Ansari v New India Assurance Ltd [2009] EWCA Civ 93

[2009] EWCA Civ 93Case No A3/2008/1317
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
[2008] EWHC 243 (Ch)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr. Justice Patten
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 18 February 2009
Before
LORD JUSTICE WALLERVice-President of the Court of Appeal, Civil DivisionLORD JUSTICE THOMASLORD JUSTICE MOORE-BICK
Between
QAYYUM ANSARIAppellant/NEW INDIA ASSURANCE LIMITEDRespondent/Defendant
(Transcript of the Handed Down Judgment ofWordWave International LimitedA Merrill Communications Company190 Fleet Street, London EC4A 2AGTel No: 020 7404 1400, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Mr. Timothy Saloman Q.C. and Mr. Jeffery Terry (instructed by HSK LLP) for appellantMr. Jonathan Watt-Pringle Q.C. and Mr. Marcus Smith (instructed by Debenhams Ottaway) for respondentHearing Hearing date : 10 th December 2008
JudgmentLord Justice Moore-Bick :Background
[1]This is an appeal against the order of Patten J. dismissing the appellant’s claim against his insurance company in respect of damage caused by fire to commercial premises in Manchester. It is brought by permission of Thomas L.J. limited to those grounds of appeal which relate to the construction of the policy in question.[2]The premises, which were owned by the appellant, Mr. Qayyum Ansari, comprised a two storey detached building with a rear basement. They were fitted with an automatic sprinkler system. At the time the fire occurred the building was let to a friend of Mr. Ansari, Mr. Ali Asim, who used them for the purposes of his business.[3]In May 2004 Mr. Ansari sought insurance on the building from the respondent, New India Assurance Ltd (“New India”). On 12th May 2004 he signed a completed proposal form by which he applied for a Commercial Property Owners Policy on the company’s usual terms. The form required him to provide information about various aspects of the premises and proceeded on the assumption that the buildings were occupied, unless the proposer stated otherwise. In response to a request for details of the trade or business of any tenants Mr. Ansari described the business carried on at the premises as “Tenants (Wholesaleing kitchenware)” and in response to the question “Are the premises protected by an automatic sprinkler system?” he wrote “Yes”. However, he did not give any details of the system, despite being asked to do so. In signing the proposal Mr. Ansari declared that the statements contained in it were true to the best of his knowledge and belief.[4]New India subsequently issued a policy of insurance on the premises for a period of 12 months from 4th May 2005 on its standard Commercial Property Owners terms. It was renewed in March 2005 for a further year with effect from 4th May without any relevant amendments. The policy form provided cover under five sections, but this appeal is concerned only with Section 1, which provided cover against destruction of or damage to the building. One of the perils against which cover was provided was fire.[5]The policy contained a number of extensions to cover, which included the following:
“3) Non-invalidation The interest of the freeholder lessor or mortgagee in this insurance shall not be prejudiced by any act or neglect whereby the risk of destruction or damage is increased without the authority or knowledge of the freeholder lessor or mortgagee provided they shall immediately on becoming aware thereof give notice in writing to the insurer and on demand pay such reasonable additional premium as the insurer may require.”
[6]The General Conditions which applied to all sections of the policy included the following:
“Changes in Facts 2 This insurance shall cease to be in force if there is any material alteration to the Premises or Business or any material change in the facts stated in the Proposal Form or other facts supplied to the Insurer unless the Insurer agrees in writing to continue the insurance. Reasonable Precautions 3 The insured shall take and cause to be taken all reasonable precautions (a) to prevent Damage (b) for the safety and security of the property insured . . . ”
Reasonable Precautions (a) to prevent Damage (b) for the safety and security of the property insured . . . ”

