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:
- Whether Mr Naqebullah was an “Insured” under the Policies;
- Whether a “Claim” had been made and notified within the relevant periods of insurance; and
- 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
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
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
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
Insurance amid uncertainty: Implications of the Iran conflict for Policyholders
On 28 February 2026, the US and Israel launched a coordinated military operation against the Iranian regime. Iran has since responded with missile and drone attacks across the Gulf, creating risk across several major trading centres including Qatar, Bahrain, Oman, Saudi Arabia and the UAE.
In addition to the very real and devastating risk to life, the escalation of the conflict is causing significant disruption to global trade, transport and energy markets alongside extensive physical damage to insured property.
Below, we consider the implications of the conflict for policyholders across key classes of business, and the coverage disputes that may arise as claims emerge.
STANDARD WAR EXCLUSIONS IN PROPERTY INSURANCE POLICIES
Standard commercial property policies typically exclude damage or loss “directly or indirectly” caused by “war, invasion, acts of foreign enemies, hostilities (whether war be declared or not)…military or usurped power”, and whilst the parties to the conflict are yet to formally declare war, whether the conflict amounts to war under the rules of contractual interpretation is a separate question.
Since the 1930s, English courts have said that “war” does not have a technical meaning and should be interpreted in a “common sense way”. Since then, caselaw has provided deliberately wide guidance as to the definition of war, including the presence of opposing sides and the number of combatants involved.
The breadth of that definition, together with standard war exclusions which override the concept of proximate cause (by applying to damage / loss even indirectly caused by war), mean that many commercial insureds are without the benefit of war-related property cover under their standard property insurance policies. An unwelcome consequence of that is that significant business interruption losses following airport closures, port shutdowns, supply chain disruption and government restrictions are likely to fall outside of the scope of cover.
Much will depend on the precise wording of the exclusion and the factual matrix of the loss. We recommend that property and business interruption policies be scrutinised for war exclusions as soon as possible and, in addition, policyholders across the leisure and manufacturing industries assess their force majeure exposure under supply and services contracts.
THE “GRIP OF THE PERIL” DOCTRINE IN AVIATION AND MARINE INSURANCE
In light of the above, policyholders may look to recover under specific political violence / war risk insurance policies and extensions.
In June last year, we reported on the long awaited Russian aviation judgment handed down by the Commercial Court. The trial involved the detention of Western-leased aircraft following Russia’s invasion of the Ukraine in 2022. You can read our analysis of that decision here - Commercial Court grounds War Risks insurers in landmark Russian aircraft judgment - Fenchurch Law.
Of particular concern to policyholders was Mr Justice Butcher’s commentary on “the grip of the peril” doctrine. He held that:
“if an insured is, within the policy period, deprived of possession of the relevant property by the operation of a peril insured against and, in circumstances which the insured cannot reasonably prevent, that deprivation of possession develops after the end of the policy period into a permanent deprivation by way of a sequence of events following in the ordinary course from the peril insured against which has operated during the policy period, then the insured is entitled to an indemnity under the policy.”
He concluded that lessors whose cover had been terminated by insurers prior to the point at which the court considered they had been permanently deprived of the aircraft were entitled to cover, on the basis that the loss of the aircraft arose in a sequence of events that followed in the ordinary course of restraints and detentions that took place in the policy period. In other words, the aircraft were in the grip of the peril by the time the relevant policies were terminated.
That ruling may be of particular relevance to aviation and marine policyholders affected by the present conflict. As a result of the closure of airspace, airline fleets remain grounded across the Gulf. Those fleets are at considerable risk of being permanently lost as a result of missile strikes on airports in Dubai, Abu Dhabi, Bahrain and Kuwait. Whilst the market will no doubt issue review notices to terminate or vary cover in those instances (as they did in the Russian aviation case), its possible that insured aircraft may already be deemed in the grip of the peril depending on the precise factual and temporal sequence of events.
Similarly, in relation to marine insurance, standard hull and cargo policies also exclude war and political perils. As a result, shipowners and charterers trading in high‑risk areas typically rely on separate war risks policies which are cancellable on short notice, requiring vessels to leave designated danger zones within a defined period. We know that cancellation notices have already been issued in respect of the current conflict so, where those vessels are unable to leave for whatever reason (for example, as a result of port closures or government restrictions), the grip of the peril doctrine may become relevant.
Whilst that analysis may offer some comfort to certain policyholders with property in the conflict zone, political violence policies include their own standard exclusions, and losses caused by perils not purchased will be excluded in any event. If, for example, an insured has only purchased terrorism or civil unrest cover, they are likely to be uninsured for war-related losses.
We recommend that political violence and war risks cover be analysed immediately, alongside the delay provisions in any related sale and trade contracts.
AGGREGATION WORDING
Where losses are covered, significant disputes may arise in relation to aggregation. Iran’s missile and drone attacks have, to date, been segmented and geographically dispersed, raising questions as to whether losses arise from a single event, a series of related events, or multiple separate occurrences for the purposes of policy limits, deductibles and excess erosion.
Whilst the outcome of any dispute is likely to be driven by the aggregation wording in a specific policy, insurers are likely to argue for a narrow interpretation and policyholders should be alive to that issue.
