(De)sign of the Times: Blurred Lines on Build Performance Liabilities
Design requirements are at the heart of any construction contract, and the precise formulation of applicable standards is crucial to evaluation of risk. Recent trends indicate that designers in the UK construction industry are assuming increasing levels of liability on build performance, with significant implications for coverage under professional indemnity insurance.
In Arbitration Appeal No 1 of 2021 [2021] CSOH 41, the Scottish Court of Session recently considered the interpretation of deemed design liability clauses, and upheld a provision imposing responsibility on a consultant for designs pre-dating its appointment and which had been proposed without its involvement. Whilst similar clauses may be given a narrower interpretation in a multi-disciplinary design context involving several third party consultants, the scope of such provisions should be carefully considered at the outset, to limit exposure and potential uninsured loss.
Reasonable Skill & Care vs. Fitness for Purpose
A contractor or professional with design responsibility should exercise reasonable skill and care, based on standards expected of an ordinary skilled person performing and professing to have that special skill, so that liability will not arise unless they have acted negligently.
Express contract terms often impose more onerous fit for purpose type obligations, providing a warranty that the works will conform to specified employer requirements. Liability arising from a higher contractual standard than that imposed by ordinary common law, including certification of compliance with specified design, will usually fall outside the scope of cover under professional indemnity insurance.
Strict liability can be implied in relation to design elements of work under a design and build contract (Viking Grain Storage v TH White Installations (1985) 3 Con. L.R. 52); or where the contractor is informed of the purpose for which the works are required and the employer relies upon the contractor’s skill and judgement (Greaves v Baynham Meikle [1975] 1 W.L.R. 1095).
Industry standard forms address the issue in different ways, with JCT contracts requiring reasonable skill and care, whilst all FIDIC contracts impose some degree of fitness for purpose obligation. This divergence in part reflects the usual approach in different industry sectors, with design and construction contracts for energy or infrastructure projects typically including output specifications capable of measurement through testing, as compared with the performance standard ordinarily assumed by an architect or other professional designer in the real estate development sector.
Conflicting Standards
In MT Højgaard v E.ON [2017] UKSC 59, the Supreme Court considered a contract containing both a reasonable skill and care obligation, and a warranty ‘tucked away’ in a technical schedule requiring a service life of 20 years. The latter took precedence, in circumstances where wind turbine foundations designed and installed by the defendant in accordance with the claimant’s requirements and certifying authority’s specification began to fail during the defects period, due to a subsequently identified error in a value in the authority’s specification. The case demonstrates that a contractor can be found to assume the risk if they have agreed to work to a design which would render the item incapable of meeting the performance criteria.
An obligation to ensure that works constructed in accordance with the build design “shall meet the requirements described in the Specification” may be construed as imposing strict liability, notwithstanding the designer having separately undertaken to exercise reasonable skill and care (Costain v Charles Haswell & Partners [2009] EWHC 3140). This depends on the particular contract wording, however, and conversely a design and build contract requiring a consultant to comply with a specific design, alongside an obligation to act with reasonable skill and care, may be construed on the basis that the obligation to comply with the specification is to be read as expressly or impliedly subject to the reasonable skill and care provision (MW High Tech Projects v Haase Environmental Consulting [2015] EWHC 152).
For complex contracts incorporating schedules from multiple sources, a priority of documents provision may be helpful to deal with potential inconsistencies.
Implementation of Design
Following on from the decision in SSE Generation v Hochtief Solutions [2018] CSIH 26, we are seeing an increase in professional indemnity disputes based on a distinction between preparation and implementation of design, with reference to the scope of ‘professional activities’ defined in the policy and declared in the proposal form.
In SSE Generation, a design and build contractor was held liable under the NEC2 contract for costs of repairing a tunnel collapse at the Glendoe hydroelectric power scheme in Scotland, due to breach of contract requirements on appropriate support for erodible rock encountered in a fault zone. The court decided by a majority that Hochtief could not rely on a limitation of liability for design defects, despite having exercised reasonable skill and care in preparing the design statement, as the damage was caused by implementation of design.
This conclusion was reached in light of specific contract terms and the interface between design and its implementation is highly fact sensitive (Bellefield Computer Services Ltd v E Turner & Sons Ltd [2002] EWCA Civ 1823), particularly in cases involving complex construction and engineering decisions.
Design Life
Construction contracts often require completed works to deliver a specified minimum ‘design life’.
