Policy Cover for Cladding “Damage”
A combustible cladding crisis has engulfed the construction sector in recent years, with tragic fires in apartment blocks in London, Melbourne, Dubai and Valencia indicative of systemic global risks. External wall panels, widely used since the 1990’s to reface high-rise buildings, have been exposed in many cases as hazardous and unsuitable, compounded by fire stopping and compartmentation defects, resulting in an avalanche of claims against developers, owners, contractors, consultants and insurers.
Rectification costs are potentially recoverable under latent defects policies, covering structural or safety issues affecting new build developments, or under professional indemnity policies, in response to third party claims against designers arising from negligence in the course of their professional duties. This article focuses on recent authority in common law jurisdictions which suggests that the incorporation of defective cladding panels may constitute physical damage for the purpose of other types of liability or property insurance.
Owners v Fairview
In Owners - Strata Plan No 91806 v Fairview Architectural (No.3) [2023] the defendant (“Fairview”) manufactured and supplied combustible Vitrabond panels, installed on two high-rise residential buildings in Sydney. Following an order by the local council to remove the panels, the owner commenced representative proceedings against Fairview alleging that the panels were not of acceptable quality, in breach of statutory requirements. The owner applied to join Fairview’s liability insurer to the claim, on the basis that Fairview’s potential liability arose from “property damage” caused by an “occurrence” (defined in the policy as an event resulting in property damage that was neither expected nor intended).
Justice Wigney acknowledged that the question of coverage was “not easy … involving matters of degree and characterisation”, with many of the authorities turning on their own unique facts and the more contentious cases involving alleged physical damage based on a loss of functionality. Notably the New South Wales Court of Appeal has rejected an argument that the blockage of a grain silo by grain constituted physical damage (Transfield v GIO (1996)).
The Federal Court held that it was at least arguable the liability policy would respond to the underlying claims, since the affixation of cladding panels “had an instant and damaging effect on the building because the panels posed an immediate and unacceptable danger to the residents of the building”. Physical damage to the facade occurred during the period of insurance, when the panels were attached by insertion of nails and screws into the walls of the building using a top hat structure. It was held that this could be characterised as an “occurrence” because Fairview did not expect or intend the panels to be combustible or defective, nor that the panels would have to be removed.
In reaching this conclusion, Justice Wigney considered Australian Plywoods v FAI (1992), where the Queensland Court of Appeal held that physical damage to the hull of a boat occurred at the time that defective plywood was attached using screws and glue; and R & B Directional Drilling v CGU (2019), where the Federal Court determined there was no physical injury to a tunnel by accidental filling of a conduit pipe with concrete, as the pipe could be removed leaving the tunnel in the same physical state as before the defective work.
Justice Wigney distinguished the decision in Pilkington v CGU [2005], where the English Court of Appeal held that installation of a small number of defective glass panels in the Waterloo Eurostar Terminal had not caused physical damage to the terminal building, to trigger cover under the manufacturer’s products liability policy. In that case, the owner did not remove the affected panels (so there was no physical damage associated with access, to replace defective components) and chose instead to implement safety measures to avoid the risk of shattered glass falling.
Fortuity
In English law, damage is a fortuitous change in physical condition that is adverse. The requirement for an altered physical state is crucial to distinguish between damage and defects. The fact that something is rendered less valuable or useful does not in itself constitute damage; but where the subject matter is added to, defaced or contaminated by some other substance, it is a matter of degree whether this will be regarded as affecting the physical condition of the property. Product liability insurance is triggered by personal injury, or physical loss or damage to third party property, during the period of insurance, as opposed to economic impacts such as loss of goodwill (Rodan v Commercial Union [1999]).
In Pilkington, the first instance decision - that the terminal was not physically damaged by an Occurrence which consisted of no more than the intentional installation of the product designed to be installed - was upheld on appeal. The policy wording made clear that damage or deterioration confined to the product itself was excluded, i.e. the policy would only answer in respect of physical damage suffered by third party property in relation to which the product had been introduced or juxtaposed.
Lord Justice Potter observed:
“Damage requires some altered state, the relevant alteration being harmful in the commercial context. This plainly covers a situation where there is a poisoning or contaminating effect upon the property of a third party as a result of the introduction or intermixture of the product supplied … difficulties of application of such a test may arise in cases where a product supplied is installed by attachment to other objects in a situation in which it remains separately identifiable, but by reason of physical change or other deterioration within it, it requires to be renewed or replaced.”
American Cases
The Court of Appeal in Pilkington considered various American authorities including Eljer Manufacturing v Liberty Mutual (1992), in which Circuit Judge Posner in a majority judgment decided that the installation of a defective product or component into property of the buyer, in circumstances where the defect does not cause any tangible change in the property until years later, can be regarded as physical injury from the time of installation. Judge Posner considered that the presence of a potentially dangerous ‘ticking time bomb’ should be construed as injury to the structure from the time of incorporation, based on the commercial intent of the parties to the insurance contract.
The outcome seems analogous with the limitation period in tort for claims where inherent design defects give rise to economic loss in the absence of physical damage, commencing at the latest on practical completion, as discussed in URS v BDW [2023].
In a dissenting judgment in Eljer, Circuit Judge Cudahy rejected the majority view, and this reasoning was endorsed by the Court of Appeal in Pilkington as better reflecting the approach of an English court. Lord Justice Potter referred to the comments of Stuart-Smith LJ in Yorkshire Water v Sun Alliance [1997] as follows:
“… the American Courts adopt a much more benign attitude towards the insured … based variously on the “folly” argument … or that insurance contracts are: “contracts of adhesion between parties who are not equally situated” … or because the Courts have … adopted the principle of giving effect to the objectively reasonable expectations of the insured for the purpose of rendering a fair interpretation of the boundaries of insurance cover … For the most part these are notions which reflect a substantial element of public policy and are not part of the principles of construction of contracts under English law.”
Arguably this benevolent approach is reflected in recent US decisions on defectively mixed concrete, suggesting that “any bad effect” may qualify as damage in the context of LEG defect exclusion clauses under Construction All Risks policies (South Capitol Bridgebuilders [2023]; Archer [2024]).
Contamination
In determining the issue in Fairview, Justice Wigney was influenced by cases concerning the harmful effects of asbestos, observing that:
“The affixation of combustible panels to a residential building can … be compared with the integration of a dangerous or toxic substance, such as asbestos, into a building. Just as the integration into a building of a potentially hazardous material such as asbestos resulted in physical injury to the building at the time of installation (even if at that time the dangers were not realised, or the toxic substances had not been released) … so the affixation to a building of potentially hazardous combustible panels can be seen to result in physical damage to the building at the point of installation.”
As noted by Paul Reed KC in Construction All Risks [at 14-014] some English and Australian authorities suggest that the courts may be willing to treat contamination as a separate category of damage that does not require an obvious physical change in characteristics of the property insured.
Applying the courts’ reasoning in The Orjula [1995] and Hunter v Canary Wharf [1996] it may be possible to infer that the property has undergone a change in physical condition, where remedial costs have been incurred.
Conclusion
Insurers would typically argue that no fortuitous physical damage has occurred in respect of combustible cladding panels, in the absence of a fire or other adverse event post-installation, and any need for replacement following identification of harmful characteristics represents, at most, an economic loss to owners.