POLITICAL RISK AND TRADE CREDIT INSURANCE
Finally, unlike political violence policies, political risk policies do not require physical damage to trigger cover. They insure against, for example, the confiscation or deprivation of assets and are concerned with the permanent or prolonged loss of rights in, or control over, those assets. Outcomes under these policies are likely to be driven by the definition of expropriation, whether the deprivation is permanent for the purpose of the policy terms, and any relevant waiting periods.
Also written within the political risk market is trade credit insurance. As the conflict progresses, disruption to energy sources and supply chains may impact a policyholder’s ability to perform its payment obligations under a contract. In those circumstances, whilst trade credit policies are likely to contain fewer war exclusions than property or marine policies, policyholders may still have challenges to overcome in relation to causation and aggregation.
CONCLUSION
Already, the market is taking steps to limit its exposure to the conflict by making amendments to certain wordings, and issuing cancellation notices in respect of hull and cargo. Policyholders would be well placed to undertake early analysis of policy terms, particularly in relation to relevant exclusions and the likely interpretation of aggregation wording. Early, careful engagement with policy wording and claims strategy will place policyholders in the strongest possible position as the insurance consequences of the conflict continue to unfold.
Author
Daniel Robin, Managing Partner
Abigail Smith, Associate
PFAS – Out of the Frying Pan into the Court Room?
Fenchurch Law considers the impact of PFAS on the UK insurance sector, following the rise of litigation progressing through the US courts.
What Are PFAs?
PFAS, or Polyfluoroalkyl Substances, also known as Forever Chemicals, are a group of over 10,000 chemicals that do not readily degrade.
These synthetic chemicals have been utilised in products such as non-stick cookware, waterproof clothing and cosmetics since the 1950s for their non-stick, water- and heat-resistant properties. A concerning aspect of PFAS is that they can accumulate indefinitely in the environment and in living organisms. Their highly durable nature has led scientists to investigate the long-term effects of these chemicals on the body and the environment, with alarming results.
Currently, PFAS are linked to several health issues, including immunosuppression and certain types of cancer. Consequently, and unsurprisingly, regulators are now aiming to tighten the regulation of PFAS chemicals to limit ongoing risks.
Regulatory Landscape in the UK
PFAS are currently regulated under the UK REACH regime (Registration, Evaluation, Authorisation, and Restriction of Chemicals). However, only a limited number of specific PFAS are restricted for use in the UK. For example, PFOA (Perfluorooctanoic acid) and PFOS (perfluorooctane sulfonate) are types of chemicals within the PFAS category and have been listed as Persistent Organic Pollutants (POPs), making it illegal (with limited exceptions) to manufacture or use them in the UK and requiring their removal from products and waste streams.
The emerging risks associated with PFAS use are being closely monitored, with the HSE initiating a six-month consultation earlier this year on the use of PFAS in firefighting foam. UK regulation lags behind other countries; for example, the US has already declared PFAS a critical contamination crisis.
Although the UK regulatory framework for PFAS is still in its early stages, the Environmental Agency has begun assessing the risks. It has identified over 10,000 “high risk” sites believed to contain elevated PFAS levels. Some of the highest-risk sites include firefighting foam manufacturing plants, RAF bases, and airports.
Emerging Risks for the Insurance Sector
PFAS present a complex challenge for insurers. They pose potential long-tail liabilities, similar to claims arising from asbestos or environmental pollution, arising from historic use. Moreover, the increased focus of regulators and claimants on PFAS means insurers must navigate a rapidly changing risk that spans numerous lines of insurance – including general liability, product liability, environmental impairment, directors & officers, as well as property and speciality lines.
Insurers' response to this uncertain risk exposure has been to introduce specific exclusions, often based on existing pollution exclusion clauses. For instance, insurers may add a clause excluding any claims “arising out of, resulting from or relating to PFAS of any kind”. Of course, such exclusions will not be relevant to the extent cover attaches to expired policies.
Lloyd’s has also issued standard PFAS exclusion wordings, LMA5595A and LMA5596A[1].
Types of Claims
- Nuisance Claims: arising from contamination of public drinking water and environmental cleanup.
- Personal injury Claims: resulting from exposure to PFAS in everyday products.
- Property Damage/Diminution of Value Claims: caused by PFAS seeping into the ground from industrial manufacturers.
- False Advertising & Product Labelling: Due to products failing to identify the dangers of PFAS.
The New Asbestos?
The insurance market has been questioning whether PFAS will become the “next asbestos”, as both are similar in that they were once widespread, marketed as safe, and only later revealed to be potentially dangerous.
However, a key difference between PFAS and asbestos is that exposure to many different types of PFAS is unavoidable in the modern world, whereas asbestos exposure can usually be traced back to a specific place and time to establish a cause. This causal link is likely to be far more difficult to establish in the context of PFAS exposure.
Currently, unlike in asbestos claims, no disease has been solely linked to PFAS exposure. This complicates the process of directly attributing the development of diseases such as cancer to PFAS, requiring substantial expert evidence to support the claim that the claimant would not have developed the disease without specific PFAS exposure.
UK PFAS Litigation
Although PFAS litigation is advancing through US courts with multimillion-dollar settlements already reached, UK litigation remains in the early stages. So far, there have been no PFAS cases litigated in UK courts, but two British law firms have announced investigations into PFAS contamination cases. While formal proceedings may take time, we might soon see the first UK group action application for PFAS.
