Grenfell Tower Inquiry: Phase 2 Report
Last week saw the publication of the second and final Grenfell Tower Inquiry report (“Report”) examining the circumstances that led to the tragedy which claimed 72 lives more than seven years ago.
The damning Report concluded that the “culmination of decades of failure by central government” and the “systematic dishonesty” of product manufacturers contributed to a rotten culture at the heart of the industry, setting the path to disaster.
Below is a summary of the key findings in the Report.
Summary of Report Findings
The Report named and shamed a number of parties, including, amongst others:
- The government. From the fires that involved extensive spread through combustible external panels at Knowsley Heights in 1991, Garnock Court in 1999 and Lakanal House in 2009 respectively; to the knowledge of BRE’s large-scale test results showing ACM panels burnt violently in 2001; and awareness of the industry’s worries that combustible insulation and ACM panels were routinely used on high-rise buildings in breach of building regulations – time and time again, the government failed to act in relation to the risks posed by use of these combustible materials in buildings. The government’s deregulatory agenda also contributed to the disregard and delays in strengthening the fire safety regime.
- The Building Research Establishment. The BRE, recognised as a leader in fire safety nationally and internationally, was regularly engaged by the government to carry out research and provide reports. The Inquiry uncovered issues with the BRE such as poor record-keeping, and a lack of scientific rigour, which exposed it to manipulation of test results by product manufacturers. Further, the BRE seemed to have been reluctant to draw the government’s attention to the dangers presented in the cladding products it tested, and the reports presenting these risks to life were drafted in less than overt terms.
- Arconic Architectural Products, Celotex and Kingspan. These companies were manufacturers of the combustible ACM cladding and insulation materials used in the refurbishment of Grenfell Tower. Despite being fully aware the products they sold came with grave concerns for fire safety and were unsuitable for using on high-rise buildings, they all “engaged in deliberate and sustained strategies to manipulate the testing processes, misrepresent test data and mislead the market” so as to further their own commercial interests at the expense of others.
- Rydon, Harley Façade and Studio E. The principal contractor, cladding subcontractor and architect engaged in the refurbishment project were all criticised for failing to understand and discharge their obligations under the contracts. None of them were found to have acted in accordance with the standards of a reasonably competent person in their respective positions. In particular, as the architect of the refurbishment project, Studio E was responsible for the design of the external wall and its choice of materials, and therefore bears a “very significant degree of responsibility”.
The Report also addresses two matters outstanding from the Inquiry Phase 1:
- On the contribution to the fire by ACM panels and the insulation boards, it confirms that the principal factor in the rapid growth of fire was the unmodified polyethylene in the ACM panels, though the insulation (due to its heat retaining ability) was also key.
- As to how the fire escaped into the external wall of the building from the kitchen of the flat where the fire first started, it confirmed the findings in Phase 1, i.e. due to the proximity of combustible cladding to the fire, where the fire likely escaped via the route of a collapsed uPVC window jamb into the column cavity in the external wall.
The Report contains various recommendations targeting the deficiencies identified, with the aim of preventing another cladding fire disaster. To enhance accountability and ensure the government will seriously consider the recommendations affecting fire safety going forward, the Inquiry recommends that the government be legally required to maintain a publicly accessible record of recommendations made by select committees and public inquiries, and document the steps taken in response.
Key Takeaways
The Grenfell Tower fire is a disaster that could have been avoided.
At present, there remain some 2,000 residential buildings in the UK at 11 metres or over identified has having unsafe cladding, in respect of which remedial works have yet to commence. The recent fire that engulfed a block of flats in Dagenham with “non-compliant” cladding highlights the urgency for remediation: there can be no excuses for history repeating itself.
Developers, landlords and construction professionals with cladding exposures should proactively step up to collaborate on completion of investigations and remedial works, to make homes safe. The Report provides some guidance on the apportionment of liability among the various industry stakeholders, which could potentially be helpful for parties pursuing recoveries / seeking contributions, for projects with unresolved cladding and fire safety claims.
