Slowly but surely: policyholders make progress in their fight to recover Covid-19 BI losses from insurers
Gatwick Investment Ltd & Ors v Liberty Mutual Insurance Europe SE [2024] EWHC 83 (Comm)
Introduction
Judgment has now been handed down following an eight-day preliminary issues hearing in October/November 2023 at which a number of different businesses, from a variety of industries, including bowling alleys, theatres, hotels, pubs, retail stores and a race course, sought to advance claims against their insurers for recovery of their COVID-19 losses.
It is the latest judicial consideration of prevention of access/non-damage denial of access wordings following: (i) the Divisional Court judgment in the FCA test case, which found that prevention of access/non-damage denial of access type wordings did not respond (a point that was not on appeal to the Supreme Court, and therefore did not benefit from a fresh look at the correct causation analysis); and (ii) Corbin & King, where further consideration of these types of wording found that there was cover based on the Supreme Court causation analysis and other factors.
The majority of the policyholders were insured by Liberty Mutual Insurance Europe (“LMIE”), as either the lead or sole insurer. There were a number of LMIE wordings and policy arrangements for the court to consider, albeit with very similar issues. Another case against Allianz Insurance Plc (“Allianz”) was heard alongside the LMIE group of claims, on a different wording, but again with similar coverage issues for determination.
In broad terms, the key preliminary issues that the court was asked to consider fell into the following categories:
- Trigger & Causation
- Limits
- Furlough
Not all issues were live in each of the claims. A full list of the answers to all preliminary issues can be seen in section H of the judgment.
Fenchurch Law acted for Hollywood Bowl and International Entertainment Holdings.
Trigger & Causation
LMIE’s starting position on causation was that Corbin & King was wrongly decided, and instead the correct analysis was that of the Divisional Court in the FCA Test Case. However, insurers ultimately accepted prior to the hearing that they would not be successful on this point at first instance, and instead were granted permission to appeal at a later date.
Despite declarations made both by the Divisional Court and the Supreme Court in the FCA test case, and then debated again in Corbin & King, insurers ran a number of arguments including that “statutory authority” assumed a peril which concerned restrictions imposed by bodies such as the police, or other bodies with authority from or created by statute, i.e. bodies with a local remit.
The court disagreed on all counts, and held that the actions taken by government were the “paradigm example” of action by a “Statutory Authority”. The judge agreed with policyholders that there was cover for interferences that resulted from the action of any person, body or entity which has lawful authority derived from statute or statutory instrument. It was also sufficient that person or body responsible for the relevant interference was exercising authority which was derived from statute.
In respect of the Allianz wording, the court found that a case or cases of Covid-19 did not amount to an “incident” within the meaning of an “incident likely to endanger human life” (notwithstanding the court also accepting that a case or cases of Covid-19 was likely to endanger human life). Furthermore, the term “policing authority” did not encompass the central government or Secretary of State for Health and Social Care, the court found that it instead refers to the police or other bodies whose function it was to ensure that the law is obeyed and enforced.
Limits
On the LMIE wordings the policyholders argued that the sub-limits applied on a per restriction and per premises basis, or alternatively, that it applied to any one occurrence. Insurers argued that sub-limit was an aggregate limit applicable to all claims under the relevant clause, irrespective of the number of separate restrictions, and regardless of the policies being composite or not.
The court’s findings were broadly as follows:
- The policies provided cover on a per occurrence basis (i.e. each occurrence was subject to the relevant sub-limit), with no annual aggregate limit for claims under the relevant clause;
- Relying on Corbin & King, the policyholders with composite polices (a policy which records the interest of a number of different companies or insureds in a single document, but with the effect that there was separate contract of insurance between the insurer and each policyholder) were not subject to an aggregate limit that applied across all insureds. Moreover, there was a sub-limit per policyholder company, per occurrence; and
- Despite the use of “limit” instead of the defined term “limit of indemnity”, which appeared elsewhere within the policy wording, the court considered there was no material distinction between the two. As a result, the single policyholders with multiple premises could not recover on a per premises basis, but instead per occurrence aggregation with no annual aggregate limit.
