Will someone think of the Lenders? Co-insurance issues for funders
Recent Court decisions such as Sky UK Ltd & Mace Ltd v Riverstone Managing Agency Ltd (which we wrote about previously in more detail here) have discussed “Project Insurance” policies taken out by employers in relation to construction projects, confirming the principles by which contractors, sub-contractors and other consultants may become insured under these policies. However, such policies normally also name lenders as insured parties (either specifically by name, or by general description) and in this article we discuss how these principles apply to lenders and what lenders need to do to ensure they are entitled to claim under the policies.
By way of recap, a Project Policy or OCIP normally covers insured parties in respect of physical damage to the “works”, as well as providing third party liability cover (both in respect of negligence and “non-negligence” under JCT 6.5.1). The employer, and/or any lenders, will frequently also want the policy to provide Delay in Start Up cover, which covers financial loss in the event that practical completion is delayed by damage[1] to the works.
A policy will normally define the “Principal Insured” as the employer, being the party who contracts with insurers when the policy is taken out. As I say, contractors, sub-contractors and lenders may also be named under the policy although, as was stated by Eyre J in RFU v Clark Smith Partnership [2022]:
“Being named as an insured does not without more make a person a party to the insurance contract. A person who is named as an insured but who is not otherwise a party to the insurance contract does not become a party to the contract simply by reason of having been named in it. That person remains a third party unless and until it becomes a party in a way recognised as constituting it in law a party to the insurance contract or obtains the benefit of the policy in question in some other way. … Similarly, the editors of Colinvaux rightly say at 15-018 “the mere fact that a policy states that it covers the interests of named or identifiable third parties does not of itself give those third parties the right to enforce the contract or to rely upon its terms (e.g. the benefit of a waiver of subrogation clause)”.
Where a third party insured, such as a contractor or lender, becomes an insured by agreement between an insurer and a Principal or contractual insured, the existence and scope of the cover the third party insured enjoys under the policy depends on the intention of the parties to be gathered from the terms of the Policy and the terms of any contract between the contractual assured and the relevant third party insured.
In a construction context, the Courts have stated that a third party insured contractor can become a party to the policy:
- If the employer taking out the policy is authorised to insure on the third party’s behalf (the “agency” route); or
- On the basis there is a standing offer from the project insurers to insure persons described in the policy such as “Main Contractor” or “Sub-Contractor”, which offer is capable of being accepted by those persons upon execution of a building contract, provided it is not inconsistent with the standing offer (this was the approach which the Court said was relevant in Haberdashers’ Aske Federation Trust Ltd v Lakehouse Contracts Ltd).
Whether a (sub) contractor becomes insured because of agency principles or accepting a standing offer, as well as looking at the policy, it will therefore be necessary to look at the (sub) contract to determine the extent to which the (sub) contractor is entitled to claim, and also to determine the extent to which the (sub) contractor will benefit from a waiver of subrogation.
For similar reasons, a lender will not be insured under a project policy where that policy has been arranged by a principal insured, unless the lender has provided authority to the principal insured to arrange insurance on its behalf and, even then, the lender will only be insured to the extent of the authority provided (even if the cover provided under the policy is wider than the authority provided).
In many cases, this will not cause any issues for a lender to a development finance project since the loan agreement with the borrower will authorise the borrower to arrange insurance in respect of the works, naming the lender as co-insured and first loss payee. Where the borrower is the principal or contracting insured in these circumstances, it will have the requisite authority to insure and the lender will be insured to the extent that the policy reflects the authority.
However, if for some reason the borrower is not the contracting insured, the lender may need to grant authority to the contracting insured via means other than the loan agreement. Further, if the lender wants to benefit from certain bespoke coverage not normally catered for in standard LMA facility agreement drafting (such as DSU cover), it will need to ensure that the principal insured is specifically authorised to obtain such cover on its behalf, and to the extent required.
A final point to note is that these principles will also apply where lenders are looking to be insured under other types of insurance policy in addition to project policies, which the lender has not taken out directly with insurers, such as latent defects or rights of light policies.
Christopher Ives is a Partner at Fenchurch Law
[1] Policies normally contain certain non-damage triggers as well, such as murder, suicide and disease.
When adjectives matter: How ‘Accidental’, ‘Sudden’ and ‘Unforeseen’ affect all-risks insurance cover
Construction and engineering projects, being subject to a wide variety of risks, are invariably insured on an all-risks basis via Construction All-Risks (“CAR”) or, in the case of projects involving the installation of plant or machinery, Erection All-Risks (“EAR”) policies. Following practical completion, the relevant works are typically insured via property damage and/or machinery breakdown insurance; such cover is similarly procured on an all-risks basis.
All-risks policies often comprise (at least) two sections:
- Section 1, which covers damage to insured property (i.e., material damage cover); and
- Section 2, which covers liability of insureds to third parties (i.e., third party liability cover).
This article is concerned with the material damage cover section of all-risks policies and considers how the words ‘accidental’, ‘sudden’ and/or ‘unforeseen’ modify the scope of cover under that section.
MATERIAL DAMAGE COVER: THE PRINCIPLE OF FORTUITY
Material damage cover does not indemnify against all forms of loss to insured property. Instead, it covers only fortuitous loss or damage. The principle of fortuity has been equated with ‘accidental damage’; an event would be ‘accidental’ if it occurred by chance and was non-deliberate: see Leeds Beckett University v Travelers Insurance Company Limited [2017] EWHC 558 (TCC) (“Leeds Beckett”) at [199].
The principle of fortuity applies regardless of whether the words ‘all-risks’ appear in the insuring clause. The insuring clause of the material damage section of a CAR policy might therefore simply state that:
“… insurers will indemnify the Insured in respect of physical loss or damage to the Insured Property arising from any cause except as hereafter provided.”
It is, however, not uncommon for an insuring clause to include the adjectives ‘accidental’, ‘sudden’ or ‘unforeseen’ (or some combination of the three). For CAR policies, the requirement for ‘sudden’ and/or ‘unforeseen’ loss is less commonly seen in the UK, but is still often encountered in the APAC region. For instance, the insuring clause of the material damage section of the Munich Re standard form CAR wording, which is commonly used in Singapore and Malaysia, provides that:
“… if at any time during the period of cover the items or any part thereof entered in the Schedule shall suffer any unforeseen and sudden physical loss or damage from any cause, other than those specifically excluded, in a manner necessitating repair or replacement, the [insurer] will indemnify the Insured in respect or such loss or damage …” (emphasis added)
We consider below whether the words ‘accidental’, ‘sudden’ and/or ‘unforeseen’ introduce any further requirements (in addition to the basic requirement of fortuity) for there to be cover for material damage.
‘ACCIDENTAL’
It is less common for the insuring clause for material damage cover to impose a requirement for ‘accidental’ damage. This stands in contrast to the insuring clause for third party liability cover, which frequently responds to damage or injury ‘accidentally’ caused by the insured.
That said, a requirement for ‘accidental’ damage may in some cases find its way into the material damage cover section of a policy. For instance, in Leeds Beckett, the word ‘damage’ was defined for the purposes of the relevant CAR policy as “accidental loss or destruction of or damage”; this meant that the material damage cover of that policy would respond only in the event of ‘accidental’ damage.
