Promised Land: Estoppel Trends in Policyholder Recoveries
Recent cases demonstrate how insurers’ claim handling may give rise to estoppel and extend the scope of policy coverage. Practices followed in earlier claims concerning the insured parties and/or operation of indemnity provisions could amount to a common assumption, conveyed between the parties and detrimentally relied upon by the policyholder, from which it would be inequitable for insurers to resile. Further, insurers are likely to be estopped from relying on breaches of policy conditions requiring consent to admissions or settlements, after refusing cover for liability claims.
George on High
In George on High Ltd & George on Rye Ltd v Alan Boswell Insurance Brokers & New India Assurance Co Ltd [2023], an historic pub hotel was largely destroyed by fire. The insurer (“NIAC”) agreed to indemnify the property damage but declined cover for a business interruption claim, alleging the company which suffered this element of loss was not named in or insured under the policy. Specifically, George on High Ltd (“GOH”) had owned the freehold property, whilst George on Rye Ltd (“GOR”) owned the business operating there. The named insured was “George on High Ltd t/a The George in Rye”. The defendant broker arranged the insurance and accepted it would be responsible for the losses claimed, if NIAC was not liable.
The claimants argued that earlier dealings with NIAC’s outsourced claim handlers proved knowledge on NIAC’s part that GOR ran the business, and that GOR had been confirmed as insured. Premiums had been paid by GOR, and the claims history included incidents relating to the business, with several previous claims reviewed by NIAC’s agents referring to GOR as the policyholder. In none of the earlier claims had concerns been raised as to whether policy coverage included GOR.
Deputy High Court Judge Tinkler decided a reasonable person having all the background knowledge available to the parties would have understood “George on High Ltd t/a The George in Rye” in the policy schedule to mean “George on High Ltd and the business operated by George on Rye Ltd t/a The George in Rye”. The Insurance Act 2015 states that insurers “ought to know” matters an employee or agent knows and ought reasonably to have passed on, or information held by the insurer and reasonably available to underwriters. The outsourced claim handlers were aware prior to policy inception that GOR ran the business, and this knowledge could be attributed to underwriters.
In the further alternatives, the Judge considered that all the requirements for rectification of the policy were satisfied. Applying the test in Swainland Builders Ltd v Freehold Properties Ltd [2002]: (1) the parties had a common continuing intention at the time of contracting, (2) there was an outward expression of accord, and (3) by mistake, the contract did not reflect that common intention. Even if the decision on construction was incorrect, the Judge would therefore have ordered the policy to be rectified to reflect the insured as: “GOH and the business operated by GOR t/a The George in Rye”.
The Judge also concluded that the claims history estopped NIAC from denying cover. Applying the test for estoppel by convention in HMRC v Benchdollar [2009]: (1) the policy included cover for business interruption and employer’s liability, demonstrating a common intention that GOR would be insured; (2) by accepting liability for earlier claims relating to staff and customers, NIAC had conveyed to the claimants that it believed GOR to be covered under the policy; and (3) the claimants relied upon that assumption by paying premiums. It would be unconscionable in the circumstances to allow NIAC to deny cover for GOR, even if those claims were not covered by the policy wording.
The decision stands in welcome contrast to the harsh outcome in Sehayek v Amtrust [2021], where insurers were entitled to avoid liability under a new home warranty based on failure to correctly name the developer on a certificate of insurance. The position in George on High was clearly distinguishable based on handling of the previous claims; and an application by the insurer for permission to appeal was refused.
World Challenge
In World Challenge v Zurich [2023], Fenchurch Law acted for a company running adventure trips, insured since 2016 under a bespoke travel and accident policy with Zurich. Following the outbreak of Covid-19, nearly all booked expeditions for 2020 had to be cancelled, and World Challenge refunded customers for deposits or advance payments as required by the applicable Terms & Conditions.
A dispute arose as to whether World Challenge was insured for all refunds paid to customers, or only for irrecoverable costs paid to third party suppliers. The policy wording provided that, if pre-booked travel arrangements for a journey were cancelled, curtailed or rearranged due to causes beyond World Challenge’s control, Zurich would pay:
“deposits and advance payments … reasonably and necessarily incurred that are forfeit under contract or are not otherwise recoverable.”
The policy specified a cancellation claims deductible of £200,000. Whilst many previous cancellation claims had been handled under the policies, the aggregate value had always fallen below the annual deductible, so that customer refunds in each case had been paid by World Challenge. A process had been agreed where cancellation details would be submitted to Zurich’s claim handlers, who would verify the customer’s entitlement to a refund in accordance with the Terms & Conditions, before authorising World Challenge to issue a refund payment, and tracking the policy deductible.
Zurich never asked how much of the refund payments related to irrecoverable costs and it was obvious that cancellation claims were being treated as equal in amount to the customer refunds. Based on this course of dealing, World Challenge believed that all refunds were covered under the policies. Zurich was slow to communicate its disagreement with this position when the pandemic struck, and urgent clarification became imperative to manage business operations and customer relationships.
Mrs Justice Dias held that the ordinary and natural meaning of the policy wording was that Zurich would indemnify customer refunds only if and to the extent they comprised irrecoverable third party costs. Zurich’s employees maintained that this is how they had always understood the policy to operate, yet the claims process above was followed without question because (as the Judge found): “neither the claims handlers nor the underwriters particularly cared what the refunds represented, since the amounts involved were all comparatively low and fell within the deductible so that it made no practical difference to Zurich”. This attitude was described in the judgment as cavalier, since the adjustment and agreement of a claim has just as much contractual significance where it goes to erode a deductible as when payment is made by the insurer.
Attempts in the witness box to explain why documents did not in fact mean what they appeared to were described by the Judge as “frequently incoherent and illogical”, creating a “dismal impression” and making Zurich’s witnesses “look more than a little foolish”. Whilst there was no suggestion of any conscious dishonesty, the Judge highlighted the inherent unreliability of witness recollection, since all “memory" of distant events depends on a process of reconstruction inevitably influenced by a multitude of factors including the selection of documents reviewed in preparing witness statements, and the natural human instinct to reconstruct events to put oneself in the most favourable light possible, particularly when the witness has a tie of loyalty to or dependence on one of the parties, such as an employer.
Applying the test in Benchdollar and Tinkler v HMRC [2021], the Judge found that a common but mistaken assumption of law or fact arose from the course of claims handling under the earlier policies, conveyed between the parties, and relied upon by World Challenge in relation to the cancellation of trips. Zurich was therefore estopped by convention from denying that World Challenge was entitled to be indemnified under the policy for the amount of its customer refunds, subject to giving credit for any recoveries.
As compared with estoppel by convention, promissory estoppel requires a clear and unequivocal promise or assurance by the defendant that it will not enforce its strict legal rights; an intention by the defendant that this promise/assurance should affect legal relations between the parties; and detrimental reliance by the claimant, so that it would be inequitable to permit the defendant to withdraw the promise, or act inconsistently with it. The Judge concluded that this was not established on the facts, since there was no understanding on the part of World Challenge that Zurich was giving up any right to rely on the true construction of the policy.
Permission to appeal has recently been granted and it will be interesting to see whether further nuances are introduced by the Court of Appeal.
Technip v Medgulf
In Technip Saudi Arabia v Mediterranean and Gulf Cooperative Insurance and Reinsurance Company [2023], the claimant (“Technip”) was principal contactor for an offshore energy project in the Middle East. A vessel chartered by Technip collided with a wellhead platform owned by the field operator, KJO, and Technip notified a liability claim under the project all risks policy, written on a WELCAR standard market wording. The defendant insurer (“Medgulf”) declined the claim and confirmed to Technip that it should act as a prudent uninsured.
