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
Challenging times for Zurich: insurer ordered to pay out on Covid 19 claim
World Challenge Expeditions Limited v Zurich Insurance Company Limited [2023] EWHC 1696 (Comm)
The court has held that, having operated a business travel policy in a certain way for nearly four years, Zurich was estopped from denying that it provided cover on that basis.
An estoppel by convention had arisen such that it would be inequitable for Zurich to resile from the common assumption between the parties as to the operation of the policy.
As such, the successful policyholder, World Challenge (represented by Fenchurch Law), was entitled to an indemnity of almost £9m, being the amount of refunds paid to its customers following the cancellation of its global programme of expeditions necessitated by the pandemic.
The court further criticised Zurich for its handling of the claim and the time that it taken to clarify its position. This was a matter of utmost importance and urgency in circumstances where it was critical to World Challenge’s business and customer relations that it was able to confirm whether it had a covered claim. Mrs Justice Dias commented that: “This is not an impressive performance even in the difficult circumstances of early 2020 and ordinary policyholders might well be appalled to think that a reputable insurance company could treat a long-standing and supposedly valued customer in this way”.
A full copy of the judgment can be found here.
Background
The policyholder, World Challenge, provides adventurous, “challenging” expeditions worldwide for secondary school students, or “challengers”. As a result of the pandemic it was obliged to cancel nearly all of its booked expeditions for 2020.
The insurer, Zurich, provided World Challenge with wide ranging cover including cover for cancellation of trips by the challengers.
Prior to the pandemic, Zurich had handled and approved more than one hundred cancellation claims since 2016 in the amount of the refund paid to challengers. The amount of the refund, less an administration fee, was recorded against the aggregate deductible in the event of a trip cancellation. Prior to the onset of Covid-19, that aggregate deductible was never exhausted.
When the pandemic struck in early 2020, Zurich faced substantial claims for refunds to challengers for trips that would be cancelled in the coming months, and which would significantly exceed the aggregate deductible. World Challenge’s position was that Covid-19, and the mass trip cancellations which could eventuate, was precisely the type of ‘black swan’ event that it thought it had insurance cover for. It sought confirmation of that cover from Zurich prior to cancelling the relevant trips and exposing itself to the millions of pounds of refunds to its customers that it would need to make as a result.
In light of the significant losses it now faced, Zurich, after an extended period of delays in confirming its position, in a complete volte-face sought to depart from the “common assumption” of cover for refunds and instead informed World Challenge that it only had cover (and only ever had cover) for irrecoverable third party costs (for example, hotel or airline costs which World Challenge had paid out and was unable to recover).
The claim
The issue before the court was the correct construction of the policy and whether Zurich was precluded by estoppel or collateral contract from denying that the policy provided the cover that World Challenge thought it had.
Mrs Justice Dias concluded that, although the policy in fact only covered irrecoverable third party costs, Zurich’s previous conduct in agreeing claims in the amount of the refunds and setting them against the deductible had clearly conveyed to World Challenge that they shared its assumption as to the scope of cover and World Challenge was strengthened and confirmed in its own reliance on that assumption.
Zurich’s argument that the subjective understanding of its claims handlers was insufficient to establish any assumption on the part of the company was rejected.
Further, the court found that the delays in cancelling trips caused by Zurich’s delay in confirming its position on cover caused World Challenge to lose its opportunity to explore other avenues in order to maintain customer goodwill and manage its exposure.
It was therefore inequitable for Zurich to resile from the common assumption. Zurich had every opportunity to correct the error in handling claims, but took no steps to do so until such time as it became apparent that the aggregate deductible would be exceeded.
Conclusion
This judgment provides a welcome reminder to insurers about the importance of handling claims in a timely manner that responds to the needs of its customers, particularly in the face of a devastating loss with significant repercussions for the continued operation of its business.
Also welcome is the confirmation that the conduct of claims handlers in approving or rejecting claims will bind an insurer as they are the people charged with handling the claims on the company’s behalf.
From a legal perspective, in addition to being essential reading for anyone interested in the requirements of a variety of types of estoppel, practitioners will do well to take note of the comments made about the witness evidence and the dangers of putting forward statements that are inconsistent with the contemporaneous documents. This made for an uncomfortable time for Zurich’s witnesses in the box, and should be a salutary tale, particularly given the spotlight on witness evidence in light of the recent changes to the rules in respect of trial witness statements.
Authors:
Rob Goodship, Associate Partner
Anthony McGeough, Senior Associate
Reach for the Sky? – judgment handed down on Sky Central
Sky UK Limited & Mace Limited v Riverstone Managing Agency Limited & Others [2023] EWHC 1207 (Comm)
Summary
The High Court has handed down the hotly anticipated judgment in Sky & Mace v Riverstone, which concerned a claim by Sky and Mace for the cost of remedial works to the roof at Sky Central, Europe’s largest flat timber roof. The sums claimed for the two remedial schemes put before the Court were both in excess of £100m.
