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:
Policy Cover for Cladding “Damage”
A combustible cladding crisis has engulfed the construction sector in recent years, with tragic fires in apartment blocks in London, Melbourne, Dubai and Valencia indicative of systemic global risks. External wall panels, widely used since the 1990’s to reface high-rise buildings, have been exposed in many cases as hazardous and unsuitable, compounded by fire stopping and compartmentation defects, resulting in an avalanche of claims against developers, owners, contractors, consultants and insurers.
Rectification costs are potentially recoverable under latent defects policies, covering structural or safety issues affecting new build developments, or under professional indemnity policies, in response to third party claims against designers arising from negligence in the course of their professional duties. This article focuses on recent authority in common law jurisdictions which suggests that the incorporation of defective cladding panels may constitute physical damage for the purpose of other types of liability or property insurance.
Owners v Fairview
In Owners - Strata Plan No 91806 v Fairview Architectural (No.3) [2023] the defendant (“Fairview”) manufactured and supplied combustible Vitrabond panels, installed on two high-rise residential buildings in Sydney. Following an order by the local council to remove the panels, the owner commenced representative proceedings against Fairview alleging that the panels were not of acceptable quality, in breach of statutory requirements. The owner applied to join Fairview’s liability insurer to the claim, on the basis that Fairview’s potential liability arose from “property damage” caused by an “occurrence” (defined in the policy as an event resulting in property damage that was neither expected nor intended).
Justice Wigney acknowledged that the question of coverage was “not easy … involving matters of degree and characterisation”, with many of the authorities turning on their own unique facts and the more contentious cases involving alleged physical damage based on a loss of functionality. Notably the New South Wales Court of Appeal has rejected an argument that the blockage of a grain silo by grain constituted physical damage (Transfield v GIO (1996)).
The Federal Court held that it was at least arguable the liability policy would respond to the underlying claims, since the affixation of cladding panels “had an instant and damaging effect on the building because the panels posed an immediate and unacceptable danger to the residents of the building”. Physical damage to the facade occurred during the period of insurance, when the panels were attached by insertion of nails and screws into the walls of the building using a top hat structure. It was held that this could be characterised as an “occurrence” because Fairview did not expect or intend the panels to be combustible or defective, nor that the panels would have to be removed.
In reaching this conclusion, Justice Wigney considered Australian Plywoods v FAI (1992), where the Queensland Court of Appeal held that physical damage to the hull of a boat occurred at the time that defective plywood was attached using screws and glue; and R & B Directional Drilling v CGU (2019), where the Federal Court determined there was no physical injury to a tunnel by accidental filling of a conduit pipe with concrete, as the pipe could be removed leaving the tunnel in the same physical state as before the defective work.
Justice Wigney distinguished the decision in Pilkington v CGU [2005], where the English Court of Appeal held that installation of a small number of defective glass panels in the Waterloo Eurostar Terminal had not caused physical damage to the terminal building, to trigger cover under the manufacturer’s products liability policy. In that case, the owner did not remove the affected panels (so there was no physical damage associated with access, to replace defective components) and chose instead to implement safety measures to avoid the risk of shattered glass falling.
Fortuity
In English law, damage is a fortuitous change in physical condition that is adverse. The requirement for an altered physical state is crucial to distinguish between damage and defects. The fact that something is rendered less valuable or useful does not in itself constitute damage; but where the subject matter is added to, defaced or contaminated by some other substance, it is a matter of degree whether this will be regarded as affecting the physical condition of the property. Product liability insurance is triggered by personal injury, or physical loss or damage to third party property, during the period of insurance, as opposed to economic impacts such as loss of goodwill (Rodan v Commercial Union [1999]).
In Pilkington, the first instance decision - that the terminal was not physically damaged by an Occurrence which consisted of no more than the intentional installation of the product designed to be installed - was upheld on appeal. The policy wording made clear that damage or deterioration confined to the product itself was excluded, i.e. the policy would only answer in respect of physical damage suffered by third party property in relation to which the product had been introduced or juxtaposed.
Lord Justice Potter observed:
“Damage requires some altered state, the relevant alteration being harmful in the commercial context. This plainly covers a situation where there is a poisoning or contaminating effect upon the property of a third party as a result of the introduction or intermixture of the product supplied … difficulties of application of such a test may arise in cases where a product supplied is installed by attachment to other objects in a situation in which it remains separately identifiable, but by reason of physical change or other deterioration within it, it requires to be renewed or replaced.”
American Cases
The Court of Appeal in Pilkington considered various American authorities including Eljer Manufacturing v Liberty Mutual (1992), in which Circuit Judge Posner in a majority judgment decided that the installation of a defective product or component into property of the buyer, in circumstances where the defect does not cause any tangible change in the property until years later, can be regarded as physical injury from the time of installation. Judge Posner considered that the presence of a potentially dangerous ‘ticking time bomb’ should be construed as injury to the structure from the time of incorporation, based on the commercial intent of the parties to the insurance contract.
