Wheeldon Brothers Waste Limited v Millennium Insurance Company Limited
In this recent pro-policyholder decision, the Court examined the construction of Conditions Precedent and Warranties. Here, the insurer attempted, rather opportunistically, to import a meaning to these terms which was far more onerous than the common sense approach adopted by the policyholder and ultimately endorsed by the Court.
Wheeldon Brothers Waste Limited (‘Wheeldon’) owned a waste processing plant (‘the Plant’) situated in Ramsbottom. The Plant received a number of combustible and non-combustible wastes, and, via a number of separation processes, produced a fuel known as 'Solid Recovered Fuel.’
Wheeldon had a policy of insurance (‘the Policy’) with Millennium Insurance Company (‘Millennium’), who provided cover against the risk of fire.
In June 2014, a major fire occurred at the Plant, which was believed to have been caused by the collapse of a bearing on a conveyor. Prior to the fire, Millennium had appointed a surveyor to undertake a risk assessment, which led to the issuing of “Contract Endorsement No 1” (‘CE1’). CE1 required compliance with a number of Risk Requirements, each of which was incorporated into the Policy as a condition precedent to liability.
Millennium refused to indemnify Wheeldon following the fire, relying upon the following grounds (‘the Grounds’):
- A failure to comply with the Risk Requirement relating to the storage of Combustible Materials at least six metres from any fixed plant or machinery (‘the Storage Condition);
- A breach of warranty requiring the removal of combustible materials at the close of business each day (‘the Combustible Materials Warranty’);
- A breach of the condition relating to the maintenance of machinery (‘the Maintenance Condition’);
- A breach of the condition relating to housekeeping (‘the Housekeeping Condition’).
Wheeldon issued proceedings against Millennium.
Before addressing the Grounds, the Judge was first required to make a finding on the cause of the fire.
Millennium asserted that the fire was caused by heat or fragments leaving ‘the housing of the bearing’, causing the usual materials that drop through the machine to catch and burn. Wheeldon, however, argued that the fire was the result of smouldering, which was caused by combustible materials falling through a ‘gap’ in the housing of the conveyor, which had been created by the failed bearing.
The Judge rejected Millennium’s explanation. The available photographs and CCTV stills showed no evidence of the material they referred to, and the presence of burn marks (on which Millennium placed huge emphasis) was inconclusive.
- The Storage Condition
The Judge approached the issue of whether there had been a breach by dealing with the following questions:
- Was there combustible waste?
- Was it in a storage area?
- Was it within 6 metres?
The parties disagreed as to the meaning of “combustible” in the Policy, notwithstanding that their experts agreed that it had the scientific meaning of “anything that burns when ignited.”
Wheeldon’s expert argued that a lay person would not consider all materials which fell within the scientific meaning to be combustible. By contrast, Millennium’s expert said that the entire process involved combustible materials, and that none of the separation processes would have been totally effective at excluding combustible materials.
The Judge, deploying a reasoning that will be welcome to all policyholders, said that, if Millennium had intended “combustible” to mean anything other than what would be understood by a layperson, it should have made that clear in the Policy.
As to the meaning of “storage”, Millennium said that this meant that “such materials had to be placed (or kept) 6 metres from fixed plant or machinery …” Wheeldon rejected that interpretation, asserting that “storage” meant something deliberate i.e. it was an area in which things were intentionally placed.
The Judge preferred Wheeldon’s construction, finding that “storage” imported a degree of permanence, and a deliberate decision to designate an area to place and keep material.
On the evidence available, the Judge found there was no combustible waste, in any storage area, within six metres of any fixed plant or machinery. Accordingly, there was no breach of the condition.
- The Combustible Materials Warranty
Wheeldon argued that there was no breach. They said that a visual inspection was always undertaken, and that their employees were required to carry out the necessary cleaning each day.
By contrast, Millennium asserted that the photographs revealed the presence of non-combustible material, and said there was no evidence that those materials had been removed.
Although evidence of a system was, without more, insufficient, the Judge accepted Wheeldon’s evidence that not only was there a safe system in place, but crucially that it had been adhered to. There was therefore no breach of warranty.
- The Maintenance Condition
This requirement, a condition precedent, required Wheeldon to maintain all machinery in efficient working order in accordance with the manufacturer’s specifications and guidelines, and keep formal records of all such maintenance.
The Judge found that the failure of the bearing did not, without more, conclusively mean that there was a breach of the Maintenance Condition. In any event, there was no evidence of any breach.
As to the requirement to keep formal records, Wheeldon said that their system of daily and weekly checklists was adequate. Millennium disagreed, and said that (what they described as) “brief manuscript” notes in a diary were insufficient to constitute formal records.
The Judge agreed with Wheeldon, and said that, if Millennium required records to be kept in a particular format, they ought to have prescribed that format in the Policy. As they had failed to do so, there could be no breach.
- The Housekeeping Condition
This was also a condition precedent, which required Wheeldon to have procedures in place to ensure a good level of housekeeping at all times, to keep clean all areas of the site to minimise fire risk, to record in a log formal contemporaneous records of Cleaning and Housekeeping in a log book covering areas cleaned.
Wheeldon said that they had a good system of housekeeping in place, which was structured around daily and weekly checklists that covered all the machines, and which focussed on the risks of fire. Millennium disagreed, asserting that there was no evidence of procedures being undertaken at the end of the day to clean up combustible materials.