Technip subsequently agreed to pay $33 million in respect of KJO’s claim, and informed Medgulf of the settlement. Medgulf considered that the insurance claim was excluded on other grounds, and raised a secondary argument that the loss did not fall within the policy definition of Damages, as follows: “compensatory damages, monetary judgments, awards, and/or compromise settlements entered with Underwriters’ consent”.
Whilst Mr Justice Jacobs ultimately found the claim to be excluded under an Existing Property Exclusion in the policy, he also agreed with Technip that the requirement for insurer’s consent to compromise settlements could not apply, as this provision presupposed the insurer’s acceptance of liability:
“It would in my view be a surprising result if an insurer could defend an insurance claim on the basis of absence of consent to a settlement in circumstances where there had been a denial of liability and the insured had been told to act as a prudent insured … [because the policyholder] would be acting in accordance with what it had been told to do. An uninsured person would, by definition, have no reason to consult or seek the consent of an insurer. I consider that a court would have little difficulty in concluding that the insurer had waived any requirement for the insured to seek its consent or was estopped from asserting that such consent should have been sought and insured.”
The Judge also considered the effect of various common law authorities, including the New Zealand Court of Appeal decision in Napier City Council v Local Government Mutual Funds [2022], as instructive in identifying waiver and estoppel as potential reasons why an insurer, which has denied liability, cannot then rely on clauses which require the insured to obtain consent to a settlement.
The comments in this case on unauthorised settlements are in stark contrast to the judgment in Diab v Regent [2006], in which the Privy Council held that a policyholder must still comply with claim conditions even though the insurer had indicated that it would reject any such claim. The decision in Technip gives some comfort that being told to act as a prudent uninsured allows a policyholder flexibility when negotiating and settling claims, although the safest course of action will still be to seek to comply with policy conditions where possible, even if insurers are unresponsive.
Conclusion
In an insurance case heard last year in the Commercial Court, Counsel for the policyholder explained to the Judge that an estoppel argument advanced by his client in a preceding arbitration had failed. “But they always do”, languidly replied the Judge. On the contrary, recent decisions highlight that estoppel is proving to be a point worth taking for policyholders whose claims have been declined.
Policyholders and brokers should exercise caution when identifying and naming parties to be insured, to avoid potential disputes. The position in relation to deemed insurer knowledge reflects increasingly sophisticated electronic systems for information sharing across the industry, as compared with traditional hard copy files. Insurers should take a considered approach to claim handling, even for low value matters, and ensure proper oversight of appointed agents.
Authors:
The world’s first LEG3 Court decision, and what it means for the Builders’ Risk market
Introduction
27 years after the London Engineering Group (“LEG”) introduced its suite of defects exclusions, a Court in the District of Columbia in the USA has delivered the world’s first Court decision on the most generous of the three LEG clauses, LEG3, in the case of South Capitol Bridgebuilders v Lexington Insurance Company, No. 21-cv-1436, 2023 US Dist. LEXIS 176573 (D.D.C. Sep 29, 2023). That fact that the Builders’ Risk market (or what we in the UK would call the Construction All Risks, or “CAR” market) has been waiting for a LEG3 decision for this long means that SCB v Lexington was always going to receive a lot of attention. However, the unrestrained and intemperate language used by the Judge means that there is a risk that the decision will create more heat than light, and has the potential to lead to a reaction by Builders’ Risk insurers, particularly in the US, which could negatively affect the interests of policyholders. That would be a great shame, as the availability of appropriate Builders’ Risk insurance is essential for the global construction community. This article therefore attempts to take a step back from the eye-catching language used by the Judge in SCB, and to discuss what a constructive response to the case might look like.
The facts
I’ll start with a very brief description of the facts. The policyholder, SCB, was hired to build the new Frederick Douglas Memorial Bridge, which is a stunningly designed bridge which crosses the Anacostia River in Washington DC, and which is the biggest public works project in the history of the District of Columbia. The design involves three consecutive steel arches on either side of the bridge, which are supported by concrete abutments on either side of the river, and by two v-shaped concrete piers which provide support towards the centre of the river.
The concrete was placed in each of the abutments and piers in separate pours, with workers standing within the formwork and vibrating the concrete in order to achieve even placement. Due to the vibration being carried out inadequately the concrete never achieved even placement, and when the concrete had dried and the formwork was removed, the policyholder saw that the concrete contained voids, referred to as “honeycombing”. The honeycombing diminished the concrete’s weight bearing capabilities, and meant that the concrete had to be repaired so that an even distribution of concrete, without honeycombing, could be achieved.
The policyholder had the benefit of a Builder’s Risk insurance policy issued by Lexington, which contained the 2006 version of the LEG3 defects exclusion. The policyholder submitted a claim to the insurer on the basis that the honeycombing of the concrete constituted “damage” which triggered the main insuring clause of the policy, which was not excluded by LEG3. The insurer refused indemnity on the basis that, in order for there to be damage which triggered the policy it was not sufficient for the honeycombed concrete components to have been in a defective condition from time they were made. Rather, for there to be damage, a subsequent alteration in the physical condition of the concrete components was required.
The insurer also argued that, even if the concrete was damaged, the LEG3 clause excluded coverage because the whole of the remedial works constituted an improvement, on the basis that “if something broken gets fixed, hasn’t that thing been improved?”.
Based on the above the Court (which, although it was in the District of Columbia was applying Illinois Law) was required to address the following questions:
- Did the honeycombing of the concrete components constitute damage, so as to trigger the main insuring clause of the policy?
- Is the meaning of the LEG3 clause unambiguous?
- If the meaning of the LEG3 clause is ambiguous, how should that ambiguity be resolved?
I’ll explain what the Court held in relation to each issue, and add some comments of my own, in turn.
Did the honeycombing comprise damage?
Lawyers from common law jurisdictions who work regularly with policies which are triggered by property damage, whether in relation to works under construction, completed works, or products, will be familiar with the extensive body of authority from around the world in relation to the question of what constitutes “damage”. In this respect it is common for the Courts of a variety of different jurisdictions to look to decisions in other jurisdictions to help inform that issue, not because decisions from other jurisdictions are binding, but because they can be helpful in understanding an issue which has received a significant amount of prior judicial attention.
The insurer in SCB appears to have drawn a significant amount of authority to the Court’s attention, but the Judge could not have been less interested in it (“Lexington does not bother to explain how these non-binding cases are analogous, or why the Court should consider them persuasive”). Ouch. Had the Judge taken the view that the damage authorities were persuasive then the outcome of the case would almost certainly have been different, because most common law jurisdictions clearly do regard damage as a “happening” (which requires a change in physical condition), as opposed to a “condition” (which does not require a change in physical condition). In SCB’s case, there was no change in physical condition, as the concrete components contained honeycombed voids from the outset. According to the authorities in most common law jurisdictions, and certainly in England & Wales, the honeycombing would therefore have meant that the concrete components were in a defective condition from their creation, and the lack of a subsequent change in physical condition would therefore have meant that they didn’t suffer damage.
However, the Judge in SCB not only took the opposite view, but did so in the clearest terms. Asking himself the question of “whether ‘damage’ is properly understood to include the costs of fixing the concrete flaws that weakened the bridge”, he found that “the answer is unambiguously, yes”. So, how did he reach a view that for lawyers in other jurisdictions would find so surprising?
The reason starts with the fact that “damage” was not a term that was defined in the policy issued by Lexington. That meant that under Illinois Law the way to understand the meaning of the term was not to consider any authorities, but to look instead to “plain, ordinary, and popular meaning of the term”. To determine that meaning the Judge looked at Black’s Law Dictionary (10th ed., 2014), which defined damage as “loss or injury to person or property” or “any bad effect on something”.