The outcome seems analogous with the limitation period in tort for claims where inherent design defects give rise to economic loss in the absence of physical damage, commencing at the latest on practical completion, as discussed in URS v BDW [2023].
In a dissenting judgment in Eljer, Circuit Judge Cudahy rejected the majority view, and this reasoning was endorsed by the Court of Appeal in Pilkington as better reflecting the approach of an English court. Lord Justice Potter referred to the comments of Stuart-Smith LJ in Yorkshire Water v Sun Alliance [1997] as follows:
“… the American Courts adopt a much more benign attitude towards the insured … based variously on the “folly” argument … or that insurance contracts are: “contracts of adhesion between parties who are not equally situated” … or because the Courts have … adopted the principle of giving effect to the objectively reasonable expectations of the insured for the purpose of rendering a fair interpretation of the boundaries of insurance cover … For the most part these are notions which reflect a substantial element of public policy and are not part of the principles of construction of contracts under English law.”
Arguably this benevolent approach is reflected in recent US decisions on defectively mixed concrete, suggesting that “any bad effect” may qualify as damage in the context of LEG defect exclusion clauses under Construction All Risks policies (South Capitol Bridgebuilders [2023]; Archer [2024]).
Contamination
In determining the issue in Fairview, Justice Wigney was influenced by cases concerning the harmful effects of asbestos, observing that:
“The affixation of combustible panels to a residential building can … be compared with the integration of a dangerous or toxic substance, such as asbestos, into a building. Just as the integration into a building of a potentially hazardous material such as asbestos resulted in physical injury to the building at the time of installation (even if at that time the dangers were not realised, or the toxic substances had not been released) … so the affixation to a building of potentially hazardous combustible panels can be seen to result in physical damage to the building at the point of installation.”
As noted by Paul Reed KC in Construction All Risks [at 14-014] some English and Australian authorities suggest that the courts may be willing to treat contamination as a separate category of damage that does not require an obvious physical change in characteristics of the property insured.
Applying the courts’ reasoning in The Orjula [1995] and Hunter v Canary Wharf [1996] it may be possible to infer that the property has undergone a change in physical condition, where remedial costs have been incurred.
Conclusion
Insurers would typically argue that no fortuitous physical damage has occurred in respect of combustible cladding panels, in the absence of a fire or other adverse event post-installation, and any need for replacement following identification of harmful characteristics represents, at most, an economic loss to owners.
By contrast, recent authorities in Australia and the US lend support for the proposition that damage may be established based on changes in condition through physical attachment of cladding panels, involving integration of dangerous substances with a ‘contaminating’ effect, given the adverse unexpected consequences and need for remedial works. Each case will depend on its individual facts in terms of the location of insured property, type of external wall system(s), and applicable policy wording.
The argument remains largely untested in the English courts, presenting a novel potential route to recovery under insurance policies triggered by physical damage.
Amy Lacey is a Partner at Fenchurch Law
Bellini v Brit: The Court of Appeal serves up a slightly sour COVID-19 decision
Bellini (N/E) Ltd trading as Bellini v Brit UW Limited [2024] EWCA Civ 435
The Court of Appeal has handed down judgment in a case that will have significant repercussions for business interruption cover and should be on every policyholder and broker’s radar.
Non-damage endorsements commonly supplement the predominantly damage-based cover afforded by business interruption insurance policies. However, as this case demonstrates, care must be taken to ensure that the policy wording reflects the intention for the endorsement to be triggered without the need for actual damage – or the policyholder might find itself without the cover the endorsement appears to provide.
The Background
The case related to the proper interpretation of a ‘Murder, suicide or disease’ extension (the “disease clause”), as set out below:
We shall indemnify you in respect of interruption of or interference with the business caused by damage, as defined in clause 8.1, arising from:
- a) any human infectious or human contagious disease (excluding [AIDS] an outbreak of which the local authority has stipulated shall be notified to them manifested by any person whilst in the premises or within a [25] mile radius of it;
- b) murder or suicide in the premises; […]
Many similar disease clause wordings, giving cover for cases of Covid-19 at the premises or within a certain vicinity, have been the subject of litigation arising out of the pandemic.
The core issue here was, whether on a true construction of the disease clause there could be cover in the absence of damage, as defined in the policy.
At first instance, the court had held that, on the wording of the disease clause, there was no cover without damage. Our article on that decision can be found here.
