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Mind the Gap: Owners Corporation 1 Plan No. PS 640567Y v Shangri‑La Construction Pty Ltd [2026] VSC 117

Introduction

A recent decision of the Supreme Court of Victoria poses an important question for the construction sector in particular: where statutory and/or strict liability regimes which concern actions taken by directors or officers are not covered by professional indemnity (“PI”) insurance, is directors’ and officers’ (“D&O”) insurance able to plug any gap in cover?

Background

Shangri‑La Construction Pty Ltd (“SCP”) was appointed to design and construct a residential development in Victoria, Australia. SCP’s Managing Director, Mr Naqebullah, recommended that the external façade incorporated expanded polystyrene (“EPS”) cladding, which was later determined to be non‑compliant with applicable building regulations. Following remediation works funded by the State of Victoria (the “State”) (similar to the Building Safety Fund here in England & Wales), it pursued an action to recover such costs under Section 137F of the Building Act 1993 (Vic) (“Section 137F”), which was enacted in 2019. Section 137F is a strict liability provision which grants the State rights of subrogation against officers and/ or directors of contractors for the cost of cladding rectification work.

Pursuant to Section 137F, the State obtained summary judgment against Mr Naqebullah in the sum of approximately $3.17 million plus interest. Mr Naqebullah then sought indemnity under two consecutive “claims made and notified” professional indemnity policies taken out by SCP (the “Policies”).

Key questions

The Court was required to determine:

1. Whether Mr Naqebullah was an “Insured” under the Policies;
2. Whether a “Claim” had been made and notified within the relevant periods of insurance; and
3. Whether the liability fell within the insuring clause, which responded to civil liability incurred in the conduct of the insured’s professional business.

Judgment

Insured status

The Court held that Mr Naqebullah was an insured person under the Policies. Although he was not named individually on the certificates of insurance, the policy documents, read as a whole (including the proposal forms), demonstrated that directors were intended to fall within the class of insureds.

Claims made and notified

The Policies were written on a strict claims made and notified basis. However, the State’s ability claim under Section 137F did not come into force until after the expiry of the Policies. As a result, and unsurprisingly, the Section 137F claim against Mr Naqebullah could not have been made during the relevant periods of insurance. Moreover, attempts to treat earlier proceedings involving SCP as the relevant claim, or to attach the Section 137F claim back to earlier notifications, were rejected as undermining the commercial purpose of claims made insurance.

Scope of the professional indemnity cover

Most interestingly from our perspective, the Court found that the liability imposed on Mr Naqebullah was not incurred in the conduct of professional business. “Professional Business” was defined by the Policies as design, including advice in relation to design in accordance with all relevant building, construction or engineering codes and standards.

It was Mr Naqebullah’s case that providing services as a registered building practitioner in drafting a specification under a design and construct contract constituted the provision of professional services of a skilful character as contemplated by the Policies.

However, no element of the State’s case against Mr Naqebullah involved provision of any design, specification or advice as contemplated by the “Professional Business” definition under the Policies, nor did Mr Naqebullah’s liability to the State depend in any way upon breach of a professional duty by him or by SCP. Instead, his liability arose solely (and strictly) under Section 137F as he was an officer of SCP at the time of the non‑compliant work.

Analysis and implications

This decision highlights an area of tension between statutory and/or strict liability regimes and professional indemnity insurance. Even where the factual background involves professional services, insurers will inevitably look closely at the legal basis on which liability is imposed. Where that basis arises in statute and/or by strict liability, PI insurance policies may not respond.

When that liability concerns actions taken by directors or officers, the question then becomes whether D&O insurance is able to plug any gap in cover.

Whilst there are no analogous strict liabilities directly arising from the design or construction of buildings here in England & Wales, sections 40 and 161 of the Building Safety Act 2022 (the “BSA”) did introduce offences for officers who commit, consent to or negligently fail to prevent breaches of the Building Act 1984 (including contravention of the Building Regulations) and breaches of Part 2 or Part 4 of the BSA (including obstructing building control or failing to manage Higher Risk Buildings).