Queenie Wong is an Associate at Fenchurch Law
Affected by the Riots? Insurance and Other Remedies
Insurance
If your property has been damaged due to the recent nationwide spate of riots, your first port of call for remedy should be your insurers.
Affected individuals should notify their insurers of any damage as a result of the riots, as soon as possible.
Most property policies will include standard cover for physical damage to property. However, some policies may contain an exclusion for losses caused by, or in consequences of riot.
The definition of a riot (unless otherwise defined) in an insurance policy is its technical legal meaning as per The Public Order Act 1986 s.1, which requires a minimum of 12 people for the offence of riot.
The Riot Compensation Act 2016
In the event that a claim is declined, for example, due to a riot exclusion or a vehicle only being insured for third-party losses, the Riot Compensation Act 2016 (“RCA”) may provide an alternative route for compensation.
The RCA was introduced to help communities recover more quickly from the impact of rioting where the affected individuals are either inadequately insured or have had their claim declined by their insurer.
If your property is insured, the RCA requires an affected person first to claim via their insurers. However, If the claim is declined in full or part, the affected person can seek further remedy under the RCA.
What the RCA will cover:
- Owners of a building may claim for damage to the buildings structure;
- Tenants/Occupiers may claim for damaged/stolen contents;
- Damaged or stolen business items stored in a vehicle;
- Damaged or stolen stock-in-trade vehicles; and
- Damaged or stolen underinsured vehicles.
What the RCA will not cover:
- personal items held outside of a building;
- consequential loss e.g. loss of trade or rent; and
- personal injury - this is dealt with by the Criminal Injuries Compensation Authority (CICA).
Deadlines:
- An affected individual will have 42 days from the date of the riot ending to claim under the RCA, unless;
- The affected individual has first made their claim under their insurance, in which case they will have 42 days from the date the insurer declines/partially declines the claim.
How to claim via the RCA:
- Claimants should complete and send the GOV.UK dedicated claim form via post or email to the claims authority for the police force in the area where the riot took place.
- The details of where to send the claim form will be found on the police force’s website.
Helpful Links:
Chloe Franklin is an Associate at Fenchurch Law
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
Webinar - The world’s first LEG3 court decision & what it means for the CAR market
Agenda
A Court in the USA has delivered the world’s first legal decision on the most generous of the three London Engineering Group (LEG) clauses related to defect exclusions, LEG3, in the case of South Capitol Bridgebuilders v Lexington Insurance Company. The fact that the Construction All Risks (CAR) market (otherwise known as the Builders’ Risk market) has been waiting for a LEG3 decision for this long means that SCB v Lexington was always going to receive a lot of attention. However, the unrestrained and intemperate language used by the Judge means that there is a risk that the decision will create more heat than light, and has the potential to lead to a reaction by CAR insurers which could negatively affect the interests of policyholders. This case study therefore attempts to take a step back from the eye-catching language used by the Judge in SCB, and to discuss what the future for LEG3 might look like.
Senior Partner, David Pryce is joined by David B. Goodman from Goodman Law Group | Chicago, the firm that represented South Capitol Bridgebuilders.
Webinar - Broker Top Tips!
Agenda
The Top Tips presentation will provide an overview on the scope of brokers’ duties with reference to case law including Infinity Reliance v Heath Crawford [2023], George on High v Alan Boswell & New India Assurance [2023], Bellini v Brit UW [2024] and ABN Amro v RSA [2021]. Addressing common pitfalls to avoid around underinsurance, named insured entities, non-damage BI extensions and DSU reinstatement, we will highlight best practice for brokers to manage potential E&O exposures, in light of recent claims experience.
Speaker
Joanna Grant, Managing Partner, and Amy Lacey, Partner
Webinar - Too Hot to Handle – a cautionary tale about Hot Works Conditions
Agenda
Hot Works Conditions are a staple of contractors’ public liability policies. They require certain precautions to be taken before, during and after the carrying out of Hot Work activities, each of which are designed to reduce the risk of a fire breaking out.
