OUTER HOUSE, COURT OF SESSION [2007] CSOH 155
CA85/06	OPINION OF LORD GLENNIE in the cause MACDUFF SHELLFISH (SCOTLAND) LIMITED Pursuers; against MESSRS MASSON & GLENNIE Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuers: Haddow Q.C., O'Carroll; Brodies, W.S.

Defenders: Cullen Q.C., Duncan; Dundas & Wilson

30 August 2007

Introduction

[1] The pursuers are shellfish processors. Their managing director is Mr Euan Beaton, who took over from his father John (sometimes known as Iain) Beaton in about May 2002. His brothers, Paul and Fergus Beaton, are also directors of the company, Paul being in charge of the day to day operation of the factory and responsible for the production and despatch of product, whilst Fergus is principally engaged in the processing side of the business. The family has been in the fish processing business since the 1880s, but the pursuers were formed in about 1985 to carry on the business of processing and freezing shellfish landed from boats on the north east coast of Scotland. At the time of the events with which this action is concerned, the pursuers still owned premises at MacDuff, Banffshire (referred to on Record and in some correspondence as "Premises A"). However, their principal place of business was at Mintlaw, Aberdeenshire, where they made use of two factories: the old factory ("Premises B") which they had owned since about 1996; and a new factory ("Premises C") leased by them in 2001. Premises B and C, both on the Mintlaw site, are sometimes called, respectively, the "old" and "new" sites/ premises/ buildings/ factories and I shall use those expressions in this Opinion.

[2] For a number of years prior to the events with which this action is concerned, the pursuers' commercial insurance was arranged through the defenders, a firm of solicitors with an insurance intermediary division. From January 2002 their file was handled by John McCombie, an employee of the defenders. Commercial combined insurance cover on the pursuer's premises, covering fire and other material damage risks to all three premises, was renewed through the defenders on 1 March 2004 for a period of twelve months.

[3] Two terms of the insurance are relevant to the present dispute. Warranty P17 was in the following terms:

"P17 Alarm Warranty (Central Station)

The Assured hereby Warrants that precedent to the liability of Underwriters hereon a National Approved Council for Security Systems and/or Security Systems & Alarms Inspection Board alarm system with a minimum of Central Station Signalling is installed and operational and maintained in good order throughout the currency of this Certificate, with an Annual Maintenance contract in force for the duration of this Certificate, and that a full specification of the system is kept and maintained by the Assured for inspection to Underwriters as required. ..."

The Warranty is concerned with the intruder alarm system rather than the fire alarm. The National Approved Council for Security Systems is known as "NACOSS". Central Station Signalling means that if the alarm is triggered a signal is sent automatically to a central alarm monitoring station. This contrasts with a "bells only" system whereby the triggering of the alarm simply causes alarm bells to ring at the premises. At times in the correspondence and discussions leading up to the renewal of the cover, reference is made to a "Red Care" system, in particular to a BT RedCARE system. In this type of system there is a continuous connection to a central station, and the central station is alerted whenever that connection is broken. This is to address the risk of a would-be intruder attempting to disconnect the alarm before entering the premises. Warranty P17 did not require there to be a Red Care system. It required a NACOSS approved alarm system with central station signalling.

[4] The other material term of the insurance was General Condition 1, which provided as follows:

"1 Alarm and Protections Clause

The Assured hereby warrants that precedent to the liability of underwriters hereon all protections provided for the safety of the insured property shall be maintained in good order throughout the currency of this insurance and shall not be withdrawn, altered or varied without the prior consent of underwriters and shall be in full and effective operation when the premises are closed for business or left unattended, and at all other appropriate times. ..."

It is the last two lines quoted above which are of importance in these proceedings.

[5] On 13 March 2004 the old premises, Premises B, was destroyed by fire. The fire was started deliberately by a person or persons unknown. The pursuers claimed on their insurance. By letter of 14 April 2004 from Jacksons, loss adjusters instructed by them, underwriters repudiated liability. The letter identified two separate grounds. The first was that in breach of Warranty P17 there was no central alarm system installed in Premises B. The alarm system there was bells only. The second was that, in breach of General Condition 1, the bells only alarm at Premises B "was not put into regular use and was not in operation at the time of the loss due to a defective roller shutter, which prevented the alarm being switched on".

[6] The pursuers sought to challenge underwriters' repudiation of liability. They maintained that they had no idea that they were required to have a NACOSS approved central station alarm system in place at Premises B. Mr McCombie put their case forcibly to the loss adjusters, but to no avail. Assisted by Mr McCombie, the pursuers took advice from senior counsel on their prospects of successfully making a claim against underwriters. They were advised that they could not succeed. It is not disputed that this advice was correct. The pursuers were in breach of Warranty P17; and, if only because of the defective roller shutter door, were also in breach of the requirement in General Condition 1 to have the alarm system in operation at the time of the fire.

[7] The pursuers have brought this case against the defenders alleging professional negligence. Their pleadings make a number of averments of breach of duty in respect of advice which, they say, Mr McCombie gave or failed to give. I heard a preliminary proof on liability. As the proof progressed, many of the specific individual averments of breach of duty fell away. No issues of law arose for decision. The dispute turned entirely on questions of fact. The nub of the pursuers' complaint at the end of the proof was that Mr McCombie did not make it clear to them that the requirement for a NACOSS approved central station intruder alarm system applied to the old premises (Premises B) as well as to the new premises (Premises C).

[8] The dispute is focused around a meeting between Euan Beaton and Mr McCombie on 20 May 2003 at which the insurers' Risk Requirements were discussed; and the correspondence just before and after that meeting. The pursuers say that if they had appreciated that Warranty P17 applied to Premises B, they would certainly have complied with it. Compliance would not have been expensive. They contend that, in the circumstances which obtained, underwriters would not have repudiated liability for breach of General Condition 1 had breach of that condition been the only matter about which they were concerned. The roller shutter door had only been damaged the previous weekend; and the pursuers had immediately taken all possible steps to replace it and to block the entrance in the meantime.

[9] Ultimately only a limited number of issues remained for decision, both of them issues of fact. The first issue went to proof of negligence. In their final submissions, counsel agreed that the question of negligence turned on what had happened at the meeting of 20 May 2003. In their discussions at the meeting, was Euan Beaton confused as to whether underwriters' requirement for a NACOSS approved central station intruder alarm system applied to Premises B, or did Mr McCombie clarify matters? If Euan Beaton was confused, was Mr McCombie aware of that or, at any rate, should he have been? If the pursuers succeeded on these issues, negligence was made out. If not, absolvitor should follow. The second issue was whether that negligence, if proved, had caused any loss. Would the pursuers have done anything different if they had realised that the requirement applied to the old premises? Would underwriters have avoided liability anyway because of the pursuers' breach of General Condition 1? Related to this last question was a side issue as to when the roller shutter door had been damaged.

[10] Much of the evidence led at the proof went to the defenders' handling of the pursuers' insurance from early 2002 until after the fire. It is necessary to deal with this fairly fully, both to set out the context in which the meeting of 20 May 2003 took place and for the light it casts upon the reliability of the principal witnesses.

The evidence adduced at the preliminary proof

[11] The principle documents before the court were the defenders' office files relating to the pursuers' insurance business. These were arranged chronologically (starting from the back of each file) and were, as I understood it, the entire files for the relevant period in the order in which the files had been compiled. Mr McCombie spoke to these in his evidence and, indeed, these documents formed the basis of most of his recollection of events.

[12] In addition to Mr McCombie, I heard evidence on the main matters in dispute from Euan and Paul Beaton. I heard also from a Mr Ken Lawson, an insurance surveyor who inspected the premises in March 2003 and issued Risk Improvement requirements which were discussed by Euan Beaton and Mr McCombie at the meeting of 20 May 2003. I shall refer to the other witnesses of fact as the need arises. The expert witnesses, both in their Reports and in their oral evidence, spoke in the main to the duties incumbent on insurance intermediaries such as the defenders. As the dispute has narrowed, it is unnecessary to dwell on this aspect of their evidence. However, they also expressed views on the question of whether underwriters would have repudiated liability for breach of General Condition 1 if the pursuers had not been in breach of Warranty P17. I shall deal with this part of their evidence towards the end of this opinion.

[13] I propose to set out and make findings upon the conflicting evidence in sequence as I go through the events of 2002 to 2004. First, however, I should say something about the credibility and reliability of the principal witnesses.

[14] The principal witnesses for the pursuers were Euan and Paul Beaton. They were not professional men and I accept that they were not especially knowledgeable about insurance matters. As Euan Beaton put it: "my skills are in shellfish, not insurance wording." Mr Cullen QC, for the defenders, submitted that Euan Beaton was not a credible witness; and that Paul Beaton also had, at times, difficulty with the truth. I do not accept that assessment of them. During the course of their evidence, I formed a favourable impression of them both. It struck me forcibly at the time that they were giving their evidence honestly and doing their best to tell the truth. They came over as individuals who genuinely believed that they had a grievance and were out to tell their story as they saw it. Sometimes they were disarming in their answers to potentially difficult questions, displaying a candour which, to my mind, reflected favourably on the rest of their evidence. I accept, of course, that they were not always correct in the answers they gave. Mr Cullen gave a number of examples from which he asked me to conclude that both of them, and Euan Beaton in particular, were not credible. I have considered these examples carefully, and shall set out my views about some of them as I come to them. Suffice it to say that I did not consider that these matters bore the inference of dishonesty which he sought to place on them. On the other hand, I was conscious that the sense of being victim to an injustice may lead a witness to give evidence which is unconsciously selective or distorted or is otherwise unreliable. There were, in my opinion, some examples of this, a particular example being in relation to whether Mr McCombie had "confessed" to negligence following upon a consultation with senior counsel on 14 May 2004. I therefore approached their evidence with some care. The assessment of reliability is always a separate exercise from the assessment of credibility, and I was particularly careful in the case of Euan and Paul Beaton to assess their evidence against the documents, the other witnesses and other indications of what was likely to have occurred.

[15] Mr McCombie was altogether a different kind of witness. He was a professional man with many years in the insurance business. He had no paper qualifications but over the years had gained considerable experience. The pursuers were by no means his largest clients. Although he was the person alleged to have been negligent, it was the pursuers who called him as a witness. Much of his evidence favourable to the defenders was led out in cross-examination. He gave his evidence carefully and deliberately, as one would expect of a professional man. However, in the course of his evidence he laboured under two distinct but overlapping difficulties. First and unsurprisingly, he had little first hand recollection of many of the events and discussions about which he gave evidence. As a result, much of his evidence was prompted by reference to documents and reconstructed from what he would have expected to do in the circumstances. This is not meant by way of criticism. Evidence of that kind can be persuasive where the individual is shown to have acted habitually in a thorough and diligent manner. I was not, however, persuaded that that could always be said of Mr McCombie in his handling of the pursuers' affairs. On more than one occasion the contemporaneous documentation suggested, at first blush, that he had done a thorough and professional job, so much so that Mr Russell, the expert witness called by the defenders, remarked about the quality of the service that Mr McCombie had provided to his clients. But on closer examination the documentation sometimes suggested that insufficient care had been taken. An example of this is referred to in para.[31] below. At certain points in his evidence he sought to distance himself from what he had said in letters written after the fire: see paras.[96] and [98] below. I did not find those parts of his evidence convincing. The second problem was equally or, perhaps, more significant. Mr McCombie suffered from a difficulty with his voice. I need not go into the details. He grew tired very quickly. For this reason his evidence was punctuated by frequent breaks. On two days his evidence had to be stopped at lunchtime. Partly because of this, his evidence spread over six days. He grew noticeably more tired towards the end of each session and generally as the days went by. I had considerable sympathy for him in this predicament and, in my assessment of his evidence, I have attempted to make full allowance for the fact that some of his answers which I have found to be unsatisfactory may have been influenced by his tiredness and voice difficulties. Mr Haddow QC, for the pursuers, did not go so far as to ask me to find that he was dishonest in his evidence. He submitted instead that he was unreliable, whether deliberately or through carelessness it was hard to say. Having considered the matter carefully, I would not have concluded that he was dishonest even if I had been invited to do so. But , on the other hand, I did not form the view that his evidence could generally be relied upon when it was not supported by documentation or other evidence. In a direct conflict between his evidence and that of Euan Beaton, and in the absence of other material to inform my judgement, I preferred the evidence of Euan Beaton.

[16] I shall comment upon the credibility and reliability of other witnesses as I deal with the matters to which their evidence is relevant

Events leading up to the meeting of 20 May 2003

(i) The pursuers' premises

[17] Mr McCombie visited the pursuers at the Mintlaw site in January 2002. According to a company profile which he prepared after that visit, as part of a package of information put together by him for the purpose of obtaining insurance cover for them, the pursuers purchased Premises B in 1996 to develop growth in their frozen and value-added seafood business. They took a lease of the new building at Mintlaw, Premises C, in August 2001. Premises B and C were right next door to each other and were connected by a bridge, which the pursuers upgraded so that it could take vehicle traffic as well as pedestrians. From then on they ceased production at the MacDuff premises (Premises A), though they kept the building there. In time, the main processing activities were moved from Premises B to Premises C, and Premises B came to be used only for flash freezing of prawn tails and for storage of frozen produce. It is not clear precisely when this change occurred, but it seems likely that it happened soon after the pursuers took the lease of Premises C; and this use was certainly established long before the events giving rise to the claim. There had been discussions within the family about putting Premises B up for sale, but according to John Beaton they were not "wholeheartedly" selling it. In any event, it had not in fact been sold at the time with which I am concerned and the pursuers still had a use for it.

