Fire loss exposes problems inflation can bring to insurance market

A UK property company is having to sue their insurer over a £4m fire claim after the insurer refused to pay, raising arguments over the cost of the repair, proof of losses, the use of the building and the timing of when any payment should crystallise.

The case of Highgate Investments Limited v Great Lakes Insurance SE, revolves around losses that flowed from a fire at Highgate’s 30,000 square foot industrial unit in Dewberry.  The fire in April 2021 destroyed the buildings and contents according to court documents filed on behalf of the claimants. However when the company submitted its insurance claim it was declined by the insurers. The Particulars of Claim state: “…wrongfully and in breach of the terms of the Policy, the Defendant has refused to pay the Claimant any sum in respect of the losses which it has suffered as a consequence of the fire. Highgate also lodges a claim for damages caused by the Insurers’ late payment of the claim, a new right following the Enterprise Act 2016.

“The reason given for the failure to pay, by the Claimant at least, was that the insurer was arguing that payment would only become liable once “reinstatement commences and proceeds without delay [and] the cost of reinstatement shall have been actually incurred.””

The reasons given for declinature are set out more fully in Great Lakes’ defence documents. These argue, amongst other things, that as the insured elected not to reinstate the premises it is not entitled to claim for the cost of repairing, or reinstating, the building.

The defence states: “The Claimant elected not to reinstate the Premises and, accordingly, is only entitled to indemnity based on loss of market value. It has produced no evidence in support of any such market value loss.”

The defence documents conclude that the insurer had “reasonable grounds” for disputing the claim, firstly as to whether any sum was payable and secondly as to the amount of the claim payable. As such it argues no late payment damages can apply.

Mactavish analysis:

The legal battle between Highgate Investments and Great Lakes Insurance may be for a relatively small sum when set against the size of some other legal disputes, however its importance should not be underestimated. The claim brings into play a number of clauses which, while standard in many insurance policies, are increasingly cited in claims disputes.

Most notably perhaps the claim would appear to rely on clauses which are written into policy documents to avoid insureds acting unreasonably by delaying repair or reinstatement works, and setting out complex alternative measurement methods which are not clear to most policyholders. It also puts the spotlight on the problem of insurance valuations in a high inflation environment, with ambiguity around how so-called “average clauses” work alongside other related policy terms to reduce claims in the event of under-declaration. In a high inflationary environment it makes understanding of all these terms critical, as well as declaring values accurately and managing the rebuild process to avoid the ratchet effects of inflation. Conversely, pinning suppliers down on costs and work schedules on a complex rebuild when inflation is running at 10% can be difficult indeed.

What is “unreasonable delay” in an environment where you can’t get materials or labour? What is the marginal cost of this delay when prices are increasing so quickly through general inflation and drastic instability in key materials prices & availability, like steel?

If insurers start fighting claims on subjective points such as these it could create huge problems for insureds creating, at a minimum, delays in payouts and massive legal costs. Policyholders need to take a close look at this policy detail before a loss, not after.

Mactavish Claims Litigation Index

The Mactavish Claims Litigation Index aims at tracking insurance litigation and claims performance and getting the market to focus on what really matters, the product you buy with your premiums, not just the premium itself.