Timing is everything – Makin v QBE and the cost of not complying with a condition precedent
This recent decision from the High Court provides a powerful reminder of the consequences of not complying with a condition precedent to liability, and that a claimant pursuing a claim under the Third Parties (Rights Against Insurers) Act 2010 inherits both the rights – and the pitfalls – of the insured’s policy.
Background
The Claimant, Daniel Makin, attended a Bar and Restaurant on 6 August 2017. At around 08:30pm he threw a glass on the floor while apparently in “high spirits”, and was then forcibly ejected by two door supervisors (“the Incident”).
Although Mr Makin was seemingly unaffected by the Incident (he walked away and took a taxi home), he later suffered a stroke rendering him unable to work and requiring long-term care.
The Proceedings
Acting by his mother and litigation friend, Mr Makin issued proceedings against (1) the Restaurant Muse Limited (“the Restaurant”); (2) Protec Security Group Limited (“Protec”), the employer of the two doormen; and (3) QBE Insurance (Europe) Limited (“QBE”), who insured Protec under a “Security and Fire Protection” insurance policy (“the Policy”). QBE was joined to the proceedings under the Third Parties (Rights Against Insurers) Act 2010 (“the 2010 Act”).
At a preliminary issues hearing (which Protec did not attend, having entered into administration on the preceding day), the Judge, HHJ Sephton KC, gave judgment that Protec were liable to Mr Makin for assault and his consequent injury (“the Judgment”).
At trial, the parties agreed that pursuant to the 2010 Act: (1) Mr Makin was entitled to claim against QBE directly; and (2) Mr Makin’s rights were no better than those of Protec ie., if QBE had a good defence to a claim for indemnity by Protec, it would also have a good defence to Mr Makin’s claim.
QBE asserted that it had no liability to Mr Makin because Protec breached the claims condition in the Policy – a condition precedent – which required it to notify, “… as soon as practical but in any event within thirty (30) days in the case of other damage, bodily injury, incident accident or occurrence, that may give rise to a claim under your policy …” (“the Condition”).
Mr Makin disagreed. He contended that even if there was a breach of the Condition, it was not a condition precedent which entitled QBE to automatically refuse cover. Rather, it only gave QBE only the discretion to decline the claim, which it could not exercise “arbitrarily, irrationally or capriciously”.
Finally, an issue arose as to whether the Judgment was binding in these proceedings.
The issues to be decided, therefore, were:
- Did Protec breach the Condition? (“Issue 1”)
- If so, was QBE entitled to refuse cover for a breach of a condition precedent, or did it merely have a discretion to decline the claim? (“Issue 2”)
- If QBE was not automatically entitled to refuse cover, was it nevertheless entitled to do so on the facts? (“Issue 3”)
- Was the Judgment binding on QBE? (“Issue 4”).
Issue 1
Following the incident in 2017, neither the correspondence passing between the Restaurant and Protec, the Police’s investigations, nor the Letter of Claim sent in 2020 were disclosed to QBE contemporaneously. In fact, there was no suggestion that QBE were aware of the Incident at all before July 2020. Against that background, QBE said that Protec breached the Condition.
Mr Makin argued that a reasonable person would not have thought that the Incident, on its own, might give rise to a claim. He also argued that any suggestion that Protec may have come under an obligation at a later point to notify the Incident was contrary to the proper meaning and effect of the Condition. He relied in that regard on Zurich v Maccaferri [2016], in which the Court held that the likelihood of a claim eventuating is assessed at the time the event occurs.
QBE, by contrast, held that it would have been apparent to a reasonable person in Mr Lucas’ position that a claim might be made against Protec arising out of the Incident. It also distinguished the present case from Zurich v Maccaferri, because the requirement in that case was to notify a circumstance that was “likely” to give rise to a claim, whereas the Condition required Protec to notify a circumstance “might” give rise to a claim, which was a much lower threshold.
Although the Court accepted that the Incident, in isolation, would not have led a reasonable insured to form the view that there might be claim, there was nevertheless “a clear point in time” when the matters known to Mr Lucas, which included the police investigation, and that Protec were potentially open to criticism for injuring a customer, gave rise to an obligation to notify. Having not done so, Protec was in breach of the Condition.
Issue 2
On Mr Makin’s case, the Condition was not a condition precedent. That is because, he said, it was not expressed in that way (by contrast, there were other terms in the Policy that were so expressed), and if there was any doubt as to the correct interpretation, the Condition should be construed contra proferentem in his favour.
QBE disagreed. It said the Condition did not need to be labelled as a condition precedent in order to have that effect. It also referred to the introductory section of the Condition, which stated: “The following conditions 1-10 must be complied with after an incident that may give rise to a claim under your policy. Breach of these conditions will entitle us to refuse to deal with the relevant claim”. So, QBE said, the Condition made clear at the outset that its obligation to meet a claim was conditional upon Protec’s compliance. Further, and importantly, QBE contended that the use of the word “will” was consistent with an absolute right, not a contractual discretion.
As with Issue 1, the Court agreed with QBE. The true meaning of the Condition was clear, even without the label of “condition precedent”. The Court also agreed with QBE’s analysis that the word “will”, in the introductory section of the Condition, did not merely import a discretion to decline indemnity. To hold otherwise, in the Court’s view, would do an injustice to the language used. There was also good commercial sense in that conclusion: an early notification enables an insurer to investigate claims at a time when witnesses will be easier to contact and memories are likely to be better, as well as to consider the early settlement of the claim, minimising any delays.
So, on the basis that the Condition was indeed a condition precedent to QBE’s liability, and in circumstances where that condition was breached, QBE was entitled to refuse indemnity under the Policy.
Issue 3
Given the Court’s earlier findings, this point was academic: QBE had already prevailed in light of the Protec’s breach of a condition precedent to liability. However, had the Court found that the Condition did not have that status, then, applying the well-established Braganza principles – namely, that a decision must be lawful, rational and made in good faith – it would have found that QBE was not entitled to refuse cover. The breaches in this case were trivial and of no meaningful consequence for QBE’s ability to deal with the claim.