(ii) The alarm systems in Premises B and C

[18] Before the pursuers moved into Premises C, the intruder alarm system in Premises B was a central station alarm, albeit not NACOSS approved and not a Red Care system. The intruder alarm at Premises C was bells only. Sometime after they started using the new building, the pursuers had the telephone line moved into it from the old. Thereafter there was no telephone connection to Premises B, which became bells only; while the system at Premises C became central station. It is not possible on the evidence led at the proof to pin down exactly when the telephone line was transferred. Euan Beaton thought that it happened in about December 2002. Paul Beaton, who was responsible for such matters, thought that they had certainly moved to a monitoring station alarm at the new premises by early 2002. At one point in his cross-examination he suggested that it might have been in late 2001. There was little assistance from the relevant documents. In the company profile drawn up by Mr McCombie in early 2002, based upon his visit in January of that year, there is a page headed "Risk Management and Security" which Mr McCombie confirmed related to the new factory. By the marginal note "Security", it is recorded that the pursuers had an alarm system which was NACOSS approved "but it is a bells only system and again they have quotations to upgrade the system and a decision will be taken in the next few weeks with which system they will proceed with (sic) but it will be NACCOS (sic) approved". This suggests that the changeover had not yet taken place by the beginning of February 2002. A letter from the defenders to the pursuers dated 22 February 2002 confirms that, so far as they were aware, the changeover had not yet been made by then. An invoice from Bell Security (Scotland) Ltd, to which Paul Beaton spoke in his evidence, showed that in the new premises the fire alarm was linked to an existing Red Care communicator for the intruder alarm system on 18 December 2002. The work took no more than an hour and involved installing a link up cable between the fire alarm system and the intruder alarm Red Care system then in place. It is possible to say, therefore, that a Red Care system was installed in the new premises at some time between February and December 2002. It is probable that the alarm at the new premises became central station, whether Red Care or not, immediately the telephone line was physically shifted there from the old. This probably happened at about the end of the first quarter of 2002. From then on, Premises B had a bells only system. It does not appear that Mr McCombie was made aware of this change at the time that it occurred.

[19] Euan Beaton said in evidence that the fire alarm at Premises B was on all the time. This was not disputed. He also said that the intruder alarm was set whenever the premises were unmanned. He amplified this by saying that it was not set during the evenings, when work would be going on around the clock in the new premises and employees would go across from the new premises to the old on occasions during the night. He said, however, that the intruder alarm was set from the time that work stopped at both premises on Saturday afternoon until the commencement of work at 6 a.m. the following Monday. He would set it himself, or it would be set by Paul or Fergus Beaton. It would depend on who locked up on the Saturday afternoon. It would certainly always be one or other of them. Both Paul and Fergus Beaton confirmed this in their evidence. According to Paul Beaton, one of them was always present when the factory closed on a Saturday afternoon and re-opened on a Monday morning. This evidence was challenged. But I accept it as true.

(iii) The defenders' handling of the pursuers' insurance before January 2002

[20] Before Mr McCombie took over in January 2002, the pursuers' insurance business was handled by a Mike Stephen of the Defenders. I did not hear from Mr Stephen. Such evidence as there was about this period came from Euan Beaton, by reference to documents in the defenders' files which were lodged in process. The documents showed annual renewals of the pursuers' insurance cover over the previous years. The renewal date was then 19 February of each year, though later it was changed to 1 March. The premium stayed fairly constant over the years until 2001, being £7,000 in 1997, £7503 in 1998, £9300 in 1999 and £8,000 in 2000. Until 2000 the pursuers had been insured under an Iron Trades policy. However, on 9 February 2001, ten days before renewal, the defenders faxed Woodbrook Underwriting Agencies Ltd ("Woodbrooks") to the effect that Iron Trades had pulled out of underwriting fish processors and that, in consequence, the insurance had to move at renewal. Woodbrooks obtained a quotation on 12 February 2001 and a cover note was issued on 20 February 2001. The gross premium was just over £23,000. One of the terms applicable to the insurance, as identified in the quotation and cover note, was "Alarm Warranty (Central Station)". There was no evidence as to whether or not this warranty was in the same terms as the warranty - P17 Alarm Warranty (Central Station) - which formed part of the insurance in 2004. There were four factories covered by that insurance at inception in February 2001: three in MacDuff (including Premises A) and one in Mintlaw (referred to in this action as Premises B, but identified as (D) in the quotation and cover note). Since the insurance was arranged close to the renewal date, a number of details and values to be included within the policy were the subject of subsequent correspondence, and the pursuers completed a proposal form only in April 2001. It was completed and signed by John Beaton, presumably with the defenders' assistance. That proposal form covered the four factories then used by the pursuers. The question concerning security was answered without any differentiation between the four factories. The insurers were given to understand that the intruder alarm was central station but that the installer was not a NACOSS member. That was true of Premises B and, for all I know, of the other factories. It may be, though again there was no evidence as to this, that NACOSS approval was not a requirement of the insurance at the time. In August 2001 the insurers were informed that part of the business was moving from MacDuff to the new premises at Mintlaw (Premises C), and those new premises were added to the policy. So far as the documents show, nothing was said to insurers about the intruder alarm at the new premises at this time.

(iv) Mr McCombie's first involvement with the pursuers' insurance

[21] When Mr McCombie took over the pursuers' account, he decided to attempt to get for himself a good understanding of their business. He met Trevor Adam, the pursuers' internal accountant, on 23 January 2002. He visited the premises at Mintlaw on 30 January 2002 and met John Beaton. He produced the company profile, to which I have already referred, with a view to being able to show it to insurers. I have already noted the comment in that document (which related to Premises C, though it did not say so) that the security system was bells only but that the pursuers had quotations to upgrade it. His notes, which he took from his visit, record, in relation to Premises B: "Security: Alarm, CCTV, still in operation". He said in cross-examination that at that time he believed that the system at Premises B was central station but not RedCARE.

(v) Renewal in 2002

[22] Mr McCombie set about obtaining quotations for the insurance for 2002-3. He sent a copy of the document which he had prepared to Lloyd's brokers, Houlder Insurance Services (International) Ltd. ("Houlders"), asking them to obtain a quotation. He also asked Woodbrooks to obtain renewal terms. Mr McCombie was criticised by Mr Haddow for having encouraged Houlders to believe (wrongly) that he was dealing exclusively with them. I do not consider that that criticism was justified. Mr McCombie explained that he was simply assuring Houlders that he was dealing with no other Lloyd's broker. Taking the correspondence as a whole, I accept that; and certainly Houlders made no complaint when told afterwards that the insurance had been placed elsewhere. Woodbrooks replied that the existing insurers had pulled out of the market, but the quotation which they obtained from other insurers, at just over £23,000, compared favourably with what was available on the Lloyd's market.

[23] At a meeting between Mr McCombie and the Beaton family on 13 February 2002 it was decided to accept the quotation from Woodbrooks but to delete business interruption cover on the basis that if the factory was destroyed there was other factory space available from which to carry on operations. Clearly this decision was heavily influenced by a desire to keep the level of insurance premiums down as much as possible. One of the pursuers' principal concerns at this time, as explained by Euan Beaton, was the huge increase in the level of premium in 2001 compared with previous years. He explained that insurers were particularly concerned about the fire hazard created by the presence within factories of composite panels, consisting of polystyrene sandwiched between two sheets of metal. There had been two or three big fires in food units in the recent past. This concern was spoken to also by the experts in their evidence. The premium had gone up by about 100% in the previous year. It was put to him in cross-examination that he had wanted to remove the old building from the insurance and that there had been a dispute with his father about this at the meeting. He rejected this. He said that he did not think that taking the old building off cover would have been an option at the time, since there were borrowings secured on it. John Beaton said in evidence that he would not have countenanced taking the old building off cover, but he thought it very unlikely that there was a dispute about it. Paul Beaton agreed, though he did not recall any discussion about removing the old building from cover. When Mr McCombie gave evidence, he recalled a suggestion that the old building should be taken off the insurance, but did not recall that there had been any major disagreement about this issue. On the evidence I formed the view that probably some consideration was given to the possibility of reducing costs by taking the old building off cover; but it is unlikely that the matter was taken very far or that it led to a dispute amongst the Beatons. The relevance of the point, from the defenders' point of view, is that if Euan Beaton had been that anxious to reduce costs, he might have been prepared to cut corners and avoid incurring expenditure to comply with insurers' requirements. I do not accept this assessment of him.

[24] In a letter to the pursuers dated 22 February 2002 notifying them of certain details of the new insurance, Mr McCombie pointed out that the policy included a number of warranties. These were identified in the renewal documentation - though Mr McCombie never received the complete policy documentation for the policy renewed in 2002. He listed the warranties (which included the central station alarm warranty) in his letter. He added:

"The majority of these warranties you comply with and some do not apply to your premises in any event but the one you do not comply with at present is the alarm warranty via Central Station as it is bells only at the moment and therefore the system would have to be upgraded."

It was the pursuers' case on Record that the comment about their non-compliance with the central station alarm warranty was intended to refer to the intruder alarm in the new factory at Mintlaw, Premises C. In his evidence, Euan Beaton at first insisted that it referred to the old premises (or to both the old and the new); and he relied upon this comment as showing that Mr McCombie knew that the old site had by then been downgraded to bells only. This was plainly wrong and he accepted as much in cross-examination, though he was still insistent that Mr McCombie knew that the old building had been downgraded. I do not accept this. The evidence does not show, on balance of probabilities, that Mr McCombie was ever told, before the fire in 2004, that the system at the old premises had been downgraded. Mr McCombie said in evidence that in February 2002 he had thought that the old building was central station. If he had been told that the intruder alarm at the old building had been downgraded to bells only, he would have picked this up, as he had with the new building. I do not think that the alarm at the old building had been downgraded by this time. It is probable, as I have found, that the telephone line had not by then yet been shifted from the old premises to the new. Mr McCombie's comment, both in his letter and in his evidence, fits in with the assessment of the new premises which he had made in the company profile prepared by him less than a month earlier. However, I do not accept Mr Cullen's submission that Euan Beaton's error on this matter reflected adversely on his credibility. To my mind, he was simply getting muddled.

[25] One might have expected Mr McCombie in these circumstances to have told the insurers that Premises C did not comply with the central station alarm warranty and to have sought a temporary dispensation from them. He did not do this. Nor is it clear what steps, if any, he took to keep himself informed of whether the pursuers had upgraded the intruder alarm at the new premises. A note on the defenders' file copy of the letter of 22 February 2002, probably made in July 2002 because of its position in the defenders' correspondence file, asks: "What was the outcome of this?" There was nothing in the evidence to indicate that this question was followed up; and the probabilities are that it was not, judging by a note prepared by Mr McCombie for a meeting which took place on 18 February 2003 - as to which see para.[30] below.

(vi) Renewal in 2003

[26] On 11 February 2003 Woodbrooks wrote to the defenders pointing out that the policy fell due for renewal on 1 March 2003. The change in renewal date arose because of a ten day extension granted in February 2002, at a time when it was necessary to change insurers. The letter directed attention to the terms of the insurance. The material part of the letter reads as follows:

"We are attaching our Renewal Invitation herewith, together with a copy of our supplementary endorsements for your perusal.

IMPORTANT - Please note:

The following renewal terms are issued on the basis of the new Woodbrook Commercial Combined Certificate and Supplementary Warranties/Endorsements/Exclusions which are effective from 1st January 2003. A copy of these is attached for your information and assistance. A copy of the new Certificate wording will be sent to you under separate cover."

A Renewal Invitation was enclosed with the letter. Again, in the box headed "Terms", there was included a reference to the "Alarm Warranty (Central Station)" as being applicable to the policy.

[27] The letter referred to the "new" Woodbrook terms. A copy of the "Supplementary Warranties/Endorsements/Exclusions" (hereafter "the Supplementary Warranties") sent with the letter was included in the documents lodged in process and referred to in evidence. The "new" Supplementary Warranties include at P17 the "Alarm Warranty (Central Station)" which is at the heart of this dispute. The terms of this warranty are set out in para.[3] above.

[28] File notes in the defenders' files lodged in process were referred to in evidence. On 16 February 2003 there is a note which refers to the need to do a letter (to the pursuers) about the renewal quotation. It goes on to state: "Need to point out all warranties applying and enclose copies". Mr McCombie explained that this was very important: Woodbrooks had changed their conditions and it was very important to go through these new terms with clients. The fact that Woodbrooks' letter described the terms as "new" was a good reason to examine with care what the documents provided. In answer to further questions, Mr McCombie said that he did not know in what respects the Woodbrooks terms had changed. He had, in fact, no way of telling because he had never received the earlier terms. Until he saw the Supplementary Warranties sent with Woodbrooks' letter of 11 February 2003, he had not seen the terms of Warranty P17 and therefore did not know that there was any requirement, for example, for the intruder alarm system to be NACOSS approved. I should add here that no copy of the previous version of these terms was in evidence before me. Accordingly it was not possible for me to see which terms had changed and which, if any, had remained the same.

(vii) The meeting of 18 February 2003

[29] The letter written following this note is dated 18 February 2003 and was taken to a meeting with the pursuers on that day. The first paragraph of the letter reads:

"I refer to the above insurance which falls due for renewal on 1 March 2003 and now have pleasure in enclosing the Renewal Invitation from Woodbrook Underwriting Agencies together with the supplementary Warranties/ Endorsements/Exclusions applicable. The endorsements relevant to yourselves have been highlighted accordingly." [emphasis added]

Attached to the letter was a copy of the Renewal Invitation (referring, as before, to the "Alarm Warranty (Central Station)") and a copy of the Supplementary Warranties. The latter had been highlighted in a number of places, including at P17 Alarm Warranty (Central Station), which had also had an asterisk put against it. However, the General Conditions applicable to the policy were not included with the material given to the pursuers at the meeting. They could not have been included, since Mr McCombie had himself not received them. He did not receive them until after the fire.

[30] In preparation for the meeting with the pursuers, Mr McCombie had also had typed out a note headed "Outstanding Matters". A hand-written date on the note suggests that the meeting was on 19 February 2003, but it was agreed in evidence that it probably took place on 18 February. Nothing turns on this. Point 4 on that note again raises the question whether the intruder alarm at the new premises had been upgraded. It reads as follows:

"4. Re. Alarm Warranty on Woodbrook Policy - bells only at moment - we sent a letter in Feb last year to Mr Beaton - was it ever upgraded - copy letter attached."

The reference to the "letter in Feb" is to the letter of 22 February 2002 to which I have referred in para.[24] above. There are manuscript notes against a number of the points on the note, possibly indicating that these points were discussed at the meeting of 18 February 2003, but nothing against point 4. It is not apparent from the annotations on the note what discussions, if any, there were about the upgrading of the alarm. Mr McCombie in his evidence in chief said that he could not remember discussing it, though it would have been surprising if he had not. He suggested that maybe the answer was that it had been upgraded. In cross-examination he said he thought it was likely that he would have asked the Beatons whether the alarm had been upgraded. That was why the point was noted in advance of the meeting. Asked whether it was likely that any of the Beatons had told him at the meeting that the alarm at the old premises had been downgraded, he said that that would obviously have registered with him. He would have said, "that's a problem" or something to that effect. I accept that he was not told that the system at the old premises had been downgraded.