The meaning of this concept was considered in Blackpool B.C. v Volkerfitzpatrick [2020] EWHC 1523, a case concerning alleged premature corrosion to a tram depot situated in a seafront location. The court referred to relevant British Standards on service life planning and structural design in concluding that an acceptable level of not “unusually onerous” maintenance is a key ingredient of performance expectations for individual parts of a building, and a specified design life implies that “major repairs” should not be needed during that period. The extent of standard maintenance will be a matter of fact and degree, which could be addressed in O&M manuals produced by the contractor.
Depending on the words used in the contract, several discrete obligations may be separately imposed and cumulatively applied to the design life and quality of particular components within a complex structure (125 OBS (Nominees1) v Lend Lease Construction [2017] EWHC 25).
Conclusion
In view of ongoing hard market conditions, policyholders are understandably reluctant to accept requirements outside the scope of conventional insurance cover, with extensive negotiation on design risk allocation at the pre-contract stage often resulting in a form of compromise wording.
The nuanced approach adopted in recent court rulings demonstrates a blurring of lines between the traditional reasonable skill and care vs. fitness for purpose dichotomy, acknowledging that different standards can apply to various aspects of design under a single contract.
Designers should exercise particular caution in relation to deeming provisions in appointment documents and standard form contracts, imposing liability for plans initially developed by the employer or third parties.
To avoid ambiguity, contractors and consultants should expressly exclude fitness for purpose obligations where possible, and consider inclusion of contract terms defining the output of building design, with reference to intended maintenance procedures. Where exclusion of fitness for purpose obligations cannot be agreed, policyholders should talk to their brokers and insurers to obtain clarity about the extent to which any onerous contractual obligations are covered by their professional indemnity insurance.
Amy Lacey is a Partner at Fenchurch Law.
Weathering the Hard Market: is your CAR Policy Watertight?
The increasing prevalence of water damage losses on construction projects, combined with hard market conditions, has led to a rise in disputes over insurance policy response for these types of events. Claims in consequence of cascading water from burst pipes or adverse weather conditions often give rise to disagreements over the occurrence and timing of ‘damage’, in order to trigger coverage under contract works policies, and a number of standard exclusion clauses may impact upon the level of protection.
Insuring Clauses
The legal test for damage requires proof of physical change to insured property, adversely affecting its value or usefulness. Authorities demonstrate a distinction between policies requiring ‘damage’ - which includes transient or reversible changes if time and money has been spent dealing with the problem (Ranicar v Frigmobile; The Orjula) - as opposed to policies with a ‘physical damage’ trigger, which may not respond in the absence of a permanent alteration in condition (Transfield Constructions v GIO).
The need for coverage in respect of temporary changes is particularly important in water damage scenarios, where the insured property could dry out relatively quickly. Insurers might suggest that no lasting damage remains, even if the policyholder has been put to considerable expense and inconvenience through a water ingress event, especially where guarantees relating to electrical elements of contract works may be invalidated.
It is sufficient for physical change to have occurred at a microscopic level, detectable only through careful examination using advanced inspection techniques, such as accumulation of dust on carpets (Hunter v Canary Wharf) or increased brittleness and liability to early degradation of a pastel painting following exposure to high temperatures (Quorum v Schramm). Accumulations of water can result in physical changes to insured property in the form of rot or fungal spores, especially in close proximity to timber elements, although expert assistance may be required to identify the presence of this type of damage.
Exclusions from Cover
Contract works policies typically exclude cover for damage resulting from changes in the water table level, and may refer to fungus or rot alongside other naturally occurring processes as part of a gradual deterioration exclusion.
Another key aspect of the policy wording determining the scope of protection for water damage events are relevant defects exclusion clauses. Contract works insurance usually contains a standard defects exclusion based on the DE or LEG suite of options, offering different levels of coverage for cost of repair associated with defective design, workmanship or materials. Failed connections in water systems may involve a combination of design or workmanship problems, and the proximate cause of loss will often need to be identified to determine policy response.
DE5 or LEG3 usually provide the broadest coverage for losses in consequence of defects, to include costs incurred to gain access to property damaged as a result of defects, and excluding only the cost of improvements. Some policies provide an option as to application of DE5 or DE3 / LEG3 or LEG2, at the policyholder’s option at the claims stage, allowing flexibility to determine which alternative produces the most favourable outcome with knowledge of the particular circumstances arising.
Some standard exclusion clauses (such as DE4) provide cover for damage to ‘other property’ caused by defects, but not the defective ‘part’ itself, which often leads to disputes over divisibility of insured property between defective and non-defective parts. In general terms, the courts will look to the commercial reality of whether a particular aspect of the development would be viewed by contracting parties as a separate package or phase of works (Seele Austria).
