loss.
An important recent case dealing with the content of the duty of good
faith at the claims stage is that of the House of Lords in Manifest Shipping v
Uni-Polaris Insurance Co (The Star Sea) [2001] 1 All ER 743 (Appendix 8.3). The
decision involves matters other than good faith, but is here dealt with only on
this topic.

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The case concerned a claim on a marine policy. The insurers rejected the
claim on the grounds that two earlier accident reports relating to other ships
owned by the insured had not been disclosed to them at the time of the
present claim and this was in breach of the utmost good faith requirement of
s 17 of the Marine Insurance Act (MIA) 1906 (see Appendix 4.3). All three
courts found for the insured. It was held that the duty of good faith found in
s 17, affecting the performance of the contract, was not the same as the duty of
good faith required in s 18 which related to pre-contract negotiations. In
relation to claims only the finding of fraud against the insured would defeat
the claim. Innocent or negligent mistakes would not allow avoidance of the
claim under s 17. The policy wording might well cover such situations and if
so then the contract rules for breach would come into operation.
Leggatt LJ in the Court of Appeal on three occasions referred to the
draconian remedy (avoidance of the policy) being the only remedy that would
be available if breach of s 17 was found. Such a remedy should be limited to
cases of fraud and not extended to negligent or culpable behaviour on the part
of the insured. (See Appendix 8.12.)
If some insurers are unhappy with the interpretation of the House of
Lords in The Star Sea, then they will find no joy at all in the Court of Appeal
decision in K/S Merc-Scandia v Certain Lloyds Underwriters [2001] Lloyd’s Rep
IR 802. (See Appendix 8.13.)
Here, under a liability policy, the insured had written a fraudulent letter
during the negotiations leading to a claim. This letter, however, had nothing
to do with the substantive claim and its falsity was discovered long before the
claim was duly processed. (In fact, it was a claim against the insured that the
insurers were seeking to defend after the insured had gone into liquidation
and thus it was not a ‘claim’ by the insured at all.) The insurer sought to avoid
on the grounds of fraud arguing that The Star Sea, while rejecting a right to
avoid merely because there may have been culpable behaviour at the claims
stage, had indicated that fraud would be an example of breach of good faith
post-contract.
It was held that the insurer was liable.
Longmore LJ explained that it was well recognised that before a contract
could be avoided for pre-contract non-disclosure/misrepresentation, the fact
not disclosed or misrepresented had, firstly, to be material from the point of
view of a prudent insurer when assessing the risk and, second, it must have
induced the actual insurer to write that risk. There was no reason why these
ingredients should not also be the test where an insurer seeks to avoid liability
for lack of good faith or fraud in relation to post-contractual matters. In
particular, the requirement of inducement which exists for pre-contractual
lack of good faith must exist in an appropriate form before an insurer can
avoid the entire contract for post-contract lack of good faith. In this way the
requirement of inducement for pre-contract conduct resulting in avoidance is

