When adjectives matter: How ‘Accidental’, ‘Sudden’ and ‘Unforeseen’ affect all-risks insurance cover
Construction and engineering projects, being subject to a wide variety of risks, are invariably insured on an all-risks basis via Construction All-Risks (“CAR”) or, in the case of projects involving the installation of plant or machinery, Erection All-Risks (“EAR”) policies. Following practical completion, the relevant works are typically insured via property damage and/or machinery breakdown insurance; such cover is similarly procured on an all-risks basis.
All-risks policies often comprise (at least) two sections:
- Section 1, which covers damage to insured property (i.e., material damage cover); and
- Section 2, which covers liability of insureds to third parties (i.e., third party liability cover).
This article is concerned with the material damage cover section of all-risks policies and considers how the words ‘accidental’, ‘sudden’ and/or ‘unforeseen’ modify the scope of cover under that section.
MATERIAL DAMAGE COVER: THE PRINCIPLE OF FORTUITY
Material damage cover does not indemnify against all forms of loss to insured property. Instead, it covers only fortuitous loss or damage. The principle of fortuity has been equated with ‘accidental damage’; an event would be ‘accidental’ if it occurred by chance and was non-deliberate: see Leeds Beckett University v Travelers Insurance Company Limited [2017] EWHC 558 (TCC) (“Leeds Beckett”) at [199].
The principle of fortuity applies regardless of whether the words ‘all-risks’ appear in the insuring clause. The insuring clause of the material damage section of a CAR policy might therefore simply state that:
“… insurers will indemnify the Insured in respect of physical loss or damage to the Insured Property arising from any cause except as hereafter provided.”
It is, however, not uncommon for an insuring clause to include the adjectives ‘accidental’, ‘sudden’ or ‘unforeseen’ (or some combination of the three). For CAR policies, the requirement for ‘sudden’ and/or ‘unforeseen’ loss is less commonly seen in the UK, but is still often encountered in the APAC region. For instance, the insuring clause of the material damage section of the Munich Re standard form CAR wording, which is commonly used in Singapore and Malaysia, provides that:
“… if at any time during the period of cover the items or any part thereof entered in the Schedule shall suffer any unforeseen and sudden physical loss or damage from any cause, other than those specifically excluded, in a manner necessitating repair or replacement, the [insurer] will indemnify the Insured in respect or such loss or damage …” (emphasis added)
We consider below whether the words ‘accidental’, ‘sudden’ and/or ‘unforeseen’ introduce any further requirements (in addition to the basic requirement of fortuity) for there to be cover for material damage.
‘ACCIDENTAL’
It is less common for the insuring clause for material damage cover to impose a requirement for ‘accidental’ damage. This stands in contrast to the insuring clause for third party liability cover, which frequently responds to damage or injury ‘accidentally’ caused by the insured.
That said, a requirement for ‘accidental’ damage may in some cases find its way into the material damage cover section of a policy. For instance, in Leeds Beckett, the word ‘damage’ was defined for the purposes of the relevant CAR policy as “accidental loss or destruction of or damage”; this meant that the material damage cover of that policy would respond only in the event of ‘accidental’ damage.
The requirement for ‘accidental’ damage would not usually change the default scope of cover. In other words, it remains the case that the loss need only be fortuitous in order for the material damage section of a policy to respond. As noted in Leeds Beckett, the principle of fortuity already encompasses the concept of accidental loss, and common law jurisdictions have generally been content to treat the two as being synonymous.
‘SUDDEN’
‘Sudden’ imports a different meaning than ‘fortuitous’. Accordingly, the use of the word ‘sudden’ in the material damage section of a policy narrows the scope of cover; the loss or damage must at minimum be ‘sudden’ (in addition to being ‘fortuitous’) in order for the policy to respond. Case law sheds the following light on the meaning of ‘sudden’.
First, it is the loss or damage itself, rather than the cause of said loss or damage, which must be ‘sudden’.
An example of the distinction between a cause and the resulting loss and damage can be seen in the Singapore High Court case of Pacific Chemicals Pte Ltd v MSIG Insurance [2012] SGHC 198 (“Pacific Chemicals”), where the sudden malfunction of a measuring gauge (the cause) led to the gradual solidification of phthalic acid stored in a tank (the loss or damage). The Court found that the loss or damage suffered, having taken place “over a period of time”, was not ‘sudden’ in nature.
Secondly, ‘sudden’ is frequently used in conjunction with ‘unforeseen’ (see again the Munich Re wording above). In such cases, it is clear that ‘sudden’ must connote something other than ‘unforeseen’ or ‘unexpected’ (as to construe it otherwise would render ‘sudden’ superfluous). The tenor of relevant case law, as noted by Paul Reed KC in the textbook Construction All-Risks Insurance, suggests that ‘sudden’ should be construed in this context as importing a need for “dramatic change to have occurred during a relatively short period of time”.
‘Sudden’ may, however, have a different meaning when used alone. The New Zealand and Australian Courts have understood the word ‘sudden’ (when used alone) to mean ‘unforeseen’ or ‘unexpected’: see New Zealand Municipalities Co-Operative Insurance Co Ltd v City of Tauranga (unreported) and Sun Alliance & London Insurance Group v North West Iron Co Ltd [1974] 2 N.S.W.L.R. 625.
Thirdly, ‘sudden’ (when used in the context of ‘sudden and unforeseen’) should not be equated with ‘instantaneous’.
In Pacific Chemicals, the Court found that the caving-in of a storage tank that had occurred rapidly (but not necessarily instantaneously) should be regarded as ‘sudden’ loss or damage.
That said, in appropriate cases, much longer periods of time could still be considered ‘sudden’. As noted in Construction All-Risks Insurance, the interpretation of the word ‘sudden’ is a context-sensitive exercise. For instance, in assessing whether there has been ‘sudden’ damage under a mining project policy in the form of a change in ground conditions, it may be appropriate to apply a geological timescale; on this interpretation, a change in ground conditions taking place over several days (or possibly even months) might well still be considered ‘sudden’.
‘UNFORESEEN’
‘Unforseen’ also imports a different meaning from ‘fortuitous’. Accordingly, the express inclusion of ‘unforeseen’ narrows the scope of cover; the loss or damage must at minimum be ‘unforeseen’ (in addition to being ‘fortuitous’) in order for the policy to respond.
Nevertheless, it is not generally difficult to establish that an occurrence was unforeseen; all that needs to be shown is that the loss or damage was ‘unanticipated’ or ‘unexpected’ from the perspective of the insured. Thus in Pacific Chemicals, one head of damage, namely the solidification of phthalic acid (see above), was caused by the lowering of the temperature in the relevant tank. The Court found that the solidification was not an expected consequence of that process and the damage thus fell within the ambit of ‘unforeseen’.