The language and requirements of Hot Works Conditions vary across the market, and difficult questions often arise as to whether a particular activity engages the precautions, the meaning of “combustible”, and whether the precautions are even capable of being satisfied.
Speaker
Alex Rosenfield, Associate Partner
Archer v Ace (or, The Demise Of LEG3?)
Introduction
In the London Market there is, by and large, a common understanding about how LEG3 and the other defects exclusions operate, and what they are intended to do. That doesn’t mean that disagreements don’t arise about how a particular defects exclusion might apply to a particular set of facts, but those disagreements tend to be relatively rare, and the London Market tends to deal with what we call Construction All Risks claims (or what would be known in the US as Builders’ Risk claims), quite well on the whole.
As a result, those using the defects exclusions in the London Market, whether that is insurers, brokers, or the more sophisticated policyholders, tend to overlook the fact that several of the clauses, in both the LEG and DE suites of exclusions, are actually very difficult to understand for those who come to the clauses with the (surely reasonable) aspiration of wanting to determine the meaning of the clauses from the words that they contain.
Towards the end of last year I wrote about the potential impact of the first Court decision anywhere in the world which considered the meaning of the defects exclusion which (along with DE5, which is much less commonly used outside the UK) is intended to preserve the most generous coverage for damage to works under construction, LEG3, in the case of South Capitol Bridgebuilders v Lexington. That case was decided by a Court in the District of Columbia, but applied the Law of Illinois. Now, like buses, a second decision has been handed down in the US which considers LEG3, this time applying the Law of Florida, in the case Archer Western - De Moya Joint Venture v Ace American Insurance Co.
The decision in SCB sounded alarm bells for the Builder’s Risk community in the US, and presumably also for the LEG Committee, who are responsible for the LEG defects exclusion clauses. It raised at least two questions of significance: what constitutes damage for the purpose of triggering a Builder’s Risk policy; and what is the meaning of the LEG3 clause? Its answers to those questions were striking: property that from an English law perspective would have certainly been regarded as merely being in a defective condition was held by the Court in SCB to have suffered damage. With regard to the meaning of LEG3, the Court in SCB appeared to be unable to form a view, and held that the clause was ambiguous: “egregiously so”.
The big question for those who, like me, have an interest in the health of the Builder’s Risk market, was whether SCB would come to be regarded as an outlier decision, or one that would have a meaningful impact? Archer v Ace suggests the latter.
The judgment in Archer concerns an application for summary judgment by the insurer which was denied, and so the issues in the case will continue towards a substantive trial in due course. However, the judgment runs to some 66 pages, and so the issues were considered in some detail. I am not going to try to cover all of the detail but, as with my article on SCB, am going to focus instead of what the most important elements might mean for the Builder’s Risk market.
The facts
Again, I’ll start with a very brief description of the facts, which up to a point may create a sense of Deja Vu for those familiar with the SCB decision. Once more we have a Builder’s Risk claim relating to inadequate concrete in a bridge under construction. We have a disagreement about whether the works under construction were damaged (so as to trigger the Builder’s Risk policy), or whether the works were merely defective (which would not trigger the policy). We have a policy that contains a LEG3 defects exclusion. And we have disagreements about what LEG3 means, and about how one might establish what constitutes the “improvements” with which LEG3 is concerned.
In Archer the policyholder was a design and build contractor for the snappily titled “I-395/SR 836 Reconstruction / Rehabilitation Project” in Miami, Florida, which included the construction of a “signature bridge”. The design of the bridge involved batches of concrete, the production of which included the addition of “fly ash” from a pressurised fly ash silo, which had a mechanical system which was intended to allow specified amounts of fly ash to be added to the concrete batches. At some point between August and November 2020 the pressure relief valve of the silo failed, so that certain batches were “adulterated by an excessive amount of fly ash”.