The Common Ground
It was common ground between the parties that standard business interruption insurance is contingent on physical loss or damage to the insured premises or other property, but that non-damage-based cover is typically available as an extension. Such extensions may take various forms and the FCA Test Case considered a number of examples which did not require physical damage to be triggered.
It was also common ground that there had been no physical loss of or damage to the premises or property used at the premises.
It is also worth noting that it was assumed for the purposes of the preliminary issues trial that the insured was able to establish that Covid-19 was manifested either at the premises or within the 25-mile radius. It was further assumed that the premises were closed by reason of government intervention, and this intervention amounted to "interruption or interference" within the meaning of the disease clause, resulting in financial loss.
The Principles
The principles of contractual interpretation are by now a well-trodden path in recent insurance coverage disputes. The concept of “correction of mistakes by construction” was considered in East v Pantiles (Plant Hire), where the Court found that two conditions must be satisfied: “…first, there must be a clear mistake on the face of the instrument; secondly, it must be clear what correction ought to be made in order to cure the mistake. If those conditions are satisfied, then the correction is made as a matter of construction.”
The principles of contractual interpretation in the context of insurance policies were neatly summarised by the Supreme Court in the FCA Test Case: “The core principle is that an insurance policy, like any other contract, must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean. Evidence about what the parties subjectively intended or understood the contract to mean is not relevant to the court's task.”
The Arguments
The policyholder argued that the disease clause should be understood as if the words "caused by damage, as defined by clause 8.1" were deleted. The words "in consequence of the damage", according to the policyholder, should instead read as "in consequence of the insured perils set out above at paragraphs (a)-(e) above". It was argued that this was the only way to make sense of the policy, and reflected how the court had interpreted the trends clause in FCA Test Case.
In addition, it argued that the words "damage, as defined in clause 8.1" made no sense on the basis that Damage was not defined in clause 8.1, which simply provided for business interruption coverage subject to certain defined provisos.
The court was invited to rewrite the policy in the most sensible way that accorded with the obvious intention of the parties (i.e. that the disease clause provided non-damage rather than damage cover).
The insurer asserted that such an approach was impermissible. They argued that it did not matter that the disease clause provided only very limited extensions of cover for disease, nor did it matter that it was hard to imagine how liability could ever arise under the disease clause on their interpretation: the parties should be held to their bargain.
The Decision
The Court of Appeal considered the well-established principles and held that it would only be permissible to rewrite the clause if something had gone wrong with the language used.
In circumstances where it was not clear that something had gone wrong, and where the clause was not ambiguous on its face, the court identified the correct approach as one that gave the clause its natural meaning - even where the end result was the provision of only limited, if any, additional cover.
In applying the principles to the facts of the case, the court considered that when objectively viewed, and taking into account the policy in its entirety, it did not provide non-damage business interruption cover as asserted by the policyholder.
The court’s reasoning can be summarised as follows:
- The standard business interruption cover clearly required damage to property. The extensions to the standard cover effectively provided cover for various things caused by physical damage;
- The same phraseology (which stated “Damage, defined in clause 8.1”) was used in most of the other extensions to the standard cover, and the reference was not a mistake, but instead made clear that the damage-based business interruption coverage in clause 8.1 was being extended to the indemnity clauses in clause 8.2;
- The policy must be interpreted as at 20 October 2019 when it incepted, and therefore cannot be interpreted through the telescope of Covid-19; and
- The fact that the disease clause provided limited additional cover does not in and of itself make it absurd. The court acknowledged that insurance policies are often somewhat repetitive and also sometimes clumsily drafted.
Comments
This judgment, while undeniably sound in its reiteration of well-established legal principles, still manages to feel particularly ugly for policyholders.
The disease clause in question, in all other respects, is a typical non-damage endorsement, and in our view should have been read as affording non-damage cover. We do not agree, as the court found, that a “reasonably informed small-business-owning policyholder” would conclude that they had only damage-based cover. Au contraire. Rather, we suggest, they would share the view of court in the FCA Test Case in finding the reference to “damage” inapposite and requiring of a wider interpretation in a non-damage context. Not least where the outcome is that the extent of cover the “extension” actually provides is so limited as to verge on being illusory.
Undoubtedly policyholders are swayed when making purchasing decisions by the idea that some policies are more extensive than others. This appeal serves as an apt reminder to policyholders and brokers that there is a real need to be alive to standard form wordings and extensions, which as this case shows, may not provide the policyholder with anything tangible.
As a parting comment, there is a theme emerging in the reporting of Covid-19 insurance disputes, including this judgment, which we find unpalatable as a concept: namely that where clauses are included automatically and no “additional” premium is paid, the policyholder is getting something it has not paid for. That cannot be right. The insurance market is not in the business in handing out “free” cover, and policyholders are not being provided with extensions free of charge. There has been and always will be a calculation of risk by insurers, for which a policyholder pays a premium and the insurer provides the end product. Free, it is not.
