FCA Takes the Lead - Fenchurch Law Covid-19 Business Interruption Briefing Note
Since the designation of COVID-19 as a notifiable disease in England on 5 March, and the subsequent ratcheting of measures to slow the spread of the disease, business owners large and small have incurred catastrophic losses which, for the time being, continue to mount up on a daily basis.
Those with business interruption insurance have turned to their insurers for assistance, but have by and large been met with outright rejection of their claims.
Matters have escalated rapidly in the course of the last two weeks as thousands of declined claims pile up, with action groups being formed, ‘class actions’ announced, and regulators adopting an increasingly interventionist stance, culminating with the FCA’s announcement on 1 May 2020 that it intends to take legal action to obtain a court declaration on the disputed wordings.
This update takes stock of developments so far, considers the positions of the market and policyholders in relation to the disputed issues emerging, and sets out the options for policyholders wishing to pursue their declined business interruption claims.
What is the market’s position on COVID BI Claims?
ABI
As the representative body of insurers in the UK, the ABI has unsurprisingly sought to manage the expectations of policyholders and government as to the extent to which the insurance market can be expected to shoulder a share of the burden currently being suffered by the nation, stating that “no country in the world is able to provide widespread pandemic insurance, and the UK is no exception”, “only a very small number of businesses choose to buy any form of cover that includes business interruption due to a notifiable or infectious disease”, and “such policies often only apply when the disease is present at the premises.”
Insurers
Some insurers have taken an even more extreme approach than the ABI, announcing that “[our] policies do not provide cover for business interruption as a result of the general measures taken by the UK government in response to a pandemic”, and “these extensions are intended to cover danger and disturbance and are not expected to cover a pandemic (or similar) breakout of disease.”[1]
This has been reflected in insurers’ responses to claims notified, which have largely been to issue blanket declinatures using cut-and-paste standard responses, often with no apparent consideration of the facts of the claim submitted.
FCA
Unlike the steps being taken by regulators in some other markets, notably some US states, there has been no attempt by the FCA to mandate retrospective coverage for COVID-19 losses on existing policies. Taking a relatively measured approach, the FCA wrote a ‘Dear CEO’ letter to CEOs of London market insurers on 15 April 2020, specifically in relation to SME BI insurance, acknowledging that many policyholders would have no cover, but noting that some policies do give rise to a clear obligation to pay out, and encouraging insurers to comply with their legal and regulatory obligations to pay claims promptly. Following the escalation of the situation over the following fortnight, and the entrenchment of insurers’ coverage positions, on 1 May 2020 the FCA took the bolder step of announcing that it intended to “obtain a court declaration to resolve contractual uncertainty in business interruption (BI) insurance cover.”
FOS
The Financial Ombudsman Service, which handles complaints for individuals and SMEs up to maximum claim value of £350,000 has also issued its own guidance in relation to the anticipated high volumes of disputed BI claims. On 14 April 2020 it indicated that it would “expect the insurers to think beyond a strict interpretation of the policy terms and consider carefully what’s fair and reasonable in each case, taking into account the unprecedented situation”. Interestingly that language has now been removed from the latest version of its guidance provided online.
What are the disputed coverage issues?
Damage
In the absence of extended cover, most policyholders will need to establish that any business interruption losses arise from insured damage to property. At first sight that may appear to have no relevance to COVID-19 BI claims, since there has been no obvious property damage that would trigger the cover. However, under English law, a number of cases have found that only very small changes in physical state can amount to property damage, leading to suggestions that viral contamination leading to loss of use can amount to damage. Much has been made of a recent decision in Canada, in which the court adopted a broader interpretation of the term physical damage, which incorporated such things as the loss of the function or use of a building, even if only temporary[2]. Whether this can successfully be argued under English law will depend in part on the definition of property damage in the policy (some policies refer to ‘physical’ damage, which requires a permanent and irreversible change in physical condition, while others refer only to ‘accidental loss or damage’, which extends to transient and reversible changes in physical condition), and the application of any contamination or pollution exclusions. Insurers will certainly resist paying any claims on this basis, but it is quite possible that litigation will be pursued on this point which, if successful, could dramatically widen the scope of cover under traditional BI policies.
Locality
Many policies that do contain extended cover for losses caused by infectious disease, prevention of access, or public authority action, under which cover is now sought, will include some form of reference to an occurrence of the insured peril on the premises, in the vicinity, or within a specified radius, commonly 1 mile or 25 miles.
Insurers’ response has broadly been that these provisions mean that the extensions will only respond to localized incidences of disease, and not to widespread epidemic or pandemic circumstances where the whole country (or in this case the world) is affected.