I am not my firm’s expert on concrete (the “I ❤️ concrete” mug on my colleague Joanna Grant’s desk probably tells you who is) but, as the Court explained in Archer, although cement and concrete are terms that are often used interchangeably, they aren’t the same. Rather, cement is one of the ingredients of concrete, with the other common ingredients of concrete being fly ash, water, and aggregates. So, the presence of fly ash in concrete is not a problem in and of itself. In fact, in one sense, the more fly ash there is in the concrete, the better, as long as using additional amounts of fly ash does not come at the expense of the amount of cement used. High proportions of both fly ash and cement “generally increases the overall compressive strength of the concrete”. The problem comes when, as in Archer, additional amounts of fly ash are used at the expense of the amount of cement used. Then the compressive strength of the concrete is impaired.
When the policyholder became aware that some of the concrete had inadequate compressive strength, it submitted a claim for indemnity for the cost of repairing the concrete. The insurer denied coverage “reasoning the concrete constituted a defective material due to to the excess fly ash, and `because of this defect the material was never in a satisfactory state and therefore was not damaged’”.
Based on the above, the Court was required to address the following questions:
- Did the insured property suffer damage?
- Is LEG3 ambiguous?
In approaching those questions, the Court applied the test for summary judgment under the Law of Florida, which is that “summary judgment is appropriate where there is ‘no genuine issue as to any material fact’, and the moving party is ‘entitled to judgment as a matter of law’” (per Federal Rule of Civil Procedure 56), and that “when deciding whether summary judgment is appropriate, the court views all facts and resolves all doubts in favour of the non-moving party”.
It also applied the test for ambiguity under the Law of Florida, which is that “a policy is ambiguous only when ‘its terms make the contract susceptible to different reasonable interpretations, one resulting in coverage and one resulting in exclusion’”, and that “if there is an ambiguity, then it is construed against the insurer and in favour of coverage”.
As I did in my SCB article, I’ll explain what the Court held in relation to each issue, and add some comments of my own.
Did the insured property suffer damage?
As with SCB, the policy in Archer didn’t define the term “damage”. However, rather than just going to the dictionary, as the judge had done in SCB, the judge in Archer held that the test for damage had been determined by previous cases, and that it “requires a tangible alteration to the covered property”. That test is largely consistent with the test under English law, which requires a change in the physical condition of the insured property, which impairs the value or the usefulness of that property.
On the facts, and based on the high bar required to give summary requirement, the judge was “not prepared to accept the insurer’s argument that damage to the cement did not involve a physical alteration” and so that issue will remain to be determined at trial.
From an English law perspective, the issue is an interesting one, and the correct answer is not obvious. The correct answer will, in my view, turn on what is considered to be the relevant property: the concrete, or the cement?
If I was representing the policyholder, I would be arguing that the relevant property is the cement, and that the cement has become damaged by being overlaid with excessive quantities of fly ash. We know, from cases such as Hunter v Canary Wharf and R v Henderson, that the deposit onto insured property of excessive quantities of benign substances is capable of constituting damage, where the excessive quantities of those substances cost more money to remove than if ordinary quantities of those substances were present. On that basis, I would argue that the cement has undergone an adverse change in physical condition, that impairs both its value and its usefulness by coming into contact with excessive amounts of fly ash: the policyholder started out with cement which had a particular value, and as a result of the change in physical condition that occurred when the fly ash was added, it no longer retains that value.
If, on the other hand, I was representing the insurer, I would be arguing that the relevant property is the concrete, and that it was in a defective condition from the moment it was created (by the mixing of the cement and the fly ash). I would argue that from that point onwards it didn’t undergo any further “tangible alteration”, meaning that the test for damage hasn’t been satisfied. We know from the Bacardi case that, in English law, the creation of a defective finished product doesn’t constitute damage. Although Tioxide tells us that damage does occur when a defective finished product undergoes a change in physical condition that constitutes a further impairment of value or usefulness, that hasn’t happened in Archer, where the concrete was under-strength as soon as it came into existence, and remained that way until discovery.