Applying the above definition, the Judge found that the policyholder’s inadequate vibration of the concrete “caused a decrease in the weight bearing capacity of the bridge and supporting structures”, and that “a decreased weight bearing capacity is surely an injury, or at the very least a bad effect, on the bridge and its support structures”. That analysis may be true as far as it goes, but it can only be justified on the basis that the “decreased capacity” exists in comparison with the intended capacity, and not as compared with a capacity which existed before a change in physical condition which resulted in the decrease. The problem with that approach, is that a decreased capacity as compared with an intended capacity is describing contract works which are in a defective condition, and Builders’ Risk policies are not intended to cover the cost of repairing defective but undamaged property. That is a commercial risk for builders which the Builders’ Risk insurance market isn’t, and never has been, prepared to insure.
That problem is not a small one, in practice. If it is right that, under Illinois Law, property which is in a defective condition triggers an insuring clause which requires “damage”, it gives rise to a risk that Builder’ Risk insurers in that jurisdiction (and other similar jurisdictions) will use another way to ensure that they aren’t required to pay for the cost of repairing defective but undamaged property. One way to do so would be to withdraw the availability of the more generous LEG clauses (LEG2 & LEG3), and restrict cover to LEG1, which excludes the cost of repairing any damage which is caused by mistakes of any kind. That would be a significant backward step for the Builders’ Risk market, and would be a terrible development for affected policyholders.
Fortunately, there is a simple fix, which is that if a Builders’ Risk policy is issued in a jurisdiction which, like Illinois, looks to the dictionary definition of damage if it isn’t defined by the policy, rather than to any of the damage authorities, then insurers and brokers need to ensure that their policies do include a definition of damage. I would suggest the following (other formulations are available):
“Damage means an accidental change in physical condition (whether permanent and irreversible, or transient and reversible) of insured property, which impairs either the value or the usefulness of that property”.
Is the meaning of LEG3 unambiguous?
Both policyholder and insurer argued that LEG3 was unambiguous. The policyholder argued that LEG3 unambiguously provided cover for the cost of repairing the honeycombed concrete components, and the insurer argued that LEG3 unambiguously excluded cover. The Judge disagreed with both parties, finding that “LEG3… is ambiguous, egregiously so”. Ouch (again). Is it, though?
Again, it is important to remember that the Judge was applying Illinois law to the question of ambiguity, and Illinois Law in this respect isn’t necessarily going to be the same as other jurisdictions. It certainly isn’t the same as the approach that would be taken by the English Courts, which only find that a clause is ambiguous if there are competing interpretations which the Court is unable to choose between. According to the Judge in SCB, however, under Illinois Law a clause is ambiguous if it is “subject to more than one reasonable interpretation”. That is a very low bar, and the Judge may well have been right that the low bar was met in this case. Of course, that does not mean that a Judge applying a different test, with a higher bar for ambiguity, wouldn’t have been able to make a finding about what LEG3 does actually mean. However, the SCB Judge’s (too) scathing comments about the drafting of LEG3 may have the positive effect of prompting a re-draft of the clause which addresses an issue with the clause which clearly exists in theory, but which thankfully I haven’t yet seen in practice.
The specific problem with the way in which LEG3 is drafted is that it mixes up causation on the one hand, and the condition of the relevant property, on the other. Defect exclusions should be concerned with either causation (which is the intended focus of LEG1 and DE1) or with the condition of the relevant property (which is the intended focus of DE2, DE3, and DE4), but not with both. The problem with LEG3 is that the exclusionary words which begin the clause (“all costs rendered necessary by [mistakes]…”) are concerned with causation. That part of the clause is a full exclusion for the cost of fixing mistakes of all types, whether workmanship, design, materials, specification, or plan, just as with LEG1 or DE1. There is then a write back (“should damage … occur to any portion if insured property containing any of the said defects…”) which brings back cover for the cost of fixing damage to insured property where the mistakes have been built into the works (with the end of the clause limiting the write back so that it only excludes improvement costs). The problem with that is that the write back is not expressed to extend to cover the cost of repairing damage caused by mistakes which are sustained by property which is not in a defective condition prior to the occurrence of the damage. A literal reading therefore suggests that LEG3 provides greater cover for the cost of fixing damage to defective insured property than it does for the cost of fixing damage to un-defective insured property. That was clearly not the intention of the LEG committee when drafting LEG3, and it is not how CAR insurers in the UK approach LEG3, but unfortunately it is what LEG3 actually says.
Given that damage is required to trigger the insuring clause of a Builders’ Risk policy then, as long as damage is properly defined, the cost of fixing defective but undamaged property should never trigger the insuring clause, and so does not need to be excluded. That being the case, the intention of the current LEG3 clause (which is to only exclude improvement costs) could be achieved by the following much simpler formulation:
“The insurer shall not be liable for that cost incurred to improve the original material workmanship design plan or specification”.
Wouldn’t the above formulation be much easier for policyholders to understand? Clearly yes. In my view nothing useful from the current clause would be lost, but I would be very interested to hearing from anyone who takes a different view (david.pryce@fenchurchlaw.co.uk).
Resolving the “ambiguity”
Having found that LEG3 was ambiguous, the consequence under Illinois Law was that the clause must be “construed against its drafter”, which in this case meant that the clause needed to be construed against the insurer, Lexington. That was the case notwithstanding that, of course, LEG3 is a standard clause that wasn’t in fact drafted by either of the parties in SCB, but by the LEG committee in London, and has been commonly used by parties to Builders’ Risk insurance policies across the world for more than a quarter of a century.
Outcome & final comment
Given the above, the Judge found wholly in favour of the policyholder. As a policyholder representative I can only applaud the effectiveness of the arguments made by SCB’s attorneys, but I am concerned about the potential for the outcome to have a negative effect on Builders’ Risk policyholders in the future. I hope the suggestions above can help those who, like me, want to ensure that doesn’t happen.
I’d like to finish with a final comment on a point that didn’t ultimately affect the outcome in SCB, but which touches on a point of general importance, which is the issue of how to assess improvement costs, which the Judge addressed in an interesting, and quite neat, way. What constitutes improvement costs is an issue that comes up frequently in practice, and there remains no clear guidance from the Courts on how improvement costs should be determined.
In SCB the insurer argued that fixing property which had been defective before the damage occurred must necessarily constitute an improvement. The extension of that argument is that the cost of fixing design mistakes which have resulted in damage must all constitute improvement costs. That interpretation is not only contrary to the intention of LEG3, but is also wrong as a matter of principle for the reasons explained in our previous article (“You have to be pulling my LEG(3)"). The way the Judge dealt with the point in SCB was as follows:
“The context of [LEG3] suggests that to improve means to make a thing better than it would have been if it were not for the defective work”.
That formulation, in my view, works well as far as it goes, and is a useful way to look at what constitutes improvement costs where damage has been caused by workmanship failures. However, it is less clear that it works for damage which is caused by design mistakes, which need to repaired by utilising a superior and more expensive design the second time around. It remains my view that the best way to assess improvement costs is by adopting the three-stage test outlined in our earlier article.
David Pryce is the Managing Partner at Fenchurch Law
Legal Expenses Insurance – A Brief Introduction
After the Event Insurance (“ATE”) is an insurance policy available to litigants to cover their disbursements and their liability to pay adverse costs in the event that the case is lost. This article will also discuss the latest Supreme Court decision about litigation funding agreements (“LFAs”) and how it may impact ATE insurance.
ATE insurance is not cheap, and obtaining it is not always straightforward. Before ATE insurance can be secured, the underwriter will evaluate the merits of the case. To do so, the insurer will generally require an opinion from counsel outlining the strengths and weaknesses of the insured’s case. The underwriter will also likely want to be provided with (amongst other things) any costs estimates that have been filed, information about the opponent’s ability to pay, and the details of any conditional fee agreement, damages based agreement (“DBA”) or LFA (more on that later).