While liability imposed on an individual by virtue of holding office might ordinarily be expected to fall within the scope of D&O insurance, such policies often contain broad professional services exclusions. This creates a real risk that policyholders may find themselves without cover under either policy.

Conclusion

For policyholders and brokers, the decision underlines the importance of reviewing PI and D&O cover together, rather than in isolation. Particular attention should be paid to the scope of the professional services definition and insuring clause alongside the breadth of professional services exclusions in D&O policies, and the extent to which programmes are designed to respond coherently to building safety liabilities.

Authors

Abigail Smith, Associate

Pawinder Manak, Trainee Solicitor

by Fenchurch Law

Ten years on: has the Insurance Act 2015 actually delivered for policyholders?

The Insurance Act 2015 (“the IA 2015”) was introduced to level the playing field for insurers and policyholders, and to move away from outcomes that were perceived as outmoded.

As the IA 2015 approaches its 10-year anniversary, this article will examine whether it has achieved those objectives – with particular focus on property damage claims – as well as the areas where uncertainty remains.

Duty of fair presentation: a shift in framework, as well as insurer behaviour?

One of the central reforms introduced by the IA 2015 was the introduction of proportionate remedies for breaches of the duty of fair presentation, which replaced the previous draconian “all or nothing” regime. In principle, this marked a significant and welcome shift. In practice, however, disputes concerning fair presentation and remedies remain common, particularly in the context of property damage claims.

A common example arises where, for example, following a fire, insurers allege that the policyholder failed to disclose historic alterations to the property, deficiencies with electrical compliance, or that one of its directors had previously been involved with insolvent companies. Had these matters been disclosed, insurers may assert that they would have only agreed to insure the policyholder on different terms or, as is more often the case, that they would not have agreed to insure the policyholder at all.

Insurers have increasingly sought to characterise alleged breaches of this nature as deliberate or reckless, thereby entitling them to avoid the policy outright (as well as keep the premium and refuse all claims), whilst sidestepping a detailed analysis of what they would have done differently. The result is that, rather than reflecting a fundamental change in behaviour, some claims handling practices have adapted tactically to fit within the structure of the IA 2015.

As a matter of law, the evidential burden remains firmly on insurers. It is for them, not policyholders, to prove how the alleged non‑disclosure or misrepresentation influenced their underwriting. In practice, insurers are frequently reluctant to disclose the evidence said to support their position, such as contemporaneous underwriting guidelines, contemporaneous exchanges at the time of placement, or a witness statement from the underwriter involved. In those circumstances, policyholders are left with an invidious choice: they can either accept the insurer’s position at face value, or commence litigation without fully understanding the strength of the case they must meet. Neither outcome sits comfortably with the intended purpose of the IA 2015, particularly in high‑value property damage claims where the consequences of avoidance can be severe.

Section 11 – a causation test, or not?

Section 11 of the IA 2015 (“s.11”) was intended to prevent insurers from declining claims on the basis of technical breaches of policy terms that had no connection with the loss. In straightforward cases, its application is uncontroversial. A breach of a fire alarm warranty should not entitle an insurer to avoid liability for a flood loss, just as a failure to maintain a burglar alarm should not defeat a claim for storm damage.

More complex property damage claims, however, expose the underlying difficulty in applying s.11 ie., where the breach can be shown not to have caused the loss per se, but it is harder to say that compliance could not have reduced the risk of that loss in different circumstances. So, for example, a failure to comply with a condition to store combustible waste in a particular place might not have caused a fire, but it nonetheless could have done. This gives rise to a fundamental question: does s.11 require a strict causation test, or is it sufficient that compliance with the term could theoretically have reduced the risk of the loss occurring?