Reasonable Precautions

[7]On 7th September 2005 a fire broke out in the premises which caused a considerable amount of damage, both to the building itself and its contents, and as a result Mr. Ansari made a claim under the policy. However, it subsequently came to light that the sprinkler system had not been working at the time, having previously been turned off at the isolating valve at the junction with the main water supply, and that the premises contained a considerable quantity of goods which could not be described as kitchenware, including scooters and mini-motorbikes. As a result New India rejected the claim and cancelled the policy, thereby giving rise to the present proceedings. The proceedings below[8]New India originally defended the claim on the grounds that there had been a misrepresentation or breach of warranty both in relation to the sprinkler system and in relation to the nature of the business carried on at the premises. In the alternative it said that, if the sprinkler system had been turned off during the period of cover, Mr. Ansari was in breach of conditions 2 and 3 of the General Conditions. However, the first two arguments were abandoned prior to the trial because there was no evidence that the sprinkler system had been turned off prior to the inception of cover or its subsequent renewal. Moreover, by the end of the trial New India no longer sought to pursue the argument based on Condition 3. Accordingly, its case depended entirely on Condition 2. In response Mr. Ansari sought to rely, if necessary, on the protection given by Extension 3.[9]The evidence of events immediately prior to the fire was in some respects confused, but it was common ground that at some point the sprinkler system had been turned off by Mr Khan, Mr. Asim’s manager, and had remained in that condition up to and including the date of the fire. The judge found that the sprinkler system had been turned off by closing the isolation valve and placing a filing cabinet against the control handle so as to prevent its being opened. He also found that the water supply to the building (and therefore to the system) had been cut off in August 2005 as a result of Mr. Asim’s failure to pay the charges, so that at the time of the fire the sprinklers could not have functioned in any event. In addition the judge found that for some time prior to the fire Mr. Asim had been using the premises for the sale of a broad range of goods, a significant proportion of which could not be described as kitchenware and which since May 2005 had included small petrol-powered motorbikes.[10]Mr. Khan was not a satisfactory witness. He said that in June or July 2005 the fire alarm had been activated causing the sprinkler system to operate throughout the building, soaking much of the stock, and that he had therefore turned it off at the isolating valve. He said he had concealed the damage to the stock from Mr. Asim. The judge did not regard Mr. Khan’s account as remotely credible because he thought it inconceivable that water damage of the kind and extent he had described could have been kept from Mr. Asim, but the evidence did not enable him to decide whether the sprinkler system could have malfunctioned in the way alleged or whether it had been turned off for some other reason unconnected with a leakage. He was satisfied, however, that Mr. Ansari had been aware prior to the fire that the system had been turned off. That made it impossible for him to rely on Extension 3.[11]Mr. Ansari argued that the terms of the declaration in the proposal form meant that the “facts stated” in that form, to which Condition 2 referred, were limited to the statement as to his own knowledge and belief at the time it was signed. He also argued that there had been no material alteration to the premises or in the facts stated in the proposal form within the meaning of the condition.[12]The judge rejected the first of those arguments on the grounds that the clause was to be construed as referring to the facts stated in the answers to the various requests for information, not merely to Mr. Ansari’s state of mind at the time. As he pointed out, if the scope of the condition were limited in the way suggested, it is difficult to see what purpose it could have been intended to serve, since any subsequent change in circumstances could not affect the position. The information sought in the proposal form was obviously intended to form the basis of the company’s underwriting decision and it is impossible to believe that either party can have thought that the reference in Condition 2 to facts stated in the proposal form can have been intended to refer to anything other than the facts stated in the answers to the questions it contained. The judge was clearly right to reject this submission which was not pursued on appeal.[13]The judge then had to consider whether there had been any “material” alteration to the premises or any “material” change in the facts stated in the proposal form within the meaning of Condition 2. Two authorities in particular were drawn to his attention, Pan Atlantic Insurance Co. Ltd v Pine Top Insurance Co. Ltd [1995] 1 A.C. 501 and Kausar v Eagle Star Insurance Co. Ltd [2000] Lloyd’s Rep IR 154. In order to understand the nature of the competing arguments it is convenient to summarise them briefly at this stage.[14]Pan Atlantic v Pine Top was concerned with the concept of materiality in the context of misrepresentation and non-disclosure in the course of negotiations leading to the formation of a contract of insurance. It is trite law that the insured is obliged to disclose to the insurer before the contract is made all material circumstances known to him, a material circumstance being defined as one which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk. That principle, which is contained in section 18 of the Marine Insurance Act 1906, applies to contracts of insurance of all kinds. The question for determination in Pan Atlantic v Pine Top was whether, in order to influence the judgment of a prudent insurer, a circumstance must be of such importance as to have a decisive effect on his decision whether to accept the risk at all and if so on the terms to be applied, or whether it is sufficient that it is something he would take into account when making his decision, without its necessarily having a decisive effect on his mind. The House of Lords held that the latter was the case, recognising that an insurer who seeks to avoid the contract on the grounds of misrepresentation or non-disclosure must also establish that it induced him to accept the risk on terms to which he would not otherwise have agreed.[15]Kausar v Eagle Star was a case of a very different kind. There the court was concerned with the construction of a clause in a policy of insurance covering a hairdressing salon against, among other things, malicious damage. The clause was in the following terms:
“. . . You must tell us of any change of circumstances after the start of the insurance which increases the risk of injury or damage. You will not be insured under the policy until we have agreed in writing to accept the increased risk . . .”
The owner of the premises failed to tell the insurers that she had become involved in acrimonious proceedings against the tenant for possession. When the insured sought to make a claim under the policy in respect of certain damage the insurers rejected the claim on the grounds that she had failed to notify them of the fact that she believed the tenant to have been responsible for a previous incident in which damage had been caused to the premises, a matter which, they alleged, amounted to an increase in the risk.[16]The court rejected that argument on the grounds that the clause did no more than state the position at common law. Saville L.J. put the matter as follows:
“In my judgment all that this condition does is to state the position as it would exist anyway as a matter of common law, namely that without the further agreement of the insurer, there would be no cover where the circumstances had so changed that it could properly be said by the insurers that the new situation was something which, on the true construction of the policy, they had not agreed to cover. The mere fact that the chances of an insured peril operating increase during the period of the cover would not, save possibly in the most extreme of circumstances, enable the insurers properly to say this, since the insurance bargain is one where, in return for the premium, they take upon themselves the risk that an insured peril will operate. In calculating that premium it is for the insurers to assess the chances of insured perils operating; and the fact that they may (in hindsight) have got this assessment wrong does not begin to establish that what has happened falls outside the cover they have agreed to give. In the present case all that the facts and matters upon which Eagle Star rely show is, at best, that during the period of the cover events occurred which increased the chances that an insured peril (namely damage to the buildings by vandals or malicious people) would operate. Thus to my mind condition 3 does not afford a defence to the claim in question.”
[17]Before the judge New India argued that the expressions “material alteration” and “material change” in Condition 2 should be construed in accordance with Pan Atlantic v Pine Top, whereas Mr. Ansari argued that the clause should be construed in the same way as the corresponding clause in Kausar v Eagle Star.

