Insurance: Damage to property and 50/50 clauses

United Kingdom
A recent case has confirmed that 50/50 clauses in policies covering the same risk, will be applicable if:

(a) there is such uncertainty that it is not possible to reach any conclusion as to when the relevant damage occurred; or

(b) one theory as to causation of the loss is so improbable that even if the other theory is ruled out, it cannot as a matter of common sense be described as more likely than not. 

In European Group Limited & Others v Chartis Insurance UK Ltd [2012] EWHC 1245 (QB), the developer of a new waste recycling plant and its contractors were insured for damage to plant and materials under two insurance policies. The first policy was provided by the Claimant, and covered damage to plant and materials on site. The second policy was provided by the Defendant, and covered damage to plant and materials while they were in transit.

The new recycling facility required the installation of economizer blocks containing lengths of tubes. These were manufactured in Romania and delivered by road and sea to the site. After the units had been on site for 4 to 6 months, cracking was discovered in the tubes. The parties agreed that the cracking was caused by fatigue stress. However, the Claimant argued that the fatigue stress and cracking was caused by the condition of the roads during transit; while the Defendant argued that it was caused by wind exposure suffered on site. Both polices contained 50/50 clauses, providing that if it was not possible to ascertain whether the cause of damage occurred before or after arrival at the site, the insurers would each contribute 50% of the properly adjusted claim.

The Judge concluded that it was not a realistic possibility that the fatigue stress and cracking was caused by wind exposure. However, although he found the wind theory improbable, that did not automatically mean that the road vibration theory was the probable cause. The balance of probabilities test had to be applied to the road vibration theory, to properly determine whether it was more likely than not to have caused the damage. If it was not possible to conclude that this alternative theory was more likely than not, either because of a lack of evidence or because this theory itself was improbable, then the 50/50 clause would apply.

The Judge in fact found that the road vibration theory was more likely than not to have caused the damage, and therefore the 50/50 clause was not applicable in this case.

The Defendant’s second defence of inherent vice also failed. The Defendant argued that, if damage was caused in transit, there was an additional proximate cause, as various parts of the unit were defective before transit. The Defendant’s policy excluded liability for damaged caused by inherent vice. The Defendant therefore sought to rely on the principle that where a loss has two proximate causes, one of which is covered under the policy and one of which is excluded, the exclusion takes effect to exempt the insurer from liability. However the judge did not consider that the units contained an inherent vice. Further, as a matter of law, an inherent vice cannot be an additional proximate cause, where it is established that another proximate cause is an accident or event which occurs during the period of cover.

Case: European Group Limited & Others v Chartis Insurance UK Ltd [2012] EWHC 1245 (QB)

Co-contributor: Eleanor Doherty +44 (0) 20 7367 3498