By contrast, recent authorities in Australia and the US lend support for the proposition that damage may be established based on changes in condition through physical attachment of cladding panels, involving integration of dangerous substances with a ‘contaminating’ effect, given the adverse unexpected consequences and need for remedial works. Each case will depend on its individual facts in terms of the location of insured property, type of external wall system(s), and applicable policy wording.
The argument remains largely untested in the English courts, presenting a novel potential route to recovery under insurance policies triggered by physical damage.
Amy Lacey is a Partner at Fenchurch Law
Covid “Catastrophe” Triggers BI Reinsurance
The first UK court ruling on the reinsurance of Covid-19 losses has confirmed coverage under excess of loss policies taken out by Covéa Insurance plc (“Covéa”) and Markel International Insurance Co Ltd (“Markel”). Mr Justice Foxton allowed recovery against reinsurers for losses occurring while the underlying policyholders were unable to use their business premises, due to government restrictions, on the basis that the pandemic was a “catastrophe” within the meaning of the reinsurance contracts.
Covéa and Markel paid out a combined total of over £100 million to policyholders for Covid-19 business interruption (“BI”) losses and made claims under their respective reinsurances with UnipolRe Designated Activity Company and General Reinsurance AG. Disagreements arose concerning the scope of cover under the reinsurance contracts, and a consolidated judgment was given in two separate appeals under s.69 of the Arbitration Act 1996, against arbitration awards dated January and July 2023. In summary, the appeals raised the following issues:
- Whether the relevant Covid-19 losses arose out of and were directly occasioned by one catastrophe on the proper construction of the reinsurances. Both arbitration awards found that they did; and
- Whether the respective Hours Clauses in the reinsurances, which confined the right to indemnity to “individual losses” within a set period, meant that the reinsurances only responded to payment in respect of the closure of insured premises during the stipulated period. The Markel arbitral tribunal found that the relevant provision did have that effect, while the tribunal in the Covéa arbitration found that it did not.
The Judge found in favour of the reinsureds on both issues.
Loss Arising from One Catastrophe
Coincidentally, both Covéa’s and Markel’s losses arose through direct insurance of nurseries and childcare facilities, which had been forced to close from 20 March 2020 by the UK government’s Order of 18 March 2020. The reinsurance contracts contained similarly worded Hours Clauses based on the LPO 98 market wording, including a form of aggregation provision operating by reference to a specified number of hours’ cover for any “Event” or “Loss Occurrence” (terms previously held to have the same meaning), defined as “all individual losses arising out of and directly occasioned by one catastrophe”.
For any Event or Loss Occurrence “of whatsoever nature” which did not include losses arising from specified perils (such as hurricane, earthquake, riot or flood) listed in the Hours Clauses, the limit was 168 hours (i.e. 7 days). Infectious disease was not a named peril and the 168 hours limit applied.
In circumstances where the arbitral awards were based on mixed findings of fact and law, it was common ground that the court could not interfere on a s.69 appeal unless the arbitral tribunal either had erred in law or, correctly applying the relevant law, had reached a decision on the facts which no reasonable person could have done.
On general principles of construction, the Judge endorsed the comments of Mr Justice Butcher in Stonegate v MS Amlin [2022] that “in considering whether there has been a relevant ‘occurrence’, the matter is to be scrutinised from the point of view of an informed observer placed in the position of the insured” (per Rix J. in Kuwait Airways [1996]).
Reinsurers argued that the gradual unfolding of the pandemic did not qualify as a “catastrophe” under the reinsurance policies, taking account of the historical development of property excess of loss market wordings, which was said to implicitly demonstrate the requirement for a sudden and violent event or happening, which could not be established on the underlying facts. Further, reinsurers claimed that a catastrophe is a species of occurrence or event that must satisfy the “unities” of time, manner and place, applied by Lord Mustill in Axa v Field [1996].
The Judge concluded that terms of the reinsurance contracts supported a generous application of the unities test, given the requirements for losses under multiple policies, with a duration potentially exceeding 504 hours (the period specified in relation to flood perils, i.e. 21 days), within broad geographical limits, indicating that a covered catastrophe could have a potentially wide field of impact.
While acknowledging the difficulties inherent in distinguishing between a “catastrophe” properly so-called, as an appropriate basis for aggregation, and a series of discrete losses sharing some common point of ancestry, the Judge held for purposes of the reinsurance claims under consideration that a catastrophe:
- Must be capable of directly causing individual losses, likely in most cases to exclude “states of affairs”.
- Is a coherent, particular and readily identifiable happening, with an existence, identity and “catastrophic” character arising from more than the mere fact that substantial losses have occurred.
- Will be identifiable, in a broad sense, as to its time of coming into existence and of ceasing in effect.
- Involves an adverse change on a significant scale from that which proceeded it.
Applying these principles to the findings in each award, the Judge noted that both tribunals had referred to the outbreak of Covid-19, and the resulting disruption of life in the UK, leading up to and necessitating the 18 March Order, as a catastrophe. In circumstances where the various government directives, including the 18 March Order, were rational and considered measures taken in the public interest, it was not necessary to explore the issue of whether a government order in isolation could be viewed as a catastrophe, since “the pandemic and the response thereto could not be disentangled”, an approach consistent with the decisions in Star Entertainment v Chubb Insurance Australia [2021] and Gatwick Investment v Liberty Mutual [2024].
Interpretation of the Hours Clauses
Covéa and Markel argued that all BI losses arising from the 18 March Order were reinsured, notwithstanding the BI losses continuing after expiry of the 168 hour period. The Covéa arbitral award endorsed this approach, determining that the reference to “individual loss” meant “a loss sustained by an original insured which occurs as and when a covered peril strikes or affects insured premises or property”. However, the Markel tribunal found in favour of the reinsurer, reasoning that it was “natural to think that BI losses occur day by day”, and therefore construing the relevant words as not “dealing with causation but with the occurrence of a particular loss”, since the “subject matter of an ‘Event’, its duration and extent, and its occurrence, are all referenced to losses not perils.”
The effect of the Markel tribunal’s finding was that only 168 hours of BI losses could be recovered from the reinsurer (although the BI had in fact extended until at least June 2020, when the relevant restrictions were first lifted), so that most losses fell outside the scope of cover and Markel was unable to reach the specified attachment point under the reinsurance policy.
In reconsidering this issue on appeal, the Judge was not persuaded that a clear line could be drawn between damage and non-damage BI, as contended by reinsurers, since even the former might continue to manifest after the specified hours period, for example by damage worsening over time. Further, the Court concluded that the “wait and see” analysis applied by the Markel tribunal, premised on the occurrence of BI losses on a day-by-day basis, may lead to “uncommercial consequences” and does not sit easily with the findings in Stonegate and Various Eateries v Allianz [2022], which treated the closure orders as having immediate impact on the insured property with continuous effect, analogous to physical damage to buildings; or with the Supreme Court’s decision in FCA v Arch [2021], which suggested that the correct causal sequence for non-damage BI approximates that of damage-related BI.
The Court therefore dismissed the reinsurers’ appeals as to the meaning of “catastrophe” and allowed Markel’s appeal against the conclusion of the arbitral tribunal as to the effect of the Hours Clause.