Once again, the Judge found that there was no breach. The CCTV footage showed that there was regular and effective cleaning, and the Judge found that daily and weekly records were sufficient. As above, if Millennium had a different requirement in mind, they should have spelt that out in the Policy.
As Millennium had failed to make out their case on any of the Grounds, judgment was given for Wheeldon.
Summary
This decision in Wheeldon is a welcome one for policyholders, and illustrates that an insurer will be unable to rely on a breach of condition or warranty, if the actions required by the policyholder are unclear or lacking particularity.
Alex Rosenfield is an associate at Fenchurch Law
Insurance Cover for Combustible Cladding
Insurance Cover for Combustible Cladding
Dame Judith Hackitt’s Review of Building Regulations and Fire Safety recommends radical integrated change to the regulatory system covering high-rise and complex buildings, reflecting the realisation after Grenfell that previous oversight of the myriad activities and conflicting motivations involved in the construction of dwellings is not fit for purpose, to ensure safety of all occupants.
Focus on delivery and preservation of high quality buildings is of crucial importance for society and stakeholders across the industry. Challenges remain for many property owners and construction businesses affected by combustible cladding to existing structures, and insurers have a significant role to play in facilitating appropriate risk transfer and keeping buildings safe.
Recommendations
The report highlights misunderstanding of ambiguous or inconsistent guidance, lack of clarity on roles and responsibilities, competence issues, lack of transparency in product testing and approval, and inadequate enforcement tools as key problems underpinning the failure, creating a ‘race to the bottom’ culture that does not promote good practice. A clear model of risk ownership is proposed, held to account by a new Joint Competent Authority operating under a simpler and more effective regulatory framework, with audit trails of information throughout the life cycle of a building, from planning to occupation and maintenance. A ban on inflammable cladding is due to be implemented later this year through changes to building regulations, but this will not apply retrospectively where materials have already been fitted.
Remedial Costs
Removal and replacement of unsafe cladding by councils and housing associations will be government funded at a cost of approximately £400 million. Sajid Javid has said that freeholders of private developments have a ‘moral responsibility’ to pay for rectification without levying the costs through service charges, affecting thousands of leaseholders in 130 apartment complexes in England that failed cladding tests since the tragedy in June 2017. The allocation of responsibility in each case will depend on the leasehold arrangements and any latent defects insurance or housing warranty.
The London Residential Property Tribunal ruled in March against residents of the Citiscape complex in Croydon over the management company’s right to recover costs of replacement cladding and fire safety marshals, in circumstances where the leasehold repairing obligations and service charge covenants were co-extensive, before the developer and freeholder stepped in to cover remedial works of around £2 million. At the New Capital Quay development of 1,000 homes in Greenwich, completed in 2014, legal proceedings are reportedly underway between the management company and NHBC warranty provider, to determine liability for c.£40 million costs of Grenfell-style cladding, certified as compliant with building regulations at the time of installation.
LDI and New Home Warranties
Latent defects insurance (LDI) can be obtained affording first party cover to both homeowners and developer from practical completion, to rectify damage or imminent damage arising from pre-existing defects. Insurers typically look to recover the loss from any negligent professional involved in the construction process. LDI can avoid costs and delay associated with apportioning fault where previously accepted industry standards are exposed as inadequate (see also MT Hojgaard), and protect against contractor insolvency risk. Take up has increased in recent years, attracting investors and tenants.
The Council of Mortgage Lenders requires a 10 year warranty or insurance policy to lend for new build residential homes. Standard new home warranties provide cover for homeowners against actual or imminent damage caused by structural defects or breach of building regulations prior to completion, subject to initial 24 months’ period where the developer is liable to rectify. The ‘immediacy’ of damage arising from unsafe cladding will depend on evaluation of the surrounding circumstances including materials used, component parts of the structure, maintenance history and overall safety systems.
Insurance claims may be especially important for owners of property blighted by combustible cladding given the difficulty in law of recovering pure economic loss (i.e. in the absence of physical damage) without a direct contractual relationship or collateral warranty with any party considered responsible for design, installation or certification of unsafe systems.
Next Steps
The first substantive hearings of the Grenfell Inquiry led by Sir Martin Moore-Bick commence today with tributes from friends and family of the 72 victims, as part of a fact-finding process to investigate how such a disaster could have occurred, alongside a police probe into alleged criminal offences.
It is hoped that industry leadership will recognise and wholeheartedly support the cultural shift required, seizing the opportunity to restore public confidence and improve safety standards in the construction and maintenance of buildings for the benefit of all.
The scope of insurance cover for cladding claims is likely be contentious given the scale of market exposure and policyholders should consider specialist advice on applicable wordings, to notify claims broadly and maximise potential recoveries.
Amy Lacey is a partner at Fenchurch Law
Contractors Beware: Defects Liability and Project Insurance Coverage
Energy firm SSE Generation has been awarded in excess of £100m damages on appeal over a tunnel collapse nearly ten years ago at the Glendoe hydroelectric power scheme in Scotland (SSE Generation v Hochtief Solutions [2018] CSIH 26). The Inner House, Court of Session, decided by a majority of 2:1 that the contractor was liable for costs of repair due to breach of the requirement that erodible rock encountered in the tunnel be shotcreted if not otherwise protected, despite having exercised reasonable skill and care, as defects were in existence at take-over by the employer. The contractor could not rely on a contractual limitation of liability for design defects as the damage was caused by implementation of the design (i.e. workmanship).