The aggregation wording in the policy may also impact upon coverage for complex aspects of contract works, such as structures formed from separate sections or modular elements, with the possibility of insurers arguing that multiple ‘losses’ have occurred for purposes of the limits of indemnity and deductible.
Policy Conditions
Careful consideration should be given to policy conditions requiring particular steps to be taken in relation to risk mitigation and claims handling.
In order to establish breach of a ‘reasonable precautions’ condition, the insurer must prove recklessness i.e. the insured subjectively appreciated the risk but didn’t care or ignored it; mere negligence will not suffice (Sofi v Prudential). This is distinguishable from policy requirements imposing positive continuing obligations on insureds to take specific actions, such as unoccupied buildings conditions. The recklessness threshold will not apply where there is “a highly defined and circumscribed set of particular safeguards which have to be put in place” (Aspen Insurance v Sangster).
Insurers are increasingly focused on water damage risk management procedures as part of the underwriting process, and may include specific provisions in the policy requiring compliance with e.g. CIREG best practice guidelines. The inclusion of ‘conditions precedent’ should be resisted, with use of appropriate ‘best endeavours’ type language especially if works on site involve third party sub-contractors, so that compliance with the condition is not entirely within the policyholder’s control.
Conclusion
Advice should be sought from specialist brokers on potential improvements to the scope of insurance for contract works, with particular reference to the trigger for coverage, exclusion clauses and policy conditions. When a loss does occur it is important to investigate and document the condition of insured property without delay following a water damage incident, with expert input if required, to minimise the prospect of insurance disputes.
Amy Lacey is a Partner at Fenchurch Law
‘Deliberate acts’ exclusion disapplied: Supreme Court decision on Public Liability
The Supreme Court has rejected attempts by an insurer to rely upon an exclusion clause under a public liability policy, in a case arising from the death of a customer following an assault by door staff at a bar in Aberdeen.
The security company’s insurance provided cover for accidental injury or death, but excluded "deliberate acts wilful neglect or default". The policy was governed by English law and there was no suggestion of any difference in approach under the law of this jurisdiction or Scotland in relation to the issues on appeal. The customer’s widow claimed against the insurer pursuant to the Third Party (Rights against Insurers) Act 2010, following liquidation of the security company employer, based on vicarious liability for wrongful acts of its employees.
The Supreme Court held that a “deliberate act” was something carried out with the intention of producing the insured outcome i.e. in this case, acts intended to cause injury. In reaching this conclusion, their Lordships recognised the commercial context of the policy to cover the business of “Manned Guarding and Door Security Contractors”, including unintended consequences of incidents at the bar door, which commonly involve deliberate physical acts. If every intentionally performed act was classed as deliberate for purposes of the exclusion, there would be no coverage for many accidental injuries the policy was designed to insure.
The same was true if “wilful neglect or default” was construed as extending the exclusion clause to acts embarked upon with reckless disregard for the consequences, in the sense of proceeding despite a known risk of injury, or not caring if such a risk may arise. Interpreting the exemption in that way would seriously limit the cover provided and lead to a “commercially unlikely exclusion, given the nature of the [insured]’s business”.
There was no determination in the earlier proceedings of intention to injure, or even recklessness, and it is not the role of appellate courts to make findings of fact. Following ejection from the bar due to intoxication, the customer hit out at security staff and was taken in a neck hold for up to three minutes, resulting in death from asphyxiation. In sentencing remarks, Lady Wolffe found that the employee’s actions were: “badly executed, not badly motivated … you believed you were acting in defence of your fellow door stewards and to minimise the danger you felt Mr Grant posed to others.”
The insurer was therefore unable to avoid liability. Following a series of pro-policyholder decisions, this appears to be another example of the Supreme Court’s willingness to take account of public policy considerations to avoid stripping insurance contracts of much of their content, and confirms that exclusion clauses will be construed based on the words used in their “documentary, factual and commercial context”, in accordance with principles set out in Wood v Capita Insurance Services Ltd [2017].
The decision is helpful for policyholders in demonstrating that conscious performance of an act with intention to cause insured damage must be established, in order to trigger a deliberate acts exclusion, and mere recklessness will not suffice. Whilst recklessness will be enough to prove breach of a reasonable precautions condition (Fraser v Furman [1967]), insurers face a higher evidential threshold in relation to ‘deliberate acts’.
