Lloyd's Law
Sifting through the legalease

When Double Insurance Isn’t

Double Insurance arises more frequently than you would think. Take the example whereby I drive your car, with your permission. In that instance, I have Third Party cover under my own Motor Insurance Policy, but I also have the benefit of cover under your Motor Insurance Policy. So far so good.

The trouble arises when both Policies that are meant to be covering me, have an ‘escape’ clause, along the lines of:

“this Policy of Insurance will not indemnify you to the extent that you have the benefit of other Insurance.”

The problem is quite apparent. If both policies operate in this way, effectively, neither offers me any coverage. Consequently, despite the existence of two insurance policies for just such a risk, I am left liable for any and all damage if I do, God forbid, end up having an accident.

As peculiar as it sounds, situations like this have actually arisen in the past. In the 1930’s, Motor Insurers attempted to argue in Court that the odd outcome referred to above was correct in law. Given that it hardly seemed fair for the buck to stop with the policyholder, the Courts gave short shrift to such arguments.

The solution arrived at by the Courts was that in such instances, both Insurers would pay a proportion of the loss and the respective “Escape Clauses” would cancel each other out.

In a property case in which we were instructed, NFUM v. HSBC [2010] EWHC 773 (Comm), an historic house was severely damaged by fire after Exchange of Contracts but before Completion of a Sale.

The Background

To understand the Court’s conclusions with regard to Double Insurance, some background is necessary:

  1. The Contract provided that risk in the Property passed at Exchange of Contracts and the Seller was under no obligation to continue to insure the Building.
  2. The Buyer then duly took out Buildings Insurance for up to £2m with NFUM.
  3. After some delay, the Buyer duly completed the Purchase. The Seller received the contractual price for the Property plus contractual interest for late Completion. He had not thereby suffered any loss.
  4. In due course NFUM came to a cash settlement with the Buyer and paid him out almost up to the £2m limit on their Policy. However, NFUM expressly reserved their position.
  5. NFUM went on to assert that there was Double Insurance and that HSBC should contribute a due proportion of the loss. The HSBC Policy of Insurance had a Purchaser’s Interest clause that covered a Buyer after Exchange of Contracts provided that he had not obtained his own Insurance.
  6. NFUM sought to argue at Trial that this meant that there were opposing Escape Clauses and that they should cancel each other out, leaving HSBC to reimburse NFUM for roughly 54% of the sums they had paid out.

The Decision

When the issue came to be heard in Court, the learned Judge heard an extensive review of the worldwide authorities concerning such conflicts in Insurance Polices.

However, in the end the decision hinged upon a different point. The Learned Judge duly held that the Purchaser’s Interest clause was de facto an Extension Clause and that it was wholly open to HSBC (and indeed made perfect commercial sense) for them to limit that Extension Clause to a situation where the Purchaser did not have his own Insurance cover.

Conclusion

The point of the ‘Extension,’ in that sense, was to protect their Insured (the Seller) in a situation where a Purchaser had not taken out his own Insurance or did not Complete the Purchase, and the Property suffered damage between Exchange of Contracts and Completion.

Any view to the contrary would mean that the clause would have effectively have been inserted by HSBC to benefit a competitor.

Obviously, it would not be within the Seller’s power to ensure that the Buyer had obtained his own Insurance, which is precisely why, whenever risk passes to the Purchaser under a Contract of Sale, all prudent Conveyancers will advise their Client to continue their current Buildings Insurance up to actual Completion of the Sale. To have two Insurance Policies covering the same risk for a few weeks is far preferable to having a situation where the property was totally uninsured.

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3 Responses to “When Double Insurance Isn’t”

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