It should be noted that fortuity and foreseeability are separate concepts. The question of whether damage is fortuitous hinges on whether the damage was caused by chance (rather than being inevitable) and was non-deliberate. Foreseeability is an entirely separate requirement that has no part to play in determining whether damage was fortuitous.
CONCLUSION
While there is not a large body of case law concerning the ambit of the words ‘sudden’ and ‘unforeseen’ (which is perhaps unsurprising given the prevalence of arbitration clauses in non-consumer insurance policies), the authorities would suggest that neither word should be read restrictively, and that considerable latitude should be afforded to insureds in establishing that an occurrence was ‘sudden’ and ‘unforeseen’.
Eugene Lee is an Associate at Fenchurch Law
Lithium Battery Fires – Not so Lit?
Introduction
Lithium batteries (also known as lithium-ion batteries) have become commonplace in devices such as mobile phones, cameras, laptops, e-cigarettes, tablets and e-bikes. They are popular because, unlike alkaline batteries, they are rechargeable and can be used multiple times, making them a comparatively sustainable energy source.
This article will outline the key risks and coverage issues associated with lithium batteries for policyholders.
Why are Lithium Batteries so dangerous?
The London Fire Brigade has said that lithium battery fires are the fastest growing cause of fires in London in 2024. That is because of the phenomenon of ‘thermal runaway’, which occurs when flammable materials within lithium batteries break down. This is usually due to manufacturing defects or when the battery cells overcharge, which can lead to the release of a cloud of flammable gases which, in turn, can cause vapour cloud explosions. The vapour cloud explosions exacerbate the ignition of the battery and the speed at which a fire spreads.
Lithium battery fires can be unpredictable, and it is common for batteries to reignite days after the initial ignition. That is why they can cause such large fires, as seen at the Suez Recycling Centre in July 2024, where the most likely cause of the fire was thought to be the improper disposal of a lithium battery, which ignited in a pile of waste of around 100sqm (and it took 15 fire engines and 100 firefighters to quell the blaze). As a further example, a fire was allegedly caused at a home in Wales in September 2024, by a mobility scooter that was charging. Firefighters were present at the blaze for more than 12 hours.
The Wider Problem
The unpredictable nature of lithium battery fires may result in some building and property insurers declining and restricting cover for fires caused by them, or charging additional premium to cover this risk.
Further, it may be more difficult for companies whose businesses rely heavily on lithium batteries, such as those in the manufacture, supply and retail of products which utilise lithium batteries to obtain cover from their product liability insurers.
The legal climate around lithium batteries is changing, as we have seen with the introduction of the Lithium-ion Battery Safety Bill which aims to regulate the safe storage, use and disposal of lithium batteries in the UK. However, as we have seen with other emerging risks such as climate change, further discussion may be required between the relevant stakeholders to ensure that lithium battery risks do not become “uninsurable”.
The following section sets out some of the key coverage issues that may arise.
Coverage Issues for Policyholders
Breach of the duty of fair presentation
Policyholders are required to make a fair presentation of the risk under the Insurance Act 2015 (“the Act”). To make a fair presentation, a policyholder must disclose all “material circumstances” to the insurer that the policyholder knows or ought to know. Failing that, an insured can satisfy the duty by giving the insurer sufficient information to put it on notice that it needs to make further enquiries for the purpose of revealing those material circumstances (section 3(4)(b) of the Act). A circumstance or representation is ‘material’ if it would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms. The duty is not limited to answering questions asked by the insurer in a proposal form.
So, for example, say a policyholder deliberately discloses to an insurer that it has a sophisticated strategy in place for mitigating the risk of fire due to the high number of products containing lithium batteries at its premises when, in fact, the position is otherwise. In that situation, an insurer would probably be entitled to refuse to indemnify the policyholder for a claim on the basis that, had the true position been disclosed, it would have provided insurance on different terms, if at all.
A more difficult position may arise when an insurer does not ask any specific questions about the extent to which lithium batteries are used in an insured’s business, and an insured inadvertently fails to disclose the true position on inception or renewal. Is the use or storage of products which contain lithium batteries itself a material circumstance? If so, will disclosure of the type of products supplied or stored be sufficient to put the insurer on notice and discharge the duty owed under section 3(4)(b), or will an insured have to spell out that the products contain lithium batteries?
It should be borne in mind that not all lithium batteries necessarily pose a fire risk. In that regard, the Fire Protection Association has provided guidance that each fire protection and mitigation strategy should be assessed on a case-by-case basis. That will include a consideration of the battery type, the Battery Energy Storage System (“BESS”) and layout.
Breach of Condition Precedent to Liability
Insurance policies frequently contain terms known as ‘conditions precedent to liability’. Subject to certain provisions in the Act, such terms must be complied with strictly, otherwise there is no cover for the claim.
In Wheeldon Brothers Waste Limited v Millennium Insurance Company Limited [2018] EWHC 834 (TCC), the policy contained a condition precedent that combustible waste had to be stored at least 6m from any fixed plant. On the evidence, the court found there was no breach of the condition precedent, and that “storage” meant a degree of permanence and a deliberate decision to designate an area to place and keep material.
Guidance from the Fire Protection Association states that the BESS should be (a) located in non-combustible containers or enclosures, (b) placed at least 3 metres from other equipment, buildings, structures and storage, and (c) the distance should only be reduced when there is a suitable-fire barrier, where exposed surfaces and fire-resisting, or where BESS enclosures have fire-resisting walls and roofs. If insurers impose conditions relating to storage in compliance with this guidance, the decision in Wheeldon is potentially relevant as to what “storage” means.
It is open to a policyholder to rely on section 11 of the Act and show that the breach could not have increased the risk of loss which occurred in the circumstances in which it occurred. For example, if there was a fire at a policyholder’s premises, and it had breached a condition requiring it to store lithium batteries in a particular way, to escape the consequences of breach, the policyholder would need to prove, in effect, that compliance would not have impacted the general risk of fire.
Concluding Thoughts
There is no UK specific guidance or legislation to govern lithium battery use, storage or disposal. Policyholders should therefore consult reliable guidance to ensure that fire risk strategies are sufficient on a case-by-case basis, and compliant with the terms of the policy.
If in doubt, policyholders should consult with their brokers on inception and renewal to ensure that they have complied with their disclosure obligations and are able to satisfy the applicable policy terms to maximise the chance of policy coverage in the event of a lithium battery fire.
Ayo Babatunde is an Associate at Fenchurch Law.
(Not) the new LEG clauses.
Let me start by making something clear. The clauses referred to below are NOT the new LEG clauses.
