The Sky is the limit: Developments in relation to damage under CAR policies
On 16 December 2024 the Court of Appeal delivered judgment in the case of (1) Sky UK Ltd and (2) Mace Limited vs Riverstone Managing Agency Ltd and Others, a decision which will provide welcome clarity to the construction community, as well as being of interest to the insurance market more widely in terms of its analysis of the nature of an indemnity policy. The judgment discusses a number of important points, notably the rights of insured parties under a Construction All Risks (“CAR”) policy to recover in respect of “deterioration and development damage” which occurred after the policy period as a result of damage which had occurred during the policy period.
The factual background
The claims were in respect of extensive water damage to the roof of Sky's global headquarters building in West London, which was constructed for Sky in 2014 to 2016 by Mace as main contractor under a JCT 2011 Design and Build Contract dated 17 March 2014. Sky and Mace were named insureds under the Policy.
The roof was comprised of 472 wooden cassettes, into a substantial number of which water had entered before final waterproofing had taken place and had remained for periods of construction, leading to wetting and, so Sky and Mace alleged, irreversible swelling and structural decay by the end of the period of insurance (or “POI”, which ran from commencement of the project to one year after practical completion).
In the period between expiry of the POI and the drying out works (which arrested any further damage) the condition of the timber already damaged had worsened, and moisture had spread to other parts of the roof construction. The Court of Appeal termed these types of damage as “deterioration damage”; i.e. damage, such as further swelling, in parts of the timber already damaged, and “development damage”; i.e. damage to additional, previously undamaged timber by way of spread.
It is important to note, as the Court of Appeal stated, that the vast majority of water ingress had occurred during the POI and there was little, if any, ingress after the POI. Secondly, there was no allegation by the defendant insurers that Sky or Mace had failed to mitigate their loss prior to the hearing, given the complexity of designing, agreeing and implementing a remedial scheme.
The underlying decision
In the underlying decision, HHJ Pelling held that Sky was only entitled to damage which had occurred during the POI, and not development or deterioration damage which occurred thereafter. In reaching this decision, the Judge relied on the House of Lords decision in Wasa International Insurance Co Ltd v Lexington Insurance Co [2009] and statements in that decision that in a policy covering losses occurring during a policy period, the cover does not extend to damage occurring before or after the policy period.
The Judge had found that the entry of moisture into the cassettes during the POI was a tangible physical change to the cassettes as long as the presence of water, if left unremedied, would affect the structural strength, stability or functionality of the cassettes during the POI.
The arguments on appeal
All of the parties were granted permission to appeal on numerous grounds, but in this article we discuss the primary point of contention, which was whether Sky could claim for deterioration and development damage.
On this point, the cover identified in the insuring clause of the policy was in respect of “damage to Property Insured occurring during the Period of Insurance” and insurers argued that damage occurring after the POI was not covered. Insurers relied on the decision in Wasa as authority for the proposition that, under “time policies”, the cover is in respect of damage occurring during the period of cover, and not occurring before or after.
In summary, Sky and Mace’s arguments in reply were that:
- An insurance claim is a claim for unliquidated damages and, as such, the measure of recovery is for all the loss suffered by reason of the insured peril occurring during the POI, including loss caused after the POI.
- The Policy contained a Basis of Settlement clause, as below, and the measure of recovery contended for was supported by the underlined words in the clause:
“Basis of Settlement
In settlement of claims under this Section of the Contract of Insurance the Insurers shall, subject to the terms and conditions of the Contract of Insurance, indemnify the Insured on the basis of the full cost of repairing, reinstating or replacing property lost or damaged (including the costs of any additional operational testing, commissioning as a result of the physical loss or damage which is indemnifiable hereunder) even though such costs may vary from the original construction costs …."
The Court of Appeal decision
Development and deterioration damage
Lord Justice Popplewell delivered the leading judgment, which was rooted in the principle, long established in the authorities, that a contract of insurance is a contract of indemnity, often described as a contract to hold someone harmless. Such a contract was not, however, a promise by the insurer to pay money upon the happening of the insured event, but rather a promise to hold harmless, i.e. a promise that the insured will not suffer the damage in the first place. This promise to hold harmless was the insurer’s primary obligation and, when breached, it was under a secondary obligation to pay damages for breach of the primary obligation.
