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
No Time To Be Without Cover
This short article considers a handful of the possible insurance claims that arise in the latest James Bond outing, No Time to Die, as well as paying homage to Daniel Craig’s brilliant 5-film stint as 007.
Warning: this article contains major spoilers. So, to all those who are yet to see the film, read no further.
Matera – the prologue
The film opens with Mr Bond enjoying some downtime in Matera, Italy, with his beloved Madeleine Swann. It’s an idyllic scene. Glorious weather; a spectacular backdrop; and a stylish cave hotel. What could possibly go wrong here? Quite a lot, sadly.
After visiting the grave of his first (and perhaps one) true love, Vesper Lynd, Bond is attacked by scores of Spectre henchmen. There’s then a frantic car chase through Matera’s ancient streets, before Bond casually disposes of said henchmen by turning the headlights of his Aston Martin DB5 into revolving machine guns. Very cool.
Sadly, the Aston Martin takes quite a battering, and presumably is no longer road-worthy. That’s a fairly chunky insurance claim, which gives rise to some non-disclosure issues. At inception of the Policy, Mr Bond’s insurers would have most likely asked: “have you or any person who will drive the motorhome had any accidents, claims, damage, theft or loss involving any vehicle during the past 5 years”.
Unfortunately for Bond, he’s had his fair share of rotten luck behind the wheel. In particular, if one assumes that the events of Skyfall and Spectre were within the last 5 years, the following incidents come to mind: –
- Aston Martin DB5 – destroyed at the end of Skyfall, after a fist-fight with Raoul Silva (estimated damage of £850,000);
- Aston Martin DB10 – sank at the bottom of the River Tiber in Spectre, after Bond is chased by one of Blofeld’s henchmen (estimated damage of £2.6m).
Given the above, a failure to disclose these incidents would probably be treated as a deliberate breach of Bond’s duty of fair presentation under the Insurance Act. Insurers would invariably avoid the Policy, refuse all claims and keep the premium. Bond could always try arguing that it wasn’t a qualifying breach, because Insurers would have written the Policy anyway, but that seems speculative.
Another issue to address is the duty to take reasonable precautions. As many of us will be aware, such provisions mean no more than the insured must avoid reckless behaviour (Sofi v Prudential Assurance [1993] 2 Lloyd’s Rep. 559). So, in order to rely on a breach, Insurers would need to demonstrate that Bond was indifferent about looking after his vehicle. Acting carelessly will not be sufficient. Once again, that poses something of a conundrum for Bond. At the time of the incident, he’s clearly courting danger by inviting Spectre’s goons to shoot at him, and makes very little effort to conduct his affairs in a prudent and businessmanlike manner. All in all, this doesn’t smell like a winner.
Cuba – Bond comes of retirement
Five years after the events in Matera, Bond is blissfully retired in Jamaica. Not before long, one of MI6’s brightest and best shows up, who tells Bond that she now stands in his shoes as the new 007, and has been tasked with recovering a Russian scientist (a subrogated recovery, one might say). Bond, suitably unimpressed, decides to buddy up with the CIA’s Felix Leiter to try and get to the scientist first.
This leads Bond to Cuba, where literally all hell breaks loose. The number of insurance claims that could arise here is mind-boggling. Those include:
- Cuban drinking establishment/Property damage – there’s fairly significant damage here, after Bond gate-crashes a birthday party held in the honour of his arch-nemesis, Ernst Stavro Blofeld;
- Cuban drinking establishment/BI Loss – more hefty losses, one would imagine;
- Cuban drinking establishment/Public Liability – given that all of the attendees meet their maker after being infected by DNA-targeting nanobots (more on that below), this could give rise to another sizeable claim.
- Property damage/boat & helicopter – catastrophic damage to a boat after a terse fist-fight between Bond and Leiter’s duplicitous associate, Logan Ash (Rest in peace, Felix). Presumably the helicopter which Bond pilots to get to the boat is also a write-off.
Lytusifer Safin – he’s been expecting you, Mr Bond
In the film’s third act, we’re properly introduced to Bond’s main adversary, Lyutsifer Safin, played by the brilliant Rami Malek. We’d seen precious little of Mr Safin until this point, but all the familiar Bond-villain tropes are there. He’s creepy as hell, has set up shop on a secret island, and has a name which literally sounds like Lucifer (definitely evil, then).
