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YOUR DUTY TO DISCLOSE... HOW FAR DOES IT GO? ILLEGAL USE OF MY PRESMISES - THE IMPLICATIONS
An insurance contract is one of 'Utmost Good Faith'. This requires the insured, to make a full and complete disclosure to the insurers of all material facts relating to the property to be insured. A material fact is a fact which would influence the mind of a prudent underwriter in deciding whether to accept the risk and on what terms. This duty not only applies at the beginning of the insurance but is ongoing throughout the period of policy cover.
Failure to disclose a material fact renders the contract of insurance voidable and allows insurers to avoid paying a claim.
Therefore, as a property owner, if you discover that your premises are being used for illegal or immoral purposes then you must disclose this to the insurers. They will then have to decide whether to continue insuring the premises but will almost certainly require you to take action to stop the illegal use by recovering possession due to breach of the lease conditions.
This issue takes on an even greater significance in the current economic climate when purse strings have to be tightened. When you have a tenant in-situ you are probably (and understandably) more grateful than concerned as to what they may be doing with the property. Unfortunately, however, the terms and conditions of the insurance policy remain the same, regardless of the financial constraints being placed upon the insured party.
In addition to the insurance position there are two pieces of legislation that are very relevant in these circumstances, as follows:-
Misuse of Drugs Act (1971)
A landlord or property manager can receive a maximum of 14 years in prison and/or a fine if they allow the production of controlled drugs to take place in their premises. It is far from clear as to whether the lack of knowledge of the use will be an adequate defence.
In addition, any rental income received could be considered under the Proceeds of Crime Act and recoverable by the police.
Please see our Newsletter 11 Article on 'Cannabis Farms' for more information.
Sexual Offences Act (1956)
If a property is let with the knowledge of an offence under this Act, the landlord or property manager can receive a prison sentence or fine.
We often read in the papers about raids by the police on properties being utilised as marijuana factories, drugs dens or used for other illegal activities. Simply put, if you become aware of one of your properties being used for such purposes you must notify ourselves and the police immediately. Once again, the insurers can, and will, refuse to deal with damage caused by, or associated with, such illegal activities, if they were known about prior to the loss. Additionally, if you have knowingly turned a blind eye, the police may prosecute you, as well as look to recover any monies paid to you in rent.
Please do not assume that from an insurance company's perspective you have fulfilled your duty if you have just notified the police and they have not taken criminal action. If you have reasonable concern, then you must notify insurers at the same time. You should bear in mind that the police do not incur costs if a loss results from an immoral or illegal use of a property - your insurers do! The choice is clear, but if you don't disclose material facts to your insurers you run the risk of a subsequent claim being repudiated - simple as that. As always we are here to help and advise. Call us if you are at all unsure.
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