In light of this, damages payable under an insurance policy fell to be assessed on the basis of established common law principles as to foreseeability, remoteness and mitigation that applied to any other contract; namely damages to put the innocent party in the position it would have been but for the breach, subject to express terms in the policy modifying the general position (e.g. limits or deductibles, exclusions such as for consequential loss or if caused by certain perils), but only if such modification was excluded by clear wording.
Lord Justice Popplewell found that the temporal limit in the insuring clause was insufficiently clear to modify the ordinary rule that insurers were liable to pay the reasonably foreseeable costs of remedying development and deterioration damage.
This conclusion was supported by the wording of the Basis of Settlement clause.
Further, Lord Justice Popplewell found that the authorities, including the House of Lords’ decision in Wasa was distinguishable on the facts, predominantly because it did not relate to development or deterioration damage of the type suffered in this case.
Investigation Costs
Mace also claimed the costs of “lifting the lid”, namely the upper surface of the cassettes in the roof upslope above the gutters, as reasonable investigation costs. The trial Judge, at first instance, denied these costs as being recoverable under the Policy and characterised them as “speculative opening up works”. Additionally, the Judge found that any investigation costs not revealing physical damage would not be recoverable under the CAR Policy.
Nevertheless, based on the normal common law principles that apply to contractual damages claim, aimed at putting the innocent party back in the position it was before the breach (to hold harmless), the Court of Appeal found that reasonable costs of investigation were recoverable if they were reasonably incurred in determining how to remediate the insured damage which has occurred. This was the case, even if the result of the investigation may be to identify the absence of damage in certain areas.
Meaning of physical damage
On a separate point, the Court of Appeal also rejected insurers’ appeal in relation to the meaning of “damage”, and upheld the trial Judge’s findings that damage meant any change to the physical nature of tangible property which impaired its value or usefulness to its owner or operator. There was no need for the physical change to compromise the performance of an individual cassette, as insurers argued.
Retained Liability
The Policy contained a deductible (or “Retained Liability”) of £150,000 “any one event but this will only apply to those claims which are recoverable under DE5…”. It was common ground that the claim was recoverable under DE5 by reason of defective design being a proximate cause, and the trial Judge had found therefore that a single deductible of £150,000 applied to the whole of the claim, as opposed to applying separately in respect of damage to each cassette.
The Court of Appeal also upheld the trial Judge’s findings on this point that, based on the long established authorities, an event refers to the cause of the damage, and not the damage itself, supported by the fact that the deductible was specifically linked to the cause of the loss being defective design.
Comment
As the Court of Appeal stated, on the principal point of contention, the fact that development and deterioration damage was recoverable, would accord with business common sense. In the context of a major construction claim, an insured party would reasonably expect to be compensated for the consequences of insured damage which occurred during the policy period, to a part of the works already damaged (deterioration) or to some other part of the building not yet damaged (development), after this period had expired, in the absence of any policy terms limiting recovery. This is especially so in relation to complex claims where a remediation scheme may not be finalised until sometime after expiry of the policy period, and where the state of the building may deteriorate in the meantime.
Of course, development or deterioration damage would be unlikely to be covered under a buildings policy, since this would exclude damage which first occurred prior to the building policy period, meaning the Court of Appeal judgment is crucial in helping insureds to transfer this risk to the insurance market.
The outcome is consistent with the approach taken in recent cases on non-damage business interruption claims, that provided the policy “trigger” occurs within the indemnity period, the totality of loss is covered including that which continued to be suffered after the policy period (UnipolSai Assicurazioni SPA v Covea Insurance plc [2024]).
The Court of Appeal decision will therefore be welcomed by employers and contractors alike. It remains to be seen whether permission to appeal to the Supreme Court is granted.
Authors
Camden Contribution Curtailed: TPRA 2010 Developments
Recent cases highlight potential difficulties for insurers in handling claims under the Third Parties (Rights against Insurers) Act 2010 (“the TPRA”).
