Sorry Tales: Problems with Double Insurance

Double insurance occurs when more than one insurance policy covers a single property in relation the same risk. This occurs because often, between the exchange and completion of the purchase of a property, both the buyer and the seller will hold insurance in respect of that property. Although it might seem like a ‘belt and braces’ approach to risk management, the reverse can in fact be true.

Although recent case law re-affirms the application of the problems in relation to purchases of real estate, the principles are equally applicable to other property, and is a good example of problems which startups do not need, and would prefer to avoid.
Why Insure?
Under the general law, a buyer is generally considered liable for any damage to the property as soon as contracts to purchase are exchanged and will normally arrange insurance cover at this point. There is no obligation on the seller to maintain insurance at this stage but sellers often opt to do so because the seller retains legal title to the property and there is always the possibility that the buyer will not go through with the purchase.
Double Insurance
Consequently, this can result in double insurance because the buyer may be able to make a claim to either insurer in the event of any property damage. In practice, the insurers become jointly liable because the insurer who pays is usually entitled to recover a contribution from the other insurance provider, although this can be contractually excluded.
Why may double insurance be an issue?
Double insurance can become an issue because it may result in one or both of the insurance policies being invalidated, leaving the party making a claim to bear the costs of any loss of damage to the property. This happens when both insurers refuse to provide cover for the loss on the basis that another insurer is already providing cover for the same property, in respect of the same risk. The 2010 case of National Farmers Union Mutual Insurance Society Limited (NFU) v HSBC Insurance Limited highlighted the possible complications that can arise in relation to double insurance.
NFU v HSBC [2010] – the facts
In this case both the buyer and seller took out insurance in respect of a property between the exchange of contracts and the completion of the sale, with NFU and HSBC respectively. During this time the property suffered extensive damage due to a fire. The buyer claimed in full under its NFU policy, which in line with its own policy, then sought a contribution from HSBC claiming that the buyer had double insurance. HSBC refused on the ground that its policy explicitly excluded payment in relation to a building that was insured by another provider and so there was no double insurance. The High Court concurred with HSBC.
Commentary
The case of NFU v HSBC highlights an important issue that can arise in relation to double insurance.

If the NFU policy had contained a provision in its policy similar to the provision relied on by HSBC, the buyer would not have been able to recover from either insurer and would have had to bear the loss themselves. This case also suggests that although the buyer is still required to go through with the purchase of the property, notwithstanding any damage which occurred prior to the completion of the sale, it is still advisable for sellers to take out insurance.

The Point

These legal principles extend not just to property purchases, but other types of property which are insured. In the case of insurance, the starting point is to make sure the property is only insured once. If in doubt, take legal advice on the circumstances of your particular case.

Article contributed by Leigh Ellis who is a business litigation lawyer with law firm Drukker Solicitors in London. Drukker Solicitors advises on insurance contracts, and breaches of contract which may lead to avoidance of payouts on insurance policies.