Burnett or Grant v International Insurance Company of Hanover Ltd [2021] UKSC 12
https://www.supremecourt.uk/cases/docs/uksc-2019-0121-judgment.pdf
Amy Lacey is a partner at Fenchurch Law
The Good, the Bad & the Ugly: #13 (The Bad). Haberdashers’ Aske’s Federation Trust & v Lakehouse Contracts
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#13 (The Bad)
Haberdashers’ Aske’s Federation Trust Ltd & others v (1) Lakehouse Contracts Ltd & (2) Cambridge Polymer Roofing Ltd [2018] EWHC 588 (TCC)
This case arose from fire damage to a school during construction works. The main contractor (“Lakehouse”) settled proceedings brought by the claimants for £8.75million, paid by the project insurers, and sought to recover £5million from its roofing sub-contractor (“CPR”), being the limit of indemnity under a separate CAR/liability policy taken out by CPR in accordance with express terms of the building contract.
The court was required to determine as a preliminary issue whether CPR was covered under the project policy, which included Lakehouse and its sub-contractors as insureds, and agreement of insurers by endorsement to “waive all rights of subrogation which they may have or acquire against any insured party”. The court held that CPR was not insured under the project policy, given the clear intention expressed in the sub-contract for CPR to take out and rely on its own insurance cover.
In reaching this conclusion, the Judge considered competing theories as to how a sub-contractor may obtain the benefit of project insurance, i.e. (1) the main insured acting as agent, with its conduct subsequently ratified by the sub-contractor (this was considered problematic as sub-contractors would not necessarily have been ascertained at the time of policy inception, nor be able to ratify if they had no insurable interest as yet); (2) a “standing offer” by project insurers to provide cover for members of a defined group; or (3) acceptance by the sub-contractor’s conduct that it would become an insured under the project policy. The standing offer rationale was considered to be the most appropriate.
An appeal was listed in January 2019 but the case settled before the hearing. Given a number of difficulties with the first instance decision, it is unfortunate that the opportunity for further debate and clarification in the Court of Appeal was missed on this occasion.
The Haberdashers judgment seems unfair in terms of a windfall for project insurers, who receive premium based on cover for sub-contractors of any tier, despite sub-contracts likely imposing additional insurance obligations. It is impossible for insurers to accurately rate their exposure on this basis, without knowing at the time of writing the project policy what limits a future (as yet unidentified) sub-contractor may or may not take out.
It seems odd that terms of a contract between third parties should determine who is insured under a pre-existing project policy. The decision effectively confines the scope of project insurers’ standing offer to provision of cover for “sub-contractors who have not agreed to obtain their own insurance” but such a limitation was nowhere to be found in the terms of the project policy.
Given the express waiver of subrogation rights, the reasoning seems inconsistent with the Supreme Court majority view in Gard Marine - that a strong presumption applies in favour of an implied term precluding claims between co-insureds (even if the contract contains an express warranty from the defendant to protect insured property); and the effect of co-insurance is to exclude - as opposed to discharge - liability as between co-insureds. On this reasoning Lakehouse would have no liability to the claimants, which suggests that there is no basis on which a back-to-back claim could be pursued against CPR.
The subrogated claim against CPR was limited to £5million and the Judge suggested (obiter) that project insurers would not have been able to recover the full loss, i.e. the additional £3.75million settlement sum, as it was surely not anticipated that CPR would bear any additional uninsured loss where there was project insurance in place with a higher limit. This was not fully explained in the judgment and begs the question of whether a hybrid situation could arise whereby a sub-contractor is not co-insured up to the limit of its own separate cover, but in excess of that level, becomes insured by the project policy. Further peculiarities as to apportionment of liability could arise where a mismatch occurs between the scope of cover under a project policy and the sub-contractor’s liability insurance, giving rise to significant uncertainties for policyholders and insurers alike.
In our view, the decision in Haberdashers is a bad one. We prefer the approach adopted by the Court of Appeal in Rathbone Brothers v Novae, to the effect that an overlapping insurance situation may arise, even where one policy was specifically intended to cover the loss in question.
Debate as to whether, and in what circumstances, primacy should be given to express allocation of risk within a construction contract as opposed to inferences drawn from the existence of a project policy is likely to continue. Even if a contractor is presumed to fall within the definition of insured parties under a project policy, it should ensure that risk allocation and insurance provisions in its construction contract(s) are consistent, for example by specifying that any separate insurance required to be taken out by the contractor should operate in excess of the project cover, to minimise the prospect of subrogated claims.
Amy Lacey is a partner at Fenchurch Law.