The requirement for ‘accidental’ damage would not usually change the default scope of cover. In other words, it remains the case that the loss need only be fortuitous in order for the material damage section of a policy to respond. As noted in Leeds Beckett, the principle of fortuity already encompasses the concept of accidental loss, and common law jurisdictions have generally been content to treat the two as being synonymous.
‘SUDDEN’
‘Sudden’ imports a different meaning than ‘fortuitous’. Accordingly, the use of the word ‘sudden’ in the material damage section of a policy narrows the scope of cover; the loss or damage must at minimum be ‘sudden’ (in addition to being ‘fortuitous’) in order for the policy to respond. Case law sheds the following light on the meaning of ‘sudden’.
First, it is the loss or damage itself, rather than the cause of said loss or damage, which must be ‘sudden’.
An example of the distinction between a cause and the resulting loss and damage can be seen in the Singapore High Court case of Pacific Chemicals Pte Ltd v MSIG Insurance [2012] SGHC 198 (“Pacific Chemicals”), where the sudden malfunction of a measuring gauge (the cause) led to the gradual solidification of phthalic acid stored in a tank (the loss or damage). The Court found that the loss or damage suffered, having taken place “over a period of time”, was not ‘sudden’ in nature.
Secondly, ‘sudden’ is frequently used in conjunction with ‘unforeseen’ (see again the Munich Re wording above). In such cases, it is clear that ‘sudden’ must connote something other than ‘unforeseen’ or ‘unexpected’ (as to construe it otherwise would render ‘sudden’ superfluous). The tenor of relevant case law, as noted by Paul Reed KC in the textbook Construction All-Risks Insurance, suggests that ‘sudden’ should be construed in this context as importing a need for “dramatic change to have occurred during a relatively short period of time”.
‘Sudden’ may, however, have a different meaning when used alone. The New Zealand and Australian Courts have understood the word ‘sudden’ (when used alone) to mean ‘unforeseen’ or ‘unexpected’: see New Zealand Municipalities Co-Operative Insurance Co Ltd v City of Tauranga (unreported) and Sun Alliance & London Insurance Group v North West Iron Co Ltd [1974] 2 N.S.W.L.R. 625.
Thirdly, ‘sudden’ (when used in the context of ‘sudden and unforeseen’) should not be equated with ‘instantaneous’.
In Pacific Chemicals, the Court found that the caving-in of a storage tank that had occurred rapidly (but not necessarily instantaneously) should be regarded as ‘sudden’ loss or damage.
That said, in appropriate cases, much longer periods of time could still be considered ‘sudden’. As noted in Construction All-Risks Insurance, the interpretation of the word ‘sudden’ is a context-sensitive exercise. For instance, in assessing whether there has been ‘sudden’ damage under a mining project policy in the form of a change in ground conditions, it may be appropriate to apply a geological timescale; on this interpretation, a change in ground conditions taking place over several days (or possibly even months) might well still be considered ‘sudden’.
‘UNFORESEEN’
‘Unforseen’ also imports a different meaning from ‘fortuitous’. Accordingly, the express inclusion of ‘unforeseen’ narrows the scope of cover; the loss or damage must at minimum be ‘unforeseen’ (in addition to being ‘fortuitous’) in order for the policy to respond.
Nevertheless, it is not generally difficult to establish that an occurrence was unforeseen; all that needs to be shown is that the loss or damage was ‘unanticipated’ or ‘unexpected’ from the perspective of the insured. Thus in Pacific Chemicals, one head of damage, namely the solidification of phthalic acid (see above), was caused by the lowering of the temperature in the relevant tank. The Court found that the solidification was not an expected consequence of that process and the damage thus fell within the ambit of ‘unforeseen’.
It should be noted that fortuity and foreseeability are separate concepts. The question of whether damage is fortuitous hinges on whether the damage was caused by chance (rather than being inevitable) and was non-deliberate. Foreseeability is an entirely separate requirement that has no part to play in determining whether damage was fortuitous.
CONCLUSION
While there is not a large body of case law concerning the ambit of the words ‘sudden’ and ‘unforeseen’ (which is perhaps unsurprising given the prevalence of arbitration clauses in non-consumer insurance policies), the authorities would suggest that neither word should be read restrictively, and that considerable latitude should be afforded to insureds in establishing that an occurrence was ‘sudden’ and ‘unforeseen’.
Eugene Lee is an Associate at Fenchurch Law
Fenchurch Law grows insurance disputes teams in Leeds and London with two new appointments
Fenchurch Law, the UK’s leading firm working exclusively for insurance policyholders and brokers, has announced the expansion of its coverage disputes teams in Leeds and London, with Chris Ives joining as Partner at its Leeds office and Pawinder Manak bolstering its London team as a Trainee Solicitor.
Chris Ives, who will help strengthen the firm’s Financial and Professional Risks practice group serving clients in the North of England, brings with him over 20 years of experience in resolving complex and high-value claims for corporate policyholder clients across a range of different risks. Chris joins Fenchurch Law from Eversheds Sutherland, where he held the position of Principle Associate for over seven years. Prior to this, Chris was an Associate at DAC Beachcroft and an Associate at Addleshaw Goddard.
Pawinder Manak will join Fenchurch Law’s London office as a Trainee Solicitor specialising in coverage disputes, initially within the firm’s Financial and Professional Risks team. Having completed a diverse range of work experience and internships throughout her undergraduate degree, Pawinder studied at University College London where she completed the LLB.
This announcement comes at a time of continued expansion for Fenchurch Law, with the recent opening of its Singapore office and the announcement of its plans to open an additional office in Denmark in November 2024.
Managing Partner at Fenchurch Law, Joanna Grant, commented: “We are delighted to welcome Chris and Pawinder to the team. Their combined legal and insurance knowledge will be invaluable in helping Fenchurch Law continue to level the playing field for policyholders in the UK and around the world.”
Chris Ives added: “I was attracted to Fenchurch Law due to its top tier reputation in the field, clarity of vision, simplicity of business model and the array of experts I will be working alongside. I look forward to helping the firm provide even more policyholders in the North of England with access to first-class legal support.”
Pawinder Manak added: “I was attracted to Fenchurch Law because of the culture at the firm. Every member of the team supports one another to create a positive environment, and everybody is made to feel welcome with their friendly attitudes.”
Flood and Storm Risk: Keeping Policyholders Afloat
Introduction
Extreme rainfall and storms have become increasingly prevalent in the UK. Figures from the Association of British Insurers (“ABI”) show that storms and heavy rain have contributed to driving up property insurance payouts to the highest level in 7 years.
During floods in September 2024, several areas of the UK experienced significant property damage. This included AFC Wimbledon’s grounds, where a sinkhole caused the football pitch to collapse, after a nearby river burst its banks due to the excessive rainfall.
This article will discuss:
- The coverage issues that policyholders could face in relation to cover for damage caused by flood and storm.
- How stakeholders can increase resilience to floods and storms.
Coverage Issues
Where policies do not clearly define what constitutes a “flood” or a “storm”
Extreme weather comes in various forms and severities. In the absence of a clear definition of “flood” or “storm”, insurers may seek to rely on metrics such as the Beaufort wind force scale, ABI definition of storm, or previous case law, to support arguments limiting the scope of policy cover depending on the particular facts.