Whilst Sky, as principal insured and loss payee under the building contract, has been awarded an indemnity in principle, the quantum of that indemnity is subject to either agreement or, failing that, determination by the Court, given Mr Justice Pelling’s finding that none of the remedial schemes put before the Court sufficiently represented the remedial works necessary to address the damage as at the end of the Period of Insurance. That said, the Judge found that one of the schemes presented by insurers “most closely approximates” to the damage in need of remediation at the end of the Period of Insurance, and has encouraged the parties to agree the quantum of the appropriate temporary works which need to be added to that scheme.
Issues
The full judgment is worth a read for all CAR practitioners (and enthusiasts) but the real take aways are:
DE5
Whilst Sky is the first court decision anywhere in the world to consider the DE5 defect exclusion, it actually does no more than provide (at paragraph 29) a slightly clearer articulation as, based on the Judge’s findings, he didn’t need to consider what actually constituted an additional cost of any additional improvement works.
The reason for that is because his judgment was premised on one of insurers’ schemes being the most appropriate (in the circumstances) which (unsurprisingly) did not include any improvements to the original design, plan, specification, materials or workmanship.
Co-insurance
Sky follows closely after the Court of Appeal’s decision in RFU that was handed down in April (https://www.fenchurchlaw.co.uk/worth-a-try-judgment-handed-down-on-rugby-football-union-appeal/).
The Judge followed the reasoning in the first instance decision in RFU which Lord Justice Coulson said was “unassailable” by the Court of Appeal. Here, Mace was found to be a co-insured under the project policy but, as a result of the building contract entered into with Sky, only to Practical Completion (“PC”) and not to expiry of the Maintenance Liability Period (“MLP”) - only Sky had the benefit of that cover.
Mr Justice Pelling rejected Mace’s argument that a distinction should be drawn, and that it therefore benefited from, being a named in the policy (as opposed to falling into a prescribed category) as being “unprincipled and unsupported”. He found that there was “ample authority” that when deciding the scope and extent of the insurance cover available, it was necessary to consider the scope that the contracting insured agreed to procure, and that cover will not generally extend beyond what is contained in that agreement.
Mr Justice Pelling confirmed (at paragraph 58), and in line with the thinking of the majority in Gard Marine, that the effect of this particular contract was that neither Sky nor insurers can recover any pre-PC loss or damage against Mace, but that Mace was required to remediate and has no entitlement to a sum beyond that which was recovered under the policy.
Physical damage
The judge rejected insurers' definition of physical damage as occurring at a ‘tipping point’ when “structural change of such severity as to require replacement of the affected timber” as being "impermissibly narrow".
Instead he found that the physical damage occurred once water entered the roof cassettes on the basis that “the entry of moisture into the cassettes during the Period of Insurance is in my view a tangible physical change to the cassette as long as the presence of the water, if left unattended, would affect the structural stability, strength or functionality or useable life of the cassettes during the Period of Insurance or would do so if left unremedied”.
In relation to the timing of the occurrence of damage, this is arguably in line with Tioxide where it was found that damage occurred once the environmental conditions where damage was liable to occur were present.
The articulation in Sky is potentially wider than that though, which is likely to be very helpful for policyholders when there is ambiguity over the timing of the damage occurring, as it permits the earliest possible date on which damage is liable to occur if left unattended, which is frequently a source of dispute, particularly in relation to water ingress claims.
Aggregation/ deductibles
The other major battle ground between Sky/Mace and insurers, and a point that this is increasingly being taken by CAR insurers in relation to modern methods of construction (including cassettes and modular pods), was the applicable number of deductibles which was determined by the number of ‘events’.
Insurers’ position was that the damage to each of the 472 cassettes was an ‘event’, whereas the Claimants said that there was one event, namely the decision not to use a temporary waterproofing system when installing the roof cassettes, which permitted water ingress during construction.
Mr Justice Pelling said that, in this policy, the “single unifying event must be an error or omission in the design plan specification materials or workmanship of the property Insured that has suffered damage as a result of such defect” when a claim was recoverable under DE5.
Applying the unities of time, place and cause, and following Mr Justice Butcher's finding in Stonegate (https://www.fenchurchlaw.co.uk/court-hands-down-judgment-in-much-anticipated-covid-19-bi-cases-the-takeaways-for-policyholders/) that a decision (or plan) was capable of being an event if it satisfied those unities, the judge agreed with Sky and Mace that there was only one event and, therefore, one deductible was to be applied to Sky's claim.Appropriate remedial scheme
The claim presented by Sky and Mace was slightly unusual given that the remedial works had not taken place by the time the claim got to trial, which seemingly resulted in the Judge being in some difficulty when determining the appropriate indemnity. Helpfully for policyholders though, Mr Justice Pelling’s instinct in response to assertions that Sky and Mace’s claims had failed as neither of their schemes were ultimately awarded was that it would be “counter intuitive” that an insured which had proved some damage would be left without remedy.