The Allianz wording, despite not extending to the central government’s response to the Covid-19 pandemic, was found to apply to each company (it was already agreed that there was a composite policy on these particular facts). Furthermore, in circumstances when multiple premises were owned by one insured, there was no basis to treat individual premises as one unit based on the terminology “interference with the Business”, or elsewhere in the relevant wording. Accordingly, the sub-limit applied to “any one claim”, and therefore potentially multiple premises, subject to proving an “incident” within the relevant radius of each of the premises.
Furlough
The issue of furlough was previously considered by the court in Stonegate v MS Amlin & Ors, where it was held that furlough payments were to be taken into account under a savings clause that provided for the reduction of costs normally payable out of turnover that ceased or were reduced as a result of the covered event.
Despite detailed submissions, the court reached the same view on the basis that the issue before it was the same as that considered in Stonegate, a number of the points made had already been rejected, and it was therefore appropriate to follow the decision. In respect of arguments made on causation, the court agreed with insurers that furlough could not be regarded as wholly separate and divorced from the restrictions which were introduced in consequence of the widespread prevalence of COVID-19, which happened prior to the introduction of the CJRS scheme. Furthermore, it was not appropriate to take a different (and stricter) approach on causation in the context of the savings clause than in the context of the insured peril - there was a sufficient proximate causal connection between the insured peril and furlough payments that reduced the wage costs of a business.
What does it mean and what happens next?
This most recent Covid-19 judgment is welcome news for policyholders, again reaffirming the decision in Corbin & King v Axa. However, as noted above, insurers have been granted permission to appeal on causation and we expect that those with wordings affected by this issue will be forced to await the outcome of that appeal, despite now having a number of significant authorities supporting their claims.
In the addition to insurers being granted permission to appeal on causation, policyholders were granted permission to appeal the decision on furlough, which remains of particular importance to the wider insurance market. Hopefully a decision at appellate level will provide the market with closure on a point that sometimes feels almost political – did the government really intend for shareholders of large insurers to benefit from taxpayers’ money?
All other grounds of appeal were refused by the first instance judge, meaning that the parties will have to seek permission directly from the court of appeal. More to come on that as matters progress.
The judgment confirmed a “per occurrence” based recovery for those on the LMIE wordings, with the issue of identifying the relevant occurrences to be determined at a later date. However, as a starter for ten, we anticipate that restrictions such as the nationwide lockdowns and local lockdowns will be the obvious first candidates.
Importantly, the recent judgment will come as particularly welcome news to those with composite polices, who in the absence of specific wording to the contrary should continue to pursue claims for each insured entity, and also multiple premises in certain circumstances.
Authors
Anthony McGeough, Senior Associate
Fenchurch Law bolsters insurance disputes team in London with new hires
Fenchurch Law has announced the expansion of its coverage disputes team in London with two new hires; Jessica Chappell and Isabel Becker.
Jessica Chappell joins as a Senior Associate, bringing with her over eight years’ experience working across complex and high-value commercial litigation matters, including contractual and shareholder disputes, professional negligence claims, coverage disputes and claims against directors by liquidators. Jessica joins Fenchurch Law from Davis Woolfe where she was a Senior Associate, having previously held positions at Calibrate Law (Associate Solicitor) and Portner Law (Associate/Trainee Solicitor).
Isabel Becker joins Fenchurch Law’s Reinsurance & International Risks team as a Foreign Qualified Lawyer, having previously trained at Bach Langheid Dallmayr, a German law firm specialising in international insurance and liability. Representing insurers, Isabel worked on a number of claims related to Covid-19 business interruption and private health insurance. Isabel graduated from Heidelberg University with a Degree in law before moving to the UK in 2022 and achieving a Distinction in Insurance Law (LLM) at Queen Mary University of London.
The new appointments will bolster the business’ insurance disputes team, which was set up to provide improved access to justice for policyholders and their insurance brokers, when coverage disputes arise.
