Facts
Scottish Coal owned Longannet Mine, the last underground
coalmine in Scotland. By 2000, the northern area had been largely
worked out and Scottish Coal was planning to close it down and
transfer operations to another area of the mine.
As an interim measure, however, it decided to eke out production
from the northern area by mining the residual "panels" of coal
between access roadways. The first of these was bisected by another
roadway (known as a "cross-cut").
Mining through a cross-cut poses a higher risk of collapse than
more conventional mining methods. Scottish Coal obtained specialist
advice on the appropriate support system but, as it turned out, did
not follow that advice.
In May 2000, the cross-cut collapsed during the mining process.
Mining equipment was lost and some 29,000 tons of coal became
permanently inaccessible.
Scottish Coal claimed under its property damage and business
interruption insurance. Insurers argued that the decision to mine
through a cross-cut represented a material change in the risk and
that, by not informing them of this, Scottish Coal had also
breached a non-disclosure clause in the policy.
Policy terms
Scottish Coal's insurance was due to expire on 23rd December
1999. In November, insurers' risk engineer visited the mine. His
report referred to the plan to close down the northern area within
6 months. He also raised concerns and made a number of
recommendations about the insured's risk management practices
generally.
In light of these comments, insurers included a clause in the
slip that gave "provisional notice of cancellation as at 1st April
2000" to enable them to review the situation after a further
inspection.
The risk engineer revisited the mine in March 2000. There was a
conflict of evidence over what he was shown and told at that
meeting, but the result was that insurers withdrew the notice of
cancellation.
The policy covered "impact caused by roof fall" as a specified
peril. It also included a "change in risk" clause that provided:
"In the event of any…material change in the original risk…the
policy shall be avoided unless the continuance is agreed by
endorsement signed by the company."
In addition, a non-disclosure clause stated that the policy
would be voidable at the option of insurers "in the event of
misrepresentation or non-disclosure of any facts that would have
influenced the company's decision in either accepting or settling
the terms of the insurance''.
A further general condition required the insured to "take all
reasonable steps to safeguard the Insured's Property, prevent
accidents and minimise loss or damage''.
Post-collapse
Shortly after the collapse, insurers raised concerns about the
apparent change in working practices. The risk engineer said he was
unaware of Scottish Coal's' decision to mine through the cross-cut.
Had he been told beforehand, he would have been very concerned and
would have recommended numerous safety checks.
On 8th August 2000, insurers reserved their position. On 21st
November, they said they considered there had been a material
change in the original risk and a non-disclosure, but they
continued to ask for further details about the claim.
While still waiting for this information, however, they agreed
to extend the period of cover for one month from 24th December 2000
to 24th January 2001.
The judgment
Was the decision to mine through the cross-cut a material change
in the risk? The judge found it was not.
The mining experts agreed that the method brought a higher risk
of collapse and that there was only very limited experience of
carrying out this type of operation in the UK.
But in order to be able to rely on the change in risk clause,
insurers had to show there had been an alteration in the subject
matter of the risk, not merely an increase in the risk.
Circumstances had to have changed to such an extent that the new
situation was something insurers had not agreed to cover.
In this case, the cover extended to all mining operations. The
decision to mine through the cross-cut may well have increased the
risk of impact by a roof collapse but it did not change it.
Non-disclosure
The judge, however, found that the decision to mine through the
cross-cut should have been disclosed to insurers before they made
their decision to withdraw the cancellation notice. On the
evidence, he was satisfied that it was not mentioned to the risk
engineer during his second visit in March 2000.
There was, however, little evidence put forward as to how this
had influenced insurers, particularly those in the following
market, and no independent underwriting evidence at all.
In the end, this made little difference because the judge
concluded that insurers had chosen to affirm the contract of
insurance when they agreed to extend the period of cover.
By mid June 2000, insurers were raising issues of
non-disclosure. In August they reserved their position. By
November, at the very latest, they had the necessary knowledge of
the breach and its implications. Yet against this background, they
decided to extend cover until 24th January on payment of a pro-rata
share of an increased premium.
There was little or no evidence from insurers to explain this
and no indication that the extension was granted against any
reservation of rights. In such circumstances, the judge found it
difficult to categorise insurers' actions as anything other than an
unequivocal election to affirm the contract.
Nor could insurers rely on the prevention of loss clause. A
failure to take "reasonable steps" in this context amounts to more
than negligence. To be in breach, the insured would have to have
been reckless, in that it recognised the danger but deliberately
took steps it knew were inadequate.
Although Scottish Coal's preparations had been faulty, its
failures fell far short of recklessness. It was entitled to recover
under the policy.
Commentary
Waiver by affirmation takes place when an insurer, knowing there
has been a breach entitling it to avoid the policy, says or does
something that unequivocally treats the contract as continuing,
such as accepting premium. In this case the affirmation was the
decision in December 2000 to extend the policy term without an
express reservation of rights.
Exercising contractual cancellation rights can also amount to a
waiver. But in March 2000, when insurers decided to withdraw their
cancellation notice, they did not have the requisite knowledge of
the breach to be able to affirm the contract.
The case also demonstrates that a material change in risk clause
is not always as effective as many insurers perhaps
assume.