Recent decisions from the US have held that flood exclusions did not apply to: water damage from backed-up drainage following Hurricane Ida (GEMS Partners LLC v AmGUARD Ins Co (2024), in the New Jersey district court); and water accumulating on a parapet roof after a severe storm (Zurich v Medical Properties Trust Inc (2024), in the Massachusetts Supreme Court); based on the meaning of “flood” and “surface waters” in the relevant policy wordings.
In FCA v Arch Insurance Limited [2021] UKSC 1, the UK Supreme Court confirmed that, when looking at the construction of a policy, it is necessary to consider how a reasonable person would understand the meaning of the words used, in light of the commercial context. Therefore, policyholders should ensure, prior to inception, that the policy contains appropriate and clear definitions of “flood” and/or “storm”, to prevent ambiguity in the event of a claim.
Where the weather event is a combination of “flood” and “storm”
Where a weather event may appear to be a combination of both a flood and a storm, identifying the proximate cause of the loss, i.e. the dominant cause, may be difficult without meteorological expert evidence. This can raise two separate issues.
Firstly, policies contain different sub-limits for flood or storm damage. For example, if “flood” has a lower sub-limit compared to “storm” perils, a policyholder would likely seek to argue that storm damage has occurred, to maximise cover under the policy.
Secondly, if a policy excludes either flood or storm damage, the principles derived from Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corp Ltd [1974] QB 57 and The Miss Jay Jay [1987] 1 Lloyd's Rep 32 may apply. This means that where two concurrent proximate causes operate together to bring about a loss, if one is insured under the policy and one is excluded, the loss will not be covered. If one concurrent proximate cause is an insured peril and the other is not insured, but not excluded, the loss will be covered.
Flood management measures
After the damage to its pitch, AFC Wimbledon was reportedly exploring ways to improve its flood management and infrastructure, to reduce the risk of future floods. It is likely that insurers will seek to introduce more conditions within property insurance policies, requiring certain flood management measures to be in place as a prerequisite to cover.
Flood resistance measures aim to “resist” or reduce the amount of water that enters a property. This can include the installation of flood gates or airbrick covers. Flood resilience measures purely mitigate the level of damage to property. This would include having concrete floor tiles, as opposed to carpets, and placing plug sockets away from entrances close to water.
Some property policies will contain a stillage condition precedent to liability. This will state that a policyholder will not be covered for loss caused by a flood, storm or escape of water, if it does not keep stock or other items a certain distance above floor level.
Furthermore, insurers could potentially restrict cover offered to policyholders whose buildings are situated in areas at a higher risk of flooding, or where businesses do not have mechanisms in place to deal with potential flood damage.
Why is Climate Change causing more Floors and Storms?
It is thought that the increase in the number of extreme weather events is a result of climate change.
Climate change contributes to more floods and storms because the increase in greenhouse gases in the atmosphere has allowed carbon dioxide to trap the sun’s rays. This has resulted in an increase in the planet’s temperature and the level of moisture that is held in the atmosphere. The warmer the atmosphere, the quicker the water can evaporate and fall, resulting in more intense and voluminous rainfall.
Improving Industry Resilience to Floor and Storm
The increase in natural disasters such as earthquakes, floods and hurricanes has led to some insurers pulling out of international catastrophe insurance markets. This is because of the unpredictable nature of these events and the severity of the losses suffered. This has resulted in limited options and more expensive premiums for catastrophe policies available to policyholders.
Similarly, insurers in the UK are becoming more reluctant to provide cover for damage caused by storm and flood, as the number of these types of claims increases, giving rise to the risk of a protection gap for policyholders.
Parametric Insurance
One of the tools available to help mitigate this effect is parametric insurance. This is a type of insurance cover where claims are paid on a predetermined basis. For example, cover for a storm would have parameters such that, if there is damage to property and a certain wind-speed or water depth is reached, then the policy would be triggered.
Traditional insurance policies are based on the actual loss that is sustained by the policyholder, whereas parametric insurance policies are triggered by the occurrence of an event and when certain parameters are reached. One of the main benefits of parametric insurance is the greater certainty of insurers paying out. This is especially important where there is a need for an urgent financial resource, allowing for a quicker payment to be made to policyholders.
Flood/Storm specific reinsurance schemes
For flood damage in the UK, there is a scheme in place for homeowners known as Flood Re. This scheme operates in a way where insurers can pay a premium to reinsurers and they would have access to a “pool” of indemnity when a claim arises. If the pool is exhausted, then the government can step in to pay the remainder of any losses.
The scheme is expected to provide cover until 2039 as Flood Re anticipates there will then be a “free market” for flood risk insurance. However, one can argue that this is unlikely if we see a similar pattern in the increase in extreme weather events and insurance claims over the next decade. Therefore, an alternative scheme may be needed, for businesses as well as homeowners, to ensure all policyholders have a safety net in the event of claims arising out of floods and storms.
Broader Risk Management
Increased industry resilience is likely to come from broader risk management. Currently, the UK does not have a robust plan in place to tackle flood risk. It is the responsibility of organisations such as the Environment Agency, the UK Climate Change Committee and DEFRA to collaborate and mitigate flood risk.
There have been calls for the Government to set specific flood risk targets as a result of climate change and the increase in extreme weather events. This would be an example of an initiative where input from a variety of organisations could help to reduce the risk of property damage and lead to increased resilience.
Conclusion
With the rise in extreme weather events, insurers will look to mitigate exposures and robustly defend claims arising from flood and storm damage, leaving policyholders in a potentially vulnerable position.
A collaborative response is needed to ensure that the insurance industry can adapt to emerging risks and ensure that appropriate cover is available for policyholders, in the event of floods and storms.
Author
Ayo Babatunde, Associate
The elephant in the room: and it’s not the Secretary of State
In this, the latest in a series of recent Covid-19 BI appeals, the Court of Appeal has handed down judgment in International Entertainment Holdings Limited & Ors v Allianz Insurance Plc [2024] EWCA Civ 1281. A copy of the judgment can be found here.
The central issue here turned on whether the restrictions brought in by the government, preventing or hindering access to the claimants’ theatres around the country, were those of a “‘policing authority”.
In concluding that they were not, the Court of Appeal held that, “It is sufficient to say that the term does not extend to the Secretary of State. To adapt Lord Justice Scrutton’s famous remark about the elephant (Merchants Marine Insurance Co Ltd v North of England Protection & Indemnity Association (1926) 26 Ll LR 201, 203), the reasonable policyholder might not be able to define a “policing authority”, but he would know that the Secretary of State was not one.”
That finding notwithstanding, the judgment brings some welcome news for the wider policyholder market with the finding that Covid-19 can be an “incident” and that, in the absence of clear wording to the contrary, cover can be available on a “per premises” basis.
The Underlying Proceedings
The issues on appeal in this matter were first heard by Mr Justice Jacobs as part of a group of cases (see Gatwick Investment Ltd v Liberty Mutual Insurance Europe SE [2024] EWHC 124 (Comm)).
The claim concerned the interpretation of a non-damage denial of access (“NDDA”) clause for losses arising out of the closure of venues, following the 21 March Regulations made by the Secretary for Health and Social Care.