The judge expressed his conclusions in this way:

“90. In Kausar the Condition was focussed in terms on a change of circumstances which increased the risk of damage and there is clearly a strong argument (accepted by the Court of Appeal) that evidence that malicious damage had occurred (and therefore was likely to recur in the foreseeable future) was not of itself a change of circumstances which increased the risk of damage or took the use outside the scope of the policy. It was simply evidence that the risk insured against existed by virtue of the state of affairs subsisting at the date of the renewal of the policy. 91. In the present case, however, General Condition 2 is not in terms limited to changes of circumstances which increase the risk of the insured peril occurring. It operates on a material change in the facts stated in the proposal form. This would include the physical state of the building and the use made of it both of which could have been highly relevant to the underwriter’s assessment of risk at the time when the existing cover was granted. 92. The protection of the Premises by a properly functioning sprinkler system was obviously something which was of concern to New India: hence question 6 in the proposal form. The cover was assessed and granted against confirmation of that fact. Turning off that sprinkler system does more in my judgment than merely to increase the risk of damage by fire. It constitutes a material alteration of the nature of the subject matter of the insurance. The existence of a working sprinkler system was on any view material to the proposal. A properly functioning system which protects the premises affects the safety of those premises and risk insured. The absence of such a system was by the same token a material change in the facts stated in that proposal. 93. For these reasons I am not persuaded that General Condition 2 ought to be construed in the same way as the Condition in Kausar and I am also satisfied that there was a material change in the facts stated in the proposal form so as to bring into effect a termination of cover from the time when the system was turned off prior to the fire. . . .”
The scope of the appeal