Managing Partner, David Pryce, commented:
“Jessica and Isabel both bring with them excellent legal and insurance knowledge with combined experience within the UK and international markets. Both will be invaluable in helping Fenchurch Law achieve its mission of levelling the playing field for policyholders.”
Jessica Chappell added: “First and foremost I was attracted to Fenchurch Law due to its excellent reputation within the legal insurance market and the team of experts I would have the opportunity to work alongside and learn from. But I was equally impressed by the business’ commitment to ensuring that when a dispute arises, the policyholder has the same advantage as the insurer, in an industry where traditionally this has not been the case. This purpose together with its forward thinking and unique values, drew me to Fenchurch from the start.”
Isabel Becker added: "I was drawn to Fenchurch Law by its excellent market reputation, as well as its inclusive and ambitious culture. I’m very excited to be working in an environment where I’ll have the opportunity to play an important role in helping the business achieve its growth objectives, whilst providing first-class legal support for policyholders.”
Various Eateries -v- Allianz – Court of Appeal prevents access to a different outcome
Background
The Court of Appeal has handed down judgment in Various Eateries v Allianz, one of the trio of cases along with Stonegate Pub Co v MS Amlin & Ors and Greggs v Zurich heard before Mr Justice Butcher in June 2022. This group of cases, which considered issues arising out of the Marsh Resilience wording found by the FCA Test Case to respond in principle, proceeded by way of a determination of certain preliminary issues that included: (i) Trigger; (ii) Aggregation; (iii) Causation: additional Increased Costs of Working (“AICW”); and (iv) Government Support (“Stage 1”).
Following judgment in Stage 1 (our summary of the Stonegate proceedings can be found here), the policyholders and insurers in each action appealed various points on their respective judgments.
Grounds of appeal on key issues such as furlough and AICW ultimately did not end up before the Court of Appeal as the parties in Stonegate and Greggs settled their actions prior to the appeal hearing. The remaining grounds of appeal in dispute between Various Eateries and Allianz included certain aggregation issues and a short point of construction on the scope of the prevention of access and enforced closure clauses.
Following a two-day combined appeal hearing, the Court of Appeal dismissed all grounds of appeal, essentially leaving the parties in the position they were in following Mr Justice Butcher’s judgments in the underlying proceedings.
The key findings in Various Eateries at first instance
In the underlying proceedings Allianz argued that all BI losses suffered by Various Eateries should be aggregated to single sub-limit by reference to a “single occurrence” to which all losses connected. Allianz put forward a number of potential “single occurrence” candidates, including an emergence event in Wuhan, and the arrival of Covid-19 in the UK. Various Eateries sought to persuade the court that there should be no aggregation, or that aggregation should only be applied on a per premises basis (i.e. there would be a separate sub-limit for each premises).
Ultimately the lower court rejected the parties’ primary cases, and found instead that BI losses should aggregate by reference to various Government actions, which meant that there were multiple sub-limits that applied to the business as a whole (not on a per premises basis). The judge also rejected Various Eateries’ argument that the various reviews and renewals of certain Government actions should be separate aggregating occurrences (and therefore attract additional sub-limits).
Aggregation
On appeal Allianz sought to revive an argument that there was a single occurrence in Wuhan to which all BI losses should aggregate on the basis that the judge found in Stonegate and Greggs that the initial animal to human infection(s) could constitute a single occurrence, but was then wrong to decide that it was too remote. Allianz also submitted that if the “initial outbreak” in Wuhan was something more widespread than the initial animal to human infection(s) there were still events in Wuhan that qualified as a single occurrence.
Allianz also maintained an alternative argument that the introduction of Covid-19 into the UK also qualified as a single occurrence, even if it could not be specifically identified, and that this single occurrence was “in connection with” the BI losses within the meaning of the relatively loose causal language of the policy wording.
The Court of Appeal held that the trial judge was entitled to reach the conclusions that he reached at trial following detailed and fully considered arguments on the events in Wuhan, and accordingly there was no error principle or other comparable error that would entitle the Court of Appeal to interfere.