Premiums and their recoverability
ATE premiums can vary significantly depending on different factors. It naturally follows that, if the risk is higher, the premium will increase, the situation will be the same if a greater level of cover is sought. Often, premiums will be “stepped” or “staged” and increase as the case proceeds. This reflects that the risk of paying out increases the closer the matter gets to court.
In policies issued before 1 April 2013, ATE premiums are recoverable. However, after this date, premiums are only recoverable from the other side as costs in certain cases (mesothelioma claims; publication & privacy proceedings; and insolvency-related proceedings where the policy was issued prior to 6 April 2016).
ATE as security for costs
ATE insurance can be used as security for costs in certain circumstances. In Premier Motorauctions Ltd (in liquidation) & Anor v Pricewaterhousecoopers LLP [2017] EWCA Civ 1872, the Court held that an ATE policy could, in principle, be considered as sufficient security for costs. However, the ATE policy did not offer sufficient protection in that case, because it was vulnerable to being avoided for misrepresentation or non-disclosure. The Juge, in that case, noted that the words of the ATE policy were important, and if the insurer’s ability to avoid was restricted, it may be sufficient security.
This case was cited in Saxon Woods Investment Ltd v Francesco Costa and others [2023] EWHC 850, where the ATE insurance policy contained an endorsement that placed restrictions on the insurer’s ability to avoid. The Judge found that the anti-avoidance endorsement (“AAE”) did not need to explicitly state that the insurer could not avoid in the event of fraud or dishonesty provided that was indeed its effect, but that the words had to be sufficiently clear, as such, to indicate “an extraordinary bargain”. In Saxon, the policy was expressed as non-voidable and non-cancellable, and the insurer agreed to indemnify the insured for any claim under the policy “irrespective of any exclusions or any provisions of the Policy or any provisions of general law, which would otherwise have rendered the policy or the claim unenforceable…”. The court held that the policy could be used as security for costs.
Avoidance of an ATE policy
A policy with an AAE is likely to come at a price, and for many insureds the premium will be prohibitively high. In the event that an insured’s policy does not have an AAE endorsement, insurers of an ATE policy can avoid it for all the usual reasons, e.g. non-disclosure or misrepresentation. This was confirmed in Persimmon Homes Ltd & Anor v Great Lakes Reinsurance (UK) plc [2010] EWHC 1705 (Comm). In that case, the insurer was entitled to avoid the policy due to material misrepresentations and non-disclosures. The alleged material non-disclosures included, amongst other things, bankruptcy and untruthful statements (which had come to light in the Judgment) and undisclosed financial difficulties.
ATE and LFAs
Litigation funding agreements are where a third-party funder agrees to fund the litigant’s costs. In the event of success, litigation funders are typically compensated in three different ways:
- A percentage of the proceeds, e.g. the funder claims 30% of the proceeds
- A multiple of the invested amount, e.g. the funder obtains 1.5 x the invested amount
- A combination of the above, e.g. the funder obtains either 30% of the proceeds or 1.5x the invested amount (whatever is the greater).
Many third-party funders require the litigant to obtain ATE insurance so that in the event of losing, the costs that the litigant is responsible for are covered, protecting both the funder and the litigant (a third-party funder is generally only liable for costs up to the amount it invested, although a discussion on the ‘Arkin’ cap and the case of Chapelgate Credit Opportunity Master Fund Ltd v Money [2020] EWCA Civ 246 is beyond the scope of this article).
LFAs, and the decision in Paccar
In Paccar Inc and Ors v Road Haulage Association Limited and UK Claims Limited [2023] UKSC 28, the Supreme Court examined s 58AA of the Courts and Legal Services Act 1990 (“CSLA”) and considered whether LFAs were DBAs for the purpose of s 58AA(3)(a), which stated that:
a damages-based agreement is an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that—
(i) the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and
(ii) the amount of that payment is to be determined by reference to the amount of the financial benefit obtained.
The Court found that third-party litigation funders were providing “claims management services”, and LFAs where the funder is remunerated on a percentage of the proceeds basis would thus be caught by s 58AA(3).
LFAs that remunerate the funder on a multiple of the invested amount basis are not caught by s 58AA. S 58AA states that a DBA cannot be enforced unless it complies with the requirements of s 58AA(4), including regulations (the Damages-Based Agreements Regulations 2013 (“the DBA Regulations”)). In summary, this means that an LFA will be unenforceable if the funder is remunerated on a percentage of proceeds basis (unless it complies with the DBA Regulations, which is unlikely).
Following this decision, funders and litigants will need to ensure that LFAs either are not DBAs (i.e. providing for a multiple of investment model of remuneration) or are compliant with the regulations. If the LFA is not re-negotiated and is thereby void, ATE insurers should be notified of this, as this could result in a change to the risk and could lead to the insurer avoiding the policy.
Grace Williams is an Associate at Fenchurch Law
Risk, Regulation and Rewards: Regulatory Developments in Artificial Intelligence
With the Government’s White Paper consultation – “A pro-innovation approach to AI regulation” – having closed at the end of June, and the UK scheduled to host the first global summit on AI regulation at Bletchley Park in early November, now is an appropriate time to assess the regulatory lay-of-the-land in relation to this nascent technology.
White Paper
The White Paper was originally published on 29 March 2023. It sets out a roadmap for AI regulation in the UK, focusing on a “pro-innovation” and “context-specific” approach based on adaptability and autonomy. To this end, the Government did not propose any specific requirements or rules (indeed, the White Paper does not give a specific definition of AI), but provided high-level guidance, based on five ‘Principles’:
- Safety, security and robustness;
- Appropriate transparency and explainability;
- Fairness;
- Accountability and governance;
- Contestability and redress.
The White Paper is, in essence, an attempt to control the use of AI but not so overbearingly as to stifle business or technological growth. Interestingly, the proposals will not create far-reaching legislation to impose restrictions and limits on the use of AI, but rather empower regulators (such as the FCA, CMA, ICO and PRA) to issue guidance and potential penalties to their stakeholders. Perhaps surprisingly, the application of the Principles will be at the discretion of the various regulators.
Motives
The White Paper is markedly different to the EU’s draft AI Act, which takes a more conservative and risk-averse approach. The proposed EU legislation is detail and rule heavy, with strict requirements for the supply and use of AI by companies and organisations.
It would appear that the Government is keen on demonstrating a market-friendly approach to AI regulation, in an effort to draw investment and enhance the UK’s AI credentials. The Government wants the UK to be at the forefront of the AI landscape, and there are understandable reasons for that. The White Paper excitedly predicts that AI could have “as much impact as electricity or the internet”. Certainly the AI sector already contributes nearly £4 billion to the UK economy and employs some 50,000 people.
And the UK does have pedigree in this field – Google DeepMind (a frontier AI lab) was started in London in 2010 by three UCL graduates. The Government is optimistically throwing money at the situation, having already made a £900 million commitment to development compute capacity and developing an exascale supercomputer in the UK. Furthermore, the Government is increasing the number of Marshall scholarships by 25%, and funding five new Fulbright scholarships a year. Crucially, these new scholarships will focus on STEM subjects, in the hope of cultivating the Turings of tomorrow.
Ignorantly Pollyannish?
