Despite several recent judgments handed down by the courts regarding material alteration of the risk, there is still a great deal of confusion surrounding such clauses. What exactly does “material” mean in these circumstances? Material to which element of the cover? No judgment has, as yet, set out guidelines that should be followed when insurers consider that such a clause may have been breached.
Court of Appeal guidance
It is only recently that the courts appear to have reached agreement as to the meaning of “material” in such clauses. The Court of Appeal ruled in Ansari v New India Assurance Limited that “material”, when used in alteration of risk clauses, does not have the same meaning as it does in relation to facts and circumstances that must be disclosed to the insurer before the policy incepts. If it were to have the same meaning, it would result in the policy lapsing on the occurrence of any new circumstance, which would influence to any extent the judgement of a prudent insurer in deciding on what terms he would be prepared to accept the risk, whether or not those circumstances were such as would actually lead him to alter his terms in any way. In the context of alteration of the risk clauses, an underwriter should consider whether the alteration has had a significant bearing on the risk. If it has, it would be considered material.
The Court of Appeal did not expand upon what might be considered to have a significant bearing on the risk. As a result, at present, what is significant to one underwriter may not be significant to another. Reviewing the cases as a whole, however, has shown that there are a number of important factors that should be borne in mind.
- The change or alteration must be more than temporary.
The temporary disconnection of a sprinkler system because of repairs, therefore, would not be considered material. The temporary storage or sale of items other than those specified on the proposal form would not be material. If, however, there is a habitual temporary alteration, for example the storage or sale of items not declared on the proposal form, then the courts will be more inclined to find that the alteration is material.
- The change or alteration must effectively change or alter the risk, such that it is a new one.
The courts will not tolerate hindsight underwriting, whereby the insurer seeks to re-write the risk on the basis that they may have got the original assessment wrong. Insurers will have to prove that there has been a change or alteration in the risk such that it is no longer the same risk. A mere increase in the risk is not sufficient. The alteration must, therefore, relate to an alteration in the building itself that is the subject of the insurance, and not in the risk itself.
For example, the storage of flammable material on the insured’s premises was held not to be material because it only increased the risk of a fire. The building itself had not been altered. Insurers’ denial of cover for breach of the material alteration of risk clause failed. In contrast, when insurers were insuring a property that the proposal form indicated was protected by sprinklers, it became a completely new risk when the sprinklers were disconnected. In this case, the building itself had been altered.
- The insured must have been aware of the alteration in risk such that they were in a position to notify insurers.
Tenants may be offering a different trade from the landlord’s property without the latter’s knowledge; tenants leave a property unoccupied for a long period without informing the landlord (though the unoccupancy warranty would normally be relevant in such circumstances); and sprinkler contractors may forget to reconnect the water supply to the system after carrying out repairs on it.
Need for clear and concise wording
Insurers can avoid problems with such clauses in the future by having clear and concise wording. Such clauses will be construed by the court strictly, meaning that the wording must be precise – the insurer should specify what changes they have in mind and require the insured to notify the insurer of such changes in writing. The clause can refer specifically, for example, to a change in the nature of the occupation or trade that is carried out at the insured premises, rather than a general reference to any alteration in the risk. Even then, without specific guidance from the courts, it is likely that confusion will remain.