In respect of the introduction of Covid-19 into the UK, the Court of Appeal departed from the trial judge’s findings and considered that there was a sufficient causal connection between the arrival of Covid-19 in the UK and the BI losses suffered by Various Eateries that would satisfy the weak causal link required by the wording. However, the Court of Appeal also found that the judge was entitled to have reached the conclusion that the introduction of Covid-19 in the UK was too remote on the basis that the first introduction was temporarily too remote from the losses, and the losses depended on the spread of the disease within the UK which was by no means certain.
Various Eateries sought to revive its case that if the BI losses fall to be aggregated, then it should be on a per premises basis, as the triggers for cover under the wording were expressed by reference to an “Insured Location”.
The Court of Appeal found that the Judge was right to have dismissed the per premises argument for the reasons given in the underlying proceedings. There was nothing within the wording that suggested that aggregation was intended to operate on a per “Insured Location” basis, which was further confirmed by (i) the definition of the “Insured’s Business”, which was defined as “Operating a chain of Italian restaurants” i.e. the business as a whole; and (ii) the Retention provision, which made clear that a Single Business Interruption Loss may affect multiple Insured Locations. Notably, the Court of Appeal distinguished Corbin & King & Ors v Axa from the present proceedings.
The Court of Appeal refused permission to appeal Various Eateries’ alternative argument that a decision to renew, change or relax a Government measure should also count as a single occurrence and therefore attract a separate sub-limit. However, the Court of Appeal did note that its analysis of the March 2020 regulations, which applied for 6 months unless revoked, may well have been different had the regulations applied for a specified period after which they were renewed by a positive decision to do so.
The Construction Point
Allianz also challenged the trial judge’s decision on the scope of cover under the Prevention of Access and Enforced Closure clauses. In summary, Allianz argued that the effect of the words (during the Period of Insurance” meant that it is only losses suffered during the policy period which would be covered, and losses which fell outside the policy period would not be.
The Court of Appeal agreed with the judge in the underlying proceedings, finding that VE was “entitled to recover the Business Interruption Loss proximately caused by that Covered Event, even if that loss extends beyond the Period of Insurance” subject to the longstop of the maximum indemnity period, based on an analysis of the definitions of “Indemnity Period” and “Reduction in Turnover” – “Reading these definitions together with the Insuring Clauses, Allianz agrees to pay the Business Interruption Loss proximately caused by a Covered Event which occurs during the Period of Insurance. The Business Insurance Loss which it agrees to pay is the Reduction in Turnover caused by the Covered Event, beginning on the date of the Covered Event and continuing for a maximum of 12 (or 24) months. Necessarily, therefore, the losses which VE is entitled to recover may continue beyond the end of the Period of Insurance”.
Comment
The Court of Appeal’s judgment, despite leaving matters as they were on the Marsh Resilience wording following the first instance decisions in Stonegate, Various Eateries and Greggs, is a positive outcome for policyholders. Had Allianz been successful on its primary arguments, it would have left policyholders on this wording with a single sub-limit in circumstances where most have claims significantly in excess.
The key points to take away for those with ongoing claims on the Marsh Resilience wording are:
- Policyholders are still able to claim multiple sub-limits by reference to various Government action.
The full range of the relevant Government actions that attract a separate sub-limit under the Marsh Resilience wording is yet to be tested by the court, and will be fact dependent on the industry in question.
- Policyholders with “composite” policies may still argue that there are separate sub-limits per separate company;
- The attribution of losses to specific occurrences has yet to be tested, and is likely to be a time consuming forensic exercise;
- Similarly, in respect of AICW, the question of what qualifies as economic or uneconomic remains unanswered;
- Furlough remains to be accounted for in the adjustment process.
It is worth noting for those on different wordings that furlough is still a live issue for the insurance market. It was considered in the recent group of cases before Mr Justice Jacobs in the commercial court as one of a number of preliminary issues arising out of disputes with Liberty Mutual and Allianz, Fenchurch Law represents Hollywood Bowl and International Entertainment Holdings in those proceedings. Judgment is currently awaited.
