Building a Safer Future: Regulatory Reform on Combustible Cladding
Following publication of the Hackitt Report in May 2018, the government has been under increasing pressure to implement effective reform of building regulations in the UK, with a focus on cladding systems to high-rise developments. Legislation has recently been introduced aimed at improving fire safety and accountability, with a range of further measures anticipated.
Building (Amendment) Regulations 2018
Regulations came into force on 21 December banning the use of combustible materials in external walls of buildings above 18 metres in height, including residential dwellings, boarding schools, student accommodation, registered care homes and hospitals (SI 2018/1230). The new rules also apply where building work is a "material change of use" that brings an existing building within one of these categories. Commercial buildings, including hotels and offices, are excluded.
The ban does not apply retrospectively to existing structures, including where a building notice or initial notice has been given to, or full plans deposited with, a local authority before the legislation commencement date, provided that building work has already started or starts within two months thereafter.
The press release announcing the ban confirms the government's "full backing" for local authorities to enable them to carry out emergency work on private residential buildings with unsafe cladding, including financial assistance, although local authorities will be expected to recover the costs from building owners. This is not mentioned in the Regulations and seems to indicate support for councils in using their existing powers relating to unsafe buildings, pursuant to the Building Act 1984.
Approved Documents 7 (Materials & Workmanship) and B (Fire Safety)
Regulation 7 of the Building Regulations 2010 requires that materials used in building work are appropriate for the circumstances. A new sub-section 7(2) has been introduced, directing that all materials which become part of an external wall, including “specified attachments” such as balconies and solar panels, achieve European fire safety classification (A2-s1, d0) or (A1), meaning only limited combustibility or non-combustible materials will be permitted. Certain limited components are exempted by regulation 7(3), including gaskets, sealants, windows and any part of a roof.
Approved Document B has been updated to include additional guidance at paragraph 12.6 that insulation products and filler materials used in external walls in buildings of 18 metres or more “should be of limited combustibility or better”. It is no longer permissible therefore to incorporate combustible materials within masonry or concrete walls to new high-rise buildings, such as the Reynobond polyethylene core ACM panels that were used on Grenfell Tower.
Further changes to Approved Document B come into effect on 21 January 2019, clarifying the role of assessments in lieu of testing for cladding and fire safety systems. In accordance with Hackitt recommendations, use of desktop studies should be restricted to appropriate situations backed up with sufficient test evidence, with those undertaking assessments able to demonstrate suitable competence.
The government has launched a wider call for evidence to gather views on (1) more extensive changes to Approved Document B technical requirements, and (2) how residents and landlords can work together to keep their homes and buildings safe. A new Standards Committee is being established to advise on applicable rules, together with a Joint Regulators’ Group to trial proposed legislative changes.
Prescriptive Requirements
The outcomes-based approach to building regulations in the UK puts the onus on companies to operate safely, allowing flexibility and seeking to ensure that emerging risks are addressed without the need for new legislation. However, problems have been highlighted around the lack of clarity in applicable rules, with insufficiently stringent oversight to avoid low standards and damaging conflicts of interest.
Changes to Approved Document B signify a departure from the level of discretion allowed under the previous regime, and moves towards a more prescriptive regulatory framework. The use of combustible materials has not been eliminated entirely though and many commentators believe the proposals do not go far enough. A stricter system of building control applies in some other jurisdictions such as France, Germany and North America, with significantly more emphasis on prescriptive baseline requirements to protect the life safety of building users.
Industry groups are lobbying for the 18 metres requirement to be reduced and the Scottish government has pledged a similar ban for buildings over 11 metres in height, including entertainment and assembly buildings. Related concerns around sprinklers, alarm systems and alternative means of escape in high-rise buildings merit urgent reconsideration as part of integrated reforms.
Future Developments
The second phase of the Grenfell Tower Inquiry is unlikely to start until the end of 2019, according to its chairman Sir Martin Moore-Bick, with some 200,000 documents (including in relation to installation of the cladding and insulation) still to be disclosed. The first phase centred on the night of the incident, and the second will examine wider issues surrounding the fire.
Disputes over remediation of private blocks affected by potentially dangerous cladding materials are ongoing in many cases, exacerbated by complexities in proving clear breaches of applicable building regulations in order to establish liability. Stakeholders in affected properties should consider whether existing insurance, warranties or guarantees can meet the costs of cladding replacement, and seek appropriate advice from policyholder coverage specialists.