The scope of the appeal

[19]In his notice of appeal Mr. Ansari sought to challenge the judge’s finding that he had been aware prior to the fire that the sprinkler system at the premises had been turned off, but permission to appeal on that ground was refused. However, in the course of a spirited reply Mr. Saloman submitted that if, as he had contended, something more substantial than merely turning off the system temporarily was required to bring about a material change in the facts stated in the proposal form, the findings made by the judge were not sufficient to deprive Mr. Ansari of the protection of Extension 3. In addition, after the completion of the oral hearing the court received a written application on behalf of Mr. Ansari for permission to appeal on new grounds relating to the positioning of the filing cabinet and the disconnection of the water supply to the premises. All these points were said to arise out of matters raised for the first time in the course of argument on the appeal.[20]The first of these points was not raised in the grounds of appeal, but since it arises out of the arguments developed in the course of the hearing I do not think it should be excluded from consideration and if necessary I would give permission to Mr. Ansari to amend his grounds of appeal to enable it to be raised. I would not, however, give permission to appeal in relation to either of the other two grounds at this stage. The first concerns the judge’s finding in paragraph 20 that a filing cabinet had been placed against the control handle of the isolation valve so as to prevent its being opened. That was said to import a finding that the purpose of placing the cabinet there was to prevent the valve from being opened, although the reason for its being there had not been investigated with the witnesses. In my view, however, the potential inference was obvious and the question could easily have been investigated with Mr. Khan, if that had been thought appropriate. As it was, the parties chose not to take that course and the judge was therefore entitled to draw his own inference.[21]The second concerns the judge’s finding in paragraph 27 that because the water supply to the premises had been cut off the sprinkler system could not have functioned on the night of the fire in any event. Mr. Ansari sought to challenge that finding, partly on the basis of the expert report into the circumstances of the fire prepared by Dr. Charles Gardner, which includes a reference to water leaking from the connection between the incoming main and the isolation valve, and partly on the basis of investigations made after the conclusion of the hearing before this court. The evidence was said to demonstrate that although (as was common ground) the domestic water supply to the building had been disconnected, there was an independent supply to the sprinkler system that was unaffected.[22]In my view the fresh evidence on which Mr. Ansari seeks to rely in support of this ground is by no means as strong as is suggested and further investigations would have to be made before any firm conclusions could be drawn. However, in my view it is far too late for that. Moreover, the real significance of the disconnection of the water supply lies not just in whether the sprinkler system was capable of operating but in what it tells one about the state of mind of those who occupied the building. The lack of mains water was canvassed with Mr. Khan and its potential significance in relation to the operation of the sprinkler system must have been obvious. The evidence on which Mr. Ansari seeks to rely could easily have been obtained for the trial. For all these reasons it would not be right in my view to allow him to re-open this matter at such a late stage in the proceedings.[23]In those circumstances it may be helpful to identify the issues that arise on this appeal. Although Condition 2 refers both to alterations to the premises and changes in the facts stated in the proposal, it is sufficient for present purposes to concentrate on the latter. Moreover, it was common ground, both at the trial and before us, that Mr. Ansari did not at any time inform New India of any change in the facts stated in the proposal form. In those circumstances the following matters have to be determined:(i) what relevant facts were stated in the proposal form;(ii) whether there was a subsequent change in any of those facts;(iii) if so, whether were any of the changes were material;(iv) if so, whether Mr. Ansari had sufficient knowledge of the change in the facts to prevent him from relying on Extension 3.