The full judgment from the Court of Appeal can be found here.
Anthony McGeough is a Senior Associate at Fenchurch Law.
Condonation and Aggregation - Decision by the Court of Appeal in Axis Specialty Europe S.E v Discovery Land [2024] EWCA Civ 7
This is the first Court of Appeal decision as to the meaning of “condoning” dishonest acts under the SRA Minimum Terms. As a reminder, solicitors’ professional indemnity policies must comply with the Minimum Terms. Under those terms insurers can decline to cover a claim which arises from dishonesty only if it had been committed or condoned by all partners in the firm.
The dispute concerned two fraudulent acts perpetrated against the claimants by their solicitor, Mr Stephen Jones, who was the senior partner in a two-partner firm. The other partner was a Mr Prentice. The firm became insolvent, and the claimants pursued two claims against the firm’s insurers, Axis, pursuant to the Third Parties (Rights against Insurers) Act 2010.
AXIS denied cover on the basis that the second partner, Mr Prentice, had condoned Mr Jones’ dishonesty (through “blind eye” knowledge), therefore engaging the exclusion considered below. While the Trial Judge found that Mr Prentice’s standards fell well below those required in his profession, he nevertheless concluded that Mr Prentice had not condoned the relevant fraudulent acts. Consequently, the claimants were entitled to be indemnified.
The appeal concerned Axis’ challenge to (1) the Judge’s finding of fact that Mr Prentice had not condoned Mr Jones’ dishonest behaviour and (2) the Judge’s decision that Axis was not entitled to rely on the aggregation clause.
Condonation
The exclusion in Axis’ policy was in the following terms:
"EXCLUSIONS
The insurer shall have no liability for: …
2.8 FRAUD OR DISHONESTY
Any claims directly or indirectly out of or in any way involving dishonest or fraudulent acts, errors or omissions committed or condoned by the insured, provided that:
a) the policy shall nonetheless cover the civil liability of any innocent insured; and
b) no dishonest or fraudulent act, error or omission shall be imputed to a body corporate unless it was committed or condoned by, in the case of a company, all directors of the company or in the case of a Limited Liability Partnership, all members of that Limited Liability Partnership."
There was an argument as to what clause 2.8 requires to be “condoned”. The Court of Appeal agreed with the Trial Judge that the clause is wide enough to include condonation of a pattern of dishonest behaviour of the same type as that which gives rise to the claim. As a result, the question would be “whether or not knowledge and acceptance or approval of other acts in the same pattern amount to condonation of the act or acts which gave rise to the claim.”
For example, where partner B condoned the regular use of client funds by partner A for his/her own purpose, the Court of Appeal considered it would be more difficult for partner B to argue that he was unaware of “the specific instances of such behaviour which gave rise to the claim.”
In this case, the Court of Appeal acknowledged that, while the Trial Judge found that Mr Prentice’s evidence contained both truth and untruth, his evaluation of the evidence and ultimate decision was entirely “rational” and one he was entitled to reach.
Aggregation
The Court of Appeal had to consider whether the two claims arose from “similar acts or omissions in a series of related matters or transactions.” To do so, it applied the test for aggregation considered by the Supreme Court in AIG v Woodman.
Teare J (at first instance) found that the degree of similarity must be “real or substantial.” As to whether the claims were “related”, Lord Toulson found that this required that they “fitted together.” In considering this, the Court of Appeal in Discovery Land commented that assessing “a real or substantial” similarity requires a careful consideration of the “substance of each claim.”
Here, whilst the same property was involved and the victims were affiliated companies, the Court of Appeal considered these factors to be “insufficient to provide the necessary link between the two transactions.” The Judge’s decision not to aggregate the claims was upheld.
In determining both issues, the Court of Appeal commented that a thorough factual analysis of the evidence was required, which is what it accepted the Trial Judge had indeed carried out in “painstaking” detail. While each case turns on its own facts, this decision provides a helpful guide at Appellate level as to how a court should approach issues of condonation and aggregation.