Whilst I have made no secret of my view that the LEG committee does need to amend LEG3 (and, perhaps, should have done so before now), and that the decisions in SCB and Archer have provided a golden opportunity to overhaul not just the LEG clauses, but the DE clauses too, I have no involvement in the decision about whether the LEG committee will, in fact, produce new versions of the LEG clauses or, if they do decide to do so, in determining what those clauses will look like. As a result, what is set out below represents nothing more than my own suggestions about how the existing LEG clauses could be amended in order to preserve what I believe to be the general market understanding of their meaning, whilst being expressed in clear language that would be easily understood not only by those who specialise in CAR / Builder’s Risk, but also by those who have no involvement in this particularly fascinating area of insurance.
I have been asked, not unreasonably, whether it is misleading of me even to refer to my own draft clauses by reference to the official LEG clauses. However, after careful consideration I have maintained the view that I originally took instinctively, that it is appropriate for me to do so, for two reasons.
The first is that my proposed clauses are not intended to alter the meaning of the existing clauses but, rather, to express what I regard as the meaning of the existing clauses in a clear way. Whilst I am happy to be challenged about my understanding of the meaning of the existing clauses, it would make no sense for me not to explicitly link my drafts to the current clauses, because my re-drafts of each clause only make sense when considered in the context of the original. I don’t consider it to be my place, as a lawyer, to be suggesting that the intention of the existing clauses should be changed in order to provide more (or less) cover. That is for underwriters and brokers to decide.
The second reason is that, although the LEG clauses are officially maintained by the London Engineering Group (i.e. “LEG”), the existing clauses have become, in my view, public property as a result of their popularity, and by their wide usage across the world. For better or for worse, the scope of cover provided by Builder’s Risk policies in every insurance market needs to be considered in the context of the defects exclusions produced by the LEG committee, whether an official LEG clause is used, or whether a different form of defects exclusion is used (whether from the DE suite, or bespoke clauses).
That being the case, it seems to me that anyone with a serious interest in the health of the Builder’s Risk market has the right to contribute to the debate about what the market-leading suite of defects exclusions (which is what the LEG clauses are) should look like in the next generation of Builder’s Risk policies. I don’t claim to have any unique insight into that debate, or to be writing the last word on the subject, but I do hope that what I say can be a useful contribution to what should be a market-wide conversation about these important clauses.
What would be worse even than the unsatisfactory position that we are in today (where SCB and Archer have raised considerable uncertainty about the meaning of the clauses, and arguably called into question whether their meaning can reliably be ascertained at all), would be for insurers to fragment and begin to provide a multiplicity of their own defects exclusions. These clauses have layers of meaning, and there is beauty in their individual and collective complexity. But if we move away from standard defects exclusions, then beautiful complexity may give rise to unfathomable chaos in which brokers, policyholders and, if we’re honest, even the Builder’s Risk underwriters themselves, will have little chance of achieving a clear common understanding of the cover that their policies are providing. In that situation it would only be the lawyers who would be the only winners, and no-one wants that.
So, what is the problem with the existing clauses?
Firstly, they are overly long and convoluted. There are numerous phrases (most notably, but not only, the words in brackets in the 2006 version of LEG3) which I understand to have been introduced “for the avoidance of doubt”, but which have had precisely the opposite effect. Rather than bringing clarity to the meaning of the clauses, these superfluous phrases have instead obscured that meaning.
Secondly, the word “defect” is used to describe two quite different things in different contexts. Sometimes the word defect is intended to describe the condition of the insured property. At other times it appears to be intended to refer to a mistake (whether a mistake concerning design, or workmanship, etc).
Thirdly, the clauses have encouraged some users to take the view that they treat “damage” on the one hand, and a “defect” on the other, as binary concepts, so that one should be concerned with the question of whether insured property is damaged OR defective. However, that is plainly not right. As I remember being explained to me when I began to work with Builder’s Risk policies, when you refer to “damage” you are concerned with a happening, whereas when you refer to a “defect” you are concerned with a condition.
Knowing that insured property is in a condition that the owner would preferred it not to be in, today (so that it can therefore be described as being defective, today), tells you nothing at all about whether the insured property underwent an adverse change in physical condition which impaired the value or usefulness of the property. If it did undergo that change (i.e. it suffered damage in order to reach its defective state or, to put it another way, it become “damaged”), then that would trigger the insuring clause of a Builder’s Risk policy. If, on the other hand, the insured property was simply built badly, it should never trigger the insuring clause of a Builder’s Risk policy.
So, what am I intending to achieve in my proposed re-drafts of the clauses? As set out above I am not intending to suggest any alteration of the cover which I believe is intended by the existing clauses. Rather, my only intention is to express, in as clear language as possible, my understanding of the meaning of the existing clauses.
With that in mind, my re-drafts have largely retained the existing language of the current LEG clauses, and primarily removed the words which in my view serve to obscure the meaning of the existing clauses. The exception to that approach is in my proposed amendment to LEG1, where in order to avoid using the word “defect” to refer to a mistake, I have instead introduced that word into the clause even though it doesn’t appear anywhere in the existing suite of exclusions. However, in my view, the natural and ordinary meaning of the word “mistake” accurately reflects the meaning of the (in my view) misleading word that it replaces in the original clause.
A final point in relation to the clauses. As I explained in my article on the SCB decision, the urgent need to amend LEG3 (and, by extension, the other LEG clauses) presents an opportunity to move away from the current unhelpful position where we have two separate suites of defects exclusions (LEG, and DE).
Each suite can be broken down in three categories: clauses that are concerned with causation (LEG1 and DE1); clauses that are concerned with improvements (LEG3 and DE5); and clauses that are concerned with the condition of the insured property before damage occurred (DE2-4, and LEG2). Of those three categories, the clauses relating to two of them are materially the same in each suite, despite differences in drafting (i.e. LEG1 and DE1 do the same thing, as do LEG3 and DE5 - there may be technical arguments that they operate slightly differently, but those technical arguments should not, in my view, be taken seriously).
The only difference between the two suites is in the intermediate clauses which are concerned with the condition of the property before the damage occurred. In that regard LEG2 operates materially differently from DE2-4. That is due to the different origin of the two suites: the DE clauses were intended to be general Builder’s Risk clauses, whereas the LEG clauses were introduced specifically to cater for engineering risks (i.e. EAR as opposed to CAR). Unfortunately, the DE clauses have not been as successfully exported as the LEG clauses (perhaps because there are more of the DE clauses and so they are perceived as being more difficult to understand), with the result that in some important markets, including the US, the LEG clauses are used as standard for civils projects, whereas the DE clauses would be more appropriate for projects of that type.
So, rather than simply amending the LEG clauses, it seems to me to be much more sensible to introduce a single suite of clauses which are based on the existing LEG clauses, but which re-brand LEG2 in the way it was intended (i.e. as applying to EAR) and amending DE3 as a civils alternative to LEG2.