Further, there was no implied term preventing the employer from bringing proceedings against the contractor, notwithstanding a joint names construction all risks policy, in view of express contract terms apportioning liability for claims due to an event at each party’s risk. Consistent with Gard Marine v China National Chartering Co [2017] UKSC 35, it was acknowledged that a requirement for joint insurance could lead to an implied term that claims between contracting parties were not permitted, and the Supreme Court’s use of language in that case such as “inconceivable” and “absurd” when referring to the possibility of a subrogated claim were “powerful contra-indicators”. However, the joint insurance required under the Glendoe contract indemnified loss or damage to the works, not breach of contract by the contractor in failing to carry out repairs, so the policy would not cover the employer’s claim on the facts in any event.
The decision is also notable in considering the Works Information requirement for a “design life” of 75 years. Following the Supreme Court decision in MT Højgaard v Eon [2017] UKSC 59, it did not mean the contractor was warranting that the works would in fact last for the specified period without “major refurbishment or significant expenditure”. Rather, the obligation was met if the contractor handed over the works with such a design life and the employer had the whole of the defects period to determine whether the works did in fact have that design life. The question of compliance therefore fell to be determined at the defects date, which may be difficult to assess in some instances, but not here, as the tunnel collapse had already occurred.
This comes hot on the heels of Haberdashers Aske v Lakehouse [2018] EWHC 588 (TCC), providing welcome clarification on the issue of how sub-contractors in the construction industry obtain the benefit of project policies. The Judge identified three different ways of analysing the situation - based on agency principles, a standing offer, or acceptance by conduct - and decided that in any case the roofing sub-contractor did not benefit from cover under the project policy (which included a waiver of subrogation term), given that it had obtained separate liability insurance with a limit of £5m in accordance with express contract terms. It was accepted that cover would otherwise be available under the project insurance to sub-contractors as additional insureds for specified perils including fire damage. The project insurers had funded settlement of claims against the main contractor for £8.75m and the subrogated claim was limited to the extent of the sub-contractor’s insurance, leaving open the question of whether a project policy might (partially) respond to losses claimed against a sub-contractor in excess of separate policy limits.
Performance obligations and insurance requirements in construction contracts must be carefully considered to ensure appropriate allocation of risk, scope of cover and limits of indemnity. If the parties intend to create an insurance fund as the sole avenue for making good the relevant loss, this should be expressed in clear and unambiguous terms. Subject to interpretation in individual cases, a sub-contractor agreeing to obtain separate liability insurance may be exposed to subrogated claims from any project insurer, even if the loss in question was covered by the project policy.
Amy Lacey is a partner at Fenchurch Law
Avoid getting out of your depth with notifications – the Court considers the scope of notification in Euro Pools plc v Royal & Sun Alliance Insurance plc
In Euro Pools Plc v Royal & Sun Alliance Insurance Plc[1] the Court considered (amongst other things) the scope of notifications made to two successive design and construct professional indemnity policies.
The Insured
The Insured, Euro Pools plc, was in the business of designing and constructing swimming pools. The pools were designed with moveable floors, so that their depth could be increased and decreased, as well as moveable booms by which the length of the pool could be altered. (By raising the boom, a large swimming pool could be divided into two smaller pools.)
The Policies
The Insured had a professional indemnity policy with RSA for the period June 2006 to June 2007 (the “2006/07 Policy”), and a subsequent policy for the period June 2007 to June 2008 (the “2007/08 Policy”). As is usual with professional indemnity policies, they were written on a claims-made basis, with both policies providing that the Insured should notify the insurers:
“as soon as possible after becoming aware of circumstances…..which might reasonably be expected to produce a Claim”.
The Policies provided that any Claim arising from such notified circumstances would be deemed to have been made in the period of insurance in which the notice had been given.
The February 2007 notification to the 2006/07 Policy
The booms operated by way of an “air-drive” system, by which they were raised and lowered by applying or decreasing the air pressure in the booms.
In February 2007 a defect became apparent, whereby air was escaping from the booms and water was entering, resulting in the booms failing to raise and lower as intended. The Insured at this time did not consider that there was any issue with the air-drive system itself, and that instead the issue could be resolved within the Policy excess by inserting inflatable bags into the booms. The Insured made a notification to that effect (“the February 2007 notification”).
The Insured also notified an issue in respect of the moveable floors, which needed urgent attention at a cost which exhausted the 2006/07 Policy limit of £5 million.
The May 2008 notification to the 2007/08 Policy
By May 2008 the Insured had experienced problems with the inflatable bags that had been used in the air-drive system and reached the conclusion that there was an issue with the air-drive system itself, which would need to be replaced with a hydraulic system. The Insured notified this issue to the 2007/08 Policy year (“the May 2008 notification”).
Attachment
The Court considered whether the claim for the costs of replacing the boom system attached to the 2006/07 Policy by virtue of the February 2007 notification or the 2007/08 Policy by virtue of the May 2008 notification. As the 2006/07 Policy limit was already exhausted it was in insurers’ interests for the claim to attach to the 2006/07 year, but was not in the Insured’s.
What was necessary was for there to be both a causal, as opposed to a coincidental, link between the claim as made and the circumstance previously notified (as set out in Kajima UK Engineering Ltd v Underwriter Insurance Co Ltd[2]). In addition, the Insured was only able to notify circumstances of which it was aware at the time of notification.
The Court held that the Insured was not aware of the need to switch to a hydraulic system for the booms at the time of the February 2007 notification, and so could not have notified this issue as a circumstance. In addition, there was also not a causal link between what was notified to the 2006/07 year (an issue with the boom which could be remedied easily and not an issue with the air-drive system itself) and the subsequent claim relating to replacing the air-drive system with a hydraulic one.