Amy Lacey is a partner at Fenchurch Law
Insurance Cover for Combustible Cladding
Insurance Cover for Combustible Cladding
Dame Judith Hackitt’s Review of Building Regulations and Fire Safety recommends radical integrated change to the regulatory system covering high-rise and complex buildings, reflecting the realisation after Grenfell that previous oversight of the myriad activities and conflicting motivations involved in the construction of dwellings is not fit for purpose, to ensure safety of all occupants.
Focus on delivery and preservation of high quality buildings is of crucial importance for society and stakeholders across the industry. Challenges remain for many property owners and construction businesses affected by combustible cladding to existing structures, and insurers have a significant role to play in facilitating appropriate risk transfer and keeping buildings safe.
Recommendations
The report highlights misunderstanding of ambiguous or inconsistent guidance, lack of clarity on roles and responsibilities, competence issues, lack of transparency in product testing and approval, and inadequate enforcement tools as key problems underpinning the failure, creating a ‘race to the bottom’ culture that does not promote good practice. A clear model of risk ownership is proposed, held to account by a new Joint Competent Authority operating under a simpler and more effective regulatory framework, with audit trails of information throughout the life cycle of a building, from planning to occupation and maintenance. A ban on inflammable cladding is due to be implemented later this year through changes to building regulations, but this will not apply retrospectively where materials have already been fitted.
Remedial Costs
Removal and replacement of unsafe cladding by councils and housing associations will be government funded at a cost of approximately £400 million. Sajid Javid has said that freeholders of private developments have a ‘moral responsibility’ to pay for rectification without levying the costs through service charges, affecting thousands of leaseholders in 130 apartment complexes in England that failed cladding tests since the tragedy in June 2017. The allocation of responsibility in each case will depend on the leasehold arrangements and any latent defects insurance or housing warranty.
The London Residential Property Tribunal ruled in March against residents of the Citiscape complex in Croydon over the management company’s right to recover costs of replacement cladding and fire safety marshals, in circumstances where the leasehold repairing obligations and service charge covenants were co-extensive, before the developer and freeholder stepped in to cover remedial works of around £2 million. At the New Capital Quay development of 1,000 homes in Greenwich, completed in 2014, legal proceedings are reportedly underway between the management company and NHBC warranty provider, to determine liability for c.£40 million costs of Grenfell-style cladding, certified as compliant with building regulations at the time of installation.
LDI and New Home Warranties
Latent defects insurance (LDI) can be obtained affording first party cover to both homeowners and developer from practical completion, to rectify damage or imminent damage arising from pre-existing defects. Insurers typically look to recover the loss from any negligent professional involved in the construction process. LDI can avoid costs and delay associated with apportioning fault where previously accepted industry standards are exposed as inadequate (see also MT Hojgaard), and protect against contractor insolvency risk. Take up has increased in recent years, attracting investors and tenants.
The Council of Mortgage Lenders requires a 10 year warranty or insurance policy to lend for new build residential homes. Standard new home warranties provide cover for homeowners against actual or imminent damage caused by structural defects or breach of building regulations prior to completion, subject to initial 24 months’ period where the developer is liable to rectify. The ‘immediacy’ of damage arising from unsafe cladding will depend on evaluation of the surrounding circumstances including materials used, component parts of the structure, maintenance history and overall safety systems.
Insurance claims may be especially important for owners of property blighted by combustible cladding given the difficulty in law of recovering pure economic loss (i.e. in the absence of physical damage) without a direct contractual relationship or collateral warranty with any party considered responsible for design, installation or certification of unsafe systems.
Next Steps
The first substantive hearings of the Grenfell Inquiry led by Sir Martin Moore-Bick commence today with tributes from friends and family of the 72 victims, as part of a fact-finding process to investigate how such a disaster could have occurred, alongside a police probe into alleged criminal offences.
It is hoped that industry leadership will recognise and wholeheartedly support the cultural shift required, seizing the opportunity to restore public confidence and improve safety standards in the construction and maintenance of buildings for the benefit of all.
The scope of insurance cover for cladding claims is likely be contentious given the scale of market exposure and policyholders should consider specialist advice on applicable wordings, to notify claims broadly and maximise potential recoveries.
Amy Lacey is a partner at Fenchurch Law
Contractors Beware: Defects Liability and Project Insurance Coverage
Energy firm SSE Generation has been awarded in excess of £100m damages on appeal over a tunnel collapse nearly ten years ago at the Glendoe hydroelectric power scheme in Scotland (SSE Generation v Hochtief Solutions [2018] CSIH 26). The Inner House, Court of Session, decided by a majority of 2:1 that the contractor was liable for costs of repair due to breach of the requirement that erodible rock encountered in the tunnel be shotcreted if not otherwise protected, despite having exercised reasonable skill and care, as defects were in existence at take-over by the employer. The contractor could not rely on a contractual limitation of liability for design defects as the damage was caused by implementation of the design (i.e. workmanship).