Similarly, to date, there have been no regulatory actions; however, the UK Environment Agency or local authorities could designate contaminated sites for remediation in the future. Companies might then face clean-up costs and seek insurance coverage for those expenses.
Furthermore, the lack of UK personal injury claims may stem from the difficulty in proving a causal link between exposure and injury. While legal systems in countries like the US are more claimant-friendly in this regard, the UK requires evidence that a defendant’s actions caused the harm. The widespread presence of PFAS compounds further complicates this issue. There is no precedent in the UK for relaxing causation standards for PFAS, unlike asbestos, where English law permits more lenient rules for mesothelioma causation.
If and when PFAS claims arise, several key coverage questions will need to be answered, including whether PFAS claims constitute “pollution” and whether the contamination was sudden or gradual. When did an “occurrence” of contamination or injury happen (continuous trigger or not)? Can a claimant’s blood PFAS levels amount to an “injury” within the policy period?
Conclusion
PFAS present an increasing challenge across various sectors due to their persistence, health hazards, and complex liability concerns. Their extensive use, environmental durability, and potential health effects have led to heightened scrutiny and regulatory measures. However, the UK’s response via regulators and the Courts is still in its early phases compared to other jurisdictions.
As UK regulation and litigation evolve, proactive risk management and continuous vigilance will be essential to navigate the uncertainties associated with these “forever chemicals.”
[1] https://lmalloyds.imiscloud.com/LMA_Bulletins/LMA23-035-TC.aspx
Chloe Franklin is an Assoicate at Fenchurch Law
The Good, the Bad & the Ugly: #26 The Good: The Seashell of Lisson Grove Ltd & Ors v Aviva Insurance Ltd & Ors [2011] EWHC 1761
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.
In our view, some cases are 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 cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
#26 The Good: The Seashell of Lisson Grove Ltd & Ors v Aviva Insurance Ltd & Ors [2011] EWHC 1761
Introduction
In the Good, the Bad and the Ugly series, we frequently look at recently decided cases but occasionally – as in this piece – we like to revisit a classic decision. This High Court judgment from 2009 relates to a Non-Invalidation Clauses (NIC). Insurers often allege that a policyholder is in breach of a policy term or obligation and that provides them with an entitlement to decline a claim. In responding, the policyholder and its lawyers will consider all of the usual points: Is the policyholder, in fact, in breach; what is the status of the term, what are the normal consequences of breach and the extent to which it may be possible to argue that any breach did not increase the risk of loss which occurred (so that the policyholder is saved by s.11 Insurance Act 2015). However, even if the prospects are looking gloomy in relation to all of those points, the policyholder’s claim may nevertheless be saved by an NIC. This is why The Seashell is a very Good case from the policyholder perspective.
The claim arose from a fire at The Seashell Restaurant in Marylebone, London, on August 13, 2009. The restaurant operator and trustees of a pension scheme, who held the building's freehold, claimed against their insurers, Aviva, under two policies. In this article, we consider only the insured’s claim under the Restaurant Policy, where Aviva denied liability, citing breaches of the Frying Range Warranty.
The Restaurant Policy
The Restaurant Policy contained the NIC below, which is a fairly typical NIC, as well as other relevant clauses as follows:
NIC
“The Insurance by Section A [Buildings] and B1 [Contents] will not be invalidated by any:
1) act; or
2) omission; or
3) alteration
either unknown to You or beyond Your control which increases the risk of Damage.
However, You must:
- a) notify Us immediately You become aware of any such act, omission or alteration; and
- b) pay any additional premium required".
Clause 5(c)
"5. Rights and Responsibilities"
(c) Any Section of this Policy will cease to be in force if after the commencement of this insurance there is any alteration in respect of such Section which results in
(i) the risk of loss damage or injury or disease being increased”
A preliminary issue was whether the NIC protected the insureds in the event they were found to have acted in breach of warranty. The insureds argued that the “act, omission or alteration” referred to in the NIC could include a breach of warranty, and that “The Insurance” meant the insurance cover, and not the entire insurance policy. In this regard, the insureds relied on the decision in Kumar v AGF [1999] where, in a different context, a bar on repudiation of “this insurance” was held to apply not only to repudiation of the policy, but also to being discharged from liability for reason of a breach of warranty. In short, the insureds argued that, if there was a breach of warranty, they would be protected by the NIC.
The insurer argued that the NIC did not ameliorate the effect of a breach of warranty; it was instead only to ameliorate the effect of clause 5(c), such that an alteration which increased the risk of damage – which was unknown to or beyond the insured’s control – would not give the insurer any remedy under clause 5(c).
The Court agreed with the insureds and found that:
- Clause 5(c) was triggered in the event there was an "alteration" which increased the risk of damage, whereas the NIC applied where there was "any act, omission or alteration" which increase the risk of damage. The inclusion of the words "act [or] omission", in addition to “alteration”, indicated that the NIC's application was not limited to ameliorating the effect of clause 5(c);
- The words "act or omission" were capable of applying to a misrepresentation, non-disclosure or breach of warranty. Thus, if the insured was inadvertently in breach of any of these different types of obligation, the NIC might alleviate the consequences of breach. Interestingly, the decision did not mention whether the words “act or omission” were capable of applying to a condition precedent but there is no reason to consider that, in another case with an identically worded NIC where an insured has breached a condition precedent, it still may fall within the ambit of the NIC for the same reasons as discussed in The Seashell.