So, which material should the Court be concerning itself with, the cement or the concrete? Although, as a policyholder representative, I would like to say that the Court should be concerning itself with the cement, I don’t think that’s right. The property which needs fixing is the concrete. The claim is not for the cost of repairing the cement, but for the cost of repairing the concrete.
On the basis of the above, although the insurer wasn’t successful in obtaining summary judgment on the proposition that the insured property hadn’t suffered damage, I expect the insurer to succeed on that issue at trial.
Is LEG3 ambiguous?
As in SCB, the Court in Archer first considered whether it was ambiguous as to whether LEG3 was an extension or an exclusion. The policyholder had argued that LEG3 is “both a coverage grant and an exclusion”, and the Court held that LEG3 “generates a functional extension, or broadening, of coverage”, as compared with the narrower exclusion which LEG3 had replaced by endorsement.
That doesn’t sound right to me, and in my view that doesn’t reflect the position under English Law. Tesco v Constable makes clear that the main insuring clause of a policy can only be widened by other clauses in the policy by using the clearest terms (and ABN Amro then gave an illustration of just how clear those terms needed to be, i.e very).
The second potential ambiguity in LEG3 was what it means to “‘improve’ the original workmanship”. Here, the Court in Archer didn’t develop the arguments any further than in SCB, and simply agreed that LEG3 was ambiguous in that regard.
So, where does that leave us?
In a few short months two different Courts, applying the law of two different States, have both held that LEG3 is ambiguous. In fact that’s being somewhat diplomatic, and it’s probably more true to say that neither Court could work out what on earth LEG3 was supposed to mean. That being the case, if SCB suggested that there was an opportunity for the LEG Committee to take a fresh look at the drafting of LEG3 and the other defects exclusions, Archer suggests that it really has no option, and that it must do so as a matter of urgency.
If LEG3 is going to be amended (as, in my view, it must), then the LEG Committee also has an opportunity to overhaul the other defects exclusions.
Although the DE clauses and the LEG clauses have different origins, it is not helpful for there to be two different suites of clauses which are so similar to each other. In my view it would be much better for there to be a single suite of clauses which captures the best elements of the current clauses.
So:
- There should be a clause which is concerned with causation, and which excludes the cost of repairing any damage caused by mistakes (which would essentially be a re-drafted, simplified, version of DE1 and LEG1, which both do the same thing);
- There should then be two clauses which are concerned with the condition of the relevant property before the damage occurs. One of those clauses would exclude the cost that would have been incurred to repair any defects which were present in property that has become damaged, if those defects had been discovered immediately before the damage occurred (i.e. a re-drafted, simplified, version of LEG2). The other clause would exclude entirely the cost of fixing damage to property which was in a defective condition immediately before the damage occurred (i.e. a re-drafted, simplified, version of DE3, which one might call LEG2A in the new suite);
- The final clause would exclude only the cost of improvements (i.e. a re-drafted, simplified, version of LEG3). My SCB article proposed an amended version of LEG3, and a few months later I would still stand behind that draft.
Those clauses would be made to be bought together. So, a policy with the most limited cover would contain only LEG1. A policy with wider cover would contain both LEG1, and also either LEG2 or LEG2A (whichever is most appropriate for the type of project involved). A policy with the widest cover would contain LEG1, plus one of LEG2 or LEG2A, and also LEG3. Where a policy contains more than one of the new defects exclusions, the policyholder should be able to choose which to apply in the event of a claim, with each exclusion coming with a different deductible. LEG1 would have the lowest deductible. LEG2 or LEG2A would have a higher deductible, and LEG3 would have the highest deductible of all.
That, in my view, would represent a very healthy outcome for insurers, brokers, and policyholders alike, and constitute a positive response to the issues raised by SCB and Archer: a single suite of defects exclusions; which are simply drafted and easy to understand; and which fit together with each other, and are intended to be used in conjunction with each other.