By way of reminder, the TPRA allows a third party claimant to pursue a recovery directly against an insolvent insured’s liability insurer, both to establish the insured’s liability to the claimant, and coverage under the policy, in the same action, without the need to join the insured to the proceedings. In relation to the underlying liability claim, the insurer is permitted to rely, as against the third party, on any defences that would have been available to the insolvent insured.
In Riedwig v HCC International Insurance plc & another [2024], the High Court (Master Brightwell) dismissed a liability insurer’s application to bring a Part 20 claim against the claimant’s professional advisors, seeking a contribution in respect of the insurer’s potential liability to the claimant under the TPRA.
The claim arose from alleged negligence by Goldplaza Berkeley Square Ltd (“Goldplaza”) in producing a valuation of property on Camden High Street. The claimant sought to recover her consequent losses from Goldplaza, and subsequently its professional indemnity insurers, HCC, following Goldplaza’s insolvency in 2021.
HCC applied to join the solicitors who had acted for the claimant on the original property transaction to the TPRA proceedings. The parties agreed that Goldplaza and the solicitors were potentially liable for the “same damage”, based on section 1 of the Civil Liability (Contribution) Act 1978 (“the CLCA”), which provides that:
“any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)”
However, the Court held that the insurer and the solicitors were not liable for the same damage. The insurer was potentially liable under the policy, while the solicitors were allegedly liable for financial loss resulting from the property transaction. Following Bovis Construction v Commercial Union [2001], approved by the House of Lords in Royal Brompton Hospital v Hammond [2002], “an insurer does not inflict damage on anyone … the only damage it is capable of inflicting is in refusing to meet its obligations under the policy of insurance”.
The Judge noted that the purpose of the TPRA is to enable a claimant to pursue an insurer directly in respect of the liability of its insured, and for the claimant to stand in the insured’s place for that purpose, not the insurer. The insurer does not become liable for damage caused by its insured, and the fact that the insured might have a contribution claim against third parties does not mean that the insurer also has that right.
Depending on the type and stage of insolvency proceedings, insurers may be able to apportion loss with third parties by a more convoluted route of joining the insolvent insured to TPRA proceedings (as HCC had intimated an intention to do) or else by way of subrogated recovery, after settling a policy claim. Alternatively, an assignment of the insured’s contribution rights could potentially be made to the insurer, through policy wording or subsequent agreement.
Liability insurers are generally required nowadays to take a more proactive approach to defence of litigation against an insolvent insured, since judgment in default may suffice to establish liability under the TPRA, even if it does not follow consideration on the merits of the underlying claim. This was confirmed by the Scottish Inner House, Court of Session, in the recent appeal decision Scotland Gas Networks plc v QBE [2024], upholding the first instance findings considered in our previous article.
While the intention behind the CLCA is to broaden the class of potential contributing parties, where a number of defendants share responsibility for a claimant’s loss, the ability of an insurer to seek contribution from third parties is limited in the context of TPRA claims.
Authors:
The F1: A closer look at the Bacardi principle and section 11 of the Insurance Act
The Facts
MOK Petro Energy FZC v Argo (No. 604) Limited, The F1 [2024] EWHC 1935 (Comm) concerned a cargo of 11,800 MT of 92 RON unleaded gasoline (“the Cargo”) that had been loaded onto the tanker F1 (“the Vessel”) in Sohar, Oman. The Cargo was insured under an all-risks marine open cover on the ICC(A) wording (“the Policy”).
The Cargo consisted of a blend of gasoline and methanol. The gasoline and methanol used for the Cargo were drawn from four shore tanks (two gasoline, two methanol). They were loaded onto the Vessel via connecting pipelines and then blended in a tank on board the Vessel.
All gasoline-methanol blends have a phase separation temperature (PST), i.e., a temperature at or under which the blend will separate into a gasoline-rich upper layer and a methanol-rich lower layer. Phase separation is undesirable as phase-separated blends have a lower octane value and may damage the engine in which they are used. Put another way: the lower the PST, the better for the blend.