The relevant wording read as follows:
“Denial of Access Endanger Life or Property
Any claim resulting from interruption of or interference with the Business as a direct result of an incident likely to endanger human life or property within 1 mile radius of the premises in consequence of which access to or use of the premises is prevented or hindered by any policing authority, but excluding any occurrence where the duration of such prevention or hindrance of us [sic.] is less than 4 hours, shall be understood to be loss resulting from damage to property used by the Insured at the premises provided that
i) The Maximum Indemnity Period is limited to 3 months, and
ii) The liability of the Insurer for any one claim in the aggregate during any one Period of Insurance shall not exceed £500,000”
At first instance, the Judge concluded that the Secretary of State was not a “policing authority”, which was sufficient for the policyholders’ claims to be dismissed.
The Appeal
While accepting that the term “policing authority” was not limited to the police, and that it could encompass restrictions imposed by a similar body performing policing functions in circumstances likely to endanger human life or property, the Court of Appeal felt it unnecessary to decide how widely the clause may extent on the basis that it was sufficient to say it did not include the Secretary for State.
That decision was ultimately determinative of whether or not the policyholders in this case were able to claim for losses arising out of the Covid-19 pandemic, however, there were three further issues on appeal which will be of interest to the wider policyholder market: (i) whether or not Covid-19 was capable of being an incident; (ii) whether the extension applied on a “per premises” basis; and (iii) whether policy wording referring to “any one claim in the aggregate” contained a mistake capable of correction.
Can Covid-19 be an “incident”?
The Court of Appeal was asked to consider whether, in the context of the relevant clause, Covid-19 could be an “incident likely to endanger human life.”
The Court of Appeal accepted that the word “incident” can be used synonymously with “event” or “occurrence” but, in ordinary usage, it would generally connote something more dependent on the context in which the word is used. In the context of this wording, “incident” was qualified by something that “endangers human life or property,” so as to require a response from a “policing authority”
It was common ground that “Covid-19 endangered human life because of the infectious nature of the disease; and taken together with all the other cases of Covid-19 in the country, it called for a response by the Secretary of State”.
Further, in this clause, it was clear that the terms “incident” and “occurrence” were being used interchangeably. Therefore, a case of Covid-19 could properly be regarded as an “incident,” and could amount to an “event” or “occurrence”.
Although this analysis differs from that of the Divisional Court in the FCA Test Case, where it was held (in the context of the Hiscox NDDA clause) that “it is a misnomer to describe the presence of someone in the radius with the disease as “an incident” for the purposes of the clause”, the Court of Appeal did not find that the point was wrongly decided by the Divisional Court. Rather, its decision was based on the wording of the clause before it.
The finding that Covid-19 can be an “incident,” in certain contexts, is a potentially significant outcome for other policyholders with “incident” wordings. There are likely to be a number of claims out there that have been in cold storage due to an “incident” wording, which should now be revisited given this apparent thawing on the issue.
Per premises
The Court of Appeal agreed with the lower court’s finding that this wording provided cover on a per premises basis.
When considering whether the wording provided for cover on a per premises basis, the Court of Appeal focused on the specific wording of the clause, and in particular the fact that the insured peril was specific to each of the premises insured. A prevention or restriction of access to each premises would, therefore, give rise to a separate claim to which a separate limit would apply. The insurer’s focus on the defined term “Business” (i.e. that it would not “make sense to speak of the business of the premises as distinct from the business of the policyholder”) was found to place more weight on the definition that it would bear.
Further, the Court of Appeal noted that the policy drew no distinction between policyholders in the claimant group who owned or operated only one venue, and those who owned or operated multiple venues. In those circumstances, interpreting the policy limit as applying separately to each policyholder rather than to each premises would be “somewhat capricious”.
This is an important finding for policyholders with more than one premises in circumstances where insurers are frequently seeking to limit losses to a single limit across multiple premises. Close attention should be paid to the specifics of the wording, as the nuance of the drafted wording and the policy as a whole will dictate whether a per premises argument can be sustained.
Correction
The insurer’s attempt to introduce an aggregate limit were unsuccessful in the absence of a clear mistake (or at least a mistake with a clear answer).
The insurer’s had attempted to rework the wording of the extension referring to “any one claim in the aggregate” to provide an annual aggregate limit by inserting the word “any one claim and in the aggregate”. The Court of Appeal found that while it was reasonably clear that something had gone wrong in the language, it was nonetheless far from obvious what solution the parties had intended. It was as likely that the insurer had intended for the limit to apply in the aggregate as it was that the limit was intended to apply to any one claim. The correction proposed by the insurer would result in the words “any one claim” being deprived of any meaning. Accordingly, the judge was correct to have rejected the insurer’s case of construction by correction at first instance.
This decision again confirms the principles in East v Pantiles (Plant Hire) Ltd and Chartbrook Ltd v Persimmon Homes Ltd, which were considered recently in another appellate Covid-19 decision, Bellini N/E Ltd v Brit UW Ltd. It serves as a stark reminder that the courts will usually be reluctant to correct mistakes, and the circumstances in which they might do so are limited to those where there is an obvious definitive answer.
Parting Comments
Despite a disappointing result on the meaning of “policing authority”, this decision has produced renewed hope for policyholders with similar issues in dispute, and it is far from the last word on the various NDDA wordings still out there. Further appeals arising from the Gatwick Investment Ltd v Liberty Mutual Insurance Europe SE group of cases are listed for hearing early next year, in addition to other matters proceeding to trial in the commercial court.
Watch this space.
Authors
Joanna Grant, Managing Partner
Anthony McGeough, Senior Associate
A “WIN WIN” for Policyholders
Background
Delos Shipholding S.A. v Allianz Global Corporate and Specialty S.E. [2024] EWHC 719 (Comm) is one of several recent judgments to consider the scope of an insured’s duty of fair presentation under the English Insurance Act 2015 (the “Act”) and helpfully applies that duty in a manner likely to favour policyholders; also noteworthy are the Commercial Court’s observations on the concept of fortuity and on the duty to sue and labour. The Court additionally considered and rejected the insureds’ claim under section 13A of the Act for damages arising from late payment, which is not covered in this article.
Facts
The bulk carrier ‘WIN WIN’ (the “Vessel”) was insured under a policy (the “Policy”) incorporating an amended form of the American Institute Hull War Risks and Strikes clause.
In February 2019, the Master unknowingly anchored the Vessel in Indonesian territorial waters without permission. Some days later, the Indonesian Navy detained the Vessel for having done so illegally. The Master was prosecuted for contravening Indonesian shipping law, with the Vessel only being redelivered to the insureds in January 2020. The insureds alleged that the Vessel had become a constructive total loss and served several Notices of Abandonment on insurers, all of which were rejected. The insureds then commenced suit to claim for total loss of the Vessel under the Policy, as well as damages for late payment of their claim under section 13A of the Act.
At trial, insurers accepted that the conditions for a total loss had had been met, but alleged that (i) they were entitled to avoid the Policy for material non-disclosure, (ii) the detainment was not fortuitous, and (iii) the delay in release was materially caused by the insureds’ unreasonable conduct in breach of their duty to sue and labour. None of the defences succeeded and the Court allowed the insureds’ claim. The insureds’ claim for damages under section 13A of the Act was, however, dismissed.