Mr Safin, it would seem, has had a bit of a chip on his shoulder since Spectre murdered his family as a boy. Having recently wiped out Spectre, thusly achieving his revenge, Safin now wants to conquer the world by using the aforementioned nanobots as a biological weapon. Bond obviously isn’t having any of this, and heroically stops Safin in his tracks; but not, in a surprising and devastating turn, before he’s inflicted with mortal wounds. Sadly, this really is the end for Bond, who shortly afterwards succumbs to his injuries whilst he’s blown to smithereens by a British warship.
We assume that Mr Bond was sensible enough to procure a policy of life insurance before his untimely passing, and that he named Ms Swann as his beneficiary. To make a claim, Ms Swann would need to provide, as a minimum: (i) the name of the deceased (Bond, James Bond); (ii) the Policy number; and (iii) the cause of death.
The price and cover available would depend on a number of factors, which include the nature of Bond’s profession, as well as the fact that he indulges in what some would say is an unhealthy lifestyle i.e. a heavy alcohol intake. One can only imagine how high the premium must have been.
Mr Bond’s estate would also need to satisfy that his death wasn’t the result of reckless or dangerous behaviour. Whether that’s the case here is debateable, but we’d argue that Bond is just on the right side. Indeed, having agreed to cover Mr Bond, the underwriter would be ‘presumed to be acquainted with the practice of the trade he insures’ (Noble v Kennaway [1780]), and therefore should have appreciated that taking on a megalomaniac and his machine-gun wielding disciples was merely an occupational hazard. In circumstances where Bond quite literally saved the world, paying this claim feels like the right thing to do.
Given that Ms Swann is seen happily driving an Aston Martin V8 Vantage at the end of the film, we’re going to assume that the claim succeeded. Happy days for all. Well, apart from Bond, of course. May his memory live on.
Alex Rosenfield is a Senior Associate at Fenchurch Law
Webinar - Euro Pools v RSA – diving into notification issues
Agenda
This webinar looks at the seminal Court of Appeal decision in Euro Pools v RSA, and will provide an overview of the core legal principles surrounding notifying circumstances under professional indemnity insurance policies. The session also addresses the vexed issue of “hornet’s nest” or “can of worms” notifications, and the practical considerations involved.
Alex Rosenfield is a Senior Associate at Fenchurch Law
Ristorante Limited t/a Bar Massimo v Zurich¬ [2021]: – Food for thought about the questions in insurance applications
This recent High Court decision considers the proper construction of questions put to an insured in insurance applications, and the circumstances in which they can amount to waiver.
Background
Ristorante Limited (“Ristorante”) was the leaseholder of a bar and restaurant in Glasgow (“the Property”). Ristorante took out an insurance policy with Zurich in 2015, which renewed in 2016 and 2017 (“the Policy”). Prior to inception of the Policy, and at each renewal, Ristorante confirmed that the following state of affairs was true:
“No owner, director, business partner or family member involved with the business:
i) ...
ii)...
iii) Has ever been the subject of a winding up order or company/individual voluntary arrangement with creditors, or been placed into administration, administrative receivership or liquidation
iv) ...
(“the Insolvency Question”)
On 3 January 2018, a significant fire broke out at the Property. After being notified of a claim, Zurich purported to avoid the Policy on the basis that Ristorante failed to make a fair presentation of the risk. In particular, it asserted that Ristorante misrepresented/failed to disclose that three of its directors had been directors of companies which previously entered liquidation (“the Other Insolvencies”), and that cover would not have been provided had they been disclosed.
Issues
There were two issues for the Court to determine at a trial of preliminary issues:
- Whether, on the true construction of the Insolvency Question, there was a misrepresentation/non-disclosure; and
- Whether, by asking the Insolvency Question in the way that it did, Zurich waived disclosure of the Other Insolvencies.
The Decision
The Judge, Mr Justice Snowden, found for Ristorante on both issues.
On the first issue, the Judge observed that the Insolvency Question limited its enquiry to any “owner, director, business partner or family member involved with the business”. There was no express enquiry in relation to any corporate bodies, and, accordingly, a person completing the Insolvency Question would not come to it “with any predisposition to think that the Defendant was interested in that information.”
