Two recent cases highlight the evidential burden on insurers seeking to either rely on a policy exclusion or pursue a recovery action. The first involves St Andrew’s Insurance Plc’s refusal to pay out in respect of fire losses under a home insurance policy. This case looks at the burden and standard of proof required where insurers seek to rely on an exclusion in a policy and there is more than one possible cause of the loss.
The second involves a subrogated claim by insurers for the recovery of material damage and business interruption losses, following water damage to the basement of restaurant premises caused by contractors. Insurers’ recovery was severely limited because they failed to prove that the sums paid out were properly recoverable from the contractors.
Smyth v St Andrew’s Insurance Plc
The claimant lived in and rented out part of a property in Brighton. The buildings policy included fire cover but excluded vandalism caused by any of his family. The policy definition of “family” included his partner.
There was a fire at the property that started in one of the let rooms. St Andrew’s refused cover, contending the insured’s partner had set the fire deliberately following an argument with a tenant. The insured issued proceedings seeking an indemnity on the basis that the fire was started carelessly by a discarded cigarette. Other possible causes of the fire were discounted.
The court accepted that the burden of proof is on the insurer where it seeks to rely on a policy exclusion. However, the issue before the court was the correct standard of proof to apply where there is more than one possible cause of loss. The court was referred to Hoffmann LJ’s judgment in Re B HL as follows:
“There is only one rule of law, namely that the occurrence of the fact in issue must be proved to have been more probable than not. Common sense, not law, requires that in deciding this question, regard should be had, to whatever extent appropriate, to inherent probabilities.”
On a common sense view, criminal acts are less likely than non-criminal ones. So it was less likely that a resident and partner of the insured would deliberately start a fire than that a smoker would carelessly discard a lit cigarette. The evidence before the court did not persuade it to retract from that position. Accordingly St Andrew’s Insurance was liable under the policy.
This case does not alter the standard of proof required in civil cases: the cause of the loss must be proved on the balance of probabilities. Nor does it prevent insurers relying on exclusion clauses for loss caused by deliberate or criminal acts, but it reminds us that robust evidence is needed to overcome the presumption that criminal causes are inherently less likely than non-criminal ones.
Brit Inns Limited v BDW Trading Limited
This case is a reminder to ensure that losses are properly adjusted under the policy and that, where recovery from a third party is available, there is sufficient evidence that losses claimed (both in character and amount) are attributable to the acts/omission of the proposed third party.
Insurers expect to be able to rely on their loss adjusters and whilst it will ordinarily take strong evidence to rebut the assumption that an adjusted loss is reasonable, the burden remains on the insurer to prove that those losses have been incurred, that they are reasonable and were caused, on the balance of probabilities, by the defendant.
Here, the defendant builders caused flooding resulting in serious damage affecting the restaurant profits. Their forecast for lost profits was £2.2 million. Loss adjusters settled the material damage claim for £355,070 and the loss of profits claim for £240,905.
Insurers pursued the builders to recover their outlay under the policy. It was not disputed that the flood was caused by defective workmanship and that the insured was entitled to the reasonable cost of reinstatement. The burden of proof was on the insured (and its insurer) to prove those costs.
The judge allowed just £136,688 for material damage and £20,779 for loss of profits, disallowing approximately £438,500. The loss adjuster was criticised for his lack of analysis and challenge and, in particular, a failure to assess the losses by reference to an earlier flood and actual profits. The court also found that the loss adjuster should not have assumed that the business (a new enterprise) would have been profitable from the outset. He ought to have interrogated the figures more critically and used actual figures generated from the business when it eventually reopened, rather than extrapolated figures based on a nearby business.
These cases underline that, whenever the burden of proof rests with insurers they should test the robustness of the evidence they rely on, whether in relation to policy response at the beginning of a claim or in pursuing a recovery after the claim is settled. If they do not, they may find that when it comes to proving their case before a court, the case is lost because the evidence they have does not satisfy the burden of proof.