- The insureds could still rely on the NIC notwithstanding damage had already occurred, provided it notified the insurer immediately on becoming aware of the breach and paid any additional premium required. Whilst not part of the decision in The Seashell, in other cases any discretion that an insurer has to charge additional premium must be exercised in good faith (subject to the wording of the policy), meaning an insurer is unlikely to be entitled to arbitrarily charge exorbitant premium post-damage where an insured seeks the protection under an NIC; any premium charged should bear some correlation to the increase in the risk of damage caused by the act/omission/alteration.
Conclusion
The precise effect of an NIC will, of course, always turn on its interpretation and that of the wider policy. Even though the judgment in The Seashell is a High Court decision following a preliminary issue trial, it is nevertheless a useful decision in showing how the Court interpreted the NIC in that case. As we say, the wording of the NIC was not untypical of the wordings which we see in many other policies so may assist policyholders in arguing that, as a matter of law, they are relieved from the consequences of a breach of obligation. In each case, the policyholder will also need to satisfy the constituent factual elements of the NIC in question, e.g. that the policyholder was unaware of the breach or that it was beyond their control (and whose knowledge/control will be a relevant factor), that they provided immediate notification and have paid additional premium.
Chris Ives is a Partner at Fenchurch Law
Timing is everything Part II – Archer v Riverstone and (a reminder of) the cost of not complying with a condition precedent
In our article on Makin v QBE last month, we highlighted the importance of complying with conditions precedent, and noted that claimants pursuing claims under the Third Parties (Rights Against Insurers) Act 2010 (“the 2010 Act”) inherit both the rights and obligations of the insured. This case serves as yet another clear reminder of that principle, underlining the risks claimants face when policy conditions are not strictly observed.
Background
The Claimant, Hannah Archer, issued proceedings against R’N’F Catering Limited (“R’N’F”) on 5 July 2022, seeking damages for personal injury following a meal at R’N’F’s restaurant (“the Proceedings”).
R’N’F filed a defence in December 2020 and then entered into a members’ voluntary liquidation in February 2023 (“the Insolvency”). It played no active role in the Proceedings thereafter.
By a consent order dated 9 July 2024, Riverstone Insurance (Malta) SE (“Riverstone”), the successor to ArgoGlobal SE, which insured R’N’F under a restaurant insurance policy from 18/09/18 – 17/09/19 (“the Policy”), was added to the Proceedings.
The Proceedings
Miss Archer claimed that she was entitled an indemnity from Riverstone by virtue of the 2010 Act. Specifically, she said that:
- The Insolvency meant that R’N’F’s rights under the Policy had automatically transferred to her; and
- By reason of s.9(2) of the 2010 Act – which stated that anything done by a third party which, if done by the insured, would amount to fulfilment of the condition as if done by the insured – she complied with the Policy.
The question of Riverstone’s liability to Miss Archer was disposed of at a preliminary issues trial. There were two issues to be determined:
- Could Riverstone prove that R’N’F was not entitled to an indemnity under the Policy (“Issue 1”)?
- Could s.9(2) of the 2010 Act assist Miss Archer to render Riverstone liable on proof of R’N’Fs liability (“Issue 2”)?
Issue 1
The breaches of condition precedent
Riverstone asserted the following breaches of condition precedent by R’N’F:
- A failure to “On the happening of any event which could give rise to a claim … as soon as reasonably possible give notice to the insurer” (“the First Breach”)
- A failure to “supply full details of the claim in writing together with any evidence and information that may be reasonably required by the Insurer for the purpose of investigating or verifying the claim … within … 30 days of the event or circumstances …” (“the Second Breach”).
- A failure to “take all reasonable precautions to prevent or diminish loss destruction damage or injury” (“the Third Breach”).
- A failure to “provide all help and assistance and cooperation required by the Insurer in connection with any claim” (“the Fourth Breach”).
(Collectively, “the Breaches”).
The Breaches were all largely based on the same facts.
In a nutshell, Miss Archer first contacted R’N’F on 29 November 2019 to advise that she had become seriously unwell following a meal at its restaurant. Her solicitors then wrote to R’N’F on a several occasions, which included their sending a Claim Notification Form (“CNF”) and a letter on 10 January 2020 which requested R’N’F’s insurance details. R’N’F did not respond.
Miss Archer’s solicitors then sent a letter of claim to R’N’F on 30 October 2020. That prompted R’N’F belatedly to notify Riverstone on 17 November 2020.
Sedgwick, Riverstone’s claims handlers, thereafter emailed R’N’F asking for information about the claim. That included, notably, a chaser email on 20 July 2021 which stated: “failure to assist us with this matter is a breach of policy terms so if we fail to receive your response your insurer may take the decision to decline indemnity”. Indeed, it was not until October 2022 that R’N’F’s Director, Mr Ali, engaged with Sedgwick, at which point he blamed the delay on the fact that emails had gone into a spam folder.
The parties’ positions
Riverstone said there was no case for R’N’F to answer in respect of the Breaches. It described R’N’F as “burying its head in the sand for months and indeed years, before coming up with a ‘dog ate my homework’ series of excuses’.
