Let us imagine the situation where a landlord rents out a warehouse to a tenant, who employs a contractor to re-fit the interior. The main contractor in turn employs a subcontractor who is responsible for the electrical installation. When the work has been done, the tenant stores fireworks in the warehouse pursuant to a contract with another party. The tenant also employs a security firm to patrol the premises. A fire then occurs and all the fireworks are destroyed, together with most of the warehouse.

The cause of the fire is either faulty switch gear supplied by the manufacturer to the electrical subcontractor, or the fireworks exploding. It also appears that a security guard, known to be a heavy cigarette smoker, was seen running away from the source of the fire immediately prior to conflagration. He had also, somewhat unfortunately, turned the sprinkler system off. It later transpires that the warehouse design was inadequate in that it failed to confine the fire within a specified area.

Of course, the last thing on anyone’s mind immediately after the loss is the question of subrogation. The insured may be more concerned with his livelihood, his relationship with his employees, contractors and customers, and with his cashflow. In fact his commercial needs may dictate that he admit liability to the owner of the fireworks, who has promised him a huge contract for the near future, and his survival may depend upon ignoring the possibility of spontaneous combustion, admitting liability and compensating him quickly.