The Law Commission appeared to favour a non‑causation approach ie., they said that the test is whether compliance could realistically have affected the loss that actually occurred, rather than requiring a strict causation analysis. However, the wording of s.11 focusses on whether the breach “could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred”. That language strongly suggests that there is, in fact, an element of causation, because the emphasis is on the way in which a particular loss occurs. In practice, this shifts the inquiry toward a counterfactual assessment of whether compliance with the relevant term could have made a difference. So, in the context of an alleged breach of a requirement to carry out a 30‑minute fire watch following hot work, it would be open to a policyholder to assert that the breach could not have made any difference if fire did not break out until three or four hours later.

The High Court’s decision in Mok Petro Energy Ltd v Argo (No.2) [2024] EWHC 1935 (Comm) is the first decision on s.11. However, the provision was dealt with only briefly, and no more than a few paragraphs. The court’s observation – that the correct question is whether compliance with the term as a whole could have reduced the risk of the loss – was obiter, and not central to the outcome of the case. While the comments are nonetheless of interest (and are now frequently relied upon by insurers to reject a causation analysis), they fall short of providing definitive guidance. As a result, considerable uncertainty remains.

Damages for late payment: the theory and the reality

Section 13A of the IA 2015 (“s.13A”) introduced a statutory right for policyholders to recover damages for the late payment of insurance claims. For example, following a major fire loss, an insurer may decline cover and take many months to investigate and maintain that position, during which time the policyholder is unable to fund reinstatement and suffers continuing business interruption losses. If it is later established that the insurer had no reasonable basis for its declinature, s.13A would, in principle, entitle the policyholder to claim damages for losses flowing from that delay, such as additional loss of profits, or increased reinstatement costs.

In theory, s.13A represents a significant shift in the balance between insurers and policyholders, with the aim of discouraging unreasonable delays. In practice, however, its impact has been limited so far.

The threshold for a successful claim under s.13A is a demanding one. It is not enough for a policyholder to establish that an insurer was wrong to deny or delay payment of a claim; the policyholder must also prove that the insurer acted unreasonably. Where an insurer can demonstrate that it had “reasonable grounds” for disputing the claim, liability under s.13A will not arise, even if the coverage position is later shown to be wrong. This creates something of an asymmetry: a relatively low bar for insurers to resist liability, and a correspondingly high bar for policyholders seeking to recover losses caused by delay.

That imbalance is particularly acute in property damage claims. Following fires, or escapes of water, insurers often rely on extended investigations into causation, compliance with policy terms, or alleged non‑disclosure as giving rise to “reasonable grounds” to investigate a claim. While some degree of investigation is plainly required, the availability of “reasonable grounds” as a defence under s.13A offers insurers considerable latitude to justify prolonged delay.

There are also significant practical constraints. Claims for s.13A damages are evidence‑heavy, requiring detailed scrutiny of the insurer’s decision‑making process and the reasonableness of the time taken. Policyholders must also continue to comply with their duty to mitigate loss, which can be particularly challenging where reinstatement cannot happen without funding. As a result, the remedy is costly to pursue and, in many cases, commercially unattractive. It also raises the question as to whether well-resourced policyholders, who might be able to mitigate more easily, are able to establish claims for s.13A damages at all.

The case law reflects these difficulties. For example, in Quadra Commodities SA v XL Insurance Co SE [2022] EWHC 431 (Comm), the court suggested that a period of “not more than about a year” was reasonable for a complex claim. While that is helpful in principle (particularly as a benchmark against which delay in straightforward claims might be assessed), the policyholder ultimately lost its s.13A claim because the insurer was found to have had reasonable grounds for disputing coverage.

To date, there have been no successful reported claims under s.13A, and its effectiveness in future claims will depend, amongst other things, on the courts’ willingness to draw firmer lines around what constitutes an unacceptable delay. Until then, damages for late payment claims are likely to remain more of a strategic lever than a routinely deployed remedy.