Miss Archer, perhaps unsurprisingly, did not advance a positive case as to R’N’F’s actions. She simply said that Sedgwick took only limited steps to contact R’N’F for information, and that “alarm bells should have rung” when R’N’F did not respond.
The decision
The court had no difficulty in finding that Riverstone was right.
As to the First Breach, it said that any and all of the initial communications from Miss Archer and/or her solicitors to R’N’F were “circumstances” which should have prompted R’N’F to notify Riverstone, and that R’N’F was “thoroughly disengaged with the threatened claim, maybe hoping that by ignoring it, it will go away”. So, because R’N’F did not notify Riverstone of the “circumstance” until 17 November 2020, the First Breach was made out.
As to the Second Breach, the court agreed with Riverstone that R’N’F repeatedly ignored Sedgwick, and had no good reason for doing so. Further, the timing of its belated engagement was redolent of a policyholder that “panicked that its prior tactic of ignoring the threatened claim had failed”. The court also rejected Mr Ali’s “spam folder” explanation; that lacked any sort of cogency, and even if it did, the court found that R’N’F ought to have had proper procedures in place for checking important emails.
Based on the same factual matrix, the court found that the Third and Fourth Breaches were also made out.
As R’N’F was in breach of conditions precedent to liability, Riverstone was entitled to refuse to indemnify it.
Issue 2
Miss Archer asserted that even if R’N’F was in breach of condition precedent, she was nonetheless entitled to an indemnity. The gist of her argument was that R’N’F only became a ‘relevant person’ within the meaning of the 2010 Act at the point of the Insolvency. Thereafter, she “stood ready” to comply with the Policy, as shown by the fact that notifying and corresponding with Sedgwick and Riverstone’s solicitors. So, her position was that anything done by her was to be treated as done by R’N’F, thus entitling her to an indemnity.
She also argued that it was impossible for her to comply with the conditions precedent in the Policy before the Insolvency, as her rights only arose at that stage. That was also consistent, she said, with the 2010 Act’s policy of protecting third parties in circumstances where an insured becomes insolvent.
Riverstone disagreed. It said that any actions taken by her after the Insolvency, however reasonable, were too late, and were incapable of leading to a conclusion that she complied with the Policy.
Although the court had considerable sympathy with Miss Archer, it found that she was nevertheless wrong. In short, it was not possible to “resurrect” her right to an indemnity in circumstances where that same right had already been invalidated by R’N’F. If it was, that would effectively mean that the conditions precedent to which was subjected were entirely different from those to which R’N’F were subjected. The court found no authority for such a proposition.
The court was also unpersuaded by Miss Archer’s impossibility argument. It noted that over three years passed between the first circumstance in November 2019 and the Insolvency, and no impossibility prevented R’N’F complying with its obligations in that time. So, as R’N’F had already lost its rights under the Policy when it was not faced with an impossibility, Miss Archer could not take the benefit of them now.
Summary
The decision in Archer is another important illustration that where an insured has already lost its rights under a policy, a claimant pursuing a 2010 Act claim stands in no better a position. Even if the failure was not of the claimant’s making, that is of no consequence – the claimant does not get a second chance.
Finally, although the judgment does not explore the point in detail, it reinforces the principle that conditions precedent, and particularly notification requirements, must be complied with strictly.
The full judgment can be found here:
https://www.bailii.org/ew/cases/EWHC/KB/2025/1342.html
Author:
Timing is everything – Makin v QBE and the cost of not complying with a condition precedent
This recent decision from the High Court provides a powerful reminder of the consequences of not complying with a condition precedent to liability, and that a claimant pursuing a claim under the Third Parties (Rights Against Insurers) Act 2010 inherits both the rights – and the pitfalls – of the insured’s policy.
Background
The Claimant, Daniel Makin, attended a Bar and Restaurant on 6 August 2017. At around 08:30pm he threw a glass on the floor while apparently in “high spirits”, and was then forcibly ejected by two door supervisors (“the Incident”).
Although Mr Makin was seemingly unaffected by the Incident (he walked away and took a taxi home), he later suffered a stroke rendering him unable to work and requiring long-term care.
The Proceedings
Acting by his mother and litigation friend, Mr Makin issued proceedings against (1) the Restaurant Muse Limited (“the Restaurant”); (2) Protec Security Group Limited (“Protec”), the employer of the two doormen; and (3) QBE Insurance (Europe) Limited (“QBE”), who insured Protec under a “Security and Fire Protection” insurance policy (“the Policy”). QBE was joined to the proceedings under the Third Parties (Rights Against Insurers) Act 2010 (“the 2010 Act”).
At a preliminary issues hearing (which Protec did not attend, having entered into administration on the preceding day), the Judge, HHJ Sephton KC, gave judgment that Protec were liable to Mr Makin for assault and his consequent injury (“the Judgment”).
At trial, the parties agreed that pursuant to the 2010 Act: (1) Mr Makin was entitled to claim against QBE directly; and (2) Mr Makin’s rights were no better than those of Protec ie., if QBE had a good defence to a claim for indemnity by Protec, it would also have a good defence to Mr Makin’s claim.