Issue 4
The final issue was whether the Judgment establishing Protec’s liability was binding on QBE in circumstances where it was given (a) at a hearing which Protec did not attend; and (b) before QBE were a party to the proceedings.
Mr Makin contended that the Judgment was binding on QBE as establishing Protec’s liability. He relied in particular on Scotland Gas Networks plc v QBE UK Ltd, in which the Court of Session held that where a policyholder’s liability was established by way of a judgment of the court in previous proceedings, “it is not open to the [insurer] to require either the existence or the amount of that liability to be proved in the present action”.
QBE argued the contrary. It referred to AstraZeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd and Omega Proteins Ltd v Aspen Insurance UK Ltd, both of which established that neither a judgment nor an agreement are determinative of whether a loss is covered by a policy – it is open to an insurer to dispute that the insured was in fact liable.
The Court agreed with Mr Makin. The present case was distinct from Omega Proteins and AstraZeneca v XL Insurance, because those cases did not involve the 2010 Act, which was focussed on placing a claimant in the same position as the insolvent insured. It would therefore be incongruous with that objective if an insured’s liability could be determined definitively, only for the insurer to later challenge it.
Summary
There are a number of salutary lessons from Makin:
Firstly, the decision provides a convenient reminder of the distinction between “likely to” and “may / might” wordings in the context of notification conditions. Whereas the former requires an insured to notify circumstances which are at least 50% likely to lead to a claim, the latter requires only a real, as opposed to fanciful, risk of a claim eventuating. Policyholders would be well advised to check which wording appears in their policies, and to ensure that the requirements are met.
Secondly, the decision reinforces that a condition precedent need not be labelled as such in order to have that effect. Where the consequences of breaching a condition are clearly spelt out, namely, that an insurer will not be liable for a claim, the courts will likely treat the condition as a condition precedent to liability. It should never be assumed, therefore, that a condition precedent does not have that status simply because the words “condition precedent” are not included.
Thirdly, and finally, although the Court’s application of the 2010 Act did not assist Mr Makin on the facts, it is likely to be helpful for policyholders generally: where an insured’s lability is definitively determined in earlier proceedings, then, applying Makin, it will not be open to an Insurer to unravel that Judgment later down the line.
Author:
URS v BDW: a milestone decision from the Supreme Court – but does it break new ground?
The Supreme Court has handed down its long-awaited judgment in URS v BDW. The judgment considers a number of important issues for construction professionals including limitation, liability in tort, and the interplay between the Defective Premises Act 1972 (“the DPA”) and the Building Safety Act 2022 (“the BSA”).
Background
BDW, a well-known developer (whose brand names include Barratt Homes and David Wilson Homes) engaged URS, a designer, to carry out design work on two apartment blocks called Capital East and Freemans Meadow (“the Blocks”). Practical completion of the Blocks took place in 2012, and the apartments were then sold to individual purchasers.
Following the tragic Grenfell Tower fire in 2017, BDW undertook a wholesale review of its developments and discovered that the Blocks’ design was seriously defective, and that they were at risk of structural failure.
It is relevant to note that, at the time the defects were discovered:
a) There was no damage or cracking at the Blocks, even though it was accepted that that they were dangerous.
b) BDW had sold all the flats in the Blocks (thus retaining no interest in them).
c) BDW’s contractual limitation period for defective design had expired, and the then applicable six-year limitation period to bring a claim under the DPA had also expired.
Despite not owing the Blocks, nor facing claims from their owners or occupiers, BDW felt that it could not ignore the problems once they came to light, and incurred costs running to “many millions” to carry out investigations, temporary works, evacuation and a permanent remedial solution. Accordingly, in 2020, BDW issued proceedings against URS to recover the cost of the remedial works, which at the time was confined to a claim in negligence.
At a preliminary issues hearing, Fraser J held that BDW’s alleged losses were recoverable in principle, and agreed with BDW that its cause of action accrued on practical completion, not, as URS contended, when the defects were discovered.
In 2022, following the advent of the BSA, s135 of which extended the limitation period to claim under section 1 of the DPA from 6 to 30 years, BDW was permitted to add new claims under (1) Section 1 of the DPA; and (2) the Civil Liability (Contribution) Act 1978 (the “CL(C)A”).
URS appealed both decisions unsuccessfully, and was then granted permission to appeal to the Supreme Court on the basis of certain “assumed facts”.
The Grounds of Appeal
URS’ grounds of appeal were as follows:
(1) As to BDW’s claim in negligence, had BDW suffered actionable damage, or was the damage too remote because it was voluntarily incurred? If the damage was too remote, did BDW already have an accrued cause of action in tort at the time it sold the Developments? (“Ground 1”)
(2) Did s135 of the BSA apply here, and if so, what was its effect? (“Ground 2”)
(3) Did URS owe a duty to BDW under s1 of the DPA, and if so, are BDW’s alleged losses of a type which are recoverable? (“Ground 3”)
(4) Was BDW entitled to bring a claim against URS under s1 of the CL(C)A, notwithstanding that there had been no judgment or settlement between BDW and any third party? (“Ground 4”).
The appeal was heard by seven Justices, who unanimously dismissed it.
Ground 1
As a preliminary point, the Supreme Court explained that BDW’s claim against URS was for pure economic loss ie., compensation for financial loss (because the Blocks has a lower value and required repair), not physical damage. Nevertheless, it was accepted that there was an “assumption of responsibility” by URS to BDW, such that, if URS was in breach of its duty by its negligent design, BDW’s losses would be recoverable.
The issue to be decided here, however, was whether BDW’s losses could be recovered in circumstances where BDW had “voluntarily” repaired the Blocks, it being noted that any claims by the Blocks’ owners would, by that time, have been time-barred.