(i) The facts stated in the proposal form

[24]As Mr. Saloman submitted, the starting point is to identify correctly the facts stated in the proposal form which New India says subsequently changed. His principal submission was that the judge wrongly treated the proposal form as containing a statement to the effect that the premises were protected by a properly functioning automatic sprinkler system, and that because he failed to construe the form correctly he came to the conclusion that turning off the sprinkler system involved a material change in that fact. He submitted that a distinction is to be drawn between the existence of such a system and its functioning and in support of his argument he drew our attention to the decision in Victor Melik & Co. Ltd v Norwich Union Fire Insurance Society Ltd [1980] 1 Lloyd’s Rep. 523, in which the court was concerned with a clause which required a burglar alarm to be “kept in efficient working order”. He also relied on Hussain v Brown [1996] 1 Lloyd’s Rep. 627, in which a statement in a proposal form that the premises were fitted with an intruder alarm system, warranted by the insured to be true and agreed to form the basis of the contract, was held not to import a continuing warranty that the system was operational or would habitually be set when the premises were unattended.[25]Mr. Saloman was clearly correct in his assessment of the way in which the judge construed the proposal form, although I think what the judge meant by “properly functioning” was not merely that the system was capable of functioning but that it was ready to operate in the event of a fire. That is apparent from the way in which he expressed himself in paragraph 92 of his judgment, to which I referred earlier. However, I am unable to accept that he was wrong to read it in that way. Where an automatic sprinkler system has been installed in a building it forms an integral part of the building and moreover is one which (unlike an intruder alarm) is intended to function permanently, in the sense of being constantly ready to operate in the event of a fire without the need for human intervention.[26]In my view the decision in Victor Melik v Norwich Union provides no assistance on this point. In that case the court was concerned with the scope of the insured’s duty to keep the alarm in efficient working order. The alarm failed to operate because (unknown to the insured) the telephone cables on which it depended for the transmission of a signal alerting third parties to an unlawful entry had been cut at a location outside the insured’s premises. Mr. Saloman relied on the case both as providing an example of how insurers can require protection systems to be maintained, if that is what they wish to achieve, and as demonstrating the court’s reluctance to construe such obligations in a way that exposes the insured to the risk of losing the protection of the policy. I do not find it surprising that the court in that case construed the clause in question in a way that provided reasonable protection to both the insured and the insurers, but neither the clause itself nor the circumstances in which the protection system became inoperative was at all comparable to that with which we are concerned.[27]Similarly, I do not think that any assistance is to be gained from Hussain v Brown. In that case it would have been difficult to read the warranty that the premises were fitted with an intruder alarm as containing by implication a continuing warranty that it would be maintained and put into operation whenever the premises were left unattended. Apart from anything else, such an interpretation could lead to a complete loss of cover as a result of a simple act of negligence on the part of the insured or his employees in failing to set the alarm.[28]Had the premises in the present case been empty at the time of the proposal and declared as such, there might have been more to be said for Mr. Saloman’s argument because the policy contained a provision requiring the water supply to be turned off under those circumstances. However, given that Mr. Ansari had stated in the proposal form that the premises were currently occupied by a tenant who was using them for the purposes of his business, to construe the completed form as meaning no more than that they were fitted with an automatic sprinkler system which might or might not be functioning would be contrary to common sense. Apart from anything else, it would give little or no effect to the word “protected”. In my view any reasonable insured would understand the question to be asking whether a sprinkler system was installed and providing the protection for the building against fire and the question could not truthfully have been answered ‘Yes’ without qualification if the system had been turned off indefinitely. The judge was therefore right, in my view, to proceed on the basis that the proposal form stated as a fact that the premises were protected by a properly functioning automatic sprinkler system.[29]At the trial New India also relied on what it said was a statement in the proposal form that the tenant’s business was selling kitchenware. Mr. Saloman criticised the judge for failing to decide whether the response Mr. Ansari had given in that part of the form contained any statement of fact at all, and if so exactly what it was. In the event, however, the judge did not base his decision on the existence of a change in the use to which the tenant put the premises and although New India sought to uphold his decision on this ground, it did not occupy much time in argument. I shall therefore deal with it quite briefly.[30]In my view, on any sensible reading Mr. Ansari’s response to the request to give details of the trade or business of any tenants contained a statement that the premises were occupied by a tenant whose business was the sale of kitchenware. That appears to be how the judge construed it and I think he was right to do so.

