Issues of Fire Insurance Policy - Case Study Example

FIRE INSURANCE POLICY affiliation Introduction Risks associated with a fire need to be protected against. Businesspersons must protect such risks that must be of good faith and can use contract of insurance. If no material, facts have been disclosed all protection is lost. When the contract remains protected, it may have some limitations and exclusions under the policy. In this case, the facts were a property owner had taken out a Fire Insurance Policy for a residential family dwelling where a group gang moved in.The house was used as a clubhouse, but the property owner did not terminate the lease. The house got fired, and the police suspected arson. The insurance company did not honor the policy due to lack of notification of the property owner about the change of circumstances. This paper will discuss all the legal issues that arise from the above facts. Analysis A Fire Insurance Policy indemnifies people in property for loss that occurs due to fires where such interest is covered by such policies. The property owner obtains such form of protection, but it is not limited to buildings only but also chattels are covered. This policy extends to damage caused by fire in cases of water or smoke damage. Companies insure only loss from hostile fires that are not in their proper place. Insurance policies usually classify fires as friendly and unfriendly. Friendly fires are not insured unless they turn out to be unfriendly; unless it is classified as arson then it cannot be insured. According to the facts, the police did suspect arson in the hands of the gang and, therefore, the insurance policy cannot cover it. However, if they are unable to prove it may prove difficult and may raise various issues. Arson is defined as the act of intentionally burning a person’s property. If the investigation report from the police does not list the fire to be caused by natural causes like lightning, then arson becomes the possible cause by most policies from insurance companies. This investigation has certain procedures where the police or investigators must determine whether the cause was by nature or set intentionally or either it was accidental. These reports must include statements from witnesses, police, and fire reports, their location, state statutes, company records and examination. According to Brown and Mercer (2013) arson cases, the burden of proof is upon the insurer in an arson defense. When escaping liability insurers must prove the property owner arson was either direct or circumstantial evidence. In this case, when the police are unable to prove arson it might create problems for the insurance company. Speculation or suspicion cannot deny a policy from paying the property owner. The insurer must have facts rather than just mere speculations that are substantial to support case of arson. Speculation or suspicion by the police in those cases is insufficient the law recognizes that presumptions of fire or accidental unless the law proves otherwise. In this case, if the police are unable to prove arson, then the policy must stipulate that the claim should be paid in 60 days to the extent of loss. The contractual relationship between the insurer and insured and has some rules. Utmost good faith is one of the special rules of the contract of insurance. This out rightly means that the person who has an application for insurance has the obligation to disclose all information on insurance claims to assume the risk. In the case of Whiten v. pilot Insurance Co., [2002] 1 S.C.R. 595 the court held that utmost good faith is required by all parties and it cuts in both directions where all parties who carry out an insurance policy must be certain that the insurance policies will pay when losses occur. All losses that property owners suffer must relate to an insurable interest. This is always stipulated in all contractual agreements where the insured has a financial interest in any occurring event that may result in loss. This interest arises in ownership of a property. Insurable interest, benefits the insured in its existence where if things change they suffer a loss and must exist at the time of the contract and when the event of loss occurs. The contract of insurance is required to have full disclosure of all materials that might affect the decision for insurance claims in determining the appropriate premium. Obligation lies with the applicant to give all material facts, and this is deemed important. Honesty is deemed important, and if the applicant fails to honor this obligation, the insurer might fail to compensate if loss occurs. All contractual insurance policies prevent anyone from making profit from a loss where they ensure that they place a person in the position they had been in before the loss occurred. From the facts of the case, the property owner failed to make full disclosure of material facts, especially by denying giving notice of change of circumstances about the residential dwellings. This shows a lack of utmost good faith by the insured property owner. In most insurers, material change in any risk like from the facts, when the dwellings changed to be used as a clubhouse the insured, must disclose this fact to the insurers. Risk change in time has to be informed insurers of circumstances that can amount to a material change and policy renewal. Change in material facts about risk in any policy and within the knowledge and control of the insured renders the contract of insurance void unless the risk is notified in time to the police or the insurers. Relevance of the insured knowledge of change in risk is important in determining whether the insurance is to indemnify the claim. If an insured can claim, ignorance in the material changes the reasonable standard rule is applied. The insured must appreciate material change of facts and inform the insurers. (Brown & Mercer, 2013 p. 22) According to the Insurance Act (SBC 2012) Chapter 37 section 17 stipulates that a contract of insurance is only rendered void when the misrepresentation or nondisclosure of material facts is material to the contract In Thomas v Aviva Insurance Co. (2011) N.B.J. No, 371.this case has left all insurance’s with the obligation of ensuring that they scramble and ensure all their clients have given them full information of any change that affects risk in the policies.. The court in this case established that the insurer could not cancel the contract with