QBE asserted that it had no liability to Mr Makin because Protec breached the claims condition in the Policy – a condition precedent – which required it to notify, “… as soon as practical but in any event within thirty (30) days in the case of other damage, bodily injury, incident accident or occurrence, that may give rise to a claim under your policy …” (“the Condition”).
Mr Makin disagreed. He contended that even if there was a breach of the Condition, it was not a condition precedent which entitled QBE to automatically refuse cover. Rather, it only gave QBE only the discretion to decline the claim, which it could not exercise “arbitrarily, irrationally or capriciously”.
Finally, an issue arose as to whether the Judgment was binding in these proceedings.
The issues to be decided, therefore, were:
- Did Protec breach the Condition? (“Issue 1”)
- If so, was QBE entitled to refuse cover for a breach of a condition precedent, or did it merely have a discretion to decline the claim? (“Issue 2”)
- If QBE was not automatically entitled to refuse cover, was it nevertheless entitled to do so on the facts? (“Issue 3”)
- Was the Judgment binding on QBE? (“Issue 4”).
Issue 1
Following the incident in 2017, neither the correspondence passing between the Restaurant and Protec, the Police’s investigations, nor the Letter of Claim sent in 2020 were disclosed to QBE contemporaneously. In fact, there was no suggestion that QBE were aware of the Incident at all before July 2020. Against that background, QBE said that Protec breached the Condition.
Mr Makin argued that a reasonable person would not have thought that the Incident, on its own, might give rise to a claim. He also argued that any suggestion that Protec may have come under an obligation at a later point to notify the Incident was contrary to the proper meaning and effect of the Condition. He relied in that regard on Zurich v Maccaferri [2016], in which the Court held that the likelihood of a claim eventuating is assessed at the time the event occurs.
QBE, by contrast, held that it would have been apparent to a reasonable person in Mr Lucas’ position that a claim might be made against Protec arising out of the Incident. It also distinguished the present case from Zurich v Maccaferri, because the requirement in that case was to notify a circumstance that was “likely” to give rise to a claim, whereas the Condition required Protec to notify a circumstance “might” give rise to a claim, which was a much lower threshold.
Although the Court accepted that the Incident, in isolation, would not have led a reasonable insured to form the view that there might be claim, there was nevertheless “a clear point in time” when the matters known to Mr Lucas, which included the police investigation, and that Protec were potentially open to criticism for injuring a customer, gave rise to an obligation to notify. Having not done so, Protec was in breach of the Condition.
Issue 2
On Mr Makin’s case, the Condition was not a condition precedent. That is because, he said, it was not expressed in that way (by contrast, there were other terms in the Policy that were so expressed), and if there was any doubt as to the correct interpretation, the Condition should be construed contra proferentem in his favour.
QBE disagreed. It said the Condition did not need to be labelled as a condition precedent in order to have that effect. It also referred to the introductory section of the Condition, which stated: “The following conditions 1-10 must be complied with after an incident that may give rise to a claim under your policy. Breach of these conditions will entitle us to refuse to deal with the relevant claim”. So, QBE said, the Condition made clear at the outset that its obligation to meet a claim was conditional upon Protec’s compliance. Further, and importantly, QBE contended that the use of the word “will” was consistent with an absolute right, not a contractual discretion.
As with Issue 1, the Court agreed with QBE. The true meaning of the Condition was clear, even without the label of “condition precedent”. The Court also agreed with QBE’s analysis that the word “will”, in the introductory section of the Condition, did not merely import a discretion to decline indemnity. To hold otherwise, in the Court’s view, would do an injustice to the language used. There was also good commercial sense in that conclusion: an early notification enables an insurer to investigate claims at a time when witnesses will be easier to contact and memories are likely to be better, as well as to consider the early settlement of the claim, minimising any delays.
So, on the basis that the Condition was indeed a condition precedent to QBE’s liability, and in circumstances where that condition was breached, QBE was entitled to refuse indemnity under the Policy.
Issue 3
Given the Court’s earlier findings, this point was academic: QBE had already prevailed in light of the Protec’s breach of a condition precedent to liability. However, had the Court found that the Condition did not have that status, then, applying the well-established Braganza principles – namely, that a decision must be lawful, rational and made in good faith – it would have found that QBE was not entitled to refuse cover. The breaches in this case were trivial and of no meaningful consequence for QBE’s ability to deal with the claim.
Issue 4
The final issue was whether the Judgment establishing Protec’s liability was binding on QBE in circumstances where it was given (a) at a hearing which Protec did not attend; and (b) before QBE were a party to the proceedings.
Mr Makin contended that the Judgment was binding on QBE as establishing Protec’s liability. He relied in particular on Scotland Gas Networks plc v QBE UK Ltd, in which the Court of Session held that where a policyholder’s liability was established by way of a judgment of the court in previous proceedings, “it is not open to the [insurer] to require either the existence or the amount of that liability to be proved in the present action”.
QBE argued the contrary. It referred to AstraZeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd and Omega Proteins Ltd v Aspen Insurance UK Ltd, both of which established that neither a judgment nor an agreement are determinative of whether a loss is covered by a policy – it is open to an insurer to dispute that the insured was in fact liable.