(a) The sprinkler system

[31]At first sight it seems obvious that if the sprinkler system had been turned off, there must have been a change in the facts stated in the proposal form, but on closer consideration the position is not quite so straightforward. However, before taking that point further it is convenient to deal with another criticism of the judge made by Mr. Saloman.[32]In paragraph 92 of his judgment the judge held that turning off the sprinkler system constituted a material alteration of the nature of the subject matter of the insurance, a conclusion criticised by Mr. Saloman on the grounds that the true subject matter of the insurance never changed but remained the building itself, including the sprinkler system, whether it happened to be turned on or off. In this connection he drew our attention to the case of Exchange Theatre Ltd v Iron Trades Mutual Insurance Co Ltd [1984] 1 Lloyd’s Rep. 149. In that case the court was concerned with a policy of insurance on premises used as a bingo hall, club and discotheque. The policy contained a clause rendering it void with respect to any “item insured” in regard to which there had been any alteration by which the risk of destruction or damage was increased. Following the destruction of the hall by fire the insurers sought to rely on the fact that a generator and a quantity of petrol had been brought into it as amounting to an alteration sufficient to avoid the policy. The argument was rejected on the grounds that there had been no alteration to the item insured, namely, the hall.[33]Mr. Saloman was right, of course, in saying that the subject matter of the insurance in this case was the building, including the sprinkler system, but I do not think that his criticism of the judge is entirely justified. When he referred to a material alteration of the nature of the subject matter of the insurance the judge was seeking to contrast a building which has the benefit of a fully functioning sprinkler system with one in which the sprinkler system has been turned off. Although in each case the subject matter of the insurance is the building itself (including the sprinkler system), the difference in the nature of that subject matter is not hard to discern. Condition 2 in the present case is concerned with changes in the facts stated in the proposal form as well as alterations to the premises themselves and in that respect differs from the clause under consideration in Exchange Theatre v Iron Trades Mutual. Whether turning off the sprinkler can properly be regarded as altering the premises does not matter if there has been a material change in the relevant facts. For that reason I do not think that that case is of assistance. Condition 2 must be construed in accordance with the words used and I see no basis for construing it as if it were limited to alterations in the subject matter of the insurance. That would involve disregarding an important part of it.[34]The purpose of an automatic sprinkler system is to extinguish outbreaks of fire promptly to prevent their taking hold. I think it is clear, therefore, that the disablement of such a system, for whatever reason and even for a short period, significantly increases the risk of damage to the building by fire. However, as Mr. Saloman submitted, it does not follow that there is a change in the facts stated in the proposal form whenever the system is turned off, however briefly. For example, New India must have contemplated that from time to time the system might be temporarily out of action for maintenance or repairs or to prevent further damage to the building or contents if a leak should occur. A short period out of service for reasons of that kind would not in my view mean that the premises ceased to be protected by a functioning system within the meaning of the statement in the proposal form since that must be understood as referring to the status of the system in general.[35]However, in the present case the system had not been turned off temporarily for routine maintenance or repairs. If it had been, Mr. Khan, who provided a good deal of information about the events which he said had caused him to turn the system off, would undoubtedly have given that explanation and the judge’s findings would have been quite different. Nor, contrary to Mr. Saloman’s submissions, are his findings consistent with the conclusion that the system had been turned off temporarily shortly before the fire in order to prevent a continuing leakage and was awaiting the attention of an engineer. Again, if that had been the case, Mr. Khan would have been able to provide an explanation of a kind which would have included some reference to the steps that had been, or were about to be, taken to repair the defect or bring the system back into operation. The fact that a filing cabinet had been placed against the control handle in such a way as to prevent the valve being opened does not lead inevitably to a finding that the system was intended to remain out of action indefinitely, but in the absence of any other explanation that is an obvious conclusion to draw. Moreover, the fact that the tenant was apparently content to allow the premises to be without a water supply tends to reinforce the conclusion that he regarded the sprinkler system as dispensable. Whatever the true position, there was no suggestion that anyone thought that it had a separate supply which was unaffected.[36]The judge’s findings leave me in no doubt, therefore, that the sprinkler system had not been turned off temporarily for some reason consistent with normal operation, but had been rendered inoperative with a view to its remaining in that condition for an indefinite period. That did amount to a change in the facts stated in the proposal form because while the system remained out of service the premises could not properly be described as being protected by a properly functioning automatic sprinkler system.