The Judge also relied on cases such as R&R Developments v AXA [2010] 2 All ER (Comm) 527 (see our previous article on the case here) and Doheny v New India Assurance [2005] 1 All ER (Comm), both of which also addressed the proper construction of insolvency questions. The Judge found that a reasonable insurer in 2015 would be expected to know of those decisions, and to have understood the importance, if it wished to make enquiries of the insolvency of companies with which the insurer’s directors were involved, of using language which referred to those companies.
Zurich made a number of further arguments about the correct interpretation of the Insolvency Question, which included an argument that the words “has ever been the subject of” were sufficient, without more, to require disclosure of companies with which Ristorante’s directors were involved. Unsurprisingly, the Judge rejected that construction, noting that it made neither grammatical nor legal sense.
Zurich also said that, regardless of the precise wording used, a reasonable broker would have understood the Insolvency Question to mean that the Other Insolvencies were material facts which needed to be disclosed. However, absent any evidence on what a “hypothetical reasonable broker” would have done, the Judge rejected that argument.
On the second issue, the Judge, having regard to the authorities on the effect of asking a limited question, held that Zurich waived disclosure of the Other Insolvencies. Although Zurich contended that past insolvencies was a relevant moral hazard from the perspective of an insurer and “certainly information about which they would ordinarily expect to be told”, the Other Insolvencies related to a different set of persons identified in the Insolvency Question. Therefore, it was reasonable for Ristorante to infer that Zurich had no interest in them.
Summary
Ristorante v Zurich is another in a recent run of policyholder friendly decisions, and a timely reminder that Insurers’ attempts to re-write questions in insurance applications, when doing so would require a completely different meaning to be given to them, will be impermissible.
Alex Rosenfield is a Senior Associate at Fenchurch Law
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #11 (The Good). R&R Developments v AXA
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.
Some cases are, in our view, 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.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#11 (The Good)
R&R Developments Ltd v AXA Insurance UK Plc [2010] Lloyd's Rep. I.R. 521
The case concerned a question in a proposal which asked if any of the insured’s directors had ever been declared bankrupt, either personally or in connection with any business with which they were involved. The Court held that the question did not extend to the insolvency of any company with which they may have been involved. The Court also held that, by asking a limited question, the insurer had waived disclosure of the insolvency of any party other than the insured and its directors.
Background
R&R Developments Limited (“R&R”) was insured by AXA Insurance UK plc (“AXA”). Prior to inception of the relevant policy, R&R completed a proposal, which asked:
“Have you or any Partners or Directors either personally or in connection with any business in which they have been involved … ever been declared bankrupt or are the subject of any bankruptcy proceedings or any voluntary or mandatory insolvency?”
R&R answered this question (“the Insolvency Question”) in the negative. AXA contended that this was a misrepresentation, since one of R&R’s directors had been a director of a company which had gone into administrative receivership. AXA also said that R&R should have disclosed that insolvency in any event, as it was material.
The Decision
The Judge, Nicholas Strauss QC, held that the Insolvency Question was clearly worded. As a matter of simple grammar and syntax, it did not relate to anybody other than R&R and its directors. So, since R&R was solvent and none of R&R’s directors had ever been made bankrupt, the Insolvency Question was answered correctly. Three further considerations supported that conclusion:
- AXA contended that the Insolvency Question referred, in effect, to “… you or any Partners or Directors or any business in which they had been involved”. Had this been its intention, it would have been very simple drafting to achieve that result.
- On AXA’s interpretation, the disclosure required from R&R would have been unreasonably wide. In particular, the meaning of “involved” could potentially have extended to any company of which one of the directors had been employed in a junior position.
- Looking at the proposal as a whole, and particularly the fact that a further question asked “Had any losses … or … any claims …. made against you (in this or any existing or previous business”), it was clear that the questions were targeted solely at R&R and its directors.
The Judge also rejected AXA’s secondary argument. Although AXA had in its mind the concept of other businesses with which R&R’s directors were involved, it chose not to ask about them. Therefore, by asking a limited question, R&R was entirely justified in thinking that AXA had waived its right to that information.
Comments
The decision is a helpful endorsement of the ‘natural and ordinary meaning’ rule of interpretation. AXA tried to argue, in effect, that words needed to be implied into the Insolvency Question which would significantly change its meaning, and that that should be done for its own benefit. Quite rightly, the Court gave short shrift to that argument.
Alex Rosenfield is a Senior Associate at Fenchurch Law.
