When an Insured chooses to ignore the known risk

While carrying out training earlier this week, I was approached by a concerned underwriter who explained that one of their senior risk surveyors had carried out a risk survey on a high rise building and they identified that the fixing mechanisms to hold the cladding in place were deteriorating and there was a real chance that pieces, or whole sections, of the cladding could fall, which of course would have catastrophic consequences if it hit a passer by.

Despite this warning, the body corporate committee for the building, or at least the chairman to whom the report was provided, is refusing to implement any remedial work or even engaging a structural engineer to provide a second opinion and potentially identify that the risk surveyor’s opinion was flawed.

There are several risks now not only to the individual who is making this decision, but all the unit holders in the strata complex who rely on their expertise to make these decisions.

First of all, the risk that a section or multiple sections of the cladding will indeed fall at any time in the future. The person who made the decision not to act to rectify the danger, will have to carry the consequences of any injuries or damage caused by the event when it happens.

Secondly, if the property insurer can demonstrate that the risk of something falling from the building had been clearly identified and communicated to the Insured and/or their representative, the consequences of the risk were understood and this issue was ignored, then the Insurer is entitled to rely on a condition found in most policies, often under “Precautions to prevent loss”.

Under an ISR Policy, the condition is Condition 11, which applies to both Property and Business Interruption. The clause reads:

11. Precautions to prevent loss

The Insured shall take all reasonable precautions to prevent loss, destruction or damage to the property insured by this Policy.

Under a Public and Products Liability Policy, there is often an exclusion in respect to reasonable precautions. Choosing one at random, the Policy reads:

General Condition 20

It is a condition precedent to [Insurers Name] liability under this Policy that the Insured shall take, at its own expense:

take, and cause to be taken, reasonable precautions to prevent personal injury, property damage and/or advertising liability.

With the issuing of the survey report, I would argue that a liability Insurer could rely on such a condition to deny liability.

Turning now to the personal liability of the decision maker, it may well be argued that at renewal, if the contents of the survey report are not made known to the Insurer, the Insurer is likely to exercise an exclusion or rely on a condition in respect of Known Facts. A typical definition of a known fact is:

‘any fact or matter which an Insured person first became aware of, after the date of continuous cover, but prior to the commencement of the period of insurance, and knew or a reasonable Insured would have considered at any time after the date of continuous cover, but prior to the commencement of the period of insurance, might result in an allegation against the Insured of a wrongful act’

In addition to being in the position that the body corporate would find itself in, which is that its property, loss of rent, public and products liability all would fail to respond, but also the committee member may find that they have no protection for their personal liability based on their decision not to act on the surveyor’s report. There may be statutory fines and penalties imposed depending upon the severity of the injury or damage sustained as a result of the cladding falling and how the regulatory authority treats the failure to act upon the surveyor’s recommendations.

In my early studies, I recall reading the case of Body Corporate Strata Plan #4303 v Albion Insurance Co. Ltd (1958) in which the test for reasonable care was whether the Insured deliberately courted the danger, by refraining from taking any measures or by taking measures that they knew to be inadequate, to avert it. The word deliberately indicates intentional considered action or inaction. While the word court, suggests action or inaction which invites the danger of an accident.

On the face of the information given to me, my initial view is that the decision not to act upon the recommendations of the risk surveyor’s report, or at the very least, having a structural engineer inspect the building, indicates to me that there has been a deliberate decision made to court the danger, and as such, the risk of any claim arising from this decision rests souley with the decision maker. This is not a position I would like to place myself in either emotionally or financially.