It all seems like it could be too good to be true. And in terms of regulation, it very well may be. The UK approach to AI regulation is intended to be nimble and able to react pragmatically to a rapidly evolving landscape, but questions arise about the devolved responsibility of various regulators. The vague and open-ended Principles may well prove difficult to translate into meaningful, straightforward frameworks for businesses to understand, and in any event are subjective to the individual regulator. It is unclear what would happen where a large company introduces various AI processes to its business functions but is subject to the jurisdiction of more than one regulator. How would there be a consistent and coordinated approach, especially given that some regulators have far more heavy-handed sanction/punishment powers than others? The Government does intend to create a central function to support the proposed framework, but given that the central function is likely over 18 months away, any dispute/contradiction between regulators before its implementation is going to be a can of worms. Furthermore, when it does arrive, is having a centralised, authoritative Government body to deal with AI not in complete contradiction to the desired regulator-led, bottom-up approach?
And with every day that passes, AI becomes more powerful, sophisticated and complex. It could be the case that all discussions of AI regulation are irrelevant, as there is no way for governments and international organisations to control it. While this risks slipping into a catastrophising and histrionic “AI will end humanity” narrative, it is certainly hard to see how regulation can keep pace with the technology. Consider the difficulty that governments and international organisations have had in regulating ‘Big Tech’ and social media companies in the past two decades, given their (predominately) online presence and global ambit, and then consider how much more difficult it would be to regulate an entirely digital technology that can (effectively) think for itself.
November Summit
In light of these considerations, it will be interesting to see what comes out of the AI Safety Summit in early November. The stated goal of the summit is to provide a “platform for countries to work together on further developing a shared approach to agree the safety measures needed to mitigate the risk of AI”. There seems an inherent tension, however, between international cooperation in relation to ‘rules of the game’ around AI and the soft power arms race in which nations are involved for supremacy of the technology. In May, Elon Musk pessimistically opined that governments will use AI to boost their weapons systems before they use it for anything else. It may be the case that curtailing the dangers of AI will need a public and private consensus – in March, an open letter titled ‘Pause AI Giant Experiments’ was published by the Future of Life Institute. Citing the risks and dangers of AI, the letter called for at least a six-month pause to training AI systems more powerful that GPT-4. It was signed by over 20,000 people, including AI academic researchers and industry CEOs (Elon Musk, Steve Wozniak and Yuval Noah Harari to name three of the most famous).
In defence of global governments, the Bletchley Park Summit is not emerging from a vacuum – there have been previous efforts by the international community to establish an AI regulatory framework. Earlier this year, the OECD announced a Working Party on Artificial Intelligence Governance, to oversee the organisation’s work on AI policy and governance for member states. In early July, the Council of Europe’s newly formed Committee on Artificial Intelligence published its draft ‘Framework Convention on Artificial Intelligence, Human Rights, Democracy and the Rule of Law’. And as recently as early September, the G7 agreed to establish a Code of Conduct for the use of AI. It would be unbalanced to suggest the international community is sitting on its hands (although note the non-binding nature of some of the above initiatives, which are nevertheless widely published by their signatories with great alacrity).
Conclusion
It is hard to predict how nations and international organisations will regulate AI, given that we are grappling with an emergent technology. It is true, however, that broad patterns have emerged. It seems the UK is taking a less risk-averse approach to AI regulation than the EU, and hoping that it can unlock both the economic and revolutionising power of the tech. The round table at Bletchley Park will be fascinating, given that it will most likely involve a melting pot of opinions around AI regulation. A sobering final thought is at the end of July the White House released a statement that the Biden-Harris Administration had secured “voluntary commitments from leading artificial intelligence companies to manage the risks posed by AI”: if the USA – the AI world leader – is only subjecting its companies to optional obligations, where does that leave the rest of us?
Dru Corfield is an associate at Fenchurch Law
Bubble Trouble: Aerated Concrete Claims and Coverage
Reinforced autoclaved aerated concrete (“RAAC”) is a lightweight cementitious material pioneered in Sweden and used extensively in walls and floors of UK buildings from the 1950’s to 1990’s. Mixed without aggregate, RAAC is ‘bubbly’ in texture and much less durable than standard concrete, with an estimated lifespan of 30 years. The air bubbles can promote water ingress, causing decay to the rebar and structural instability.
RAAC is often coated with other materials and may be difficult to detect from a visual inspection. Invasive testing will often be required to investigate the condition of affected areas and evaluate operational risks. In some instances RAAC structures have failed with little or no warning, posing a significant risk to owners, employees, visitors and occupants. Aging flat roof panels are especially vulnerable from pooling rainwater above.
Buildings insurance is designed to cover damage caused by sudden and unforeseen events, whilst ordinary ‘wear and tear’ is treated as an aspect of inevitability and usually expressly excluded. Where damage occurs, it will be a matter of expert evidence as to the relative impact of contributing factors. English law recognises a critical distinction between failure due to inherent weakness of insured property, and accidental loss partly caused by external influences. Depending on the specific policy wording, unexpected consequences of a design defect or flawed system adopted by contractors may provide the requisite element of fortuity, notwithstanding the concurrent effects of gradual deterioration under ordinary usage (Versloot Dredging BV v HDI Gerling (The DC Merwestone) [2012]; Prudent Tankers SA v Dominion Insurance Co (The Caribbean Sea) [1980]).
Original designers and contractors responsible for RAAC elements in affected buildings in many cases will no longer exist, adding further complexity to potential liabilities. Given that the widespread use of RAAC ended in the 1990’s, it is likely that limitation (even under the new 30-year period for Defective Premises Act claims, if applicable) will have expired, though a fresh period for bringing such claims can be triggered where subsequent refurbishment works have been carried out. To the extent that RAAC related claims are not time barred, professional indemnity insurance may respond subject to operation of any relevant policy exclusions.
Structural problems associated with RAAC were first identified in the 1980’s and multiple collapses have been reported in recent years at public buildings including schools, courts and hospitals. The Institution of Structural Engineers has advised that many high rise buildings in the private sector with flat roofing constructed in the late 20th century may contain RAAC, which could include residential blocks, offices, retail premises and hotels. Landlords and designated duty holders responsible for ‘higher risk buildings’ should factor RAAC assessments into safety case reports pursuant to the Building Safety Act 2022.
RAAC represents another unfortunate legacy issue in the UK construction landscape requiring urgent steps from government and industry stakeholders, to implement a coordinated and transparent approach to proactively manage safety risks.
Amy Lacey is a Partner at Fenchurch Law
Insurance for fees claims: RSA & Ors v Tughans
Introduction
This Court of Appeal decision, in which our firm represented the successful respondents, considered the scope of a professional indemnity policy written on a full “civil liability” basis. Will such a policy respond to a claim against a firm (in this case, a firm of Solicitors) for damages referable to its fee, for which the firm had performed the contractually agreed work, but where the fee was only paid by the client following a misrepresentation by the firm?
That was the issue in Royal and Sun Alliance Insurance Limited & Ors v Tughans (a firm) [2023] EWCA Civ 999 (31 August 2023), although it is important to stress that the Court of Appeal hearing, like the Commercial Court before it, proceeded on the assumption that there had in fact been a misrepresentation. Whether that was or was not the case remains to be determined in the underlying proceedings against the Solicitors.
The underling facts of the case were complex, but the appellant Insurers’ argument was summarised by the Court of Appeal as follows:
“Because the fee was procured by misrepresentation, Tughans had no right to retain it; and if it was obliged to return it, as part of a damages claim, it had not lost something to which as a matter of substance it was entitled, just as much as if the contract were avoided and it was obliged to return it or its value in a restitutionary claim… Tughans had not suffered a loss in the amount of the fee, and cover for that element of a damages claim would violate the indemnity principle.”
That argument failed at first instance before Foxton J, and failed again in the Court of Appeal.
The indemnity principle
At the heart of Insurers’ argument was reliance on the indemnity principle, the principle that a policy of indemnity insurance (as distinct from contingency insurance) will only indemnify an insured’s actual loss, and no more than that. The Court of Appeal held that Insurers’ reliance on the indemnity principle here was misplaced, for a number of reasons.
