Negligence in Claims – Covered or not Covered?

Negligent acts or negligence which can be a part of the causing of a claim has created confusions and doubts in the minds of insurers for long. The general feeling is that if there is negligence, the claim is not payable.

The UK case P (A Child) v Royal London Mutual Insurance Society Ltd [2006] EWCA Civ 421 (30 March 2006) explains the position. A mill had burned down when children had lit a fire. They had not intended the fire to get out of hand as it did. The insurer refused to pay the claim on the basis that the policy did not cover damage arising from ‘any wilful malicious or criminal act’ carried out by the assured’s immediate family, including children.

The Court stated that: “Most acts, including negligent acts, are deliberate and intentional.” The court further stated: “Obviously if the act is deliberate and intended to cause damage of the kind in question it will be within the exclusion. It will be wilful, as the judge held, and might also be malicious or criminal. But for an act to be wilful I do not think it is necessary to go as far as this. It will be enough to show that the insured was reckless as to the consequences of his act. Recklessness has been variously defined but if someone does something knowing that it is risky or not caring whether it is risky or not he is acting recklessly.”

The court explained the concept of negligence by an example: “If I light a bonfire in my garden which gets out of control and burns down my neighbour's house would I be covered by this policy? On the insurer's construction I would not because I had started the fire deliberately; on the judge's construction I would be covered because I had not intended to burn down my neighbour's house.”

Circuit Court of Appeals, Fifth Circuit, US, in the case Federal Insurance Co. et al. v. Tamiami Trail Tours Inc. et al. (1941) stated that: “An overwhelming percentage of all insurable losses sustained because of fire can be directly traced to some act or acts of negligence. Were it not for the errant human element, the hazards insured against would be greatly diminished. It is in full appreciation of these conditions that the property owner seeks insurance, and it is after painstaking analysis of them that the insurer fixes his premiums and issues the policies. It is in recognition of this practice that the law requires the insurer to assume the risk of the negligence of the insured and permits recovery by an insured whose negligence proximately caused the loss. In the absence of fraud or gross negligence on the part of the insured, his negligence is no defense against his recovery.”

What is the position in Marine Insurance? In the case Finkelstein v. Central Mut. Ins. Co. (1957) the City Court of the City of New York stated: “Notwithstanding the comprehensive all-risk coverage of the policy in suit, there can, of course, be no recovery here unless the plaintiff suffered a fortuitous loss. It may be conceded that the plaintiff's employee was negligent as well as inexperienced and even that the plaintiff himself was negligent in entrusting her with household responsibilities. But this inland marine insurance policy protects the insured against the consequences of his own negligence. Only fraud or intentional wrongdoing or gross negligence, such as a deliberate disregard of plainly foreseeable consequences, would defeat recovery. Bad judgment may not be equated with bad faith. Ordinarily the unexpected and unforeseen result of a voluntary act is considered an accident. As in liability insurance the insurer assumes the risk of the negligence of the insured, so in marine insurance the insured is protected against the consequences of his own conduct if unattended by fraud or design to cause damage.”

US Supreme Court in the case Phoenix Ins. Co. v. Erie & W. Transp. Co., 117 U.S. 312 (1886) stated: “It is conclusively settled in this country and in England that a policy of insurance taken out by the owner of a ship or goods covers a loss by perils of the sea or other perils insured against although occasioned by the negligence of the master or crew or other persons employed by himself.”

Wilful Deliberate Negligence is not covered

In the case Sheehan v. Goriansky, (1947) the Supreme Judicial Court of Massachusetts stated: “Wilful means intentional….. The "undoubted rule applicable to ordinary insurance" is that an insurance policy indemnifying an insured against liability due to his wilful wrong is void as against public policy.”

In the case Beresford v Royal Insurance Co Ltd, HL 1938, the House of Lords stated: ‘On ordinary principles of insurance law an assured cannot by his own deliberate act cause the event upon which the insurance money is payable. The insurers have not agreed to pay on that happening. The fire assured cannot recover if he intentionally burns down his house, nor a marine assured if he scuttles his ship, nor the life assured if he deliberately ends his own life. This is not the result of public policy, but of the correct construction of the contract.’ and ‘But apart from these considerations the absolute rule is that the courts will not recognise a benefit accruing to a criminal from his crime.’”

However, in a recent judgement by the England and Wales Court of Appeal,  in the case C A Blackwell (Contracts) Ltd v Gerling Allegemeine Verischerungs-Ag [2007] EWHC 94, the court stated: “ 49. It is common ground that an insured is not entitled to indemnity in respect of a casualty which he or it (as opposed to someone else) was brought about by wilful misconduct, the principle arising as a matter of public policy.”

The conclusions are twofold: (1) most claims will have some element of negligence and this is not a bar to paying the claim, unless the negligence is willful or the insured had acted recklessly; (2) the onus of proving willful negligence or recklessness is on the insurer. Mere allegations will not be sufficient.