England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION, MERCANTILE COURT
(HIS HONOUR JUDGE MACKIE QC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		28th November 2007

Lord Justice Toulson:

1. This is an appeal from a judgment of HHJ Mackie QC in the London Mercantile Court dismissing a claim brought under an insurance policy for loss resulting from a burglary on 16 April 2004. The amount of the loss was agreed subject to liability at £195,433 net of interest.
2. The insured is a wholesaler of audiovisual equipment and home cinema systems. It carries on business from an office and warehouse building in Mildenhall, Suffolk. Its Managing Director is Mr Derek Kuziw. The company was formed in 1989, and by 2004 it had a turnover of £8 million, yielding a net profit of £390,000. It had, by the time of the burglary, some 25 employees.
3. The policy was for a period of 12 months, from 10 December 2003. It was called a retail and wholesale policy. It provided cover in respect of damage to property, theft, business interruption, employer's liability, and public and product liability. We are concerned with the theft section of the policy.
4. The claim failed because the insured was found to have failed to fulfil a condition precedent to its entitlement to recover under the policy. The insuring words of the relevant part of the policy provided as follows:

"We will indemnify You in respect of Damage occurring during the Period of Insurance

(1) in The Premises

(2) in respect of buildings at The Premises where You are responsible for the repairs

caused by

(a) theft or attempted theft involving entry into or exit from The Premises by forcible and violent means

(b) theft involving violence or threat of violence to You, Your partners, directors or Employees"

It is convenient to refer to the first of those two classes of theft as Clause A theft, and the second as Clause B theft.

5. The condition on which the insurer relied was headed "Intruder Alarm System". The material part of this clause read as follows:

"If in relation to any claim for Damage caused by theft or attempted theft involving entry or exit from The Premises by forcible and violent means [ie. Clause A theft], You have failed to fulfil any of the following conditions, You will lose Your right to indemnity or payment for that claim.

While The Premises are unattended You must ensure that

(1) The Premises are protected by an Intruder Alarm System and means of communication used to transmit signals from such an Intruder Alarm System designed, installed and maintained as agreed by Us.

(2) the Protected Premises must not be left without at least one Responsible Person in attendance

(i) unless the Intruder Alarm System is set in its entirety with all means of communication used to transmit signals in full operation

(ii) if the police have withdrawn their response to alarm calls unless we agree otherwise.

(3) in the event of notification of any activation of the Intruder Alarm System or interruption of any of the means of communication during any period that the Intruder Alarm System is set, a Keyholder shall attend The Premises as soon as reasonably possible, in order to confirm the security of The Premises and reset the Intruder Alarm System in its entirety. If the Intruder Alarm System cannot be reset in its entirety or all means of communication used to transmit signals are not in full operation, a Keyholder must remain at the premises unless We agree otherwise in writing."

A keyholder was defined in the policy as somebody who had to be identified by the company and authorised by it and who would be available at all times to accept notification of faults relating to the intruder alarm system, to attend and to allow access to the premises.

6. In summary, the insurers' case was that the intruder alarm system at the premises was not in operation at the relevant time and that Mr Kuziw had been notified that it was not working, but that he failed to see that a keyholder remained at the premises.
7. There were three keyholders: Mr Kuziw, a Mr Richard Butcher and Miss Ann Coxhead, who were respectively the company's installation manager and its company secretary.
8. There is no appeal by either party in relation to the judge's findings of fact regarding the burglary, and it is convenient to take them from the judgment. The judge found as follows:

"11. Mr Kuziw left the warehouse just after 6.00 pm on Friday 16 April 2004. He was the last to leave apart from the cleaner Miss Schultheiss. At about 7.00 pm the BT telephone line used for the alarm system was cut. At about 7.10 pm Miss Schultheiss telephoned Mr Kuziw and told him that the alarm pad was bleeping. At about the same time he also received a call from the maintainers of the alarm system, Chubb, who told him of a fault on the BT line. Mr Kuziw went back to the warehouse and telephoned Chubb and BT. BT was unable to tell him when an engineer would attend…Mr Kuziw left his home and mobile telephone numbers with BT so that he could be kept informed of progress. He telephoned the police to ask them to be vigilant given the problem that had developed and supplied them also with his home and mobile numbers. Mr Kuziw parked a forklift truck in front of the roller doors to the warehouse and ensured that each lock was secure. The police station was about one and a half miles away from the warehouse. At about 9.30 pm Mr Kuziw felt alone in the warehouse in a relatively remote location on an otherwise empty industrial estate. Mr Kuziw did not feel safe remaining at the warehouse and returned home….