The Court rejected a principle of voluntariness which established a “bright line” rule of law which would render BDW’s losses too remote. In any event, there were powerful features of the case to suggest that BDW’s actions were not ‘voluntary’ in the true sense of the word. Those included that: (1) if BDW had not repaired the Blocks, there was a risk that they would cause personal injury (or at worst death) to the owners; (2) even though any claims by the owners would have been time barred, that would only provide BDW with a limitation defence, which it was not obliged to take – it did not extinguish the owners’ rights altogether; and (3) BDW would be exposed to reputational damage if it ignored the problems, including the danger to homeowners, once they had been discovered.
On the basis that there was no automatic “voluntariness principle”, the Court declined to consider when the tortious cause of action accrued. As such, the much-maligned decision in Pirelli - in which it was held that limitation in negligence against a designer runs from the date of the damage, not when it was discovered - remains, for now at least, good law.
Ground 2
The question here was whether s135 of the BSA could apply to claims which, although not claims under the DPA, were dependent on the time limits under the DPA e.g., claims by homeowners against a developer, designer or contractor.
In grappling with that question, the Court firstly set out that a key objective of the BSA was “to identify and remediate historic building safety defects as quickly as possible, to protect leaseholders from physical and financial risk and to ensure that those responsible are held to account.” S135 of the BSA, which created a “backward-looking” 30-year limitation period for claims under s1 of the DPA, was written with that objective in mind.
Against that background, the Court found that s135 applied to cases such as the present one. A finding to the contrary would seriously undermine the scheme of s135 of the BSA, and effectively create two contradictory “parallel universes” – one for claims by homeowners against developers, and another for onward claims by developers against the designers or contractors responsible for the defects, each of which would bear different limitation periods. Plainly, the Supreme Court found, that would be an incoherent outcome.
Ground 3
S1 of the DPA imposes a duty on those who “take on work” for in connection with the provision of a dwelling to ensure that the work is done in a professional manner, and that the dwelling is fit for habitation when completed. The duty is owed to the person who commissioned the dwelling, ie., “to the order of any person”, and any person who acquires a legal or equitable interest in the dwelling.
It was common ground that BDW owed the s1 duty on the basis that it took on work. The question raised by Ground 3 was whether BDW could also be owed the s1 duty, because URS took on work to BDW’s order.
Unsurprisingly, the Court held that BDW was owed the s1 duty. As a matter of normal meaning, the words “to the order of any person” did not confine the recipients of the duty to lay purchasers, but were capable of embracing the “first owners” who order work ie., developers. Accordingly, the Court found, “there is no good reason why a person, for example, a developer, cannot be both a provider and person to whom the duty is owed …”.
Ground 4
S1 of the CL(C)A 1978 establishes a right of a person who is liable for damage to seek a contribution from others who are also liable for the same damage. There is a two-year limitation period that applies to such claims, running from the date that the right accrues.
URS asserted that BDW was not entitled to bring a claim for a contribution. That was because, it said, there had been no judgment against BDW, a settlement, or an admission of liability on BDW’s part. BDW, by contrast, contended that the right to claim a contribution under the CL(C)A arose as soon as the damage was suffered.
The correct answer, the Court found, was somewhere in between: when (1) there is damage suffered for which two defendants are each liable; and (2) the first of the defendants “has paid or been ordered or agreed to pay compensation in respect of the damage”. It was at that point, and not before, that the first defendant would be entitled to recover a contribution.
Accordingly, BDW was not prevented from bringing a contribution simply because there was no judgment against it, nor a settlement with any third-party claimants.
Conclusion
Although the Supreme Court stopped short of breaking new ground in some respects (Pirelli, notably, being left for another day), the decision in BDW v URS brings welcome clarification on a number of important issues. Those include, in particular, that claims under s1 of the DPA are not confined to lay purchasers: developers and other construction professionals may be owed precisely the same duties by professionals responsible for design and construction. That the Supreme Court came to that conclusion is unsurprising, and is on all fours with the BSA’s central purpose of holding those responsible for building safety defects accountable.
The corollary is that liabilities under the DPA will be considerably broader in scope. That will inevitably open the floodgates for more claims against construction professionals.
How the insurance market will respond remains to be seen. Watch this space.
Alex Rosenfield is a Partner at Fenchurch Law.
The Good, the Bad & the Ugly: #24 The (mostly) Ugly: Tynefield Care Ltd (and others) v the New India Assurance Company Ltd
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
In our view, some cases are bad for policyholders, wrongly decided and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
#24 The (mostly) Ugly: Tynefield Care Ltd (and others) v the New India Assurance Company Ltd
Background
A substantial fire broke out at a care home which was owned and operated by the insured Claimants. At the time of the fire, the Claimants had a policy of insurance with New India Assurance co Ltd (“New India”), under which New India agreed to indemnify them against various losses.
Following the fire, the Claimants claimed from New India the cost incurred of having to move residents out of the care home for four weeks in order to carry out remedial work, as well as the cost of the remedial work itself.
New India refused to indemnify the Claimants on the basis that they misrepresented and failed to disclose that their Mr Khosla, a de facto director (a director who performs the duties and functions of a director, but without being legally appointed as such), was a de jure director (a legally appointed director) of a company that previously went into administration (“the Khosla Insolvency”).
The Claimants accepted that Mr Khosla was a de facto director at all relevant times, but denied making a misrepresentation or failing to disclose the Khosla Insolvency.
Although the Claimants had been taken out policies with New India from 2013 onwards, this article will address the parts of the Judgment that deal with the post-Insurance Act 2015 (“the IA 2015”) position.
The Good – was there a misrepresentation?
The relevant question in the Proposal asked: “Have you or any director or partner been declared bankrupt, been a director of a company which went into liquidation, administration or receivership. If so give details” (“the Insolvency Question”).
The Claimants answered the Insolvency Question in the negative. New India asserted that their answer was a misrepresentation, because any person who had the status of a director, if not the title, was nevertheless a director for the purposes of the Companies Act. It also argued that any reasonable person completing the Proposal would have realised that “what was being asked related to the reality of the position”.