Appeal Courts Triumph for Structural Defects Policyholders: Manchikalapati v Zurich
Leaseholders of flats in a development in Manchester have secured a major victory against Zurich Insurance under a standard form defects policy, in a case with significant implications for new build home owners affected by inadequate construction works. Following a long running Court battle over claims first notified in 2013, policyholders have been awarded approximately £11 million to rectify failures by the insolvent developer to comply with technical requirements and building regulations.
Residents moved into New Lawrence House from 2009 but were forced to leave following a prohibition notice issued shortly after the Grenfell Tower disaster in June 2017, in view of structural deficiencies including missing lifts and balconies, a collapsing roof deck and complete lack of fire stopping measures. The Court of Appeal judgment handed down last week essentially upheld the decision of HHJ Davies, requiring Zurich - through run-off insurers East West - to pay out under the Standard 10 New Home Structural Defects Insurance Policy (the Policy), aside from overturning the maximum liability cap of around £3.6 million applied below.
The development contains 104 flats and the Claimants between them own only 30, with many others left empty. The Policy limited Zurich’s liability for new homes forming part of a continuous structure by reference to “the purchase price declared to Us”, which had been construed as restricting the Claimants’ recovery to the combined sums paid for their own flats. The Court of Appeal disagreed and recalculated the cap based on the total purchase price of all flats in the block, since the Policy enabled a single leaseholder to recover the entire cost of rectifying a danger to the health and safety of occupants and the previous approach would prevent them from doing so. The Policy wording was ambiguous and should be construed “in a manner which is consistent with, not repugnant to, the purpose of the insurance contract”.
Zurich advanced a number of grounds of appeal relating to interpretation of the Policy, all of which were rejected. Lord Justice Coulson found that:
“what [Zurich] suggest as the proper interpretation of the words used in their own policy is, on analysis, nothing of the kind, and is instead a strained and artificial construction (often requiring the interpolation of words not present) with the result that it becomes impossible to see any circumstances in which [Zurich] would ever pay out under the terms of the policy.”
In particular, the Court of Appeal decided:
1. It is not necessary for the costs of rectification work to have been incurred before a claim can be made under the Policy - otherwise insurers could take advantage of leaseholders’ impecuniosity to avoid liability altogether;
2. The fact that funds recovered would in part be used to pay the Claimants’ lawyers and funders was irrelevant. An insured can apply the insurance proceeds as they wish and it would be unjust to hold otherwise, penalising the Claimants merely because they do not have pockets as deep as Zurich’s. The legal and funding costs would never have been incurred had Zurich acknowledged their proper liabilities at the outset;
3. The Policy does not require the insured to sue any third parties against whom the insured might have a possible claim before pursuing Zurich under the Policy;
4. The underground car park and balconies at the development fall within the scope of cover;
5. The condensation exclusion in the Policy does not apply where the condensation which causes damage is caused by a defect. The proximate cause of damage is the defect, not condensation.
6. The trial judge’s application of Policy excess provisions could not be challenged on appeal.
New build developments are usually constructed by single-purpose corporate entities with limited assets, and purchasers of defective properties have restricted rights of recourse against those responsible for the construction or building control approval process in the absence of contractual claims under collateral warranties (Murphy v Brentwood DC [1991] 1 A.C. 398, Herons Court v Heronslea Ltd [2019] EWCA Civ 1423). The decision in this case is an important step forward in protecting the interests of new build home owners, in light of wider concerns about regulatory oversight and industry standards under contractor-led procurement methods.
The Zurich Policy was a standard wording indirectly descended from the original NHBC scheme and widely used across the country at the relevant time, with the intention of providing peace of mind for the purchasers and mortgagees of new build properties. The policyholder-friendly interpretation upheld by the Court of Appeal serves as a welcome reminder of this commercial context, limiting the extent to which insurers can seek to rely upon unrealistic arguments to avoid liability or delay payment for outstanding claims. Home owners with the benefit of structural defects policies should notify potential claims as soon as possible, to maximise the prospects of effective recoveries.
Manchikalapati & others v Zurich Insurance plc & others [2019] EWCA Civ 2163
https://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWCA/Civ/2019/2163.html&query=(MANCHIKALAPATI)
Amy Lacey is a partner at Fenchurch Law
Building a Safer Future: Regulatory Reform on Combustible Cladding
Following publication of the Hackitt Report in May 2018, the government has been under increasing pressure to implement effective reform of building regulations in the UK, with a focus on cladding systems to high-rise developments. Legislation has recently been introduced aimed at improving fire safety and accountability, with a range of further measures anticipated.