[31] Before turning to discuss further the evidence about this meeting, I should refer in more detail to the highlighting of the "endorsements relevant to yourselves", since this is illustrative of the difficulty I had with certain parts of Mr McCombie's evidence and the reliability of his attempts to re-construct what had happened. Mr Russell, the expert witness called by the defenders, praised Mr McCombie for bringing his clients' attention the particular Supplementary Warranties relevant to them and described this as "an example of a good insurance adviser making his client fully aware of all matters relevant to the renewal process". The steps he had taken were "all indicative of Mr McCombie having done an extremely good job for his clients". This was the picture which both the defenders and Mr McCombie sought to paint. Mr McCombie had thought it very important to go through the applicable warranties with the clients. He had asked someone within the office to highlight the relevant warranties so as to bring them to the clients' attention, with a view to going through them at the meeting. When asked in cross-examination whether he would have discussed the warranties at the meeting of 18 February 2003, he said that bearing in mind the effort expended in preparing the notes and highlighting the warranties, he could not think that he would not have mentioned them, though he had no specific recollection of doing so. It would be normal practice to mention the warranties. He repeated this in re-examination. He would have gone over the relevant warranties and explained to the clients the consequences of their being in breach of warranty. When the highlighting was examined, however, it turned out to be in many respects entirely misleading. Some warranties were correctly highlighted. But in other cases, instead of highlighting the warranties, the person responsible for carrying out the job had highlighted a waiver of those warranties. A few examples will illustrate the point. The terms mentioned on the Renewal Invitation from Woodbrooks included a "Five Lever Mortice Deadlock Warranty", a "Portable Heating Warranty" and a "Fire Appliance Maintenance Clause". On the copy of the Supplementary Warranties the defenders had highlighted P15, P14 and P26 as corresponding to these warranties. P15 was not in fact the "Five Lever Mortice Deadlock Warranty" but a "Five Lever Closed Shackle Padlock Warranty Waiver". Similarly, P14 was not the "Portable Heating Warranty" but a "Portable Heaters Clause Waiver" and P26 was not the "Fire Appliance Maintenance Clause" but a "Fire Appliance Maintenance Clause Waiver". The warranties themselves were not contained in the document copied for the clients but were to be found in the General Conditions contained in the Certificate of Insurance, which the defenders had never received. The person in the office responsible for highlighting had no doubt done her best. She had highlighted the terms which most nearly corresponded to the description of the warranties in the Renewal Invitation, without appreciating that those warranties were contained in another document. Mr McCombie said in re-examination that at the meeting of 18 February 2003 he did not notice any problem between the warranties listed in the Renewal Invitation and those highlighted by the person in his office and handed to the pursuers at the meeting. Later he accepted that it was "possibly right" that the discrepancies had not been noticed because the warranties had not been discussed. It was also "possibly right" that none of the highlighted warranties had been discussed. In my opinion this conclusion is unavoidable. The importance of this is not that the clients were misled. It is that it demonstrates quite clearly to my mind that, contrary to what Mr McCombie said must have happened, there cannot have been any significant discussion at the meeting about the terms applicable to the insurance. It is inconceivable that some of the wrong highlighting would not have been noticed if there had been a discussion about the terms. It does not reflect well on Mr McCombie's thoroughness and diligence as an insurance intermediary. Most important of all, it undermines any confidence one might otherwise have in relying upon evidence given by Mr McCombie on the basis of what he would expect, and be expected, to have done as a thorough and conscientious professional man.

[32] I heard evidence about the meeting of 18 February 2003 from both Euan Beaton and Mr McCombie. I have already referred to Mr McCombie's evidence. Euan Beaton said that he would have expected Mr McCombie to have told him about the significance of the relevant warranties. It was put to him in cross-examination that at the meeting Mr McCombie would have gone through the requirements of the P17 warranty. Mr Beaton did not accept this and neither do I. Mr Beaton said that if there was discussion about alarms at the meeting, the focus would have been on the alarms at the new site. I do not think that there was any serious discussion about the alarm at either site. Had there been, I would have expected the outcome to have been annotated against point 4 of the note prepared by the defenders in advance of the meeting as an aide-memoire. I do not think that it was drawn to the pursuers' attention at that meeting that the central station alarm warranty applied to the old premises. The issue was probably never raised. Nor do I think that Mr McCombie left that meeting any better informed as to whether the alarm at the new premises had been upgraded.

[33] At or after the meeting the pursuers took the decision to renew the insurance on the terms offered. Although the premium had risen markedly - to about £56,000 - the alternative quotation from the Lloyd's market was even higher.

(viii) The survey of the pursuers' premises and the surveyor's risk improvement requirements

[34] One of terms of the renewal was that a survey should be carried out on the insured premises by a surveyor appointed by insurers. The surveyor appointed to carry out the survey was Mr Ken Lawson of Risk Management Surveys Limited ("RMS"). The survey took place towards the end of March 2003. Mr Lawson reported back to Woodbrooks. In addition to his formal survey Reports, he submitted reports (each extending to two or three sheets of paper) of the Risk Improvements to be implemented at each site. To distinguish these sheets from the formal survey Reports, I shall refer to them as the "Risk Improvement sheets".

[35] On 16 April 2003 Woodbrooks wrote to the defenders attaching the Risk Improvement sheets for the Mintlaw premises (Premises B and C). Those for the MacDuff premises (Premises A) had been sent earlier. That letter was in the following terms:

"We are now in receipt of the surveyors reports following his recent visit to the undermentioned premises and would advise as follows:

Premises (B) - Old Site, Station Road, Mintlaw

Report No 2003/288:

We attach a list of risk requirements which are to be implemented by the assured.

Premises (C) - New Site, Station Road, Mintlaw

Report No 2003/289:

We attach a list of risk requirements which are to be implemented by the assured.

We await your confirmation within the next thirty days that these Risk Improvements have been complied with."

It should be noted here that the Risk Improvement sheets attached to the letter bore the RMS Report numbers - 2003/288 and 2003/289 - but were not headed up with the identification of the premises to which each referred. It seems that Woodbrooks did not pass on the survey Reports to the defenders at this time. Mr McCombie said, and I accept this, that they only received them at some time after the fire, probably in late 2004.

(ix) The Risk Improvement sheets

[36] The Risk Improvement sheets relating to RMS Report No 2003/288 ran to seven numbered points over two pages. Those relating to RMS Report No 2003/289 ran to thirteen points extending over three pages. It is necessary to set them out in full.

[37] The Risk Improvement sheets for Report No 2003/288 read as follows:

"RMS Report No. 2003/288

RISK IMPROVEMENTS

REQUIREMENTS

Fire:

1 The abuse of electrical systems etc. and their lack of maintenance are major causes of fire and can also result in death and injury. Your attention is drawn to the Electricity at Work Regulations 1989 which make requirements to ensure that electrical installations are safe in use and thus it is required that this is given your early attention. In the circumstances please arrange for appropriate inspections with electrical engineers or electricians who are members of NIVEIC or ECAS.

Any electrical defects found require to be remedied immediately in accordance with the current edition of the Institution of Electrical Engineers Regulation for Electrical Installations (the 'IEE Wiring Regulations') where they apply.

2 It is required that the appropriate portable fire extinguishers be provided adjacent to electrical switch boards etc.

3 The use of the Hydrasun oil-fired fan assisted warm air unit for defrosting purposes is no considered a suitable means of providing heat. It is required that an industrial electric heater be used when defrosting is required.

Similarly, it was noted that an LPG torch is used for removing build-ups of ice from pipes etc. This is not considered to be good practice and a safer means of ice removal requires to be used. Accordingly, a task specific risk assessment requires to be carried out which must consider the areas where this is taking place, the combustibility of surrounding panels and insulation, the type of refrigerant being used etc. Safer methods of ice removal would seem to include the use of electric hot air guns [with all necessary safety precautions taken] or the use of a methylated spirit spray with all appropriate fire and health and safety precautions taken.

It is suggested that discussion and agreement with the H&S Executive might be prudent.

4 It is required that all combustible pallets, crates and lumber be kept to a minimum and if possible removed from site. Any external storage of combustible items requires to be kept to a minimum and must be stored no closer than 9 metres from the building.

Special perils:

5 The cause of the water ingress through a small section of roof requires to be ascertained and repairs undertaken.

Theft:

6 It is required that the intruder alarm system have its signalling upgrade with it being sent to the Police Authority via a NACOSS Approved Alarm Receiving Centre (ARC), included in the 'Official List of Nacoss Recognised Firms', using the BT RedCARE system.

7 This site tends to be unoccupied for periods during the day but the building is not secure. It is required that the doors be locked when there is no working presence. The use of a mechanically coded door lock[s] may assist."

[38] The Risk Improvement sheets corresponding to Report 2003/289 were in the following terms:

"RMS Report No. 2003/289

RISK IMPROVEMENTS

REQUIREMENTS

Fire:

1 It is understood that all composite insulation panels are inspected on a daily basis; this is considered to be good practice. It is required that this be done to ensure that they remain in a good state of repair and any damage repaired together with a record kept of such incidents. Damaged panels require to be replaced with a panel approved to LPS 1208 or be totally non-combustible. Minor damage can be repaired using sheet metal of minimum thickness equivalent to the original, this being securely bonded and fastened in place.

In addition, it is required that gaps around service openings through panels (e.g. for hoses, pipes, ducting, cables, etc.) where the combustible core is exposed must pass through a non combustible sleeve and be fire stopped as recommended by the panel manufacturer or alternatively an intumescent sealant used. Exposed ends must be capped in accordance with the manufacturer's instructions. Also, heater flues or hot ducting positioned in the proximity of combustible composite panels require to be located no closer to the panel than three times the diameter of the flue or duct and should not pass through such panelling. If panel penetration is unavoidable, hot flues, pipes or ducts require to be enclosed within either a non-combustible insulating sleeve at least 40mm thick or a proprietary sleeve system achieving 60 minutes fire resistance in terms of integrity and insulation. Any gap between the sleeve and panel is to be filled with mineral fibre or other suitable non-combustible material.

2 Various holes in masonry walls for the passage of cables, pipes and the like were noted within the building. These holes require to be fire stopped to the full the (sic) thickness of the wall using brick, concrete or similar in order to help prevent the passage of smoke, flames and hot gases if a fire should occur.

3 It was noted that the portable fire extinguishers and fire hosereels were overdue their annual maintenance check. It is required that all fire extinguishing media [is] maintained under an annual service contract with the manufacturer, supplier or by a specialist maintenance company.

4 It was noted that an LPG torch is used for removing build-ups of ice from pipes etc. This is not considered to be good practice and a safer means of ice removal requires to be used. Accordingly, a task specific risk assessment requires to be carried out which must consider the areas where this is taking place, the combustibility of surrounding panels and insulation, the type of refrigerant being used etc. Safer methods of ice removal would seem to include the use of electric hot air guns [with all necessary safety precautions taken] or the use of a methylated spirit spray with all appropriate fire and health and safety precautions taken.

It is suggested that discussion and agreement with the H&S Executive might be prudent.

5 It is required that all combustible pallets, crates and lumber be kept to a minimum and if possible removed from site. In addition it is required that all external combustible storage must be kept at least 9 metres from the building.

6. It is required that the kitchen extraction system ducting must be inspected and cleaned as necessary, ideally by specialist contractors, at regular internals not exceeding 12 months.

7 It is required that the gas cylinders within the development kitchen are chained to the wall to prevent them from being knocked over,

8 The door to the main electrical switchroom requires to be fitted with a lock and this area kept secure at all times, with access permitted only to authorised users.

9 The storage area for polystyrene packing materials over the chills was untidy. This area requires to be cleared out, kept tidy and any small waste "off-cuts" etc. removed on a regular basis.

Theft:

10 It was noted that the cold store ... which contains the major proportion of the finished stock ... is not protected by the intruder alarm system. It is required that all doors to this store be protected by suitable and appropriate magnetic contacts and if possible movement detection provided internally.

11 Presently, it is understood that the intruder alarm system comprises a single zone and therefore no protection is provided to portions of the premises which are unoccupied at night e.g. the offices. It is required that the usage of the building be examined and appropriate zoned areas created which protect unoccupied areas when other portions of the building remain occupied.

12 It is required that each authorised operator of the intruder alarm system is allocated an individual access code to enable any recorded event to be identified to that operator.

13 The movement detector adjacent to the battery charging units appeared to be faulty. It is required that this be checked and replaced if necessary.

RECOMMENDATIONS

Fire:

1 It is recommended strongly that an automatic fire detection and alarm system is installed throughout the premises in accordance with a Type P1 System complying with BS: 5839: Part 1: 2000.

Liability:

2 The small "bridge" across the burn is insecure from a liability aspect. Prudence would dictate that this deficiency be improved.

(x) Evidence about what was discussed during the survey

[39] There was some dispute about what happened during Mr Lawson's survey of the two premises at Mintlaw and the extent to which the matters which subsequently found their way into the Risk Improvement sheets were discussed and agreed, or at least understood, by Euan Beaton.

[40] Euan Beaton recollected meeting Mr Lawson. In his evidence in chief he said that he did not accompany Mr Lawson around the premises but arranged for Bob Middleton, who was employed by the pursuers as an engineer, to do so. He did not recall his brother, Paul, being present. He did not specifically remember meeting Mr Lawson afterwards. He remembered that the composite panels were a "hot potato" and he thought he would have discussed these with Mr Lawson at the beginning of the visit. He did not recall discussion of the alarm system in either building. In cross-examination he was shown the survey Reports prepared by Mr Lawson. He had not received these. He accepted that they appeared to reflect a detailed systematic survey carried out by Mr Lawson. It seemed from the Reports that Mr Lawson had inspected the intruder alarms at both Mintlaw sites. He could not recall Mr Lawson discussing the alarms with him, but accepted that, given the nature of his interest, it was likely that he would have done so.

[41] Mr Lawson began his evidence by explaining his normal practice. He regularly carried out surveys for Lloyds' underwriters and insurance companies. Typically when instructed to carry out a survey, he would go to the premises, meet the insured, carry out the survey, and discuss with the insured any matters that arose during the survey, including risk improvement requirements or recommendations. I interject to point out that Mr McCombie confirmed from his experience that this was the norm - he had never known a surveyor not to discuss his thoughts with his clients. Mr Lawson said that during the course of his survey he would make hand-written notes and mention anything he noticed to the person accompanying him. He would use his notes as the basis for a Report to be issued to underwriters and Risk Improvement sheets to be passed to the insured via the broker. He would not expect the Report to be passed on to the insured. He would not include any items in the Risk Improvement sheets without first having discussed them with the insured. He had no further involvement after the Report and Risk Improvement sheets were issued. The hand-written notes would be shredded after about a year. The notes for this inspection were long gone.