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then made to tally with post-contract conduct said to enable the insurer to
avoid the contract. The conduct of the assured which is relied on by the
insurer must be causally relevant to the insurer’s ultimate liability or, at least,
to some defence of the insurers before it can be permitted to avoid the policy.
‘This is ... the same concept as that insurers must be seriously prejudiced by
the fraud complained of before the policy can be avoided.’
Even in a clearly established case of a fraudulent claim, the draconian
remedy led to a divided Court of Appeal in Orakpo v Barclays Insurance Services
and Another [1995] LRLR 443 (Appendix 8.4). The insured had obtained
buildings insurance based on a material misrepresentation as to the state of
repair of the building. He also made a grossly exaggerated claim as to loss of
income that followed from damage to the building. It is the latter point with
which we are concerned. The majority of the court were clear that any fraud in
the making of the claim goes to the root of the contract and entitles the insurer
to be discharged. Staughton LJ thought the claim was grossly exaggerated and
that it was a breach of good faith, but he had doubts as to the punishment,
particularly as the policy itself did not provide for a specific penalty. He
expressed the opinion that he did not know of any other branch of the law
that disentitled a claimant to that to which he was entitled, on the grounds
that he was to forfeit other claims on the basis of fraud. This is an interesting
view but one clearly without support from the insurance cases. It found no
supporters with the Court of Appeal in Diggens v Sun Alliance and London
[1994] CLC 1146. The facts of Diggens are interesting and probably reflect a not
uncommon situation. The insured made a legitimate claim on his policy but
the builders also carried out non-insurance work on the building and the
value of that work was merged with the insurance claim. The Court of Appeal
allowed the plaintiff claim for the insurance repair and dismissed the insurer’s
argument that it was a fraudulent claim. There was no evidence that the
insured was party to or had instructed the builders to make the additional
claim. There was no evidence that he had fraudulently suppressed an earlier
and lower tender for the work.
If the court is of the opinion that a contract is tainted by fraud and that
contract would lead to an insurance claim, then it will not only refuse to
enforce any insurance claim but also the primary contract. Thus in Taylor v
Bhail [1996] CLC 377 a builder claimed a sum for work done for the defendant
which was overpriced so that the defendant could ultimately claim that sum
from his insurers and in turn the defendant promised the plaintiff that he
would be awarded the job. In effect the overpricing was £1,000 on a £12,000
job. The Court of Appeal held that the builder was not entitled to the price for
the job, the defendant would not be entitled to any insurance claim and if any
had been paid then the insurer would be entitled to reclaim such sum. In the
words of Millett LJ: ‘Let it be clearly understood if a builder or a garage or
other supplier agrees to provide a false estimate for work in order to enable its
customer to obtain payment from his insurers to which he is not entitled, then

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it will be unable to recover payment from its customer and the customer will
be unable to claim on his insurers even if he has paid for the work.’ Here both
parties are ‘guilty’ of fraud but English law has no method of allocating
responsibility thus the ‘guilty’ defendant has his repairs done without making
full payment.
Merely to exaggerate a claim may not amount to fraud. It would depend
largely on the scale of the exaggeration. The courts in a number of cases have
accepted that the size of the claim is seen as a bargaining position. Insurers
will often attempt to reduce the claim. The insured, wary of the approach,
may therefore increase the claim with a view to it being reduced and thus
arrive at a figure near to the true value. The annual reports of the Insurance
Ombudsman (see Chapter 11) refer, on several occasions, to the value insurers
put on vehicles that are written off. Such values are often below what the
Insurance Ombudsman Bureau regards as the fair value and thus lead to a
higher figure being suggested by the Insurance Ombudsman. Is offering a
figure held to be too low by the insurer a sign of breach of good faith by the
insurer? Probably not, as long as a slightly exaggerated claim is not seen as
fraud by the insured.
In Sofi v Prudential Assurance Co Ltd [1993] 2 Lloyd’s Rep 559 (Appendix
7.6), while the Court of Appeal found for the insured for the theft of his
jewellery, the trial judge had disallowed unfair parts of the insured’s claim in
relation to the contents of suitcases on the grounds that it was exaggerated.
Thus, in that case, the over valued loss was not equated to fraud. (See s 56 of
the (Australian) Insurance Contracts Act 1984 (Cth) (Appendix 8.10), for its
approach to fraudulent claims.)

MEASURE OF INDEMNITY

The guiding principle of insurance is that the insured should be indemnified

against his loss whether the loss is total or partial. He should not be under
compensated nor should he receive a windfall. The chances, however, of
reaching a figure that accurately reflects each side’s view of what is true
compensation are probably rare. It is possible to have a valued policy wherein
both sides agree at the outset the value of the object and that figure is paid if
there is a total loss. Such policies are rare outside marine insurance, but a
vintage car might attract such a policy. House contents policies are usually
written on a ‘new for old’ basis whereby the 10 year old television, stolen or
destroyed in a fire, will be replaced by a new set equivalent to the model lost
or destroyed. In that sense it can be said that the insured receives more than a
true indemnity. Premiums will, of course, reflect this approach. Insurers
usually reserve for themselves a choice between payment or repairing or
reinstating (see below). Obviously they will choose whichever remedy most
suits them. Payment is normally the chosen option, the main reason being it is