First, a professional who has done the contractually agreed work, and has earned the contractually agreed fee, does suffer a loss if he is ordered to return the fee because the retainer had been procured by a misrepresentation.
Secondly, the Insurers’ argument was inconsistent with the public interest in there being compulsory PI cover for certain professionals, so that, if a firm and its partners were not good for the money, a client would be unprotected where its damages claim included the fee which it had paid.
Thirdly, the implication of the Insurers’ argument would leave uninsured those partners, and potentially also those employees, who had no involvement with the misrepresentation and/or who had not benefited in any way from the fee.
Restitutionary claims
In RSA v Tughans, the underlying claim was one for damages, albeit damages calculated by reference to the fee which the client had paid. The Insurers argued that, since a claim framed in restitution would certainly not (they said) be covered, the same must be true of an analogous damages claim.
The Court of Appeal was unpersuaded. First, a damages claim is different from a restitutionary one. In any case, the Court of Appeal held that not only would a professional indemnity policy cover a restitutionary claim in respect of a fee which had been earned, it might in some circumstances also cover a fee which had not been earned. Thus, said Popplewell LJ, if a professional “… receives money on account of fees, and an employee steals them from the client account, or negligently transfers them to a third party, before the work is done to earn the fee, a claim by the client for the money, advanced as a restitutionary claim, would seem to me to give rise to a liability which constitutes a loss; and would, moreover, appear to fall squarely within the intended scope of PII cover, and be a necessary part of cover if the PII policy is to fulfil the public protection function of a compulsory insurance scheme”.
Conclusion
This is a very welcome decision for professional firms facing claims which extend to the fees which they have received and where previously PI insurers would have inevitably asserted that their policy would not cover such a claim.
Jonathan Corman is a partner at Fenchurch Law
Fenchurch Law's Chiltern 50 Charity Walk
On the 23rd of September 2023, employees of Fenchurch Law will be taking on the challenge of the Chiltern 50.
The Chiltern 50 is a charity walk through the Chiltern Hills, a route that follows the Thames to Henley Bridge, then out into the picturesque countryside on Shakespears Way, Icknield Way, and Chiltern Way. The team will walk a total distance of 50km (31 miles), with over 900 metres of climb.
Fenchurch Law are proud to support MIND, a charity that's doing incredible work in destigmatizing conversations around mental health and providing essential support to those in need. By participating in this charity walk, we're actively contributing to a cause that resonates deeply with us.
Any donations would be very much appreciated, and if you’d like to donate, please just click on the following link: https://www.justgiving.com/team/fenchurchlaw
Stay tuned for updates on our official channels and social media platforms as we prepare to embark on this challenge.
Developments for Developers: Court of Appeal Guidance on Building Safety Act Claims
In a landmark decision providing guidance on limitation issues and application of the Building Safety Act 2022 (“BSA”), the Court of Appeal has held that:
- Developers can recover economic loss from professional consultants responsible for negligent design, despite having sold the buildings prior to discovery of defects;
- Developers that commission construction works may be owed duties under s.1(1)(a) of the Defective Premises Act 1972 (“DPA”), whilst simultaneously owing duties to owners or occupants under s.1(1)(b);
- Extended limitation periods introduced by the BSA apply to ongoing proceedings, as if they had always been in force; and
- Developers can establish contribution claims against professional consultants based on notional liability to property owners for the ‘same damage’, without any formal claims having been commenced against the developers by the owners.
Background
BDW Trading Ltd (“BDW”) as developers engaged URS Corporation Ltd (“URS”) as consulting engineers in relation to various blocks of flats across the UK. Cracking reported in 2019 in the structural slab of a building designed by URS led to BDW undertaking a review of all related projects, and discovering that Capital East, on the Isle of Dogs, and Freemens Meadow, in Leicester, had been negligently designed. Whilst no cracking or other physical damage was identified at these developments, the existing structures were found to be dangerously inadequate and residents in part of Capital East were evacuated.
Freemens Meadow had achieved practical completion in 2012 and Capital East in 2008. By the time that defects came to light, BDW no longer had any proprietary interest in the buildings but decided, as responsible developers, they could not ignore the problem and incurred millions of pounds in costs to carry out investigations, temporary works, evacuation of residents and permanent remedial works.
Proceedings
BDW commenced proceedings against URS in 2020 based on claims in negligence. Contract claims were outside the standard 6 years limitation period at that time, whilst section 14A Limitation Act 1980 (“LA”) allows the time period for claims in tort to be extended if the claimant only had the necessary knowledge to bring the claim within the last three years (subject to a longstop of 15 years from the date of breach).
URS applied unsuccessfully to strike out BDW’s claims. This was followed by two related appeals on behalf of URS, against: (1) an Order answering various Preliminary Issues in favour of BDW; and (2) permission granted to BDW in 2022 to amend its pleadings, to rely upon longer limitation periods for DPA claims introduced by s.135 of the BSA.
Substantive Appeal
URS maintained that BDW suffered no actionable damage having sold at full value, and were not liable to carry out remedial works given the limitation defence available to potential claims by purchasers, so the loss fell outside the scope of URS’s duty of care.
Lord Justice Coulson observed that this was a kind of legal ‘black hole’ submission similar to the defendant’s argument in St Martin’s v McAlpine [1994], where the original employer sold its interest even before any breach of contract. The consequential “formidable, if unmeritorious” argument that the original employer had suffered no loss was ultimately rejected by the House of Lords, confirming that a defects claim does not always require an ownership interest in order for the cost of remedial works to be recoverable.
The Court of Appeal concluded that URS were under a clear duty to protect BDW from the risk of economic loss caused by structural deficiencies, and BDW’s liability to purchasers at the point of sale was not extinguished by any limitation defence - which operates as a procedural bar only (Kajima v Children’s Ark [2023]). URS’ argument that its duties to BDW were limited by the agreement to provide collateral warranties to individual purchasers was also misconceived, given the advantages of a consolidated claim:
“…there are many practical reasons why the existence of a claim on behalf of the individual purchasers by a major corporate entity like BDW which would cover the whole building and not just individual parts is an important benefit to those purchasers, regardless of the terms of any individual warranties in their favour. The difficulties that defendants can place in the way of individual claimants in large residential blocks can be seen in Manchikalapati v Zurich [2019]” (paragraph 61).
BDW’s motivation in carrying out the work was irrelevant and URS’ attempt to portray the losses as ‘reputational’ was rejected: “to adopt such a characterisation in relation to damages of this type would be dangerous in the extreme. It would be contrary to public policy because it might dissuade a builder from rectifying defective work” (paragraph 223).
On the question of when damage was suffered by BDW, in the sense of being worse off as a result of URS’ breach of duty, the Court of Appeal held that in cases of economic loss arising from inherent design defects that do not cause physical damage, the cause of action accrues at the latest when a building is practically completed (Tozer Kemsley v Jarvis (1983); New Islington v Pollard Thomas & Edwards [2001]), consistent with the House of Lords decision in Murphy v Brentwood [1991] and the limitation period for statutory claims under s.1(5) of the DPA. URS’ argument that BDW’s claim in negligence did not arise until the defects were discovered was dismissed.
Lord Justice Coulson’s judgment also summarises relevant authorities in relation to defects giving rise to physical damage, in which case the cause of action in tort arises when damage occurs, regardless of the claimant’s knowledge of it (Pirelli v Oscar Faber [1983]). The Courts of New Zealand and Australia have adopted a different approach, based on accrual of the cause of action when defects become discoverable (Sutherland v Heyman (1985), Invercargill v Hamlin [1996]); whereas English law developed an alternative solution to potential injustice arising from strict application of the primary limitation period, pursuant to section 14A LA (implemented by the Latent Damage Act 1986).