Authors
Jessica Chappell, Senior Associate
Too Hot to Handle: Everything You Always Wanted to Know About Hot Works Conditions (But Were Afraid to Ask)
Introduction
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.
This short article considers some of the key issues.
The nature of Hot Works Conditions
Hot Works Conditions are usually written as “Conditions Precedent to Liability”. Those are fundamental terms of insurance contracts and must be complied with strictly before an insurer can become liable for a particular claim.
In some cases, the condition might not actually include the words “Condition Precent to Liability”, but it will have that effect if the consequences of breaching it are made clear. So, the condition might say: “We [the insurer] will not pay a claim unless you will have complied with the following …”.
The Courts generally treat conditions precedent to liability as onerous or draconian terms. This means that it is incumbent on the insurer to spell out any such terms clearly so that the insured knows precisely what they have to do – or else they are not going to be bound by them.
The meaning of “Hot Work”
Hot Work Conditions often define the term “Hot Work” precisely. Typically, that will cover any activity which uses or produces an open flame, or any other activity which could ignite any combustible or flammable material.
While that may seem relatively straightforward, the question of whether the precautions apply may turn on whether the condition refers to activities that apply heat, or which merely generate it. For example, suppose a contractor wishes to use an angle grinder and the definition of ‘Hot Works’ encompasses activities that only “apply heat”. Strictly speaking, a grinder does not apply heat – it merely generates it – and so the precautions would arguably not apply. Conversely, if the contractor wished to use a gas torch, then that would engage the precautions, as that activity clearly does apply heat.
Actions required in respect of combustible materials
Hot Works Conditions always include a hierarchy of steps which, before starting work, the insured must take in relation to combustible materials. Those are that the insured must:
- Examine the area of works for combustible materials; and
- If the materials are moveable, move them a certain distance away from the Hot Works.
- If the materials are not moveable, cover them with non-combustible materials.
Taking each of the above in turn:
The examination
The requirement to carry out a pre-work examination of the area of work will often be highly circumscribed. For example, it may require a specific individual in the insured’s organisation (usually the fire watcher or ‘responsible person’) to conduct the examination at a particular time, and in a particular way.
On the other hand, the requirement may contain no stipulation as to how the property should be examined, or by whom. In such a case, it would arguably be open to an insured to delegate the examination to someone outside of the insured’s organisation, or to carry out the inspection by way of a desktop study or video link.
In any given case, the insured must satisfy itself that the examination was comprehensive, and that it acted reasonably in carrying out the examination in a particular way.
What does “combustible” mean in this context?
As a matter of science, almost any material is combustible if heat is applied at a sufficiently high temperature. However, “combustible” has to be construed in the context of a commercial insurance policy, and with regard to its natural and ordinary meaning.
The Oxford Dictionary of English (3rd Ed.) defines “combustible” as “able to catch fire and burn easily” and other dictionaries give similar definitions. Accordingly, it is that meaning – not its scientific meaning – to which a Court must have regard. That is supported by the decision in Wheeldon Brothers v Millenium Insurance [2018] EWHC 834 where the Court held, when referring to the term “combustible”:
“If the underwriters had intended “combustible” to have a meaning other than that understood by a layperson interpreting the Policy, it was for underwriters to make that express in the Policy. I find that “combustible” as used in the Policy is the meaning which would be understood by a layperson. To take the example given by the experts, a layperson would not consider diamonds and metals to be “combustible.”
The question then arises as to whether “combustible” should also be interpreted with regard to the specific hot works being undertaken. For example, a gas torch is a more potent source of ignition than an angle grinder, and a given material may be readily combustible in the presence of a gas torch, but not in the presence of a spark from an angle grinder.
In our view, therefore, the nature of the hot work activity should be taken into account when considering whether a material is combustible (and therefore whether it should be moved or covered), as that makes more commercial sense in the context of an insurance policy.