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administratively the simplest method – claim, pay, close file, increase

premiums(!?).
How is the loss or damage to be calculated? First, it should be said that it is
calculated at the time of loss or damage and not when the policy was taken
out. Thus, in motor insurance, you value the car at £5,000 on 1 January (and,
even then, this may not be a figure which, if the car was stolen on that day,
you would receive) and the car was written off on 1 November. It is the value
on 1 November that will be paid. Choosing the correct figure at that date is
clearly an area ripe for disagreement and a fertile ground for the Insurance
Ombudsman (see Chapter 11).
A useful illustration of the above points is found in Leppard v Excess
Insurance Co Ltd [1979] 2 All ER 668 (Appendix 8.5). See also comments on this
case in Appendix 8.6 and Appendix 8.7. The insured bought a remote country
cottage for £1,500 in 1972. In 1994, he insured it for £10,000, declaring this to be
the value that it would cost to replace it should it be totally destroyed. The
policy reserved for the insurer the option of payment, reinstatement or repair.
In 1975, the plaintiff increased the value to £14,000. The cottage was destroyed
by fire that year. The agreed cost of reinstatement was £8,694 taking into
account betterment (see Reynolds, below). However, the insurers discovered
that the cottage was for sale at the time of the fire. Due to difficulties the
insured was having with his neighbour, he admitted that he would have
accepted £4,500 for the cottage. Obviously, the insurers chose not to repair or
reinstate and they successfully argued that the market value of the cottage to
the insured was the figure that he would have accepted on a sale the day
before the fire. Was that £4,500? No, it was £3,000. Why? Because the land or
the site was worth £1,500 and he still had that to sell even after the fire. This
last point is important. Are most of those who live in the south east of
England over-insuring their houses? Do most people insure at the price they
paid for the property? If so, they have included the value of the land as part of
the price. What should be insured are the rebuilding costs of that property: do
insurers warn customers not to over-insure? The rebuilding costs formula is
probably to be found somewhere in the policy, but who reads that far? In the
property slump of the late 1980s and early 1990s, did insurers advise
customers to recalculate their figures? If the buildings cost formula had been
correctly used, then those costs remained roughly similar to before the slump,
but, if the land value had been incorrectly included, then there was massive
over insurance.
While ‘new for old’ may apply to house contents, it does not apply to
property. That brings us to the question of betterment. This is a phrase which
reflects the fact that repair or reinstatement provides the insured with a
building superior to the original. A deduction is usually made to reflect this.
This was a technique used by the trial judge in Leppard, but the Court of
Appeal tackled the problem in the way described above.

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Betterment is illustrated in Reynolds and Anderson v Phoenix Assurance Co

Ltd and Others [1978] 2 Lloyd’s Rep 440 (Appendix 8.8 and also on another
issue, see Appendix 4.11). The plaintiffs insured the premises in 1973 for
£550,000. The policy contained a pay, reinstate or replace clause. Following a
fire, which destroyed seven 10ths of the building, the insured claimed a sum
for reinstatement. The insurers argued that the true method of compensation
was the modern replacement value, about one 10th of the figure claimed, and
that no commercial man would consider spending in excess of £1 m in
rebuilding an obsolete building. The court found for the insured. He had
convinced the court that his desire to rebuild was no eccentricity, and equally
he had convinced the court that he genuinely intended to reconstruct the
building if he was awarded an adequate sum as compensation. In that case,
the sum claimed by the insured was the true method of indemnification.
Betterment should be taken into account but as the insured intended to use a
great deal of second hand material and to use a certain amount of inferior
material the betterment figure should not be too great.
In Exchange Theatre Ltd v Iron Trades Mutual Insurance Co [1983] 1 Lloyd’s
Rep 674, however, the court did not consider that a Victorian hall used for
bingo merited rebuilding to its original splendour and awarded the costs of a
modern equivalent.
Is it possible for an insurer to be held liable for losses that the handling of
the claim has caused to the insured? While it is obviously the right of the
insurer to defend a claim there are times when that defence could be shown to
be one of incompetence, negligence or even a sign of bad faith on the part of
the insurer. The effect of late payment of the claim, either as a result of the
insured’s successful litigation or a change of position by the insurer, will
attract interest on the award. The actual loss suffered by the insured may be
shown to be far greater than mere interest added to the insured sum.
The answer is that no additional sum is possible and this is a situation on
which the Court of Appeal has, on two recent occasions, had cause to
comment adversely.
The unease was clearly reflected by the judges in Sprung v Royal Insurance
(UK) Ltd [1999] Lloyd’s Rep IR 111.
The claimant insured a factory which was seriously damaged by vandals
in April 1986. The defendant insurers visited the premises, made a small
payment but refused the major claim arguing that it was not covered by the
policy. Without insurance monies the claimant could not afford to carry out
the repairs, a possible sale of the premises that existed before the insured
event occurred fell through and the claimant had to close the works.
A writ was issued in 1988; in 1990 a consent order for £30,000 interim
payment was made; in 1994 the question arose as to whether claimant was
entitled to further sums.