[42] Turning to the inspection of the pursuers' premises, Mr Lawson recalled carrying out the survey. In his evidence in chief, he described how he drove from home in central Scotland and went first to the pursuers' premises at MacDuff, spent the night in Peterhead and visited the two buildings at Mintlaw the next day. He thought he arrived at Mintlaw "fairly sharp" in the morning, at about 9 a.m., and did not leave until well into the afternoon. He recalled meeting "the Mr Beatons" - whom he identified as Euan and Paul Beaton - and had a discussion with them when he arrived, at which, after the usual pleasantries, he would have gone through his pro-forma and ask a number of standard questions. He then walked around the premises. Typically this might take about an hour, but he could not remember in this case how long it took. He started at the new premises. He thought he had been accompanied around the new premises by one of the Beatons, possibly Euan Beaton, and possibly also by an engineer, though he could not be certain of that either. He could not identify Euan Beaton, who was sitting at the back of the court, as the one who had come round with him - he had had the impression that the person who accompanied him had looked different in a number of respects. Nor, in cross-examination, could he identify Paul Beaton. The persons who accompanied him had been wearing white coats and hats.

[43] Mr Lawson was asked about his inspection of the new premises and was referred to his Report No 2003/289 covering those premises. He explained the fire risk arising from the presence of foam and composite panels. This had caused insurance premiums to rocket. He had discussed this with the Beatons, probably Euan Beaton. As regards fire protection and security, he would first go through the pro-forma by asking questions about the alarm system and then verify the details as he went round the building. He explained that NACOSS was an approval body on which insurance companies based their standards. He explained that BT RedCARE worked by sending an alarm to the receiving centre if the signal was interrupted. He was taken to the Risk Improvement sheets for Report 2003/289 covering the new premises. Amongst other items, his attention was drawn to item 11 concerning the inadequacies of the intruder alarm system and the need for the area to be sub-divided by zoning of some kind. He said that this would have been discussed along with all the other items.

[44] He then turned to his inspection of the old premises, which he described as "unoccupied". He thought that the engineer had accompanied him around this site. He was referred to his Report 2003/288 and the relative Risk Improvement sheets. In the Report, the fire detection and alarm system was described as "audibles only". The intruder alarm system was described as "non NACOSS with local audible only". His Report noted that "this requires to be improved notwithstanding that there is no loss history and it is away from high crime incidence areas." He explained that the premises themselves were of value and had some stock in them. Insurers do not like unoccupied buildings. In the Risk Improvement sheets for the old premises he had noted that the "bells only" system was not acceptable and needed to be upgraded.

[45] Mr Lawson said that after inspecting both buildings he went back to the office and had a discussion about the risk improvements which he had identified as requiring to be made. This discussion would have lasted for about half an hour or more. He thought this discussion was with Euan Beaton. He recalled that Euan Beaton's reaction to the requirement for the intruder alarm at the old premises to be upgraded had been that it was not worth doing since there was nothing much kept there. Mr Lawson commented in his evidence that clients usually think that insurers require a good intruder alarm because of concerns about theft, but in fact they are interested in it more because of the risk of malicious damage.

[46] In cross-examination Mr Lawson accepted that he could not remember everything about the visit to Mintlaw. The Reports helped him to refresh his memory. He did distinctly remember seeing the composite panels and he remembered the discussion about the increase in premium. His recollection was that Euan Beaton accompanied him around the new building but not around the old. There were a number of points in his Report which did not make obvious sense and which he could not explain. For example, Report 2003/288 described an employee presence in the old building of 23 hours a day, six days per week, whereas it was 24 hours a day Monday to Friday and a half-day on Saturday. He described the old building as "mainly unoccupied" and "primarily silent and disused", which could have been an impression gained if he had walked around it in mid-afternoon but would have been corrected if he had raised it with anyone. In Report 2003/289, his summary of the shifts worked did not appear to add up. It wrongly suggested that there was an external door to the cold store. He accepted that he had no clear recollection of what he had been told or how these entries came to be made. As to whether everything would have been discussed at the meeting after his tour of the buildings, his evidence shifted somewhat. At one point, he said that the points which later featured in the Risk Improvement sheets would have been discussed either during the walk around the factory or at the meeting in the office afterwards. Later he said that, generally, all points would be discussed at the meeting afterwards even if they had been raised before. Later still, he said that he could not be certain that he discussed every point at the meeting afterwards, though his normal practice would have been to do so. He particularly remembered emphasising the foam panels and electrics. He "tended" to remember the discussion about the lack of an alarm system within the old premises.

[47] I accept that Mr Lawson, like Euan Beaton, was a credible witness doing his best to assist the court. But it is clear that Mr Lawson nor Euan Beaton had much detailed recollection of the visit. In Mr Lawson's case this is entirely understandable. He carries out many surveys. He makes notes and uses them for preparing his Report and note of Risk Improvement requirements. In due course, his notes are destroyed. I would not expect him to have a detailed unprompted recollection of what he had seen and said on any particular visit occurring some four years earlier. Making the best I can of the evidence, I do not think it likely that Euan Beaton accompanied him around either building. I see no particular reason for him to have done so if he had deputed Mr Middleton to take him round. I thought that Mr Lawson's inability to recognise Euan Beaton as the man who had accompanied him was telling. It was not simply a case of not being sure. He identified differences between Euan Beaton and his recollection of the person who had accompanied him. Whether Euan Beaton accompanied Mr Lawson around the new building may not matter. Of more importance is the question whether he accompanied him around the old building. I have formed the view that he probably did not. This was, I think, Mr Lawson's final position in his oral evidence. And it seems to me to fit with the existence of inaccuracies in Mr Lawson's Report. Had Euan Beaton accompanied him, I would have expected the two of them to have had a fairly full discussion as they went round. During such a discussion, these points would to have been clarified; and the errors would probably not have crept into the Report. It is also not clear precisely what was discussed at the meeting afterwards. I am persuaded that there was a meeting afterwards between Mr Lawson and Euan Beaton but, if that meeting lasted for only half an hour or so, there would not have been much time to go through in any detail all the points which were subsequently put into the Risk Improvements sheets. If there was a serious discussion about composite panels, as Mr Lawson remembers and Euan Beaton accepts (though he thinks it happened at the beginning of the day rather than later), this would have left less time for other matters. Further, had all the Risk Improvement requirements been discussed and agreed before Mr Lawson left, there would have been little scope for Euan Beaton to have challenged any particular requirement when he received the Risk Improvement sheets a few weeks later. Yet, as will be seen, he did respond robustly to some of the requirements in the Risk Improvement sheets, and insurers accepted his comments.

[48] I think it very likely that the question of alarms was mentioned when Mr Lawson visited Mintlaw. Since the systems in the two buildings differed from each other, it is likely that Mr Lawson spoke about the alarm system in each building to the person accompanying him in that building. In the case of the new building, that may have been Euan Beaton but, on balance, I think not. In the case of the old premises it was probably Mr Middleton. It is possible, indeed I think it likely, that the question of alarms was mentioned again at the meeting at the end of the inspection. But having considered the evidence carefully, I do not think it likely that specifics were mentioned. I suspect that at that post-inspection meeting there was no more than a quick run through of the various headings that Mr Lawson had made in his notes without much elaboration on any particular point. Taking the evidence as a whole, it does not seem to me that the evidence establishes that the risk improvement requirements relating to upgrading the intruder alarm at Premises B were discussed with Euan Beaton at any time during Mr Lawson's visit to Mintlaw.

[49] I have said that Mr Lawson's lack of detailed recollection of what was said and done at the time of his visit is entirely understandable. It seems to me that, if my assessment of what happened on that day is anywhere near the mark, Euan Beaton's lack of detailed recollection about the visit is also understandable. From his point of view, nothing of great significance was done or said. This seems to me to accord also with his initial reaction of puzzlement on receiving the Risk Improvement sheets when they were sent to him.

(xi) Risk Improvement sheets sent to the pursuers

[50] On 25 April 2003, the defenders sent the Risk Improvement sheets for Premises B and C to the pursuers. Already, by that time, some nine of the thirty days allowed by underwriters for compliance had passed. There is some uncertainty as to whether the third page of that relating to Premises C - which contained two "Recommendations" in addition to the earlier "Requirements" - was sent to the pursuers. Euan Beaton said that he did not recall receiving three sheets for the risk improvements relating to Report 2003/289. There is some support for that in the fact that the last sheet does not appear anywhere in the defenders' main files, nor is there a copy containing the type of annotation which Euan Beaton made on the other sheets against each point. The point is ultimately not of great significance, since it relates to Premises C rather than to Premises B.

[51] The pursuers did not receive copies of the survey Reports; nor did they receive a copy of the letter from Woodbrooks to the defenders which identified which Risk Improvement sheets related to which building. In the pursuers' case on Record, there is criticism of Mr McCombie for not sending the Woodbrooks covering letter, for had this letter accompanied the Risk Improvement sheets there would have been no room for doubt as to which sheets related to which building. This criticism was not pressed and rightly so, since Mr McCombie gave evidence that it would have been unusual for an insurance intermediary to forward to his clients letters received from underwriters. However, the fact remains that when the Risk Improvement sheets were sent to the pursuers, there was nothing sent to them to spell out in simple terms which building each sheet related to.

[52] Mr McCombie's letter to the pursuers of 25 April 2003 reads as follows:

"I refer to the recent survey carried out by Mr Lawson at your premises and have now received a note of the Risk Improvements that have to be carried out at both premises, situate Station Road.

I confirm that they have given 30 days for the Risk Improvements to be complied with and perhaps you could telephone me once you have had a chance to study the details of the report. I would welcome your comments on whether all aspects of the report were discussed with you at the time of the survey, and/or whether all requirements can be complied with given the time scale."

The "report" referred to in the second paragraph of the letter is the note of risk improvements (i.e. the Risk Improvement sheets) rather than the Report prepared by Mr Lawson for underwriters. The 30-day time limit is referred to without any indication that only 21 days remained for compliance. However, the possible need for an extension was taken up by Mr McCombie with Woodbrooks, to whom he wrote on the same day, informing them that he had passed on the Risk Improvement sheets to the pursuers and stating that, because of the number of improvements required, it might be necessary to try to negotiate a short extension to the 30-day limit.

[53] It is not clear whether Mr McCombie got any response from the pursuers to his letter enclosing the Risk Improvement sheets. A note from an assistant on a copy of the letter reads: "Have we heard from Euan Beaton?" Euan Beaton said in evidence that he thought he had telephoned Mr McCombie to say that he was not comfortable with the Risk Improvement Sheets and was not sure which was which. Whether in response to this or by some other means, a meeting was arranged.

The meeting of 20 May 2003

(i) The meeting

[54] The meeting took place on 20 May 2003 at the Mintlaw premises. Only Euan Beaton and Mr McCombie were present. They went through the Risk Improvement sheets together. In the course of the meeting Euan Beaton annotated the Risk Improvement sheets with comments about what had been done or would be done, or, in some cases, would not be done. He gave Mr McCombie a copy - or the original, it does not matter which - to take away with him.

(ii) Subsequent discussion with underwriters about risk improvements

[55] On 22 May 2003 Mr McCombie wrote to Woodbrooks. He enclosed with his letter copies of the risk requirement sheets as annotated by Euan Beaton. In the letter he set out his own summary of the pursuers' position. He had not spoken to Euan Beaton since the meeting. Nor, as appears from para.[65] below, does it appear that he took any notes of his own at the meeting. His summary must therefore have been derived from his discussions with Euan Beaton at the meeting, no doubt prompted by the copies of the Risk Improvement sheets, as annotated by Euan Beaton, which he had taken from the meeting. He did not in terms identify in his letter which sheet related to which site, but he set out the sheets and the individual requirements sequentially. Under reference to point 6, he simply wrote the word "Completed".

[56] On 28 May 2003 Woodbrooks replied saying that underwriters had found the pursuers' comments acceptable, and looked forward to hearing further in respect of the outstanding requirements. That letter appears to have been mislaid by the defenders with the result that they did not reply. Woodbrooks wrote to the defenders again on 24 June 2003 saying that they were awaiting confirmation "that the remaining Survey Risk Improvements have been carried out" and looking forward to "receiving you advices within the next 7 days, otherwise terms will be imposed". Mr McCombie wrote back on 26 June 2003 stating that "the two outstanding recommendations ie, Numbers 2 and 12 have still not been completed". These recommendations were in respect of Premises C, though the letter does not say so. He went on to mention alterations being made to the new plant room, which were taking longer than expected, and the fitting of a new fire alarm system, a level 1 with Red Care. Again, these matters related to Premises C, though the letter is silent on that. He asked the insurers to bear with the pursuers while these matters were being finalised.

[57] On 23 July 2003 Woodbrooks sent the policy documentation to the defenders. Certain errors were pointed out and amended policy documents were sent out on 6 August 2003. There were further small corrections to the documentation made at a later date

(iii) The principal dispute about the meeting

[58] What happened at the meeting was the subject of conflicting evidence from Euan Beaton and Mr McCombie. It is not disputed that, when the meeting began, Euan Beaton was confused as to which sheets referred to which premises at Mintlaw. Mr McCombie maintained, in his evidence, that he quickly cleared up that confusion. Euan Beaton, on the other hand, insisted that Mr McCombie had been unable to clarify the position. He said that at the end of the meeting he was still unclear, and Mr McCombie knew this. This chapter of evidence is at the centre of this litigation. It is, therefore, necessary to consider it in some detail and make findings of fact.

(iv) Euan Beaton's evidence

[59] Euan Beaton's evidence in chief was that he read Mr McCombie's letter of 25 April 2003 and the attached Risk Improvement sheets but the "code" at the top, i.e. the RMS Report numbers, did not mean anything. He was not sure which sheets related to which site. A meeting was arranged for him and Mr McCombie to go through the sheets. This was the meeting of 20 May 2003. The meeting took place in the boardroom at Mintlaw. Mr McCombie had not brought his own copy of the Risk Improvement sheets with him. They went through the sheets together. There was some discussion about which sheets related to which building, but the uncertainty remained and Mr McCombie was unable to clarify the position at the meeting. In relation to the various items on the sheets, Euan Beaton said what action he had taken to date and annotated the sheets with comments. At the end of the meeting he photocopied the sheets with his annotations on them and gave them (or a copy) to Mr McCombie.

