Property Insurance: Non-Disclosure and Breach of Warranty

Sugar Hut Group Ltd & Ors v. Great Lakes Reinsurance (UK) Plc & Ors [2010] Commercial Court, 26 October 2010

This litigation concerned a claim by the owners and operators of four nightclubs under a property insurance policy issued by the Defendant insurers, following a fire at one of the insured premises.

By way of a slip scratched on 24 March 2009, the policy insured various companies within the Sugar Hut Group, including the then holding company and its four subsidiaries through which the clubs were each operated (the "Old Companies"). Soon afterwards, insurers were presented with an endorsement, requesting the substitution of the Old Companies by four new group companies, the Claimants in the litigation. Ostensibly, this amendment was sought merely to reflect a change in the name of the relevant operating companies. The endorsement was duly agreed on 31 March 2009.

The slip contained various warranties concerned with fire and intruder protection, and cover was also expressly subject to receipt of a satisfactory proposal form, in fact provided two weeks after inception.

Non-disclosure

On 13 September 2009 a fire occurred at one of the insured nightclubs. In the course of insurers' investigations into the loss, it emerged that the original insureds (that is, the Old Companies), had gone into administration only a few weeks prior to their agreeing to underwrite the policy, this being the real (but undisclosed) reason for the requested endorsement. Relying upon section 18 of the Marine Insurance Act 1906, insurers contended that these were material facts that ought to have been disclosed, thereby entitling them to avoid the policy.

On the question of materiality, the court had little difficulty in concluding that a reasonable and prudent underwriter would have wanted to know why the Claimant companies had been formed, what had happened to the Old Companies and why they were no longer to be the subject of insurance. There was, as it turned out, much more to the requested endorsement than a mere change of corporate name, and these matters were clearly material to the decision whether to accept the risk and, if so, on what terms.

However, applying the two stage test set down in the well known case of Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995]1, the court also needed to be satisfied that the particular underwriter in this case had been induced to enter into the contract as a result of the said non-disclosure. On that, the...