Material non-disclosure
At the time the Policy was renewed on 29 June 2018, one Mr Bairactaris, who was the sole director of the first claimant (the shipowner), was being prosecuted by the Greek authorities on charges relating to a shipment of heroin (the “Charges”). Mr Bairactaris was also at all material times a nominee director of the first claimant. In other words, he exercised no independent judgment as director and instead acted on the instructions of other persons, who in this case where the second claimant (the Vessel’s commercial managers) and its owner.
Insurers sought to avoid the Policy on the basis that the insureds had breached their duty of fair presentation. Accordingly, Insurershad to establish that:
- the insureds had actual or constructive knowledge of the Charges;
- the Charges were a material circumstance that should have been (but was not) disclosed at the time of renewal; and
- the relevant underwriter had been induced by the non-disclosure of the Charges to write the risk.
(i) Knowledge
So far as actual knowledge was concerned, since Mr Bairactaris was the only individual within the claimants who knew of the Charges, the key issue was whether the first claimant had been fixed with knowledge of the Charges via section 4(3)(a) of the Act, which attributes to an insured “what is known to ... the insured’s senior management”. Section 4(8)(c) of the Act defines senior management as “those individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised”.
Notwithstanding his position as nominee director, the Court found that Mr Bairactaris was not part of senior management. It was the substance of the role played by him which was determinative, and since his responsibilities as sole nominee director were confined to executing administrative formalities (rather than the organisation of the first claimant’s activities), he could not be regarded as senior management.
This case thus demonstrates the key principles regarding the “knowledge” of a corporate policyholder and re-states the balance under English insurance law between the rights of the insurer to be provided with the material facts prior to inception of a policy against the practical challenges faced by those responsible for the insurance of corporate policyholders in ensuring they are in possession of the material facts in the first place.
As the Court also found that the insureds also did not have any constructive knowledge of the Charges, the defence of material non-disclosure failed at the first hurdle. The Court nevertheless continued to consider the remaining issues
(ii) Materiality
The parties agreed that the test for materiality was substantively unchanged by the Act, i.e. it was whether a prudent underwriter would have wanted to take the undisclosed circumstances (here, the Charges) into account.
The more controversial issue was whether the hypothetical prudent underwriter could also take into account exculpatory circumstances under the test for materiality. These consisted of information that the insureds would also have made known to insurers had the Charges been disclosed, including in this case:
- Mr Bairactaris’ firm belief that the charges were without foundation; and
- the fact that Mr Bairactaris was a nominee director fulfilling only an administrative function and had no role in the operation of the Vessel.
The Court observed that, had it been necessary to decide, it would have held that that exculpatory circumstances could be taken into account; were it otherwise, an insurer “could … be as selective as it liked in how it defined the circumstances which it alleged could be disclosed”. On the facts, the Court observed that the Charges (considered with the said exculpatory circumstances) would have been material and would have led a prudent underwriter to consider imposing a condition, e.g. that Mr Bairactaris should be replaced as a nominee director.
(iii) Inducement & Remedy
The Court found that, had the Charges been disclosed, the actual underwriter would have imposed a condition requiring replacement of Mr Bairactaris as nominee director. The test for inducement under section 8(1)(b) of the Act would thus have been satisfied – the situation was one where, but for the non-disclosure of the Charges, insurers would only have entered into the Policy on different terms.
Insurers would thus have been entitled to treat the Policy as though it included the above condition (per paragraph 5 of Schedule 1 of the Act). The more interesting issue was whether, in this case, it was equally open to the insured to then prove that it could and would have complied with the condition. The Court, accepting that “sauce for the goose [was] … equally sauce for the gander”, opined that insureds could, and that on the facts the insureds would, have complied with a condition requiring replacement of Mr Bairactaris in any event; as such, insurers would have been without a remedy even if they had successfully proved knowledge of the Charges.
Other issues
This wide-ranging judgment covered several other issues, two of which are dealt with below.
(i) Fortuity
Insurers relied on the proposition set out in The Wondrous [1991] 1 Lloyd’s Rep 400, that the ordinary consequences of an assured’s deliberate and voluntary conduct are not fortuitous and do not fall within the cover provided by all risks policies. Insurers argued that, by anchoring in Indonesian waters, the Vessel had voluntarily exposed herself to the operation of local law. The consequent detention was simply an ordinary consequence of that voluntary conduct.
These arguments failed. The Court declined to read the proposition in The Wondrous so widely and instead clarified that the proposition had two aspects:
- First, there must be some choice by the insured. This implies awareness that a decision is being made between two or more options which are different in some relevant sense.
- Second, the consequences must be such as to flow in the ordinary course of events. This requires the consequence to be “inevitable in the sense that it is bound to eventuate in the ordinary course”.
Neither aspect was satisfied on the facts. Since the Master did not realise that the Vessel was in Indonesian waters to begin with, there was no conscious choice by the Master to anchor there. Further, since at the time of detention the Indonesian navy had only just begun to arrest vessels that had been anchored in Indonesian waters without permission (whereas previously there no reported cases of such detention), the detention was neither inevitable nor an ordinary consequence of the Vessel’s conduct.
(ii) Sue and Labour
Both the terms of the Policy and section 78(4) of the Marine Insurance Act 1906 imposed on the insureds a duty to sue and labour. In simple terms, this duty is analogous to a contract party’s duty to mitigate its losses caused by a breach of contract and in the same way, the duty to Sue and Labour requires the insured to make every attempt to reduce the possible exposure to loss.
Insurers argued that, by being side-tracked into discussions with the Navy which involved considerations of a bribe or something similar (which the insureds were ultimately not prepared to do), the insureds had unreasonably protracted Indonesian Court proceedings against the Master and delayed the release of the Vessel.
The Court reiterated the well-established principle that an alleged breach of the duty to sue and labour would only afford insurers a defence where the breach breaks the chain of causation between the insured peril and the loss. This required the insured to act in a way in which no prudent uninsured would have acted; a mere error of judgment or negligence would not suffice. On the facts, there was no breach of the duty – given the uncertain circumstances faced by the insureds, there was no way of their knowing that engaging in discussions with the Navy would “slow things down”, so it could not be said that the insureds had acted in a way that no prudent uninsured would have acted.
Comment
The Court’s policyholder-friendly reading of both the elements of the duty of fair presentation, as well as of the meaning of the “ordinary consequences of an assured’s deliberate and voluntary conduct”, are welcome developments for policyholders. That said, many of the Court’s observations – particularly in relation to the issues of materiality and insurers’ remedies – were obiter, and it remains to be seen if future judgments will follow the lead established here.
Authors
Lithium Battery Fires – Not so Lit?
Introduction
Lithium batteries (also known as lithium-ion batteries) have become commonplace in devices such as mobile phones, cameras, laptops, e-cigarettes, tablets and e-bikes. They are popular because, unlike alkaline batteries, they are rechargeable and can be used multiple times, making them a comparatively sustainable energy source.
This article will outline the key risks and coverage issues associated with lithium batteries for policyholders.
Why are Lithium Batteries so dangerous?