[60] He was taken in his evidence through each of the items on the Risk Improvement sheets. Dealing first with that referenced to RMS Report No 2003/288, he said that when he went through the items with Mr McCombie, he took item 1 to relate to both buildings. At the end of the first paragraph, which called for the pursuers to arrange inspections of the electrical systems, he wrote: "No. 1 Buckie to send". This referred to the electrical contractor in Buckie. Items 2 and 3 had seemed to him to relate to both premises. He wrote "Done" against item 2 and the first paragraph of item 3, and put a tick and the words "Disposed of" by the second paragraph of item 3 relating to LPG torches. They had LPG torches in both factories. Euan Beaton said that he had thought that item 4 referred to the new site (Premises C) where the perimeter fence did not allow storage of pallets 9 metres away from the building. In manuscript by this item he changed the "9" to "3" and added the comment: "But storage of pallets + box kept to a minimum". He said that item 5 could have related to both sites and he ticked it to indicate that the leaks would be dealt with. He had thought that item 6, which concerned the requirement for a NACOSS approved central station BT RedCARE intruder alarm system, related to the new site. He wrote the word "Done" with a tick against that item, since the alarm system in the new factory did comply, and underlined the words "RedCARE system". By item 7, which clearly related to the old site, he wrote "Noted".

[61] Turning to the Risk Improvement sheets relating to RMS Report 2003/289, Euan Beaton said that he had thought that item 1 related to both sites. He ticked each paragraph. Items 2, 3, 4 and 5 related to the new site. Against item 2 he had written the words "Not done yet, 2 weeks", indicating that it would take about two weeks to stop up the holes in the masonry walls. By items 3 and 4 he had written the word "Done"; and he had simply put a cross by item 5. He ticked items 6, 7, 8 and 9, thinking that item 7 related to the new premises, and that items 6 and 9, and possibly 8, related to both. Item 10 related to the new premises, but he had not been willing to do this. He had written: "Not done - won't be done". By item 11, which also related to the new premises, he had written "J.Mc." to indicate that Mr McCombie was going to check what the insurers' requirements really were in this regard. Item 11 related to the new site. He had not known whether the system had the facility for individual access codes and wrote "t.b.c" against this item, meaning "to be confirmed". He thought that item 13, concerning a movement detector, applied to the old premises. He wrote the word "Done" against it.

[62] It was put to Euan Beaton in cross-examination that it was obvious that Report No 2003/288 related to the old premises and that Report No 2003/289 related to the new. His answer was that with hindsight it was clear that that was so (though there were still items in each which appeared to cross over to the other), but at the time it was not clear. Even Mr McCombie did not understand which was which. At the time they did not did not pick up the features which made it obvious. They thought parts of each report related to the old or new premises, or both. They were both blind to the obvious. Hindsight was a great thing. What is obvious now was not obvious then.

[63] Euan Beaton was asked how he could have thought that item 6 on the Risk Improvement sheets referenced to Report No 2003/288 could have related to the new premises since, by the time of the survey, a NACOSS central station BT RedCARE intruder alarm had already been installed in the new premises.. Again he accepted the logic of the position. But he insisted that he had thought that the requirement related to the new site - otherwise why would he have written the word "Done"? He said that when the meeting ended it was left that the uncertainty was to be clarified by Mr McCombie. In the event, Mr McCombie never came back to him about this, and Euan Beaton did not chase him up. He said: "I believed I had done everything."

[64] He was taken through other items on the Risk Improvement sheets. It is not necessary to set this out in detail. Again, in relation to a number of items, Euan Beaton accepted that it was now clear that each set of Risk Improvement sheets related to a different site. An example is the reference to the LPG torch in item 3 of the Risk Improvement sheets relating to Report 2003/388 and in item 4 of the sheets relating to Report 2003/289. Certain items, such as item 11 on Report 2003/289, clearly only related to one of the sites. He also agreed that it would be most unusual for a surveyor to produce two reports, in each of which some items related to one building and some to another. But that was not how he or Mr McCombie thought of it at the time.

(v) Mr McCombie's evidence

[65] Mr McCombie did not have a note of the meeting. He said that it was his normal practice to take a note and put it in his file. If there was no note in his file, and there was not, it probably meant that he had not taken one. He had not taken his file with him to the meeting and therefore did not have Woodbrooks' letter of 16 April 2003 to hand. They had worked from Euan Beaton's copies of the Risk Improvement sheets. He accepted that, when the meeting began, Euan Beaton had been confused as to which premises the various points on the Risk Improvement sheets applied to. His evidence was that he clarified this at the meeting. He had told Euan Beaton that the sheets with "288" on them referred to the old building and those with "289" on them referred to the new. He recalled that there had been a requirement to do with zone protection in the premises. This was to do with staff using the offices at night. This was a reference to item 11 on the Risk Improvement sheets for 2003/289. The only offices in use were those in the new premises. It followed that that Risk Improvement sheet related to the new premises. He had no specific recollection of correcting Euan Beaton's belief that item 6 on the Risk Improvement sheets for 2003/288 related to the new premises. In fact he had no recollection of any discussion about item 6 or about RedCARE. He denied that the meeting was adjourned so that he could go away to sort out the confusion. He did not need to check his file after the meeting to clarify which sheets related to which premises. Any initial confusion had been resolved at the meeting. In cross-examination, he added that if he had needed, or been asked, to go away to clarify the position, he could easily have done so and would have got back to Euan Beaton on it. He would not simply have ignored such a request. That would have been grossly irresponsible.

[66] He was taken through the points in the Risk Improvement sheets for Report 2003/288. With reference to point 1, he accepted that both premises had electrical systems. He did not know which building had the portable fire extinguishers referred to in item 2. He did not know whether the points made in item 3 referred to the old or the new premises. He did not recall the discussion about item 4 which led to Euan Beaton deleting the figure "9" and replacing it with a "3". Under reference to item 5, he did not know that a section of the roof needed repair. Item 6 contained the reference to NACOSS approval of the intruder alarm system. He could not recall whether or not, at the time, he had been aware that the new premises already had what was required in item 6. As far as he was aware, the alarm system at the old building was not NACOSS approved. He did not think he had been aware of either building having BT RedCARE, though there were a lot of changes going on at the new premises. He said that item 7 could not apply to the new premises.

[67] He was then taken through some of the items in the Risk Improvement sheets referenced to Report 2003/289. Item 1 dealt with composite insulation panels. He said that he was told that they had been removed from the old premises, but he had not re-visited the premises since January 2002. Item 11 was the one which fixed in his mind that these Risk Improvement sheets related to the new premises. Against item 10 Euan Beaton had written: "Not done - won't be done". He could not recall this from the meeting. If asked about it now, he would say it referred to the new premises.

[68] In cross-examination, he again confirmed that there had initially been confusion in Euan Beaton's mind as to which Risk Improvement sheets referred to which premises. He had cleared up the confusion by reference to item 11 on the Risk Improvement sheets referenced to Report 2003/289. He did not recall whether this clarification had occurred at the beginning of the meeting, or only when they reached that point on that Risk Improvement sheet. He was asked to clarify what had been his understanding at the time of the meeting of the alarm at the old building. He said that at the time of the meeting, his understanding of the alarm system at the old premises had been that it was central station. He would not have known that it was NACOSS approved. He had not been told that it was anything other than non-NACOSS. He could not remember what Euan Beaton had told him at the meeting, but he had come away with the understanding that the required upgrading had been done. In re-examination he said that it was in May 2003 (which I took to refer to this meeting of 20 May 2003) that he learned that the old premises had been upgraded to NACOSS. Mr McCombie was adamant that it would not have made sense for Euan Beaton to think that item 6 related to the new premises, since the new premises already had a BT RedCARE system.

(vi) Discussion of the evidence and conclusions about the meeting

[69] Although there is further evidence affecting the assessment of what happened at the meeting, to which I shall refer below, it is appropriate that I should now set out my conclusions about the main points in dispute.

[70] I have formed the clear view that, in the main, Euan Beaton's evidence about the meeting is to be preferred to that of Mr McCombie. My reasons for preferring his evidence can be stated fairly briefly.

[71] In my opinion, it is useful to start by recognising the fact that, when the meeting began, Euan Beaton was confused as to which items on the Risk Improvement sheets related to which premises. Mr McCombie accepted in evidence that Euan Beaton had been confused then. That confusion is not entirely surprising, particularly since, as I have found earlier, there was no thorough and systematic discussion of Mr Lawson's recommendations and requirements at the end of the survey. It may have been this confusion which prompted Euan Beaton to telephone and suggest a meeting, if this is indeed what happened. Whether or not that was what prompted the meeting, the fact is that there is no doubt not only that Euan Beaton was confused but also that Mr McCombie was aware of that fact. Therefore such part of the cross-examination as was designed to challenge Euan Beaton on this - by pointing out, for example, that he had had the documentation for some time and had not raised any questions about it before the meeting - was beside the point, even if factually correct. So also was cross-examination designed to show that he ought to have realised which sheets related to which building - a proposition which, in the cold light of day, Euan Beaton accepted. This point might well have been relevant to inform a submission that it was highly improbable that Euan Beaton was confused; and, further that, even if Euan Beaton was confused, Mr McCombie could not be criticised for not realising it. However, these are not live issues so far as concerns the beginning of the meeting at least, since Mr McCombie both accepted that Euan Beaton was initially confused and also accepted that he was aware of this initial confusion.

[72] It is also necessary, in considering different accounts of the meeting, to bear in mind that Risk Improvement sheets were sent by the defenders to the pursuers without any covering letter saying which sheets related to which building. The pursuers correctly did not press their case that the defenders were negligent in not forwarding to the pursuers the letter from Woodbrooks dated 16 April 2003. That letter set out in black and white which sheets related to which building. But I find it surprising that, if the defenders, for whatever reason, preferred not to pass on Woodbrooks' covering letter, they did not send some letter of their own explaining in a straightforward manner which sheets applied to which building. I cannot help thinking that if they had done this none of the problems that are at the centre of this litigation would have happened. The Risk Improvement sheets were marked only with the RMS Report number. In the absence of some covering letter saying which was which, the recipient had to try to work it out for himself. However easy it may seem now to work out which was which, I can well understand that it might not have seemed so obvious then. A likely reaction on part of Euan Beaton would be to take a quick look at the documents, form a view that they were confusing, telephone Mr McCombie and suggest a meeting, and not go back to the documents until the meeting. This is probably what happened. It is certainly consistent with him having been confused at the beginning of the meeting.

[73] It is not at all clear how the meeting went. I did not gain the impression from the evidence that there was a discussion at the beginning of the meeting to try to resolve the uncertainties. Mr McCombie said at one stage in his evidence that he clarified everything at the beginning. I do not accept this evidence. Many of the items which, with hindsight, might have made it clear which sheet related to which building came later on in the sheets. I was particularly struck by the fact that it was item 11 on the Risk Improvement sheet for Report 2003/289 which Mr McCombie thought made the position clear beyond all doubt. On further questioning, Mr McCombie could not be sure when they had reached this item. I think it most likely that Mr McCombie and Euan Beaton simply sat down together and went through the Risk Improvement sheets item by item. They would have approached the items in the sheets without necessarily asking on each occasion which building the item applied to. I doubt that sufficient attention was paid to the question. Comments would have been made about each item on the basis of assumptions that the item applied to one building or to the other. In most cases, it probably seemed clear.

[74] Item 6 on the Risk Improvement sheets for Report 2003/288 is, of course, crucial to the present dispute. I am satisfied on the evidence that when considering and commenting on this item, Euan Beaton did so on the basis that item 6 was referring to the intruder alarm system at the new building. His comment "Done" is explicable on one of two bases. One is that he was lying to insurers, hoping there would be no fire and he would get away with it. The other is that he believed that the question related to new premises. I prefer the latter explanation, for two reasons. First, I found him to be an honest witness in this as in other respects. I believed his explanation. Secondly, I did not see what motive he would have to lie in this form. It would not have cost an enormous amount to restore a telephone line to the old premises and to link the intruder alarm there to a central station. It might have cost more than the few hundred pounds which Euan Beaton mentioned in evidence, but probably not more than two or three thousand. Although he was not an insurance specialist, it seems to me that Euan Beaton knew enough about insurance to be fully aware that a lie about something like this would put his whole insurance cover at risk, not just for the old building but for the new building as well.

[75] I consider that at this stage of the meeting, when item 6 on the sheets relating to Report 2003/288 was discussed, Mr McCombie also assumed, without necessarily thinking very carefully about it, that it referred to the new premises. From his point of view, the comment "Done" made sense in this context. Ever since his inspection in January 2002 he had thought that the alarm at the new premises needed upgrading. But he had never found out that the upgrading had been done. The matter was raised in his letter of 22 February 2002 (as to which, see para.[24] above). There was a question raised about it, at least within his office, in July 2002 (see para.[25]). He was still uncertain in the lead up to the meeting of 18 February 2003, as is shown by point 4 of the note of "Outstanding matters" (see para.[30]). And there is no note of it having been discussed at that meeting of 18 February. So the query as to whether the system at the new premises had been upgraded was still unanswered. On the other hand, there was no live question about the old premises - he had never been told that the system there had been downgraded. Against this background, Mr McCombie would have been justified in thinking (absent other information) that the requirement in item 6 for the intruder alarm system to be upgraded was a requirement that applied to the new premises, not the old. It is true that he was probably aware that the system at the old premises was not BT RedCARE, and he may still have had doubts about whether it was NACOSS approved. To that extent, part of the requirement in item 6 might have applied to the old premises. But the language of item 6 does not suggest that the surveyor is talking of an upgrade to an already existing central station system. If Mr McCombie had thought that item 6 applied to the old premises, he would have been surprised by Euan Beaton writing "Done". It would not have made much sense. I would have expected this to have led to a full discussion at which the downgrading of the alarm system at the old premises would have been brought to light. There is no evidence that this happened. It would surely have been reflected in subsequent correspondence if it had. Instead, when Mr McCombie passed on Euan Beaton's comments to Woodbrooks, he simply wrote "Completed".

[76] In summary, I find that when Euan Beaton put the word "Done" against item 6 of the Risk Improvement sheets relating to Report 2003/288, he did so in the belief that that item was directed towards the intruder security system in the new premises, and not that in the old premises. Mr McCombie shared this misunderstanding. Whether, when they reached item 11 on the sheets relating to Report 2003/289, there was some realisation of the confusion under which they had been labouring, I cannot say. But they clearly did not go back to the items which had been discussed previously. In particular, they did not re-visit item 6 of the sheets relating to Report 2003/288. Mr McCombie left the meeting with a note of the comment made by Euan Beaton against that item which was made under a misapprehension as to which building the item applied to. I do not think that Euan Beaton was right to say that the meeting adjourned for Mr McCombie to go away and check the position. That suggests rather too much awareness of possibility that they had fallen into error. I cannot say whether, at any time before the fire broke out, Mr McCombie realised that there had been this confusion. If he did, he certainly did not tell the pursuers. He clearly had the means of knowing that item 6 related to the old premises, since he had the letter from Woodbrooks of 16 April 2003 which explained which sheets related to which site. It may be that he did not look at that.