Building (Amendment) Regulations 2018
Regulations came into force on 21 December banning the use of combustible materials in external walls of buildings above 18 metres in height, including residential dwellings, boarding schools, student accommodation, registered care homes and hospitals (SI 2018/1230). The new rules also apply where building work is a "material change of use" that brings an existing building within one of these categories. Commercial buildings, including hotels and offices, are excluded.
The ban does not apply retrospectively to existing structures, including where a building notice or initial notice has been given to, or full plans deposited with, a local authority before the legislation commencement date, provided that building work has already started or starts within two months thereafter.
The press release announcing the ban confirms the government's "full backing" for local authorities to enable them to carry out emergency work on private residential buildings with unsafe cladding, including financial assistance, although local authorities will be expected to recover the costs from building owners. This is not mentioned in the Regulations and seems to indicate support for councils in using their existing powers relating to unsafe buildings, pursuant to the Building Act 1984.
Approved Documents 7 (Materials & Workmanship) and B (Fire Safety)
Regulation 7 of the Building Regulations 2010 requires that materials used in building work are appropriate for the circumstances. A new sub-section 7(2) has been introduced, directing that all materials which become part of an external wall, including “specified attachments” such as balconies and solar panels, achieve European fire safety classification (A2-s1, d0) or (A1), meaning only limited combustibility or non-combustible materials will be permitted. Certain limited components are exempted by regulation 7(3), including gaskets, sealants, windows and any part of a roof.
Approved Document B has been updated to include additional guidance at paragraph 12.6 that insulation products and filler materials used in external walls in buildings of 18 metres or more “should be of limited combustibility or better”. It is no longer permissible therefore to incorporate combustible materials within masonry or concrete walls to new high-rise buildings, such as the Reynobond polyethylene core ACM panels that were used on Grenfell Tower.
Further changes to Approved Document B come into effect on 21 January 2019, clarifying the role of assessments in lieu of testing for cladding and fire safety systems. In accordance with Hackitt recommendations, use of desktop studies should be restricted to appropriate situations backed up with sufficient test evidence, with those undertaking assessments able to demonstrate suitable competence.
The government has launched a wider call for evidence to gather views on (1) more extensive changes to Approved Document B technical requirements, and (2) how residents and landlords can work together to keep their homes and buildings safe. A new Standards Committee is being established to advise on applicable rules, together with a Joint Regulators’ Group to trial proposed legislative changes.
Prescriptive Requirements
The outcomes-based approach to building regulations in the UK puts the onus on companies to operate safely, allowing flexibility and seeking to ensure that emerging risks are addressed without the need for new legislation. However, problems have been highlighted around the lack of clarity in applicable rules, with insufficiently stringent oversight to avoid low standards and damaging conflicts of interest.
Changes to Approved Document B signify a departure from the level of discretion allowed under the previous regime, and moves towards a more prescriptive regulatory framework. The use of combustible materials has not been eliminated entirely though and many commentators believe the proposals do not go far enough. A stricter system of building control applies in some other jurisdictions such as France, Germany and North America, with significantly more emphasis on prescriptive baseline requirements to protect the life safety of building users.
Industry groups are lobbying for the 18 metres requirement to be reduced and the Scottish government has pledged a similar ban for buildings over 11 metres in height, including entertainment and assembly buildings. Related concerns around sprinklers, alarm systems and alternative means of escape in high-rise buildings merit urgent reconsideration as part of integrated reforms.
Future Developments
The second phase of the Grenfell Tower Inquiry is unlikely to start until the end of 2019, according to its chairman Sir Martin Moore-Bick, with some 200,000 documents (including in relation to installation of the cladding and insulation) still to be disclosed. The first phase centred on the night of the incident, and the second will examine wider issues surrounding the fire.
Disputes over remediation of private blocks affected by potentially dangerous cladding materials are ongoing in many cases, exacerbated by complexities in proving clear breaches of applicable building regulations in order to establish liability. Stakeholders in affected properties should consider whether existing insurance, warranties or guarantees can meet the costs of cladding replacement, and seek appropriate advice from policyholder coverage specialists.
Amy Lacey is a partner at Fenchurch Law
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #4 (The Good). The Orjula
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those are cases that can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#4 (The Good)
Losinjska Plovidba v Transco Overseas Ltd (The Orjula) 14 June 1995
In a useful decision for policyholders under construction all risks insurance, the Commercial Court in The Orjula determined that the spillage of hydrochloric acid onto a vessel requiring decontamination was “damage”, even on the assumption that there was no corrosion. Although decided in the context of a negligence claim, the case opened up the possibility of greater recoveries under policies triggered by damage, demonstrating that even transient or reversible physical changes to insured property should suffice.