The actual quantum of Sky’s claim remains unresolved, but the judge saw no difficulty in principle with the various schemes being ‘mixed and matched’ in order to identify the appropriate indemnity.
Comment
Although the judgment does not delve into the correct interpretation and application of DE5 as perhaps hoped, it does contain a number of helpful nuances in relation to typical coverage issues under CAR policies, which will be helpful to property and contract works policyholders generally.
Rob Goodship is an Associate Partner at Fenchurch Law
Not so peachy – a disappointing Covid-19 decision for policyholders
Bellini (N/E) Ltd trading as Bellini v Brit UW Limited [2023] EWHC 1545 (Comm)
In a month where Covid-19 decisions are coming in thick and fast, policyholders will be disappointed by the most recent judgment concerning a disease wording. A copy of the judgment can be found here.
On this occasion the policyholder, Bellini (N/E) Ltd, was issued with a policy by its insurer, Brit UW Limited, that contained an extension to business interruption cover for business interruption caused by damage arising from a notifiable disease manifested by any person whilst in the premises or within a 25-mile radius.
Disease wordings like these will be familiar to those who are acquainted with the FCA test case and Covid-19 litigation, but in this particular case the quirk is a reference to the defined term “damage” in the introductory paragraph to the extension. Damage within this policy was defined as “physical loss, physical damage, physical destruction”. However, it was common ground between the parties that there had been no physical loss of or damage to the policyholder’s premises or property.
The policyholder argued that policy provided both basic cover for physical damage and also extensions of cover for other matters that would not ordinarily result from or in physical damage. In particular, the provision of a radius clause of 25 miles for the manifestation of disease went beyond the basics of physical damage to the premises or property therein, which the policyholder asserted was reinforced by the court’s analysis of similar wordings in the FCA test case.
Among other arguments on the construction of the policy, the policyholder contended that if the extension only responded to physical damage it would “render any cover it provided illusory, and negate the purpose of the clause in providing cover for a notifiable disease that could manifest itself miles away”.
The court, however, was unpersuaded by the policyholder’s arguments, instead relying upon the “ordinary meaning” of the clause, which provided no cover in the absence of physical loss, damage or destruction. In particular, the court considered it to be significant that the clauses dealt with in the FCA test case were not expressed as to cover interruption caused by damage, and had been recognised as non-damage in that cover was not contingent on physical damage.
The court considered that the policyholder’s arguments effectively required it to re-write the policy contrary to the parties' express agreement and the established approach to contractual construction.
Comment
Recognising that the impact of a notifiable disease will be non-damage related losses, many wordings make it clear that the extension is intended to be triggered in the absence of physical damage, and that is how the clause would be understood to operate.
In circumstances where the parties agreed that a disease at the premises or within 25 miles of the premises does not cause physical damage, it is difficult to see what purpose, if any, can served by a clause that only provides cover for physical damage.
It is therefore difficult to reconcile the court’s attempts to give effect to the wording of the policy with what most policyholders (and we assume those insuring them) would expect to be covered when offering a 25-mile radius clause as part of the policy cover.
It is notable that the courts in the FCA test case grappled with similar difficulties on wordings where the standard form of certain clauses assumed the paradigm case of business interruption by reference to physical damage. The Supreme Court, albeit in the context of trends clauses, came to the view at [257] that the “reference to “damage” is inapposite to business interruption cover which does not depend on physical damage to insured property such as the cover with which these appeals are concerned. It reflects the fact that the historical evolution of business interruption cover was as an extension to property damage insurance. It was held by the court below, and is now common ground, that for the purposes of the business interruption cover which is the subject of these appeals, the term “damage” should be read as referring to the insured peril”. It appears that in the right circumstances the courts are not opposed to manipulating the wording of a policy to give it proper effect, and one might have expected the court in this matter to have taken a similar approach to the 25-mile radius clause.
Undoubtedly the market will be watching this one closely for any signs of an appeal, especially in light of the body of Covid-19 case law that appears to support a disease clause such as the one in dispute here.
Authors:
Anthony McGeough, Senior Associate
Joanna Grant, Partner
AI: The Wizard behind the Data Curtain?
“What is Chat GPT?” is a frequently heard question this year. “What is AI? How does it work?” is occasionally the follow up. And for the sceptics, “Will it take my job? Is it dangerous?” One cheerful BBC News headline recently read “Artificial Intelligence could lead to extinction, experts warn”.