Also relevant is the fact that water increases the propensity of a gasoline-methanol blend to under phase separation. Unwanted water contamination therefore increases the PST of a blend.
The Cargo specifications, per the sale and purchase contract between MOK (the buyer) and PetroChina (the seller), required the Cargo to have a PST of 1°C or below. However, when the Vessel arrived at the discharge port, the Cargo was found to have a PST of 29°C. The Cargo was rejected by MOK’s end purchaser and ultimately sold by MOK to a salvage buyer. MOK claimed an indemnity under the Policy for the difference between (i) the value of the Cargo had it complied with specifications and (ii) the value at which it was actually sold.
Insurers declined the claim. In the ensuing trial, the Commercial Court upheld insurers’ declinature. While much of the judgment turned on the specific facts of the case, the Court’s findings on the following two issues carry wider implications for policyholders:
- Whether the mere fact that the Cargo had been defectively blended could constitute damage.
- How should a Court assess whether compliance with a warranty would reduce the risk of loss, as required under section 11 of the Insurance Act 2015.
Whether the mere fact of defective blending could constitute damage
Clause 1 of the ICC(A) wording provides that the insurance “covers all risks of loss of or damage to the subject-matter except as provided in Clauses 4, 5, 6 and 7 below”.
A policyholder seeking to obtain cover under the ICC(A) wording must generally establish (i) a fortuitous event which (ii) caused loss or damage to the insured cargo. Insured cargo is damaged only where it undergoes an adverse change in physical state.
In this case, one of MOK’s arguments was that (i) PetroChina’s decision to blend the gasoline and methanol in the proportions actually used was fortuitous, and (ii) this blending caused damage by resulting in a product that had a propensity to phase separate at 17°C, which was higher than the contractually stipulated PST of 1°C (although the blend did not actually undergo phase separation).
The question that arose was – could the blend be regarded as damaged merely because it was defective from the moment of its creation? Dias J held that it could not as there had never been a change to the physical state of the blend. The facts were on all fours with the well-known Bacardi Breezers case: Bacardi-Martini Beverages Ltd v Thomas Hardy Packaging Ltd [2002] EWCA Civ 549 (“Bacardi”).
- In Bacardi, a drinks manufacturer mixed cardon dioxide which it did not appreciate had been contaminated with benzene with water and concentrate to form light alcoholic drinks. Unsurprisingly, the contaminated drinks were unmarketable. The issue was whether there had been “physical damage” to the drinks for the purpose of a limitation of liability clause. The English Court of Appeal held that there had been no damage – the drinks had not been subject to damage, but were merely defective from the moment of their creation.
- Similarly, in the present case, the blend was formed through the mixing of gasoline and methanol, and had a propensity to phase separate from the moment of its creation. It had never existed without this propensity. Since there was no change in the physical state of the blend to speak of, it could not, held the Court, be said to have suffered damage.
How should a Court assess whether compliance with a warranty would reduce the risk of loss?
Section 11 of IA 2015 applies to (among others) warranties which, if complied with, would tend to reduce the risk of loss of a particular kind. The general effect of section 11 is that, where an insured has breached a warranty to which section 11 applies:
- if the insured can show that “the non-compliance with the warranty could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred”, per section 11(3); then
- the insurer would not be able to rely on the insured’s breach to exclude/limit/discharge its liability.
Put another way, section 11 obviates an insured’s breach of warranty where the warranty is not relevant to the insured’s actual loss.
In the present case, the Policy contained an express warranty requiring a surveyor to inspect and certify the connecting pipelines between the Vessel and the shore tanks. On the facts, MOK’s surveyor had done the former but not the latter. Accordingly, the Court found that MOK had not complied with the express warranty.
The issue then became whether section 11 negated MOK’s breach of warranty. This would be the case if MOK could show that “the non-compliance with the warranty could not have increased the risk of the loss which actually occurred”.
MOK’s primary case had been that the blend had been fortuitously contaminated with water either when the gasoline and methanol were loaded onto the Vessel via connecting pipelines, or when they were blended on board the Vessel. This water contamination in turn increased the PST of the blend (see above). The Court therefore assumed, for the purposes of its section 11 analysis, that the “loss which actually occurred” was the contamination of the blend with water as alleged by MOK.
