Reinstatement re-stated
In its recent judgment in Endurance Corporate Capital v Sartex (05/03/20), the Court of Appeal confirmed that, absent any contractual provision to the contrary, the appropriate basis of indemnity in a property policy is the reinstatement basis - ie, the cost of repairing/replacing the damaged/destroyed building. The only exception is is where, at the time of the loss, the policyholder had been planning to sell the building, rather than continuing to use it.
The Court of Appeal rejected the Insurer’s case that, in order to be entitled to the cost of reinstatement (rather than merely the decrease in market value, where that was lower), the policyholder needed either to have already carried out the reinstatement itself or at least - as per Great Lakes v Western Trading (CoA, 11/10/16) - to have held a “fixed and settled intention” to do so. In a blow to property insurers, the Court of Appeal ruled that this requirement only applied in the very rare situation where the flood, fire, etc had increased the value of the building - as had occurred in the Great Lakes case (see https://www.fenchurchlaw.co.uk/ordinary-measure-indemnity-great-lakes-reinsurance-uk-se-v-western-trading-limited/).
In a further blow to property insurers, the Court of Appeal held that they cannot apply a blanket percentage discount (in practice, often as much as 30-35%) to the cost of reinstatement, to represent the alleged betterment where an old building was replaced using modern materials. A deduction for betterment will be permitted only where insurers can prove and quantify the lower running costs of the new building or, in the case of new plant & machinery, its greater efficiency.
https://www.bailii.org/ew/cases/EWCA/Civ/2020/308.html
Jonathan Corman is a partner at Fenchurch Law
Court of Appeal plunges into notification issues
In a Judgment handed down yesterday, the Court of Appeal considered for the first time in over ten years issues regarding the effect of a notification of a “circumstance” to a professional indemnity policy: Euro Pools plc v RSA [2019] EWCA Civ 808 [1].
Introduction
The commercial background to the dispute was unusual. Typically, a policyholder will argue that its notification was wide in scope, so that in due course its notification will “catch” any ensuing claims. By contrast, the insurer to whom the notification was made will typically argue that the scope of the notification was narrow (or, sometimes, wholly ineffective), so that it is in a position to resist indemnifying the policyholder for the later claim(s).
Here the position was reversed. The insurer (RSA) argued that the notification in question was sufficiently wide to catch the later claims; and the policyholder argued that its original notification was very narrow, so that accordingly the claims in question could be said to arise from the (unquestionably wider) notification which it had made to its successive policy.
The reason for this apparent role reversal was the simple fact that the indemnity limit under the original policy (which was on an aggregate basis, not “per claim”) was exhausted, so that the policyholder needed to establish that the later policy (also written, as it happens, by RSA) would respond.
The facts
Euro Pools plc (“Euro Pools”) designed and installed swimming pools. One particular feature which it offered was the inclusion of vertical “booms”, which could be raised and lowered in order to compartmentalise the pool.
Initially, the booms were powered by an air drive system, whereby air would be pumped into and out of stainless steel tanks housed within the booms.
In February 2007, Euro Pools notified its 2006/07 policy (“the First Policy”) that the booms weren’t working. This was, it said, because of a perceived problem with the stainless-steel tanks. Euro Pools proposed an inexpensive solution whereby inflatable bags would be used instead of the steel tanks.
In June 2007, just before expiry of the First Policy, Euro Pools supplemented its original notification by informing RSA that, while it was continuing to replace the tanks with inflatable bags, the cost of which it expected would fall within its excess, it nevertheless wished “to ensure the matter [was] logged on a precautionary basis should there be any future problems”. [2]
Thereafter, during the course of its 2007/08 policy (“the Second Policy”, also written, as I have said, by RSA), it became apparent to Euro Pools that the inflatable bags were no more successful than the stainless steels tanks had been, and that the air drive system would need to be replaced with a hydraulic system - which would be far more expensive. Indeed, it appears that, with a view to preventing its customers from making claims against it, ultimately Euro Pools spent about £2m replacing the air drive system with a hydraulic system.
By this time, the limit under the First Policy was exhausted. The issue was therefore whether the £2m of mitigation costs had been spent in avoiding putative claims which, had they been made, would have arisen out of the circumstance(s) notified to the First Policy.