Say hello, waive goodbye – waiver in insurance disputes
Waiver involves a party abandoning some or all of its rights under a contract. The concept is broad, and arguments about its application arise frequently in insurance disputes, in relation to both the creation and operation of a policy.
This article will outline situations where waiver arguments most commonly occur.
Waiver of disclosure
Under the Insurance Act 2015 (“the Act”), an insured must make a fair presentation of the risk. This requires disclosure of every material circumstances which the insured knows or ought to know, and in a manner which would be reasonably clear and accessible.
An insurer’s failure to ask questions has always risked being treated as a waiver of the insured’s duty of disclosure. That situation is now codified in s3(4)(b) of the Act, which confirms that it is only necessary for an insured to disclose “sufficient information to put a prudent insurer on notice that it needs to make enquiries for the purpose of revealing those material circumstances.” The insurer therefore has a duty to make enquiries when it requires further information – it cannot simply sit on the disclosure provided and ask questions only once a claim is made.
Absent enquiry by the insurer, the Act provides that an insured does not need to disclose a circumstance if, amongst other things, it is something about which the insurer waives information. This can happen expressly, or impliedly.
Express waiver
Numerous forms of agreement can be reached between an insurer and an insured whereby the latter’s duty of fair presentation is restricted. This may be by way of agreement which restricts materiality to knowledge held by specific individuals. Alternatively, they may agree that specific types of information need not be disclosed.
Implied waiver – asking limited questions in a proposal
An insurer may, in some circumstances, be taken to have waived the scope of disclosure by asking a limited question in a proposal. By way of example; suppose an insurer asks a proposer, “have you been made insolvent during the last 5 years?” which the proposer correctly answers “no”. Then, following the making of a claim, the insurer refuses to pay on the basis that the insured failed to disclose that it entered into administration 8 years ago. On those facts, there is an unanswerable argument of waiver. The insurer could easily have asked the proposer about insolvencies occurring more than 5 years prior, and by not doing so indicated that it had no interest in those insolvencies. These types of argument are fact-sensitive, and will depend on the proper construction of the proposal as a whole. The question to be asked, as MacGillivray says, is:
“Would a reasonable man reading the proposal form be justified in thinking that the insurer had restricted his right to receive all material information, and consented to the omission of the particular information in issue?”
If the answer to that question is “yes”, an insurer cannot subsequently use that non-disclosure as a reason to avoid paying a claim.
Waiver of the insurer’s remedy for breach of the duty of fair presentation
This type of waiver is known as waiver by election. In short, where an insurer discovers that there has been a non-disclosure entitling it to avoid the policy, it has a choice between two inconsistent rights: it can either affirm the policy (i.e. treat it as continuing), or it can avoid it. If the insurer, having knowledge of those inconsistent rights, makes an unequivocal representation that it will affirm the policy, the right to avoid will be lost.
For example; suppose an insurer, during the course of its investigations following a claim, discovers that the insured had failed to disclose that it has an unsatisfied CCJ. If the insurer expressly affirm cover, it cannot go back on that choice.
That example can be contrasted with implied affirmation i.e. where the insurer’s conduct amounts to an unequivocal communication that it has chosen to affirm the policy. Such conduct might include the actual payment of a claim under a policy, or accepting future premiums.
Waiver of the insurer’s remedy for breach of condition
Where an insured breaches a policy condition, the only form of waiver available is waiver by estoppel (Kosmar Villa Holdings PLC v Trustees Syndicate 1243 [2008] EWCA Civ 147).
As with waiver by election, waiver by estoppel rests on an unequivocal representation that a party will not rely on its rights; however, the insured must also show detrimental reliance i.e. that it has relied on the insurer’s representation, such that the insurer’s withdrawal of that representation would be unjust.
As an example; say there is a fire at an insured’s premises, and the insurer then discovers that the insured had breached a condition precedent regarding the storage of combustible materials. Ordinarily, no liability would attach to the insurer for the claim, as the condition precedent was breached. However, in this case the insurer chooses to act in a manner only consistent with it having waived the insured’s breach, by asking the insured to provide information about the repair costs. If the insured can show that it relied on the insurer’s representation to its detriment (e.g. by starting to repair the premises), the insurer will be estopped from relying on the breach.
Estoppel by silence?
Recent case law has raised the potential for the court to find, in some circumstances, that an insurer’s silence or acquiescence may give rise to an estoppel.