On the facts, MOK’s surveyor had inspected the pipelines and found no water contamination, but had not issued a certificate in respect of the inspection. Arguably, the requirement to issue a certificate (when an inspection had already been carried out and no trace of water contamination had been found) was a mere formality and the failure to issue a certificate could not have increased the risk of loss (water contamination). The question then arose – in considering whether “the non-compliance with the warranty could not have increased the risk of the loss which actually occurred”:
- Should the Court consider only the effect of the particular breach of warranty committed by MOK (i.e., only the effect of its surveyor’s failure to issue a certificate)? If so, MOK’s breach arguably would not have increased the risk of water contamination, and MOK would be able to rely on section 11 to negate its breach of warranty.
- Alternatively, should the Court consider the effect of non-compliance with the warranty as a whole (i.e., the effect of both not inspecting and not certifying the pipelines)? If so, non-compliance with the warranty as a whole would probably have increased the risk of contamination, and MOK would not be able to rely on section 11.
Dias J preferred the second view, holding that section 11 was directed at the effect of compliance with the entire warranty and not with the consequences of the specific breach by the insured, and that paragraph 96 of the Explanatory Notes to IA 2015 supported this reading. Accordingly, MOK’s breach of warranty would have been fatal to its claim.
Implications for policyholders – English law
Neither of the findings discussed are policyholder-friendly.
That said, Dias J’s finding that the mere fact of defective blending cannot constitute damage intuitively accords with the reason why mere defects are not covered under all-risks insurance – namely, that all-risks insurance is not meant to guarantee the proper manufacture or construction of the property insured. A parallel can be drawn with construction all-risks policies, which typically do not cover the costs of rectifying defects in design or workmanship. Apart from this, the F1 is also significant for being the first case to explicitly endorse the applicability of Bacardi in an insurance context (Bacardi having been concerned with a dispute under a supply of goods contract).
As for section 11 of IA 2015, this case (as noted in an earlier article) is significant for being the decision to consider that section. That said, Dias J’s observations (i.e. that it is the effect of non-compliance with the entire warranty, rather than the insured’s particular breach, that should be taken into account) were obiter and it remains to be seen whether another Court would agree with her. In our view, notwithstanding Dias J’s observations, the use of the definitive article in section 11(3) (“the non-compliance”) might suggest on the contrary that it is the insured’s particular breach that should be looked at.
Implications for policyholders – Singapore Law
The authors – both of whom are APAC-based – will briefly consider the implications of this decision for Singapore law, a commonwealth jurisdiction whose law of insurance substantially reflects the English position prior to IA 2015.
There do not appear to be strong reasons why a Singapore Court would not consider Dias J’s findings on the issue of defective blending persuasive.
However, Dias J’s observations on section 11 of IA 2015 have less relevance. Under Singapore law, a breach of warranty has a draconian effect – the insurer is discharged from liability from the date of an insured’s breach of warranty: see section 33(3) of the Singapore Marine Insurance Act 1906. There is no equivalent of section 11 of IA 2015 that a policyholder can look to negate the breach of warranty. The Singapore law position accords with what had been the English law position prior to 2015, and its harshness was the reason behind the English reforms to insurance warranties as set out in the IA 2015.
Authors:
Toby Nabarro, Director Singapore
Reinsurance Cover for Covid BI Losses Upheld on Appeal
In UnipolSai Assicurazioni SPA v Covea Insurance PLC [2024] EWCA Civ 110, the Court of Appeal has upheld the first instance finding that the reinsured (Covea), having paid out substantial sums in respect of Covid business interruption (BI) losses, were entitled to indemnity under property catastrophe excess of loss policies with reinsurers. The decision provides clarification on the operation of aggregation clauses and the proper interpretation of a “catastrophe” in treaty reinsurance arrangements.