David Pryce is the Managing Partner at Fenchurch Law
Covid “Catastrophe” Triggers BI Reinsurance
The first UK court ruling on the reinsurance of Covid-19 losses has confirmed coverage under excess of loss policies taken out by Covéa Insurance plc (“Covéa”) and Markel International Insurance Co Ltd (“Markel”). Mr Justice Foxton allowed recovery against reinsurers for losses occurring while the underlying policyholders were unable to use their business premises, due to government restrictions, on the basis that the pandemic was a “catastrophe” within the meaning of the reinsurance contracts.
Covéa and Markel paid out a combined total of over £100 million to policyholders for Covid-19 business interruption (“BI”) losses and made claims under their respective reinsurances with UnipolRe Designated Activity Company and General Reinsurance AG. Disagreements arose concerning the scope of cover under the reinsurance contracts, and a consolidated judgment was given in two separate appeals under s.69 of the Arbitration Act 1996, against arbitration awards dated January and July 2023. In summary, the appeals raised the following issues:
- Whether the relevant Covid-19 losses arose out of and were directly occasioned by one catastrophe on the proper construction of the reinsurances. Both arbitration awards found that they did; and
- Whether the respective Hours Clauses in the reinsurances, which confined the right to indemnity to “individual losses” within a set period, meant that the reinsurances only responded to payment in respect of the closure of insured premises during the stipulated period. The Markel arbitral tribunal found that the relevant provision did have that effect, while the tribunal in the Covéa arbitration found that it did not.
The Judge found in favour of the reinsureds on both issues.
Loss Arising from One Catastrophe
Coincidentally, both Covéa’s and Markel’s losses arose through direct insurance of nurseries and childcare facilities, which had been forced to close from 20 March 2020 by the UK government’s Order of 18 March 2020. The reinsurance contracts contained similarly worded Hours Clauses based on the LPO 98 market wording, including a form of aggregation provision operating by reference to a specified number of hours’ cover for any “Event” or “Loss Occurrence” (terms previously held to have the same meaning), defined as “all individual losses arising out of and directly occasioned by one catastrophe”.
For any Event or Loss Occurrence “of whatsoever nature” which did not include losses arising from specified perils (such as hurricane, earthquake, riot or flood) listed in the Hours Clauses, the limit was 168 hours (i.e. 7 days). Infectious disease was not a named peril and the 168 hours limit applied.
In circumstances where the arbitral awards were based on mixed findings of fact and law, it was common ground that the court could not interfere on a s.69 appeal unless the arbitral tribunal either had erred in law or, correctly applying the relevant law, had reached a decision on the facts which no reasonable person could have done.
On general principles of construction, the Judge endorsed the comments of Mr Justice Butcher in Stonegate v MS Amlin [2022] that “in considering whether there has been a relevant ‘occurrence’, the matter is to be scrutinised from the point of view of an informed observer placed in the position of the insured” (per Rix J. in Kuwait Airways [1996]).
Reinsurers argued that the gradual unfolding of the pandemic did not qualify as a “catastrophe” under the reinsurance policies, taking account of the historical development of property excess of loss market wordings, which was said to implicitly demonstrate the requirement for a sudden and violent event or happening, which could not be established on the underlying facts. Further, reinsurers claimed that a catastrophe is a species of occurrence or event that must satisfy the “unities” of time, manner and place, applied by Lord Mustill in Axa v Field [1996].
The Judge concluded that terms of the reinsurance contracts supported a generous application of the unities test, given the requirements for losses under multiple policies, with a duration potentially exceeding 504 hours (the period specified in relation to flood perils, i.e. 21 days), within broad geographical limits, indicating that a covered catastrophe could have a potentially wide field of impact.
While acknowledging the difficulties inherent in distinguishing between a “catastrophe” properly so-called, as an appropriate basis for aggregation, and a series of discrete losses sharing some common point of ancestry, the Judge held for purposes of the reinsurance claims under consideration that a catastrophe:
- Must be capable of directly causing individual losses, likely in most cases to exclude “states of affairs”.