Policyholders on the other hand might reasonably question why, in the absence of any pandemic exclusion, the presence of the disease elsewhere can have any effect on the local coverage provided by their policy. Perhaps insurers’ decisions on coverage are being driven by concerns over their likely overall exposure rather than the actual cover provided by a policy? The correct answer will as ever lie in the drafting of the policy wording in question, but this is set to be one of the key contested issues.
Causation
The second broad category of issues on which disputes will turn are various forms of causation argument. Insurers are arguing that, even if the relevant policy trigger can be demonstrated to have occurred, the losses suffered by the policyholder are not caused, or are not solely caused, by the insured peril.
Although such arguments may be couched in various different terms, they all effectively seek to apply the controversial principle established in the case of Orient Express Hotels v Generali, in which the losses of an insured hotel in New Orleans following Hurricane Katrina were found not be insured because they were caused not by the relevant trigger (property damage), but by damage to the wider area, i.e. the losses would have happened anyway even if the insured property damage had not occurred.
Again the outcome of such arguments will depend on application of the policy wording, including the relevant causation language in the insuring clause, and any ‘Trends Clause’ to the facts of any given claim. Causation arguments are generally complex and difficult to generalise in relation to multiple claims, and we can expect to see some hard-fought litigation in this field.
Aggregation
A perennial issue that is not unique to COVID-19 claims is whether losses suffered at multiple insured locations should be aggregated for the purpose of applying limits of liability and deductibles. As a general rule, the cover provided by the non-damage BI extensions tends to be sub-limited to a level which may be a small fraction of the total policy limits. Whether policyholders may claim for multiples of the specified sub-limit will depend on the existence of any express aggregation clause, and whether for example the sub-limit is expressed as applying to any one ‘loss’, ‘occurrence’, ‘event’, or arising from the same ‘originating cause’. For those policyholders with multiple locations insured under the same policy, for example restaurants, pubs and shops, this issue may determine whether whether a claim is worth £1 million or £100 million (and beyond), and as such will no doubt give rise to some hotly contested claims.
What happens next?
Policyholders whose BI claims have been rejected have various options open to them at this stage, and it is important to note that there is no one-size-fits-all solution for all policyholders.
Negotiation
As a general starting point, negotiations through open dialogue with the insurer are always advisable, either directly or through a representative such as a broker or lawyer. For the many thousands of SME businesses this is unlikely to be a realistic option at this stage, but for those larger businesses with more significant losses reaching seven, eight, or nine figures, insurers are more likely to be willing to engage in constructive discussions.
FOS
For eligible policyholders, the FOS provides a cost-free and fair solution to resolving disputed insurance claims. However, the prescribed timescales may frustrate some policyholders in the current situation, since they are required to make a complaint following an insurer’s rejection of any claim, following which the insurer has eight weeks to each a ‘final decision’. Only then may the policyholder refer the matter to the FOS. Following those timescales, policyholders are prevented from taking any action for the next two months unless the insurer agrees to issue an expedited ‘final decision.’
Arbitration
Any policyholder with an arbitration clause in their policy will be required to pursue private arbitration proceedings to resolve their dispute, unless they are FOS-eligible. This may be an appropriate option for some larger policyholders with bespoke coverage issues, and the resources to pursue lengthy and expensive arbitration proceedings, but for many smaller policyholders the prospect of having to arbitrate will be a significant barrier to pursuing their claim. Further difficulties with arbitration in the present situation are the absence of effective procedures for aggregating claims, and the lack of any system of binding precedent.
Group Litigation
There has been much talk of ‘class actions’ or other group litigation being pursued against certain insurers, and several action groups have been formed for this purpose. Whilst this remains a possibility, there are significant downsides to policyholders in attempting to pursue their claims as part of a group, not least that each of their claims will have factual, if not legal, issues that are specific to their own circumstances. The ability of group legal proceedings to determine large numbers of complex BI insurance claims is doubtful, and the procedural complexities and timescales are unlikely to be attractive, not to mention the funding necessities that will see policyholders sacrificing a significant proportion of any damages in return for representation as part of the group. Moreover, this option may now have been rendered largely redundant by the FCA’s announcement of its own legal action.
FCA legal action
The FCA’s proposal to seek a ruling on the disputed coverage issues is an unusually interventionist but potentially welcome step. The action sensibly stops short of over-reaching the FCA’s remit, and preserves the role of the English courts as the proper arbiter of matters of contractual interpretation. The FCA has indicated that it intends to invite the participation of a select group of insurers in the process by 15 May 2020, and further details are awaited on the proposed process.