The Court upheld the principle of a “hornet’s nest” or “can of worms” notification: where there is uncertainty at the time of the notification as to the precise problems or potential problems, the insured can make a notification of wide scope, to which numerous types of claims may ultimately attach. However, such a notification had not been made in this instance.
Lessons for policyholders
The case again highlights the issues that can arise in respect of notifications of circumstances, especially when made during a developing investigation. The overarching message is that in each case the extent and ambit of the notification and the claims that will be covered by such notification will depend on the particular facts and terms of the notification.
Although in this instance the Insured was aware of an issue with the booms in February 2007, the notification was held to be limited as a result of the Insured’s view that this was not a problem with the air-drive system itself, which was not considered to be the issue until the 2007/08 Policy year and the May 2008 notification. Applying a narrow interpretation of Kajima, the Court determined that it was not enough that the issue with the air-drive system was discovered as part of the continuum of investigations instigated following the initial discovery of issues in 2007.
In Kajima the insured had notified distortion of external walkways and balconies in a housing development due to settlement and, subsequently and following further investigation, discovered separate defects at the development (for instance in relation to the kitchens and bathrooms). The Court held that the defects that were discovered after the notification did not arise from the defect notified as a circumstance so as to attach to the Policy, as there was not a sufficient relationship between the defects notified and the separate defects discovered subsequently. Whilst the same reasoning was applied in the current case, arguably the position differed in Euro Pools as the Insured was aware of the defect (the malfunctioning boom) at the time of the notification, and did notify circumstances in relation to it. It was the cause of the defect of which the Insured was not aware at the time of notification.
This narrow interpretation worked in the Insured’s favour, given that the May 2008 notification was deemed to be valid and insurers did not seek to rely upon a clause within the 2007/08 Policy which excluded the consequences of any circumstances notified under any prior insurance or known to the insured at the inception of the insurance. However, the narrow interpretation of the scope of the May 2007 notification will not be to an insured’s benefit in other circumstances where, for instance, they do not have cover under a subsequent policy.
Policyholders can seek to avoid uncertainty by ensuring that careful consideration is given to the wording of any notification. If the policyholder intends the notification to have a wide scope so as to cover the widest possible range of claims arising out of a circumstance in a “can of worms” style, then the notification should be drafted in as broad a manner as possible so as to achieve this, subject to the overarching criterion that an insured can only notify a circumstance of which it is aware.
[1] [2018] EWHC 46 (Comm)
[2] [2008] EWHC 83 (TCC)
Tom Hunter is an associate at Fenchurch Law
Bluebon Ltd (in liquidation) – v – (1) Ageas (UK) Ltd (2) Aviva Insurance Ltd (3) Towergate Underwriting Group Ltd (2017)
What was the proper construction of an electrical installation inspection warranty?
Bluebon Limited (‘Bluebon’) brought proceedings against their insurers, Ageas and Aviva (‘the Insurers’), and their broker, Towergate, following a fire at their premises at the Star Garter Hotel, West Lothian (‘the Hotel’) on 15 October 2010.
Bluebon had purchased the Hotel in December 2007, and the relevant insurance policy (‘the Policy’) incepted on 3 December 2009, for a period of 12 months.
The Policy contained the following Electrical Installation Inspection Warranty (‘the Warranty’):
“It is warranted that the electrical installation be inspected and tested every five years by a contractor approved by the National Inspection Council for Electrical Installation (NICEIC) and that any defects be remedied forthwith in accordance with the Regulations of the Institute of Electrical Engineers.”
The last electrical inspection at the Hotel had taken place in September 2003.
The insurers asserted that there had been a breach of the Warranty since no inspection had been carried out in the 5-year period immediately prior to inception, with the result that the Policy was either voided or suspended from inception.
At a hearing of preliminary issues, the Judge, Mr Justice Bryan, was required to determine the following:
- The proper construction of the Warranty – was the five-year period to be calculated from the date of the last electrical inspection, or from Policy inception?
- Was the Warranty a True Warranty, a Suspensive Warranty, or a Risk Specific Condition Precedent, and what was the consequence of a breach?
The First Issue
The Insurers argued that the natural meaning of the Warranty was that the 5-year period had to be calculated from the date of the last inspection, and, if no inspection had been carried out in the last 5 years, the inspection would have to be undertaken prior to or immediately upon inception (with there being no cover until such inspection had taken place). In support of that analysis, they said that the Warranty did not require the inspection to occur within 5 years of inception, and that a reasonable person, having all the background knowledge available to the parties, would know that inspections needed to be undertaken regularly.
Bluebon argued, perhaps optimistically, that the proper construction of the words “be inspected and tested every five years” meant “every five years starting with the date of imposition of the stipulation” i.e. from Policy inception. In support, Bluebon said that the language of the Warranty was “forward-looking”, and that if the Insurers had intended otherwise, the Policy could have stated “has been inspected and tested” or “is inspected and tested.”
The Judge found that Bluebon’s construction made no commercial sense in the context of a 12-month policy, and rendered the Warranty meaningless, since there would be no requirement for an electrical inspection until (at least) after the fourth annual renewal. This provided no protection from the risk of fire and, unsurprisingly, Bluebon’s construction was rejected. It followed that Bluebon had not complied with the Warranty.