A developing framework

While there has been meaningful case law in relation to the duty of fair presentation, other aspects of the IA 2015 remain comparatively underdeveloped. In particular, further authoritative case law on s.11 is needed to resolve the continuing uncertainty as to its proper application, especially in complex property damage claims where issues of causation and risk frequently overlap.

Similar uncertainty surrounds s.13A, and in particular the threshold for what constitutes “unreasonable” grounds for refusing or delaying payment of a claim. Absent any successful reported claims under s.13A, its true potential as a remedy for policyholders remains to be seen.

A decade on from its introduction, the IA 2015 has unquestionably reshaped the legal framework governing commercial insurance disputes. However, it has not eliminated all of the underlying tensions between insurers and policyholders. Further case law, particularly in relation to s.11 and s.13A, will be critical in determining how the IA 2015 operates in practice over the next decade.

Author

Alex Rosenfield, Partner

by Michael Hayes

Levelling the Playing Field?: the Impact of Section 13A, almost a decade on

Despite having been introduced almost nine years ago, the impact of section 13A remains to be seen. In this article, we consider whether it has achieved its purpose of levelling the playing field for policyholders, or whether it has fallen short of the reform that was originally promised.

A (brief) history

Section 13A of the Insurance Act 2015 (the “Act”) was enacted by section 28(1) of the Enterprise Act 2016 and came into force on 4 May 2017. It introduced an implied term into every contract of insurance that the insurer must pay claims within a reasonable time (including time to investigate and assess the claim) and marked a significant development in UK insurance law.

To date however, there have been only two section 13A claims heard by the courts, both of which have failed: in Quadra Commodities S.A v XL Insurance Co SE and Others [2022] because the insurer succeeded in presenting a “reasonable grounds” defence, and in Delos Shipholding SA & Ors v Allianz Global Corporate and Specialty SE & Ors [2024] because the insured had failed to establish its loss.

You can read our analysis of Quadra here – Better late than never: the first reported case on damages for late payment - Fenchurch Law.

While limited inferences can be drawn from the outcomes of only two claims, there are some obvious challenges to policyholders wanting to pursue these claims.

We consider those challenges below.

What is a “reasonable time” in which a claim should be paid?

The first issue is that the burden of proof is on the insured to demonstrate that the insurer failed to pay within a reasonable time.

The Law Commission Report, and the Explanatory Notes to the Enterprise Act, make it explicit that a reasonable time will always include a reasonable time for investigating and assessing a claim, that claims under business interruption policies will usually take longer to value than claims for property damage, and that larger more complicated claims will take longer to assess than straightforward claims.

In Quadra the Commercial Court commented that assessing what was a reasonable time was “not an easy one to decide”. The facts involved transport and storage operations across different jurisdictions and there were a number of factors outside of the insurers’ control including the destruction of evidence and the fact that legal proceedings had been issued in another jurisdiction three years prior.

The good news for policyholders was that, even in what the Court termed “complicated circumstances”, it was found that a reasonable time was not more than about a year from notification: the inference being that more straightforward losses should be paid in a number of months.

However, the challenge remains that, in circumstances where the insurer has reasonable grounds for defending the claim (in respect of liability and/or quantum), a section 13A claim may not succeed even in circumstances where an insurer has failed to pay the claim within that period.

When is an insurer both wrong and unreasonably wrong?

It was on that basis that, in Quadra, insurers successfully defended the insured’s section 13A claim, despite the insured’s coverage claim succeeding at trial.

The Commercial Court found that insurers had reasonable grounds for disputing the claim and that their arguments on policy coverage were not unreasonable merely by virtue of being mistaken.

Whilst the court can take into account insurer’s conduct in handling the claim, Quadra makes clear that slow claims handling, unnecessary investigations and improper construction / application of the policy terms will not be enough to deprive an insurer of the “reasonable grounds” defence.

So what kind of conduct would operate to deprive an insurer of a defence?