And with that rather long introduction, and with thanks for the patience of anyone who has taken the time to read this far rather than jumping straight to the draft clauses themselves, here are my suggestions for a new single suite of defects exclusions, modelled on the current LEG clauses, but with an amended version of DE3 introduced as an alternative to LEG2 (and branded LEG2 (CAR)).
| Original clauses | My draft clauses |
| LEG1
“The Insurer(s) shall not be liable for Loss or Damage due to defects of material workmanship design plan or specification.” |
LEG1
The Insurer shall not be liable for the cost of fixing any damage caused by mistakes of any kind. |
| LEG2
“The Insurer(s) shall not be liable in respect of: All costs rendered necessary by defects of material workmanship design plan or specification and should damage occur to any portion of the Insured Property containing any of the said defects the cost of replacement or rectification which is hereby excluded is that cost which would have been incurred if replacement or rectification of the said portion of the Insured Property had been put in hand immediately prior to the said damage. For the purpose of this policy and not merely this exclusion it is understood and agreed that any portion of the Insured Property … shall not be regarded as damaged solely by virtue of the existence of any defect or material workmanship design plan of specification”. |
LEG2 (EAR)
Should damage occur to any portion of the Insured Property which was in a defective condition before the damage occurred the Insurer shall not be liable for the cost that would have been incurred to fix the defects in that portion of the Insured Property immediately before the damage occurred.
|
| DE3
“This policy excludes loss of or damage to and the cost necessary to replace repair or rectify: i. Property insured which is in a defective condition due to a defect in design plan specification materials or workmanship of such property insured or any part thereof; ii. Property insured lost or damaged to enable the replacement repair or rectification of Property insured excluded by (i) above. Exclusion (i) above shall not apply to other Property insured which is free of the defective condition but is damaged in consequence thereof.” |
LEG2 (CAR)
The Insurer shall not be liable for the cost incurred to fix any portion of the Insured Property which was in a defective condition immediately before the damage occurred.
|
| LEG 3/06
“The Insurer(s) shall not be liable in respect of: All costs rendered necessary by defects of material workmanship design plan or specification and should damage (which for the purposes of this exclusion shall include any patent detrimental change in the physical condition of the Insured Property) occur to any portion of the Insured Property containing any of the said defects the cost of replacement or rectification which is hereby excluded is that cost incurred to improve the original material workmanship design plan or specification. For the purpose of the policy and not merely this exclusion it is understood and agreed that any portion of the Insured Property shall not be regarded as damaged solely by virtue of the existence of any defect of material workmanship design plan or specification.” |
LEG 3
The insurer shall not be liable for the cost incurred to improve the original material workmanship design plan or specification.
|
I would love to hear from anyone who either agrees or disagrees with what I’ve set out above. The market would benefit from a debate on this important issue, and we have an opportunity to create a better situation than the one in which we find ourselves today. Please feel free to email me either at david.pryce@fenchurchlaw.co.uk, or at david.pryce@fenchurchlaw.com.sg.
David Pryce is a Senior Partner at Fenchurch Law.
Affected by the Riots? Insurance and Other Remedies
Insurance
If your property has been damaged due to the recent nationwide spate of riots, your first port of call for remedy should be your insurers.
Affected individuals should notify their insurers of any damage as a result of the riots, as soon as possible.
Most property policies will include standard cover for physical damage to property. However, some policies may contain an exclusion for losses caused by, or in consequences of riot.
The definition of a riot (unless otherwise defined) in an insurance policy is its technical legal meaning as per The Public Order Act 1986 s.1, which requires a minimum of 12 people for the offence of riot.
The Riot Compensation Act 2016
In the event that a claim is declined, for example, due to a riot exclusion or a vehicle only being insured for third-party losses, the Riot Compensation Act 2016 (“RCA”) may provide an alternative route for compensation.
The RCA was introduced to help communities recover more quickly from the impact of rioting where the affected individuals are either inadequately insured or have had their claim declined by their insurer.
If your property is insured, the RCA requires an affected person first to claim via their insurers. However, If the claim is declined in full or part, the affected person can seek further remedy under the RCA.
What the RCA will cover:
- Owners of a building may claim for damage to the buildings structure;
- Tenants/Occupiers may claim for damaged/stolen contents;
- Damaged or stolen business items stored in a vehicle;
- Damaged or stolen stock-in-trade vehicles; and
- Damaged or stolen underinsured vehicles.
What the RCA will not cover:
- personal items held outside of a building;
- consequential loss e.g. loss of trade or rent; and
- personal injury - this is dealt with by the Criminal Injuries Compensation Authority (CICA).
Deadlines:
- An affected individual will have 42 days from the date of the riot ending to claim under the RCA, unless;
- The affected individual has first made their claim under their insurance, in which case they will have 42 days from the date the insurer declines/partially declines the claim.
How to claim via the RCA:
- Claimants should complete and send the GOV.UK dedicated claim form via post or email to the claims authority for the police force in the area where the riot took place.
- The details of where to send the claim form will be found on the police force’s website.
Helpful Links:
Chloe Franklin is an Associate at Fenchurch Law
Policy Cover for Cladding “Damage”
A combustible cladding crisis has engulfed the construction sector in recent years, with tragic fires in apartment blocks in London, Melbourne, Dubai and Valencia indicative of systemic global risks. External wall panels, widely used since the 1990’s to reface high-rise buildings, have been exposed in many cases as hazardous and unsuitable, compounded by fire stopping and compartmentation defects, resulting in an avalanche of claims against developers, owners, contractors, consultants and insurers.
Rectification costs are potentially recoverable under latent defects policies, covering structural or safety issues affecting new build developments, or under professional indemnity policies, in response to third party claims against designers arising from negligence in the course of their professional duties. This article focuses on recent authority in common law jurisdictions which suggests that the incorporation of defective cladding panels may constitute physical damage for the purpose of other types of liability or property insurance.
Owners v Fairview
In Owners - Strata Plan No 91806 v Fairview Architectural (No.3) [2023] the defendant (“Fairview”) manufactured and supplied combustible Vitrabond panels, installed on two high-rise residential buildings in Sydney. Following an order by the local council to remove the panels, the owner commenced representative proceedings against Fairview alleging that the panels were not of acceptable quality, in breach of statutory requirements. The owner applied to join Fairview’s liability insurer to the claim, on the basis that Fairview’s potential liability arose from “property damage” caused by an “occurrence” (defined in the policy as an event resulting in property damage that was neither expected nor intended).
Justice Wigney acknowledged that the question of coverage was “not easy … involving matters of degree and characterisation”, with many of the authorities turning on their own unique facts and the more contentious cases involving alleged physical damage based on a loss of functionality. Notably the New South Wales Court of Appeal has rejected an argument that the blockage of a grain silo by grain constituted physical damage (Transfield v GIO (1996)).