The Second Issue
The Insurers’ primary case was that the Warranty was a True Warranty i.e. a term which took effect as a condition precedent to the existence of any cover, such that the breach rendered the Policy void from inception. Alternatively, they said the warranty was a Suspensive Warranty, which had the effect of suspending cover during the period of the breach. Neither construction required a causal link between the breach and the fire, and, accordingly, the Insurers asserted that they had no liability to Bluebon.
Bluebon, by contrast, argued that the Warranty was a ‘Risk-Specific Condition Precedent’ i.e. a term which required compliance as a condition precedent to the Insurers’ liability to provide cover in respect of risks relating to the electrical installation. Put another way, Bluebon said that unless the fire was caused by the electrical installation, their breach was irrelevant.
The Judge again rejected Bluebon’s argument, finding that it would be entirely unbusinesslike for the Warranty to suspend cover in respect of losses arising from defects in the electrical installation (pending inspection of the installation), but not for losses arising out of the fire generally. The Judge’s interpretation was that, while the Warranty was breached, there could be no cover for any losses arising out of fire.
Having regard to his findings on the proper meaning of the Warranty, the Judge found that the Warranty was a Suspensive Condition.
Insurance Act 2015 implications
Although the outcome in Bluebon may not be particularly surprising, it is interesting to consider whether it would have been decided differently under the Insurance Act (‘the Act’).
The Act does not change what an insurance warranty is, but does change the effect if breached. Under Section 11 of the Act, an insured will be protected in the event of a breach of warranty. Providing that it can show that the term was ‘totally irrelevant to the loss’ i.e. the breach “could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.”
There are two interpretations of how Section 11 might have applied in Bluebon (or for that matter generally), both of which have been postulated by the Law Commission.
Under the ‘non-causation’ interpretation, the Insurers would have been entitled to rely upon the breach of the Warranty, because the absence of an electrical inspection might have made a difference, given the type of loss that occurred i.e. a fire. It would not have been open to Bluebon to argue that the fire would have started even if the electrical inspection had taken place.
Under the ‘causation’ interpretation, it would have been open to Bluebon to establish that the fire was due to some other cause, so that the Insurers would be liable under the Policy. That is because, in that scenario, the ‘circumstances’ of the loss were such that compliance with the Warranty would not have made any difference.
Of course, unless and until the true meaning of Section 11 is determined by the Courts (and, given its importance, the point is likely eventually to end up at the Supreme Court), the interpretation will doubtless remain a matter for debate.
Alexander Rosenfield is an associate at Fenchurch Law
Business Interruption Claims - Improving Outcomes for Policyholders
Insurers are set to pay out a record $135 billion to cover losses from natural catastrophes in 2017, driven by the costliest hurricane season ever in the United States and widespread flooding in South Asia. Extreme weather events such as recent mudslides and wildfires, as well as industrial disasters and acts of terrorism, often cause damage affecting many businesses, bringing into focus the issue of policy response for BI claims involving wide area damage.
Policy Wordings
Standard UK policy wordings provide BI cover for interference to revenues caused by loss or damage to the insured’s property (the “Incident”). The link to physical damage is maintained for purposes of the “Other Circumstances” clause, which provides that adjustments shall be made as appropriate to reflect trends in turnover affecting the business at the relevant time, so the level of indemnity represents so far as reasonably practicable the loss of profits that would have been achieved but for the Incident. This does not encompass interruption consequent upon damage within the surrounding area and is not synonymous with operation of the insured peril itself, which can give rise to anomalous results and severely limit policyholders’ recoveries.
Windfall Profits
In the aftermath of a catastrophic event causing wide area damage not all businesses will be affected in the same way. Despite a general downturn in the local economy, some businesses will experience increased demand (provided they are able to continue trading), for example builder’s merchants supplying materials for reconstruction or those catering for an influx of claims handlers, while similar operations shut down by the damage sustained may be deprived of the opportunity to enjoy such “windfall profits”. There is some reluctance by certain parts of the insurance market to agree to cover lost windfall profits, but in principle the Other Circumstances clause works both ways and policyholders should be able to invoke an upward trend in appropriate cases, subject to adequacy of the overall sum insured.
UK Legal Position
The issue of whether the Other Circumstances clause can or should be used to adjust the standard turnover to reflect trends resulting from an event causing damage not only to the insured’s property, but also to the wider geographical area, was considered by the English courts in Orient-Express Hotels v Generali [2010]. Prior to this some disputes over holiday resorts in the Far East, subject to UK policy wordings, had gone to arbitration and been variously decided both in favour of and against the respective insureds.
The Orient-Express case considered the impact of Hurricane Katrina on a luxury hotel in New Orleans, and the owner’s appeal on points of law following arbitration. In summary, the hotel suffered significant physical damage from wind and water resulting in its closure throughout September and October 2005, and partially reopened in November, albeit with limited amenities and ongoing repairs. A state of emergency had been declared and mandatory evacuation of the city ordered on 28 August, and lifted at the end of September. Insurers rejected the owner’s claim for BI losses during closure of the hotel by applying the trends clause, arguing that New Orleans was effectively closed throughout this period and the adjusted standard turnover should be zero.
The owner argued that: it was entitled to indemnity for losses caused by insured damage even if concurrently caused by damage in the vicinity (The Miss Jay Jay [1987]); a reasonable interpretation should not permit adjustment of the consequences of the same insured peril which caused the insured damage; the trends clause was effectively being treated as an exclusion, which it was not; the precise reasons for cancellations and reduced revenue were likely to be a combination of factors, which could not sensibly be separated from each other evidentially; and insurers’ position had the remarkable result that the more widespread the impact of a natural peril, the less cover is afforded by the BI policy for the consequences of damage to insured property.