Covea provided cover for a large number of children’s nurseries which were forced to close between 20 March 2020 and July 2020, as a result of the pandemic. The factual background and outcome at first instance are explained in detail in our earlier article. The decision was appealed by reinsurers and the following questions arose for re-evaluation:
1. Whether Covid-19 losses arose out of, and were directly occasioned by, a “catastrophe”; and
2. Whether the “Hours Clause” - by which the duration of any “Loss Occurrence” was prescribed depending on the nature of the underlying peril - meant that:
(i) an “individual loss” occurs on the date the covered peril strikes, including where the insured peril is the loss of ability to use premises; and
(ii) where the (re)insured first sustains indemnifiable BI loss within a nominated 168-hour period, subsequent losses after that period fall to be aggregated as part of a single “Loss Occurrence”.
Meaning of Catastrophe
At first instance, Mr Justice Foxton held that Covid-19 did amount to a “catastrophe,” as required under the reinsurance wording. On appeal, the reinsurers argued that a catastrophe must be a sudden or violent event, capable of causing physical damage, whereas the pandemic was an ongoing state of affairs.
The Court of Appeal rejected these submissions, highlighting the absence of any reference to an “event” within the policy wording, and noting that the unities test in Axa v Field [1996] is merely an aid to be used with broad application. Their Lordships also rejected the argument that “suddenness” was a pre-requisite for all catastrophes, and, in any event, the “exponential increase in Covid 19 infections in the UK […] did amount to a disaster of sudden onset.” The attempt by reinsurers to rely on an ejusdem generis argument, in relation to the alleged need for physical damage, was flawed, as the types of catastrophes mentioned in the policy were not intended to be a prescribed class. The expert evidence that BI cover may include cover for non-damage BI was unchallenged.
Operation of the Hours Clause
The central question for consideration under the Hours Clause was when the relevant loss occurred. If it fell outside the period stipulated, then it would not be recoverable. It was also noted that the term “Loss Occurrence” was defined in the policy to mean “individual losses”. Discussing this further, the Court of Appeal emphasised that the term “occur” means when a loss first happens during a period of time. In relation to BI specifically, it was held that when the covered peril is the loss of an ability to use the premises, the individual loss occurs at the same time, regardless of how long the financial loss continues - consistent with the approach taken by Mr Justice Butcher in Stonegate and Various Eateries. Provided the individual loss occurs within the indemnity period, the totality of that loss is covered and all of its financial consequences. An apportionment of financial loss would give rise to considerable practical difficulties and was deemed to be incorrect.
Implications for Policyholders
The decision is welcomed by cedants with the benefit of similarly worded reinsurance policies. The implications are far-reaching, with total payouts for Covid BI claims estimated in the region of £2 billion, according to the Association of British Insurers. This policyholder-friendly precedent is particularly helpful, since most reinsurance disputes are resolved in confidential arbitrations.
Authors:
Pawinder Manak, Trainee Solicitor
Climate Risks Series, Part 3: Aloha v AIG - Liability Cover for Reckless Environmental Harm
Aloha v AIG - Liability Cover for Reckless Environmental Harm
Increasing numbers of claims are proceeding around the world alleging that the public were misled about the risks associated with climate change, resulting from fossil fuels and greenhouse gas (“GHG”) emissions.
A recent decision in the Supreme Court of Hawaii, Aloha Petroleum Ltd v National Union Fire Insurance Co. of Pittsburgh and American Home Insurance Co. [2024], held that an “occurrence” in this context included the consequences of reckless conduct, and GHG emissions were a “pollutant” for purposes of a pollution exclusion under a commercial general liability policy.
Background
The Appellant, Aloha Petroleum Ltd (“Aloha”), was insured with two subsidiaries of AIG under a series of liability policies, in respect of its business as one of the largest petrol suppliers and convenience store operators in Hawaii.
The counties of Honolulu and Maui sued several fossil fuel companies, including Aloha, claiming that the defendants knew of the effects of climate change and had a duty to warn the public about the dangers of their products. It was alleged that the defendants acted recklessly by promoting climate denial, increasing the use of fossil fuels and emitting GHGs, causing erosion, damage to water infrastructure and increased risks of flooding, extreme heat and storms.
