It is important that landlords have a basic understanding of The Basic Principles of Insurance when letting Residential or Commercial Properties
Having adequate insurance cover is vital – not only could you lose your whole investment if there is a fire, you could be the recipient of a third party claim for damages if someone is injured on the premises. Third part injury claims can result in very high damages awards, sometime in excess of the value of your property.
Various insurance packages can be arranged at reasonable cost to cover all kinds of insurable risks for landlords, and to protect the interests of your tenants – for both residential and commercial tenancies. Insurers advertising their services on LandlordZONE have “stood the test of time” and offer reputable and reliable landlord insurance policies.
Always use a reputable insurance company. It’s only when you have a claim that you find out how good your insurers really are, so think very carefully when taking out insurance cover – cheapest is not always best.
Insurance is a special form of contract between the insured and insurer (policy holder and insurance company). A higher duty is expected from parties to an insurance contract than is the case with other commercial contracts. This is to ensure the disclosure of all material facts so that the contract may accurately reflect the actual risk being undertaken. The principles underlying this rule were stated by Lord Mansfield in the leading and often quoted case of Carter v Boehm (1766) 97 ER 1162, 1164,
Contracts of “The Utmost Good faith”
An insurance contract is therefore known in legal parlance as a contract of “the utmost good faith” or in Latin: uberrimae fidei. What this means is that all material facts about an insured risk must be disclosed to the insurers at the time of completing the proposal form, or subsequently if the facts change.
If you misrepresent the facts about a risk to your insurers, they will quite happily take your premiums without question. However, in the event of a loss everything is investigated. Your insurance is void if you misrepresented material facts or fail to inform your insurance company when these facts (the measurable risk) change. In fact, if you misrepresent material facts you are not insured at all!
An Insurable Interest exists when the insured person derives a financial or some other kind of benefit from the continued existence of the insured thing or object (or in the case of life insurance and living persons, their continuing survival). A person has an insurable interest in something when loss or damage to that object would cause the person to suffer a financial or other kind of loss.
Insurable interest would normally be established by ownership, possession, or a direct relationship to the object insured. We all have “insurable interest” in our own homes, vehicles etc, but not in those of or friends, neighbours or strangers possessions.
The “factual expectancy test” and “legal interest test” are the two major concepts of insurable interest.
The concept of insurable interest in English law in effect distances the insurance business from gambling. The United Kingdom was a world leader in that development by passing legislation that prohibited insurance contracts if no insurable interest can be proven, most notably the Life Assurance Act 1774, and the Marine Insurance Act 1906 which render such contracts illegal.
Landlords have an insurable interest in their properties up to the value of those properties, but not more. This principle of indemnity dictates that the insured be compensated for any loss of the property, but not for a penny more than the property was worth. Likewise, a lender who grants a mortgage on the landlord’s property has an insurable interest on that property, which is used as security, but the insurable interest cannot be in excess of the value of the loan.
In other words, you must have an interest (insurable interest or ownership) in the thing insured. If you could insure something which you did not have an insurable interest in (ownership of) it would be possible to gain in the event of another’s loss!
Indemnity is a very important principle of insurance and stems form the value of the insurable interest. Indemnity means that the insurers agree to compensate in the event of loss such that the insured is left substantially in the same position financially after the loss as s/he was before it – the insured cannot profit from a loss!
Indemnity has basically the same meaning as compensation or reparation. Indemnity also implies an obligation by the insurer to act on an injured party’s behalf after the occurrence of a contractually-insured risk or event. It is in effect it is contract to make the insured party “whole” again should that event occur.
Whilst the maximum liability is often expressly limited by the contract any actions to be taken to make the injured party “whole” again are largely unknown to the parties until the event occurs.
For example, a car insurance policy owner involved in an accident where the liability for the accident is not disputed by insured driver. Then the insurer has the duty to indemnify their insured driver in specific ways to “make them whole” again. The insurer may pay compensation for lost wages, pay for medical, legal and pain and suffering, the costs involved in recovering and repairing the vehicles involved and in returning them to their original condition, plus the payment of any rental vehicles used while awaiting repairs.
Therefore the insurer has a wide ranging obligation in the application of an indemnity, a general promise of protection against a specific event by way of making the injured party whole again.
An indemnity is not a guarantee. A guarantee is the promise of a third party to honour the obligation of one party to a contract should that party be unable or unwilling so to do. This distinction between indemnity and guarantee was made in the eighteenth century case of Birkmya v Darnell.
Following the strict insurance principle of indemnity, in the event of a claim and where the thing reinstated improves the insured’s position, the principle of betterment applies. In this case a financial payment is required of the insured.
For example, following a fire, it may not be possible, practical or desirable to replace a part of the roof and leave the remaining undamaged section in a dilapidated condition. Following the principle of indemnity therefore, the insured is now in a better financial position with a new roof than before -betterment has occurred.
The insured therefore must pay something towards the cost of the replacement roof to the extent that the repair leaves the insured in a better position than was the case before the insured event occurred.
Normally the insurance company’s assessor will calculated the values involved and it is up to the insured to accept or challenge these amounts. The insured can employ his/her own independent assessor if expert assistance is required, usually in the case of a large claim.
The betterment principle can be varied where the final compensation for loss is an agreed value beforehand, or where the policy is based on an agreed replacement of new-for-old.
A common example is where an Agreed Value policy is available on Classic, Collectable or Modified Vehicles. Depending on the vehicles condition the listed Market Value may not reflect the true value that could then be reached if the vehicle were to be sold. In the case of a total Loss, then any compensation offer will be based on the agreed value, rather than current market price value of the vehicle at the time of loss.