"12. Overnight a burglary took place. Entry was gained by forcing a window. The alarm equipment was disabled when a sounder was ripped from the wall. The telephone lines were cut as were the locks to the roller doors. The fork-lift truck was pushed out of the way. After the police arrived it emerged that the reason the alarm had not been working the night before was that the telephone line had been deliberately cut in advance, almost certainly by the burglars.

"13. Mr Kuziw rang round on Saturday to find a security guard to come to the warehouse and remain there. He tried seven or eight companies without getting a response. Eventually he spoke to the owner of a small business, Star Security, who came round promptly and was later awarded a contract by Anders & Kern."

On its face, therefore, on these findings, the insured failed to fulfil two clauses of the intruder alarm condition which were precedent to the insured's entitlement to recover in respect of the loss.

9. Contrary to Clause 2, from the time that Mr Kuziw left the premises there was no responsible person in attendance, albeit that the alarm system was not in full operation; and contrary to Clause 3, there was no keyholder remaining at the premises until the alarm system could be fully reset.
10. In a clearly reasoned and cogent judgment, HHJ Mackie considered and rejected various grounds advanced by the insured for avoiding the conclusion that its claim therefore failed.
11. On this appeal, Mr West on the insurer's behalf renews the argument on three grounds, which the judge rejected. The first argument was that this was a Clause B theft, and therefore the intruder alarm condition did not apply. It was submitted that the theft involved violence or threat of violence to Mr Kuziw. The basis of that argument was that Mr Kuziw feared what might happen if he had remained. He had no idea what had caused the alarm system to malfunction, but he did not feel safe alone at a warehouse in a relatively remote location on an otherwise empty industrial estate. It is, of course, speculative what might have happened if he had stayed. We do not know how many people were involved in the burglary, or whether the criminals were prone to the use of violence to the person. One possibility is that they would not have attempted to burgle the premises if they had seen that they were occupied. Another possibility is that Mr Kuziw would have telephoned the police, that they would have attended, and that the loss would not have occurred; but one has no way of knowing what the police response time would have been.
12. The judge had to decide on the facts as they were whether the actual theft had involved the violence or threat of violence towards someone in the category of "You, Your partners, directors or Employees".
13. The judge took the wording of Clause B to mean that for that clause to apply, the criminals must have carried out the theft by the use or threat of violence directed towards someone within the category of persons identified in the clause. Mr West submitted that this was too narrow an approach. According to his argument, the theft was within Clause B if at the time of the theft some individual within the category identified in the clause (in this case, Mr Kuziw) had absented himself from the premises in circumstances where a) he reasonably feared that he might be the subject of violence if he attended or remained at the premises, or b) there would in fact have been a risk to him of violence if he had attended or remained at the premises -- in either case, the risk of violence being such that a person having his characteristics would not reasonably have been expected to run it.
14. In my judgment, the judge's interpretation of the clause is the natural and correct interpretation. It requires a considerable stretching of language to say that the theft involved violence or threat of violence to Mr Kuziw. Mr West argued that the broader interpretation should be heard because it better fitted the structure of the policy; in particular, the fact that the intruder alarm condition applied to Clause B thefts but not to Clause A thefts. He developed his argument in stages. First, the fact that the intruder alarm condition was not made applicable to Clause B thefts reflected a mutual understanding that it was not reasonable to expect the company's officers or employees to put themselves in personal danger. Secondly, the parties cannot therefore have intended that if a person absented himself from fear of violence, the premises would cease to be covered against theft by an intruder. This second limb becomes pivotal to the next ground of appeal, relating to implied terms, but it formed part of his argument also on the first ground of appeal.
15. Mr Best submitted that this process of reasoning provided good cause for giving a broad meaning to the expression "threat of violence". I do not accept this argument. As I see the policy, the theft section provides cover against two essentially different types of theft: a) breaking and entering, and b) robbery. The intruder alarm condition required in essence that the premises should not be left unattended and unalarmed. This was relevant to the breaking and entering risk, but not to the robbery risk. There was no need or reason to apply the intruder alarm condition to Clause B, because that covered a very different type of occurrence, which presupposed the presence of a person at whom the violence was directed or threatened. If that is a correct approach to the coverage afforded by the policy, then the argument based on the limitation of the intruder alarm clause to Clause A and not Clause B falls away.
16. Mr West also submitted that the narrow interpretation could result in commercially and unreasonable consequences. I do not find this argument persuasive. In the first place, it seems to me that the consequences which would flow from the broader interpretation are more likely to be commercially unreasonable than the reverse. A curiosity of the argument, if correct, is that the more exposed the premises might be to the risk of attack by professional criminals -- and therefore, on its face, the greater the need for the applicability of the intruder alarm condition to counteract that risk -- the less the likelihood of it being applicable. Indeed, given Mr Kuziw's circumstances, it is hard to see how on Mr West's construction the intruder alarm condition could ever apply if a breakdown in the alarm system happened at night. But more particularly, the plain and natural meaning of the words is, in my view, such that the arguments he advances based on the potentially harsh consequences do not, in my view, lead to the conclusion that his construction should be preferred.
17. The next ground of appeal was that the judge should have found that the intruder alarm condition was subject to implied terms. The argument about this developed from the reasoning process to which I have already referred in relation to the first ground of appeal, namely, that the policy must be construed in a way which has proper regard for the safety of the insured's officers and employees.
18. Mr West submitted that Clauses 2 and 3 of the intruder alarm condition, which respectively required that a responsible person should be at the premises if the intruder alarm system was not working and that the keyholder should remain at the premises, should be read as subject to the following implied terms:

"In the event that the intruder alarm system (or means of communication used to transmit signals) cannot be put into full operation, you shall not be treated as having failed to fulfil conditions 2 or 3 above if the responsible person or keyholder in attendance leaves the premises unattended in circumstances where he would have been, or he reasonably perceived that he would have been, at risk of personal violence if he had remained there (such risk being one which he could not reasonably be expected to have faced)".

19. The tests for the implication of a term into a written contract are well known. Essentially, it has to be shown that the words sought to be implied give expression to what must be taken to have been the mutual intention of the parties as reasonable people. One way of doing so is to show that the proposed term is necessary to make the contract workable in the way that the parties must intended or, as it sometimes said, to give it "commercial efficacy". Conversely, you cannot imply a term which contradicts an expressed term, because the parties cannot have intended that.
20. The judge dealt with this aspect of the case in his judgment as follows:

"30. There is no basis for implying the 'personal danger' term. The allocation of risk in the Policy is clear. If the alarm does not comply with the requirements of the IAC, cover will only remain in place if a responsible person remains at the premises. This does not mean that there is an obligation upon an individual to face personal danger. It means that if that person leaves the risk of burglary is borne by the company not the insurer. If the company had been properly aware of the terms of the IAC it would have made other arrangements in advance to deal with the exposure. Furthermore any term to be applied would be shaped not by the particular circumstances facing Mr Kuziw on the night of the burglary but more generally by the position as at the date the parties entered into the contract. The parties allocated the risk explicitly and if, at the date the contract was entered into Norwich Union had been asked whether if accepted that it would remain on risk if Mr Kuziw left the premises feeling that he was in personal danger the answer would not have been 'yes of course' but, probably, 'no'".

21. I agree. The judge went on to say that he reached his conclusion with regret. He described Mr Kuziw as a prudent and conscientious executive, who took his responsibilities for the security of the warehouse seriously. He found himself in a difficult predicament. He could not have found anyone at that time of night to act as a security guard. His conduct was reasonable. But those are insufficient reasons for implying the term alleged. Axiomatically, risk is critical to an insurer when deciding the scope of cover which it is prepared to provide, on what terms, and at what premium. Commercial premises which are unalarmed and unattended, for whatever reason, obviously present a higher risk than premises which are attended or alarmed. The effect of the intruder alarm clause was to put the premises off risk in relation to break-ins when the unattended and unalarmed language is plain. However unfortunate the predicament in which Mr Kuziw found himself, it is one thing to recognise that Mr Kuziw acted reasonably in not staying at the premises, but is quite another to say that the insurer should therefore carry the risk of break-in after he left. The insurer never agreed to do so, and the implied term would extend the risk borne by the company significantly beyond the clear limit established by the wording of the policy.
22. The third ground of appeal is that the insurer unreasonably withheld retrospective consent to Mr Kuziw leaving the premises. Clause 2 of the intruder alarm clause ended with the words "unless we agree otherwise", and Clause 3 ended with the words "unless we agree otherwise in writing". It was submitted by Mr West that it followed that such consent must not be unreasonably withheld. On 14 October 2004, the insured's solicitors sent a letter before action to the insurer, in which they said:

"In our view, the requirement for the 'agreement' of CGU to dispense with the need for a responsible person to attend at the premises if the means of communication used by the alarm system are not in full operation is one which is not to be unreasonably withheld. In our view, it would be unreasonable for them to refuse such agreement in the circumstances of this court case, as explained above. Mr Kuziw could have done nothing to prevent the burglary and he would by remaining at the premises have put himself at considerable personal danger. We therefore formally request that your client give their written agreement to Mr Kuziw leaving the premises on the evening of 16 February 2004".