The decision
The claimant was a bareboat charterer of a vessel which operated a liner service. Two containers each containing 72 drums of acid were loaded on to the vessel in England, for transportation to Libya. The second defendant, whose application to strike out the claimant’s claim was being determined by the Court, was the physical supplier of the drums to the first defendant, the named shipper in the Bill of Lading.
On its route to Libya the vessel docked in Holland, where one of the containers was discovered to be leaking. On inspection it was found that the drums inside were damaged and required replacement and reloading, with the boat having to be decontaminated and the drums repacked inside the containers.
The Court, in refusing to strike out the claim against the second defendant, held that although it was only necessary to wash the acid off the boat before it could again be in a useable condition, a specialist cleaner had to be employed for this purpose before the vessel could again set sail. As a result, the claimant had suffered actual damage, not pure economic loss (which would not have been recoverable from the second defendant in negligence[1]).
The second defendant’s solicitor argued that there was no physical damage to the vessel. The contamination could be and was cleaned off with a soda solution and the only loss was the financial cost of the operation. The Judge summed up the defence argument as being, in effect, that prior to the cleaning the vessel remained undamaged albeit with a layer of hydrochloric acid over part of her deck or hatch.
Taking guidance from civil and criminal authorities, the Court considered whether there had been “injury impairing value or usefulness” of the property in question, and the need for effort and expense to restore the property to its former usable condition. The Judge rejected the submission that there was no damage, noting:
“Here, specialist contractors were engaged in undertaking the decontamination work using soda to neutralise the acid before washing the deck and hatch covers down with fresh water; further, it is pleaded, perhaps not surprisingly, that the vessel was required to be decontaminated of the hydrochloric acid before she could sail from the special berth to which she had been directed after discovery of the leakage. On these alleged facts, I would have no hesitation in concluding that the vessel should be regarded as having suffered damage by reason of her contamination”.
The alleged contamination of the vessel was held to constitute damage sufficient to enable the claimant to claim in tort against the second defendant for recovery of its loss and mitigation costs arising from negligence in the stowage of the containers.
Comment
In determining that damage was suffered in these circumstances, the Court acknowledged the reality that “injury impairing value or usefulness” (the dictionary definition of damage) can be sustained without there having been a permanent change to the damaged material.
The question of whether damage has occurred is often contentious in CAR insurance claims and this case is helpful in support of improved outcomes for policyholders, subject to expert evidence in appropriate cases and applicable policy wording.
[1] Murphy v Brentwood District Council [1991] 1 AG 398
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
Not Too Slender a Thread - Supreme Court decision in MT Højgaard v E.ON
The Supreme Court has upheld an appeal concerning liability to comply with fitness for purpose obligations in a design and build contract, in a case with significant ramifications for policyholders involved in construction projects. The judgment highlights the difficulties which arise when accepted industry practices are exposed as inadequate and reinforces the importance of precise drafting of contract terms, and associated policy wordings, given the literal interpretation likely to be applied notwithstanding potentially harsh consequences for unwary contractors.
The dispute arose from a significant error in an international standard for the design of offshore wind turbines known as J101. The contractor, MT Højgaard (“MTH”), relied on J101 whilst engaged by E.ON to design, fabricate and install foundations for the Robin Rigg wind farm in the Solway Firth, Scotland. Following completion of the works, it was discovered that J101 contained an inaccuracy such that the load-bearing capacity of grouted connections had been substantially over-estimated, resulting in remedial works at a cost of €26 million.
In April 2014, the trial judge held that MTH was liable to E.ON because the foundations were not fit for purpose, in breach of a provision in the Technical Requirements section of the Employer’s Requirements in the contract which imposed an obligation that the design “shall ensure a lifetime of 20 years in every aspect without planned replacement”. This provision applied in addition to less onerous contract terms requiring MTH to exercise reasonable skill and care, and to comply with J101.
The Court of Appeal overturned that decision, concluding that the 20 year service life provision in the Technical Requirements was qualified by compliance with J101 and good industry practice, in light of the inconsistency between that provision and other contractual terms. The relevant wording tucked away in the Technical Requirements was described as “too slender a thread” upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations, viewed in context of the contractual provisions as a whole and commercial implications.