The Federal Court held that it was at least arguable the liability policy would respond to the underlying claims, since the affixation of cladding panels “had an instant and damaging effect on the building because the panels posed an immediate and unacceptable danger to the residents of the building”. Physical damage to the facade occurred during the period of insurance, when the panels were attached by insertion of nails and screws into the walls of the building using a top hat structure. It was held that this could be characterised as an “occurrence” because Fairview did not expect or intend the panels to be combustible or defective, nor that the panels would have to be removed.
In reaching this conclusion, Justice Wigney considered Australian Plywoods v FAI (1992), where the Queensland Court of Appeal held that physical damage to the hull of a boat occurred at the time that defective plywood was attached using screws and glue; and R & B Directional Drilling v CGU (2019), where the Federal Court determined there was no physical injury to a tunnel by accidental filling of a conduit pipe with concrete, as the pipe could be removed leaving the tunnel in the same physical state as before the defective work.
Justice Wigney distinguished the decision in Pilkington v CGU [2005], where the English Court of Appeal held that installation of a small number of defective glass panels in the Waterloo Eurostar Terminal had not caused physical damage to the terminal building, to trigger cover under the manufacturer’s products liability policy. In that case, the owner did not remove the affected panels (so there was no physical damage associated with access, to replace defective components) and chose instead to implement safety measures to avoid the risk of shattered glass falling.
Fortuity
In English law, damage is a fortuitous change in physical condition that is adverse. The requirement for an altered physical state is crucial to distinguish between damage and defects. The fact that something is rendered less valuable or useful does not in itself constitute damage; but where the subject matter is added to, defaced or contaminated by some other substance, it is a matter of degree whether this will be regarded as affecting the physical condition of the property. Product liability insurance is triggered by personal injury, or physical loss or damage to third party property, during the period of insurance, as opposed to economic impacts such as loss of goodwill (Rodan v Commercial Union [1999]).
In Pilkington, the first instance decision - that the terminal was not physically damaged by an Occurrence which consisted of no more than the intentional installation of the product designed to be installed - was upheld on appeal. The policy wording made clear that damage or deterioration confined to the product itself was excluded, i.e. the policy would only answer in respect of physical damage suffered by third party property in relation to which the product had been introduced or juxtaposed.
Lord Justice Potter observed:
“Damage requires some altered state, the relevant alteration being harmful in the commercial context. This plainly covers a situation where there is a poisoning or contaminating effect upon the property of a third party as a result of the introduction or intermixture of the product supplied … difficulties of application of such a test may arise in cases where a product supplied is installed by attachment to other objects in a situation in which it remains separately identifiable, but by reason of physical change or other deterioration within it, it requires to be renewed or replaced.”
American Cases
The Court of Appeal in Pilkington considered various American authorities including Eljer Manufacturing v Liberty Mutual (1992), in which Circuit Judge Posner in a majority judgment decided that the installation of a defective product or component into property of the buyer, in circumstances where the defect does not cause any tangible change in the property until years later, can be regarded as physical injury from the time of installation. Judge Posner considered that the presence of a potentially dangerous ‘ticking time bomb’ should be construed as injury to the structure from the time of incorporation, based on the commercial intent of the parties to the insurance contract.
The outcome seems analogous with the limitation period in tort for claims where inherent design defects give rise to economic loss in the absence of physical damage, commencing at the latest on practical completion, as discussed in URS v BDW [2023].
In a dissenting judgment in Eljer, Circuit Judge Cudahy rejected the majority view, and this reasoning was endorsed by the Court of Appeal in Pilkington as better reflecting the approach of an English court. Lord Justice Potter referred to the comments of Stuart-Smith LJ in Yorkshire Water v Sun Alliance [1997] as follows:
“… the American Courts adopt a much more benign attitude towards the insured … based variously on the “folly” argument … or that insurance contracts are: “contracts of adhesion between parties who are not equally situated” … or because the Courts have … adopted the principle of giving effect to the objectively reasonable expectations of the insured for the purpose of rendering a fair interpretation of the boundaries of insurance cover … For the most part these are notions which reflect a substantial element of public policy and are not part of the principles of construction of contracts under English law.”
Arguably this benevolent approach is reflected in recent US decisions on defectively mixed concrete, suggesting that “any bad effect” may qualify as damage in the context of LEG defect exclusion clauses under Construction All Risks policies (South Capitol Bridgebuilders [2023]; Archer [2024]).
Contamination
In determining the issue in Fairview, Justice Wigney was influenced by cases concerning the harmful effects of asbestos, observing that:
“The affixation of combustible panels to a residential building can … be compared with the integration of a dangerous or toxic substance, such as asbestos, into a building. Just as the integration into a building of a potentially hazardous material such as asbestos resulted in physical injury to the building at the time of installation (even if at that time the dangers were not realised, or the toxic substances had not been released) … so the affixation to a building of potentially hazardous combustible panels can be seen to result in physical damage to the building at the point of installation.”
As noted by Paul Reed KC in Construction All Risks [at 14-014] some English and Australian authorities suggest that the courts may be willing to treat contamination as a separate category of damage that does not require an obvious physical change in characteristics of the property insured.
Applying the courts’ reasoning in The Orjula [1995] and Hunter v Canary Wharf [1996] it may be possible to infer that the property has undergone a change in physical condition, where remedial costs have been incurred.
Conclusion
Insurers would typically argue that no fortuitous physical damage has occurred in respect of combustible cladding panels, in the absence of a fire or other adverse event post-installation, and any need for replacement following identification of harmful characteristics represents, at most, an economic loss to owners.
By contrast, recent authorities in Australia and the US lend support for the proposition that damage may be established based on changes in condition through physical attachment of cladding panels, involving integration of dangerous substances with a ‘contaminating’ effect, given the adverse unexpected consequences and need for remedial works. Each case will depend on its individual facts in terms of the location of insured property, type of external wall system(s), and applicable policy wording.
The argument remains largely untested in the English courts, presenting a novel potential route to recovery under insurance policies triggered by physical damage.
Amy Lacey is a Partner at Fenchurch Law
Webinar - The world’s first LEG3 court decision & what it means for the CAR market
Agenda
A Court in the USA has delivered the world’s first legal decision on the most generous of the three London Engineering Group (LEG) clauses related to defect exclusions, LEG3, in the case of South Capitol Bridgebuilders v Lexington Insurance Company. The fact that the Construction All Risks (CAR) market (otherwise known as the Builders’ Risk market) has been waiting for a LEG3 decision for this long means that SCB v Lexington was always going to receive a lot of attention. However, the unrestrained and intemperate language used by the Judge means that there is a risk that the decision will create more heat than light, and has the potential to lead to a reaction by CAR insurers which could negatively affect the interests of policyholders. This case study therefore attempts to take a step back from the eye-catching language used by the Judge in SCB, and to discuss what the future for LEG3 might look like.