Amendments Appeal
URS claimed that the wrong test had been applied by the Judge at first instance in allowing BDW to amend its pleadings, to include claims under the DPA and Civil Liability (Contribution) Act 1978 (“CLCA”), without determining the disputed points of law as to when BDW’s cause of action accrued. This was rejected by the Court of Appeal: the arguments raised could not be described as short points of law of the type identified in Easyair v Opal [2009] and there was no question of a relevant limitation period having expired. The test had correctly been described as one of reasonable arguability, as to whether the amendments had some prospect of success, and the Judge was permitted to exercise discretion in leaving the substantive issues to be decided at trial.
For completeness given the wider implications, Lord Justice Coulson went on to consider the arguments raised in relation to the DPA and CLCA claims. In particular, URS argued that: (i) the longer limitation periods permitted by the BSA do not apply to parties to ongoing litigation; (ii) developers are not owed duties under the DPA; and (iii) BDW had no legal right to make a claim for contribution when no claim had been made or intimated by any third parties against BDW. All of these arguments were unsuccessful.
The Court of Appeal confirmed that the BSA, including retrospective limitation periods under section 135, applies equally to parties involved in ongoing litigation, subject to the carve out for any claims settled by agreement or finally determined prior to the new legislation coming into force. There is no reason why a party who started an action promptly, before the BSA came into force, should be disadvantaged, and ‘Convention rights’ are preserved: “So if, for example, URS could show that, in 2016, they had destroyed some critical documents which might have provided a defence to the claim under the DPA, because they assumed that under the existing law any relevant claims were statute-barred, then they may be able to deploy that fact at trial” (paragraph 170).
As to the scope of duties under the DPA, the relevant provisions are set out in section 1:
“1. Duty to build dwellings properly
(1) A person taking on work for or in connection with the provision of a dwelling (whether the dwelling is provided by the erection or by the conversion or enlargement of a building) owes a duty –
(a) if the dwelling is provided to the order of any person, to that person; and
(b) without prejudice to paragraph (a) above, to every person who acquires an interest (whether legal or equitable) in the dwelling;
to see that the work which he takes on is done in a workmanlike or, as the case may be, professional manner, with proper materials and so that as regards that work the dwelling will be fit for habitation when completed.”
The Court of Appeal held that URS did owe a duty to BDW under s.1(1)(a) of the DPA, based on the ordinary meaning of the language used. The category of persons to whom a duty is owed under this section must be different to s.1(1)(b), otherwise the sub-section would be otiose, and the Law Commission Report which gave rise to the DPA did not limit those requiring protection to individual purchasers (as opposed to commercial organisations, including developers). Application of the DPA is not binary: as with a contractual chain, where the main contractor owes duties to his employer, whilst being owed duties by sub-contractors; so a developer owing duties to purchasers can at the same time be owed duties by professional consultants.
A further submission that no duty was owed to BDW under the DPA because URS were providing an entire development was also rejected. Rendlesham v Barr [2014] establishes that work “in connection with the provision of a dwelling” includes the structure and common parts; and the absence of previous claims by developers under the DPA did not mean that such claims were inherently unlikely (as with statutory inspectors in Herons Court v Heronslea [2019]), given that the DPA “has been significantly under-used in its lifetime so far” and has a higher threshold than claims in contract or tort. Recoverability of damages under the DPA is not limited by property ownership and BDW’s sale of the buildings was irrelevant.
In relation to the CLCA claim amendment, the Court of Appeal held it was irrelevant that individual property owners had not commenced any formal claims against BDW. A crystallised claim from a third party ‘A’ is not required before a party ‘B’ has the right to claim a contribution from another party ‘C’ in respect of the same damage. B’s right to claim can anticipate the making of a claim by A against B and in circumstances where B’s liability has already been discharged, a notional liability is all that is required. For purposes of the LA, which provides a 2 year period for CLCA claims to be brought from when the right to claim accrued, the reference to ‘payment’ in section 10(4) could encompass the situation where remedial works were carried out instead.
Conclusion
The outcome is policy driven, encouraging builders and developers to act responsibly in remediating residential property defects.
Parties to existing disputes will be reviewing their pleadings and applying to amend in many cases, to incorporate retrospective DPA claims against parties responsible for sub-standard work. The trend for greater reliance on the DPA looks set to continue, where claimants can demonstrate substantial inconvenience, discomfort or risks to health & safety of occupants, which could include defective shower trays in some instances given the impact on ability to wash (an example given by the Court of Appeal).
Latent defects policies for new build homes often exclude losses recoverable from third parties and policyholders should consider potential claims against all relevant members of the construction project team. Similarly, landlords are required under section 133 BSA to take all reasonable steps to obtain monies available through insurance, third party claims or other means, such as Building Safety Fund grants, prior to seeking recovery of remedial costs through service charges.
It remains to be seen if permission will be requested for a further appeal on preliminary issues and whether the case will proceed to final determination on the substantive claims.
URS Corporation Ltd v BDW Trading Ltd [2023] EWCA Civ
Amy Lacey is a Partner at Fenchurch Law
Collisions, Allisions and Prudent Uninsureds - Technip v Medgulf, and insurance for unauthorised settlements
Technip Saudi Arabia Ltd v Mediterranean and Gulf Cooperative Insurance and Reinsurance Company [2023] EWHC 1859 (Comm) (21 July 2023)
This decision provides helpful insight into how the Courts will deal with insurance claims for sums due under a settlement agreement.
Technip was the principal contractor for a project in an offshore oil and gas field in the Persian Gulf. In 2015, a vessel that Technip had chartered collided with and damaged a platform in the field. Technip and the platform owner, KJO, reached a settlement for US$25 million, which Technip sought to claim from the defendant insurer (“Medgulf”), along with other alleged losses, under the liability section of its Offshore Constructions All Risks policy. The settlement had occurred some three years after Medgulf had declined indemnity for the original claim, instead telling Technip that it should act as a “prudent uninsured”.
Claiming losses under Settlement Agreements
Technip -v- Medgulf confirmed the general principle under English Law that it is not enough for a policyholder simply to prove that a settlement agreement reached with a third party is reasonable in order to claim for the resulting loss under a liability policy, but it must also prove that there was a legal liability to the third party and that the settlement does not exceed the amount of that liability. In other words, the law does not provide a carte blanche to policyholders to settle disputes with third parties and expect a liability insurer to pick up the tab.
Settlement Agreements and Insurer’s Consent
Liability policies very commonly require the insurer's consent before a policyholder takes various steps during a dispute with a third party. These can include admission of liability, settlement discussions, negotiations and entering settlement agreements.
Here, the Policy provided an indemnity to Technip for its 'Ultimate Net Loss' ("UNL"), which was defined as:
"the total sum the Insured is obligated to pay as Damages …"
Damages were defined as:
"…compensatory damages, monetary judgments, awards, and/or compromise settlements entered with Underwriters' consent, but shall not include fines or penalties, punitive damages, exemplary damages, equitable relief, injunctive relief or any additional damages resulting from the multiplication of compensatory damages". (Our emphasis)
Technip did not obtain Medgulf’s consent before concluding the settlement agreement, and Medgulf predictably argued that the settlement sum therefore did not fall within the definition of “Damages”.
Technip successfully argued that the sums payable under the Settlement Agreement comprised, in part, "compensatory damages" and so fell under the definition of "Damages" under the Policy. Medgulf had argued that the four categories identified in the first part of the definition of “Damages” had a degree of separation and that, crucially, “compensatory damages” must be sums awarded by a court or tribunal, which would not be applicable to the US$25 million Technip paid to KJO. The Court rejected this argument, however, and did not view the four categories as disjunctive: the settlement payment was caught by the definition of “compensatory damages” within the ordinary meaning of the term, with the result that the absence of consent by Medgulf was irrelevant.