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Even though the court decided that the insurers had no good defence, in
fact Evans LJ was of the opinion that the insurer’s stance was unattractive
both from a commercial and moral point of view, nevertheless English law
does not recognise a cause of action in damages for the late payment of what
might be due as damages. All that was possible was the interest on those
damages. This, of course, was no help to the claimant whose business had
been wound up because of the failure of the insurers to accept liability.
Lord Justice Beldam said:
There will be many who share Mr Sprung’s view that in cases such as this such
an award is inadequate to compensate him or any other assured who may
have had to abandon his business as a result of insurers’ failure to pay, and
that early consideration should be given to reform of the law in similar cases.
In Pride Valley Foods Ltd v Independent Insurance Co Ltd [1999] Lloyd’s Rep IR
120 the Court of Appeal granted leave to appeal to them on a similar point of
law so that the matter could be further considered by them or ultimately the
House of Lords. (See [1998] LMCLQ 154.)
It is not difficult to find a contrary approach to the present English
position. Australia and New Zealand recognise the award of damages in a
situation similar to Sprung and some of the United States go a lot further with
their tort of bad faith doctrine in awarding damages as multiples of the
original insured loss in the form of punitive damages. (See Appendix 4.22.)
Selecting the appropriate value of goods or property at the time of
insuring, or renewing, is not always an easy matter. That requires discussion
of the possibility of over valuing or under valuing by the insured and the
effect that this might have on the claim.
Over valuing might be a sign of fraud on the part of the insured. If it is a
genuine mistake, then the insured will only receive the true market value at
the time of the loss and he will have paid too high a premium.
Under valuing is more common. As the premium is largely linked to the
declared value, some insureds may under value to keep down the premium.
They may have house contents worth £30,000 but believe that not everything
could be stolen, or even in the case of a fire, the chances are that not
everything will be lost before the fire brigade arrives. They may simply think
they cannot afford the full premiums. Wary of this technique, insurers
countered with their own technique of ‘subject to average clauses’ or the
rateable proportion clause. A typical clause reads:
Whenever a sum insured is declared to be subject to average, if the property,
shall at the breaking out of any fire, be collectively of greater value than such
sum insured, then the insured shall be considered as being his own insurer for
the difference, and shall bear a rateable share of the loss accordingly.
If there is total loss then the insured will receive up to the insured sum, which
of course will be less than the true value. If there is partial loss, however, he