23. The insurer conceded at the trial that it had a contractual duty to consider such a request in good faith; but, it submitted, not a wider duty. The judge considered that it did have a duty, but its scope was a duty to consider the request in good faith rather than a duty to consider it reasonably. He went on to say:

"34. If I am wrong about that and the test is whether Norwich Union acted unreasonably in declining to give its agreement there is still not, as I see it, a breach given the competing arguments put forward. There is no doubt that Mr Kuziw acted entirely reasonably given the situation which he found himself in and to the extent that Norwich Union contend otherwise I disagree. There is however more force in the submissions made by Norwich Union about the wider considerations it would have been entitled to take into account. First the scope of the risk described in the IAC is clear and should have been known to Anders and Kern. Secondly it was open to Anders and Kern to put in place the provision of people or contractual assistance so that the premises were attended if the alarm was not working. If Anders and Kern did not want its employees to attend the premises at night if the alarm was not working then it was open to them either to decline the cover or to take a risk of being uninsured. In contrast to some contractual provisions the effect here of agreeing otherwise is to shift the entire agreed allocation of a risk from one party to the other. Clearly some circumstances may arise where it would be unreasonable to agree otherwise, for example in the aftermath of the burglary. There is a distinction to be drawn between what is reasonable for the Claimant to do on the one hand and what it was unreasonable for the Defendant to decline to agree on the other. It does not follow that because the claimant was acting reasonably in a particular situation that it would be unreasonable for the Defendant to decline to extend the cover."

24. Mr West attacked that reasoning, insinuating that it contained an illogical distinction. I do not agree. We have not heard argument from the insurer about the distinction, if there be a material distinction, between a duty to consider in good faith and a duty to consider reasonably. Nor have we heard full argument about the extent to which there might be a duty, under this form of policy, to consider any such request retrospectively. In deciding the scope of any duty which may be implied from words in a contract which say "unless a party consents", or words to that effect, the context is vital. In the context of an insurance policy of this kind, there is a very considerable difference between a request which would materially alter the balance of risk and one which would not. Let me illustrate the distinction in this way by reference to Clauses 2 and 3 of the intruder alarm condition.
25. Suppose that Mr Kuziw had been able to arrange for a responsible person to attend the premises and remain there until such time as the intruder alarm system was repaired. Such a responsible person might have been an employee of the company, or might have been a security guard. That would have met the requirement of Clause 2. It would not technically have met the requirement of Clause 3, which was that a keyholder should remain. But assuming that the person was indeed responsible, it would have met the purpose of those protective provisions by providing the level of protection at the premises which those conditions were designed to ensure. In such circumstances, a request that the insurer should not require the keyholder to be present, because there was somebody else of responsibility who would provide sufficient protection, would not have involved the insurer being asked to assume a materially increased risk.
26. However, the present situation is significantly different. The insurer was being asked to assume a materially increased risk -- indeed, to accept a loss after it had happened, and had happened in circumstances where the risk had been materially increased by the absence of any responsible person. If an insured wants to increase the risk covered by the policy, that is necessarily a matter for negotiation. I do not see how a court could judge, even before a loss, let alone after it, whether an insurer ought reasonably to agree to a material increase in risk, and if so, on what terms. I therefore reject the ground that there was a contractually enforceable obligation, however expressed, to agree to a request which materially increased the risk, or even to enter into negotiations to that effect.
27. As I have said, the judge concluded his judgment by an expression of regret. Nobody could read the papers in this case without having a degree of sympathy for Mr Kuziw and the company. It may indeed be that this form of policy was not a wholly appropriate policy for a small or intermediate company, but those are not matters for us to consider. In my judgment, the judge came to the correct answer on each of the questions of law which he had to decide and which has been challenged before us on appeal. I would therefore dismiss this appeal.

Lord Justice Tuckey:

28. I agree. This policy covered theft or attempted theft in the course of burglary ("forcible and violent entry into or exit from the premises") and theft in the course of robbery ("violence or threats of violence to the insured or its employees"). But burglary was only covered if the intruder alarm was properly set or a responsible person was in attendance on the premises. The robbery cover was not subject to these restrictions because violence to the person could be expected to occur only when the insured and its employees were in attendance on the premises. In effect, the appellant seeks to equate theft involving threat of violence with theft resulting from a reasonable fear of violence. But that cannot be done. On the facts of this case there was no threat of violence and the theft did not involve violence to the person or any threat of it. Once the policy is construed in this way the attempt to make good the equation by way of an implied term was, I think, doomed to failure. Such a term would be inconsistent with the express terms of the policy and uncertain. Nor do I think the appellant can attain its objective by relying on the words "unless we agree otherwise". In the circumstances of this case they meant no more than that the appellant might request and the insurers might agree to cover if the premises were to be left unattended and unalarmed, but they did not impose any obligation on the insurers to agree to any such extension; nor did the insurers' continuing duty of good faith.

Lord Justice Buxton:

29. I agree with both judgments. The appeal is dismissed.

Order: Appeal dismissed