It is not known at this stage whether policyholders or their representatives will have any opportunity to make submissions or representations in the proceedings, or what procedural mechanism will be followed, although a claim for a declaratory ruling under CPR Part 8 seems likely. Provided that the right issues are put before the court, supported by appropriate representations on both sides of the fence, this may well be the most cost-effective and efficient way to resolve the common issues. The proceedings will not and cannot provide an answer to all of the questions, and some disputed claims will inevitably still proceed to litigation or arbitration. But for a large majority of policyholders, particularly those whose claims do not justify the pursuit of independent legal proceedings, this development may provide the best opportunity to overturn the rejection of their claim, without requiring any active participation on their part.
Next Steps
For most policyholders, a wait-and-see approach is likely to be advisable at this stage. Any attempt to negotiate with insurers or take more formal steps such as commencing arbitration or litigation is unlikely to produce results until all parties have a better understanding of the proposed FCA legal action, including the likely timetable and the scope of the issues for determination.
For now, policyholders’ focus should therefore be on ensuring that effective notification has been given to insurers in sufficiently broad terms (usually via brokers), taking steps to mitigate losses where possible, and keeping records of any costs reasonably and necessarily incurred in doing so.
[1] https://qbeeurope.com/media/8685/covid-19-qbe-faqs.pdf
[2] MDS Inc v Factory Mutual Insurance Company (1 April 2020)
Zagora Management Limited & Others – v – Zurich Insurance PLC and others
In this recent decision, the Technology and Construction Court allowed claims brought by the leaseholders under “Standard 10 Year New Home Structural Defects Insurance Policies” (“the Policies”), but rejected all the claims against the Approved Inspector.
The case concerned a development of two blocks of flats in Hulme, Manchester (“the Property”). The claimants were the freeholder, Zagora Management Ltd (“Zagora”), and 26 long leaseholders, who between them owned 30 flats. The defendants were (1) Zurich Insurance plc (“ZIP”), which had issued the Policies to the leaseholders; and (2) Zurich Building Control Services Ltd (“ZBC”), which had undertaken the role of building inspector and issued final certificates under the Building Regulations (“the Certificates”).
As against ZIP, the Claimants sought to recover under the Policies the cost of remedying a number of serious defects at the Property, pleaded at £10.9m. Zagora also sued ZIP based under what was referred to as an “agreement to rectify”.
As against ZBC, thirteen of the Claimants, including Zagora, claimed damages representing the diminution in their respective interests as the Property, on the basis that ZBC knew that the statements made in the Certificates were untrue, or was reckless as to their truth.
The claims against ZIP
(i) Zagora’s claim under the Policies
Zagora claimed that it was entitled to sue ZIP under the Policies because it had a freehold interest in the Property as a whole. By contrast, ZIP argued that Zagora was not, and never had been, insured under the Policy.
It was common ground that Zagora had never been issued with a certificate identifying it as the buyer; however, Zagora claimed that did not matter, as it became a co-insured in relation to each flat when it acquired the freehold of the Property in 2013.
Although acknowledging the ingenuity of Zagora’s argument, the Judge (HHJ Stephen Davies) had no difficulty in concluding that it was wrong. Each insurance certificate identified the buyer by name; the only situation provided for in the Policy where the buyer’s identity could change was in the event of an onward sale of the flat in question. That did not apply in this case, as Zagora’s predecessor was never issued with an insurance certificate. Further, the Policies did not allow for there to be more than one insured with separate interests in the same flat. In the circumstances, the Judge held that Zagora was not an insured under the Policy.
(ii) The leaseholders’ claims under the Policies
The Judge found that the Property was seriously defective and that the leaseholders were entitled to recover the reasonable cost of repairs. Before coming to that conclusion, however, the Judge addressed a number of issues of policy construction; in particular, ZIP’s contentions that (a) the claims were subject to a maximum liability provision (“the Cap”), and (b) the Policies did not indemnify the cost of repairs that the claimants never intended to carry out.
Zagora asserted that the Cap imposed a maximum liability of £25m. ZIP’s case, by contrast, was that the Cap limited each leaseholder’s claim to the declared purchase price of its flat, with the result that the total maximum liability was the declared value of 30 flats i.e. £3.634m. The Judge agreed with ZIP, and found that it was not unreasonable for it to have wanted to limit its cover for a 10-year policy. Accordingly, the leaseholders’ claims were capped at the total purchase price of their flats.
As to the correct indemnity, the Claimants contended they were entitled to recover the reasonable cost of repair without first having to undertake those repairs. Whereas ZIP argued that the Policies did not cover repairs which would never be carried out.
The Policy provided that ZIP would pay “the reasonable cost of rectifying or repairing the physical damage [or] the reasonable cost of rectifying a present or imminent danger”. The term “reasonable cost” was, in the Judge’s view, neutral as to whether it was a cost already occurred or a cost to be incurred. Accordingly, there was no obvious reason why it should have the limited meaning for which ZIP contended.
