Part 1 of this blog discussed what subsidence was, how to rectify it and whether it is covered by buildings and contents insurance policies. Part 2 explores in more detail subsidence and associated insurance claims in relation to commercial property.
As I discussed in part one, subsidence, as well as heave and landslip, is generally covered by most buildings and contents insurance policies for private homes in the UK. Now for the not so good news; subsidence is not as widely covered by commercial property insurance policies. If a business owns or leases a commercial property for which it has purchased buildings insurance cover, it would be wise to review the policy documents to ensure damage and/or loss caused by subsidence is covered. Where subsidence is covered, the points made in part 1 of this blog about disclosure at inception or on renewal, and early notification apply. Where subsidence is not covered, it is important to consider whether the risk of subsidence to property and the wider effects of subsidence occurring to property, are substantial enough for subsidence to be included as an extension to any current policy.
Business interruption cover and underinsurance are two important issues for commercial property owners to consider, and I shall discuss them in turn.
In part one I discussed the case of Loyaltrend Ltd v Creechurch Dedicated Ltd  EWHC 425 (Comm) which concerned subsidence to a fashion retail outlet in Notting Hill. The insurer successfully defended this claim due to the claimant’s material non-disclosure and delayed notification. The claimant’s business interruption cover was analysed in detail. Loyaltrend’s policy covered the business interruption losses which follow from material damage, where that material damage is covered by the ‘Material Damage’ section of the claimant’s policy. The policy however, did not cover business interruption losses caused by the subsidence directly, where no insured material damage occurred. The relevant section of the claimant’s policy defined the relevant material damage as damage to “trade contents, stock and tenant’s improvements”.
In reality for Loyaltrend to have a valid claim, the material damage had to occur to the shop’s stock or retailer fittings for example, and be as a consequence of the subsidence, which went on to cause a disruption to the business. Alternatively, where damage occurred to the shop front which meant the shop had to close and could not trade for a period of time, but did not affect the tenant’s improvements or stock, then those business interruption losses would not necessarily have been covered. Judge Mackie QC highlighted in his judgment that the Claimant had mistakenly overlooked this distinction in its arguments, but in any event, its claim was not successful.
The damage in The Loyaltrend case comprised cracked walls, jammed doors and damp, which the Claimant argued led to a loss of profits at the shop. However, Judge Mackie QC had “insuperable difficulties in deciding what business interruption losses flowed from material damage” and had the defendants not succeeded with its defence it is not clear whether much, if any, of the Claimant’s loss would have been recoverable in any event.
Underinsurance can also become a problem in subsidence claims as the cost of repair, especially where underpinning is elected, can be high. Some insurers will stop funding repairs, where they are incomplete, if the cost exceeds the sums insured on the policy. However, the Financial Ombudsman Service (FOS) guidance makes their position clear, being that where an insurer elects to repair the damage caused by subsidence, they are agreeing to a separate “contract of repair” alongside their existing “contract of insurance” (i.e. the policy). Therefore, a limit that applies in one contract, the contract of insurance, does not necessarily carry over to the other contract, the contract of repair.
Although the FOS guidance is useful, it is not binding legal precedent and a court will deal with each matter on its own merits. FOS decisions take into consideration principles of fairness. The FOS scheme now has a limit of £350,000 on the awards it can give which means that some of the more expensive and complex subsidence claims will now fall within its jurisdiction.
Insurers may also apply average where a property is underinsured. Average further reduces the sums payable by an insurer, by the percentage that the policyholder was underinsured. At renewal each year, policyholders should check their sums insured to ensure they accurately reflect the property’s value.
During this blog and the last we have discussed some of the key problematic areas with subsidence claims. What is clear is that subsidence issues and associated insurance claims are often far from straightforward and if you or your business needs assistance or advice on this topic, or any other insurance related matter, please contact Nicola Maher, or any other member of the Edwin Coe Insurance Litigation Team.
Edwin Coe LLP is a Limited Liability Partnership, registered in England & Wales (No.OC326366). The Firm is authorised and regulated by the Solicitors Regulation Authority. A list of members of the LLP is available for inspection at our registered office address: 2 Stone Buildings, Lincoln’s Inn, London, WC2A 3TH. “Partner” denotes a member of the LLP or an employee or consultant with the equivalent standing.