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to be widely accepted that when it comes to the availability of sufficient funds to effect reinstatement, the material damage proviso fails. There is no requirement for the property insurance to be adequate, or for that matter that it be on a reinstatement basis. The proviso is either satisfied or it is not; an all-or-nothing position is established, irrespective of the underlying commercial sufficiency of the cover.

      The need to anticipate separate material damage and business interruption investigations into causation is anachronistic, particularly in respect of commercial combined policies.

      The material damage proviso was conceived when the various covers were purchased as separate policies. Not only have commercial combined covers become the norm, but also the breadth and availability of BI extensions have increased. The extent to which the traditional material damage proviso wording can be applied to these extensions varies between wordings.

      This issue was tested in the courts in the case of Glengate-KG Properties Ltd v Norwich Union Fire Insurance Society Ltd and Others.⁵ Glengate bought an old department store building on Oxford Street to redevelop. It took out two policies with Norwich Union, one for material damage and one for business interruption. It had a temporary site office in the building, which was used by the construction professionals, including the architects. There was a fire that destroyed the site office, and, with it, a large number of drawings on which the the architects were working. Importantly, the drawings were very clearly the architects’ property. They retained the copyright and ownership and the drawings were in their possession. Once completed, Glengate was to have a license to use the drawings.

      The architects had not insured the drawings. There was an extension in the material damage policy that included temporary offices and plans, but only if these were the, ‘property of the insured or for which they are responsible’. Norwich Union argued that the material damage proviso in the business interruption policy was not satisfied because there was no cover in force for the drawings. The two majority judgments rejected this argument. These drew a distinction between the type of interest covered by the business interruption policy and the insurable interest necessary to insure property under a material damage policy. It was held that the former was broader and focused on the fact that the business interruption cover clause only required the property to be used by the insured for the purposes of the business at the premises. It did not spell out a need to have a proprietary interest (e.g., ownership). In contrast, they found that the material damage cover required an insurable interest in a more narrow sense, namely a proprietary or contractual interest in the property.

      By this reasoning, the Court of Appeal found that there was sufficient insurable interest to allow the claim under the business interruption section but no insurable interest for the purposes of the material damage section, meaning that there was no breach of the material damage proviso. The broader interest required by BI did not need to be insured by Glengate and the claim was paid.

      1.4.3What are the consequences?

      The material damage proviso is ineffective in terms of the main objective stated in Riley.⁶ In the event of significant underinsurance giving rise to delay in the reinstatement process, insurers have to employ other arguments to avoid their liability being increased by virtue of a potentially extended indemnity period.

      If the current wordings can produce unfairness to insurers, there can also be disproportionate difficulty for the policyholder. In Glengate, there was a suggestion that any failure to satisfy the material damage proviso might invalidate all of the BI cover, which may have produced an unfair resolution in the mind of the policyholder. If funds are made available, so that any failure to adequately insure all elements of the business at risk has no impact on the reinstatement period or BI loss, it may be inequitable for a technical breach of the material damage proviso to invalidate significant elements of claim.

      Potential breaches of the material damage proviso may be more likely now than in the past, as recent wordings have required the material damage proviso to be applied to property (used by the policyholder) that others insure also, notably buildings insured by landlords, in addition to property owned by the policyholder.

      Duplication of cause investigation work etc. is not relevant for combined policies, where the adjuster investigation relates to all sub-sections of cover; in cases of BI loss only (extensions), there is an underlying policy requirement to prove any loss subject to the terms and conditions of the policy, irrespective of the material damage proviso.

      Historically, before policies became combined, the material damage proviso could be satisfied by any one of several separate covers, potentially underwritten by different insurers being triggered, for example: stock, engineering, computers, contents, buildings. Some recent wordings relate the proviso to a specific section of the combined policy only thereby producing a restriction in the way that the material damage proviso can be satisfied and reducing the breadth of the BI cover.

      1.4.4Potential solutions

      United States’ policy forms relate the indemnity period to a notional reinstatement period, which excludes additional/exacerbation of loss due to a lack of funds (irrespective of whether that arises due to inadequate insurance or any other cause). This could be adopted within UK-style policies.

      The above suggestion is considered equitable if reinstatement is within the insured’s control. However, there is a difficulty when the reinstatement is under the control of a third party. For example, a third party may fail to carry out the reinstatement expeditiously, as a result of which the policyholder suffers extended business interruption losses. This could be addressed by including an explicit statement within the policy wordings concerning whether the exacerbation of loss caused by third parties is covered or not.

      It seems appropriate to observe that adequate insurance does not guarantee timely reinstatement, and inadequate insurance does not lead directly to delay, if alternative funds are drawn upon to drive mitigation.

      With regard to the issue of the duplication of investigation, the BI insurers could specify that they will rely on the investigations carried out by the material damage insurer to determine liability under the material damage claim. The findings of these investigations could then be accepted as prima facie evidence in relation to causation. The BI insurers would thus have the option to follow the material damage insurers’ decision to accept or deny liability, provided there were no other grounds on which liability might be disputed, such as a breach of a condition of the BI policy.

      If the material damage proviso were altered, there would be a need to alter the wordings for BI extensions. Those extending the definition of Perils at the Premises (such as notifiable diseases, murder, etc.) present no particular difficulty, but those that extend the definition of Premises (such as customers, suppliers, utilities, etc.) require fundamental refreshment.

1.5 Rent

      1.5.1Overview

      There is sometimes confusion as to the scope of cover for Rent that is required. Where there is cover on a schedule, it can be unclear whether this is intended to relate to Rent Receivable or Rent Payable. For the purposes of the discussion that follows it is considered helpful to provide clarity as to the meaning of the following terms.

      1.5.1.1Rent

      The money paid by a lessee to the landlord for the benefit of occupying a building or part of it. The rent is usually expressed as an annual figure but is paid quarterly.

      1.5.1.2Rent review

      An agreement in the lease whereby the rent payable is reviewed at specified intervals. Many leases are written on the basis that the rent can never go down regardless of market conditions and many on the basis that the rent can only go up. Sometimes the increase is capped so that it cannot exceed a certain percentage. Rent reviews usually take place at five-year intervals although more frequent reviews could be agreed if it suits both parties.

      1.5.1.3Service charges

      This is the amount payable by a tenant for services provided by the landlord, for example, cleaning or security.

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