(iii) The “agreement to rectify” claim
Zagora claimed that at a meeting in June 2013, ZIP agreed to resolve certain defects, regardless of the strict position under the Policies.
The Judge commented that, where parties have no pre-existing contractual relationship, it would be necessary to show that they agreed on all matters essential to the formation of a contract. However, the need to do so would be less acute where there was a pre-existing contractual relationship. The difficulty here, however, was that the relationship between Zagora and ZIP did not fit neatly into either category, given that by the time of the crucial meeting, there was a dispute as to the claimants’ contractual rights under the Policy.
In any event, the Judge found that what was actually agreed between the parties was merely a “step along the road” to what the parties would have expected to be a pragmatic resolution of a serious problem, and did not represent a binding and enforceable contract. Accordingly, Zagora’s claim failed on the basis that the agreement lacked contractual certainty.
The claims against ZBC
The Claimants contended that they would not have acquired the individual flats, or (in the case of Zagora) the freehold, had they known the true position regarding the value of their interests. As their claim was brought in deceit, the Claimants were required to show not only that ZBC knew that the representations in the Certificates were untrue or were reckless as to their truth, but that they also relied on those representations.
It was common ground that ZBC knew at the time that it had not taken reasonable steps to satisfy itself that the Building Regulations had been complied with, and had thus been reckless. The issue therefore turned on reliance.
ZBC’s evidence was that it never anticipated that Zagora, as a subsequent purchaser of the freehold, would have relied on the Certificates. The Judge accepted Zagora’s evidence, and found that it was “impossible” to conclude that it intended Zagora to rely on the certificates 2 to 3 years after they were issued. Accordingly, Zagora’s claim failed.
Contrary to the position vis-à-vis Zagora, ZBC accepted that it did anticipate that the leaseholders would rely on the Certificates. However, there was a complete absence of evidence that the leaseholders or their solicitors were provided with the Certificates either before exchange or completion. Therefore, even though the Claimants were able to prove deceit on ZBC’s part, their claims also failed at the reliance hurdle.
Conclusion
The case illustrates the various complexities and challenges facing policyholders, and particularly leaseholders, when bringing claims under new home warranties. The case is also a reminder of the practical difficulties of bringing claims against Approved Inspectors. Indeed, in the recent decision in The Lessees and Management Company of Herons Court v Heronslea and others [2018] EWHC 3309 (TCC), a claim against an Approved Inspector failed, this time because Approved Inspectors were not subject to the Defective Premises Act 1972.
Alex Rosenfield is an associate at Fenchurch Law
Damages for late payment of insurance claims: some practical aspects
The effects of an insured loss on an insured’s business can be financially devastating. It is in those times of need that policyholders turn to their insurers for help. The longer a policyholder goes without that help the worse the policyholder’s financial situation can become.
The Enterprise Act 2016 amended the Insurance Act 2015 (the “Act”) to create a new right for insureds to claim damages against their insurers for the late payment of insurance claims.
This article revisits this new right in a practical context with a view to encouraging all interested parties to bear its provisions in mind when dealing with insurance claims that have, or may, run on for far too long.
Damages for late payment
Section 13A of the Act now provides that it is an implied term in all contracts of insurance entered into from 4 May 2017 that payment of sums due under an insurance contract must occur within a ‘reasonable time’.
There is no guidance on what is meant by ‘reasonable time’. We wait for the courts to consider that question in this context. For now, we can say with certainty that what is reasonable in the context of contracts of insurance very much turns on its facts. Whilst not an exhaustive list, consideration will be given to the type of insurance contract, its complexity, any regulatory or third party issues and the conduct of all parties. In other words, some claims will reasonably take longer than others to investigate.
Others may be delayed as a result of the unreasonable conduct of insurers, however. It is in those cases that policyholders should seek to rely upon the right created by section 13A.
Whilst the right can be relied upon even where the claim has been paid, a decision as to whether or not to pursue such a claim should be made quickly. A one year limitation period applies and the clock commences from the date that payment is made in full.
The insured's burden
An insured will be required to prove that it has suffered actual loss as a result of the delay by its insurers.
In addition, the insured must demonstrate that its loss was reasonably foreseeable at the time the policy was entered into. That presents a higher burden than demonstrating foreseeability from the date of the breach and may also have the practical effect of limiting any recovery for late payment.
Furthermore, there is an obligation on insureds to mitigate losses caused by any delay. For example, this might include securing a line of credit during any period of delay to overcome any short term cash flow problems. In such circumstances insureds should make the insurer aware of the fact that additional lines of credit may have to be sourced contrary to the business’ intentions and solely as a result of the insurer's delay and that any losses associated with that will be sought from the insurer under section 13A of the Act. The prospect of an increased exposure to the claim may spur the insurer into action.
