Question...
Our client had a burst pipe at his holiday home. The insurers have accepted the claim, however, they have declined to pay the extra cost of the water bill. Their normal water usage is around $36 a month and the bill came up to $650-plus. The insurers have declined this portion of the claim on stating that it falls under consequential loss and that is an exclusion under the policy.
My understanding of consequential loss is indirect loss which accompanies an insured loss, such as loss of earnings resulting from a total loss of a building. This should fall under the business interruption section - however, this property is not used for financial gain and therefore the water bill should fall within the claim.
When the pipe burst, the insured suffered physical loss of the water it had paid for, and physical damage to the house and contents the water saturated.
Assuming this scenario is correct, the physical loss of the water was not consequential on the damage to the house and contents.
I suggest the consequential loss exclusion addresses loss consequential on the physical loss and physical damage covered by the insuring clause. A good example would be if the insured regularly rented the property and lost rent because of the damage. This consequential financial loss is excluded.
In a situation where a client incurs costs to remediate damage to third party property; either because it was prudent and practical to do so, or in order to preserve a commercial relationship, to what extent can an insurer then decline a claim because they feel that their situation has been prejudiced? Is it a cause to decline outright or must they weigh the degree of prejudice against the value of the claim?
Reply... Crossley Gates
Two issues arise from this scenario:
1. Is the insured legally liable in the circumstances? Assuming we are referring to a liability policy, it only responds to legal liability not moral liability. For example, there will be no cover if the remediation was solely to preserve a commercial relationship where there was no legal liability.
2. Assuming there is legal liability, was the settlement with the third party reasonable? To the extent it wasn't, the insurer is prejudiced by the failure to notify it first. It will only have to meet what a reasonable settlement would have been. Otherwise, there is no prejudice and the insurer cannot dispute the settlement.