[77] I should add that my conclusions as to what happened at the meeting are fortified (a) by what Euan Beaton told the loss adjuster immediately after the fire; and (b) by what Mr McCombie said in certain items of correspondence written after the fire. I refer to these matters in paras.[96] and [98] below. Meanwhile I should note that these findings conclude the issue of negligence in favour of the pursuer.

Renewal in 2004

[78] A renewal invitation was sent to the defenders on 22 January 2004. By this time the pursuers had installed a Chubb PS1 System Automatic Fire Alarm in Premises C, linked to central station, and this was notified to insurers. This resulted in a reduction of the premium for fire cover for the 2004 renewal. Renewal terms were notified to the pursuers on 12 February 2004. The terms and conditions were the same as the previous year.

The break-in at Premises B

(i) Outline narrative

[79] Early in the morning of Sunday 7 March 2004, intruders entered the old factory at Mintlaw (Premises B) and caused damage to the cold store. A blast freezer within the premises was switched off and the doors left open. The intruders were picked up on CCTV. One of them was an ex-employee. He was prosecuted and convicted. The pursuers made no claim on their insurance in respect of this incident.

[80] According to the pursuers, the intruders gained entry to the factory by ramming one of the roller shutter doors with a forklift. One of the pursuers' forklifts was found abandoned in a field. The pursuers took steps immediately after that weekend to have the roller shutter door replaced. Euan Beaton gave evidence that he contacted the Garage Door and Gate Company on the morning of Monday 8 March 2004, the morning the break-in was discovered, and obtained a quotation from them for the supply and fitting of a replacement door. The quotation was referred to in evidence. He accepted that quotation on the same day by writing on it and faxing it back. At the foot of his acceptance he wrote: "Please fit new door a.s.a.p." He was given an estimate of seven days for the new door to be fitted. In the meantime, the pursuers secured the premises by placing large plastic containers or bins in the opening. These were 600 litre containers, each about a metre wide and a metre in height. Two of them side by side blocked the opening and two more were placed on top. Each container was filled with water to make in more difficult to move. The damaged roller shutter door was rolled down to meet the top of the stack of containers. It was a tight fit. A person could not walk in past the containers. In the week following, whenever they needed to obtain access through that opening, the pursuers would go into the factory by another door - the only door which could be unlocked from the outside - and release the roller shutter from the inside. They could then move the containers with a forklift.

[81] The defenders disputed the part of this account relating to the means of entry into the premises. They maintained that the roller shutter door had been damaged much earlier than that. It was suggested that the vandals had gained entry on 7 March 2004 without having to force entry into the premises. They were not charged with or convicted of forcible entry. They were charged only with maliciously entering an insecure building and taking a forklift.

(ii) The evidence

[82] The pursuers' evidence on this issue came initially from Euan, Paul and Fergus Beaton. Paul Beaton said that he went to the site after being called by Fergus. A forklift had been used to damage the door. The CCTV footage of the new factory showed the forklift being taken from that building. He said that the roller shutter door had been damaged then. There had been no damage to the door on any previous occasion. Euan Beaton said that the intruders had set off the alarm but it was then silenced. Fergus Beaton confirmed that he was not aware of any prior damage to the door.

[83] The defenders led evidence from two police officers. PC Anderson arrived at the Mintlaw premises at about a quarter past two on the morning of 8 March 2004. He said that he met Paul Beaton there. Paul Beaton told him that that someone had tampered with a forklift at the new premises and had switched off a freezer unit in the old. He and Paul Beaton went to the old factory and saw the blast freezer. He was not looking for any damage to the factory doors. Paul Beaton did not complain that the door had been forced. If Paul Beaton had made such a complaint, he would have investigated for evidence of housebreaking. He had not asked which door they had entered through, or even whether that door was a door for vehicles or pedestrians. He took a statement in his notebook from Paul Beaton which Paul Beaton signed. I was given a photocopy of the statement and a transcript. At one point the statement says: "entry into the old premises was not restricted. I doubt the door to the old premises was closed or secure." He had understood the door to the old premises to have been open. He had spoken to Paul Beaton about this. Paul Beaton had said that there were technical difficulties with the door which prevented them securing it.

[84] DS Crowther did not attend at the time of the break-in but did so after the fire a week later. He then took over responsibility not only for the fire but for the incident of 7 March as well. His understanding was that there had been three youths in the curtilage of the Mintlaw premises. They had driven the forklift. They had also turned off the blast freezer in the old building. He had not learned of any damage being caused to the door of the old building and the incident was not viewed as one of forced entry - rather it was viewed as one of the youths walking in through an insecure door. He made the report to the Procurator Fiscal on the basis of which the complaint was laid against the three accused. They pled guilty to the first charge, that of maliciously entering an insecure building, and the second charge was not insisted on. There was no allegation of forced entry because there was no evidence to that effect. He learned that, after the incident, the pursuers had taken steps to block the door with large bins full of water. The bins had not been there on 7 March 2003. Asked about his understanding of what had been the condition of the roller shutter door on 7 March 2003, he said that he had been informed that it would not close properly. He said that he had spoken to three directors of the pursuers. They had all told him that the roller shutter door had been damaged previously. The bins had been placed there after the incident on 7 March and the gap had been stopped up as best they could. On the night of the fire, the fire was deliberately started by an intruder or intruders who appeared to have entered the old building through the opening left by the damaged roller shutter door. Two bins were found lying on their sides with the water emptied from them. The bins had plugs in them. In cross-examination he said that he had spoken to Mr Scott. Mr Scott had not told him how long the door had been damaged for. What he had was information that a uniformed constable had taken from Mr Warner, as well as PC Anderson's report on the computer system. He took the fact that the door had been damaged before 7 March 2003 from PC Anderson's report. It was not part of his enquiry. He was concentrating on the fire and what had caused it.

[85] Paul Beaton was recalled to answer questions about the statement he had made to PC Anderson. This statement had not been put to him in his earlier evidence. Under reference to the remark in the notebook that "entry into the old premises was not restricted", he said that he could not understand why PC Anderson had written this - at the time of the break-in, entry would have been restricted. Nor did he tell PC Anderson: "I doubt the door to the old premises was closed or secure"; though it was possible he had said something like: "I doubt the door will be able to close." The notebook recorded him saying: "The door to the plant room is not secure." This did not make sense, since this was an internal door. It was irrelevant to the question of an intruder obtaining access to the building. Paul Beaton expressed the view that the uniformed officer (PC Anderson) did not appear to be interested in whether entry had been forced. Indeed, he did not appear to be interested in the incident as a whole. He did not recall reading over the statement before signing it. His main concern was with whether the product in the old building was damaged beyond economic loss.

[86] In response to the defenders' reliance on the statement made to PC Anderson, the pursuers adduced evidence from David Anderson, a farmer who had diversified into the business of re-cycling shellfish shells. He was not an entirely independent witness, since he was the father in law of Euan Beaton. Nonetheless, it was not suggested that his evidence was not given honestly. He had collected shells from Mintlaw for some time. He would collect more or less every weekday. When there were enough shells to be collected, he would get a call from the factory telling him which building to go to. He would take a tractor and trailer. If he was going to the old building, there were sometimes people there when he arrived and sometimes not. If there no one was there, he would go in by the side (pedestrian) door and pull up the roller shutter door from the inside. He confirmed in cross-examination that the side door would be unlocked. He did not have a key. He did not have to de-activate any alarm when pulling up the roller shutter door. The opening was large enough for the forklift to go through. The forklift would be used to load the shells onto the trailer parked outside. Loading would take about 35 minutes. Invoices and uplift notes for the period from February through to April 2004 showed uplifts in March both before and after the weekend of the break-in. Mr Anderson recollected that, early in the week before the fire, he received a telephone call from the pursuers to lift shells from the new factory. In the course of this telephone call he was told that they had stopped storing shells in the old factory because the doors had been damaged. In cross-examination, by reference to the details on the relevant uplift notes, he identified the telephone call as having taken place on Tuesday 9 March 2004. That was the first uplift that week. Until then he had never had any difficulty opening the roller shutter door. The uplift notes did not say which premises the shells were taken from on each trip, but in the course of each week he would, until then, routinely have been at both premises.

[87] The pursuers also called John Warner, an employee who had worked at pursuers' factory for over ten years. He had previously worked at the MacDuff premises. He worked a twelve hour shift from 6 a.m. to about 6 p.m. Monday to Friday and a shorter shift from 6 a.m. until noon on Saturday. With reference to the break-in, he said that, when he turned up for work on the Monday morning, he had gone to the freezer facilities in the old building and found that the main door had been pushed inwards. A forklift had been abandoned on the ground near the new building. He had not spoken to the police until after the fire a week later. He had not told the police that the damage to the door had occurred earlier. It was damaged in the week before the fire. He accepted in cross-examination that, on the occasion he had spoken to the police after the fire, he might have told them that the door had been broken for some time and that the opening had been blocked by bins. If so, he would have been referring to the fact that it had been broken for a week. It had not been broken for longer than that. It was a cast iron roller door. The damage was obvious. Someone had tried to force entry by means of the door.

(iii) Discussion of the evidence and conclusions

[88] I am persuaded on the evidence that the damage to the roller shutter door happened on the weekend of the break-in. There was no reason, in my opinion, to think that any of the witnesses was doing other than trying to assist the court as best he could. The defenders naturally relied upon the evidence of the two police officers. I do not think much of value can be taken from the evidence of DS Crowther. He attended a week after the break-in and his attention was on the fire. Any understanding by him that the door had been damaged earlier could have referred simply to the previous weekend. His understanding about when the door was damaged was, on his own admission, taken from PC Anderson's report. However, although PC Anderson attended the site immediately after the break-in was reported, he carried out no investigation into the means of entry into the building. It appears that he was not asked to do so. The pursuer's main concern at the time was about whether the stock was damaged rather than how someone entered the premises. The remarks that PC Anderson took from Paul Beaton do not, in my opinion, point clearly to an acceptance by him that the premises were not secured before the break-in. Nor do I take Mr Warner's remark, made after the fire, that the door had not been secure for some time as necessarily meaning that they were not secure at the time of the break-in. Mr Anderson's evidence of collecting shells from the site is inconsistent with the damage having occurred earlier than the weekend of the break-in. The pursuers' account is supported by inferences to be drawn from the fact that the intruders had moved a forklift from outside the new premises (even though there was no footage of it having been used to damage the door); and from the evidence, which I do not think was challenged, that the intruder alarm had been set off by the break-in. The most persuasive evidence, however, in support of the pursuers' case is the fact that it was on the Monday after the break-in that they took urgent steps to obtain a new door and have it fitted. Had the door been damaged previously I cannot see why the steps to replace it would not have been taken earlier.

The fire on 13 March 2004

[89] Early on the morning of Saturday 13 March 2004 a fire was started at the old factory (Premises B) at Mintlaw by a person or persons unknown. There is no suggestion that the pursuers deliberately started the fire. Evidence about what happened is relevant only to the question of how the intruders entered the premises and how frequently employees of the pursuers visited the old premises during the night.

[90] Euan Beaton heard about the fire by way of a call from his brother Fergus just before six o'clock that morning. According to his evidence, there were about five employees working at Mintlaw that night. The nightshift supervisor was Frank Scott. He was overseeing the prawn peeling in Premises C but was also responsible for the blast freezer in Premises B. Mr Beaton said that Mr Scott would be going backwards and forwards between the two buildings the whole time. In this respect the routine was no different from that which obtained during the day.

[91] Frank Scott gave evidence that he was the supervisor in charge of the prawn peeling machines in the new building. At the time of the fire, he and about ten others had been working on the nightshift. He was mainly in the new building but would go to the old building from time to time to check temperatures in the cold store and the blast freezer. He visited the old building two or three times that night. This was fairly normal. The premises were in use six days a week, twenty-four hours a day (I took the twenty-four hours a day to refer to Monday to Friday, but not Saturday when a shorter day was worked). He would walk from one building to the other by way of the bridge linking the two sites. Sometimes he would spend five minutes in the old building, sometimes two or three hours. On the night of the fire his visits were short. He discovered the fire when a lady who had been walking her dogs came in and said there was a fire in the old building. He went and saw. He met Fergus Beaton and the engineer, Bob Middleton. He looked all round the building but saw nothing odd. The only door that was damaged was a vehicle door which was blocked off with big skips filled with water. He did not notice if the skips had been moved.

Insurers' repudiation of liability

(i) Discussions with loss adjusters

[92] A loss adjuster, Mr Jackson, came to the premises at Mintlaw on the Sunday after the fire was discovered and carried out an inspection of the premises. One or more meetings took place in the boardroom of the new premises between Mr Jackson, Euan, Fergus and Paul Beaton and Mr McCombie. It seems likely that the alarm at the old premises was discussed. It was put to Euan Beaton in cross-examination that at one of these meetings he said that the alarm had not been used for twelve months. Euan Beaton denied saying this. He said that what he would have told Mr Jackson was that the alarm was not set every night since production was going on round the clock. It was only set when there was no one on site. He also told Mr Jackson that the telephone line had been moved to the new factory.

[93] Mr McCombie had heard of the fire on the Saturday morning and dashed to the premises. The Beatons were all there. He then contacted the claims handlers. Mr Jackson, the loss adjuster, arrived on the Sunday. Mr McCombie said that they all sat down in the boardroom at the site and went through the basic details. There was a discussion about the alarm. He could not recall exactly how the question was phrased, but Mr Jackson had asked what alarm there was and Euan Beaton had replied: bells only. There was a discussion about the line having been taken out when they moved premises. Mr McCombie said that he was stunned when he heard this. His understanding had been that it was a central station alarm at the premises, albeit that it was not NACOSS approved. It had to be upgraded after the survey. He said that he could not recall Mr Jackson's reaction. He thought that he had gone on to ask one or two questions about when the alarm was downgraded. Mr Jackson was not necessarily familiar with the warranties in the policy. Mr McCombie said that Euan Beaton had commented that the alarm at the old factory had not been used for about 12 months. Mr Jackson had said something about appreciating his honesty. This is seems to me to be supportive of my conclusion that when, at the meeting of 20 May 2003, he wrote "Done" against item 6 of the Risk Improvement requirements for Report 2003/288, Euan Beaton must have believed that that item referred to the new premises. If he had written "Done" against that item, knowing it to relate to the old premises and with the purpose of deceiving underwriters into thinking that the old premises had a fully upgraded RedCARE system when it had no such thing, why did he volunteer to the loss adjuster at the first opportunity after the fire that the system at the old premises was bells only? I should add that Euan Beaton denied that Mr McCombie was "stunned" on hearing that it was a bells only system: he said that he already knew it was bells only. As to this point, I have found that Mr McCombie did not know that the alarm at the old premises was bells only. He may well have been stunned on hearing that it was.