The Claimants disagreed. They said that the word ‘director’ should be restricted to its plain meaning, i.e., a legally appointed director, and that to hold otherwise would create uncertainty and confusion because a policyholder needs to understand precisely what is being asked of it.
The Judge, Judge Rawlings, agreed with the Claimants: the Claimants were not taken to be qualified lawyers who understood the concepts of de facto and shadow director (and he accepted their evidence that they didn’t even know what those terms meant). The Judge also held that while one could determine if a person had been appointed as a de jure director with certainty, that was not the case with de facto directors, which would turn on a number of factors, including that individual’s role and responsibilities and how they were perceived by others in the organisation.
So far, so Good. But that was not the end of the story.
The Ugly – Was there a failure to disclose a material circumstance under s. 3 of the IA 2015
The duty of fair presentation requires an insured to disclose to an insurer every material fact which it knows or ought to know, in a manner which would be reasonably clear and accessible. A circumstance will be material if it would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms.
Therefore, quite apart from the Insolvency Question – which the Judge found did not embrace the Khosla Insolvency – the question was whether the Khosla Insolvency was material, and therefore disclosable, in any event.
Applying the summary of the law provided by Lionel Percy QC in Berkshire Assets (West London) Ltd v AXA Insurance UK PLC (see our article on that decision here), and particularly the principle that facts which raise doubt as to the risk, without more, are sufficient to be material, the Judge found that the Khosla Insolvency was a material fact. Specifically, the Judge held:
“Whist I cannot say whether a prudent underwriter would, if asked to provide insurance for the first time, refuse to provide that insurance, or only agree to do so on more stringent terms than would otherwise be the case, because of those concerns, it seems to me clear that a prudent underwriter would, at least be influenced or affected by those concerns and would.”
The Judge also considered – but had no hesitation in rejecting – the Claimants’ further argument that New India waived disclosure of the Khosla Insolvency because the Insolvency Question only used the term “director”. That argument was wrong, the Judge found, because a reasonable person would have appreciated that New India had not waived the requirement to disclose that Mr Khosla controlled the management of the Claimants, and was their director in all but name. Accordingly, the case was distinguished from cases such as Ristorante v Zurich (see our article on that decision here), because the insolvency question in that case enquired only about “owners, directors, business partners or family members of the business” i.e., unlike in this case, it did not extend to other business with which those individuals were involved.
Having found that the Claimants failed to disclose a material circumstance, and thus breached their duty of fair presentation, the next issue to be decided was whether that failure was deliberate, reckless, or innocent. The judge held it was the latter. In particular, he accepted the Claimants’ evidence that they did not, at the relevant time, understand what “de facto director” and “shadow director” meant, and therefore would not have understood the Insolvency Question to be referring to Mr Khosla. The Judge also accepted Mr Khosla’s evidence that he had not read the proposal forms, and was unlikely to have read the Statement of Facts, either. While the Judge was satisfied that those failings were negligent, we can see how a different Judge could just as easily have found it to have been reckless (i.e., where a claimant “does not care” whether or not it was in breach of the duty).
The final issue to be decided was the remedy to which New India was entitled. New India’s evidence, which the Judge accepted, was that it had a strict policy of refusing to incept policies if it was disclosed to it that a director (which included Mr Khosla) had been a director of a company which had gone into liquidation. Accordingly, pursuant to the IA 2015, New India was entitled to refuse the Claimants’ claim, but had to refund the premiums.
Conclusion
We think Tynefield is a paradigm example of an ugly decision. In particular, while we sympathise with the Claimants given the wording of the Insolvency Question, the position in this case was that Mr Khosla was essentially “running the show”, such that his insolvency history was disclosable.
The decision is a salutary reminder that there is a critical difference between a misrepresentation and a non-disclosure, and that even an honest and correct answer to a question in a Proposal will not avail an insured of its duty under the IA 2015 to disclose material facts.
Alex Rosenfield is an Associate Partner at Fenchurch Law
Webinar - Too Hot to Handle – a cautionary tale about Hot Works Conditions
Agenda
Hot Works Conditions are a staple of contractors’ public liability policies. They require certain precautions to be taken before, during and after the carrying out of Hot Work activities, each of which are designed to reduce the risk of a fire breaking out.
The language and requirements of Hot Works Conditions vary across the market, and difficult questions often arise as to whether a particular activity engages the precautions, the meaning of “combustible”, and whether the precautions are even capable of being satisfied.
Speaker
Alex Rosenfield, Associate Partner
Seven things a good Insurer will never do
- Give You Up: Are you looking to your existing insurance provider to renew your cover and continue supporting your business through the good times and bad? A good insurer will always do that.
- Let you down: Under ICOBS rule 8.1.1, a good insurer will handle claims promptly and fairly, provide reasonable guidance to help a policyholder make a claim, provide appropriate information on its progress, and not unreasonably reject a claim (including by terminating or avoiding a policy).
- Run around: When investigating a claim, an insurer will never run around trying to find reasons not to pay. It will always treat its customer fairly.
- Desert you: In the case of liability insurance, a good insurer will always step up and pay defence costs, even where coverage might be under the microscope, and will not leave its policyholder in the lurch.
- Make you cry: Following a heavy loss, a good insurer will always take an even-handed approach to its claims process, rather than taking the opportunity to carry out a ‘post-loss underwriting process’.
- Tell a lie: A good insurer will never tell its policyholder that a claim is not covered by a policy when it clearly knows otherwise.
- Hurt you: Quick, lastly – A good insurer will always investigate and pay a claim quickly, lest it be on the wrong side of S13A damages for late payment claim, and will never add to the pain often felt by policyholders at such difficult times.
Alex Rosenfield is an Associate Partner at Fenchurch Law
“Just and equitable” under section 124 of the Building Safety Act 2022 – Triathlon Homes LLP v SVDP, Get Living and EVML [2024]
The First Tier Tribunal (“the FTT”) has decided that it was “just and equitable” to make a Remediation Contribution Order (“RCO”) against the respondent developers under section 124 of the Building Safety Act 2022 (“the Act”).