The London Fire Brigade has said that lithium battery fires are the fastest growing cause of fires in London in 2024. That is because of the phenomenon of ‘thermal runaway’, which occurs when flammable materials within lithium batteries break down. This is usually due to manufacturing defects or when the battery cells overcharge, which can lead to the release of a cloud of flammable gases which, in turn, can cause vapour cloud explosions. The vapour cloud explosions exacerbate the ignition of the battery and the speed at which a fire spreads.
Lithium battery fires can be unpredictable, and it is common for batteries to reignite days after the initial ignition. That is why they can cause such large fires, as seen at the Suez Recycling Centre in July 2024, where the most likely cause of the fire was thought to be the improper disposal of a lithium battery, which ignited in a pile of waste of around 100sqm (and it took 15 fire engines and 100 firefighters to quell the blaze). As a further example, a fire was allegedly caused at a home in Wales in September 2024, by a mobility scooter that was charging. Firefighters were present at the blaze for more than 12 hours.
The Wider Problem
The unpredictable nature of lithium battery fires may result in some building and property insurers declining and restricting cover for fires caused by them, or charging additional premium to cover this risk.
Further, it may be more difficult for companies whose businesses rely heavily on lithium batteries, such as those in the manufacture, supply and retail of products which utilise lithium batteries to obtain cover from their product liability insurers.
The legal climate around lithium batteries is changing, as we have seen with the introduction of the Lithium-ion Battery Safety Bill which aims to regulate the safe storage, use and disposal of lithium batteries in the UK. However, as we have seen with other emerging risks such as climate change, further discussion may be required between the relevant stakeholders to ensure that lithium battery risks do not become “uninsurable”.
The following section sets out some of the key coverage issues that may arise.
Coverage Issues for Policyholders
Breach of the duty of fair presentation
Policyholders are required to make a fair presentation of the risk under the Insurance Act 2015 (“the Act”). To make a fair presentation, a policyholder must disclose all “material circumstances” to the insurer that the policyholder knows or ought to know. Failing that, an insured can satisfy the duty by giving the insurer sufficient information to put it on notice that it needs to make further enquiries for the purpose of revealing those material circumstances (section 3(4)(b) of the Act). A circumstance or representation is ‘material’ if it would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms. The duty is not limited to answering questions asked by the insurer in a proposal form.
So, for example, say a policyholder deliberately discloses to an insurer that it has a sophisticated strategy in place for mitigating the risk of fire due to the high number of products containing lithium batteries at its premises when, in fact, the position is otherwise. In that situation, an insurer would probably be entitled to refuse to indemnify the policyholder for a claim on the basis that, had the true position been disclosed, it would have provided insurance on different terms, if at all.
A more difficult position may arise when an insurer does not ask any specific questions about the extent to which lithium batteries are used in an insured’s business, and an insured inadvertently fails to disclose the true position on inception or renewal. Is the use or storage of products which contain lithium batteries itself a material circumstance? If so, will disclosure of the type of products supplied or stored be sufficient to put the insurer on notice and discharge the duty owed under section 3(4)(b), or will an insured have to spell out that the products contain lithium batteries?
It should be borne in mind that not all lithium batteries necessarily pose a fire risk. In that regard, the Fire Protection Association has provided guidance that each fire protection and mitigation strategy should be assessed on a case-by-case basis. That will include a consideration of the battery type, the Battery Energy Storage System (“BESS”) and layout.
Breach of Condition Precedent to Liability
Insurance policies frequently contain terms known as ‘conditions precedent to liability’. Subject to certain provisions in the Act, such terms must be complied with strictly, otherwise there is no cover for the claim.
In Wheeldon Brothers Waste Limited v Millennium Insurance Company Limited [2018] EWHC 834 (TCC), the policy contained a condition precedent that combustible waste had to be stored at least 6m from any fixed plant. On the evidence, the court found there was no breach of the condition precedent, and that “storage” meant a degree of permanence and a deliberate decision to designate an area to place and keep material.
Guidance from the Fire Protection Association states that the BESS should be (a) located in non-combustible containers or enclosures, (b) placed at least 3 metres from other equipment, buildings, structures and storage, and (c) the distance should only be reduced when there is a suitable-fire barrier, where exposed surfaces and fire-resisting, or where BESS enclosures have fire-resisting walls and roofs. If insurers impose conditions relating to storage in compliance with this guidance, the decision in Wheeldon is potentially relevant as to what “storage” means.
It is open to a policyholder to rely on section 11 of the Act and show that the breach could not have increased the risk of loss which occurred in the circumstances in which it occurred. For example, if there was a fire at a policyholder’s premises, and it had breached a condition requiring it to store lithium batteries in a particular way, to escape the consequences of breach, the policyholder would need to prove, in effect, that compliance would not have impacted the general risk of fire.
Concluding Thoughts
There is no UK specific guidance or legislation to govern lithium battery use, storage or disposal. Policyholders should therefore consult reliable guidance to ensure that fire risk strategies are sufficient on a case-by-case basis, and compliant with the terms of the policy.
If in doubt, policyholders should consult with their brokers on inception and renewal to ensure that they have complied with their disclosure obligations and are able to satisfy the applicable policy terms to maximise the chance of policy coverage in the event of a lithium battery fire.
Ayo Babatunde is an Associate at Fenchurch Law.
Fenchurch Law expands into Scandinavia with Denmark office launch
Fenchurch Law, the UK’s leading firm working exclusively for insurance policyholders and brokers, has announced plans to offer its specialist legal support across the Nordic region, with the launch of its new Denmark office.
The new office will be run by Morten Christensen, supported by his colleague Maria Bitsch, who have a combined 50 years of experience handling complex insurance and liability disputes across Scandinavia.
Morten brings with him extensive leadership expertise, having previously held the position of Co-Managing Partner, EMEA, at Kennedy’s and having also founded several independent specialist law firms. He has also been recognised as a leading individual by the Legal 500 for insurance in Denmark for the past 6 years. Maria also brings with her a deep understanding of the insurance industry, the broker sector, and reinsurance, having held senior legal positions at three of the top Danish insurance providers, including the Alm Brand Group.
This announcement coincides with the official opening of Fenchurch Law’s Singapore office and marks another major milestone in the firm’s ongoing global expansion strategy.
Senior Partner at Fenchurch Law, David Pryce, commented: “Today’s opening of our Singapore office, to serve policyholders across the APAC region, and the opening on 1st November of our Copenhagen office, to serve policyholders across the Nordic region, are key milestones towards achieving the firm’s purpose to level the playing field for policyholders globally. These office openings put us ahead of schedule to achieve our objective of having a presence in every region of the world by 2030.”
Morten Christensen, Managing Partner at Fenchurch Law DK, added: “We’re delighted to be joining Fenchurch Law to establish its presence in Scandinavia, and to be playing a key part in the firm’s growth around the world.
In my experience, I have often found that clients would have been better off with a representative who not only understands the law and the insurance industry but also exclusively stands on their side, which is exactly the type of support we will be offering them.”
(Not) the new LEG clauses.
Let me start by making something clear. The clauses referred to below are NOT the new LEG clauses.