The Commercial Court disagreed with these submissions, upholding the tribunal’s conclusion that a “but for” causation test was appropriate in accordance with the policy wording, so that the BI loss was to be assessed on the hypothesis that the hotel was undamaged but the city was devastated, as in fact it was. Permission to appeal was granted, however, and it was subsequently rumoured in academic circles the Court of Appeal might have taken a different view, had the case not settled by then.
US Approach
BI forms in the US generally refer to “Direct physical loss of or damage to property, including personal property in the open or within 100 feet, at premises described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss”. The link to physical damage for claims involving wide area loss is not as strong as the standard UK wording.
Many US policies include a loss determination provision specifically excluding windfall profits caused by the impact of the insured peril. Nevertheless it is interesting to note the decision in Berkshire-Cohen LLC v Landmark Aon Insurance (2009), in which the claimant realty agents were successful in recovering windfall profits due to increased demand for rental properties following Hurricane Katrina, despite the exclusion clause. The reasoning was that both storm and flood damage had occurred with only the former being a covered cause of loss, and in the US (as in most of mainland Europe) flood is a contingency addressed by the government rather than by insurance. The US District Court therefore held that, whilst the exclusion applied to storm damage under which the property damage claim was presented, it did not apply to an upward trend based on flood damage.
Practical Difficulties
The UK legal position reflected in Orient-Express has been criticised as unsatisfactory for both insurers and policyholders in applying a downward trend or “windfall loss” under the Other Circumstances clause in response to wide area damage during the period when the insureds themselves were affected by their own property damage. Most policyholders expect their loss to be measured in relation to the impact of the event that caused both damage at their premises and more widely, and consider arguments otherwise to be unjust and artificial.
Furthermore, this is in contrast to the approach adopted by the UK market following previous incidents including the City of London bombing in 1992, and severe Cumbrian flooding in 2009. In Cockermouth all businesses on Main Street were submerged to a depth of six feet or more and reconstruction works continued for around six months. A strict application of Orient-Express would have resulted in limited if any BI cover for individual insureds, who would have suffered a severe downturn irrespective of their own damage. Although the reduction might be offset in some cases by windfall profits and “non-damage” denial of access/loss of attraction extensions, subject to inner policy limits, such an outcome seems paradoxical at best and would have been reputationally damaging for insurers.
Potential Solutions
As firms become more exposed to major disasters and subsequent business interruptions as a result of increasingly complex global networks, improvements are required to ensure optimal coverage and effective risk management. It seems that insurers always intended to pay for losses that insureds would have suffered based on their own damage and challenges remain for the market to develop suitable wordings fully consistent with this approach, avoiding punitive application of the “but for” test in wide area damage scenarios that does not reflect well on the industry.
Amy Lacey is a Partner at Fenchurch Law
Fenchurch Law recognised for claims dispute expertise with tier one ranking in Legal 500
Fenchurch Law, the leading UK firm working exclusively for policyholders and brokers on complex insurance disputes, has received a tier 1 ranking in the latest Legal 500, marking an important milestone in the firm’s commitment to improving policyholder outcomes.
David Pryce, managing partner, said: “From the very launch of the firm seven years ago, our aim has been to provide insurance policyholders with access to the same levels of legal expertise and support that insurers have in dealing with complex claims disputes.
“To be recognised for both our policyholder litigation expertise and our client-focused ethos is testament to the commitment of the team to ensuring there is a level playing field in the resolution of disputes.”
“This recognition also comes in no small part thanks to the support and shared commitment of the insurance broking community to improving outcomes for policyholders. We will continue to work with them to develop our services and capabilities to reflect the evolving needs of policyholders to support their clients through complex disputes.”
Legal 500 recognised the Fenchurch Law team’s legal and policyholder litigation capabilities and expertise and its client-focused ethos. David Pryce was recognised as a leading individual in insurance litigation and partners Daniel Brooks and Amy Lacey were also rated as next generation lawyers.
Has the Enterprise Act Expanded the Duty of Fair Presentation?
For more than a century after the Marine Insurance Act of 1906, the law relating to insurance contracts was a territory into which parliament did not venture, ceding it instead to the courts. By 2015, though, Parliament was launching a full-scale invasion. The Insurance Act of that year replaced the old duty of disclosure with a new “Duty of Fair Presentation” and fundamentally reformed the remedies prescribed by law both for breach of the Duty of Fair Presentation (by introducing the concept of proportionality) and for breach of warranties.
A year later the Enterprise Act 2016 introduced a brand new right to claim damages from insurers for unreasonable delay in the payment of claims. On the face of it, each of the two Acts creates its own seemingly unrelated code of rights, obligations and remedies with no obvious interplay or knock-on effect. However, the question arises as to whether circumstances particular to the insured, which make the insurer vulnerable to a damages action if it delays in paying claims, are circumstances which, in the wake of the Enterprise Act 2016, fall within the Duty of Fair Presentation created by the Insurance Act 2015.
Legal Ingredients of a Claim for Damages for Late Payment
In assessing whether the information encompassed within the Duty of Fair Presentation has been broadened by the Enterprise Act, one first has to consider what is needed to found a claim for late payment.