- Is a coherent, particular and readily identifiable happening, with an existence, identity and “catastrophic” character arising from more than the mere fact that substantial losses have occurred.
- Will be identifiable, in a broad sense, as to its time of coming into existence and of ceasing in effect.
- Involves an adverse change on a significant scale from that which proceeded it.
Applying these principles to the findings in each award, the Judge noted that both tribunals had referred to the outbreak of Covid-19, and the resulting disruption of life in the UK, leading up to and necessitating the 18 March Order, as a catastrophe. In circumstances where the various government directives, including the 18 March Order, were rational and considered measures taken in the public interest, it was not necessary to explore the issue of whether a government order in isolation could be viewed as a catastrophe, since “the pandemic and the response thereto could not be disentangled”, an approach consistent with the decisions in Star Entertainment v Chubb Insurance Australia [2021] and Gatwick Investment v Liberty Mutual [2024].
Interpretation of the Hours Clauses
Covéa and Markel argued that all BI losses arising from the 18 March Order were reinsured, notwithstanding the BI losses continuing after expiry of the 168 hour period. The Covéa arbitral award endorsed this approach, determining that the reference to “individual loss” meant “a loss sustained by an original insured which occurs as and when a covered peril strikes or affects insured premises or property”. However, the Markel tribunal found in favour of the reinsurer, reasoning that it was “natural to think that BI losses occur day by day”, and therefore construing the relevant words as not “dealing with causation but with the occurrence of a particular loss”, since the “subject matter of an ‘Event’, its duration and extent, and its occurrence, are all referenced to losses not perils.”
The effect of the Markel tribunal’s finding was that only 168 hours of BI losses could be recovered from the reinsurer (although the BI had in fact extended until at least June 2020, when the relevant restrictions were first lifted), so that most losses fell outside the scope of cover and Markel was unable to reach the specified attachment point under the reinsurance policy.
In reconsidering this issue on appeal, the Judge was not persuaded that a clear line could be drawn between damage and non-damage BI, as contended by reinsurers, since even the former might continue to manifest after the specified hours period, for example by damage worsening over time. Further, the Court concluded that the “wait and see” analysis applied by the Markel tribunal, premised on the occurrence of BI losses on a day-by-day basis, may lead to “uncommercial consequences” and does not sit easily with the findings in Stonegate and Various Eateries v Allianz [2022], which treated the closure orders as having immediate impact on the insured property with continuous effect, analogous to physical damage to buildings; or with the Supreme Court’s decision in FCA v Arch [2021], which suggested that the correct causal sequence for non-damage BI approximates that of damage-related BI.
The Court therefore dismissed the reinsurers’ appeals as to the meaning of “catastrophe” and allowed Markel’s appeal against the conclusion of the arbitral tribunal as to the effect of the Hours Clause.
Practical Implications
Figures published by the Financial Conduct Authority in March 2023 indicate that, since conclusion of the Test Case in 2021, insurers have paid around £1.4 billion in BI claims. The Commercial Court’s decision in this case provides comfort for cedants with ongoing recoveries, significantly restricting reinsurers’ ability to challenge the presentation of Covid-19 losses under similarly worded excess of loss property policies. It will be interesting to see how the decision may be applied in subsequent cases involving aggregation of losses across multiple jurisdictions. Given that reinsurance contracts typically provide for resolution of disputes by way of (confidential) arbitration proceedings, this clear judgment in favour of the cedants is particularly illuminating.
UnipolSai Assicurazioni SPA v Covea Insurance PLC [2024] EWHC 253
Amy Lacey is a Partner at Fenchurch Law
Slowly but surely: policyholders make progress in their fight to recover Covid-19 BI losses from insurers
Gatwick Investment Ltd & Ors v Liberty Mutual Insurance Europe SE [2024] EWHC 83 (Comm)
Introduction
Judgment has now been handed down following an eight-day preliminary issues hearing in October/November 2023 at which a number of different businesses, from a variety of industries, including bowling alleys, theatres, hotels, pubs, retail stores and a race course, sought to advance claims against their insurers for recovery of their COVID-19 losses.