Practical Implications
Figures published by the Financial Conduct Authority in March 2023 indicate that, since conclusion of the Test Case in 2021, insurers have paid around £1.4 billion in BI claims. The Commercial Court’s decision in this case provides comfort for cedants with ongoing recoveries, significantly restricting reinsurers’ ability to challenge the presentation of Covid-19 losses under similarly worded excess of loss property policies. It will be interesting to see how the decision may be applied in subsequent cases involving aggregation of losses across multiple jurisdictions. Given that reinsurance contracts typically provide for resolution of disputes by way of (confidential) arbitration proceedings, this clear judgment in favour of the cedants is particularly illuminating.
UnipolSai Assicurazioni SPA v Covea Insurance PLC [2024] EWHC 253
Amy Lacey is a Partner at Fenchurch Law
Broker Negligence on BI Policy Advice
A recent ruling of the Commercial Court held brokers Heath Crawford Ltd (“HC”) liable to pay a former client £2.3 million in damages, for uninsured loss resulting from negligent advice on placement of a business interruption (“BI”) insurance policy.
Infinity Reliance Ltd v Heath Crawford Ltd [2023] EWHC 3022 (Comm)
The Claim
Following a fire at warehouse premises used for its online retail business, Infinity Reliance Ltd (“Infinity”) claimed for lost sales revenue and costs to fit out new premises under its insurance with Aviva. The BI sum insured was based on forecast gross profit of around £25 million over two years but the right figure would have been closer to £33 million. Infinity was underinsured and the doctrine of average applied (reducing pro rata the indemnity paid by the proportion of underinsurance) - since the insured exposure was 26% less than the total loss, Infinity recovered only 74% of its adjusted loss.
Infinity claimed the shortfall from HC, alleging it would have been fully insured if proper advice had been given on (1) calculation of the sum insured, (2) whether to obtain declaration linked cover, and (3) provision for costs to fit out alternative premises.
Types of BI Cover
Traditional “sum insured” BI cover requires the policyholder to forecast insured profit for the indemnity period, with a fixed premium payable in advance. If the policyholder has underestimated the risk or grows faster than expected, average would apply to any claim, however carefully the forecasts were made. So if the insured gross profit is £1 million but the actual gross profit is £2 million, the insurer will pay only 50% of the loss - even if the loss is far below £1 million. The policyholder is treated as having chosen to insure only part of its revenue, and to have self-insured the rest, so that the insurer and policyholder contribute rateably to any loss.
It is important for policyholders to estimate future gross profit correctly for the full indemnity period, bearing in mind that loss may be suffered on the last day of the insured period. For example, if the policy provides for a two year indemnity period (as Infinity’s did), i.e. it may compensate the policyholder for up to two years’ lost revenue after a loss begins, gross profit must be estimated for three years from inception of the policy.
Alternatively BI insurance may be taken out as “declaration linked” cover, originally developed during the 1970’s to cope with the problems faced by policyholders forecasting revenue during periods of high inflation. When covered on this basis, the policyholder must still declare its turnover and profit in advance, so that the initial premium can be assessed, but at the end of each period of insurance, the actual performance may be considered. Within broad limits, if it is higher than forecast, the policyholder pays an additional premium; if it is lower, premium is returned. The insurer agrees not to apply average. Effectively, the actual risk is retrospectively rated by adjusting the premium. It is only if the policyholder’s original estimate was very badly wrong that a claim may be at risk.
The policy arranged by Infinity’s previous brokers prior to 2018 was declaration linked cover. For the 2018/19 renewal, HC placed a new commercial combined policy with Aviva. At some point during the renewal process, Infinity told HC that it did not want BI cover on a declaration linked basis, because it had been hit by a premium adjustment previously and wanted premiums fixed in advance. However, HC did not explain to Infinity the potential downside of taking out BI insurance on this basis, including the significance of average in cases of underinsurance. HC did not make sure that Infinity knew what it was giving up, or whether its preference for traditional BI cover represented a genuine willingness to retain part of its BI risk.
Sum Insured Calculation
Leading up to the 2019/20 renewal, Infinity was provided with a generic document produced by HC entitled “How to Calculate Gross Profit”. The guidance contained the following statements under the heading “Sum Insured”:
"For many businesses, the basis of the Sum Insured will be the annual Gross Profit figure, which for BI purposes represents:
Annual turnover plus closing stock and work-in-progress less
Opening stock and work-in-progress plus variable expenses.
Variable expenses are those expenses which would reduce, or disappear entirely, in the event of a stoppage to the business.
Once an accurate and current BI Gross Profit figure has been calculated, it must be adjusted upwards to allow for anticipated growth in the business during the period of insurance itself and the Indemnity Period selected, bearing in mind that it is possible for a 'worst case scenario' loss to occur on the last day of the period of insurance.
As an example, if the current annual Gross Profit figure is £100,000, the period of
insurance is 12 months, the Indemnity Period selected is 24 months and business growth is estimated at 10% per annum, the correct Gross Profit sum insured is £254,100:
Gross Profit during 12 month period of insurance = £100,000 + 10% = £110,000
Gross Profit during 1st year of Indemnity Period = £110,000 + 10% = £121,000
Gross Profit during 2nd year of Indemnity Period = £121,000 + 10% = £133,100
Gross Profit sum insured = £121,000 + £133,100 = £254,100"
As a guide to calculating the sum insured for purposes of the Aviva policy, this was incorrect. Based on the Aviva policy insuring clauses and definitions, insured profit did not constitute the difference between turnover and “expenses which would reduce, or disappear entirely, in the event of a stoppage of the business”; it was the difference between turnover and the cost of material for production and discounts received.
HC’s guidance document included the warnings that: “In the event that the Gross Profit sum insured is not calculated correctly, there is likely to be underinsurance and average would apply to the settlement of ANY claim … If cover is arranged on a Declaration Linked basis this may well offset the need for projection but the selected indemnity period and any exceptional changes to the business will still need to taken into account.” Infinity’s finance director read these statements but did not appreciate the significance, because he did not know what “average” is and assumed the sum insured was a limit of liability, so that provided the ultimate loss was below £25 million, the claim would be paid in full. HC did not explain how declaration linked cover worked, or how it could alter the consequences of underinsurance.
Broker Duties
Brokers are required to exercise “reasonable skill and care in and about obtaining insurance on [the client’s] behalf” (JW Bollom v Byas Mosley [2000]). The extent to which an act or omission represents a breach of this duty depends on all the circumstances.
A major part of the broker’s role is to bridge a gap between the client’s knowledge and its own, in terms of cover available in the market. The broker must learn enough about the client’s needs and business to make sensible recommendations, and enable an informed decision to be made, depending on the attributes and sophistication of the individual client. Previous authorities demonstrate that brokers must:
- Aim to “match as precisely as possible the risk exposures which have been identified with the coverage available”, recommending “sufficient and effective” cover if available in the market (Standard Life v Oak Dedicated [2008]).
- Seek to assess the client’s needs beyond instructions to place specific insurance, in appropriate cases. A broker given highly specific instructions, for example, to place “mortality only” cover for a racehorse is not obliged to advise that theft cover should be obtained (O’Brien v Hughes-Gibb [1995]). However, a reasonable broker instructed to place suitable cover for exposure of a general class will consider the risks presented and what insurance will meet them.