The decision is the first to consider an RCO under the Act, and raises some interesting implications for Building Liability Orders (“BLOs”), another type of order available under the Act.
What is an RCO?
RCOs can be issued by the FTT to require present or former landlords, developers, or other persons “associated” with the aforementioned to contribute towards the cost of remediation work “incurred or to be incurred” by someone else.
RCOs are “non-fault” based, and are amongst the suite of measures introduced by government to protect leaseholders from the costs of repairing building safety defects that cause a “building safety risk” – meaning “a risk to the safety of people in or about the building arising from the spread of fire, or the collapse of the building or any part of it”.
If the relevant qualifying conditions are met, the FTT may make an RCO if it considers it “just and equitable” to do so. That term is conspicuously not defined in the Act, albeit the Explanatory Notes state that it is intended to afford the Tribunal “a wide decision-making remit which it is expected will allow it to take all appropriate factors into account when determining whether an order shall be made”.
Background
The case concerned a number of residential blocks in East London which were developed by the first respondent, Stratford Village Development Partnership (“SVDP”), to house athletes participating in the 2012 Olympic Games in London. The blocks are now occupied by tenants on long leases.
The applicant, Triathlon Homes (“Triathlon”), is the co-owner of the blocks, which brought proceedings against the respondents after discovering significant building defects which included unsafe ACM cladding.
The respondents were (1) SVDP; (2) Get Living PLC (“Get Living”), which acquired an interest in the blocks long after the blocks were constructed; and (3) East Village Management Limited (“EVML”), the management company with responsibility for the repair and maintenance of the blocks, and which was invited to participate solely as the entity to which Triathlon had paid the costs of taking various interim fire safety measures.
The decision
The respondents argued that the Act had no application in this case as the relevant costs were incurred before 28 June 2022 i.e., prior to the Act becoming law. The FTT had no difficulty in quashing that argument, finding that, as a matter of statutory language, section 124 encompassed both historic and future costs.
The FTT was equally satisfied that the other grounds for making a RCO were met i.e., there was a “relevant defect” in a “relevant building” (as those terms are defined in the Act), and that the respondents were amongst the class of persons against whom an RCO could be made.
Fundamentally, the FTT was also satisfied that the “just an equitable” test had been made out. That aspect of the decision is of particular interest in relation to Get Living. In particular, despite it being accepted that Get Living was not involved in the blocks’ design or construction, and that it derived no financial benefit from its earlier disposals, the FTT found that those factors were irrelevant to the question of whether it was “just and equitable” to make the order. That is because, in the FTT’s view, Get Living acquired not only the assets of EVML, but also its liabilities, which included latent and consequential liabilities.
Fundamentally, the FTT found that it was “not open [to Get Living] to ask that the timing and circumstances in which they made their investment in those assets be taken into account in determining whether it is just and equitable for the companies in which they invested to be the subject of contribution orders.”
Accordingly, the FTT granted the orders sought by Triathlon, which required both SVDP and Get Living to reimburse the expenditure paid by Triathlon thus far, as well as to fund further liabilities which had not yet been paid.
Implications for BLOs
Although made under a different section of the Act, the decision raises some interesting implications for BLOs, which employ precisely the same “just and equitable” test.
In particular, if one assumes that the same wide decision-making remit is afforded to the High Court as it would the FTT, then a BLO is capable of being made against parent companies (and potentially those higher up the corporate chain) even where they were not involved with the work at the time it was carried out.
That thinking would appear consistent with the fact that BLOs can be made against corporate entities that have been “associated” with the entity that undertook the work during the very widely drafted “relevant period” i.e., from the date of the commencement of the work to the date any BLO would be made.
Conclusion
The decision in Triathlon Homes is a sobering reminder to those involved in construction that simply being “plugged in” to a corporate structure months or years after the work has been done by another entity will not constitute sufficient grounds to resist an RCO, and the same principles are likely to apply in relation to BLOs.
It remains to be seen precisely how the High Court will approach BLOs, albeit the first decision on that is expected shortly in the matter of 381 Southwark Park Road RTM Company Ltd & Ord v Click St Andrews Ltd & Ors.
Alex Rosenfield is an Associate Partner at Fenchurch Law
Too Hot to Handle: Everything You Always Wanted to Know About Hot Works Conditions (But Were Afraid to Ask)
Introduction
Hot Works Conditions are a staple of contractors’ public liability policies. They require certain precautions to be taken before, during and after the carrying out of Hot Work activities, each of which are designed to reduce the risk of a fire breaking out.
The language and requirements of Hot Works Conditions vary across the market, and difficult questions often arise as to whether a particular activity engages the precautions, the meaning of “combustible”, and whether the precautions are even capable of being satisfied.
This short article considers some of the key issues.
The nature of Hot Works Conditions
Hot Works Conditions are usually written as “Conditions Precedent to Liability”. Those are fundamental terms of insurance contracts and must be complied with strictly before an insurer can become liable for a particular claim.
In some cases, the condition might not actually include the words “Condition Precent to Liability”, but it will have that effect if the consequences of breaching it are made clear. So, the condition might say: “We [the insurer] will not pay a claim unless you will have complied with the following …”.
The Courts generally treat conditions precedent to liability as onerous or draconian terms. This means that it is incumbent on the insurer to spell out any such terms clearly so that the insured knows precisely what they have to do – or else they are not going to be bound by them.
The meaning of “Hot Work”
Hot Work Conditions often define the term “Hot Work” precisely. Typically, that will cover any activity which uses or produces an open flame, or any other activity which could ignite any combustible or flammable material.
While that may seem relatively straightforward, the question of whether the precautions apply may turn on whether the condition refers to activities that apply heat, or which merely generate it. For example, suppose a contractor wishes to use an angle grinder and the definition of ‘Hot Works’ encompasses activities that only “apply heat”. Strictly speaking, a grinder does not apply heat – it merely generates it – and so the precautions would arguably not apply. Conversely, if the contractor wished to use a gas torch, then that would engage the precautions, as that activity clearly does apply heat.