Whilst I have made no secret of my view that the LEG committee does need to amend LEG3 (and, perhaps, should have done so before now), and that the decisions in SCB and Archer have provided a golden opportunity to overhaul not just the LEG clauses, but the DE clauses too, I have no involvement in the decision about whether the LEG committee will, in fact, produce new versions of the LEG clauses or, if they do decide to do so, in determining what those clauses will look like. As a result, what is set out below represents nothing more than my own suggestions about how the existing LEG clauses could be amended in order to preserve what I believe to be the general market understanding of their meaning, whilst being expressed in clear language that would be easily understood not only by those who specialise in CAR / Builder’s Risk, but also by those who have no involvement in this particularly fascinating area of insurance.
I have been asked, not unreasonably, whether it is misleading of me even to refer to my own draft clauses by reference to the official LEG clauses. However, after careful consideration I have maintained the view that I originally took instinctively, that it is appropriate for me to do so, for two reasons.
The first is that my proposed clauses are not intended to alter the meaning of the existing clauses but, rather, to express what I regard as the meaning of the existing clauses in a clear way. Whilst I am happy to be challenged about my understanding of the meaning of the existing clauses, it would make no sense for me not to explicitly link my drafts to the current clauses, because my re-drafts of each clause only make sense when considered in the context of the original. I don’t consider it to be my place, as a lawyer, to be suggesting that the intention of the existing clauses should be changed in order to provide more (or less) cover. That is for underwriters and brokers to decide.
The second reason is that, although the LEG clauses are officially maintained by the London Engineering Group (i.e. “LEG”), the existing clauses have become, in my view, public property as a result of their popularity, and by their wide usage across the world. For better or for worse, the scope of cover provided by Builder’s Risk policies in every insurance market needs to be considered in the context of the defects exclusions produced by the LEG committee, whether an official LEG clause is used, or whether a different form of defects exclusion is used (whether from the DE suite, or bespoke clauses).
That being the case, it seems to me that anyone with a serious interest in the health of the Builder’s Risk market has the right to contribute to the debate about what the market-leading suite of defects exclusions (which is what the LEG clauses are) should look like in the next generation of Builder’s Risk policies. I don’t claim to have any unique insight into that debate, or to be writing the last word on the subject, but I do hope that what I say can be a useful contribution to what should be a market-wide conversation about these important clauses.
What would be worse even than the unsatisfactory position that we are in today (where SCB and Archer have raised considerable uncertainty about the meaning of the clauses, and arguably called into question whether their meaning can reliably be ascertained at all), would be for insurers to fragment and begin to provide a multiplicity of their own defects exclusions. These clauses have layers of meaning, and there is beauty in their individual and collective complexity. But if we move away from standard defects exclusions, then beautiful complexity may give rise to unfathomable chaos in which brokers, policyholders and, if we’re honest, even the Builder’s Risk underwriters themselves, will have little chance of achieving a clear common understanding of the cover that their policies are providing. In that situation it would only be the lawyers who would be the only winners, and no-one wants that.
So, what is the problem with the existing clauses?
Firstly, they are overly long and convoluted. There are numerous phrases (most notably, but not only, the words in brackets in the 2006 version of LEG3) which I understand to have been introduced “for the avoidance of doubt”, but which have had precisely the opposite effect. Rather than bringing clarity to the meaning of the clauses, these superfluous phrases have instead obscured that meaning.
Secondly, the word “defect” is used to describe two quite different things in different contexts. Sometimes the word defect is intended to describe the condition of the insured property. At other times it appears to be intended to refer to a mistake (whether a mistake concerning design, or workmanship, etc).
Thirdly, the clauses have encouraged some users to take the view that they treat “damage” on the one hand, and a “defect” on the other, as binary concepts, so that one should be concerned with the question of whether insured property is damaged OR defective. However, that is plainly not right. As I remember being explained to me when I began to work with Builder’s Risk policies, when you refer to “damage” you are concerned with a happening, whereas when you refer to a “defect” you are concerned with a condition.
Knowing that insured property is in a condition that the owner would preferred it not to be in, today (so that it can therefore be described as being defective, today), tells you nothing at all about whether the insured property underwent an adverse change in physical condition which impaired the value or usefulness of the property. If it did undergo that change (i.e. it suffered damage in order to reach its defective state or, to put it another way, it become “damaged”), then that would trigger the insuring clause of a Builder’s Risk policy. If, on the other hand, the insured property was simply built badly, it should never trigger the insuring clause of a Builder’s Risk policy.
So, what am I intending to achieve in my proposed re-drafts of the clauses? As set out above I am not intending to suggest any alteration of the cover which I believe is intended by the existing clauses. Rather, my only intention is to express, in as clear language as possible, my understanding of the meaning of the existing clauses.
With that in mind, my re-drafts have largely retained the existing language of the current LEG clauses, and primarily removed the words which in my view serve to obscure the meaning of the existing clauses. The exception to that approach is in my proposed amendment to LEG1, where in order to avoid using the word “defect” to refer to a mistake, I have instead introduced that word into the clause even though it doesn’t appear anywhere in the existing suite of exclusions. However, in my view, the natural and ordinary meaning of the word “mistake” accurately reflects the meaning of the (in my view) misleading word that it replaces in the original clause.
A final point in relation to the clauses. As I explained in my article on the SCB decision, the urgent need to amend LEG3 (and, by extension, the other LEG clauses) presents an opportunity to move away from the current unhelpful position where we have two separate suites of defects exclusions (LEG, and DE).
Each suite can be broken down in three categories: clauses that are concerned with causation (LEG1 and DE1); clauses that are concerned with improvements (LEG3 and DE5); and clauses that are concerned with the condition of the insured property before damage occurred (DE2-4, and LEG2). Of those three categories, the clauses relating to two of them are materially the same in each suite, despite differences in drafting (i.e. LEG1 and DE1 do the same thing, as do LEG3 and DE5 - there may be technical arguments that they operate slightly differently, but those technical arguments should not, in my view, be taken seriously).
The only difference between the two suites is in the intermediate clauses which are concerned with the condition of the property before the damage occurred. In that regard LEG2 operates materially differently from DE2-4. That is due to the different origin of the two suites: the DE clauses were intended to be general Builder’s Risk clauses, whereas the LEG clauses were introduced specifically to cater for engineering risks (i.e. EAR as opposed to CAR). Unfortunately, the DE clauses have not been as successfully exported as the LEG clauses (perhaps because there are more of the DE clauses and so they are perceived as being more difficult to understand), with the result that in some important markets, including the US, the LEG clauses are used as standard for civils projects, whereas the DE clauses would be more appropriate for projects of that type.
So, rather than simply amending the LEG clauses, it seems to me to be much more sensible to introduce a single suite of clauses which are based on the existing LEG clauses, but which re-brand LEG2 in the way it was intended (i.e. as applying to EAR) and amending DE3 as a civils alternative to LEG2.
