Insurance Policies Must Comply with the Governing Law

Under English law, the principle that a contract must not contain agreements which are contrary to law applies equally to a contract of insurance.  This can cause insurers to have to pay out very much larger sums than they anticipated:

A factory building was substantially damaged by fire, causing extensive collapse. The local authority required the reconstruction of the fire-damaged factory to comply fully with current Building Regulations. The factory had been partially demolished by the fire to ground level but parts of the structure were still largely intact.  The building could – but for the Building Regulations – have been rebuilt, retaining the parts of the factory which were still intact, to the original standard of construction.  This would have complied with the regulations current at the time the building was built but not those current at the time of the fire damage.

The local authority pointed out that, where a building was to be reconstructed from within eight metres of the ground, the Building Regulations would apply to the whole of the fabric including the retained part and that the retained part would have to be brought up to current Building Regulation standards. The result was, to all intents and purposes, that the factory had to be rebuilt as a brand new building.

This increased the claim on the insurance by about £1m. The insurers, an American company, were not familiar with this peculiarity of English Building Regulations and had not foreseen, in setting the premium for the insurance, their exposure to this risk.  They nevertheless could not insist that they had a right to limit cover to the cost of reconstruction to a standard below that required by statute and so accepted that they would have to pay for a new building which complied fully with the Building Regulations but which was otherwise the same as that which had been fire damaged.