Actions required in respect of combustible materials
Hot Works Conditions always include a hierarchy of steps which, before starting work, the insured must take in relation to combustible materials. Those are that the insured must:
- Examine the area of works for combustible materials; and
- If the materials are moveable, move them a certain distance away from the Hot Works.
- If the materials are not moveable, cover them with non-combustible materials.
Taking each of the above in turn:
The examination
The requirement to carry out a pre-work examination of the area of work will often be highly circumscribed. For example, it may require a specific individual in the insured’s organisation (usually the fire watcher or ‘responsible person’) to conduct the examination at a particular time, and in a particular way.
On the other hand, the requirement may contain no stipulation as to how the property should be examined, or by whom. In such a case, it would arguably be open to an insured to delegate the examination to someone outside of the insured’s organisation, or to carry out the inspection by way of a desktop study or video link.
In any given case, the insured must satisfy itself that the examination was comprehensive, and that it acted reasonably in carrying out the examination in a particular way.
What does “combustible” mean in this context?
As a matter of science, almost any material is combustible if heat is applied at a sufficiently high temperature. However, “combustible” has to be construed in the context of a commercial insurance policy, and with regard to its natural and ordinary meaning.
The Oxford Dictionary of English (3rd Ed.) defines “combustible” as “able to catch fire and burn easily” and other dictionaries give similar definitions. Accordingly, it is that meaning – not its scientific meaning – to which a Court must have regard. That is supported by the decision in Wheeldon Brothers v Millenium Insurance [2018] EWHC 834 where the Court held, when referring to the term “combustible”:
“If the underwriters had intended “combustible” to have a meaning other than that understood by a layperson interpreting the Policy, it was for underwriters to make that express in the Policy. I find that “combustible” as used in the Policy is the meaning which would be understood by a layperson. To take the example given by the experts, a layperson would not consider diamonds and metals to be “combustible.”
The question then arises as to whether “combustible” should also be interpreted with regard to the specific hot works being undertaken. For example, a gas torch is a more potent source of ignition than an angle grinder, and a given material may be readily combustible in the presence of a gas torch, but not in the presence of a spark from an angle grinder.
In our view, therefore, the nature of the hot work activity should be taken into account when considering whether a material is combustible (and therefore whether it should be moved or covered), as that makes more commercial sense in the context of an insurance policy.
Finally, an insured must have reasonable knowledge that a material is combustible in order to take the required precautions. So, an insured would be expected to know that an oil-soaked rag is combustible and so would need to move it. By contrast, if a non-combustible material had secretly been doused in petrol without the insured knowing (nor being reasonably capable of discovering that), the obligation to remove or cover it would not apply.
The requirement to move or cover up combustible materials
Several points arise on the construction of this requirement.
Firstly, while it may go without saying, the requirement to move combustible materials applies only to materials that are within a certain distance of the hot work activities (usually 6 or 10 metres). Therefore, there is no requirement to remove or cover material which is further away.
Secondly, the requirement to cover up combustible material would apply only to material that is not being worked upon. That is supported by the decision in Cornhill Insurance PLC v D E Stamp Felt Roofing Contractors Ltd [2002] EWCA Civ 395, in which the Court agreed with the Insured roofing contractor that it would be “absurd” to cover up a plywood deck of a roof over which roofing felt was to be laid.
Finally, consideration must be given to whether it is even possible to remove or cover the combustible material at all. In Milton v Brit Insurance [2016] Lloyd’s Rep IR 192, in which the Court considered the meaning of a condition which required insured premises not to be ‘left unattended’, it was held that the condition “clearly only applies to the extent possible, without requiring the insured to fulfil an impossible obligation … it would make no commercial sense for the clause to require the insured to do something which was impossible …”
So, imagine a roof consisted of two layers, the inner layer of which was made of combustible timber and was inaccessible. In that situation, it would plainly not be possible to cover the timber layer, and so, applying Milton, an Insurer cannot decline a claim on the basis that the requirement has not been satisfied.
The requirement to take reasonable precautions
Hot Works Conditions frequently include a requirement that the insured takes “reasonable precautions to prevent damage”. It is well-established principle of insurance law that an insurer can only rely on a reasonable precautions clause where it shows recklessness by the insured. In particular, in Fraser v Furman [1967] 1 WLR 898, the Court held that it must be “shown affirmatively that the failure to take precautions … was done recklessly, that is to say with actual recognition of the danger and not caring whether or not that danger was averted”.
So, acting carelessly will not be sufficient. The requirement is that the insured must be reckless and not care about its conduct.
Other precautions
As stated above, the requirements of Hot Works Conditions vary across the market but will typically include a requirement to appoint a fire watcher, to have a fire extinguisher available for immediate use, and to carry out a thorough post-work fire check for a period of no less than 30 minutes.
A detailed examination of those requirements is beyond the scope of this note, but whether an insured has satisfied the requirements is likely to be fact sensitive.
The consequences of breaching a Hot Works Condition
If an insured breaches a particular term of a Hot Works Condition, then, applying Section 11 of the Insurance Act 2015 (“Section 11”), Insurers will still have to pay the claim if the insured can show that any breach could not have increased the risk of damage occurring in the circumstances in which it occurred.
Section 11 is intended to prevent an insurer from relying on a failure to comply with a policy term where the loss that occurred is unrelated to the breach. So, it would prevent an insurer from relying on a breach of a burglar alarm where the loss is caused by falling debris from an aircraft. While that example is relatively straightforward, the position is more complicated in the context of breaches of hot works conditions and fire, because there is a link between the term in question and type of loss.
There are currently no authorities on the meaning and effect of Section 11, and its precise operation is a matter of legal debate. In particular, it is unclear whether the test requires there to be a causal link between the breach and the loss, or not.
Absent any authorities, it is open to an insured to argue that Section 11 that the test is one of causation. So, if an insured could establish that a fire started as a result of a discarded cigarette for example, and notwithstanding the fact that it had not complied with the Hot Works Condition strictly, it would be open to argue that compliance made no difference, and that Insurers must pay the claim.