Effects on insurer behaviour
Insurers now have to act expeditiously when investigating the merits of a claim under their policies in order to ensure that claims are settled in a ‘reasonable’ period of time. This may present opportunities for insurers to reflect on their claims handling processes and technical skills. Such outcomes can only be seen as a positive effect of the new remedy.
Disputes may take some time to resolve and the loss caused to a policyholder whilst an unsound declinature or restriction on cover is unwound may fall within the scope of section 13A. In other words, handling claims efficiently and ensuring that claims adjusters reach the correct conclusions in a reasonable period of time (and putting in place systems and training to achieve those outcomes) will: (a) ensure that insurers avoid this additional unnecessary exposure to claims liabilities; and (b) ensure that policyholders receive the cover to which they are entitled in a timeframe to be reasonably expected.
Insurers may also be more inclined to make early commercial decisions in order to resolve claims more swiftly than a full coverage investigation or litigation might allow.
Contracting out
The insurer and insured can agree between themselves to contract out of section 13A of the Act. Such a clause would be enforced by the Courts providing that it is clear, unambiguous and brought to the policyholder's attention before the contract is agreed.
We mention this simply to emphasise that brokers and policyholders should check their policy wordings carefully to ensure that: (a) there are no such contracting out provisions; and (b) if there are, those provisions preserve a right to claim damages for the late payment of a claim and are more advantageous than the right conferred by section 13A.
An attempt by an insurer to contract out of the provision would amount to a request to be at liberty to unreasonably delay in payment of claims. That is quite a brazen request that insureds are unlikely to want to accede to.
Comment
The usefulness of section 13A of the Act to policyholders is its ability to be deployed in communications with an insurer as an incentive to resolve claims more quickly. Even if the complexity of a claim merits a period of significant investigation by the insurer, reference to section 13A, alongside drawing an insurer’s attention to financial loss caused by the delayed payment itself, may at the very least elicit an interim payment. Interim payments can in themselves keep the wolf from the door.
For those few cases where insurers are not persuaded to act by their increased exposure to damages arising from late payment, we look forward to seeing the Courts intervene to underline to insurers, at last, that delay does not pay.
James Breese is an associate 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
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #3 (The Ugly). Pioneer Concrete
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those are cases that can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#3 (The Ugly)
Pioneer Concrete (UK) Ltd v National Employers Mutual General Insurance Association Ltd [1985] 2 All ER 395
As Bingham J put it: “this action raises one question of some interest and importance in the law of insurance.”
The issue here was: does an insurer have to show that it has suffered prejudice, when relying on a breach of a condition precedent?
Pioneer Concrete (UK) Ltd (“the Claimants”) sued East London Ltd (“the Insured”), after they had negligently installed some machinery ten months earlier.
The Insured had a public liability policy with National Employers Mutual General Insurance Association Ltd (“the Insurers”), which contained a condition precedent requiring them to give written notice to the Insurers of “any accident or claim or proceedings immediately the same shall have come to the knowledge of the Insured or his representative” (‘the Condition’).
The Claimants obtained a judgment against the Insured, who then became insolvent. The Claimants then claimed against the Insurers under the Third Party (Rights Against Insurers) Act 1930.
Although the Insurers knew about the original allegations, they said they had not been made aware of the proceedings, and therefore relied on a breach of the Condition to avoid paying the claim. The Claimants argued that the claim should be covered, as the Insurers had not suffered any prejudice.
The decision
It was held, dismissing the Claimants’ claim, that a breach of a condition precedent to liability, however trivial, will entitle an insurer to escape liability for a particular claim. It was not necessary for the Insurers to show they had suffered any prejudice as a result of the breach.
The case laid to rest a line of authorities indicating that insurers could not rely on a breach of a condition precedent when the breach caused no prejudice to them. In our view, this decision was extremely harsh for the policyholder, as the Insurers had always known about the incident, and even the claim itself. While we recognise that the law ought to make a distinction between a condition precedent and a ‘mere condition’, arguably it was open to the Court in Pioneer Concrete to have held that an insurer needed to establish at least some more than minimal prejudice before the draconian effect of a condition precedent was triggered.
Lastly, a point worth mentioning is that, although the Insurance Act 2015 has sought to level the playing field between policyholders and insurers, it is likely that a breach of a condition precedent, however innocuous, would still give an insurer a complete defence to a claim.
Avoid getting out of your depth with notifications – the Court considers the scope of notification in Euro Pools plc v Royal & Sun Alliance Insurance plc
In Euro Pools Plc v Royal & Sun Alliance Insurance Plc[1] the Court considered (amongst other things) the scope of notifications made to two successive design and construct professional indemnity policies.
