Nature of Risk
A material damage policy is commonly referred to as a buildings or fire insurance policy. The risks and types of loss covered are wider than just fire damage risks and they have expanded over time.
Material damage policies exist in a wide variety of forms. Material damage risks are often included in “all risk” policy. Despite the name, the risks are defined. Specified risks are excluded.
The typical all risks policy covers most accidental damage to and destruction of property. The loss must generally not arise by reason of gradual events including wear and tear.
The insurer undertakes to pay the value of the insured property at the time of the loss, subject to the limit of liability. Material damage extends to real and personal property. The policies classically cover certain accidental, unexpected and typically sudden events. The events are statistically possible or even likely in the longer term, but relatively unlikely relative to the typical policyholder.
The wording of the policy will determine the extent of the cover and the limits of the policy. Where the risk that has occurred is within the scope of the policy, the insurer is liable to indemnify the insured, unless it can prove that the risk or event is within the scope of an exception, provided by the term of the policy.
The policy may specify the value of the insured building or item. It may specify a procedure for determining the value. It may provide for the nature and quality of reinstatement required. A classic issue which arises under a material damage policy is the extent to which the replacement may cost more than the value of the thing lost.
The cost of replacing a building might be significantly greater than its market value. The policy may provide for reinstatement, with a deduction for the upgrade element. It might pay the market value or an equivalent new replacement.
The policy may provide for reinstatement as new. This will cover the cost of reinstatement as new but without betterment. This may cost more than their market value. Actual reinstatement will be required as a precondition to payment of sum greater than the market value.
It is required that the building must be reinstated within a reasonable time. Cases have been taken regarding the implied terms of payment under the policy on reinstatement. The building industry requires stage payments and their payment might be implied. There may be express or implied terms in relation to the frequency of payments. Alternatively, the availability of the insured sum might facilitate the financing of stage payments.
Where the loss is not full, the proportion of the loss which is underinsured, is excluded. General average has the effect that where the asset or property is underinsured, a proportion only of the loss is paid.
The proportion is the proportion of the loss represented by the actual level of insurance relative to insurance in full. Where there is a reinstatement as new clause, it may limit recovery the proportion of the cost incurred in actual reinstatement.
The classic material damage risk is in respect of damage by fire. There must be a flame. Mere burning is not enough. A fire generally requires an ignition. Heat damage or singeing will not generally suffice. Smoke damage is usually covered provided, that it arises from the fire.
The damage may be caused by the indirect consequences of fire, such as by a collapsing structure or walls. Damage may ensue as a result of attempts to fight the fire, whether manually or automatically (such as by sprinkler systems).
Property damaged by removal or by steps taken to reduce or negate the risk, whether ultimately necessary or not, will be sufficiently a consequence of the fire, for insurance cover purposes. The action taken should be reasonable in the circumstances, allowing for the fact of an emergency and the heat of the moment.
Flooding is commonly covered under material damage policies. In some cases, and controversially, flooding cover may not be available due to the susceptibility of the place concerned to flooding. Cover for flooding may be excluded where it is most required, due to the high probability of the risk becoming manifest.
Flood is usually defined as including inundation of water, natural or artificial from places where it is confined. It may result from the breaking of a man-made reservoir or dam and the overflowing of rivers, canals and the inundation of the sea. It is commonly due to rain, storms and weather, but need not necessarily be s connected.
A flood implies a sudden or relatively sudden inundation. It generally arises from the release of a large body of water, usually due to the force of nature. A flood need not necessarily arise from rainfall. It may arise from a build-up, breach and the sudden intrusion usually sudden water.
Flooding may be proved by meteorological records of exceptional weather and rainfall. This may be required to prove flood-related loss, where the damage has occurred sometime earlier and was not immediately apprehended.
Where there is a build-up of water due to exceptional rainfall, such that it causes an intrusion, causing damage, there may be “flood”, notwithstanding that the inundation was not immediately apparent. Generally, however, a flood will be very apparent inundation.
Damage caused by a gradual build-up of water is unlikely to be within the scope of most policies. An escape from water tanks through leaking and breakage will not generally be a flood, as it will be not due to the forces of nature.
Some Other Common
Material damage policies usually cover riot and civil commotion. Riot has a specific meaning at law. See the sections on criminal law. Civil commotion is broader and refers to civil unrest short of an outright rebellion against the government. Civil commotion implies concerted action by rioters. Civil commotion amounting to civil war would not be covered.
Subsidence may be covered. It implies the sinking of a premises or building. The policy may cover cracking due to subsidence, but would not generally include normal building settlement. It would have to be attributed to subsidence.