In Quadra, the Court found that insurers had instructed a loss adjuster, and sought legal advice, within the “reasonable time” for paying the claim, which suggests that not to have done so would be unreasonable. In addition, the Explanatory Notes to the Enterprise Act tell us that it will be unreasonable if an insurer is slow to change its position when further information confirming the validity of the claim comes to light.

Importantly, it is also necessary for the insured to highlight the insurer’s unreasonableness: in Quadra, the Court commented that the insured had not attempted to rebut the insurer’s argument that it had reasonable grounds to defend the claim.

Establishing loss – do pecunious policyholders have poorer prospects of succeeding under s13A?

In Delos, the claimant, who was the registered owner of a detained bulk-carrier, argued that it had suffered a loss of opportunity as a result of the insurer’s failure to pay the claim within a reasonable time, because the insurance funds would have been used to purchase a replacement vessel, which could have been traded at a profit.

The Court noted that no evidence had been adduced to show that the Claimant had been serious about pursuing that opportunity (by way of correspondence or a business plan, for example) and therefore it had not established its loss.

Controversially, Mrs Justice Dias commented that there was force in the argument that, because the Claimant was a profitable group and could have purchased a vessel without the benefit of the insurance proceeds, it had not incurred a loss as a result of the insurer’s alleged failure to pay the claim within a reasonable time.

That begs a further question: do policyholders with deeper pockets (for example, blue-chip companies) have poorer prospects of succeeding under section 13A, because of their ability to mitigate their own loss?

Arguably, yes, although there are no reported decisions on this issue. In Quadra, the Commercial Court emphasised that s13A damages are not automatic and must satisfy strict causation and mitigation standards, meaning that a claimant cannot recover loss which it could reasonably have avoided.

In other words, section 13A may operate most effectively where late payment renders a claimant impecunious, because causation and mitigation is easier to establish in such cases.

Suitability of Section 13A claims for preliminary hearings

Recently in The Members of The Probitas Syndicate 1942 at Lloyd’s -v- Pro 2 Care Limited [2025], the Commercial Court refused to consider a Claimant’s section 13A claim at a preliminary hearing, advising that evidence is crucial to assessing the period of the delay, and any loss.

In presenting its claim under section 13A, the Claimant, a care home business, argued that it had taken about 19 months for the insurer to pay its property damage claim, which was unreasonable by about 11 months (8 months having been sufficient to investigate and assess the claim), causing losses in excess of £2 million. It argued that, had the claim been paid sooner, repair works would have commenced and completed, and revenue would have been earned. In contrast, the insurer argued that the Claimant had not set out the basis for unreasonable delay, and relied on the fact that it had made staged interim payments as and when elements of the claim had been evidenced and accepted by its loss adjuster.

At a summary judgment hearing, the judge commented that, although the Claimant’s claim under section 13A was “clearly arguable”, claims under section 13A are a paradigm example of factual disputes which require evidence, and cannot be resolved summarily.

We query whether arguably this might present a further hurdle for policyholders if it can be inferred from the fact that the case has gone to trial that the insurer must have a reasonable basis to defend the claim, even if that defence ultimately fails, as otherwise the claim would likely have settled.

Conclusion

Almost nine years on, it is hard to see that section 13A has – yet – succeeded in levelling the playing field for policyholders.

Nevertheless, the optimistic view is that, in different circumstances, the path has been laid for section 13A claims to succeed. If the precedent set by Quadra is that even complicated claims should be paid within a period of 12 months, the real challenge lies in contesting an insurer’s “reasonable grounds” defence.

Despite the apparent hurdles, section 13A claims remain a powerful negotiating tool for policyholders in disputes with insurers. No insurer wishes to be the first to be subject to a successful damages claim for late payment, or to risk establishing a precedent which is unfavourable to the market.

For that reason, even almost a decade on, the jury is out; and only time will tell.

Author

Abigail Smith, Associate

by Michael Hayes

The Iran War: Property and Business Interruption Insurance Implications for Policyholders

The ongoing Middle East conflict has significant implications for many insurance issues facing policyholders. In the first of a two-part series, our partners Julian Teoh and Chris Wilkes highlight areas of concern for downstream policyholders outside of the conflict zone, and what these potentially affected policyholders should be looking out for.