[94] There appears to have been some contact between Mr Jackson and Mr McCombie over the next ten days or so. On 19 March 2004 Mr Jackson sent an e-mail to Mr McCombie saying that he had now received underwriting papers and, although he had not had time to go through them all, he had found two important matters which he wished clarified. He asked Mr McCombie "to discuss the queries with your clients". The relevant parts of the e-mail read as follows:

"I have now received confirmation that there is an alarm clause, number P17, which relates to a 'central station system'. Your clients appear to be in breach of this warranty for two reasons, it seems to be a bells only system, and it had not been set. In fact we understand that it had not been used for at least 12 months.

Under the general conditions, number 1, warrants that all protections shall be in full and effective operation when the business is closed for business. This was not the case as the roller shutter door was not closed.

With regard to the first point as you know the property was surveyed last year and they recommended an upgrade of the intruder alarm that the insured confirmed had been done. I am puzzled as to why they confirmed that the old site had a BTRedCare system, which they did on the Risk Improvements Requirements sheet that was completed by Euan Beaton I believe.

The apparent breach of the general condition is something that Underwriters will have to consider separately but I would be grateful to learn as to whether they had been notified of the incident and therefore the condition of the roller shutter door.

The photographs taken by the surveyor seem to show an empty building and he refers to it being unoccupied. Has this situation changed since his survey and when. ...

It would be helpful to know what the regular daily use of the building was i.e. the number of employees and times of working, and what overnight visits were made in particular since the malicious damage incident, were they increased.

I am sure there will be other questions but these are the important queries at the present time."

Mr McCombie gave evidence that he took instructions over the telephone from the pursuers on these points and made notes in manuscript on the e-mail. By the first of the paragraphs quoted above, he had written "possibly right". Euan Beaton said that, if the comment was referable to the alarm not having been used for 12 months, this must have been based on a misunderstanding. The alarm was set when the building was unoccupied.

[95] Mr McCombie wrote to Loss Adjusters on the same day answering their e-mail in the following terms:

"1. P17 alarm condition - central station system. It is agreed that this was a bells only system and it is possibly right that it hadn't been used for at least 12 months as Euan couldn't give a precise date.

2. We note the general condition number 1, but it was impossible to close the door due to the distortion of the roller shutter door and I enclose a fax which Euan sent to the Garage Door Company accepting their quotation and as you will note Euan even put at the bottom of the fax 'Please fit new door asap'.

3. With regard to the survey last year, I confirm having discussed the point you have made with Euan. When the letter was sent to Euan with the survey requirements I did not notice that the survey requirements did not contain the addresses of each property and therefore from Euan's point of view there would have been an element of confusion as to which risk requirement referred to which property and as previously stated I was not present at the survey and not party to what was discussed and agreed at the time of the survey. Therefore Euan genuinely believed there had been a misunderstanding in regard to the BT Red Care System and [his response "Done"] was confirmation that the alarm at the new system was BT Red Care because it was not evident from looking at the dial-up facilities. The situation is that the dial-up facility alarm is contained near the entrance door for the workers and the BT Red Care box is contained within the main offices. I have noticed how under the survey requirements he has underlined BT Red Care and says it has been done, of course this was done in 2001 as far as the new site was concerned. ..." [emphasis added]

Two points call for comment. First, under reference to para.1 of the letter, Mr McCombie was pressed in re-examination as to his recollection of how the "12 month" point arose. He was asked whether 12 months might have been a reference to the period since the system at the old premises had become bells only. He said that his recollection was that he was referring to 12 months within which the alarm had not been used at all. As indicated above, Euan Beaton's evidence was that if this was the case Mr McCombie had misunderstood what he had been told.

[96] The second point is of more direct importance. Under reference to what he had written in para.3 of the letter, Mr McCombie said that when he had written it he did not believe that Euan Beaton had been under a misunderstanding. He, Mr McCombie, was simply passing on what information he had been given by Euan Beaton. I do not accept this. It seems to me to be clear that in this paragraph, and in particular in the passages which I have italicised, Mr McCombie was accepting that his failure to identify which report related to which site was a potential source of confusion. The statement that "from Euan's point of view there would have been an element of confusion" and "therefore Euan genuinely believed" would be misleading if, in fact, any confusion had been clarified by Mr McCombie during the meeting. Mr McCombie sought to explain this by saying that he was trying to do his best for his client, but he would not have lied to help his client. If McCombie had removed any uncertainty at the meeting, these statements, suggesting that there was a continuing uncertainty, would have been lies.

(ii) Instructions to counsel and consultation on 14 May 2004
[97] A decision was taken to consult senior counsel in light of the insurers' repudiation of the claim. The purpose at this stage was to obtain advice on the prospects of a successful claim against the insurers. Prior to a consultation being arranged, Mr McCombie wrote to Peter Paterson of Tods Murray on 23 April 2004 explaining the problem. The relevant part of that letter is contained on p.2, where Mr McCombie sets out the pursuers' position about the alarms and their understanding of what requirements in the Risk Improvement sheets related to which site. He said this:

"The situation was that in 2001 when our clients moved their offices from the old site to the new site they took the telephone lines i.e. the telephone number, the fax number and also the number for the alarm system to the new site and the alarm system which was previously central station and was now used as bells only. The reason for this is that they felt that the stock list was only £50,000 comprising chilled or frozen fish of no great attraction and didn't have any machinery of any consequence.

The premises were surveyed in 2003 and I attach a copy of the requirements both for the old site and the new site and although it does not specify an upgrade in the alarm you will note there is no addresses on the reports and also the requirements are under the Theft Section not the Fire and Perils Section. Regretfully, I did not accompany the Surveyor because I was in London on business and this is the first survey I have not attended in over 5 years. When the reports were sent from our office, we did not point out that there were report numbers on the requirements and we did receive a letter advising which report number related to which premises and when I discussed the requirements with Euan Beaton the Managing Director of the Company he was positive that the upgrade referred to the new site and not the old site and because of the type of stock, etc. that was in the old site it was not a requirement. I therefore advised the Underwriters by sending back the survey requirement forms duly marked by Mr Beaton. Indeed even the Surveyor was confused because you will note in the correspondence from the Loss Adjuster, in his e-mail there is some reference to the old site being unoccupied which was never the case. ...

Our clients feel that there was genuine confusion surrounding the requirements but in any event, irrespective of the type of alarm that was within the premises that night, the alarm could not have been operational as far as that contact was concerned on the door and also in regard to General Condition 1 it was not physically possible to close the door and they could not fix the door by any other means because it is one of the main entrances and exists to the factory and as the premises were still operational they had to have facility to open that door during that week."

[98] This letter, to my mind, is of the utmost importance. It provides clear confirmation of my impression of what happened at the meeting of 20 May 2003. It was a letter setting out the facts as McCombie knew them, for the purpose of obtaining legal advice for his clients. There was no purpose in not setting out the true position. If when writing to loss adjusters he might have felt justified in putting a gloss on his clients' position, he could have felt no such need when writing this letter. In the letter, he refers to the fact that he had had a letter (the Woodbrooks' letter of 16 April 2003) identifying which report related to which premises, but that Euan Beaton did not have that information. He then sets out how the meeting started and progressed:

"when I discussed the requirements with Euan Beaton the Managing Director of the Company he was positive that the upgrade referred to the new site and not the old site and because of the type of stock, etc. that was in the old site it was not a requirement. I therefore advised the Underwriters by sending back the survey requirement forms duly marked by Mr Beaton. Indeed even the Surveyor was confused ..." [emphasis added]

I have italicised certain parts of the letter which are clear statements of fact. The first is a statement that Euan Beaton was under a misapprehension as to which sheets related to which premises: he "was positive" that the upgrade related to the new site. He does not go on to say that he put him right. On the contrary he confirms, both by omission and by what he does say, that he did not put him right. The letter makes it clear that Euan Beaton's misunderstanding continued through to the end of the meeting. Mr McCombie possibly shared that misunderstanding. Whether this is so or not, according to his letter he acted upon that misunderstanding in that he "therefore" advised underwriters (viz. of Euan Beaton's response to the requirement, which he knew was based on a belief that the requirement related to the new premises) by sending back the survey requirement forms as (mistakenly) marked by Mr Beaton. This account is quite inconsistent with him having put Euan Beaton right; and inconsistent with him having thought that when Euan Beaton wrote the word "Done" by item 6 he knew that the requirement related to the old building. Mr McCombie gave an explanation that this was a long complex letter and that errors would be made which he had not picked up. If that explanation were correct, it would reflect poorly on Mr McCombie's professional competence, since it would mean that through carelessness he had put misleading information before lawyers advising his clients. But I do not accept it. In offering this explanation it seemed to me that Mr McCombie was simply trying to avoid the obvious difficulties into which this letter placed him. It was neither very complex nor very long. He might not have proof read it - indeed that seems quite likely having regard to the number of syntactical and other errors - but that does not explain the content, which quite clearly states his own recollection of what happened and does not just pass on the clients' position.

[99] The consultation took place on 14 May 2004 and was attended by Euan and Paul Beaton, Mr McCombie and Peter Paterson. It appears that there had been some breakdown of communications as a result of which counsel had received only limited documentation. Documents were produced and considered during the consultation. According to Euan Beaton, the critical point of the consultation was when the letter of 16 April 2003 from Woodbrooks to the defenders was produced. This was the letter under cover of which the Risk Improvement sheets for Premises B and C had been sent to the defenders.

[100] According to Euan Beaton, when this was produced at the consultation Mr McCombie said that he had only seen it the previous day. There was "deadly silence", because the letter showed which risk improvement requirements related to which premises. Paul Beaton said something to the effect of: "it's not our fault that we didn't receive this - why didn't we?" The consultation stopped shortly thereafter. Euan and Paul Beaton and Mr McCombie travelled back north together by car. On the journey the atmosphere was becoming frosty. They stopped for a quick bite in Dundee. John McCombie said that they had insurance cover against this type of negligence. He said it again at Mintlaw later as they parted. Euan Beaton took this as an admission of liability on the part of Mr McCombie. In cross-examination he explained that the letter of 16 April 2003 was critical. Had they had the covering letter, everything would have been crystal clear. It would have cost £100 to put in a telephone line - why wouldn't they have done it? At the consultation, when the letter was produced and there had been some further discussion, Paul had said: "so what you're saying is, it's all Masson & Glennie's fault". Then the meeting had adjourned. It was put to him that there had been no admission of negligence. It was more likely that Mr McCombie had said: if you feel we are at fault, we have insurance cover. There was no reference in the pleadings to an admission. It was put to him that he had never mentioned it before and that he had just made it up. Euan Beaton denied this. He was adamant that he had told people about it.

[101] Paul Beaton said that he attended the consultation. He had not been aware of the Risk Improvement sheets beforehand. He first saw them at the consultation. The letter of 16 April 2003 was made available to counsel during the consultation. When he saw it, counsel advised that with this letter they had basically no leg to stand on. It was apparent from this letter that item 6 applied to the old premises. Mr McCombie had said that he had only recently seen the letter. Paul Beaton had then said that they might have a claim against Masson & Glennie, because that letter had not been supplied to them. The consultation did not last for much longer. After the consultation he had walked back to Tods Murray's offices with Peter Paterson. Euan Beaton had walked mainly with McCombie. Paul Beaton said that he had had no discussion at this time with McCombie about his liability. They had stopped for a bite in Dundee on the way back to the north-east. While there Mr McCombie said that they had insurance that would cover the defenders' failures. Asked in cross-examination if he had become angry during the consultation, he replied: "Angry? No. Disappointed? Yes." He had not stood up. He had remained seated and said something about Masson & Glennie's fault. He accepted that it would have been "very surprising" for McCombie to have said that he had not seen the letter of 16 April 2003 before. Nonetheless, he was clear "beyond a shadow of a doubt" that it was this letter, not that of 22 May 2003 (in which McCombie had passed on Euan Beaton's comments on the Risk Improvement sheets) that had caused the consternation. The letter of 22 May 2003 may have been mentioned, but his overriding recollection of the meeting was that it was the letter of 16 April 2003. He too rejected the suggestion that all that McCombie had said when they stopped at Dundee on the way back was: "if you feel we are responsible, we have insurance."

[102] In his evidence in chief, Mr McCombie volunteered that at the consultation he might have said that he did not remember seeing the letter before; but he obviously had seen it, it was in his file. He could not remember every letter in his file. He accepted that it was this letter which put beyond doubt which of the Risk Improvement sheets related to which premises. He rejected the suggestion put to him that he ought to have sent this letter to clients with the Risk Improvement sheets. It was not normal insurance practice to send the covering letter to clients. He did not remember it being this letter which had caused consternation at the consultation. He described how Paul Beaton got out of his chair and said: "so it's all Masson & Glennie's fault". However, this was not a reaction to that letter. It was a reaction to his letter of 22 May 2003 to Woodbrooks, further on in the file, confirming the pursuers' position about the risk improvements. So far as senior counsel was concerned, that letter had been decisive and meant that the pursuers had no prospects of successfully claiming against the insurers. He did not remember discussing the question of their having liability insurance when they were walking back to Tods Murray after the consultation. He did mention it at the eating establishment in Dundee. He did so in response to Paul Beaton's outburst at the consultation. When sitting down at the table, he had said something like: "Look, if you feel Masson & Glennie are liable, we'll obviously pass it to our insurers and they'll deal with the complaint".

[103] Neither counsel nor Mr Paterson gave evidence as to what had happened at the consultation or (to the extent of their involvement) thereafter.

[104] This passage of evidence is relevant only to the question of whether Mr McCombie made some admission of negligence at or after the consultation. As the evidence came out, it became clear to me that he had not done any such thing. I accept that at the consultation there was some consternation when a letter was produced which showed clearly which Risk Improvement sheets related to which premises. Logically it would seem that Woodbrook's letter of 16 April 2003 would have caused this consternation, since it identified precisely which applied to which. But I can see how it could have been Mr McCombie's letter of 22 May 2003, since this specifically told underwriters that the upgrading had been done to the system at what they knew to be Premises B. If, in relation to either of those letters being produced, Mr McCombie had said that he had not seen them before, he would clearly have been wrong. But it is easy to see how Paul Beaton could have seized on this as focusing where the blame lay; and it is easy to see how, after the consultation, Mr McCombie's reference to having insurance might have been interpreted by his lay clients as amounting to an admission that he had been negligent. It seems to me that Mr McCombie did not make any such admission. But I do not think that the Beaton's evidence that he did make an admission reflects adversely on their credibility.