Further, there was no implied term preventing the employer from bringing proceedings against the contractor, notwithstanding a joint names construction all risks policy, in view of express contract terms apportioning liability for claims due to an event at each party’s risk. Consistent with Gard Marine v China National Chartering Co [2017] UKSC 35, it was acknowledged that a requirement for joint insurance could lead to an implied term that claims between contracting parties were not permitted, and the Supreme Court’s use of language in that case such as “inconceivable” and “absurd” when referring to the possibility of a subrogated claim were “powerful contra-indicators”. However, the joint insurance required under the Glendoe contract indemnified loss or damage to the works, not breach of contract by the contractor in failing to carry out repairs, so the policy would not cover the employer’s claim on the facts in any event.
The decision is also notable in considering the Works Information requirement for a “design life” of 75 years. Following the Supreme Court decision in MT Højgaard v Eon [2017] UKSC 59, it did not mean the contractor was warranting that the works would in fact last for the specified period without “major refurbishment or significant expenditure”. Rather, the obligation was met if the contractor handed over the works with such a design life and the employer had the whole of the defects period to determine whether the works did in fact have that design life. The question of compliance therefore fell to be determined at the defects date, which may be difficult to assess in some instances, but not here, as the tunnel collapse had already occurred.
This comes hot on the heels of Haberdashers Aske v Lakehouse [2018] EWHC 588 (TCC), providing welcome clarification on the issue of how sub-contractors in the construction industry obtain the benefit of project policies. The Judge identified three different ways of analysing the situation - based on agency principles, a standing offer, or acceptance by conduct - and decided that in any case the roofing sub-contractor did not benefit from cover under the project policy (which included a waiver of subrogation term), given that it had obtained separate liability insurance with a limit of £5m in accordance with express contract terms. It was accepted that cover would otherwise be available under the project insurance to sub-contractors as additional insureds for specified perils including fire damage. The project insurers had funded settlement of claims against the main contractor for £8.75m and the subrogated claim was limited to the extent of the sub-contractor’s insurance, leaving open the question of whether a project policy might (partially) respond to losses claimed against a sub-contractor in excess of separate policy limits.
Performance obligations and insurance requirements in construction contracts must be carefully considered to ensure appropriate allocation of risk, scope of cover and limits of indemnity. If the parties intend to create an insurance fund as the sole avenue for making good the relevant loss, this should be expressed in clear and unambiguous terms. Subject to interpretation in individual cases, a sub-contractor agreeing to obtain separate liability insurance may be exposed to subrogated claims from any project insurer, even if the loss in question was covered by the project policy.
Amy Lacey is a partner at Fenchurch Law
Business Interruption Claims - Improving Outcomes for Policyholders
Insurers are set to pay out a record $135 billion to cover losses from natural catastrophes in 2017, driven by the costliest hurricane season ever in the United States and widespread flooding in South Asia. Extreme weather events such as recent mudslides and wildfires, as well as industrial disasters and acts of terrorism, often cause damage affecting many businesses, bringing into focus the issue of policy response for BI claims involving wide area damage.
Policy Wordings
Standard UK policy wordings provide BI cover for interference to revenues caused by loss or damage to the insured’s property (the “Incident”). The link to physical damage is maintained for purposes of the “Other Circumstances” clause, which provides that adjustments shall be made as appropriate to reflect trends in turnover affecting the business at the relevant time, so the level of indemnity represents so far as reasonably practicable the loss of profits that would have been achieved but for the Incident. This does not encompass interruption consequent upon damage within the surrounding area and is not synonymous with operation of the insured peril itself, which can give rise to anomalous results and severely limit policyholders’ recoveries.
Windfall Profits
In the aftermath of a catastrophic event causing wide area damage not all businesses will be affected in the same way. Despite a general downturn in the local economy, some businesses will experience increased demand (provided they are able to continue trading), for example builder’s merchants supplying materials for reconstruction or those catering for an influx of claims handlers, while similar operations shut down by the damage sustained may be deprived of the opportunity to enjoy such “windfall profits”. There is some reluctance by certain parts of the insurance market to agree to cover lost windfall profits, but in principle the Other Circumstances clause works both ways and policyholders should be able to invoke an upward trend in appropriate cases, subject to adequacy of the overall sum insured.