Summary
The consequences of Hot Work activities can be devastating for a contractor, which may face large claims against them if property is damaged or destroyed. While public liability insurance is intended to protect an insured against that risk, insureds nevertheless need to be fully aware of their obligations under these conditions, and the consequences which could follow in the event of a non-compliance.
Alex Rosenfield is an Associate Partner at Fenchurch Law
Webinar - The Insurance Act - Recent Developments
Agenda
This webinar will provide a refresher of the key principles under the Insurance Act 2015 (“the Act”), which include the scope of an Insured’s Duty of Fair Presentation, the remedies available to an Insurer where that duty is breached, and the changes to warranties and other conditions. Alex will also review some of the key cases decided under the Act, as well as identifying the key issues which remain to be decided.
Speaker
Alex Rosenfield, Associate Partner
Reinstatement 101 – (rein)stating the obvious?
Reinstatement can be a difficult issue for a policyholder to navigate in the wake of a loss.
The answers to what might seem like obvious questions such as: what is it? who does it? and, do the costs actually have to be incurred? are in actual fact far from straightforward, and have been the subject matter of a number of legal cases in recent years.
This short article summarises some of the key principles that are involved.
What is it?
Reinstatement is the repair or replacement of property so that it is in the same condition or a materially equivalent condition to that which it was in prior to the loss occurring.
Of itself that seems clear enough. However, as ever the devil is in the detail, and the wording of reinstatement clauses varies from policy to policy with very different outcomes for the policyholder.
For example, depending on the precise wording, the policyholder may or may not be entitled to a cash settlement, may or may not be required to rebuild, and may or may not have to rebuild on the same site. Also, many policies give the insurer the option to reinstate.
Who does it?
As might be expected, more often than not the policyholder reinstates. However, many policies give the insurer the option to reinstate at its election. Why might an insurer choose to do so?
There are several reasons why an insurer might elect to reinstate, rather than have the policyholder reinstate or pay them an amount equivalent to the cost of reinstatement. Certainly, one reason identified by the courts is to avoid what other might be “the temptation to an ill-minded owner to set fire to the building in order to pocket the insurance money” (Reynolds v Phoenix Assurance Co Ltd [1978] 2 Lloyd’s Rep 440).
If an insurer elects to reinstate, it must give unequivocal notice to the insured, whether expressly or by conduct. Following a valid election to reinstate, the policy is no longer treated as one under which payment is to be made, and instead stands as if it had been a contract to reinstate in the first place. The consequence of this is that if the insurer fails to perform the contract adequately, it will be liable to the policyholder for damages.
Do the works have to take place?
Whether, and if so, when the reinstatement works have to be carried out, or whether the policyholder is entitled to an indemnity for what the works would cost if carried out, is again going to turn on the precise wording of the policy.
The starting position is as set out in the following extract from the judgment in Endurance Corporate Capital Ltd v Sartex Quilts & Textiles Ltd ([2020] EWCA Civ 308):
“How the claimant chooses to spend the damages and whether it actually attempts to put itself in the same position as if the breach had not occurred – for example by reinstating lost, damaged or defective property – or whether the claimant does something else with the money, is – in accordance with the general principle mentioned earlier – irrelevant to the measure of compensation.”
Therefore, subject to any contrary wording in the policy, a policyholder is entitled to recover the cost of repairing their property, regardless of whether they in fact carry out such repairs, but instead decide, for example, to sell their property or to use the money to build elsewhere on site.
Insurers often look to limit that entitlement, and reinstatement clauses often provide that the work must be commenced and carried out “with reasonable despatch”, and that “no payment is to be made until the costs of reinstatement have actually been incurred”. This presents something of a chicken and egg situation for insureds, since an impecunious policyholder will not have the funds available to pay for reinstatement without first receiving the costs of reinstatement from the insurer.
In Manchikalapati & Others v Zurich [2019] EWCA CIV 2163, the insurer contended that where the policy provided an indemnity for “the reasonable cost of rectifying or repairing damage …”, the term “reasonable cost” should be read as meaning “actual” or “incurred” costs. Therefore, because that cost had not yet been incurred, the insurer argued that its liability under the policy had not been triggered. The court rejected that argument, finding that there was nothing about the wording which indicated that the cost must be incurred before the policyholder was entitled to an indemnity.
An insurer can limit its liability to costs actually incurred, provided it uses clear language to that effect. However, absent clear language, or where the clause is neutral as to whether the cost must already be incurred or may be incurred in the future, the courts have made it clear that insurers are no longer able to able to withhold the indemnity pending the works being carried out.
To what extent are intentions relevant?
One thorny issue that has come up time and again in the context of reinstatement is the relevance of a policyholder’s intentions. This first arose in a case where the policyholder intended to sell the property at the time of the fire. In that case, the court found that the indemnity to which the policyholder was entitled was the price at which it was prepared to sell at the time of the fire. This is because a policyholder is entitled to be indemnified for its loss, and in quantifying that loss, an insured’s intentions may impact on an assessment of the value of the property to them.
This issue most recently came before the court in Endurance v Sartex [2020] EWCA Civ 308. The insured, Sartex, claimed an indemnity on the reinstatement basis following a fire at its premises. The insurers asserted that that this was inappropriate because Sartex did not have a genuine intention to reinstate, placing reliance on the fact that Sartex had not carried out reinstatement in the many years after the fire occurred. As such, the insurer said that Sartex was only entitled to the considerably lower sums representing the diminution in market value of the property as a result of the fire. The court found that the question of whether Sartex actually intended to reinstate the buildings was, in most cases, of no relevance to the measure of indemnity.
Standard of repair
Another issue that frequently arises, particularly in the context of older properties, is what happens when the reinstatement results in the property being in a condition better than it was before. This is known as betterment. The principle of betterment requires the policyholder to account to the insurer for the improved or better aspects of the new property.