- Enable an informed decision to be taken, by ensuring the client understands the key terms of the cover that is being obtained (Eurokey Recycling v Giles [2014]).
- Explain key aspects of the placement process including information required by insurers. There are technical complexities to insurance which a broker is expected to understand, but a client may not, which often relate to things that the broker personally cannot do for the client. The broker is required in such cases to educate the client so that it can do what it needs to do.
The duties apply on renewal as much as original placement of a risk. Whilst a broker comes to renewal with existing knowledge for use in the process, it cannot simply assume renewal is all that is required, even if nothing appears to have changed. Brokers must apply their minds to the client’s present circumstances and the sufficiency of cover in that situation.
Breach of Duty
HC admitted breach of duty in providing generic information about how to calculate the sum insured which was not accurate in relation to the policy placed for Infinity. The Court and both parties’ experts agreed that a reasonable broker would have recommended declaration linked cover to a client in Infinity’s position.
The Judge rejected HC’s attempt to rely in defence upon Infinity’s instructions that it did not want declaration linked cover, since that was not an informed decision. It is not for a broker to force upon its client a type of cover that is unwanted, even if the broker disagrees with that preference, and even if it a foolish preference. However, the broker must ensure the client understands any disadvantageous consequences - such as the risk that underinsurance would lead to any claim being reduced by average. That would be an important point to hammer home because it is an aspect of insurance that may not be obvious to the typical client, even an otherwise financially literate one. Even when a preference has been expressed, the reasonable broker should check that it remains a genuine and informed choice at renewal, especially as circumstances change.
In relation to fit out costs, the Judge held that HC was in breach of duty in failing to obtain sufficient information to make a suitable recommendation for cover to address the obvious risk that Infinity would need to find alternative premises, in the event of a fire or similar event, putting the warehouse used for its business out of action. The broker is not expected to second-guess or audit the information it is given but must follow up reasonably obvious gaps or uncertainties as part of the dialogue leading up to placement of a policy. HC knew that the warehouse premises (owned by a logistics company) were critical to Infinity’s business but failed to ask further questions, to facilitate advice on suitable Additional Increased Costs of Working provision to mitigate a potential gap in coverage.
The “How to Calculate Gross Profit” guide included a disclaimer:
“Whilst we are able to provide … information about how to calculate the sum insured, we do not accept any responsibility for the adequacy of your indemnity period and sum insured - and in some instances, you may need to consider the assistance of a suitable professional service.”
This did not absolve HC of responsibility. It was designed to make clear that HC could not undertake the BI sum insured calculations (which required a detailed financial understanding of Infinity’s business); but it was still obliged to provide accurate guidance on what the insurance policy required to be calculated.
In terms of quantum, Infinity’s recoverable loss was reduced by 20% due to contributory negligence, for carelessly failing to follow even the flawed guidance provided by HC.
Practical Implications
Brokers must take care to fully investigate and understand a client’s business and risk exposures prior to inception or renewal, so that appropriate cover can be obtained. The advantages and disadvantages of different options available in the market should be clearly explained, with detailed notes taken of client meetings for future reference.
The decision in this case highlights the perils of underinsurance for policyholders and brokers alike. BI sum insured calculations may be especially complex and declaration linked cover will be preferable in most cases, to ameliorate the potential consequences of inaccurate forecasts. Policyholders need to know that the price paid for certainty about the premium may be uncertainty about recovery in the event of a claim. Brokers should be wary of providing generic guidance notes on policy coverage or sum insured calculations if policies are placed with multiple insurers, on variable standard wordings.
In an increasingly volatile commercial landscape, with high inflation in the wake of challenges including Covid-19 and Brexit, policyholders and their brokers should proceed with caution in relation to declared values to avoid finding themselves caught short.
Amy Lacey is a Partner at Fenchurch Law
Terrorism Law Reform: Compliance and Coverage for Property Owners
The Terrorism (Protection of Premises) Bill was confirmed by the King’s Speech on 7 November 2023 for the legislative agenda in the year ahead. Also known as ‘Martyn’s Law’ in tribute to Martyn Hett, who was tragically killed in the Manchester Arena bombing in 2017, the proposals are aimed at enhancing security and mitigating risks of terrorism in public venues such as music halls, stadiums, theatres, festivals and shopping centres.
Mandatory requirements would be imposed on operators of crowded premises throughout the UK to prepare for and seek to prevent terrorist attacks, overseen by a regulator with powers to issue enforcement notices and impose fines or criminal sanctions. The new measures focus on risk assessment, planning, mitigation and security protection training, with the level of duty depending on the type of premises:
- Venues with capacity of 100 individuals or less fall outside the scope of the Bill. However, these premises are encouraged to adopt the spirit of the legislation and implement voluntary measures to reduce the risk (which may be relevant in the context of licensing applications).
- Venues with capacity over 100 people are ‘standard tier’ premises, required to undertake basic security measures including staff training, public awareness campaigns and development of a preparedness plan.
- Venues with capacity of 800 or more are ‘advanced tier’ premises subject to additional requirements including: notification to the regulator of the premises or event, and its designated senior individual, where the responsible person is a company; taking all reasonably practicable steps to reduce the risk of terrorist attacks or physical harm occurring, for example, bag searches and metal detectors in appropriate cases; and maintaining a security document evaluating the risk assessment and planned response, for submission to the regulator.
- Venues with capacity over 5,000 or hosting specific types of activities, such as major sporting events or concerts, will be subject to more stringent requirements covering the risk assessment and security planning process.
Government consultation is continuing with industry stakeholders on the scope of duties reasonably deliverable for standard tier locations, to strike a fair balance between public protection and the need to avoid excessive burdens on smaller premises.
The Home Affairs Select Committee raised concerns about proportionality, and the impact on small businesses or voluntary and community-run organisations. Implementation costs of £2,160 for standard tier premises and around £80,000 for enhanced premises were estimated by the Home Office, over a ten year period, but these figures have been queried amid concern that costs will escalate. The idea of staged implementation focusing initially on enhanced tier venues has been suggested by some commentators, whilst others believe this would increase the threat to smaller locations and put lives at risk.
Critics argue the draft Bill is not fit for purpose to adequately reduce terrorism risk, which may vary significantly based on the event or persons attending rather than the size of venue, especially since most provisions are directed towards mitigating the consequences of attacks, rather than preventing them from happening. Jonathan Hall KC, the Independent Reviewer of terrorism legislation, said that most attacks since 2010 would be outside the scope of the Bill; and campaigners argue current exemptions for outdoor Christmas markets and mass sporting events, such as marathons, should be lifted. Further improvements are recommended in areas including mandatory life-saving training, statutory provision for security to be considered in the design of new public buildings, and improved systems for procurement and training of security staff.
The events (re)insurance market is likely to see increased demand for terrorism-specific policies, or extensions to existing property programmes. It will be easier in future to identify whether operators of premises affected by terrorist attacks took reasonable steps to minimise risk, and respond appropriately to such events, judged against the new mitigation guidelines. Insurers will be apprehensive at the prospect of enhanced duties and liabilities, during the initial period whilst changes are introduced and understood, which may lead to increased casualty pricing or restricted terms of coverage. The scope of management liability insurance should also be considered for businesses operating in this sector, to cover potential mistakes by directors and officers tasked with implementation of additional controls.