Finally, an insured must have reasonable knowledge that a material is combustible in order to take the required precautions. So, an insured would be expected to know that an oil-soaked rag is combustible and so would need to move it. By contrast, if a non-combustible material had secretly been doused in petrol without the insured knowing (nor being reasonably capable of discovering that), the obligation to remove or cover it would not apply.
The requirement to move or cover up combustible materials
Several points arise on the construction of this requirement.
Firstly, while it may go without saying, the requirement to move combustible materials applies only to materials that are within a certain distance of the hot work activities (usually 6 or 10 metres). Therefore, there is no requirement to remove or cover material which is further away.
Secondly, the requirement to cover up combustible material would apply only to material that is not being worked upon. That is supported by the decision in Cornhill Insurance PLC v D E Stamp Felt Roofing Contractors Ltd [2002] EWCA Civ 395, in which the Court agreed with the Insured roofing contractor that it would be “absurd” to cover up a plywood deck of a roof over which roofing felt was to be laid.
Finally, consideration must be given to whether it is even possible to remove or cover the combustible material at all. In Milton v Brit Insurance [2016] Lloyd’s Rep IR 192, in which the Court considered the meaning of a condition which required insured premises not to be ‘left unattended’, it was held that the condition “clearly only applies to the extent possible, without requiring the insured to fulfil an impossible obligation … it would make no commercial sense for the clause to require the insured to do something which was impossible …”
So, imagine a roof consisted of two layers, the inner layer of which was made of combustible timber and was inaccessible. In that situation, it would plainly not be possible to cover the timber layer, and so, applying Milton, an Insurer cannot decline a claim on the basis that the requirement has not been satisfied.
The requirement to take reasonable precautions
Hot Works Conditions frequently include a requirement that the insured takes “reasonable precautions to prevent damage”. It is well-established principle of insurance law that an insurer can only rely on a reasonable precautions clause where it shows recklessness by the insured. In particular, in Fraser v Furman [1967] 1 WLR 898, the Court held that it must be “shown affirmatively that the failure to take precautions … was done recklessly, that is to say with actual recognition of the danger and not caring whether or not that danger was averted”.
So, acting carelessly will not be sufficient. The requirement is that the insured must be reckless and not care about its conduct.
Other precautions
As stated above, the requirements of Hot Works Conditions vary across the market but will typically include a requirement to appoint a fire watcher, to have a fire extinguisher available for immediate use, and to carry out a thorough post-work fire check for a period of no less than 30 minutes.
A detailed examination of those requirements is beyond the scope of this note, but whether an insured has satisfied the requirements is likely to be fact sensitive.
The consequences of breaching a Hot Works Condition
If an insured breaches a particular term of a Hot Works Condition, then, applying Section 11 of the Insurance Act 2015 (“Section 11”), Insurers will still have to pay the claim if the insured can show that any breach could not have increased the risk of damage occurring in the circumstances in which it occurred.
Section 11 is intended to prevent an insurer from relying on a failure to comply with a policy term where the loss that occurred is unrelated to the breach. So, it would prevent an insurer from relying on a breach of a burglar alarm where the loss is caused by falling debris from an aircraft. While that example is relatively straightforward, the position is more complicated in the context of breaches of hot works conditions and fire, because there is a link between the term in question and type of loss.
There are currently no authorities on the meaning and effect of Section 11, and its precise operation is a matter of legal debate. In particular, it is unclear whether the test requires there to be a causal link between the breach and the loss, or not.
Absent any authorities, it is open to an insured to argue that Section 11 that the test is one of causation. So, if an insured could establish that a fire started as a result of a discarded cigarette for example, and notwithstanding the fact that it had not complied with the Hot Works Condition strictly, it would be open to argue that compliance made no difference, and that Insurers must pay the claim.
Summary
The consequences of Hot Work activities can be devastating for a contractor, which may face large claims against them if property is damaged or destroyed. While public liability insurance is intended to protect an insured against that risk, insureds nevertheless need to be fully aware of their obligations under these conditions, and the consequences which could follow in the event of a non-compliance.
Alex Rosenfield is an Associate Partner at Fenchurch Law