The Court of Appeal’s Judgment
Euro Pools argued that its notifications in February and June 2007 to the First Policy had been confined to a problem with the stainless-steel tanks. Relying on the principle that one cannot notify a circumstance of which one is not aware, Euro Pools submitted that when notifying the First Policy it had not been aware of a possible problem with the inflatable bags, let alone with any inherent defect in the air drive system generally, and thus could not have been notifying either of those as a “circumstance”.
That argument was accepted at first instance by Moulder J, who thus held, to RSA’s disappointment, that the Second Policy did respond. However, some commentators had criticised this decision on the basis that the Judge had confused the ability to notify a problem (here, that that the booms were not working) with the cause of that problem. As earlier cases such as Kidsons [3] and Kajima had had held, it is open to a policyholder to make a “hornets’ nest” notification - ie, a general notification of a problem, even where the cause of the problem and/or its potential consequences are not yet known.
The Court of Appeal (Hamblen LJ, Males LJ, and Dame Elizabeth Gloster) largely echoed those criticisms, and held that the notification to the First Policy had not been confined to the failure of the steel tanks and the consequential need to replace them with inflatable bags. Instead, the Court of Appeal agreed with RSA that the circumstances notified in February 2007 were that “multiple failures had taken place in relation to the [booms] and….[Euro Pools] was not sure what was causing the failures” and that the circumstances notified in June 2007 were that “in the face of continuing boom failures, Euro Pools had developed a potential solution involving the use of inflatable bags, but that it nevertheless wished to make a notification in case of ‘any future problems’ giving rise to possible third party Claims”.
“In other words,” said the Court of Appeal, “Euro Pools appreciated that it might not have got to the bottom of the problem in the sense of understanding what the root cause of the booms’ failure was. Thus, although Euro Pools hoped that it could make the boom design work by using bags in place of tanks, and that solution would fall within the deductible, it nonetheless wanted to make a general precautionary notification.”
Conclusion
In allowing the appeal, the Court of Appeal has re-stated the orthodox approach, as set out in previous cases such as Kidsons, Kajima and McManus [5]. Although the Court of Appeal’s decision was undoubtedly disappointing to this particular policyholder, in the long run its approach is likely to be beneficial to policyholders since it will assist them when, as is often the case, they wish to make a precautionary notification of a problem when the cause of that problem and/or its potential consequences are as yet unknown.
Notes:
[1] The full Judgement is here: https://www.bailii.org/ew/cases/EWCA/Civ/2019/808.html
[2] This request seems to have been prompted by a realisation on the part of Euro Pools’ broker that, owing to an administrative error, RSA had not opened a claims file following the original notification in February 2007.
[3] HLB Kidsons (a firm) v Lloyd’s Underwriters [2008] Lloyd’s Rep IR 237.
[4] Kajima UK Engineering Limited v The Underwriter Insurance Company Limited[2008] EWHC 83.
[5] McManus v European Risk Insurance Co [2013] Lloyd’s Rep IR 533.
Jonathan Corman is a partner at Fenchurch Law.
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #2 (The Ugly). Kosmar Villa Holidays plc
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those are cases that can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#2 (The Ugly)
Kosmar Villa Holidays plc -v- Trustees of Syndicate 1243 [2008] EWCA Civ 147
The issue in Kosmar Villa Holidays plc was whether an insurer’s conduct in investigating a claim prevented it from subsequently relying on a breach of a condition precedent to avoid liability.
The policyholder, a tour operator, Kosmar, made a claim under its public liability insurance in respect of injuries suffered by an individual who was paralysed after diving into the shallow end of a swimming pool at apartments in Greece operated by Kosmar.
In breach of a condition precedent requiring it to notify the insurer immediately after the occurrence of any injury, Kosmar did not do so for a year.
Once notified, the insurer did not immediately deny liability for breach of condition precedent but sought further information about the accident.
The Court of Appeal had to consider whether in dealing with the claim in this way, without expressly reserving its position or denying liability, there had been a waiver, either by election or estoppel, that meant that the insurer was no longer able to decline indemnity because of the late notification.
The Court found that waiver by election had no application to a breach of a procedural condition precedent. However, where, through its handling of a claim, an insurer made an unequivocal representation that it accepted liability, or would not rely on a breach of a condition precedent, and where there had been detrimental reliance by the policyholder, the doctrine of estoppel would protect the policyholder.
On the facts, there had been no unequivocal communication by the insurer and insufficient reliance or detriment on the part of Kosmar. It was not therefore inequitable for the insurer to rely on Kosmar’s breach of the condition precedent to decline indemnity.