The Court agreed with Mr Makin. The present case was distinct from Omega Proteins and AstraZeneca v XL Insurance, because those cases did not involve the 2010 Act, which was focussed on placing a claimant in the same position as the insolvent insured. It would therefore be incongruous with that objective if an insured’s liability could be determined definitively, only for the insurer to later challenge it.
Summary
There are a number of salutary lessons from Makin:
Firstly, the decision provides a convenient reminder of the distinction between “likely to” and “may / might” wordings in the context of notification conditions. Whereas the former requires an insured to notify circumstances which are at least 50% likely to lead to a claim, the latter requires only a real, as opposed to fanciful, risk of a claim eventuating. Policyholders would be well advised to check which wording appears in their policies, and to ensure that the requirements are met.
Secondly, the decision reinforces that a condition precedent need not be labelled as such in order to have that effect. Where the consequences of breaching a condition are clearly spelt out, namely, that an insurer will not be liable for a claim, the courts will likely treat the condition as a condition precedent to liability. It should never be assumed, therefore, that a condition precedent does not have that status simply because the words “condition precedent” are not included.
Thirdly, and finally, although the Court’s application of the 2010 Act did not assist Mr Makin on the facts, it is likely to be helpful for policyholders generally: where an insured’s lability is definitively determined in earlier proceedings, then, applying Makin, it will not be open to an Insurer to unravel that Judgment later down the line.
Author:
Court pours cold water on insurer’s fraud claims: Malhotra Leisure Ltd v Aviva
Court pours cold water on insurer’s fraud claims: Malhotra Leisure Ltd v Aviva
During the Covid-19 lockdown in July 2020, water escaped from a cold-water storage tank at one of the Claimant’s hotels causing significant damage.
Aviva, the Claimant’s insurer under a property damage and business interruption policy, refused to indemnify the Claimant on the basis that:
1. the escape of water was deliberately and dishonestly induced by the Claimant; and
2. there were associated breaches by the Claimant of a fraud condition in the policy.
The Commercial Court dealt with each of the issues as follows.
Was the escape of water accidental or deliberate?
Aviva bore the burden of proof and had to show that, on a balance of probabilities, the escape of water was the result of an intentional act carried out either by, or at the direction of, the Claimant or its agents.
In considering whether the escape of water was accidental or deliberate, the Deputy Judge, Nigel Cooper KC, held that there was a distinction to be drawn between whether the Claimant’s witnesses were credible, and the question of whether they were sufficiently dishonest that they were prepared to deliberately cause the incident and thereafter lie about their involvement both during the investigation and then throughout the litigation. In reaching that view, he considered the following established principles:
a) if fraud is to be made out, the evidence must exclude any substantial plausible explanation for how the escape of water may have occurred accidentally; and
b) when assessing the evidence, the Court should take into account as probative tools the following factors:
i) whether there is evidence of a plausible financial motive for the Claimant to damage its own property;
ii) the fact that owners of property do not generally destroy their own property and an allegation that they have done so is a serious charge to make;
iii) instances of lesser wrong-doing may not be probative of an allegation that an insured has deliberately destroyed property to defraud insurers; and
iv) in considering where the balance of probabilities lies, it is important to consider the evidence as a whole, putting the available evidence as to the physical cause of the escape of water into the context of the surrounding circumstances and commercial background.
In considering (a) the Judge was satisfied that it was possible, based on the plumbing evidence and the fact that Aviva’s own expert accepted that the escape of water could have been accidental, that the incident was fortuitous.
Evidence of a plausible financial motive
In circumstances where there was no direct evidence as to how the escape of water was caused, the question as to whether there was a financial motive became correspondingly more significant. Aviva submitted that there was a “preponderance of evidence” that the Claimant was struggling financially in the lead up to the incident, and that from March 2020 onwards the Claimant and its wider group had been placed under significant financial pressure as a result of the pandemic. To the contrary, the evidence showed that the Claimant’s group had extensive cash reserves (£7.5 million in cash and £150 million in tangible assets at the time of the incident) with a turnover of £38 million.
The Court held that the cash reserves represented a substantial hurdle to Aviva’s case that the Claimant’s controlling shareholder, Mr Malhotra, had motive to commit fraud to obtain a payment in relation to damage to the hotel. To that end, the Judge pointed out that any payment made would have been diminished in covering the immediate clean-up costs (which had already been incurred by the Claimant) and the costs of repair and refurbishment. There was therefore no evidence of a financial motive sufficient to explain why the Claimant would have caused the incident. In fact, all necessary steps to reinstate the hotel had been taken, without the benefit of an interim payment from Aviva.
The proper approach to the construction of fraud conditions
The Fraud Condition
The policy included a fraud condition, which read:
"If a claim made by You or anyone acting on your behalf is fraudulent or fraudulently exaggerated or supported by a false statement or fraudulent means or fraudulent evidence is provided to support the claim, We may:
(1) refuse to pay the claim”
(the “Fraud Condition”).