The case in question, Ted Baker v AXA Insurance UK plc [2017] EWCA Civ 4097, concerned a claim by the clothing retail company, Ted Baker, following a theft. AXA refused to pay the claim because, amongst other reasons, Ted Baker had breached a condition precedent in the policy requiring it to produce certain information.
Ted Baker argued that AXA was estopped from relying on its breach, because AXA had known that Ted Baker believed, albeit mistakenly, that the obligation to produce the information had been “parked”. Although Ted Baker’s claim failed on other grounds, the Court of Appeal agreed that Ted Baker was entitled to expect AXA, acting honestly and responsibly, to speak up if it regarded the information as outstanding, and if it realised that Ted Baker had wrongly believed otherwise.
Summary
Waiver arguments arise in a number of different guises in insurance disputes, and are likely to be hotly contested. Although the availability of any waiver argument will be fact-specific, relevant considerations include the conduct and knowledge of the insurer, and whether the insurer had reserved its rights.
If an insured is able to establish that the insurer has waived its rights, the law will hold the insurer to its choice, and any alternative choice will be lost.
Government to fund replacement of non-ACM cladding systems on residential buildings
On 11 March, the government announced that it would provide up to £1 billion in 2020/21 to fund the removal and replacement of unsafe non-ACM cladding systems on high-rise residential buildings.
Attitudes towards building safety have undergone a paradigm shift since the tragic events at Grenfell Tower. Since then, the government has introduced a wide-ranging package of measures to ensure that buildings, particularly those with Aluminum Composite (ACM) cladding, are made safe. Notably, the government last year introduced a fund of £600m for the replacement of unsafe ACM cladding from residential buildings, similar to the type that was in place on Grenfell Tower.
Although ACM cladding remains the government’s priority, it has now announced proposals to extend funding for the removal and replacement of non-ACM cladding, such as High Pressure Laminate panels (‘HPL’). The announcement follows the guidance issued by the government earlier in the year in its “Consolidated Advice Note on Building Safety”, and in particular, the views of its Expert Panel that HPL systems with a ‘C’ or ‘D’ (i.e. those with a medium or high contribution to fire) would not meet the requirements of the Building Regulations, and that owners of such buildings should replace those materials as soon as possible.
Funding will be available to both the social and private sectors. In the private sector, the fund will be for the benefit of leaseholders to ensure that their buildings are made safe; and in the social sector, where remediation costs would otherwise be too prohibitive.
What are the eligibility criteria?
As with the ACM fund last year, funding will be available for buildings that are 18m or above.
The government has also said that building owners will be required to pursue warranty claims and take “appropriate action against those responsible for putting unsafe cladding on these buildings, with any damages recovered paid to Government once recouped.”
What are warranty claims?
Warranty claims refer to claims made under latent defect insurance policies. Those policies provide cover for newly built properties in the event of an inherent defect that was not capable of being discovered through inspection before completion.
Typically, latent defect policies are triggered in the event of (a) a non-compliance with the relevant Building Regulations that applied at the time of construction/conversion; and (b) which causes a present or imminent danger.
Given the above, unsafe non-ACM cladding that has been installed in high-rise residential blocks is likely to meet those requirements.
What other claims might be available against those responsible for putting unsafe cladding on buildings?
Those involved with the original cladding installations may include Main Contractors, Architects, and specialist cladding subcontractors. The type of claims that can be brought against them will differ in each case, and will depend upon the nature of the relationships between the parties, and the specific work that was undertaken.
One route to making a recovery against those involved with the original cladding installation is under the Defective Premises Act 1972.
The Defective Premises Act imposes a duty on builders and any other professionals who take on work in connection with the provision of a dwelling. It requires the work to be done in a professional or workmanlike manner, with proper materials, and that the dwelling is for habitation when completed. The duty is owed to every person who acquires a legal or equitable interest in the dwelling.
Summary
The announcement of funding for the remediation of non-ACM buildings underlines the government’s ever-increasing commitment to building safety.
It is also likely to come as a blow to latent defect insurers, who may face a surge in the number of claims made under their policies. The potential for claims will be increased if, as expected, local authorities and Fire and Rescue Services are granted enforcement powers where building owners refuse to apply for funding, or otherwise refuse to remediate their buildings.
Alex Rosenfield is a Senior associate at Fenchurch Law