In its judgment, the Court explored the tension between an insurer’s need to have sufficient time to investigate claims and the insured’s need to know where it stands as regards policy coverage. On one hand, insurers were not to be encouraged to repudiate claims or to reserve their rights without asking questions about the claim simply to avoid being taken to have waived their rights in respect of a breach of a condition precedent. To do so would be to push insurers into an over-hasty reliance on their procedural rights. On the other hand, insurers were not entitled to give the impression that they were treating the claim as covered without running the risk of having waived their right to avoid the policy.
The message for policyholders is that, in the absence of an express communication to that effect, it is not safe to assume from conduct alone that an insurer has waived a breach of a procedural condition precedent.
No on-going obligation to assess if a claim is likely: Zurich -v- Maccaferri
In a (predictably?) pro-policyholder decision, the Court of Appeal (Black and Christopher Clark LJJ) yesterday dismissed Insurers’ appeal. Instead it agreed with the trial judge that the policyholder (Maccaferri) had not breached a condition in its public liability policy requiring it to notify insurers “as soon as possible after the occurrence of any event likely to give rise to a claim”.
Maccaferri’s business involved the hiring out of “Spenax Guns” (pictured - in effect, giant staplers used to tie steel mesh gabions together) to builders’ merchants, who in turn hired them out to building contractors. In this case, an employee of one such building contractor was badly injured by a Spenax Gun. Maccaferri quickly found out that there had been an incident involving one of its Guns, but did not know either that there had been a serious injury or that the Gun might have been faulty - as opposed to its having been mis-used or the accident having happened without anyone’s fault.
Zurich argued, however, that further information about the incident which Maccaferri subsequently discovered meant that many months after the incident Maccaferri knew or should have known that a claim was likely, and thus should have - but failed - to notify them, thereby disentitling it from cover.
The Court of Appeal disagreed. Instead, it agreed with the trial judge that the clause in question required a reasonable assessment by the insured at the time of the “event” as to whether it was likely to give rise to a claim and did not, as Zurich had submitted, impose an obligation on the insured to “carry out something of a rolling assessment, as circumstances develop, as to whether a past event is likely to give rise to a claim”. The Court of Appeal held that:
“This is a condition introduced by Zurich into its policy which has the potential effect of completely excluding liability in respect of an otherwise valid claim for indemnity. If Zurich wished to exclude liability it was for it to ensure that clear wording was used to secure that result. It has not done so. It is possible to construe the use of the phrase “as soon as possible” as meaning that even if, when the event occurred, it was not likely to give rise to a claim, the obligation to notify would arise whenever thereafter the insured knew or should have known that an event which had occurred in the past was likely to give rise to a claim. But I regard this as a strange interpretation and erroneous.
It is, in any event, far from clear that that is the right interpretation and, given the nature of the clause, the ambiguity must be resolved in favour of Maccaferri.”
Putting the boot in (or kicking an insurer when it’s down), the Court of Appeal went on to find that, even if Zurich’s construction of the clause had been correct, nothing in fact had subsequently occurred which meant that Maccaferri ever knew or should have known that a claim was in the offing, until it had eventually received (and promptly notified) civil proceedings against it.
The Court of Appeal’s decision is yet another instance of the courts deciding coverage disputes in the policyholder’s favour when that outcome is open to it on the relevant policy wording and when there is no evidence of any real culpable conduct by the policyholder.
However, one should sound a note of caution. As the Court of Appeal mentioned in passing (see paragraph 33 of the judgment), while the above might apply to a typical clause in a public liability policy requiring the policyholder to notify “an event likely to give rise to a claim”, the position will be different in professional indemnity policies, where the obligation is to notify a circumstance which is likely to (or, depending on the wording, which might) give rise to a claim. Whereas an event is a one-off occurrence, whose likelihood to give rise to a claim is (as we now know) to be assessed then and there, circumstances can and do evolve during the currency of a professional indemnity policy. Thus, whereas a client’s failure to pay a professional's invoice would, in isolation, almost always fall short of a notifiable “circumstance”, the position would change if, a few months later, the client explained that his failure to pay was the result of his dissatisfaction with the services which he had received.
See: Zurich Insurance plc -v- Maccaferri Ltd [2016] EWCA Civ 1302(12/01/2017)
http://www.bailii.org/ew/cases/EWCA/Civ/2016/1302.html
Jonathan Corman is a partner at Fenchurch Law.