AC Ward & Son Ltd v Catlin (Five) Ltd & Ors

Insurance warranties requiring protective systems to be maintained in full and effective operation are qualified by provisions requiring defects to be promptly remedied. An insured is therefore not in breach merely because an unknown defect exists, unless it knew or ought reasonably to have known of the defect and failed promptly to remedy it, or acted recklessly.

A maintenance warranty ordinarily applies only to protections or alarm systems in place when the insurance began, unless clear words extend it to later additions. An insurer may avoid a variation where material inaccuracies about compliance with risk-improvement requirements induced the variation. Materiality may be determined by the court from the nature of the facts.

The claimant sought an indemnity from its insurers for cigarettes and tobacco stolen from an unoccupied warehouse. The insurers relied on employee collusion, breach of protection and burglar-alarm maintenance warranties, and avoidance of a variation which had removed an exclusion for theft of cigarettes and tobacco outside business hours.

The court considered the scope and construction of the warranties, the condition of the warehouse security, the representations made when the exclusion was removed, and whether those representations were material and induced the insurers’ decision.

1. Collusion. The insurers bore the burden of proving collusion. Applying National Justice Compania Naviera v Prudential Assurance Ltd (The Ikarian Reefer) (No 1) [1995] 1 Lloyd’s Rep 455, the evidence did not exclude a substantial possibility that the theft was accidental. The exclusion therefore did not apply.
2. Warranty construction. The protection and burglar-alarm maintenance warranties applied to the security protections and alarm system in place at inception on 1 April 2006. The wording did not extend to later-installed protections. The warranties were qualified by the requirement that defects be promptly remedied. They were not strict obligations making the insurers free of liability immediately upon the existence of an unknown defect. The approach in Melik v Norwich Union [1980] 1 Lloyd’s Rep 523 was consistent with that construction, and the principles in The Resolute [2008] EWCA Civ 1314; [2009] 1 Lloyd’s Rep 225 supported a reasonable and businesslike interpretation.
3. The warranties were not breached. The ADSL line was installed after inception and was outside the warranties. In any event, the claimant promptly remedied the disconnection. The additional guardwire was also installed after inception, and its disconnection resulted from the alarm contractor’s failure, of which the claimant neither knew nor ought reasonably to have known. The insurers could not establish when the motion detectors had been angled upwards or that the claimant knew or ought reasonably to have known of the defect. The warranty defences failed.
4. Misrepresentation and inducement. Under Pan Atlantic Insurance v Pine Top Insurance [1994] 1 AC 501 and Assicurazioni Generali SpA v Arab Insurance Group [2003] Lloyd’s Rep IR 131, the insurers had to prove materiality and inducement. The representation that risk-improvement requirement 2006/02 had been complied with falsely implied that additional detectors had been installed and that guardwire protected all cage walls. Those matters were material. The court could determine materiality from the facts, applying Glicksman v Lancashire and General Assurance Company [1925] 2 KB 593.
5. The representations induced the removal of Endorsement 6. The insurers were entitled to avoid or rescind the variation. Endorsement 6 therefore remained in force, and the claim for indemnity failed because the stolen goods had been taken from the mezzanine rather than the specified ground-floor secure store.

The judgment records that HHJ Mackie QC had previously rejected the insurers’ summary-judgment application in a judgment dated 19 November 2008. The insurers appealed other aspects unsuccessfully, but did not appeal the conclusion that the warranties were promissory warranties. This judgment determined the merits of the indemnity claim.