Material damage usually includes damage resulting from theft, robbery and related risks Theft is defined by the criminal law. Policies which insure buildings will generally cover a burglary. The policy may cover theft within a premises. It may be broader and cover theft in other places. Burglary implies the entry onto premises, as a trespasser with an intention of stealing. Force is not necessarily required.
The policy may require that there be some degree of forcible entry. In this case, entry through an open door or using a key is not covered. However, in this case, it is likely to may cover entry achieved by threats or violence. Any level of force may suffice.
More modern policies are usually broader in scope and recognise modern security systems. The concept of theft has been broadened considerably and covers a wide range of dishonest behaviour. Theft, in its modern formulation, covers a broad range of dishonest misappropriation.
Storm damage is a classic material damage risk covered. It is usually sudden and violent. Persistent bad weather in itself and its cumulative effects are insufficient.
Common Excluded Risks I
Certain risks will be excluded from the scope of a material damage policy. There may be exclusions which apply to all risks covered. Alternatively, they may apply in respect of particular risks. Questions of interpretation may arise where loss and damage arises after both excluded and unexcluded risks have occurred. The wording of the policy will determine the position.
Risks due to war, invasion, the act of foreign enemy, hostilities (whether amounting to war or not), civil war, revolution, insurrection, military action and usurpation of power, are usually excluded.
Loss due to explosions, whether in an industrial or another context may be excluded. Damage from cracking or collapse is commonly excluded from buildings insurance cover.
The Fire Services Act provides that the acts of demolition done in the course of extinguishing a fire or protecting property or life is deemed caused by the fire. Conditions in insurance contracts excluding this risk for fire damage are invalid.
Common Excluded Risks II
Risks due to an error in design, faulty workmanship and materials are not generally covered. These are inherent defects in the building or product as constructed or manufactured and are appropriate to professional indemnity insurance.
The faulty workmanship, wood, materials etc. will generally be something in the product in its original constructed state. Where the loss is attributable to failure to properly maintain, it may not be within the scope of the exclusion.
Errors resulting from a process or manufacturing are commonly excluded. The objective is to exclude risks from products in the course of processing or manufacture.
Where the defects increase the risk of another insured risk occurring, it may be covered notwithstanding that the immediate occasion of the loss is due to the inherent defect, faulty workmanship etc.
Damage from environmental pollution or contamination is generally excluded from an “all risks” material damage policy. Separate environmental insurance cover may be available. Environmental damage and contamination may manifest itself, long after the original policy has expired. Environmental liability is an evolving area.
Changes in the nature of the insured risk policy or alterations which materially affect the risk, may not be covered without notification and agreement of any adjustment in premium. A building which becomes vacant is usually subject to greater risks and may require notification to the insurer. The introduction of factors which materially affect the risk may avoid the policy.
Duties of Insured
The terms of the policy will set out the duties of the parties. The contract may provide a continuing duty of disclosure. Some case law suggests that there may be a continuing duty of disclosure and good faith, as an implied obligation, irrespective of the terms of the contract.
The policy may contain the terms and conditions and warranties, compliance with which is required.
Material damage policies commonly require the insured to take reasonable precautions. See separate sections in relation to the effect of not taking the required precautions. Generally, the courts have interpreted the obligation that mere negligence in failing to so do, is not excluded. Otherwise, the commercial purpose of the policy may be avoided.
The insured person should be the owner of the asset concerned. There may be various ownership interests in assets vested in different persons. The relevant interest should be covered by the policy.
In order to be insured, the holder of the interest should be party to the contract. A third party may be covered as principal of an agent policyholder or as the beneficiary of a trust.
If the intention is that the benefit of the policy should be available to a third party, this may exclude the right of subrogation against the third party. If for example, it is provided in a lease that the landlord is to insure and that certain insured risks are excepted, then it may be held that the landlord would have no right of recourse. Accordingly, the insurer by way of subrogation would have no right of recourse to the tenant.
A person may have an insurable interest without title. Persons may be responsible for goods in their custody, without having an ownership interest in them. These responsibilities are liabilities which are, in principle, insurable.
A policy may cover stocks and materials held on trust for another, for which the insured is responsible. This may arise in the course of the sale of goods. A person may be responsible as bailee or as vendor or purchaser, where title has not yet vested in him.
A bailee may insure his own liability to the bailor, up to the value of the goods which he holds. He must, however, account to the owner of the goods in respect of loss. See generally the sections on bailment and the sale of goods.
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