If more than one policy covers the same risk then clearly under the indemnity principle it is not possible for the insured to claim on both and make a gain. In this situation each of the insurers involved would be required to contribute a proportionate amount of the loss – this is known as the principle of contribution. Both insurers which have similar obligations to the insured and will therefore contribute in the indemnification in proportion.
In the event of an insurance claim, and where the insurers have fully indemnified the insured, the insured’s original interests can be taken over by the insurers.
This is known as the principle of subrogation. In law therefore, once the claim has been settled and the insured indemnified for the loss, the insurance company acquires the insured’s legal rights to pursue, sue and recover damages from the third party.
Proximate cause, or the Latin Causa Proxima, relates to the cause of the loss in that the event of the peril insured against must be covered under the insurance contract (policy), and the dominant cause of the event must not be excluded. The principle of proximate cause relates to this and is define as: The efficient cause which brings about a loss with no other intervening cause which breaks the chain of events.
In law, the proximate cause is an event sufficiently related to a specified insured event or peril which is legally recognisable to be the cause of the loss.
It is also the cause that has the most significant impact in bringing about the loss under a policy, when two or more independent causes happen together (concurrently) to produce a loss.
Law courts employ a set of rules to help resolve causation disputes where an insurance policy states that it covers or excludes losses “caused by” a particular peril and there is more than one cause or peril at work in a chain of events.
Under common law, whether a claim is honoured depends on the peril chosen as the proximate cause. If the peril agreed to be the the proximate cause is covered by the policy then the courts will will uphold the claim. However, if the peril selected as the proximate cause is not covered or excluded in the policy, then the courts would consider the loss not covered.
With third-party liability insurance, proximate cause refers to a doctrine by which a claimant must prove that the defendant’s (insured’s) actions set in motion a relatively short chain of events that could have reasonably been anticipated to lead to the claimant’s damages.
If the insured’s actions were “proximate” or “close enough” in the chain of causation to have been foreseeable as leading to the loss, courts would find the insured liable. Otherwise, if the insured’s actions set in motion a long, obscure chain of events that could not reasonably have been foreseen to lead to the third party’s loss, then the courts will not impose liability.
In the event of a claim the insurers will want to ascertain if the cause of the loss was an insured risk.
An example of this might be where belongings were removed from a house in the event of a flood, stored in an outside yard and subsequently damaged by rain. Was the proximate cause of the loss of the belongings the flood or the rain?
If the owner had made every attempt to protect the items quickly that the proximate cause would be deemed to be the flood. If however, the owner had neglectfully left the good unprotected for an excessive length of time the proximate cause would be deemed to be the rain.
It is incumbent on the insured to mitigate his or her losses so as to minimise the amount of any claim. For example, in the case of a fire, it would be expected that the insured would, given the opportunity and taking into account safety considerations, remove valuables from the building and fight the fire rather than do nothing or add fuel to the flames so to speak.
Therefore in case of any loss or casualty, the asset owner (insured) must attempt to keep loss to a minimum, as if the asset was not insured.
All insurance policies are different and have some form of exclusions. It is therefore important to read your policy document carefully to see what events (perils) are excluded from cover. Also, insurers often change their terms as times goes on, so what was covered when you took the policy out may not be covered several years on.
Most standard landlord policies from reputable insurers will give you comprehensive cover, but you should check carefully to see what the policy says. For example, some landlord plicies will cover re-housing your tenants in the event of a fire or flood etc, where others do not.
If you make a claim on an insurance policy your insurer will often make a deduction from the claim, and will not pay out the full amount. This is know as the policy excess.
The excess amount will be spelled out to you when you take out the insurance and has two objectives. (1) it discourages the insured from making small or frivolousness claims and (2) because of (1) the insurance premium payable will be less that it would be without the excess restriction. For example, your building policy may have a £250 excess, so when you make a claim of £1000 for vandal damage to your building you are only paid out ££750.
There are different types of excess. On both buildings and contents policies, there is typically a compulsory excess and a voluntary excess. The compulsory excess, as the phrase suggests, is applied to every claim. It may typically be around £100, but check the policy before you sign up. The voluntary excess on your policy is up to you to agree.
Under insurance can have serious implications when insuring a property. Under insurance means that the replacement value of the property or the value of the contents has been understated on the proposal, thereby lowering the premiums paid.
In an under insurance situation, in the event of a claim, the loss adjuster will “average” the compensation paid.
The principle of average means that the amount of the claim payment will be reduced proportionality if the property was not insured to the full amount of its replacement cost. Bear in mind replacement cost for a total loss would include site clearance, architects and professional fees etc. which add considerably to the cost of re-building. Old and unusual properties and those in conservation areas would have considerably higher costs than some modern buildings.
A £10,000 claim would be paid out at £7,000 if it can be shown that your insured value was 25% under the true cost of replacement.
An important point for landlords: if you rely on an insurance agent to complete your proposal form and to set replacement values, always bear in mind that the agent is usually your agent and not the insurance company’s agent.
If your agent makes a mistake, misrepresents material facts or miscalculates values and replacement costs, then it is your mistake, not the insurance company’s mistake.
Your only redress on facing a loss in this instance would be against your insurance agent on professional negligence grounds!
By Tom Entwistle,
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©LandlordZONE All Rights Reserved – never rely totally on these general guidelines which apply primarily to England and Wales. They are not definitive statements of the law. Before taking action or not, always do your own research and/or seek professional advice with the full facts of your case and all documents to hand.