Furthermore, Technip argued that, even if the settlement sum did not constitute “compensatory damages” and instead was only potentially covered as a “compromise settlement”, there was still no need for Medgulf's consent given that it had refused to indemnify Technip in 2016 (three years before the Settlement Agreement) and told Technip to act as a 'prudent uninsured'. Technip contended that, in these circumstances, the provision requiring consent could not apply, as the provision presupposed the insurer's acceptance of liability under the Policy.
The Court agreed with Technip and held that it "would have little difficulty in concluding that the insurer had waived any requirement for the insured to seek its consent or was estopped from asserting that such consent should have been sought and insured". So, in short, the Court found that Medgulf was prevented from relying on the “Underwriter’s consent” part of “compromise settlements”.
Summary
Although Technip’s claim for an indemnity ultimately failed on other grounds, the Court’s comments concerning insurers' inability to rely on terms requiring their consent once they have told the policyholder to act as a prudent uninsured (or use similar language) are plainly useful for other policyholders. The decision stands in welcome contrast to the Privy Council’s judgment in Diab v Regent [2006] UKPC 29, which had seemingly held that, where an insurer has declined indemnity, a policyholder is still bound by all the claim conditions, including the need to seek insurer’s consent for a settlement. The policyholder in Diab had also raised an estoppel argument, which failed because the Court viewed the alleged representation of the insurer as essentially a warning not to pursue a claim under the policy, and not as an indication that, if the policyholder did pursue the claim, it would not be expected to comply with the procedural requirements of the policy.
Fun Fact: The event leading to the Damage in Technip -v- Medgulf was referred to throughout the Trial as an allision rather than a collision, an allision being where one of the objects involved is stationary.
Authors:
Cladding PI Notifications - A View from Down Under
A recent decision in the Federal Court of Australia provides guidance on broad professional indemnity insurance notifications for external cladding works, confirming that a wide problem may be validly notified with reference to appropriate supporting information - MS Amlin Corporate Member Ltd v LU Simon Builders Pty Ltd [2023] FCA 581.
A full copy of the judgment can be found here.
The Policies
LU Simon Builders Pty Ltd and LU Simon Builders (Management) Pty Ltd (the “Policyholders”) operated a construction and project management business. Professional indemnity (“PI”) insurance was arranged through local Australian and London placing brokers for the 2014/2015 period, including excess layers.
The insuring clause provided cover for civil liability arising from claims first made against the Policyholders during the policy period, and reliance was placed upon section 40(3) of the Insurance Contracts Act 1984, whereby an insurer is also liable for claims made after expiry of the period of insurance:
“where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired”.
This creates a statutory mechanism similar to the common position in the English PI market, where claims made covers are frequently extended to allow notification of circumstances known to the policyholder that may give rise to a claim: if notification of circumstances is made during the policy period then the third party claim itself – even though it may actually come in at a later date – is deemed to have been made during that same policy year.
The Claims
In 2019 proceedings were commenced against the Policyholders by developers and owners of Atlantis Towers in Melbourne, alleging that unsuitable ”Alcotex” aluminium composite panels (“ACP”) were used as cladding for the building (the “Atlantis Claims”). The Policyholders sought indemnity for the Atlantis Claims, and excess layer insurers applied for a declaration that the PI policies would not respond.
The Atlantis Claims came about following investigation by the Metropolitan Fire Brigade (the “Fire Brigade”) and Municipal Building Surveyor for the City of Melbourne (the “Municipal Surveyor”) into a fire on 25 November 2014 at Lacrosse Tower, another building constructed by the Policyholders. The investigation found that ACP at Lacrosse Tower (Alucobest) was not compliant with the Building Code of Australia, and had contributed to the rapid spread of fire.
The Victorian Building Authority (the “Building Authority”) subsequently commenced an investigation and audited around 170 high-rise buildings in Melbourne. The Building Authority concluded that ACP on the Atlantis Tower (Alcotex) was combustible, and Building Orders were issued requiring replacement.
The Notifications
The dispute centred around two notification emails headed “Potential Claim”, sent to insurers in May 2015, neither of which identified Atlantis Towers or the Alcotex brand of ACP which had been used in its construction.
The first notification email referred to: “a notification of circumstances that may result in a claim under [the Policyholders’] Policy … Really most of the noise is around the press release … No formal claim has been made against [the Policyholders] at this point in time”.
The email attached: (1) a newspaper article dated 28 April 2015, referring to the Building Authority’s investigation into the Policyholders’ building practices, to identify whether non-compliant ACP had been used elsewhere; and (2) a document headed “Lacrosse Apartments - Docklands” including commentary from the managing director of the Policyholders in relation to ACP having been widely used in Australia for decades with “no like product passing the test for combustibility”, and referencing a potential class action by owners of Lacrosse Tower.
The second notification email attached a report on Lacrosse Tower by the Fire Brigade entitled “Post Incident Analysis Report”, together with the design and construct contract. The report stated that the Fire Brigade was not aware of any competitor aluminium / polyethylene panel product which had satisfied combustibility tests, and expressed the Fire Brigade’s firm opinion that ACP without appropriate accreditation / certificates of conformity represented an unacceptable fire safety risk, given the need to prevent similar incidents. The Fire Brigade’s report contained hyperlinks to four media reports, suggesting that the Building Authority’s audit had revealed a pattern of poor compliance with regulations, and that “buildings may be a risk to occupants in a fire situation”.
The Decision
His Honour Justice Jackman concluded that the notification emails clearly pointed to a wider problem than one confined to the Lacrosse Tower, or to Alucobest products. The reference to broader investigations, alongside the proposal form statement that 100% of the Policyholders’ work in the last financial year related to high-rise buildings, had the effect of conveying to insurers that there was (at least) a real and tangible risk of the Policyholders facing claims for rectification of that aspect of its work on this building, and on others that it had constructed.
Applying principles discussed in P&S Kauter Investments Pty Ltd v Arch Underwriting at Lloyd’s Ltd [2021] NSWCA 136, the Court acknowledged notification need not be given in a single document, nor the likely claimant(s) identified. Information included by hyperlinks formed part of the notification, since the task of clicking “is not significantly more demanding than turning a physical page” - provided that the link is to a specific page or document. Opinions expressed by public authorities with appropriate expertise (such as the Fire Brigade or the Municipal Surveyor) were held to be capable of constituting “facts” for the purpose of s.40(3), despite the contrary Federal Court decision in Uniting Church (NSW) v Allianz Australia Ltd [2023] FCA 190.
Given a clear causal connection between investigations reported in the notification emails, and later proceedings against the Policyholders, the Court concluded that insurers had been notified before expiry of the policies of facts giving rise to the Atlantis Claims, within the meaning of s.40(3).
English Law
Australia is a common law jurisdiction originating from the English legal system, applying statutory provisions enacted by its various states and federal governments.
Policyholders are similarly able to make “hornets’ nest” notifications under English law, i.e. general notification of a problem even where the cause of the problem or its potential consequences are not yet known (HLB Kidsons v Lloyd’s Underwriters [2008]; Kajima UK Engineering v The Underwriter [2008]; Euro Pools plc v RSA [2019]).
The operation of notification of circumstances provisions under liability policies is often contentious, and careful consideration should be given to the content and timing of notices to insurers, with supporting documents, to maximise the scope of cover. Policyholders should be mindful of precise wording in their PI policy conditions on the knowledge threshold for notifications (whether based on “may” or “likely to” give rise to claims language), and ensure that the trigger remains consistent between policy years and insurance layers where possible, in order to avoid potential gaps in cover.
Amy Lacey is a Partner at Fenchurch Law