The Insured
The Insured, Euro Pools plc, was in the business of designing and constructing swimming pools. The pools were designed with moveable floors, so that their depth could be increased and decreased, as well as moveable booms by which the length of the pool could be altered. (By raising the boom, a large swimming pool could be divided into two smaller pools.)
The Policies
The Insured had a professional indemnity policy with RSA for the period June 2006 to June 2007 (the “2006/07 Policy”), and a subsequent policy for the period June 2007 to June 2008 (the “2007/08 Policy”). As is usual with professional indemnity policies, they were written on a claims-made basis, with both policies providing that the Insured should notify the insurers:
“as soon as possible after becoming aware of circumstances…..which might reasonably be expected to produce a Claim”.
The Policies provided that any Claim arising from such notified circumstances would be deemed to have been made in the period of insurance in which the notice had been given.
The February 2007 notification to the 2006/07 Policy
The booms operated by way of an “air-drive” system, by which they were raised and lowered by applying or decreasing the air pressure in the booms.
In February 2007 a defect became apparent, whereby air was escaping from the booms and water was entering, resulting in the booms failing to raise and lower as intended. The Insured at this time did not consider that there was any issue with the air-drive system itself, and that instead the issue could be resolved within the Policy excess by inserting inflatable bags into the booms. The Insured made a notification to that effect (“the February 2007 notification”).
The Insured also notified an issue in respect of the moveable floors, which needed urgent attention at a cost which exhausted the 2006/07 Policy limit of £5 million.
The May 2008 notification to the 2007/08 Policy
By May 2008 the Insured had experienced problems with the inflatable bags that had been used in the air-drive system and reached the conclusion that there was an issue with the air-drive system itself, which would need to be replaced with a hydraulic system. The Insured notified this issue to the 2007/08 Policy year (“the May 2008 notification”).
Attachment
The Court considered whether the claim for the costs of replacing the boom system attached to the 2006/07 Policy by virtue of the February 2007 notification or the 2007/08 Policy by virtue of the May 2008 notification. As the 2006/07 Policy limit was already exhausted it was in insurers’ interests for the claim to attach to the 2006/07 year, but was not in the Insured’s.
What was necessary was for there to be both a causal, as opposed to a coincidental, link between the claim as made and the circumstance previously notified (as set out in Kajima UK Engineering Ltd v Underwriter Insurance Co Ltd[2]). In addition, the Insured was only able to notify circumstances of which it was aware at the time of notification.
The Court held that the Insured was not aware of the need to switch to a hydraulic system for the booms at the time of the February 2007 notification, and so could not have notified this issue as a circumstance. In addition, there was also not a causal link between what was notified to the 2006/07 year (an issue with the boom which could be remedied easily and not an issue with the air-drive system itself) and the subsequent claim relating to replacing the air-drive system with a hydraulic one.
The Court upheld the principle of a “hornet’s nest” or “can of worms” notification: where there is uncertainty at the time of the notification as to the precise problems or potential problems, the insured can make a notification of wide scope, to which numerous types of claims may ultimately attach. However, such a notification had not been made in this instance.
Lessons for policyholders
The case again highlights the issues that can arise in respect of notifications of circumstances, especially when made during a developing investigation. The overarching message is that in each case the extent and ambit of the notification and the claims that will be covered by such notification will depend on the particular facts and terms of the notification.
Although in this instance the Insured was aware of an issue with the booms in February 2007, the notification was held to be limited as a result of the Insured’s view that this was not a problem with the air-drive system itself, which was not considered to be the issue until the 2007/08 Policy year and the May 2008 notification. Applying a narrow interpretation of Kajima, the Court determined that it was not enough that the issue with the air-drive system was discovered as part of the continuum of investigations instigated following the initial discovery of issues in 2007.
In Kajima the insured had notified distortion of external walkways and balconies in a housing development due to settlement and, subsequently and following further investigation, discovered separate defects at the development (for instance in relation to the kitchens and bathrooms). The Court held that the defects that were discovered after the notification did not arise from the defect notified as a circumstance so as to attach to the Policy, as there was not a sufficient relationship between the defects notified and the separate defects discovered subsequently. Whilst the same reasoning was applied in the current case, arguably the position differed in Euro Pools as the Insured was aware of the defect (the malfunctioning boom) at the time of the notification, and did notify circumstances in relation to it. It was the cause of the defect of which the Insured was not aware at the time of notification.
This narrow interpretation worked in the Insured’s favour, given that the May 2008 notification was deemed to be valid and insurers did not seek to rely upon a clause within the 2007/08 Policy which excluded the consequences of any circumstances notified under any prior insurance or known to the insured at the inception of the insurance. However, the narrow interpretation of the scope of the May 2007 notification will not be to an insured’s benefit in other circumstances where, for instance, they do not have cover under a subsequent policy.