Discussion and conclusions

(i) Negligence

[105] As I have already indicated, in their closing submissions both parties accepted that the issue of whether the defenders, through Mr McCombie, were negligent turned on the questions whether, during the meeting on 20 March 2003 Euan Beaton was confused as to whether item 6 on the Risk Improvement Sheets relating to RMS Report No 2003/288 related to the old premises or the new; and whether Mr McCombie was aware or ought reasonably to have been aware of such confusion and failed to correct it. I use the word "confused" because that was the word used in the course of evidence and submissions, but I bear in mind the point made by Mr Cullen, with which I agree, that one may be concerned only with a mere (and he would say, short-lived) failure to grasp what, with more thought, should have been obvious. I consider that counsel were correct to identify the critical question in this way. An insurance broker (or agent or intermediary) owes his client a duty to take reasonable care to ensure that he understands what is required of him in terms of his insurance and compliance with the terms thereof. In the case of some terms this may require the broker to take the initiative in identifying the terms, explaining what they mean in practice and spelling out the potential consequences of a failure to comply. In other cases, less may be required. Much will depend on the familiarity with insurance matters possessed by the client and the broker's knowledge of that. Much might also depend on the reasonableness of the client's misunderstanding, and whether it could reasonably have been anticipated. This is because in the normal case the broker will not necessarily be privy to what the client does or does not know, and the broker's conduct, including what he ought to have appreciated about the difficulties being experienced by the client, requires to be judged by the standards of a reasonably competent broker in the particular circumstances. These considerations fly off if the broker is in fact aware that the client is ignorant of something important or has misunderstood something of relevance. If the client is in fact uncertain of some material aspect of the insurance, and this is apparent to the broker, or becomes apparent to him later when he could still put it right, then the broker must attempt to clarify the matter for the client. Accordingly if, for whatever reason, Euan Beaton was uncertain about whether the NACOSS central station RedCARE intruder alarm requirement applied to the old premises, and if Mr McCombie knew this, then he would have been failing in his duty if he did not take steps to clarify the position. Similarly, if Euan Beaton was proceeding upon an understanding that that requirement only applied to the new premises, and if Mr McCombie not only knew this but also knew that his understanding was wrong, then he should have taken steps to put him right. And in both cases, if Mr McCombie did not actually know that Euan Beaton's understanding was wrong, but had readily to hand the means of finding out, he would be failing in his duty if he failed to take steps to do so. None of this was in dispute.

[106] I have found that Euan Beaton responded to item 6 on the assumption that it applied to the new premises. I have found that Mr McCombie knew this. Even if, contrary to my finding, he did not realise this, it would have been obvious to him if he had applied his mind to it, having regard to all the circumstances to which I have referred. It is not disputed that Mr McCombie had the means of checking which premises this requirement applied to. I find that he ought reasonably to have realised that the requirement applied to the old premises. He ought to have realised that the assumption upon which Euan Beaton was proceeding was wrong. He ought to have put him right, whether during the meeting or afterwards. He did not. Rather he compounded the error by simply passing on Euan Beaton's response to Woodbrooks, so that they were led to believe that the alarm at the old premises had been upgraded. These findings conclude the question of negligence in favour of the pursuers.

(ii) Would the pursuers have acted differently?

[107] The immediate question that follows this finding is whether the pursuers would have acted differently if they had appreciated that they were required to upgrade the intruder alarm at the old premises in accordance with the requirements set out in item 6 of the relevant Risk Improvement sheets.

[108] I have no doubt that they would have queried the requirement, pointing out that the value of the stock in the old premises was relatively small. Ultimately, however, I consider that they would not have persuaded underwriters to relax that requirement. They might have been given some indulgence to allow them time to do the work, but they would have been required to do it eventually, and certainly before renewal in 2004. They would have faced a choice of carrying out the upgrade or removing the old premises from cover under the policy. If the evidence that the old premises was being used as security for loans is correct, and it was not seriously challenged, taking the old premises off cover was not an option. I accept that the cost of upgrading would have been considerably in excess of the "£100 or so" spoken to by Euan Beaton. No precise figures were proved for the likely cost. Installation of a telephone line and an upgraded system might have cost a few thousand pounds, and there would have been annual and maintenance charges on top of that. But it seems to me that the pursuers would have had little option but to incur this expense and upgrade the system. I find that they would have done so.

(iii) Would underwriters nonetheless have repudiated liability for breach of General Condition 1?

[109] In addition to relying upon the pursuers' breach of Warranty P14, underwriters repudiated liability in reliance on General Condition 1 of the policy. They said that even the bells only alarm system "was not put into regular use and was not in operation at the time of the loss due to a defective roller shutter, which prevented the alarm being switched on". The defenders rely on this to say that their negligence, if proved, did not cause any loss. The pursuers say that underwriters would probably not have relied on these matters to repudiate liability had they stood alone. There might conceivably have been a question as to where the onus of proof lay on this issue. However, I did not have to decide this since Mr Haddow, for the pursuers, accepted that the onus was on him to establish, to the usual standard of proof, that underwriters would not have repudiated liability on these grounds alone. I proceed on that basis.

[110] It is important to put this issue in context. There is no doubt that the damage to the roller shutter door prevented the intruder alarm in the old premises being switched on. To that extent those premises were unprotected on the night that intruders entered and started the fire. No criticism is made of the fire alarm which, I assume, was working. The fire was started early on the Saturday morning. On the night shift from 6 p.m. on Friday to 6 a.m. on Saturday, work was going on in the new premises and Mr Scott was walking across to the old premises from time to time. Even had the roller shutter door not been damaged, the intruder alarm would not have been switched on at either the old or new premises. The damage to the roller shutter door was, therefore, not causative of any lack of protection. The old premises were no worse protected, in terms of the alarm, than they would have been had the roller shutter door not been damaged. The intruder alarm would have been switched off anyway.

[111] It is in those circumstances that the court is asked to form a view as to how underwriters would have reacted had there been no breach of Warranty P17. The task is somewhat artificial. I have found that, if they had realised that Warranty P17 applied to the old premises, the pursuers would have complied by having the necessary telephone lines and other equipment installed. One could speculate as to whether the detailed discussion that would probably have ensued about the need to protect the old premises would have heightened the pursuers' awareness of other aspects of security. They might, for example, have been made aware of the need to set the intruder alarm in the old premises all the time, even when constant work was being carried out in the new premises next door. They might have reported the damage to the roller shutter door, rather than just get on with arranging to have it put right as soon as possible. Such speculation seems to me to be fruitless and I heard no evidence on the probabilities of what might have happened if things had been different. I have to put such matters to one side. On the other hand I do, so it seems to me, have to assume that had it not been for the clear breach of Warranty P17, underwriters would have ensured that they had full and accurate information relating to the circumstances in which the pursuers were in breach of General Condition 1. Neither party invited me to decide the issue on the basis that underwriters would have made their decision on an incorrect assessment of the facts.

[112] No evidence was led from underwriters or Woodbrooks or loss adjusters as to how their position might have been affected had their been no breach of Warranty P17. But I did hear evidence from expert witnesses. Each of them dealt with this issue in a brief passage at the end of their reports and they amplified it in oral evidence. Both were well qualified to give evidence on insurance matters.

[113] In his report lodged on behalf of the pursuers, Mr Brian Murton offered this analysis of the likelihood that underwriters would have invoked General Condition 1 had there been no breach of Warranty P17:

"2.3.2 I have seen no evidence that the security alarm in the factory on the old site had not been maintained in good order. Technically, insurers might be able to avoid liability because the alarm was not in full and effective operation at the time of the fire but, since the reason for this was that it was impossible for the alarm to be in full and effective operation because the damaged roller door could not be closed, it is my opinion that insurers generally would regard such a decision as harsh and would not attempt to invoke this condition. This is particularly so where, as in this case, it can be shown that the insured acted reasonably and responsibly by immediately ordering a replacement door and taking precautions to block the damaged entrance in the meantime. If the insurers in this case relied on infringement of this condition alone to avoid liability, then it is my opinion that such action could be successfully challenged in the Courts.

2.3.3 It has been alleged that the security system in the old premises had been out of action for some 12 months prior to the fire but this is denied by the Pursuers who state that, prior to the damage caused by vandals, the alarm system was always put into operation outside of normal business hours in those particular premises and therefore insurers would have had no grounds to invoke General Condition 1 prior to the date of the vandalism."

The last sentence of para.2.3.2 appears to contradict the earlier statement that "technically" insurers might be able to avoid liability, but Mr Murton explained in his evidence what he meant: although insurers would have a legal right to avoid liability, on the facts assumed by him they were unlikely to do so.

[114] The expert called by the defenders was Mr Alan Russell. He dealt with this question in his report in this way:

"The question is also asked as to whether insurers would have been prepared to ignore (breach of) General Condition 1 had there been satisfaction of Warranty P17. This is also a matter of conjecture but, based on my experience, I am certain that, given the circumstances of the loss, the insurers would have relied on General Condition 1 to repudiate liability. Those circumstances are that a) there had been an attempted break-in one week previously b) the premises were unlocked and only water filled fish boxes were being uses to prevent entry and c) no alarm system of any kind was in operation. The failure to pass this information on is a breach of the insureds duty of good faith and is a failure to advise insurers of a material fact. This failure would have allowed insurers to repudiate liability.

This position is confirmed in a letter dated 14 April 2004 from Jackson's Loss Adjusters to the Insured where they say "It is the Underwriters view that you are in breach of General Condition 1 and would be unable to recover under the Policy."

The reference to the letter of 14 April 2004 is to the letter to which I have referred in para.[5] above. Since it is written in the context of there being also a breach of Warranty P17, it seems to me to provide little insight into how underwriters would have acted had there been no breach of Warranty P17. I say that because it is, I think, a matter of common knowledge, and it was in any event implicit in the discussion of the matter by the experts, that a decision by underwriters to reject or accept a claim, even where the insured is in breach of a material term of the policy, will depend on their perception of all the circumstances. It is likely that in this case underwriters took the view that the breach of Warranty P17 was so fundamental - particularly in light of their having been told, in answer to the Risk Improvement sheets, that the old premises had been upgraded - that they were determined to repudiate liability. Having made that decision, they would no doubt, for good measure, rely on such other breaches as had been brought to their attention. But it does not follow from that that they would have repudiated liability for the claim had those other breaches stood alone. Mr Russell agreed with Mr Murton that insurers generally try to be fair and reasonable in their approach to such matters.

[115] Both Mr Murton and Mr Russell amplified their views on these and other points in their oral evidence. Mr Russell emphasised that that the pursuers were in breach of General Condition 1 not only because of the damage to the roller shutter door but also because they only turned the alarm on between the time work ceased on Saturday afternoon and when it re-commenced at about 6 a.m. on the Monday. As regards the duty on the pursuers to notify the insurers of the damage to the roller shutter door, he said that it made no difference that at the time of the fire they were still within the time allowed for making a claim under the policy. They were required promptly to report anything that affected the security of the premises. I was concerned at one point to clarify whether the defenders were relying on this as a separate breach of duty by the pursuers under the policy upon which underwriters might have relied to repudiate liability, but Mr Cullen confirmed that that was not the case: he relied on it simply as a matter which might have affected the way in which underwriters approached the claim.

[116] I accept, of course, that the pursuers were in breach of General Condition 1 and that underwriters had a right to repudiate liability. The question is whether they would have done so. This would have involved them in the exercise of a judgement. They would have tried to be fair and reasonable in their approach to the exercise of that judgement.

[117] I propose first to consider separately each of the matters raised which might have affected the underwriters in reaching a decision. First, it is clear that the intruder alarm at the old premises was only set when work stopped at both premises. It was not set during the week. This may have been a breach of General Condition 1 in that that condition required the alarm to be in full and effective operation when the premises were left unattended. I shall assume that it was a breach, though Mr Russell recognised that such a condition can sometimes be viewed as harsh. At times during the night, the old premises were unattended, but Mr Scott would go across from the new premises from time to time. The site at Mintlaw was, in effect, treated almost as one. I would not have expected underwriters to refuse the claim on this ground alone unless this requirement had specifically been drawn to the attention of the insured. The evidence led as to the survey carried out by Mr Lawson in March 2003 did not persuade me that this matter had been drawn specifically to the attention of the pursuers. Absent some such specific direction, it was, I think, natural that the premises should be kept unalarmed during the week when work was going on. In a similar vein, I do not consider that insurers would have been too concerned, absent some specific direction from them, at the fact that during the day the pedestrian door to the old premises was left unlocked. This emerged in the evidence of Mr Anderson, and was relied upon by Mr Cullen, but I consider that it too would have been regarded as natural when work was going on at the Mintlaw site as a whole. I should emphasise that I reject the suggestion that the alarm had not been set in the old premises for over 12 months, though I accept that this might, had it been correct, have influenced underwriters' decision. Secondly, whilst I see the force of Mr Russell's point that the pursuers were under an obligation to report to underwriters any change of circumstances affecting the security of the premises, I do not consider that underwriters would have held their failure to report the damage to the roller shutter door against them in this case. There are a number of reasons for this. The damage was not causative of the alarm not being switched on. The pursuers had acted very promptly in ordering a replacement door. And the steps taken to block the opening were, I think, accepted as being the best that could be done in the circumstances. I consider that underwriters would have taken the view that the pursuers had acted reasonably.

[118] It is not sufficient, however, to deal with the points separately. Underwriters may, I assume, sometimes take the view that, while one breach may be excused, they will be less sympathetic to two or more breaches of similar character or gravity. However in the present case I would not have expected them to take this view. This does not seem to me to be a case where, absent the breach of Warranty P17, the pursuers' approach to the security of their premises would attract serious criticism from underwriters or loss adjusters advising them. Looking at the matter in the round, I would not have expected underwriters to refuse the claim on the basis of a breach of General Condition 1.

Disposal

[119] In the proof so far I have been concerned only with issues of liability. In light of my conclusion there will require to be a hearing on quantum. I shall accordingly uphold the third plea-in-law for the pursuers and continue the matter for proof on quantum. I shall also put the case out By Order to allow questions of further procedure to be considered. In the meantime I shall reserve all questions of expenses.