i INTERRUPTION INSURANCE PROXIMATE LOSS ISSUES by Gordon J.R. Hickmott, M.B.E., F.C.I.I., F.C.I.Arb., F.R.S.A., F.I.R.M. ii First Edition 1990 Reprinted 2009 ISBN 0 948691 95 6 © Gordon Hickmott 1990 British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library. Notice of Terms of Use All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher and copyright owner. While the principles discussed and the details given in this book are the product of careful study, the author and publisher cannot in any way guarantee the suitability of recommendations made in this book for individual problems, and they shall not be under any legal liability of any kind in respect of or arising out of the form or contents of this book or any error therein, or the reliance of any person thereon. Printed and bound in Great Britain by Bell & Bain Ltd, Glasgow Published in 2009 by Witherbys Insurance 4 Dunlop Square, Livingston Edinburgh, EH54 8SB Scotland, UK Tel No: +44(0)1506 463 227 Fax No: +44(0)1506 468 999 Email: info@emailws.com www.witherbyseamanship.com iii INTERRUPTION INSURANCE PROXIMATE LOSS ISSUES (including Proximate peril’s, interruption causation and quantum aspects) by GORDON J.R. HICKMOTT M.B.E., F.C.I.I., F.C.I.Arb., F.R.S.A., F.I.R.M. Interruption Insurance Consultant WITHERBY SEAMANSHIP INTERNATIONAL LTD 4 Dunlop Square, Livingston, Edinburgh, EH54 8SB Scotland, UK v PREFACE “A description of the subject matter of the insurance is required both for the nature of the contract and from the universal practice of insurers. It is necessary that the thing insured and in some cases also the kind of interest intended to be protected, should be sufficiently set forth in the policy, or that the policy should at least prescribe the way of ascertaining to what the contract is to be applied.” Mackenzie & Whitworth (1875) ____________________________ 01. The doctrine of “proximate cause” has long been established as a feature of material damage insurance. With the introduction and now widening acceptance of “All Risks of Damage” covers, the practical difficulties of its application in that class of insurance has been reduced considerably; even further than from the stage when “fire” and “explosion” protection became commonplace as a basic joint cover. 02. However, the phrase “proximate cause” continues to be used, misused, and misunderstood and the historical legal decisions and relevant “Obiter dictum” forgotten. 03. In the field of Interruption Insurance*, this very widening of the insured perils introduces considerations not previously arising. Thus the application of “proximate cause” together with the associated aspect of “interruption causation” is becoming a growing topical matter as indicated in the Introduction notes. *The term “Interruption Insurance” has been adopted as the generic title of this class of business to avoid the use of the many older phrases such as “Loss of Profits”, “Profits Insurance”, and “Consequential Loss Insurance” which unfortunately are still to be found. However, it is not to be confused with the term “Business Interruption Insurance” which is that used in the United States of America for its counterpart but different form of insurance. 04. With the demise of the “Tariffs” in the United Kingdom, there seems to be a loss of known established market opinion from a central monitoring and updating body in constant touch with the economic, social, legal, insurance, and industrial and commercial factors and outlooks which form the mutually interlocking background to Interruption Insurance. Yet to fulfill its function, insurance must still set out to be the handmaiden of Commerce and Industry especially in this field. The protection it offers must be as clear and as precise as possible. 05. This paper deals with the subjects of “proximate perils” and “interruption causation” and the associated aspects that are involved relative to insurances effected on the United Kingdom types of forms. Interruption insurances relating to business and premises outside this Country but written on the U.K. basis have vi some variations in the policy wordings from the recommended standard wording used here, and the laws applicable may involve differences from English Law. In general, however, no basic alterations to the principles and practices outlined later are considered to apply. 06. The specific purpose then of this paper is threefold: (a) to provide as much clarity as possible in areas which can present complex practical issues, (b) to give a warning on matters which require consideration prior to the concluding of an insurance contract or subsequently when a loss has arisen, (c) to indicate areas which in the future may introduce disagreement relative to the cover given by interruption insurance policies. 07. The paper has been divided into parts to enable the points to be brought forward in a logical manner; but it is important to remember that the policy is a single contract and it is designed, and needs to be read, as a whole. 08. Appendix D sets out extracts from the U.K. recommended standard form (omitting the detail of those portions that are not relevant to the matters under review). Certain phrases and sentences which are shown in enbolden is that of the writer and indicates that specific consideration of them is important. 09. For Business Interruption insurance effected on the United States of America standard forms (Business Interruption or the older Use and Occupancy Wordings), the position is quite different. To give some guidance, some notes have been provided at Appendix “C”. 10. Finally, bearing in mind the current use of “All Risks of damage” forms with the exclusions to the cover being set down, it is necessary to stress that insurance deals with an accidental, and/or fortuitous type of event, and not the inevitable or intentional situation. Fire policies do not include damage in respect of the consumption of coal for heating and this is not changed by the omission of the peril “fire” as such under a Comprehensive type of cover. The principle well established from the case of Austin v Drew (1816) applies to other perils; an example being that explosion cover does not include inevitable damage from the normal use of explosives in the operation of mining as such. Thus regard must be had to this doctrine whatever the peril, and an All Risks of damage cover is not an exception to it. vii INTRODUCTION Consequential Loss/Interruption Insurance Currently there have been a number of losses and claims which have given rise to difficulties with regard to the extent of the cover under the normal British policy. These losses relate to the situations where 1. The specific insured loss has arisen during an event which also has occasioned widespread area damage. Examples are — A. A storm or hurricane with resulting trading loss associated with (a) damage to the insured premises (b) failure of public supplies for a period (c) general trading loss which arises from (i) bad publicity of the area following the effects of the damage with less tourists arriving. (ii) fall in tourist trade following damage to docks and/or airports, and changes in tourist ship movements. B. A major factory explosion which gives rise to evacuation of employees hindering continued production and/or repair to the plant, aggravated by government intervention measures, public enquiries etc. and prevention of inward and onward supplies to the factory. C. An earthquake giving zonal as well as individual damage and interruption therefrom. 