In addition to the allegation that the escape of water was deliberately induced by the Claimant, Aviva made various submissions in respect of statements made by the Claimant’s employees and associates to Aviva’s loss adjusters. Those allegations included:
1. That the Claimant’s Estates Manager, Mr. Vadhera, who discovered the escape of water, was not an honest witness and had good reasons to be willing to lie in order to support the Claimant's insurance claim, including that:
a) he had been the Claimant’s Estates Manager since 2019, overseeing 20 members of staff, and was responsible for 20 - 30 properties;
b) there was a close personal relationship between Mr Malhotra and Mr. Vadhera dating back nearly three decades;
c) Mr Vadhera was personally and financially indebted to the Claimant, due to various substantial loans;
d) Mr Vadhera was the sole director of a construction company owned by Mr Malhotra;
e) his testimony was that, upon discovery of the escape of water, he saw the cold water tank overspill, which on Aviva’s case, would not have occurred without the connected tanks also overspilling (when in fact, the Judge found that the tank in question did overspill); and
f) he told loss adjusters that he had apologised to Mr Malhotra for disturbing his birthday on the day of the incident, when in fact it was not Mr Malhotra’s actual birthday (incidentally, it was found that Mr Malhotra was indeed celebrating his 60th birthday on that day).
2. That Atul Malhotra, Mr Malhotra’s son and the sole director of the Claimant, had lied about the whereabouts of the valve that had caused the escape of water (when in fact, he had simply not appreciated what the plumbers had handed him during the cleaning works, it being in a dissembled state and in a plastic bag).
3. That Mr Malhotra lied to loss adjusters about Mr Vadhera finding insulation in the overflow of the cold-water tank (when in fact, the evidence supported that there was indeed insulation in the overflow, there was no benefit to the Claimant in it being Mr Vadhera who discovered it, and in any event who discovered it was immaterial to the claim).
4. That Mr Malhotra told loss adjusters that Mr Vadhera told him of what he had discovered on 12 July 2020, when it must have been 11 July 2020 (which was immaterial to the claim and provided no benefit to the Claimant).
Regardless, Aviva’s position was that the Fraud Condition had been breached such that it was entitled to refuse the claim.
An extension of the common law position
The common law has long prohibited recovery from an insurer where the insured’s claim has been fabricated or dishonestly exaggerated, a principle known as the fraudulent claims rule. In The Aegeon [2002] EWHC 1558 (Comm) Mance LJ extended that rule to apply to ‘collateral lies’ (i.e. fraudulent statements made in support of claims which are otherwise valid) which are material in that they:
a) directly relate to the claim;
b) are intended to improve the assured’s prospects of obtaining a settlement or winning the case; and
c) if believed, are objectively capable of yielding a not insignificant improvement in the insured’s prospects of obtaining a settlement or better settlement.
However, Versloot Dredging BV v HDI Gerling [2017] 1 AC 1 abolished that doctrine, establishing that the fraudulent claims rule does not apply to collateral lies. Giving a dissenting judgment, Lord Mance indicated that he would have upheld the test in The Aegeon, subject to potentially raising the threshold of materiality from a requirement for 'a not insignificant improvement' to the insured's prospects, requiring instead ‘a significant improvement’.
After Versloot, policy provisions purportedly allowing an insurer to reject a claim pursuant to collateral lies go further than the common law position. In Malhotra Leisure, the Judge accepted the Claimant’s submission that - in the absence of very clear words to the contrary - fraud conditions which seek to write in a power to decline claims on the basis of collateral lies should be read as taking effect subject to the limitations of the old common law doctrine, as set out in The Aegeon and modified in Versloot.
The specific wording of the Fraud Condition
The Judge further considered whether, by referring to a 'false' as opposed to 'fraudulent' or 'dishonest' statement in the Fraud Condition, the parties were intending that any false statement, including a statement made carelessly or without knowing it to be untrue, should be enough to entitle Aviva to reject a claim.
In finding that this was not the intention, he referred to the language of the Fraud Condition, which makes clear that it is dealing with fraudulent claims and collateral lies. In other words, the Court held that the Fraud Condition intended to address a situation where there was dishonesty, and did not apply to false statements made carelessly or innocently. Further, the wording of the Fraud Condition required that any false statement support the Claimant’s claim. In other words, it only applied to false statements made to assist in persuading Aviva to pay the claim, consistent with the common law position (both before and after Versloot).
Since there was no evidence of dishonesty on behalf of Mr Malhotra or any of the Claimant’s employees and/or associates, the Judge held that the Fraud Condition had not been breached and the Claimant was entitled to an indemnity in respect of the claim.
Key takeaways for policyholders
The obiter guidance in Malhotra Leisure on the interpretation of fraud conditions in insurance policies provides welcome protection for policyholders and reads as a cautionary tale for insurers. Allegations of dishonesty and fraud cannot be pleaded lightly, and there are professional obligations on insurers to first ensure that reasonably credible evidence exists establishing a prima facie case of fraud.
Following Malhotra Leisure, it is clear that courts will interpret conditions seeking to provide an insurer with the power to decline claims on the basis of collateral lies, subject to limitations of the old common law doctrine. In short, any collateral lie covered by a fraud condition must directly relate to the claim, be intended to improve the insured’s prospects and be capable of yielding a significant improvement in the insured’s prospects of obtaining a settlement or better settlement. Many of the allegations made in this case, including immaterial points such as whether Mr Malhotra was celebrating his birthday, and whether he was told certain facts on one day or the next, were never going to pass that test, and only served to distract from what was an otherwise covered claim.
Citation: Malhotra Leisure Ltd v Aviva Insurance Limited [2025] EWHC 1090 (Comm)
Abiigail Smith is an Associate at Fenchurch Law