A number of ingredients must be present if an insured is to be entitled to damages for loss caused by breach of an insurer’s duty to pay claims within a reasonable period. Aside from showing it has a valid claim under the policy in the first place, that the insurer’s delay was unreasonable, that the loss for which compensation is sought was caused by the insurer’s delay and that it has taken steps to mitigate its loss, the insured also has to show that the loss suffered as a result of the delay was foreseeable or contemplated by the parties at the time the policy was entered into.
The classic case for late payment damages is likely to be a property loss - e.g. at industrial premises where, say, a particular item of machinery is crucial to production and, unless it is quickly replaced following an insured event, the insured will suffer significant loss of production or even be put out of business. To found a claim for late payment damages, such eventualities must have been forseeable as at the date the policy was entered into. The insured would have to show, for example, that it was or should have been in the contemplation of the insurer at the time the policy was taken out that production turned on the availability of a particular machine and that the insured would rely on insurance proceeds if that machine were damaged because it would not be able to finance replacement through any other means. This means that the prospects of establishing a claim for damages will be greatly enhanced if the insured informed the insurer of these particular vulnerabilities when the policy was taken out.
Impact on the Duty of Fair Presentation
The question then arises as to whether it is simply prudent to tell the insurer about such vulnerabilities or whether the insured has a duty to do so.
The information that must be contained within the “Fair Presentation” of the risk by the insured is defined in section 7(3) of the Insurance Act 2015 as that which would “influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms”.
The “risk” in question is the risk of damage from an insured peril. In our classic case it is the risk of damage to or destruction of the insured property from insured perils. On the face of it, the importance of the property to the insured’s business or the ability of the insured to raise finance for replacement of the property if damaged has no bearing on the risk of damage from an insured peril occurring (although different considerations could well apply if the insurance had business interruption cover attached to it). These particular vulnerabilities wouldn’t seem to have any bearing on the pure underwriting decision as to the susceptibility of the insured to suffer damage from an insured peril.
What these vulnerabilities do have a bearing on is the insurer’s risk of exposure to a late payment damages claim. The key point is whether the risk of exposure to such a claim is part of the “risk” contemplated by section 7(3), so that the insured has a duty to disclose such circumstances to the insurer (rather than simply being well advised to do so in order to enhance the prospects of a claim for late payment damages should such a claim become necessary).
Until the courts look at the question there is no clear answer. On the one hand section 7(3) is ostensibly dealing purely with the insured risk. This is the risk upon which the judgment of the underwriter is exercised, be that the risk of flood, fire or storm. Since the risk of exposure to late payment damages is not an insured risk and instead one to which the insurer exposes itself by its own unreasonable delay rather than by reason of some fortuity over which neither insured nor insurer has control, there is good reason for saying that section 7(3) does not extend to circumstances relevant only to the recoverability of late payment damages.
On the other hand, section 7(3) contemplates the provision by the insured of any and all information relevant to the insurer’s willingness to provide a policy at all or, if so, on what terms. It may be that an insured with particular vulnerabilities that would set up a late payment damages claim is not the sort of insured the insurer would want to write cover for at all, making such information “material”. Even if the insurer would still be prepared to write cover notwithstanding such knowledge it might be prompted to require a term in the policy excluding the application of the Enterprise Act (the Act allows an insurer to contract out when not insuring consumers) or a term that caps exposure to late payment damages or it might simply charge a higher premium.
Perhaps the most significant consideration is the provision in section 7(4) which defines as material “any particular concerns which led the insured to seek insurance cover for the risk”. In some cases the vulnerabilities of the insured that would be the basis for a claim for late payment damages may be precisely what led the insured to take out the insurance in the first place.
Conclusion
Certain brokers are recommending that their clients tell insurers about circumstances that would make them vulnerable if claim payments were delayed because it helps lay the foundation for any late payment damages claim that might become necessary. In light of the uncertainty around whether such circumstances are material to the “risk” for the purposes of section 7(3) of the Insurance Act and thus encompassed by the insured’s Duty of Fair Presentation (and since insurance policies are riddled with conditionalities as it is), insureds should err on the side of caution and include information about such vulnerabilities in their presentation of the risk.
John Curran is a partner at Fenchurch Law
Make your position plain: the duty on insurers to speak out
In a judgment that will be welcomed by policyholders, the Court of Appeal has held that insurers have a duty to speak out and make their position plain in a claims handling context.
This duty has been found to arise where, in light of the circumstances known to the parties, a reasonable person would expect the other party, acting honestly and responsibly, to take steps to make its position plain.
On the facts of this case, it was unjust and unconscionable for the insurers to escape liability on the grounds of non-compliance with a condition precedent where they were aware that the policyholder thought that its obligation to comply had been effectively parked by agreement between the parties.
The case relates to an insurance claim brought by the clothing retail company Ted Baker for business interruption losses relating to goods stolen by an employee. At first instance, the court rejected Ted Baker’s claim for indemnity under the policy on a number of grounds including for breach of a condition precedent requiring the provision of certain documentation relating to quantum. On appeal, Ted Baker argued that an estoppel by acquiescence had arisen that precluded the insurers from relying on the condition precedent. This was on the basis of a meeting between the parties at which the insurers’ loss adjuster had undertaken to seek instructions as to whether the cost of producing certain documents was covered under the policy, but had not done so. The insurers knew that Ted Baker was under the impression that its obligation to produce the documentation had been parked pending a response on that issue.