Authors
Joanna Grant, Managing Partner
Anthony McGeough, Senior Associate
“Just and equitable” under section 124 of the Building Safety Act 2022 – Triathlon Homes LLP v SVDP, Get Living and EVML [2024]
The First Tier Tribunal (“the FTT”) has decided that it was “just and equitable” to make a Remediation Contribution Order (“RCO”) against the respondent developers under section 124 of the Building Safety Act 2022 (“the Act”).
The decision is the first to consider an RCO under the Act, and raises some interesting implications for Building Liability Orders (“BLOs”), another type of order available under the Act.
What is an RCO?
RCOs can be issued by the FTT to require present or former landlords, developers, or other persons “associated” with the aforementioned to contribute towards the cost of remediation work “incurred or to be incurred” by someone else.
RCOs are “non-fault” based, and are amongst the suite of measures introduced by government to protect leaseholders from the costs of repairing building safety defects that cause a “building safety risk” – meaning “a risk to the safety of people in or about the building arising from the spread of fire, or the collapse of the building or any part of it”.
If the relevant qualifying conditions are met, the FTT may make an RCO if it considers it “just and equitable” to do so. That term is conspicuously not defined in the Act, albeit the Explanatory Notes state that it is intended to afford the Tribunal “a wide decision-making remit which it is expected will allow it to take all appropriate factors into account when determining whether an order shall be made”.
Background
The case concerned a number of residential blocks in East London which were developed by the first respondent, Stratford Village Development Partnership (“SVDP”), to house athletes participating in the 2012 Olympic Games in London. The blocks are now occupied by tenants on long leases.
The applicant, Triathlon Homes (“Triathlon”), is the co-owner of the blocks, which brought proceedings against the respondents after discovering significant building defects which included unsafe ACM cladding.
The respondents were (1) SVDP; (2) Get Living PLC (“Get Living”), which acquired an interest in the blocks long after the blocks were constructed; and (3) East Village Management Limited (“EVML”), the management company with responsibility for the repair and maintenance of the blocks, and which was invited to participate solely as the entity to which Triathlon had paid the costs of taking various interim fire safety measures.
The decision
The respondents argued that the Act had no application in this case as the relevant costs were incurred before 28 June 2022 i.e., prior to the Act becoming law. The FTT had no difficulty in quashing that argument, finding that, as a matter of statutory language, section 124 encompassed both historic and future costs.
The FTT was equally satisfied that the other grounds for making a RCO were met i.e., there was a “relevant defect” in a “relevant building” (as those terms are defined in the Act), and that the respondents were amongst the class of persons against whom an RCO could be made.
Fundamentally, the FTT was also satisfied that the “just an equitable” test had been made out. That aspect of the decision is of particular interest in relation to Get Living. In particular, despite it being accepted that Get Living was not involved in the blocks’ design or construction, and that it derived no financial benefit from its earlier disposals, the FTT found that those factors were irrelevant to the question of whether it was “just and equitable” to make the order. That is because, in the FTT’s view, Get Living acquired not only the assets of EVML, but also its liabilities, which included latent and consequential liabilities.
Fundamentally, the FTT found that it was “not open [to Get Living] to ask that the timing and circumstances in which they made their investment in those assets be taken into account in determining whether it is just and equitable for the companies in which they invested to be the subject of contribution orders.”
Accordingly, the FTT granted the orders sought by Triathlon, which required both SVDP and Get Living to reimburse the expenditure paid by Triathlon thus far, as well as to fund further liabilities which had not yet been paid.
Implications for BLOs
Although made under a different section of the Act, the decision raises some interesting implications for BLOs, which employ precisely the same “just and equitable” test.
In particular, if one assumes that the same wide decision-making remit is afforded to the High Court as it would the FTT, then a BLO is capable of being made against parent companies (and potentially those higher up the corporate chain) even where they were not involved with the work at the time it was carried out.
That thinking would appear consistent with the fact that BLOs can be made against corporate entities that have been “associated” with the entity that undertook the work during the very widely drafted “relevant period” i.e., from the date of the commencement of the work to the date any BLO would be made.
Conclusion
The decision in Triathlon Homes is a sobering reminder to those involved in construction that simply being “plugged in” to a corporate structure months or years after the work has been done by another entity will not constitute sufficient grounds to resist an RCO, and the same principles are likely to apply in relation to BLOs.
It remains to be seen precisely how the High Court will approach BLOs, albeit the first decision on that is expected shortly in the matter of 381 Southwark Park Road RTM Company Ltd & Ord v Click St Andrews Ltd & Ors.
Alex Rosenfield is an Associate Partner at Fenchurch Law