The Eastern High Court has ruled in a fundamental legal action between LEGO and an insurance company concerning termination of the parties' insurance agreement. The High Court found that the insurance company had wrongly terminated the insurance agreement as it had not been substantiated that LEGO had provided incorrect information. The insurance company was therefore ordered to pay a large compensation amount to LEGO.
In 2011, LEGO's insurance cover for real estate, chattels and operating losses was put out to tender. The insurance was to cover plants and buildings worldwide. If Skadeforsikring won the tender and issued a policy, which originally covered damage exceeding DKK 5 billion and maximum DKK 17 billion.
The insurance was taken out for a three-year period, but had to be renewed each year to update the insurance values. However, in connection with the renewal in 2013, If assessed that the risks and assumptions upon which the insurance had been taken out had changed significantly, and by letter of 22 March 2013, If offered LEGO a cover for damage exceeding DKK billion and maximum DKK 5 billion as at 1 April 2013.
This meant that LEGO would be without insurance cover for damage exceeding DKK 5 billion from 1 April 2013, and LEGO therefore decided to establish a 24-hour firewatch at the non-insured plants and buildings until LEGO had re-obtained cover.
INCORRECT INFORMATION IN THE TENDER DOCUMENTS?
If claimed that LEGO had provided incorrect information in the tender documents in 2011, and that the termination of the insurance was therefore justified under section 5 (2) of the Insurance Contracts Act, alternatively, under the doctrine of fundamental breach.
LEGO claimed that it appeared from the tender documents that LEGO experienced major development each year, and that the insurance company was therefore aware of the risks of changes in the risk profile. Further, LEGO claimed that the insurance company, when concluding the agreement in 2011, had not comprehended the degree of the mutual dependency between LEGO's plants meaning that damage to one plant would also result in the loss of another plant.
Incorrect information was not substantiated or rendered probable - Termination was wrongful
The High Court found that If had not substantiated or rendered probable that the information provided by LEGO in connection with the taking out of the insurance had been incorrect, and If was therefore not entitled to terminate or cancel the insurance.
Consequently, the High Court ruled in favour of LEGO ordering If to pay compensation of DKK 5.6 million calculated as follows:
- LEGO's expenses in connection with the taking out of new a insurance;
- LEGO's expenses in connection with advice concerning a new insurance offer; and
- LEGO's expenses for 24-hour firewatch.
The High Court ruling shows that changes in the risk profile do not in itself justify the insurance company's termination of the insurance under section 5 (2) of the Insurance Contracts Act. This also applies even if the these changes are considered material.
Termination under section 5 (2) of the Insurance Contracts Act requires that the information provided when taking out the insurance is incorrect.
The High Court ruling shows that demands are made on the insurance companies' ability to comprehend and take into account the policyholder's business and - in specific situations - the mutual financial dependency of production plants.
The ruling also illustrates that a wrongful termination of an insurance contract may result in substantial expenses for the insurance company because the policyholder's expenses due to the termination may be quite high, and these expenses are generally to be compensated by the insurance company.
Finally, the ruling gives rise to considerations as to the meaning and handling of renewal procedures, including whether the information provided - or not provided - in connection with the annual renewal of long-term insurance may affect the insurance cover. In the present case, the insurance had been taken out for a three-year period, but it had to be renewed each year to update the insurance values. However, it has not been possible to conclude based on the available information whether importance was attached to this annual renewal.