Policyholders can seek to avoid uncertainty by ensuring that careful consideration is given to the wording of any notification. If the policyholder intends the notification to have a wide scope so as to cover the widest possible range of claims arising out of a circumstance in a “can of worms” style, then the notification should be drafted in as broad a manner as possible so as to achieve this, subject to the overarching criterion that an insured can only notify a circumstance of which it is aware.
[1] [2018] EWHC 46 (Comm)
[2] [2008] EWHC 83 (TCC)
Tom Hunter is an associate 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
Make your position plain: the duty on insurers to speak out
In a judgment that will be welcomed by policyholders, the Court of Appeal has held that insurers have a duty to speak out and make their position plain in a claims handling context.
This duty has been found to arise where, in light of the circumstances known to the parties, a reasonable person would expect the other party, acting honestly and responsibly, to take steps to make its position plain.
On the facts of this case, it was unjust and unconscionable for the insurers to escape liability on the grounds of non-compliance with a condition precedent where they were aware that the policyholder thought that its obligation to comply had been effectively parked by agreement between the parties.
The case relates to an insurance claim brought by the clothing retail company Ted Baker for business interruption losses relating to goods stolen by an employee. At first instance, the court rejected Ted Baker’s claim for indemnity under the policy on a number of grounds including for breach of a condition precedent requiring the provision of certain documentation relating to quantum. On appeal, Ted Baker argued that an estoppel by acquiescence had arisen that precluded the insurers from relying on the condition precedent. This was on the basis of a meeting between the parties at which the insurers’ loss adjuster had undertaken to seek instructions as to whether the cost of producing certain documents was covered under the policy, but had not done so. The insurers knew that Ted Baker was under the impression that its obligation to produce the documentation had been parked pending a response on that issue.
The Court of Appeal agreed, finding that in light of what had passed between the parties, Ted Baker was entitled to expect that if the insurers in fact regarded the documentation as outstanding, due and unparked, then acting honestly and responsibility they had a duty to tell them. Not to do so was misleading. Had the insurers told Ted Baker that the documents were in fact outstanding, the court considered that they would no doubt have been supplied. However, no renewed request for the material was made and there had been no suggestion made in correspondence that the insurers considered Ted Baker to be in breach of a condition precedent entitling them to avoid liability.
This duty to speak was found to be of general application, arising in the context of commercial contracts where a reasonable man would expect a party acting honestly and responsibly to bring to his attention the fact that he was under a mistake as to the parties’ respective rights and obligations. It is not specific to insurance contracts, and is not dependent on the duty of good faith, although the good faith nature of an insurance policy would tend to increase the likelihood of such an estoppel by silence or acquiescence arising.
Nor does the duty to speak require any dishonesty, bad faith or an intention to mislead. On the facts of this case there was no suggestion that the insurers had deliberately kept quiet or sought in some way to hoodwink the policyholder. However, Ted Baker’s mistaken understanding was not one that had arisen in a vacuum but in the context of specific circumstances whereby it was common ground that a response from the loss adjuster was awaited. As such, it was reasonable to expect the insurers to say if they required the documentation to be provided in the interim and that any failure to provide it would be fatal to the claim.
The Court of Appeal was clear that, generally speaking, an insurer is under no duty to warn an insured as to the need to comply with policy conditions, and that position has not changed. However, the articulation by the court of the existence of this duty to speak may make it easier for a policyholder to establish an estoppel in the appropriate factual circumstances, particularly as there is no need to demonstrate reliance on an unequivocal representation which would be necessary to found other types of estoppel or waiver.
In a year which has also seen the introduction of damages for late payment of insurance claims, it is clear that insurers need to pay attention to their systems and processes for ensuring that claims are handled transparently, fairly and promptly – which is good news for policyholders.
See Ted Baker v AXA [2017] EWCA Civ 4097.
Joanna Grant is a Partner at Fenchurch Law
Leeds Beckett University – v – Travelers Insurance Co Ltd
A recent decision by the Technology and Construction Court has considered causation issues in the context of a property insurance claim. Was the damage accidental or inevitable?
The insured, Leeds Beckett University (‘the University’), acquired the site of a former brewery on which to build a number of accommodation blocks in 1993. The blocks were completed by 1996.
In December 2011, large cracks appeared in the largest of the buildings (“the building”). Subsequent investigations revealed that the concrete walls below ground-level had turned to mush. The building was then demolished in 2012.
The University insured the building with Travelers, who declined the claim in May 2012. In support of their declinature, Travelers said that the building had been subjected to sulphate attack by ground water beneath, and that the exclusions for gradual deterioration, faulty or defective design, or contamination applied.