The Court of Appeal agreed, finding that in light of what had passed between the parties, Ted Baker was entitled to expect that if the insurers in fact regarded the documentation as outstanding, due and unparked, then acting honestly and responsibility they had a duty to tell them. Not to do so was misleading. Had the insurers told Ted Baker that the documents were in fact outstanding, the court considered that they would no doubt have been supplied. However, no renewed request for the material was made and there had been no suggestion made in correspondence that the insurers considered Ted Baker to be in breach of a condition precedent entitling them to avoid liability.
This duty to speak was found to be of general application, arising in the context of commercial contracts where a reasonable man would expect a party acting honestly and responsibly to bring to his attention the fact that he was under a mistake as to the parties’ respective rights and obligations. It is not specific to insurance contracts, and is not dependent on the duty of good faith, although the good faith nature of an insurance policy would tend to increase the likelihood of such an estoppel by silence or acquiescence arising.
Nor does the duty to speak require any dishonesty, bad faith or an intention to mislead. On the facts of this case there was no suggestion that the insurers had deliberately kept quiet or sought in some way to hoodwink the policyholder. However, Ted Baker’s mistaken understanding was not one that had arisen in a vacuum but in the context of specific circumstances whereby it was common ground that a response from the loss adjuster was awaited. As such, it was reasonable to expect the insurers to say if they required the documentation to be provided in the interim and that any failure to provide it would be fatal to the claim.
The Court of Appeal was clear that, generally speaking, an insurer is under no duty to warn an insured as to the need to comply with policy conditions, and that position has not changed. However, the articulation by the court of the existence of this duty to speak may make it easier for a policyholder to establish an estoppel in the appropriate factual circumstances, particularly as there is no need to demonstrate reliance on an unequivocal representation which would be necessary to found other types of estoppel or waiver.
In a year which has also seen the introduction of damages for late payment of insurance claims, it is clear that insurers need to pay attention to their systems and processes for ensuring that claims are handled transparently, fairly and promptly – which is good news for policyholders.
See Ted Baker v AXA [2017] EWCA Civ 4097.
Joanna Grant is a Partner at Fenchurch Law
BAE Systems Pension Funds – v – RSA
Third Parties (Rights against Insurers) Act 2010
An analysis of the first judgment on the Third Parties (Rights against Insurers) Act 2010 (‘the Act’)
BAE Systems Pension Funds Trustees Limited (‘the Claimant’) brought proceedings against 4 Defendants following the construction of a large warehouse. The damages sought exceeded £10 million.
Protective proceedings were issued against the Defendants on 24 August 2016. In February 2017, the third Defendant, Twintec Limited (‘Twintec’), went into administration, and a few weeks later Twintec’s solicitors revealed that it was insured by RSA. The Claimant accordingly applied to join RSA to the claim.
RSA resisted the application on the grounds that:
- They were not in fact liable to indemnify Twintec for the claim;
- The policy and any dispute as to coverage was subject to French law and must be determined by arbitration or by the French courts.
The First Ground
It was uncontroversial that Twintec had become a ‘relevant person’ under section 1 of the Act i.e. it had incurred a liability to the Claimant, and had become insolvent in one of the ways specified by the Act.
Section 2 entitled the Claimant to bring proceedings directly against RSA seeking a declaration as to Twintec’s liability and/or a declaration as to RSA’s potential liability to the Claimant.
RSA argued, somewhat ambitiously, that Twintec was not entitled to indemnity because of an exclusion for pre-existing circumstances, and, if there was thus no cover, section 2 was not engaged.
The Judge, Mrs Justice O’Farrell DBE, found that Section 2 was engaged even where there was a dispute as to coverage. This did not require the Claimant to establish that there was a relevant insurance policy which necessarily responded to the loss – all that was needed was for the Claimant to make a claim that there was such a policy.
RSA argued that a number of difficulties could arise if Section 2 was engaged where cover was disputed. In particular, they suggested that this could pave the way for any insurer to be joined to an action, or possibly an insurer who had provided cover for a previous irrelevant period. The Judge gave short shift to this point, and stated that the Court, in these circumstances, could simply strike out those proceedings as having no prospect of success. The Judge’s decision was obviously right. Were it otherwise, the 2010 Act would not avail a Claimant where an insurer had denied indemnity.
RSA also suggested that there was an irreconcilable conceptual difficulty insofar as they would be faced with defending a claim for a declaration, when, in their view, the Claimant did not have the right to step into Twintec’s shoes. Again the Judge was unpersuaded, and found that it was entirely a matter for RSA as to the submissions they wished to make in response to the Claimant’s claim (and whether they wished to take any substantive part in the proceedings at all).
The Second Ground
The policy contained two dispute resolution clauses. The first clause provided for any dispute between the parties to be referred to the French courts and “shall be subject exclusively to French legislation”.
The second clause provided that, in the event of a dispute regarding the activation of cover, the parties agreed to refer their disputes to two arbitrators chosen by each party.
The claimant argued that the coverage dispute was caught by neither of the clauses. RSA, by contrast, argued that the coverage dispute was caught by both clauses.
The Judge was satisfied that the coverage dispute would be covered by one or other of the clauses i.e. it should be decided by either the French courts, or by arbitration. It did not, however, affect her finding as to whether section 2 was engaged.
The Result
The Judge granted the Claimant’s application to join RSA to the Claim, and, somewhat predictably, made it clear that in order to engage section 2 of the Act, a Claimant need not establish, as a pre-condition, that there is valid coverage. Were it otherwise the case, insurers would have carte blanche to reject any claims made against insolvent insureds.
Alexander Rosenfield is an associate at Fenchurch Law