2. The specific insured loss is giving rise to interruption of business activities, but this is parallel with an equal interruption which arises from a non insured event happening virtually coincidentally with that which is insured. 3. The introduction of “damaged” goods into a major or small food etc. stores, with hoax or other developments. It is with these problems in mind that the Author, an acknowledge expert in this field, sets out to examine the basic principles and practices relating to this class of business. He then puts forward the logical conclusions arising and gives numerous examples of the practical application in typical cases. There is little or no legal history or precedents and thus this expose is of the utmost value to enable the various interested parties to analyse and decide the situation after a loss has occurred; but more importantly for Insurance Brokers, Consultants and Risk Managers, to appreciate the aspects involved when arranging covers and to ensure agreement with Underwriters of the extent of protection given, before any such event arises. ix CONTENTS Page PREFACE v INTRODUCTION vii PART I — PROXIMATE PERILS 1-15 The basic elements of an interruption policy — Proximate peril doctrine — Material damage insurance — Onus of proof, Interruption insurance — Variations arising between them — Interruption insurances as a separate class of business — The time factor in interruption insurance, Concurrent damage — Onus of proof, The position regarding Excluded perils, Additional or extra peril insurances, Area damage — Quasi-Damage matters — Threat of damage — Defused bomb — Poisoned goods — Hoax incidents — Fear — New practices — Environmental — Drought — “The premises” and “the insured”, Conclusion. PART II — INTERRUPTION CAUSATION 17-28 Causation, Nuclear fission exclusion, Historic practice, Market decision, The wording, Practical issues, Actions in respect of material damage that take place, Duty to minimise the loss, Early advice, Increase in cost of working, Economic limit, Capital expenditure, Apportionment of increase in cost of working, Other factors, Effects of subsequent events, Area damage, Conclusions. PART III — QUANTUM CALCULATION 29-32 Specification wording, Purpose of the wording, Professional accountants clause, Other circumstances clause, Increase in cost of working, Area damage quantum, Conclusions. PART IV — ASSOCIATED MATTERS 33-42 The sum insured, Material damage proviso, Deductibles and franchises, Arbitration, Duties of Loss Adjusters. PART V — CONCLUSION 43-45 Appendices A. Illustrations, practical examples and case studies. 47-58 B. Interruption causation — History of its development to 1939. 59-62 C.(i) United States interruption covers, (ii) Scandanavian Countries. 63-64 D. Extracts from U.K. policy wordings. 65-70 E. Rationale of the doctrine of parallel loss in respect of Interruption Insurance. 71-72 Table of Law Cases 73-74 Index 75-77 40 INTERRUPTION INSURANCE 11. A method rarely adopted can meet the situation and this is as follows: (a) a time franchise to apply, i.e. no claim arises unless the damage to the plant cannot be repaired so that it is again operating normally within “X” days. (b) if the franchise does not operate the policy then is subject to a monetary deductible equal to X days Gross Profit (or such other sum as is appropriate. D Arbitration provisions 12. Except for Eire, where the older wide arbitration condition is still in standard use, the policies in the U.K. limit the rights of the parties to refer a case to an Arbitrator to where liability is admitted and the dispute is with regard to the Quantum. This U.K. practice was introduced by agreement of U.K. Insurance Companies following the Report of a Law Commission and as a “quid pro quo” for the exclusion of insurance policies from the Unfair Contract Term Act 1978. With the harmonisation proposals for insurance contracts throughout the EEC still in indeterminate form, the future outcome cannot be predicted. It has to be added that the policy condition does not prevent the parties after the loss mutually to agree for any dispute between them to be settled by an Arbitrator who can be appointed by their joint agreement, or at their joint request to a nominating body such as the Chartered Institute of Arbitrators or, finally, if no other course is available by request to the High Court. The comparison of costs between a Court action and Arbitration is not a simple matter. If the parties so wish the arbitration action can be speedy and confined to the fundamental issues involved, but if it is developed by the advisers to the parties on the same lines as a Court action with a desire by them to secure at any cost a win for their Clients, then either method introduces delay and heavy costs. Further, an “open” Court action is most likely to prevent continued relationships of the parties. 13. With the practical issues in mind arising in actual cases, there is now a growing practice to avoid such formal processes and for the parties, frequently without reference to legal advisers at the stage outlined, mutually to agree the data concerned and the points of difference arising, and at that early point in the loss negotiations submit them to an Independent expert for a Report of his Opinion in the matter. This Opinion is not binding on the parties, its costs minimal compared to the legal processes of Arbitration or Court action, and being in private to the parties may well enable them to conclude negotiations on the loss in acceptable financial terms, and still enable them to continue their associations in the future. 14. Bearing in mind the difficulties outlined within this paper with the application of the policy wording in unusual circumstances, the stricture of Lord Diplock in the