Marine & Transit - December 2009
Warehousers’ insurance: theft and breach of warranty
A C Ward & Sons Ltd v Catlin
(Five) Ltd & Other – Commercial Court (Flaux J) [2009] EWHC
3122 (Comm)
In our November 2008 legal update we reported
on the Court of Appeal decision in Pratt v Aigion Insurance
(The “Resolute”) [2008] EWCA SIV 1314 which concerned a
total loss - caused by fire - of an unmanned fishing boat while in
berth. Insurers declined cover on the basis of a breach of
warranty that the boat was “warranted skipper onboard at all
times”, and succeeded at trial. However, the Court of Appeal
overturned the decision, and held that such warranties should not
be read literally if an absurd result would follow; proper
construction should look to the contractual context and surrounding
circumstances.
This recent Commercial Court decision raised a
similar issue, save that this concerned a warehouse theft involving
the theft of cigarettes and tobacco to the value of
£432,940.00. Under the policy the insured warranted, inter
alia, that:
- The protections for the warehouse would be
maintained in good order throughout the period of insurance and
would be in effective operation at all times when the warehouse was
closed for business
- The burglar alarm system would be in full and
effective operation at all times when the warehouse was closed for
business and maintained in good order throughout the period of
insurance
There were a number of issues as to the
adequacy of the warehouse security, including the fact that CCTV
was not activated by reason of the ADSL line (which provided the
link for the remote monitoring of the CCTV system) having been
switched off as a consequence of BT having disconnected the
landline for that period. There was also evidence of a guard wire,
installed after the inception of the policy, having too been
disconnected.
Insurers argued the warranty was strict
insofar as the alarm system was not in full working order at the
time of the theft and, as a result of its breach, underwriters
could avoid the policy.
The court disagreed, holding that the words in
a warranty must be restricted if their literal construction
produced a result inconsistent with a reasonable and businesslike
interpretation of such warranty. Flaux J. concluded that the
warranties were qualified:
“…In the sense that the insured is
only in breach of warranty there is a defect in the particular
protection or the burglar alarm system, of which the insured
becomes aware or should reasonably have become aware and the
insured has then failed to remedy the defect promptly.”
To give the warranty any other meaning
would result in the insured automatically being in breach and
the insurers relieved from liability even before the insured knew
of a defect or had the opportunity to remedy it.
Therefore, the purpose of the warranty was to
impose upon the insured a duty to take prompt steps to rectify
defects. On the facts presented the warehouse owner was at the time
of the theft reasonably unaware of these issues.
Meanwhile, the defect of the guard wire was
irrelevant: the warranty only applied to security in place at the
time of policy inception.
Separately, insurers argued that the
circumstances pointed to an “inside job”, which would be excluded
under the policy. However the court was reminded of the
strict burden of proof in relation to such a serious
allegation. Despite circumstantial evidence, adopting the
principles in The “Ikarian Reefer” [1995] 1 Lloyd’s Rep
455, the burden of proof would not be discharged
if the evidence failed to exclude the substantial, as opposed to
fanciful or remote possibility, that the loss was otherwise
explainable. Flaux J. concluded the most probable explanation
for lapses in security (including upward angling of motion
detectors) was that they were left that way by engineers. Other
aspects of the theft further suggested that internal assistance was
unlikely: “… If this had been done with collusion, it indicated an
Inspector Clouseau like bungling, which is belied by the
professionalism of other aspects of the theft.”
However, at the final hurdle insurers
succeeded in establishing there had been a material
misrepresentation enabling the policy to be avoided. The
goods had been stolen from the mezzanine floor of the
warehouse. At the inception of the policy, there was an
endorsement to the policy excluding theft outside business hours
unless goods were stored in a secure floor on the ground
floor. The insured later managed to obtain the removal of the
endorsement upon giving assurances to underwriters that, following
inspections and upgrades that the security system was compliant
with a “Risk Improvement Requirement 2006/02”. The facts
established that such representation was not in all respects
true, the representations were material, and induced underwriters
to vary the policy so as to exclude the endorsement – Pan
Atlantic Insurance v Pine Top Insurance [1994] 1 AC
501.
The message for insurers therefore continues
to be that for warranties to be effective, clear and unambiguous
wording is required. The courts will otherwise construe the
warranty against insurers and will look to achieve a balanced
commercial interpretation with reference to surrounding
circumstances and common sense. Here the material
misrepresentation saved the day for underwriters, but such
arguments are usually more difficult to run- having to show
materiality and inducement- than proving breach of warranty.
Mike Burns,
Partner
Weightmans LLP