UK Legal Position
The issue of whether the Other Circumstances clause can or should be used to adjust the standard turnover to reflect trends resulting from an event causing damage not only to the insured’s property, but also to the wider geographical area, was considered by the English courts in Orient-Express Hotels v Generali [2010]. Prior to this some disputes over holiday resorts in the Far East, subject to UK policy wordings, had gone to arbitration and been variously decided both in favour of and against the respective insureds.
The Orient-Express case considered the impact of Hurricane Katrina on a luxury hotel in New Orleans, and the owner’s appeal on points of law following arbitration. In summary, the hotel suffered significant physical damage from wind and water resulting in its closure throughout September and October 2005, and partially reopened in November, albeit with limited amenities and ongoing repairs. A state of emergency had been declared and mandatory evacuation of the city ordered on 28 August, and lifted at the end of September. Insurers rejected the owner’s claim for BI losses during closure of the hotel by applying the trends clause, arguing that New Orleans was effectively closed throughout this period and the adjusted standard turnover should be zero.
The owner argued that: it was entitled to indemnity for losses caused by insured damage even if concurrently caused by damage in the vicinity (The Miss Jay Jay [1987]); a reasonable interpretation should not permit adjustment of the consequences of the same insured peril which caused the insured damage; the trends clause was effectively being treated as an exclusion, which it was not; the precise reasons for cancellations and reduced revenue were likely to be a combination of factors, which could not sensibly be separated from each other evidentially; and insurers’ position had the remarkable result that the more widespread the impact of a natural peril, the less cover is afforded by the BI policy for the consequences of damage to insured property.
The Commercial Court disagreed with these submissions, upholding the tribunal’s conclusion that a “but for” causation test was appropriate in accordance with the policy wording, so that the BI loss was to be assessed on the hypothesis that the hotel was undamaged but the city was devastated, as in fact it was. Permission to appeal was granted, however, and it was subsequently rumoured in academic circles the Court of Appeal might have taken a different view, had the case not settled by then.
US Approach
BI forms in the US generally refer to “Direct physical loss of or damage to property, including personal property in the open or within 100 feet, at premises described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss”. The link to physical damage for claims involving wide area loss is not as strong as the standard UK wording.
Many US policies include a loss determination provision specifically excluding windfall profits caused by the impact of the insured peril. Nevertheless it is interesting to note the decision in Berkshire-Cohen LLC v Landmark Aon Insurance (2009), in which the claimant realty agents were successful in recovering windfall profits due to increased demand for rental properties following Hurricane Katrina, despite the exclusion clause. The reasoning was that both storm and flood damage had occurred with only the former being a covered cause of loss, and in the US (as in most of mainland Europe) flood is a contingency addressed by the government rather than by insurance. The US District Court therefore held that, whilst the exclusion applied to storm damage under which the property damage claim was presented, it did not apply to an upward trend based on flood damage.
Practical Difficulties
The UK legal position reflected in Orient-Express has been criticised as unsatisfactory for both insurers and policyholders in applying a downward trend or “windfall loss” under the Other Circumstances clause in response to wide area damage during the period when the insureds themselves were affected by their own property damage. Most policyholders expect their loss to be measured in relation to the impact of the event that caused both damage at their premises and more widely, and consider arguments otherwise to be unjust and artificial.
Furthermore, this is in contrast to the approach adopted by the UK market following previous incidents including the City of London bombing in 1992, and severe Cumbrian flooding in 2009. In Cockermouth all businesses on Main Street were submerged to a depth of six feet or more and reconstruction works continued for around six months. A strict application of Orient-Express would have resulted in limited if any BI cover for individual insureds, who would have suffered a severe downturn irrespective of their own damage. Although the reduction might be offset in some cases by windfall profits and “non-damage” denial of access/loss of attraction extensions, subject to inner policy limits, such an outcome seems paradoxical at best and would have been reputationally damaging for insurers.
Potential Solutions
As firms become more exposed to major disasters and subsequent business interruptions as a result of increasingly complex global networks, improvements are required to ensure optimal coverage and effective risk management. It seems that insurers always intended to pay for losses that insureds would have suffered based on their own damage and challenges remain for the market to develop suitable wordings fully consistent with this approach, avoiding punitive application of the “but for” test in wide area damage scenarios that does not reflect well on the industry.