There have been 14 terror attacks in the UK since 2017, representing a complex and evolving risk affecting a broad range of locations. Subject to fine-tuning during the process of detailed scrutiny through both Houses of Parliament, the new legislation is broadly welcomed as raising the bar on public safety, helping leisure, entertainment and retail premises to be better prepared and ready to respond to security threats.
Amy Lacey is a Partner at Fenchurch Law
Bubble Trouble: Aerated Concrete Claims and Coverage
Reinforced autoclaved aerated concrete (“RAAC”) is a lightweight cementitious material pioneered in Sweden and used extensively in walls and floors of UK buildings from the 1950’s to 1990’s. Mixed without aggregate, RAAC is ‘bubbly’ in texture and much less durable than standard concrete, with an estimated lifespan of 30 years. The air bubbles can promote water ingress, causing decay to the rebar and structural instability.
RAAC is often coated with other materials and may be difficult to detect from a visual inspection. Invasive testing will often be required to investigate the condition of affected areas and evaluate operational risks. In some instances RAAC structures have failed with little or no warning, posing a significant risk to owners, employees, visitors and occupants. Aging flat roof panels are especially vulnerable from pooling rainwater above.
Buildings insurance is designed to cover damage caused by sudden and unforeseen events, whilst ordinary ‘wear and tear’ is treated as an aspect of inevitability and usually expressly excluded. Where damage occurs, it will be a matter of expert evidence as to the relative impact of contributing factors. English law recognises a critical distinction between failure due to inherent weakness of insured property, and accidental loss partly caused by external influences. Depending on the specific policy wording, unexpected consequences of a design defect or flawed system adopted by contractors may provide the requisite element of fortuity, notwithstanding the concurrent effects of gradual deterioration under ordinary usage (Versloot Dredging BV v HDI Gerling (The DC Merwestone) [2012]; Prudent Tankers SA v Dominion Insurance Co (The Caribbean Sea) [1980]).
Original designers and contractors responsible for RAAC elements in affected buildings in many cases will no longer exist, adding further complexity to potential liabilities. Given that the widespread use of RAAC ended in the 1990’s, it is likely that limitation (even under the new 30-year period for Defective Premises Act claims, if applicable) will have expired, though a fresh period for bringing such claims can be triggered where subsequent refurbishment works have been carried out. To the extent that RAAC related claims are not time barred, professional indemnity insurance may respond subject to operation of any relevant policy exclusions.
Structural problems associated with RAAC were first identified in the 1980’s and multiple collapses have been reported in recent years at public buildings including schools, courts and hospitals. The Institution of Structural Engineers has advised that many high rise buildings in the private sector with flat roofing constructed in the late 20th century may contain RAAC, which could include residential blocks, offices, retail premises and hotels. Landlords and designated duty holders responsible for ‘higher risk buildings’ should factor RAAC assessments into safety case reports pursuant to the Building Safety Act 2022.
RAAC represents another unfortunate legacy issue in the UK construction landscape requiring urgent steps from government and industry stakeholders, to implement a coordinated and transparent approach to proactively manage safety risks.
Amy Lacey is a Partner at Fenchurch Law
Developments for Developers: Court of Appeal Guidance on Building Safety Act Claims
In a landmark decision providing guidance on limitation issues and application of the Building Safety Act 2022 (“BSA”), the Court of Appeal has held that:
- Developers can recover economic loss from professional consultants responsible for negligent design, despite having sold the buildings prior to discovery of defects;
- Developers that commission construction works may be owed duties under s.1(1)(a) of the Defective Premises Act 1972 (“DPA”), whilst simultaneously owing duties to owners or occupants under s.1(1)(b);
- Extended limitation periods introduced by the BSA apply to ongoing proceedings, as if they had always been in force; and
- Developers can establish contribution claims against professional consultants based on notional liability to property owners for the ‘same damage’, without any formal claims having been commenced against the developers by the owners.
Background
BDW Trading Ltd (“BDW”) as developers engaged URS Corporation Ltd (“URS”) as consulting engineers in relation to various blocks of flats across the UK. Cracking reported in 2019 in the structural slab of a building designed by URS led to BDW undertaking a review of all related projects, and discovering that Capital East, on the Isle of Dogs, and Freemens Meadow, in Leicester, had been negligently designed. Whilst no cracking or other physical damage was identified at these developments, the existing structures were found to be dangerously inadequate and residents in part of Capital East were evacuated.
Freemens Meadow had achieved practical completion in 2012 and Capital East in 2008. By the time that defects came to light, BDW no longer had any proprietary interest in the buildings but decided, as responsible developers, they could not ignore the problem and incurred millions of pounds in costs to carry out investigations, temporary works, evacuation of residents and permanent remedial works.
Proceedings
BDW commenced proceedings against URS in 2020 based on claims in negligence. Contract claims were outside the standard 6 years limitation period at that time, whilst section 14A Limitation Act 1980 (“LA”) allows the time period for claims in tort to be extended if the claimant only had the necessary knowledge to bring the claim within the last three years (subject to a longstop of 15 years from the date of breach).
URS applied unsuccessfully to strike out BDW’s claims. This was followed by two related appeals on behalf of URS, against: (1) an Order answering various Preliminary Issues in favour of BDW; and (2) permission granted to BDW in 2022 to amend its pleadings, to rely upon longer limitation periods for DPA claims introduced by s.135 of the BSA.
Substantive Appeal
URS maintained that BDW suffered no actionable damage having sold at full value, and were not liable to carry out remedial works given the limitation defence available to potential claims by purchasers, so the loss fell outside the scope of URS’s duty of care.
Lord Justice Coulson observed that this was a kind of legal ‘black hole’ submission similar to the defendant’s argument in St Martin’s v McAlpine [1994], where the original employer sold its interest even before any breach of contract. The consequential “formidable, if unmeritorious” argument that the original employer had suffered no loss was ultimately rejected by the House of Lords, confirming that a defects claim does not always require an ownership interest in order for the cost of remedial works to be recoverable.
The Court of Appeal concluded that URS were under a clear duty to protect BDW from the risk of economic loss caused by structural deficiencies, and BDW’s liability to purchasers at the point of sale was not extinguished by any limitation defence - which operates as a procedural bar only (Kajima v Children’s Ark [2023]). URS’ argument that its duties to BDW were limited by the agreement to provide collateral warranties to individual purchasers was also misconceived, given the advantages of a consolidated claim:
“…there are many practical reasons why the existence of a claim on behalf of the individual purchasers by a major corporate entity like BDW which would cover the whole building and not just individual parts is an important benefit to those purchasers, regardless of the terms of any individual warranties in their favour. The difficulties that defendants can place in the way of individual claimants in large residential blocks can be seen in Manchikalapati v Zurich [2019]” (paragraph 61).
BDW’s motivation in carrying out the work was irrelevant and URS’ attempt to portray the losses as ‘reputational’ was rejected: “to adopt such a characterisation in relation to damages of this type would be dangerous in the extreme. It would be contrary to public policy because it might dissuade a builder from rectifying defective work” (paragraph 223).