And with that rather long introduction, and with thanks for the patience of anyone who has taken the time to read this far rather than jumping straight to the draft clauses themselves, here are my suggestions for a new single suite of defects exclusions, modelled on the current LEG clauses, but with an amended version of DE3 introduced as an alternative to LEG2 (and branded LEG2 (CAR)).
| Original clauses | My draft clauses |
| LEG1
“The Insurer(s) shall not be liable for Loss or Damage due to defects of material workmanship design plan or specification.” |
LEG1
The Insurer shall not be liable for the cost of fixing any damage caused by mistakes of any kind. |
| LEG2
“The Insurer(s) shall not be liable in respect of: All costs rendered necessary by defects of material workmanship design plan or specification and should damage occur to any portion of the Insured Property containing any of the said defects the cost of replacement or rectification which is hereby excluded is that cost which would have been incurred if replacement or rectification of the said portion of the Insured Property had been put in hand immediately prior to the said damage. For the purpose of this policy and not merely this exclusion it is understood and agreed that any portion of the Insured Property … shall not be regarded as damaged solely by virtue of the existence of any defect or material workmanship design plan of specification”. |
LEG2 (EAR)
Should damage occur to any portion of the Insured Property which was in a defective condition before the damage occurred the Insurer shall not be liable for the cost that would have been incurred to fix the defects in that portion of the Insured Property immediately before the damage occurred.
|
| DE3
“This policy excludes loss of or damage to and the cost necessary to replace repair or rectify: i. Property insured which is in a defective condition due to a defect in design plan specification materials or workmanship of such property insured or any part thereof; ii. Property insured lost or damaged to enable the replacement repair or rectification of Property insured excluded by (i) above. Exclusion (i) above shall not apply to other Property insured which is free of the defective condition but is damaged in consequence thereof.” |
LEG2 (CAR)
The Insurer shall not be liable for the cost incurred to fix any portion of the Insured Property which was in a defective condition immediately before the damage occurred.
|
| LEG 3/06
“The Insurer(s) shall not be liable in respect of: All costs rendered necessary by defects of material workmanship design plan or specification and should damage (which for the purposes of this exclusion shall include any patent detrimental change in the physical condition of the Insured Property) occur to any portion of the Insured Property containing any of the said defects the cost of replacement or rectification which is hereby excluded is that cost incurred to improve the original material workmanship design plan or specification. For the purpose of the policy and not merely this exclusion it is understood and agreed that any portion of the Insured Property shall not be regarded as damaged solely by virtue of the existence of any defect of material workmanship design plan or specification.” |
LEG 3
The insurer shall not be liable for the cost incurred to improve the original material workmanship design plan or specification.
|
I would love to hear from anyone who either agrees or disagrees with what I’ve set out above. The market would benefit from a debate on this important issue, and we have an opportunity to create a better situation than the one in which we find ourselves today. Please feel free to email me either at david.pryce@fenchurchlaw.co.uk, or at david.pryce@fenchurchlaw.com.sg.
David Pryce is a Senior Partner at Fenchurch Law.
A twist in the tale!: - the Court of Appeal throws up some surprises in the “At the Premises” judgment
The long-awaited judgment in the “At the Premises” (“ATP”) judgment has now been handed down, and the expected policyholder-friendly outcome marks another welcome milestone in the journey towards bringing these cases to a conclusion, even if the route by which the Court of Appeal got there took some less expected twists and turns.
While there were a number of other issues on appeal, this article focuses on causation, which continues to be a key battleground for insurers and their policyholders.
Background
By way of a brief recap, policies with clauses providing cover for cases of Covid-19 “at the premises” were not considered by the Divisional and Supreme Court in the FCA Test Case, which instead considered a range of policies including those which provided cover for a disease occurring within a specified radius of an insured premises.
In the FCA Test Case, the Supreme Court considered causation at some length, finding that “[212]…in order to show that loss from interruption of the insured business was proximately caused by one or more occurrences of illness resulting from COVID-19, it is sufficient to prove that the interruption was a result of Government action taken in response to cases of disease which included at least one case of COVID-19 within the geographical area covered by the clause.”
However, insurers resisted the application of that analysis to ATP policy wordings, leading to this litigation considering “the critical question” as to whether the Supreme Court’s reasoning in respect of causation could properly be applied to such wordings. At first instance, the answer was a decisive yes (and some further background can be found in our previous article). Insurers appealed, and this judgment is from that appeal which was heard earlier this year.
Insurers’ Causation Arguments
Despite a number of common causation issues to all of the appeals, the primary case advanced differed between the insurers, as follows:
- ExCeL & Kaizen Insurers – their position was that there would be cover only when an occurrence of disease at the premises was a “distinct effective cause” of the closure of the premises (i.e. it must be a known occurrence of the disease at the premises to which the government or local authority was responding);
- Hairlab & Why Not Insurers – they took the position that only a stricter “but for” test applied (requiring the occurrence of a disease at the premises to be a necessary and sufficient cause of the subsequent restrictions - the court recognised this test would seldom be satisfied); and
- Mayfair Insurers – whose position was that the authority had to know about the suffering of disease at the particular premises and had to take it into account in reaching its decision (although it need only contribute to that decision).
The Court of Appeal’s Decision
In setting out their positions, the insurers argued that the correct approach was to begin with the interpretation of the policies in issue, having regard to their language and context, rather than asking whether those clauses differ materially from the radius clauses considered by the Supreme Court in the FCA Test Case. The Court of Appeal agreed there was some force in that.
However, ultimately that change of approach proved to make very little difference to the outcome, with the Court of Appeal finding that:
- The nature of the insured peril informs the causation test agreed between the parties, which is not derived from other perils mentioned in the insuring clause (such as vermin infestation), but instead focuses on the particular peril in question.
- In that regard, notifiable diseases spread rapidly and widely, with the potential to cause interruption over a wide area. The circumstances that would lead to a closure of an insured premises are unlikely to be in response to an isolated incident: instead, it must have been contemplated that a closure or restrictions imposed by a relevant authority would be in response to an outbreak as a whole over a particular area, whether that be local or national. Furthermore, the worse and more widespread the outbreak of the disease, the more likely it would be that such restrictions would be imposed.
- Accordingly, a “but for” test could not have been the intended approach to causation, as the parties must have intended for the causation requirement to be satisfied if the occurrence at the premises was one of a number of causes of the closure.
- It would be unrealistic to suppose that the authority would apply its mind to identifying a particular case of a disease at a particular premises. In the case of a serious outbreak, a relevant authority would know that there had been a number of occurrences of a disease (perhaps over a certain area, or affecting a particular kind of premises within an area) and it would simply react to those occurrences by imposing restrictions accordingly.
- The finding of fact by both the Divisional and Supreme Court in the FCA Test Case (that “each of the individual cases of illness resulting from Covid-19 which had occurred by the date of any Government action was a separate and equally effective cause of that action”), applies equally to the ATP claims, both in respect of the cases which were known about, and those which were “known unknowns”.
Comment
This appeal judgment is a welcome development for policyholders and confirms that despite the differences between radius and ATP clauses, it may not materially affect the nature of the casual link that must be established, which is a matter of policy interpretation and intention.
Policyholders with the benefit of ATP cover can now expect a recovery from their insurers, although notably a lack of clarity remains about the evidence required to demonstrate the presence of a case of Covid-19 at the premises, and it is to be hoped that insurers take a pragmatic approach that avoids this issue becoming the next battleground.
Now that the ATP appeal has concluded, and with the tide very much in favour of the policyholders, the Court of Appeal will be considering similar causation arguments along with furlough in the upcoming appeals arising out of the Gatwick Investment Ltd & Ors v Liberty Mutual Insurance Europe SE group of cases.
Watch this space.
Anthony McGeough is a Senior Associate at Fenchurch Law