the insured by depending on Statuary condition 4 that stipulates that the insured should notify the company of the change of risk. The Appeal Court found that utmost good faith was violated. The question was whether the insured had knowledge of material risk. In facts of our case, the owner had knowledge about the use of the house as a clubhouse that changed the material facts and had been informed by the police about this. However, since he was receiving payments from the tenants, he did not terminate the lease or inform the insurer about the change of their contractual agreement since in the beginning it was a residential dwelling house. Insurance companies may refuse to pay a claim if the insured causes harm to benefit from it (Knutsen, 2011). However, in accordance with the facts the owner did not set fire, but the gang was suspected by the police. If the police can prove this, then the insurance can refuse to pay the policy and the owner has the right to sue the gang if the police can prove arson on their part. He can be entitled to the full amount of the property or the damage caused to the property. However, if the police are unable to prove arson the insurance company is entitled to pay the claim, however the owner had failed to disclose material facts in reference to change of risk since the house was been used as a club house. The failure of such notification renders the contract between the insurer and the insured void and, therefore, the insurers are validly allowed to deny the claim. However, if the owner had knowledge of facts as a reasonable person standard would then the claim may fail. Courts to ensure that insurers have the full facts of change of risks. The owner had knowledge of change of risk and therefore using the reasonable standard test he cannot be covered under the policy due to change of risk. Arson is termed as insurance fraud in Canada. This is because the party who causes arson does that with the intention of fraudulently obtaining a benefit that they are not entitled to. In this case, the persons accused by the police of arson are the motorbike gang who run the clubhouse, however the owner of the property cannot also benefit from acts of arson by his tenants since he had failed to disclose and give notice to his insurers of the change in risk. Time factor in arson cases is an important issue when determining claims in insurance policies. Enforcement, police must make decisions about their documentary evidence, especially from witnesses. The police must make conclusions whether there is sufficient evidence to justify there was arson. Claims are to be paid within 60 days from submission of loss. Insurance companies must work fast under this time deadline in determining whether to pay the claim or to decline it. Police, in this case, must ensure that in determining arson they are aware of arson indicators a legal requirement in investigating incidental losses and elements of the arson proof. In this case, there are factors that determine fraud, one is that disclosure of the change of risk was not reported, and the police seem to believe highly that there was arson. Therefore, if the claim turns out to be fraudulent, the insurance company has the right to deny payment of the claim of loss. In this case, the owner had an insurable interest when taking out the Fire Insurance Policy. The identified himself as the person obtaining the insurance since the property was a residential dwelling place at the time of carrying out the policy. At the time of obtaining the contractual insurance agreement he had an insurable interest, however a due change of circumstances of use of the property as a clubhouse and acquiring rent there was change in terms of the previous insurance agreement. Failure to disclose material facts of other associates like the gang operating a clubhouse amounts to the fraudulent scheme by the insured and the insurance company can deny the claim. Description of risk is key in claims, should be confirmed that all information during the application of an insurance policy is accurate and remains the same at the time of the loss. If the police have a solid case against the insurer, the other party has a right to recover unless it is proved he is an accomplice. This generally means that the insurer may lose half the claim. This may force insurers to pay the claim, in general. In this case, if the police are unable to prove arson by the gang, which operated the club house the insurer may lose half the claim since the owner was not directly involved with the claim, however the total compensation may be reduced due to non-disclosure of change of risks. If the insurers with all its investigation decide to pay the claim, they will do so, but they will usually pay a reduced or depreciated amount for the property in question. In general, insurance companies denying a claim are considered too risky, and they, therefore, prefer to cut down their losses and settle the claim with reduced amounts. Conclusion The main issues were whether the insurance company could pay incidental to the claim. In addition, what implications arise in the case of arson and what would happen if the police did not suspect arson? From the above analysis, it is clear that the owner did not notify the insurance of change at risk since the house was no longer being used and a dwelling house but a clubhouse and the owner had knowledge of this. Secondly, the police did suspect arson, and thus reduces chances of being paid if the police proof that there was indeed arson the insured might loss his chances of been paid. However the insurer is always aware of the risks involved in not honoring claims and may decide if the police are unable to proof arson to pay the claim in a depreciating mount due to lack of non-disclosure of full facts as agreed in the insurance policy agreement. References Case Law and Website Legislation (2012). Consumer Insurance (Disclosure and Representations) Act 2012. [Online] Available at http://www.legislation.gov.uk/ukpga/2012/6/contents/enacted Thomas v Aviva Insurance Co. (2011) N.B.J. No 371 Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 595 Books and Articles Top of Form Bottom of Form Brown, C., & Mercer, A. (2013). Introduction to Canadian insurance law. Markham, Ont: LexisNexis Canada. Knutsen, E. S. (2011). Fortuity Clauses in Liability Insurance: Solving Coverage Dilemmas for Intentional and Criminal Conduct. Queens Law Journal, 37. Read More