Senior Partner, David Pryce is joined by David B. Goodman from Goodman Law Group | Chicago, the firm that represented South Capitol Bridgebuilders.
Webinar - Broker Top Tips!
Agenda
The Top Tips presentation will provide an overview on the scope of brokers’ duties with reference to case law including Infinity Reliance v Heath Crawford [2023], George on High v Alan Boswell & New India Assurance [2023], Bellini v Brit UW [2024] and ABN Amro v RSA [2021]. Addressing common pitfalls to avoid around underinsurance, named insured entities, non-damage BI extensions and DSU reinstatement, we will highlight best practice for brokers to manage potential E&O exposures, in light of recent claims experience.
Speaker
Joanna Grant, Managing Partner, and Amy Lacey, Partner
Webinar - Too Hot to Handle – a cautionary tale about Hot Works Conditions
Agenda
Hot Works Conditions are a staple of contractors’ public liability policies. They require certain precautions to be taken before, during and after the carrying out of Hot Work activities, each of which are designed to reduce the risk of a fire breaking out.
The language and requirements of Hot Works Conditions vary across the market, and difficult questions often arise as to whether a particular activity engages the precautions, the meaning of “combustible”, and whether the precautions are even capable of being satisfied.
Speaker
Alex Rosenfield, Associate Partner
Archer v Ace (or, The Demise Of LEG3?)
Introduction
In the London Market there is, by and large, a common understanding about how LEG3 and the other defects exclusions operate, and what they are intended to do. That doesn’t mean that disagreements don’t arise about how a particular defects exclusion might apply to a particular set of facts, but those disagreements tend to be relatively rare, and the London Market tends to deal with what we call Construction All Risks claims (or what would be known in the US as Builders’ Risk claims), quite well on the whole.
As a result, those using the defects exclusions in the London Market, whether that is insurers, brokers, or the more sophisticated policyholders, tend to overlook the fact that several of the clauses, in both the LEG and DE suites of exclusions, are actually very difficult to understand for those who come to the clauses with the (surely reasonable) aspiration of wanting to determine the meaning of the clauses from the words that they contain.
Towards the end of last year I wrote about the potential impact of the first Court decision anywhere in the world which considered the meaning of the defects exclusion which (along with DE5, which is much less commonly used outside the UK) is intended to preserve the most generous coverage for damage to works under construction, LEG3, in the case of South Capitol Bridgebuilders v Lexington. That case was decided by a Court in the District of Columbia, but applied the Law of Illinois. Now, like buses, a second decision has been handed down in the US which considers LEG3, this time applying the Law of Florida, in the case Archer Western - De Moya Joint Venture v Ace American Insurance Co.
The decision in SCB sounded alarm bells for the Builder’s Risk community in the US, and presumably also for the LEG Committee, who are responsible for the LEG defects exclusion clauses. It raised at least two questions of significance: what constitutes damage for the purpose of triggering a Builder’s Risk policy; and what is the meaning of the LEG3 clause? Its answers to those questions were striking: property that from an English law perspective would have certainly been regarded as merely being in a defective condition was held by the Court in SCB to have suffered damage. With regard to the meaning of LEG3, the Court in SCB appeared to be unable to form a view, and held that the clause was ambiguous: “egregiously so”.
The big question for those who, like me, have an interest in the health of the Builder’s Risk market, was whether SCB would come to be regarded as an outlier decision, or one that would have a meaningful impact? Archer v Ace suggests the latter.
The judgment in Archer concerns an application for summary judgment by the insurer which was denied, and so the issues in the case will continue towards a substantive trial in due course. However, the judgment runs to some 66 pages, and so the issues were considered in some detail. I am not going to try to cover all of the detail but, as with my article on SCB, am going to focus instead of what the most important elements might mean for the Builder’s Risk market.
The facts
Again, I’ll start with a very brief description of the facts, which up to a point may create a sense of Deja Vu for those familiar with the SCB decision. Once more we have a Builder’s Risk claim relating to inadequate concrete in a bridge under construction. We have a disagreement about whether the works under construction were damaged (so as to trigger the Builder’s Risk policy), or whether the works were merely defective (which would not trigger the policy). We have a policy that contains a LEG3 defects exclusion. And we have disagreements about what LEG3 means, and about how one might establish what constitutes the “improvements” with which LEG3 is concerned.
In Archer the policyholder was a design and build contractor for the snappily titled “I-395/SR 836 Reconstruction / Rehabilitation Project” in Miami, Florida, which included the construction of a “signature bridge”. The design of the bridge involved batches of concrete, the production of which included the addition of “fly ash” from a pressurised fly ash silo, which had a mechanical system which was intended to allow specified amounts of fly ash to be added to the concrete batches. At some point between August and November 2020 the pressure relief valve of the silo failed, so that certain batches were “adulterated by an excessive amount of fly ash”.
I am not my firm’s expert on concrete (the “I ❤️ concrete” mug on my colleague Joanna Grant’s desk probably tells you who is) but, as the Court explained in Archer, although cement and concrete are terms that are often used interchangeably, they aren’t the same. Rather, cement is one of the ingredients of concrete, with the other common ingredients of concrete being fly ash, water, and aggregates. So, the presence of fly ash in concrete is not a problem in and of itself. In fact, in one sense, the more fly ash there is in the concrete, the better, as long as using additional amounts of fly ash does not come at the expense of the amount of cement used. High proportions of both fly ash and cement “generally increases the overall compressive strength of the concrete”. The problem comes when, as in Archer, additional amounts of fly ash are used at the expense of the amount of cement used. Then the compressive strength of the concrete is impaired.
When the policyholder became aware that some of the concrete had inadequate compressive strength, it submitted a claim for indemnity for the cost of repairing the concrete. The insurer denied coverage “reasoning the concrete constituted a defective material due to to the excess fly ash, and `because of this defect the material was never in a satisfactory state and therefore was not damaged’”.
Based on the above, the Court was required to address the following questions:
- Did the insured property suffer damage?
- Is LEG3 ambiguous?
In approaching those questions, the Court applied the test for summary judgment under the Law of Florida, which is that “summary judgment is appropriate where there is ‘no genuine issue as to any material fact’, and the moving party is ‘entitled to judgment as a matter of law’” (per Federal Rule of Civil Procedure 56), and that “when deciding whether summary judgment is appropriate, the court views all facts and resolves all doubts in favour of the non-moving party”.
It also applied the test for ambiguity under the Law of Florida, which is that “a policy is ambiguous only when ‘its terms make the contract susceptible to different reasonable interpretations, one resulting in coverage and one resulting in exclusion’”, and that “if there is an ambiguity, then it is construed against the insurer and in favour of coverage”.