Aloha sought indemnity under the policies and AIG refused to defend the underlying claims, alleging that the harm caused by GHGs was foreseeable and therefore not “accidental”; and alternatively, seeking to rely upon an exclusion to cover for losses arising from pollution.
Aloha issued proceedings seeking a declaration that the policies would respond, and the District Court of Hawaii referred the following questions to the Supreme Court, to assist with determining the parties’ motions for summary judgment:
- Does an “accident” include recklessness, for purposes of the policy definition of “occurrence”?
- Are greenhouse gases “pollutants” within the meaning of the pollution exclusion?
Policy Wording
The policies provided occurrence-based coverage, with two different definitions of “occurrence” for the relevant periods:
- “an accident, including continuous or repeated exposure to substantially the same general harmful conditions”, or
- “an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured”
The pollution exclusion clauses varied across the policies, but the differences were immaterial for purposes of the issues before the Supreme Court.
The 2004-2010 policy excluded cover for:
“Bodily injury” or “property damage” which would not have occurred in whole or part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants” at any time.
. . . .
“Pollutants” [mean] “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”
Is Reckless Conduct Accidental?
Aloha argued that it was entitled to indemnity, as the allegations of recklessness were sufficient to establish an “accident” and therefore an “occurrence” under the policies. Aloha relied on Tri-S Corp v Western World Ins. Co. (2006), which held - in the context of unintentional personal injury resulting from proximity to high voltage power lines - that reckless conduct is accidental, unless intended to cause harm, or expected to with practical certainty.
AIG claimed that Aloha understood the climate science, and the environmental damage was intentional, not fortuitous. It relied on AIG Hawaii Ins. Co. v Caraang (1993), which held - in the context of torts involving obvious physical violence - that an “occurrence” requires an injury which is not the expected or reasonably foreseeable result of the insured’s own intentional acts or omissions.
The Supreme Court agreed with Aloha, ruling that:
“when an insured perceives a risk of harm, its conduct is an ‘accident’ unless it intended to cause harm or expected harm with practical certainty … interpreting an ‘accident’ to include reckless conduct honors the principle of fortuity. The reckless insured, by definition, takes risk.”
Are GHGs “Pollutants”?
Aloha argued that GHGs are not pollutants, because they are not “irritants” (applicable in the context of personal injury, not property damage) or “contaminants”. The drafting history was said to indicate that the exclusion should be limited to clean-up costs for traditional pollution caused by hazardous waste from the insured’s operations, not liability resulting from its finished products.
The Supreme Court held that a “contaminant”, and therefore “pollutant” for purposes of the exclusion, is determined by whether damage is caused by its presence in the environment. Although a single molecule of carbon dioxide would not be viewed as pollution, a fact-specific analysis is required, and the Supreme Court was satisfied that Aloha’s gasoline production is causing harmful climate change. This approach was supported by the regulation of GHG emissions in Hawaii and the federal Clean Air Act.
Not all of the policies contained a pollution exclusion clause, however, and the question of whether AIG is required to indemnify Aloha for that policy period (covering 1986 to 1987) will now be considered by the District Court.
Impact On Policyholders
The finding that reckless conduct is covered by liability policies in the context of climate harms is highly significant and will be welcomed by energy companies.
While the issues are yet to be fully explored in European jurisdictions, it is interesting to compare the UK Supreme Court decision in Burnett v Hanover [2021], where merely reckless conduct was insufficient to engage a ‘deliberate acts’ exclusion in a public liability policy; and the recent decision in Delos Shipping v Allianz [2024], confirming that a defence based on lack of fortuity requires the insurer to establish that consequences of the insured’s actions were inevitable, i.e. “bound to eventuate in the ordinary course”.
The precise wording of any pollution or climate change exclusion should be carefully considered prior to inception of the policy period. The causative language used can significantly alter the scope of coverage and prospects of indemnity (see, for example, Brian Leighton v Allianz [2023]).
Authors:
Climate Risk Series:
Part 1: Climate litigation and severe weather fuelling insurance coverage disputes
Part 2: Flood and Storm Risk – Keeping Policyholders Afloat
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.”
Climate Risks Series, Part 2: 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