(b) Change of use

[37]The position in relation to Mr. Asim’s business is equally clear. The judge found that he had been importing and selling saddles, harnesses and scooters since 2003 and had started importing mini-motorbikes in May 2005. The number being sold must have been quite substantial because the judge appears to have accepted the evidence of Mr. Khan and Mr. Asim that they sold for £50 to £100 each and that about £20,000 worth had been imported between May and September 2005. Goods of that kind are quite different from kitchenware and it follows that there had been a change in the facts relating to the nature of the tenant’s business stated in the proposal form. (iii) Materiality of the changes[38]The question whether any of the changes were material within the meaning of Condition 2 lies at the heart of the case. Mr. Saloman submitted that in construing Condition 2 the judge applied a test of materiality derived from Pan Atlantic v Pine Top, which was wrong in principle, both because it was not apt to form the basis of a condition of this kind and because its potential effect would be to deprive Mr. Ansari of the whole benefit of the policy on the slenderest of grounds. That could not have been what the parties intended. He submitted that the clause, which bears a striking similarity to condition 3 of the policy in Kausar v Eagle Star, should be construed in a similar manner. Accordingly, turning off the sprinkler system was therefore neither a material alteration to the premises nor a material change in the facts stated in the proposal form.[39]Mr. Watt-Pringle Q.C. submitted that “material” has a well established meaning in the law of insurance and that the judge was right to take the test of materiality from the decision in Pan Atlantic v Pine Top. However, he also submitted that even if the court were to prefer the approach adopted in Kausar v Eagle Star, the absence of a working sprinkler system rendered the risk substantially different from that undertaken by New India and that the change of facts therefore fell within the scope of the clause. Mr. Saloman questioned whether the latter argument had ever been part of New India’s case before the judge and whether it was open to Mr. Watt-Pringle to pursue it on the appeal, but in my view there is little doubt that by the end of the trial it was squarely before the court. The parties did not join issue in the pleadings on the specific question of materiality and, as often happens, their perception of the issues that were likely to prove most relevant to the outcome of the proceedings seems to have altered during the course of the trial. However, it is clear from the transcript of the closing speeches that New India did argue that, even on the construction of Condition 2 put forward by Mr. Ansari, the lack of a properly functioning sprinkler system constituted a material change in the facts stated in the proposal form and that the substance of the point was addressed by counsel for Mr. Ansari in his closing speech. As I have indicated, the judge appears to have accepted that alternative submission.[40]In my view Mr. Saloman was right in submitting that the word “material” as used in Condition 2 cannot bear the same meaning as that which it was given in Pan Atlantic v Pine Top. It is true that the expression has a well established meaning in insurance law, but that is in the particular context of negotiations leading to the formation of a contract. It has long been recognised that the insurer depends on the insured to provide him with much of the information he needs to enable him to assess the risk; hence the need for utmost good faith, both in relation to disclosure and description of the facts. In that context a relatively undemanding test of materiality is appropriate and the consequences of adopting it are to a large extent controlled by the need for an insurer who seeks to avoid the contract on the grounds of misrepresentation or non-disclosure to establish that he was thereby induced to enter into it.[41]In the present case, however, the expression is used in a very different context. Condition 2 is concerned with events occurring after the contract has been entered into. If “material” were to bear the same meaning as that which it bears in the context of pre-contractual negotiations, the policy would automatically lapse on the occurrence of any new circumstances which would influence to any extent the judgment of a prudent insurer in deciding on what terms he would be prepared to accept the risk, whether or not those circumstances were such as would actually lead him to alter his terms in any way. That would be highly detrimental to the position of the insured, who might well not be aware that a particular change of circumstances would be viewed in that way, and render his position precarious. Moreover, it would, in effect, give New India the right to renew the underwriting exercise every time it was notified any minor alteration of the premises or any minor change in the facts stated in the proposal regardless of whether there was any significant change in the risk. That is not, in my view, how a reasonable insured, or for that matter a reasonable insurer, would read this clause. On the contrary, I think it is clear that it is intended to protect New India against alterations to the premises themselves or in the facts on the basis of which it wrote the policy that have a significant bearing on the risk and that “material” in this context must be understood in that sense. For these reasons I think the condition has a very similar effect to condition 3 of the policy in Kausar v Eagle Star. Accordingly, insofar as the judge construed the word “material” in accordance with Pan Atlantic v Pine Top, I think he was wrong to do so.[42]Having said that, I am not sure that the judge did simply take the meaning given to the word “material” in Pan Atlantic v Pine Top and apply it in its full rigour to the construction of Condition 2, because in paragraph 92 he made it clear that in his view turning off the sprinkler system did more than merely increase the risk of damage by fire and constituted a material alteration of the nature of the subject matter of the insurance. It is true that he said he was not persuaded that the clause ought to be construed in a manner similar to the corresponding provision in Kausar v Eagle Star, but that may have been because he did not think that its effect was necessarily circumscribed by the common law rule to which the court had referred in that case.[43]In my judgment, once it is accepted, as I think it must be, that a material alteration or change is one which significantly affects the risk, there is obviously a comparison to be drawn between Condition 2 in the present case and condition 3 in Kausar v Eagle Star. The judge held that turning off the sprinkler system significantly increased the risk of loss or damage by fire and that that was sufficient for the purposes of Condition 2. Mr. Saloman submitted that he was wrong to do so. He argued that the common law principle, to which the court referred in Kausar v Eagle Star, required a fundamental change in the nature of the risk undertaken by the insurer and that turning off the sprinkler system was not sufficient for that purpose.[44]The position at common law was stated by Warrington J. in Law Guarantee Trust and Accident Society v Munich Re-insurance Company [1912] 1 Ch. 138 as follows at page 154:
“. . . the obligation of the insurer is confined to the particular risk insured, and that if the risk in respect of which a claim is made against the insurer differs from the risk he has insured, he is not liable to make good that claim. . . . It is hardly necessary to enlarge upon that principle, but I take it that it involves this. The alteration, if there has been an alteration, must be a real alteration of the risk; if what appears on the face of it to be an alteration of the conditions is only such an alteration as, on the true construction of the contract of insurance, might be taken to have been within the contemplation of the parties at the time they entered into the contract, then, of course, though apparently an alteration, it is no real alteration at all, because the fact that such an alteration might take place was an element in the contract itself.”
It is hardly necessary to enlarge upon that principle, but I take it that it involves this. The alteration, if there has been an alteration, must be a real alteration of the risk; if what appears on the face of it to be an alteration of the conditions is only such an alteration as, on the true construction of the contract of insurance, might be taken to have been within the contemplation of the parties at the time they entered into the contract, then, of course, though apparently an alteration, it is no real alteration at all, because the fact that such an alteration might take place was an element in the contract itself.”[45]The essence of the principle is that the insurer’s liability to indemnify the insured is circumscribed by the contract into which he has entered. If circumstances have altered so as to take the risk outside that which was within the contemplation of the parties when the contract was made, he ceases to be liable. In the present case the position with regard to alterations to the premises and changes in the facts stated in the proposal form are governed not by the common law but by Condition 2. No doubt Condition 2 must be construed with the common law in mind, but as the draftsman has chosen a particular form of words in which to express himself, in my view the correct approach is to give the condition the meaning which reasonable persons in the position of the insured and insurer would understand it to bear. Adopting that approach, and bearing in mind that the effect of Condition 2 is that the policy ceases to be in force altogether, I think that the word “material” must be understood as referring to alterations or changes in facts of a kind that take the risk outside that which was in the reasonable contemplation of the parties at the time the policy was issued. Accordingly, the question that now has to be considered is whether the change in the facts stated in the proposal form brought about by turning off the sprinkler system is something which, on the true construction of the contract, the parties must be taken to have had in contemplation when the contract was made.[46]As I have already observed, New India must be taken to have understood that there might be occasions on which the sprinkler system would be turned off temporarily, for example, for maintenance or repairs. It must also have had in mind the possibility that the system might be turned off for other reasons, but again only temporarily. What I do not think it can be taken to have contemplated is that the system would be turned off indefinitely. A system of this kind is intended to provide constant protection against fire and I do not think that any insurer would regard a building fitted with a functioning automatic sprinkler system as presenting the same risk as one that was not. If a protection system of that kind is turned off for an indefinite period the nature of the subject matter of the insurance, as the judge said, is altered. The insured must then inform the insurer if he wishes to retain his cover. In my view that is how a reasonable insured would understand Condition 2 to operate in a situation such as the present. Moreover, it is in my view a perfectly reasonable provision having regard to the protection provided to the insured by Extension 3. For these reasons I have reached the conclusion that Condition 2 applied in this case and that unless Mr. Ansari was able to take advantage of Extension 3, his claim could not succeed. (iv) Mr. Ansari’s knowledge[47]Mr. Saloman submitted that although the judge found that Mr. Ansari knew before the fire occurred that the sprinkler system was not working, he did not find that Mr. Ansari knew that it had been turned off indefinitely. Accordingly, he did not find that Mr. Ansari was aware of the relevant change in the facts stated in the proposal form.[48]Although I accept that an appellate court must be cautious about drawing inferences which were not drawn by the trial judge, I think it is important in this case to examine the whole of the judge’s primary findings and to see where they lead. On this question the judge was faced with contradictory evidence from Mr. Ansari and Mr. Ward, the Fire Investigation Officer, to whom he spoke at the scene. Mr. Ward said that Mr. Ansari had told him that the sprinkler system was not operating. Mr. Ansari denied that. He said that neither Mr Asim nor Mr Khan had complained to him about the system prior to the fire and that he had no reason to believe that it had been turned off.[49]In the event the judge preferred the evidence of Mr. Ward, but he did not limit himself to finding that Mr. Ansari was aware before the fire that the sprinkler system had been turned off. He accepted that Mr. Ansari had visited the premises regularly to collect the rent and to see Mr Asim and he also appears to have accepted Mr. Ward’s evidence, supported by the transcript of his contemporaneous notes, that he had been told while at the scene of the fire that the sprinkler system had not been operating for about eighteen months. Mr. Ward said that all that information had come from Mr. Ansari. The judge recognised that the reference to eighteen months was odd because, if taken literally, it would mean that the sprinkler system had been turned off before Mr. Ansari purchased the building, but he regarded that as little more than a casual expression and it did not cause him to doubt the accuracy of Mr. Ward’s recollection.[50]If one takes those findings as a whole, it is clear that the judge must have been satisfied that Mr. Ansari had visited the premises frequently, was aware that the sprinkler system had not been in operation for a considerable time and gave that information to Mr. Ward when they spoke on the night of the fire. That being the case, Mr. Ansari must have been aware not only that the system had been turned off, but that it had been turned off indefinitely and was no longer providing the protection that the statement in the proposal form indicated. Since he had failed to inform New India of the position, the judge was right to hold that he was not entitled to the protection of Extension 3.[51]For those reasons I would dismiss the appeal.

Lord Justice Thomas:

[52]I agree.

Lord Justice Waller:

[53]I also agree.

Cited in 1 later judgment