As I did in my SCB article, I’ll explain what the Court held in relation to each issue, and add some comments of my own.
Did the insured property suffer damage?
As with SCB, the policy in Archer didn’t define the term “damage”. However, rather than just going to the dictionary, as the judge had done in SCB, the judge in Archer held that the test for damage had been determined by previous cases, and that it “requires a tangible alteration to the covered property”. That test is largely consistent with the test under English law, which requires a change in the physical condition of the insured property, which impairs the value or the usefulness of that property.
On the facts, and based on the high bar required to give summary requirement, the judge was “not prepared to accept the insurer’s argument that damage to the cement did not involve a physical alteration” and so that issue will remain to be determined at trial.
From an English law perspective, the issue is an interesting one, and the correct answer is not obvious. The correct answer will, in my view, turn on what is considered to be the relevant property: the concrete, or the cement?
If I was representing the policyholder, I would be arguing that the relevant property is the cement, and that the cement has become damaged by being overlaid with excessive quantities of fly ash. We know, from cases such as Hunter v Canary Wharf and R v Henderson, that the deposit onto insured property of excessive quantities of benign substances is capable of constituting damage, where the excessive quantities of those substances cost more money to remove than if ordinary quantities of those substances were present. On that basis, I would argue that the cement has undergone an adverse change in physical condition, that impairs both its value and its usefulness by coming into contact with excessive amounts of fly ash: the policyholder started out with cement which had a particular value, and as a result of the change in physical condition that occurred when the fly ash was added, it no longer retains that value.
If, on the other hand, I was representing the insurer, I would be arguing that the relevant property is the concrete, and that it was in a defective condition from the moment it was created (by the mixing of the cement and the fly ash). I would argue that from that point onwards it didn’t undergo any further “tangible alteration”, meaning that the test for damage hasn’t been satisfied. We know from the Bacardi case that, in English law, the creation of a defective finished product doesn’t constitute damage. Although Tioxide tells us that damage does occur when a defective finished product undergoes a change in physical condition that constitutes a further impairment of value or usefulness, that hasn’t happened in Archer, where the concrete was under-strength as soon as it came into existence, and remained that way until discovery.
So, which material should the Court be concerning itself with, the cement or the concrete? Although, as a policyholder representative, I would like to say that the Court should be concerning itself with the cement, I don’t think that’s right. The property which needs fixing is the concrete. The claim is not for the cost of repairing the cement, but for the cost of repairing the concrete.
On the basis of the above, although the insurer wasn’t successful in obtaining summary judgment on the proposition that the insured property hadn’t suffered damage, I expect the insurer to succeed on that issue at trial.
Is LEG3 ambiguous?
As in SCB, the Court in Archer first considered whether it was ambiguous as to whether LEG3 was an extension or an exclusion. The policyholder had argued that LEG3 is “both a coverage grant and an exclusion”, and the Court held that LEG3 “generates a functional extension, or broadening, of coverage”, as compared with the narrower exclusion which LEG3 had replaced by endorsement.
That doesn’t sound right to me, and in my view that doesn’t reflect the position under English Law. Tesco v Constable makes clear that the main insuring clause of a policy can only be widened by other clauses in the policy by using the clearest terms (and ABN Amro then gave an illustration of just how clear those terms needed to be, i.e very).
The second potential ambiguity in LEG3 was what it means to “‘improve’ the original workmanship”. Here, the Court in Archer didn’t develop the arguments any further than in SCB, and simply agreed that LEG3 was ambiguous in that regard.
So, where does that leave us?
In a few short months two different Courts, applying the law of two different States, have both held that LEG3 is ambiguous. In fact that’s being somewhat diplomatic, and it’s probably more true to say that neither Court could work out what on earth LEG3 was supposed to mean. That being the case, if SCB suggested that there was an opportunity for the LEG Committee to take a fresh look at the drafting of LEG3 and the other defects exclusions, Archer suggests that it really has no option, and that it must do so as a matter of urgency.
If LEG3 is going to be amended (as, in my view, it must), then the LEG Committee also has an opportunity to overhaul the other defects exclusions.
Although the DE clauses and the LEG clauses have different origins, it is not helpful for there to be two different suites of clauses which are so similar to each other. In my view it would be much better for there to be a single suite of clauses which captures the best elements of the current clauses.
So:
- There should be a clause which is concerned with causation, and which excludes the cost of repairing any damage caused by mistakes (which would essentially be a re-drafted, simplified, version of DE1 and LEG1, which both do the same thing);
- There should then be two clauses which are concerned with the condition of the relevant property before the damage occurs. One of those clauses would exclude the cost that would have been incurred to repair any defects which were present in property that has become damaged, if those defects had been discovered immediately before the damage occurred (i.e. a re-drafted, simplified, version of LEG2). The other clause would exclude entirely the cost of fixing damage to property which was in a defective condition immediately before the damage occurred (i.e. a re-drafted, simplified, version of DE3, which one might call LEG2A in the new suite);
- The final clause would exclude only the cost of improvements (i.e. a re-drafted, simplified, version of LEG3). My SCB article proposed an amended version of LEG3, and a few months later I would still stand behind that draft.
Those clauses would be made to be bought together. So, a policy with the most limited cover would contain only LEG1. A policy with wider cover would contain both LEG1, and also either LEG2 or LEG2A (whichever is most appropriate for the type of project involved). A policy with the widest cover would contain LEG1, plus one of LEG2 or LEG2A, and also LEG3. Where a policy contains more than one of the new defects exclusions, the policyholder should be able to choose which to apply in the event of a claim, with each exclusion coming with a different deductible. LEG1 would have the lowest deductible. LEG2 or LEG2A would have a higher deductible, and LEG3 would have the highest deductible of all.
That, in my view, would represent a very healthy outcome for insurers, brokers, and policyholders alike, and constitute a positive response to the issues raised by SCB and Archer: a single suite of defects exclusions; which are simply drafted and easy to understand; and which fit together with each other, and are intended to be used in conjunction with each other.
David Pryce is the Managing Partner at Fenchurch Law
Covid “Catastrophe” Triggers BI Reinsurance
The first UK court ruling on the reinsurance of Covid-19 losses has confirmed coverage under excess of loss policies taken out by Covéa Insurance plc (“Covéa”) and Markel International Insurance Co Ltd (“Markel”). Mr Justice Foxton allowed recovery against reinsurers for losses occurring while the underlying policyholders were unable to use their business premises, due to government restrictions, on the basis that the pandemic was a “catastrophe” within the meaning of the reinsurance contracts.