On the question of when damage was suffered by BDW, in the sense of being worse off as a result of URS’ breach of duty, the Court of Appeal held that in cases of economic loss arising from inherent design defects that do not cause physical damage, the cause of action accrues at the latest when a building is practically completed (Tozer Kemsley v Jarvis (1983); New Islington v Pollard Thomas & Edwards [2001]), consistent with the House of Lords decision in Murphy v Brentwood [1991] and the limitation period for statutory claims under s.1(5) of the DPA. URS’ argument that BDW’s claim in negligence did not arise until the defects were discovered was dismissed.
Lord Justice Coulson’s judgment also summarises relevant authorities in relation to defects giving rise to physical damage, in which case the cause of action in tort arises when damage occurs, regardless of the claimant’s knowledge of it (Pirelli v Oscar Faber [1983]). The Courts of New Zealand and Australia have adopted a different approach, based on accrual of the cause of action when defects become discoverable (Sutherland v Heyman (1985), Invercargill v Hamlin [1996]); whereas English law developed an alternative solution to potential injustice arising from strict application of the primary limitation period, pursuant to section 14A LA (implemented by the Latent Damage Act 1986).
Amendments Appeal
URS claimed that the wrong test had been applied by the Judge at first instance in allowing BDW to amend its pleadings, to include claims under the DPA and Civil Liability (Contribution) Act 1978 (“CLCA”), without determining the disputed points of law as to when BDW’s cause of action accrued. This was rejected by the Court of Appeal: the arguments raised could not be described as short points of law of the type identified in Easyair v Opal [2009] and there was no question of a relevant limitation period having expired. The test had correctly been described as one of reasonable arguability, as to whether the amendments had some prospect of success, and the Judge was permitted to exercise discretion in leaving the substantive issues to be decided at trial.
For completeness given the wider implications, Lord Justice Coulson went on to consider the arguments raised in relation to the DPA and CLCA claims. In particular, URS argued that: (i) the longer limitation periods permitted by the BSA do not apply to parties to ongoing litigation; (ii) developers are not owed duties under the DPA; and (iii) BDW had no legal right to make a claim for contribution when no claim had been made or intimated by any third parties against BDW. All of these arguments were unsuccessful.
The Court of Appeal confirmed that the BSA, including retrospective limitation periods under section 135, applies equally to parties involved in ongoing litigation, subject to the carve out for any claims settled by agreement or finally determined prior to the new legislation coming into force. There is no reason why a party who started an action promptly, before the BSA came into force, should be disadvantaged, and ‘Convention rights’ are preserved: “So if, for example, URS could show that, in 2016, they had destroyed some critical documents which might have provided a defence to the claim under the DPA, because they assumed that under the existing law any relevant claims were statute-barred, then they may be able to deploy that fact at trial” (paragraph 170).
As to the scope of duties under the DPA, the relevant provisions are set out in section 1:
“1. Duty to build dwellings properly
(1) A person taking on work for or in connection with the provision of a dwelling (whether the dwelling is provided by the erection or by the conversion or enlargement of a building) owes a duty –
(a) if the dwelling is provided to the order of any person, to that person; and
(b) without prejudice to paragraph (a) above, to every person who acquires an interest (whether legal or equitable) in the dwelling;
to see that the work which he takes on is done in a workmanlike or, as the case may be, professional manner, with proper materials and so that as regards that work the dwelling will be fit for habitation when completed.”
The Court of Appeal held that URS did owe a duty to BDW under s.1(1)(a) of the DPA, based on the ordinary meaning of the language used. The category of persons to whom a duty is owed under this section must be different to s.1(1)(b), otherwise the sub-section would be otiose, and the Law Commission Report which gave rise to the DPA did not limit those requiring protection to individual purchasers (as opposed to commercial organisations, including developers). Application of the DPA is not binary: as with a contractual chain, where the main contractor owes duties to his employer, whilst being owed duties by sub-contractors; so a developer owing duties to purchasers can at the same time be owed duties by professional consultants.
A further submission that no duty was owed to BDW under the DPA because URS were providing an entire development was also rejected. Rendlesham v Barr [2014] establishes that work “in connection with the provision of a dwelling” includes the structure and common parts; and the absence of previous claims by developers under the DPA did not mean that such claims were inherently unlikely (as with statutory inspectors in Herons Court v Heronslea [2019]), given that the DPA “has been significantly under-used in its lifetime so far” and has a higher threshold than claims in contract or tort. Recoverability of damages under the DPA is not limited by property ownership and BDW’s sale of the buildings was irrelevant.
In relation to the CLCA claim amendment, the Court of Appeal held it was irrelevant that individual property owners had not commenced any formal claims against BDW. A crystallised claim from a third party ‘A’ is not required before a party ‘B’ has the right to claim a contribution from another party ‘C’ in respect of the same damage. B’s right to claim can anticipate the making of a claim by A against B and in circumstances where B’s liability has already been discharged, a notional liability is all that is required. For purposes of the LA, which provides a 2 year period for CLCA claims to be brought from when the right to claim accrued, the reference to ‘payment’ in section 10(4) could encompass the situation where remedial works were carried out instead.
Conclusion
The outcome is policy driven, encouraging builders and developers to act responsibly in remediating residential property defects.
Parties to existing disputes will be reviewing their pleadings and applying to amend in many cases, to incorporate retrospective DPA claims against parties responsible for sub-standard work. The trend for greater reliance on the DPA looks set to continue, where claimants can demonstrate substantial inconvenience, discomfort or risks to health & safety of occupants, which could include defective shower trays in some instances given the impact on ability to wash (an example given by the Court of Appeal).
Latent defects policies for new build homes often exclude losses recoverable from third parties and policyholders should consider potential claims against all relevant members of the construction project team. Similarly, landlords are required under section 133 BSA to take all reasonable steps to obtain monies available through insurance, third party claims or other means, such as Building Safety Fund grants, prior to seeking recovery of remedial costs through service charges.
It remains to be seen if permission will be requested for a further appeal on preliminary issues and whether the case will proceed to final determination on the substantive claims.
URS Corporation Ltd v BDW Trading Ltd [2023] EWCA Civ
Amy Lacey is a Partner at Fenchurch Law
Cladding PI Notifications - A View from Down Under
A recent decision in the Federal Court of Australia provides guidance on broad professional indemnity insurance notifications for external cladding works, confirming that a wide problem may be validly notified with reference to appropriate supporting information - MS Amlin Corporate Member Ltd v LU Simon Builders Pty Ltd [2023] FCA 581.
A full copy of the judgment can be found here.
The Policies
LU Simon Builders Pty Ltd and LU Simon Builders (Management) Pty Ltd (the “Policyholders”) operated a construction and project management business. Professional indemnity (“PI”) insurance was arranged through local Australian and London placing brokers for the 2014/2015 period, including excess layers.
The insuring clause provided cover for civil liability arising from claims first made against the Policyholders during the policy period, and reliance was placed upon section 40(3) of the Insurance Contracts Act 1984, whereby an insurer is also liable for claims made after expiry of the period of insurance:
“where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired”.
This creates a statutory mechanism similar to the common position in the English PI market, where claims made covers are frequently extended to allow notification of circumstances known to the policyholder that may give rise to a claim: if notification of circumstances is made during the policy period then the third party claim itself – even though it may actually come in at a later date – is deemed to have been made during that same policy year.