Physical Damage Insurance

The effective closure of the Strait of Hormuz and Iranian attacks on energy infrastructure across the Middle East has resulted in a shortage of oil and gas and a spike in energy and related prices.

Energy price spikes are already translating into significant increases in the costs of reinstatement and rebuilding property which has been damaged.

• Petroleum-based materials such as waterproof membranes, paint and sealants have become more expensive as oil prices surge.
• Increased costs of insurance and shipping (due to increased fuel costs and the need to take longer routes to avoid the warzone) will also be baked into the end price of building materials.
• Large cranes consume large amounts of fuel. Coupled with labour shortages, crane hire rates have increased significantly since the start of the conflict.
• Energy costs feed directly into the cost of raw materials e.g. steel and aluminium, not to mention inflation causing a general increase in prices across the board, plus shortages of supply compounding price increases (and delay in supply).

The impact on supply chains is also likely to be severe, leading not only to increased direct costs, but also prolonged time scales for deliveries leading in turn to time inflation and related indirect costs.

It would be prudent for policyholders and their brokers to re-examine their physical damage sums insured under property, machinery and construction policies to reflect these issues. Policy average / under-insurance clauses can be applied even in partial loss situations, proportionately reducing any indemnity due under the policy.

Business Interruption and Increased Costs of Working Cover

Most operational policies contain cover for business interruption following damage and increased costs of working (ICW). In short, ICW are the additional costs incurred by the policyholder to mitigate BI losses (which may be highly relevant if there are delays in the supply of components or materials).

ICW cover is subject to various tests, including the “economic test”: the increase in costs must be less than the reduction in turnover due to the incident (i.e. the saving must exceed the cost of the additional expenses). In other words, uneconomic expenditure will not be covered.

Where the costs of inputs are spiking, it would normally be more difficult to pass this economic test.  Policyholders will need to consider the interaction between cost and time-related savings when considering such mitigating measures.

Business Interruption (BI) Insurance

Non-Damage BI Extensions

Many BI policies contain non-damage BI extensions, i.e. they allow the policyholder to make a BI claim even where there has not been damage at the policyholder’s premises. Most relevant to the current conflict would be:

• Suppliers’ extensions: BI resulting from supply chain disruptions at suppliers.
• Denial of access: BI resulting from an inability to access the policyholder’s premises.
• Public authority order: BI resulting from an order from a civil or military authority.

The coverage triggers for these extensions is usually damage, whether at the premises of the supplier, within a certain radius of the policyholder’s premises or which has caused the authority to issue the order.  But this is not inevitably the case. Especially in bespoke wordings, the coverage triggers may be far more permissive, and policyholders are encouraged to review their non-damage BI extensions.

Where the coverage triggers are damage-based, the policy’s war risks exclusion will also come into play.  While these exclusions can be quite comprehensive, we would encourage policyholders to review the wordings carefully and seek advice on whether or not the exclusion applies.

Adequacy of BI Indemnity Periods

The BI indemnity period is the period for which the insurer agrees to indemnify the policyholder during which the interruption to business is ongoing.

If, for example, the policy BI indemnity period lasts for 12 months but the interruption persists for 18 months, the insurer is required to pay an indemnity for only 12 months. The policyholder would not enjoy any cover for its BI losses for the last 6 months.

If the conflict is prolonged and materials are in short supply and/or cannot be shipped to the premises in a timely manner due to the conflict or the knock-on effects, this may result in the interruption period extending beyond the policy’s BI indemnity period. In situations where critical parts of complex machinery are needed for the business to resume and are difficult to source in a timely manner, the shortfall between the indemnity period and the duration of the interruption will come into sharp focus.

Authors

Julian Teoh, Partner

Chris Wilkes, Partner

by Fenchurch Law