Covéa and Markel paid out a combined total of over £100 million to policyholders for Covid-19 business interruption (“BI”) losses and made claims under their respective reinsurances with UnipolRe Designated Activity Company and General Reinsurance AG. Disagreements arose concerning the scope of cover under the reinsurance contracts, and a consolidated judgment was given in two separate appeals under s.69 of the Arbitration Act 1996, against arbitration awards dated January and July 2023. In summary, the appeals raised the following issues:
- Whether the relevant Covid-19 losses arose out of and were directly occasioned by one catastrophe on the proper construction of the reinsurances. Both arbitration awards found that they did; and
- Whether the respective Hours Clauses in the reinsurances, which confined the right to indemnity to “individual losses” within a set period, meant that the reinsurances only responded to payment in respect of the closure of insured premises during the stipulated period. The Markel arbitral tribunal found that the relevant provision did have that effect, while the tribunal in the Covéa arbitration found that it did not.
The Judge found in favour of the reinsureds on both issues.
Loss Arising from One Catastrophe
Coincidentally, both Covéa’s and Markel’s losses arose through direct insurance of nurseries and childcare facilities, which had been forced to close from 20 March 2020 by the UK government’s Order of 18 March 2020. The reinsurance contracts contained similarly worded Hours Clauses based on the LPO 98 market wording, including a form of aggregation provision operating by reference to a specified number of hours’ cover for any “Event” or “Loss Occurrence” (terms previously held to have the same meaning), defined as “all individual losses arising out of and directly occasioned by one catastrophe”.
For any Event or Loss Occurrence “of whatsoever nature” which did not include losses arising from specified perils (such as hurricane, earthquake, riot or flood) listed in the Hours Clauses, the limit was 168 hours (i.e. 7 days). Infectious disease was not a named peril and the 168 hours limit applied.
In circumstances where the arbitral awards were based on mixed findings of fact and law, it was common ground that the court could not interfere on a s.69 appeal unless the arbitral tribunal either had erred in law or, correctly applying the relevant law, had reached a decision on the facts which no reasonable person could have done.
On general principles of construction, the Judge endorsed the comments of Mr Justice Butcher in Stonegate v MS Amlin [2022] that “in considering whether there has been a relevant ‘occurrence’, the matter is to be scrutinised from the point of view of an informed observer placed in the position of the insured” (per Rix J. in Kuwait Airways [1996]).
Reinsurers argued that the gradual unfolding of the pandemic did not qualify as a “catastrophe” under the reinsurance policies, taking account of the historical development of property excess of loss market wordings, which was said to implicitly demonstrate the requirement for a sudden and violent event or happening, which could not be established on the underlying facts. Further, reinsurers claimed that a catastrophe is a species of occurrence or event that must satisfy the “unities” of time, manner and place, applied by Lord Mustill in Axa v Field [1996].
The Judge concluded that terms of the reinsurance contracts supported a generous application of the unities test, given the requirements for losses under multiple policies, with a duration potentially exceeding 504 hours (the period specified in relation to flood perils, i.e. 21 days), within broad geographical limits, indicating that a covered catastrophe could have a potentially wide field of impact.
While acknowledging the difficulties inherent in distinguishing between a “catastrophe” properly so-called, as an appropriate basis for aggregation, and a series of discrete losses sharing some common point of ancestry, the Judge held for purposes of the reinsurance claims under consideration that a catastrophe:
- Must be capable of directly causing individual losses, likely in most cases to exclude “states of affairs”.
- Is a coherent, particular and readily identifiable happening, with an existence, identity and “catastrophic” character arising from more than the mere fact that substantial losses have occurred.
- Will be identifiable, in a broad sense, as to its time of coming into existence and of ceasing in effect.
- Involves an adverse change on a significant scale from that which proceeded it.
Applying these principles to the findings in each award, the Judge noted that both tribunals had referred to the outbreak of Covid-19, and the resulting disruption of life in the UK, leading up to and necessitating the 18 March Order, as a catastrophe. In circumstances where the various government directives, including the 18 March Order, were rational and considered measures taken in the public interest, it was not necessary to explore the issue of whether a government order in isolation could be viewed as a catastrophe, since “the pandemic and the response thereto could not be disentangled”, an approach consistent with the decisions in Star Entertainment v Chubb Insurance Australia [2021] and Gatwick Investment v Liberty Mutual [2024].
Interpretation of the Hours Clauses
Covéa and Markel argued that all BI losses arising from the 18 March Order were reinsured, notwithstanding the BI losses continuing after expiry of the 168 hour period. The Covéa arbitral award endorsed this approach, determining that the reference to “individual loss” meant “a loss sustained by an original insured which occurs as and when a covered peril strikes or affects insured premises or property”. However, the Markel tribunal found in favour of the reinsurer, reasoning that it was “natural to think that BI losses occur day by day”, and therefore construing the relevant words as not “dealing with causation but with the occurrence of a particular loss”, since the “subject matter of an ‘Event’, its duration and extent, and its occurrence, are all referenced to losses not perils.”
The effect of the Markel tribunal’s finding was that only 168 hours of BI losses could be recovered from the reinsurer (although the BI had in fact extended until at least June 2020, when the relevant restrictions were first lifted), so that most losses fell outside the scope of cover and Markel was unable to reach the specified attachment point under the reinsurance policy.
In reconsidering this issue on appeal, the Judge was not persuaded that a clear line could be drawn between damage and non-damage BI, as contended by reinsurers, since even the former might continue to manifest after the specified hours period, for example by damage worsening over time. Further, the Court concluded that the “wait and see” analysis applied by the Markel tribunal, premised on the occurrence of BI losses on a day-by-day basis, may lead to “uncommercial consequences” and does not sit easily with the findings in Stonegate and Various Eateries v Allianz [2022], which treated the closure orders as having immediate impact on the insured property with continuous effect, analogous to physical damage to buildings; or with the Supreme Court’s decision in FCA v Arch [2021], which suggested that the correct causal sequence for non-damage BI approximates that of damage-related BI.
The Court therefore dismissed the reinsurers’ appeals as to the meaning of “catastrophe” and allowed Markel’s appeal against the conclusion of the arbitral tribunal as to the effect of the Hours Clause.
Practical Implications
Figures published by the Financial Conduct Authority in March 2023 indicate that, since conclusion of the Test Case in 2021, insurers have paid around £1.4 billion in BI claims. The Commercial Court’s decision in this case provides comfort for cedants with ongoing recoveries, significantly restricting reinsurers’ ability to challenge the presentation of Covid-19 losses under similarly worded excess of loss property policies. It will be interesting to see how the decision may be applied in subsequent cases involving aggregation of losses across multiple jurisdictions. Given that reinsurance contracts typically provide for resolution of disputes by way of (confidential) arbitration proceedings, this clear judgment in favour of the cedants is particularly illuminating.
UnipolSai Assicurazioni SPA v Covea Insurance PLC [2024] EWHC 253
Amy Lacey is a Partner at Fenchurch Law