The Claims
In 2019 proceedings were commenced against the Policyholders by developers and owners of Atlantis Towers in Melbourne, alleging that unsuitable ”Alcotex” aluminium composite panels (“ACP”) were used as cladding for the building (the “Atlantis Claims”). The Policyholders sought indemnity for the Atlantis Claims, and excess layer insurers applied for a declaration that the PI policies would not respond.
The Atlantis Claims came about following investigation by the Metropolitan Fire Brigade (the “Fire Brigade”) and Municipal Building Surveyor for the City of Melbourne (the “Municipal Surveyor”) into a fire on 25 November 2014 at Lacrosse Tower, another building constructed by the Policyholders. The investigation found that ACP at Lacrosse Tower (Alucobest) was not compliant with the Building Code of Australia, and had contributed to the rapid spread of fire.
The Victorian Building Authority (the “Building Authority”) subsequently commenced an investigation and audited around 170 high-rise buildings in Melbourne. The Building Authority concluded that ACP on the Atlantis Tower (Alcotex) was combustible, and Building Orders were issued requiring replacement.
The Notifications
The dispute centred around two notification emails headed “Potential Claim”, sent to insurers in May 2015, neither of which identified Atlantis Towers or the Alcotex brand of ACP which had been used in its construction.
The first notification email referred to: “a notification of circumstances that may result in a claim under [the Policyholders’] Policy … Really most of the noise is around the press release … No formal claim has been made against [the Policyholders] at this point in time”.
The email attached: (1) a newspaper article dated 28 April 2015, referring to the Building Authority’s investigation into the Policyholders’ building practices, to identify whether non-compliant ACP had been used elsewhere; and (2) a document headed “Lacrosse Apartments - Docklands” including commentary from the managing director of the Policyholders in relation to ACP having been widely used in Australia for decades with “no like product passing the test for combustibility”, and referencing a potential class action by owners of Lacrosse Tower.
The second notification email attached a report on Lacrosse Tower by the Fire Brigade entitled “Post Incident Analysis Report”, together with the design and construct contract. The report stated that the Fire Brigade was not aware of any competitor aluminium / polyethylene panel product which had satisfied combustibility tests, and expressed the Fire Brigade’s firm opinion that ACP without appropriate accreditation / certificates of conformity represented an unacceptable fire safety risk, given the need to prevent similar incidents. The Fire Brigade’s report contained hyperlinks to four media reports, suggesting that the Building Authority’s audit had revealed a pattern of poor compliance with regulations, and that “buildings may be a risk to occupants in a fire situation”.
The Decision
His Honour Justice Jackman concluded that the notification emails clearly pointed to a wider problem than one confined to the Lacrosse Tower, or to Alucobest products. The reference to broader investigations, alongside the proposal form statement that 100% of the Policyholders’ work in the last financial year related to high-rise buildings, had the effect of conveying to insurers that there was (at least) a real and tangible risk of the Policyholders facing claims for rectification of that aspect of its work on this building, and on others that it had constructed.
Applying principles discussed in P&S Kauter Investments Pty Ltd v Arch Underwriting at Lloyd’s Ltd [2021] NSWCA 136, the Court acknowledged notification need not be given in a single document, nor the likely claimant(s) identified. Information included by hyperlinks formed part of the notification, since the task of clicking “is not significantly more demanding than turning a physical page” - provided that the link is to a specific page or document. Opinions expressed by public authorities with appropriate expertise (such as the Fire Brigade or the Municipal Surveyor) were held to be capable of constituting “facts” for the purpose of s.40(3), despite the contrary Federal Court decision in Uniting Church (NSW) v Allianz Australia Ltd [2023] FCA 190.
Given a clear causal connection between investigations reported in the notification emails, and later proceedings against the Policyholders, the Court concluded that insurers had been notified before expiry of the policies of facts giving rise to the Atlantis Claims, within the meaning of s.40(3).
English Law
Australia is a common law jurisdiction originating from the English legal system, applying statutory provisions enacted by its various states and federal governments.
Policyholders are similarly able to make “hornets’ nest” notifications under English law, i.e. general notification of a problem even where the cause of the problem or its potential consequences are not yet known (HLB Kidsons v Lloyd’s Underwriters [2008]; Kajima UK Engineering v The Underwriter [2008]; Euro Pools plc v RSA [2019]).
The operation of notification of circumstances provisions under liability policies is often contentious, and careful consideration should be given to the content and timing of notices to insurers, with supporting documents, to maximise the scope of cover. Policyholders should be mindful of precise wording in their PI policy conditions on the knowledge threshold for notifications (whether based on “may” or “likely to” give rise to claims language), and ensure that the trigger remains consistent between policy years and insurance layers where possible, in order to avoid potential gaps in cover.
Amy Lacey is a Partner at Fenchurch Law
Covid BI claim jurisdiction overturned on appeal
In Al Mana Lifestyle Trading LLC & others v United Fidelity Insurance Co PSC & others [2023] EWCA Civ 61, the Court of Appeal (by a 2:1 majority) held the English courts did not have jurisdiction to hear business interruption claims pursued under multi-risk insurance policies issued in the Middle East, reversing the first instance decision.
The claimants operate in the food, beverage and retail sectors and sought recovery of around $40 million losses arising from the pandemic, against defendant insurers located in the UAE, Qatar and Kuwait. A dispute arose concerning interpretation of the following clause contained in the policies:
“APPLICABLE LAW AND JURISDICTION
In accordance with the jurisdiction, local laws and practices of the country in which the policy is issued. Otherwise England and Wales UK Jurisdiction shall be applied,
Under liability jurisdiction will be extended to worldwide excluding USA and Canada.”
The Commercial Court construed this as a non-exclusive jurisdiction provision, allowing proceedings to be brought either in the country where the policy was issued or England & Wales. The policies had been issued as part of a suite of insurances intended to provide comprehensive cover for group operations in numerous jurisdictions, reinsured in the international market, and the court was influenced by the commercial advantage of facilitating resolution of disputes through a single neutral venue. In reaching this decision, Cockerill J noted that English courts are: “particularly well-versed in the issues relating to claims for indemnity for Covid-related business interruption losses [and] highly experienced in dealing with issues of foreign law, where they arise.”
The Court of Appeal agreed that the question to be determined was how the words of the contract would be understood by a reasonable policyholder. Of central importance was the adverbial conjunction “otherwise” - which could be taken to mean, for example, “or”, “or else”, “alternatively”, “if not” - and its impact on surrounding provisions in the context of this clause. A degree of choice was implicit but did the clause provide for a true “either/or” alternative; or a conditional “primary/secondary” position?
By a majority (Males LJ and Nugee LJ), their Lordships allowed the appeal and decided that the clause gave exclusive jurisdiction to the courts in the country in which each policy was issued. Only if the jurisdiction of the local court is not available would the courts of England & Wales have jurisdiction in relation to claims under the policy. Males LJ saw no reason why parties should not agree to confer jurisdiction on one court, with another as a fall-back in case the primary choice was not available. The word “otherwise” was therefore construed as equivalent to “if not available”, as opposed to “if not fancied by whichever party is the claimant”.