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will not receive the loss he had suffered but only a percentage of that,
assessed as follows:
The policy value over the true value, times the amount of loss.
To use simple figures: if X insures his house for £50,000 whereas the true
value is £100,000 and the fire damage is assessed at £10,000 then he will
receive 50,000/100,000 multiplied by £10,000 = £5,000.
Insurers may decide to offer a settlement figure rather than use the
average clause. If the undervaluing is due to negligent advice from an
intermediary it may be possible to sue the intermediary: see Bollom v Byas
Mosley [1999] Lloyd’s Rep PN.
The average condition can apply to any type of insurance, other than life,
but usually it is applied to fire insurance and buildings. It is commonly stated,
in the major texts, that it does not apply to domestic contents insurance. But
that may lead an insured into a false sense of security. One needs to go back
to Chapter 4 (‘Misrepresentation and Non-Disclosure’). If the value required
by the policy is falsely stated, then there is the possibility of the insured losing
everything, or having to accept an ex gratia (that is, lesser) sum, whereas the
use of the average clause would have given him a percentage of the loss.
The recent Court of Appeal decision in Economides v Commercial Union
Assurance Co plc [1997] 3 All ER 636 (Appendix 8.9) is of considerable
importance in this area, Peter Gibson LJ stating that the case raised ‘issues of
significance to all who have household insurance policies as well as to all
insurers under such policies’.
The plaintiff insured the contents of his flat with the defendant in 1988
stating their value to be ‘£12,000 (including property of members of your
family permanently residing with you. The figure must represent the full cost
of replacing all your contents as new …)’. That figure was increased to £16,000
in 1990. The policy also covered valuables but only up to one third of sum
insured. The policy was index linked, a commonly used technique to save the
insured from making a fresh calculation on each renewal. In 1990, the
plaintiff’s parents came to live permanently in England and stayed with him.
They brought with them their family valuables. The flat was burgled and
property worth £31,000 was stolen. Most of the value consisted of valuables
belonging to the parents. There was no subject to average clause and the
insurers argued that there had been a misrepresentation, which if successful
would have led to no payment. The court held that there was no
misrepresentation because the insured’s statement as to value was one of
opinion and s 20(5) of the Marine Insurance Act 1906 states: ‘A representation
as to a matter of expectation or belief is true if it be made in good faith …’ The
insured had been honest (but certainly forgetful). Based on the discussion
above as to indemnity, to what sum was the insured entitled? He could not
have more than the sum insured and he could not, on the policy wording,
have more than one third for the valuables of the sum insured. Therefore, the

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answer was that he was awarded £7,815, representing the fact that, as most of
items stolen were classed as ‘valuables’, the claim was subject to the one third
of £16,000 formula.
This decision will have come as something of a shock to insurers generally
and only time will tell whether it will lead to subject to average clauses being
used more regularly in domestic contents insurance.
Section 44 of the (Australian) Insurance Contracts Act 1984 (Cth)
(Appendix 8.10) deals with the question of average in a different way. The
intention is to relieve, to a certain extent, the insured from the dangers of
under valuation. This is achieved by allowing an under valuation of 20%
before it is actionable under valuation and, if it is in excess of the 20% margin,
using the 80% valuation as the criterion for assessing the damages. The
section does, however, unlike present English law, apply this approach to all
types of general insurance. This decision was based on a majority view of the
Australian Law Reform Commission Report (ALRC 20, para 271), which
revised its earlier discussion paper view (ALRC DP 7, para 71) in the light of
the insurance industry’s response.
English law does in fact have a ‘special condition of average’ which is
based on a 75% variation but appears to be limited to special types of
insurance cover. Agricultural produce is one example where it would be
difficult at the start of the policy to fix on a specific valuation.
The possibility of reinstatement as an option available for an insurer has
been referred to in several cases used in this chapter, for example, Leppard and
Reynolds. To insist on reinstatement, the insurers must have reserved for
themselves the option in the policy. Even when they have done so they will
still choose to adopt the least costly method available to them. Reynolds
illustrates that the court may insist on reinstatement as the correct method of
indemnification.
Brief reference should be made here to a statutory form of reinstatement
found in the Fires Prevention (Metropolis) Act 1774 (Appendix 8.11 and
Appendix 8.8).
Assume a worst case scenario. The insured is heavily in debt; he has an
interest in an insured building; desirous to obtain the cash value of the
insurance he deliberately sets fire to it; arson cannot be proven. The purpose
of the 1774 Act is to prevent insureds from obtaining the cash proceeds and
allows the insurer to insist on reinstatement. Others with an interest in the
building can also so insist. Despite its title, the Act has been held to apply to
the whole of England, but it does not apply to Lloyd’s underwriters because
the Act is directed to ‘governors or directors’ of insurance companies, words
considered inappropriate to describe the Lloyd’s market. However, with
changes to the financial basis on which Lloyd’s now functions, that is, the
growth of corporate membership in the 1990s, and recent suggestions to ‘buy-
out’ the remaining names, perhaps the Act could be applied to fire business at
Lloyd’s.

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