Amy Lacey is a Partner at Fenchurch Law
Not Too Slender a Thread - Supreme Court decision in MT Højgaard v E.ON
The Supreme Court has upheld an appeal concerning liability to comply with fitness for purpose obligations in a design and build contract, in a case with significant ramifications for policyholders involved in construction projects. The judgment highlights the difficulties which arise when accepted industry practices are exposed as inadequate and reinforces the importance of precise drafting of contract terms, and associated policy wordings, given the literal interpretation likely to be applied notwithstanding potentially harsh consequences for unwary contractors.
The dispute arose from a significant error in an international standard for the design of offshore wind turbines known as J101. The contractor, MT Højgaard (“MTH”), relied on J101 whilst engaged by E.ON to design, fabricate and install foundations for the Robin Rigg wind farm in the Solway Firth, Scotland. Following completion of the works, it was discovered that J101 contained an inaccuracy such that the load-bearing capacity of grouted connections had been substantially over-estimated, resulting in remedial works at a cost of €26 million.
In April 2014, the trial judge held that MTH was liable to E.ON because the foundations were not fit for purpose, in breach of a provision in the Technical Requirements section of the Employer’s Requirements in the contract which imposed an obligation that the design “shall ensure a lifetime of 20 years in every aspect without planned replacement”. This provision applied in addition to less onerous contract terms requiring MTH to exercise reasonable skill and care, and to comply with J101.
The Court of Appeal overturned that decision, concluding that the 20 year service life provision in the Technical Requirements was qualified by compliance with J101 and good industry practice, in light of the inconsistency between that provision and other contractual terms. The relevant wording tucked away in the Technical Requirements was described as “too slender a thread” upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations, viewed in context of the contractual provisions as a whole and commercial implications.
In a unanimous decision, the Supreme Court ruled that MTH was liable for breach of the fitness for purpose obligations, construed either as a warranty that the foundations (1) would have a minimum service life of 20 years, or alternatively (2) be designed to last for 20 years. The court referred to UK and Canadian authorities where contractor warranties to complete works without defects were held to override any prescribed specification, noting: “it is the contractor who can be expected to take the risk if he agreed to work to a design which would render the item incapable of meeting the criteria to which he has agreed”. J101 was expressed to be a minimum standard and the court was not prepared to disregard or give a different meaning to provisions of the Technical Requirements incorporated to the contract.
Construction contracts routinely incorporate schedules and technical documents with less than complete harmonisation as to intended legal standards of design and workmanship. The contract in this case was acknowledged to be of a “complex, diffuse and multi-authored” nature with many “ambiguities, infelicities and inconsistencies”. Nevertheless the court saw no reason to depart from the natural meaning of the fitness for purpose provisions, alongside MTH’s other obligations, in accordance with the prevailing approach of judicial non-interventionism that parties will be taken to mean what they say in their contracts (Arnold v Britton [2015] UKSC 36).
To avoid ambiguity, contracting parties should consider the inclusion of express provisions clarifying whether and how technical schedules are to affect overall obligations as to design and workmanship, clearly distinguishing requirements to exercise skill and care from performance warranties or guarantees of fitness for purpose. This in turn will allow policyholders to properly evaluate the risks assumed under the contract, and liaise with their insurance brokers to ensure adequate professional indemnity and all risks cover for potential liabilities.
MT Højgaard A/S (Respondent) v E.ON Climate & Renewables UK Robin Rigg East Limited and another (Appellants) [2017] UKSC 59
https://www.supremecourt.uk/cases/docs/uksc-2015-0115-judgment.pdf
Amy Lacey is a partner at Fenchurch Law
Construction and Professional Indemnity expert Amy Lacey joins Fenchurch Law
Insurance coverage specialists, Fenchurch Law, have announced that Amy Lacey has joined as a partner from Rosling King. Amy will concentrate on insurance disputes with a particular focus on construction and professional indemnity
Acting for brokers and policyholders across a variety of industry sectors, she has considerable experience of complex international litigation and arbitration and regularly advises on coverage issues and policy drafting.
Amy is a member of the British Insurance Law Association and the Society of Construction Law.
In her spare time Amy is a keen equestrian and enjoys sailing with Lloyd‘s Yacht Club.
"We are delighted that Amy has agreed to join our growing team at Fenchurch Law. We welcome the rich mix of new skills and expertise she brings and this is part of a wider objective of improving outcomes for policyholders, and putting policyholders first in everything we do," said David Pryce Managing Partner.
Founded in 2010 Fenchurch Law is a specialist firm of City solicitors providing insurance advice and handling insurance disputes. Based in the heart of the London Insurance Market at 40 Lime Street, they represent policyholders in complex and high value coverage disputes with their insurers.