Artificial Intelligence (AI) and Machine Learning Technologies (MLTs) have rapidly gone from the stuff of science fiction to real world usage and deployment. But how will they affect the insurance industry, what are the legal implications, and is the whole issue really that much of a concern?
Taking the final question first, the evidence suggests that jobs are already being lost to this new technological revolution. In March 2023, Rackspace surveyed IT decision-makers within 52 insurance companies across the Americas, Europe, Asia and the Middle East. 62% of the companies said that they had cut staff owing to implementation of AI and MLTs in the last 12 months. In the same period, 90% of respondents said they had grown their AI and MLTs workforce.
It is worth drilling into the specifics of what AI and MLTs actually are. McKinsey & Company define AI as “a machine’s ability to perform the cognitive functions we usually associate with human minds”. MLTs, according to IBM, are best considered as a branch of AI, in which computers “use data and algorithms to imitate the ways that humans learn, gradually improving their accuracy”. So, taking ChatGPT (released 30 November 2022) as an example, Open AI (the developer) has trained ChatGPT on billions of documents that exist online. From news, to books, to social media, to TV scripts, to song lyrics. As explained by Boston Consultancy Group, the “trained model leverages around 175 billion parameters to predict the most likely sequence of words for a given question”. In many ways, it has to be seen to be believed. If you haven’t already, it is worth signing up to ChatGPT. It’s free and takes moments. The author has just asked it to write a Jay-Z song about the London Insurance Market and to write a story about Sun Tzu waking up in the world of Charles Dickens – both with instant, detailed results. The absurdity of the requests was done to demonstrate the power of the MLT: it is quite remarkable.
What is exciting, or scary, depending on your position, is that GPT-4 (the next version of ChatGPT) has 1 trillion parameters. It was released at the end of March and is behind a paywall. But the point is that the never-seen-before power behind the technology released only at the end of last year has become nearly 6 times more advanced in four months. Not unlike the Sorcerer’s Apprentice wielding his axe and doubling and redoubling broomsticks carrying pails of water, MLTs scythe through and consume data at an exponential rate.
So, what does it all mean for the insurance industry? MLTs can sift through data vastly faster than humans, and with far greater accuracy. The tech poses the most immediate threat to lower-level underwriters and claims handlers, as well as general administrative roles. But what about to the wider London Market?
As this firm’s David Pryce has explained*, the London Market does not have as many generalised wordings as do other insurance markets around the world. The policies written here are highly sophisticated and frequently geared towards bespoke risks. The specialism of the London Market means that, in terms of senior underwriters, while they may be informed by AI/MLTs, their judgement, gained through experience, will mean their role is fairly safe – machine learning tech is far superior at analysing past knowns than conceptualizing future risks.
Similarly, in high-value, sophisticated non-consumer insurance contracts that are the norm within Lloyd’s, questions arise about AI’s/MLTs’ potential to remove the broker role. Consider a cutting-edge ChatGPT equivalent that does the role of a broker, but is developed by an insurer for an insured. There is an inherent conflict between acting as an agent of an insured and seeking to maximise profit for the insurer. There would undoubtedly be a data bias in this metaphorical ChatGPT. In the same vein, a ChatGPT equivalent could be developed by London Market brokers, but this would miss the personalised touch that (human) brokers bring to the table (and policyholders enjoy). James Benham, Insurtech guru and podcast host, recently said that AI could stop brokers doing menial form-filing and spend more time doing what policyholders want – stress testing the insured’s policy and giving thought to what cover they need but had not considered. So while in the short term low-level work will likely be made more efficient by AI/MLTs, and lead to reductions in staff, a wholesale revolution or eradication of vast swathes of the London Market broking sector remains unlikely.
Finally, it is worth noting the speech on 14 June 2023 by Sir Geoffrey Vos, Master of the Rolls, given to the Law Society of Scotland’s Law and Technology Conference. After highlighting a recent example of an American lawyer who used ChatGPT for his legal submissions, in which ChatGPT not only grossly misunderstood/misrepresented the facts of some cases but actually made up another one for the purposes of the submissions, he cautioned the use of the MLT in legal proceedings. He further observed dryly that “clients are unlikely to pay for things they can get for free”. Perhaps specific MLTs will be successful developed in the near future to assist or stress test lawyers’ approaches (for example, Robin AI is a London-based startup that uses MLTs to assist lawyers with contract drafting), but ChatGPT is not there yet. A similar point could be made in its application to the insurance industry – simple, concise deployment of the technology will remove grunt work and effectively and cheaply simplify data, but human experience will not be replaced just yet. As with blockchain, in the short term we are likely to see more of an impact on consumer insurance contracts than high-value, bespoke, London Market insurance.
Dru Corfield is an Associate at Fenchurch Law
* See The Potential impact of ChatGPT on insurance policy wordings, Insurance Business Mag