The University disagreed, and argued that the relevant damage was “accidental” such that it was caught by the policy’s definition of “damage.” Further, it sought to characterise the damage as “flood” damage, so as to bring it within the meaning of “defined peril.”
The issues to be decided at trial were as follows:
a. Could the damage be characterised as “accidental damage” within the meaning of the policy?
b. If so, was it caught by any of the exclusions which the insurers sought to rely upon?
Was the damage accidental?
The Judge, Mr Justice Coulson, began his analysis by setting out the detailed history of the building and the land upon which it was sited. He referred specifically to the fact that the building was built over an existing watercourse, and to the historic geotechnical reports which raised concerns with the sulphate content of the soil and the damage it might cause. The Judge also made reference to the defective design of the groundwater drainage system, remarking that “this was going to be a difficult site to develop because of the numerous water issues.”
The University tried to deflect these issues, and asserted that the watercourse did not show up on every O/S map, and could not be identified when construction commenced. Further, it said that the occurrence of the damage over the watercourse was just a coincidence. The Judge gave short shrift to these points, and rejected any notion that the damage could be described as “flood damage.”
As to whether the damage was accidental; again, the Judge found against the University. His view was that “accidental simply means an event occurs by chance, which is non-deliberate.” In framing his view, he drew a distinction between the risk of something happening, which would usually be covered by a policy, and the inevitability of something happening (such as wear and tear), which would not.
On the facts, the Judge was left with little doubt that the damage was not accidental or fortuitous, a fact on which both parties’ experts agreed. There was not simply a risk that the concrete walls would fail – it was an inevitability. Accordingly, the University could not succeed on causation, and its claim failed.
Did any of the exclusions apply?
1. Gradual deterioration?
The University argued that, if the damage was accidental, the exclusion could not apply. The Judge disagreed, and concluded that there was nothing in the policy which supported such an analysis. Further, he considered the University’s argument to be ‘contrary to commercial common sense.’
As to the meaning of the words “gradual deterioration”, the Judge concluded that “gradual deterioration can be caused by the interaction between the property insured and the circumstances in which the property exists.” In other words, one had to take a holistic view when looking at gradual deterioration – it was wrong to look at the building itself without considering any external influences i.e. the ground and flowing water.
In the present case, the damage was caused by an inherent defect or weakness of the building, and occurred over a period of at least 10 years. Accordingly, the Judge found that the exclusion applied.
2. Faulty design?
The Judge was satisfied that this exclusion also applied. He made reference to the lack of a suitable drainage system (or rather, the lack of one at all), and the fact that the risks were brought to the University’s attention at an early stage. It followed that the design was unfit for purpose, and the exclusion applied.
3. Contamination?
As above, the Judge found in favour of the insurers. The evidence made it clear that there were ‘probably’ old mineshafts underneath the site (albeit they were never found), which was agreed as being the most likely source of the contaminated water which was discovered in December 2011.
The ‘proviso’ clause
The final issue to be decided was whether the University’s claim was capable of being salvaged by the ‘proviso’ to the exclusion clause. This provided that the exclusion could not exclude subsequent damage from a cause not otherwise excluded.
The nub of the University’s argument was that, whilst the original damage was to the blockwork, the subsequent damage was the cracking and the other damage to the superstructure.
The Judge rejected this argument. The damage to the sub-structure and the visible damage to the superstructure above were all part of the same damage, the cause of which was excluded.
Comments
The judgment is a useful yardstick of how the Courts will resolve claims for property damage which was inevitable rather than fortuitous.
It also provides some helpful commentary as to how exclusion for wear and tear or gradual deterioration will be assessed – namely, by considering the interaction between the insured property and its environment.
Alexander Rosenfield is an associate at Fenchurch Law
Fenchurch Law strengthens professions insurance disputes capabilities with Rosenfield hire
Fenchurch Law, the UK’s leading firm working exclusively for policyholders and brokers on complex insurance disputes, has announced the appointment of Alex Rosenfield as an associate.
Alex joins Fenchurch Law’s profession team utilising his experience of property damage, business interruption and professional indemnity claims to represent a broad range of professionals including accountants, insolvency practitioners, solicitors, IFA’s and surveyors in claims disputes.
David Pryce, managing partner of Fenchurch Law, said: "Alex brings the team a solid grounding in coverage disputes. His experience both within the Lloyd’s and London market and in acting for policyholders, adds further strength to the capabilities of our professions team.”
Alex joins Fenchurch Law from Elborne Mitchell LLP where he was an assistant solicitor. He trained at Manchester-based BPS Law LLP which provides policyholder coverage representation.