Sometimes, a policyholder has no practical alternative but to replace the original property with modern, upgraded property. This is known as involuntary betterment, and in those circumstances the policyholder is entitled to the actual replacement cost.
If an insurer does look to apply a discount for betterment, a policyholder would be advised to require the insurer to identify precisely what betterment the policyholder would enjoy and to serve evidence in support, as where an insurer fails to adequality quantify and evidence its case on betterment, no deduction should be applied.
Summary
Reinstatement clauses are intended to place policyholders into a materially equivalent position to that which they would have been in had the loss not occurred. Quite how that works in practice can be a minefield, but recent case law has helpfully cleared up some misconceptions around the policyholder’s intentions and the extent to which the works have to be carried out – both of which will be of assistance to policyholders in getting their claims paid.
Alex Rosenfield is a Senior Associate at Fenchurch Law
Even a Solicitors’ PI policy has its limits - Doorway Capital Limited v AIG
In this recent decision, the High Court considered whether a liability incurred by a solicitor under a factoring agreement was covered by its professional indemnity policy.
Background
In 2016, Doorway Capital Limited (“Doorway”) entered into a Receivable Funding Agreement (“the Agreement”) with Seth Lovis & Co Solicitors Ltd (“the Solicitors”). The relevant terms of the agreement were as follows:
- Doorway would provide funding to the Solicitors for use as working capital and to repay certain of their debts.
- The Solicitors would sell to Doorway its “Receivables” i.e., the Solicitors’ trading debts, together with the right to pursue those debts.
- the Solicitors would be appointed as Doorway’s agents to collect the Receivables.
- On receipt, the Solicitors would hold the Receivables in their client account on trust for Doorway, before paying the sums over to Doorway’s nominated account.
Doorway claimed that the Solicitors collected c. £2m worth of Receivables between 2017 and 2018 but in breach of the Agreement, only paid over a small portion of them. Doorway also asserted that the Solicitors breached fiduciary duties owed to Doorway.
As the Solicitors had entered into administration, Doorway claimed directly against the Solicitors’ professional indemnity insurers, AIG, under the Third Parties (Rights Against Insurers) Act 2010.
The Application
AIG applied for summary judgment, arguing that Doorway’s claim had no prospects of success. For the purposes of the application, AIG did not dispute that the Solicitors had breached the Agreement nor that they had breached fiduciary duties owed to Doorway.
There were two principal issues for the Court to decide:
- Did the liability that the Solicitors incurred to Doorway fall within the insuring clause of the policy (“the Policy”)?
- If so, did the ‘Debts and Trading Liabilities’ exclusion (“the Exclusion”) nevertheless apply?
The insuring clause
The insuring clause indemnified the Solicitors against “… civil liability to the extent that it arises from Private Legal Practice in connection with the Firm’s Practice.”
“Private Legal Practice” was defined as meaning “the provision of services in Private Practice as a solicitor … including, without limitation … (c) any Insured acting as a personal representative, trustee, attorney, notary, insolvency practitioner, or in any other role in conjunction with a Practice.
Doorway argued that the Solicitors’ services fell within the definition of “Private Legal Practice.” In particular, it said that acting as a trustee, without more, was sufficient. It also argued that (i) the Solicitors exercised “professional judgment in relation to the assessment of obligations which would arise in the course of the solicitor’s practice”, because they were required to determine whether, as a matter of law, a Receivable was payable to Doorway; and (ii) the holding of monies in their client account showed that they were providing a service in private practice.
The Judge, Mr Justice Butcher, paid short shrift to Doorway’s arguments. Any liabilities that the Solicitors owed to Doorway derived from Agreement alone; the fact that the Solicitors were holding monies on trust was merely “a part of the mechanism” of fulfilling their obligations under the Agreement. The Judge came to the same conclusion in respect of the Solicitors’ use of “legal judgment” to recover the Receivables, as well as the use of their client account – neither were for the provision of services in private practice as a solicitor.
In the circumstances, the liabilities incurred by the Solicitors did not arise from Private Legal practice, and were therefore not covered by the insuring clause. Accordingly, AIG’s application for summary judgment succeeded.
The Exclusion
Although it was not necessary for the Judge to decide this given his findings on the insuring clause, the Judge nevertheless also expressed a view on the applicability of the Exclusion.
The Exclusion stated: “The Insurer will have no liability to indemnify an insured in relation to any … legal liability assumed or accepted by an Insured under any contract or agreement for the supply to, or use by, the Insured of goods or services in the course of the Insured Firm’s Practice.”
In considering this issue, the Judge referred to the Supreme Court decision in Impact Funding Solutions Limited v AIG Europe Insurance Ltd [2016] UKSC 57. As with the present case, Impact Funding concerned a commercial agreement between a firm of solicitors and a third-party funder, and required to court to decide whether services conducted in connection with that agreement were covered (or, in the circumstances, excluded) under the solicitor’s PI policy. The policy contained an exclusion for “breach by any Insured of terms of any contract or arrangement for the supply to, or use by, any Insured of goods or services in the course of providing legal services.” By a majority of 4 to 1, the Supreme Court found that the exclusion applied. Of particular relevance, Lord Toulson said that the commercial agreement “did not resemble a solicitor’s professional undertaking as ordinarily understood, and it falls aptly within the description of a “trading liability” which the minimum terms were not intended to cover.”
Therefore, by analogy with Impact Funding, the liability incurred by the Solicitors to Doorway was not the type of liability which would be covered by a solicitors’ PI policy. Therefore, had he been required to do so, the Judge would have found that the Exclusion applied.
Conclusion
The case is confirmation that not every service provided by a solicitor will be covered by its professional indemnity policy. In any case, one has to look at the substance of the service being provided; merely acting as a trustee or using a client account, for example, will not necessarily be enough.
As to the Exclusion, although the Judge’s comments were obiter, it is difficult to see how the issue could have been decided any other way in light of Impact Funding. As with that case, the meaning and effect of the Exclusion were clear, and the Judge had no doubt that it applied.
Alex Rosenfield is a Senior Associate at Fenchurch Law