In a dissenting judgment, Andrews LJ took a different view: “Whereas the defendants' interpretation might commend itself to a commercial lawyer, I doubt it would even occur to the reasonable policyholder, appraised of all the relevant circumstances, that it could be understood as meaning that it was mandatory to bring proceedings in the local forum, and that they could not go to the English court unless they could establish that the local court had declined, or would decline jurisdiction. They would understand it to mean that if, for whatever reason, they did not bring proceedings in the local forum, they would have to do so in England and Wales."
It is striking to note the opposing conclusions reached by senior judiciary in this case, applying the same test of contractual interpretation. The inherent complexity of construing ambiguous language was acknowledged by Nugee LJ (at paragraph 63): "It must be admitted … it is not always easy to articulate with precision why one reading of a disputed provision seems more natural and ordinary than another, as the way in which language strikes a reader is an accumulation of experience of how language is ordinarily used. And, as the present case illustrates, the same words may strike different readers differently".
Policy wordings should be carefully considered prior to inception of the indemnity period to ensure the parties’ intention is clearly expressed. Jurisdiction and other important provisions dealing with alternative scenarios in a single clause require proper explanation as to triggering events and orders of application. Particular caution should be exercised in the use of words with multiple meanings, to minimise the prospect of disputes.
Amy Lacey is a Partner at Fenchurch Law
(New Home) Buyer Beware
Recent case law highlights the importance of adequate insurance cover for buyers of new homes, to remediate any latent defects identified post-completion, whilst the Building Safety Act 2022 implements significant changes to the new build warranty landscape.
In Griffiths and another v Gilbert [2022] EWHC 3122 (TCC) (6 December 2022), HHJ Sarah Watson (Principal Judge of the Technology and Construction Court in Birmingham) dismissed allegations that a director of the building contractor responsible for construction of the claimants’ property had fraudulently misrepresented that £2 million worth of NHBC cover would be obtained, covering the full build cost, rather than the standard £1 million limit for defects claims under the NHBC Buildmark policy.
After practical completion, a dispute arose concerning building defects and contamination of surrounding land. The claimants referred matters to the NHBC's dispute resolution service but subsequently withdrew from the process, unhappy with the initial response. Court proceedings alleging personal liability for fraudulent misrepresentation were commenced in 2014 and then stayed, pending the outcome of an arbitration pursued by the claimants against the contractor. In 2018 the arbitrator awarded substantial damages and costs to the claimants, which the contractor was unable to meet, and it went into insolvent liquidation. The claimants successfully recovered £1 million under the NHBC warranty, and court proceedings against the director were revived seeking recovery of outstanding losses.
The Judge held that elements of the tort of deceit were not made out in this case and the fraudulent misrepresentation claim failed. The director had confirmed the property would be built to NHBC standards and a Buildmark warranty would be obtained, but premium figures in the contract costings were estimates not representations. It was inherently unlikely the contractor would fraudulently represent the situation to save a small fee on a £2 million contract, knowing this would come to light when the NHBC certificate was provided. Further, NHBC was advised of the sale price at the outset with no question of “underinsurance”, analogous to standard property policies, where claims might be reduced if a building was insured for less than full reinstatement costs.
The judgment illustrates the limitations of new home warranties and how parties can extend the scope of cover for a price. In 2011, NHBC had offered to increase the cover to £2 million for an additional fee of approximately £4,500 but that proposal was not accepted by the claimants.
The importance of sufficient protection for buyers of new homes is also reflected in legislative changes under section 144 of the Building Safety Act. These provisions impose legal requirements on developers to provide new build warranties with a term of at least 15 years (increased from the usual 10 years period applicable previously), in line with the new prospective limitation period for claims under the Defective Premises Act 1972. Regulations are anticipated in 2023 imposing additional requirements on the kinds of defects covered, minimum policy limits, period during which the developer remains responsible, and financial penalties for non-compliance, following further industry consultation. Mandatory parameters of coverage should increase transparency for all concerned, helping to minimise the prospect of disputes.
Amy Lacey is a Partner at Fenchurch Law
Grasping the Nettle on International Risks
Recent decisions of the English courts show enthusiasm for boldly tackling the largest and most complex cases, including those involving international risks, with significant implications for commercial policyholders.
In Municipao de Mariana v BHP Group (UK) Ltd [2022] EWCA Civ 951, the Court of Appeal has allowed claims to proceed against the Anglo-Australian mining company BHP in respect of losses caused by the Fundão Dam collapse in 2015, overturning the first instance decision to strike out the case as an abuse of process. Millions of tonnes of toxic mining waste were released along the Doce River resulting in mass claims from individuals, businesses and municipalities seeking at least £5 billion in damages. Over 200,000 claimants can now seek redress through the English legal system in respect of Brazil’s worst ever environmental disaster.
The High Court previously concluded that the case would be “irredeemably unmanageable” and “akin to trying to build a house of cards in a wind tunnel”, in view of concurrent claims and compensation schemes in Brazil. The Court of Appeal disagreed, noting that case management complexity could not of itself justify a finding of abuse, and there was a real risk that full redress could not otherwise be obtained. In a striking statement of the English courts’ approach, their Lordships observed (at paragraph 211):
“In principle, claimants are entitled to choose whom to sue. There may be diverse and legitimate reasons why a claimant may choose to sue a particular defendant or defendants and it is not part of the court’s function to interfere with that process. … A claimant’s unhindered right of access to justice in respect of properly arguable claims is a core constitutional right inherent in the rule of law.”
In Al Mana Lifestyle Trading LLC & others v United Fidelity Insurance Co PSC & others [2022] EWHC 2049, the Commercial Court decided that an ambiguously worded jurisdiction clause allowed COVID-19 business interruption insurance claims to be brought in the English courts, having regard to the good commercial sense of facilitating resolution of disputes through a single neutral venue with extensive insurance law expertise.
The claimants operate in the food, beverage and retail sectors and sought recovery of around $40 million pandemic related losses under multi-risk insurance policies issued in the Middle East. The defendant insurers, located in the UAE, Qatar and Kuwait, challenged the English court’s jurisdiction, with reference to the following policy provision:
APPLICABLE LAW AND JURISDICTION
In accordance with the jurisdiction, local laws and practices of the country in which the policy is issued. Otherwise England and Wales UK Jurisdiction shall be applied.
Under liability jurisdiction will be extended to worldwide excluding USA and Canada.
This was construed as a non-exclusive jurisdiction clause allowing proceedings to be issued either in the UK or the country where the policy was issued. Reference was made to the relevant factual matrix in reaching this decision, including the policies having been issued as part of a suite of insurances intended to provide comprehensive cover for group operations in numerous jurisdictions and reinsured in the international market. The option for policy disputes to be determined in one place was advantageous and presumed to accord with the parties’ intentions, with the English courts being: “particularly well-versed in the issues relating to claims for indemnity for Covid-related business interruption losses [and] highly experienced in dealing with issues of foreign law, where they arise.”
The English legal system’s independence and flexibility inspire business confidence, underpinning international trade and investment. As one of the leading financial, (re)insurance and commercial centres in the world, the UK offers unrivalled access to high quality legal services, and specialty underwriting through Lloyd’s of London. These factors are important for multi-national businesses considering a choice of jurisdiction, as well as potential claimants affected by the actions of their foreign subsidiaries. The UK courts remain at the forefront of jurisprudence on recovery of pandemic related losses, alongside growing trends for human rights and environmental litigation.
Amy Lacey is a Partner at Fenchurch Law