In a unanimous decision, the Supreme Court ruled that MTH was liable for breach of the fitness for purpose obligations, construed either as a warranty that the foundations (1) would have a minimum service life of 20 years, or alternatively (2) be designed to last for 20 years. The court referred to UK and Canadian authorities where contractor warranties to complete works without defects were held to override any prescribed specification, noting: “it is the contractor who can be expected to take the risk if he agreed to work to a design which would render the item incapable of meeting the criteria to which he has agreed”. J101 was expressed to be a minimum standard and the court was not prepared to disregard or give a different meaning to provisions of the Technical Requirements incorporated to the contract.
Construction contracts routinely incorporate schedules and technical documents with less than complete harmonisation as to intended legal standards of design and workmanship. The contract in this case was acknowledged to be of a “complex, diffuse and multi-authored” nature with many “ambiguities, infelicities and inconsistencies”. Nevertheless the court saw no reason to depart from the natural meaning of the fitness for purpose provisions, alongside MTH’s other obligations, in accordance with the prevailing approach of judicial non-interventionism that parties will be taken to mean what they say in their contracts (Arnold v Britton [2015] UKSC 36).
To avoid ambiguity, contracting parties should consider the inclusion of express provisions clarifying whether and how technical schedules are to affect overall obligations as to design and workmanship, clearly distinguishing requirements to exercise skill and care from performance warranties or guarantees of fitness for purpose. This in turn will allow policyholders to properly evaluate the risks assumed under the contract, and liaise with their insurance brokers to ensure adequate professional indemnity and all risks cover for potential liabilities.
MT Højgaard A/S (Respondent) v E.ON Climate & Renewables UK Robin Rigg East Limited and another (Appellants) [2017] UKSC 59
https://www.supremecourt.uk/cases/docs/uksc-2015-0115-judgment.pdf
Amy Lacey is a partner at Fenchurch Law
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #1 (The Bad). Why Wayne Tank is wrongly decided.
Welcome to a new series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those are cases that can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#1 (The Bad)
Concurrent proximate causes and insurance claims: why Wayne Tank is wrongly decided.
As Rob Merkin says in Colinvaux, there is a logical fallacy at the heart of the Court of Appeal’s decision in Wayne Tank and Pump Co v Employers’ Liability Assurance Corporation [1974] QB 57. The case concerns concurrent proximate causes of liability / loss sustained by a policyholder in an insurance context. The Court of Appeal, held that whereas the policyholder can recover when one cause is insured and the other is not insured, the policyholder is unable to recover when one cause is covered and the other is excluded.
The problem with that approach is exemplified when a policyholder has two insurance policies which each cover one of the two concurrent causes, and exclude the other. The issue is more common than most policyholders would expect, and arises perhaps most often where physical damage occurs to someone else’s property as a result of both a workmanship failure (commonly insured by public liability policies, but excluded by professional indemnity policies), and a design failure (insured by professional indemnity policies, but commonly excluded by public liability policies).
In that situation Wayne Tank says that the policyholder cannot recover under either policy, despite having paid premiums in respect of both of the risks which have given rise to the loss. For that reason we believe the case is wrongly decided, and should not be followed when the issue next reaches the Supreme Court. In the meantime, while the decision remains good law, here are our thoughts about arguments that policyholders can use if their insurers refuse to pay a claim on the basis of Wayne Tank.
Option 1: to apply the approach taken by the House of Lords in Fairchild v Glenhaven Funeral Services Ltd [2003] 1 AC 32, where the usual rules of causation were abandoned in order to ensure that the Claimant was able to recover damages where it could demonstrate that one of two defendants must be at fault, but to determine which one. As has been noted, the Fairchild decision seeks to avoid the very consequence created by “mirroring” exclusions in professional indemnity and public liability policies.
Option 2: to follow the Court’s approach to “other insurance” clauses: i.e. to uphold the clause when an insured has two policies, and one contains an “other insurance” clause and the other policy does not, but to treat the clauses as cancelling each other out when they are present in both policies (It is worth noting that in Wayne Tank the Court only considered the application of a single policy, and so the insured had not paid a premium to cover the full extent of the exposure which gave rise to its loss). The leading authority on “concurrent escape clauses” is Weddell v Road Traffic and General Insurance Co Ltd [1932], where the absurdity of the result that would have been created by giving effect to the escape clauses in each policy was the basis of the Court’s decision:
“The reasonable construction is to exclude from the category of co-existing cover any cover which is expressed to be itself cancelled by such co-existence, and to hold in such cases that
both companies are liable… [otherwise] one would reach the absurd result that whichever policy one looks at it is always the other one which is effective”.