It is the latest judicial consideration of prevention of access/non-damage denial of access wordings following: (i) the Divisional Court judgment in the FCA test case, which found that prevention of access/non-damage denial of access type wordings did not respond (a point that was not on appeal to the Supreme Court, and therefore did not benefit from a fresh look at the correct causation analysis); and (ii) Corbin & King, where further consideration of these types of wording found that there was cover based on the Supreme Court causation analysis and other factors.
The majority of the policyholders were insured by Liberty Mutual Insurance Europe (“LMIE”), as either the lead or sole insurer. There were a number of LMIE wordings and policy arrangements for the court to consider, albeit with very similar issues. Another case against Allianz Insurance Plc (“Allianz”) was heard alongside the LMIE group of claims, on a different wording, but again with similar coverage issues for determination.
In broad terms, the key preliminary issues that the court was asked to consider fell into the following categories:
- Trigger & Causation
- Limits
- Furlough
Not all issues were live in each of the claims. A full list of the answers to all preliminary issues can be seen in section H of the judgment.
Fenchurch Law acted for Hollywood Bowl and International Entertainment Holdings.
Trigger & Causation
LMIE’s starting position on causation was that Corbin & King was wrongly decided, and instead the correct analysis was that of the Divisional Court in the FCA Test Case. However, insurers ultimately accepted prior to the hearing that they would not be successful on this point at first instance, and instead were granted permission to appeal at a later date.
Despite declarations made both by the Divisional Court and the Supreme Court in the FCA test case, and then debated again in Corbin & King, insurers ran a number of arguments including that “statutory authority” assumed a peril which concerned restrictions imposed by bodies such as the police, or other bodies with authority from or created by statute, i.e. bodies with a local remit.
The court disagreed on all counts, and held that the actions taken by government were the “paradigm example” of action by a “Statutory Authority”. The judge agreed with policyholders that there was cover for interferences that resulted from the action of any person, body or entity which has lawful authority derived from statute or statutory instrument. It was also sufficient that person or body responsible for the relevant interference was exercising authority which was derived from statute.
In respect of the Allianz wording, the court found that a case or cases of Covid-19 did not amount to an “incident” within the meaning of an “incident likely to endanger human life” (notwithstanding the court also accepting that a case or cases of Covid-19 was likely to endanger human life). Furthermore, the term “policing authority” did not encompass the central government or Secretary of State for Health and Social Care, the court found that it instead refers to the police or other bodies whose function it was to ensure that the law is obeyed and enforced.
Limits
On the LMIE wordings the policyholders argued that the sub-limits applied on a per restriction and per premises basis, or alternatively, that it applied to any one occurrence. Insurers argued that sub-limit was an aggregate limit applicable to all claims under the relevant clause, irrespective of the number of separate restrictions, and regardless of the policies being composite or not.
The court’s findings were broadly as follows:
- The policies provided cover on a per occurrence basis (i.e. each occurrence was subject to the relevant sub-limit), with no annual aggregate limit for claims under the relevant clause;
- Relying on Corbin & King, the policyholders with composite polices (a policy which records the interest of a number of different companies or insureds in a single document, but with the effect that there was separate contract of insurance between the insurer and each policyholder) were not subject to an aggregate limit that applied across all insureds. Moreover, there was a sub-limit per policyholder company, per occurrence; and
- Despite the use of “limit” instead of the defined term “limit of indemnity”, which appeared elsewhere within the policy wording, the court considered there was no material distinction between the two. As a result, the single policyholders with multiple premises could not recover on a per premises basis, but instead per occurrence aggregation with no annual aggregate limit.
The Allianz wording, despite not extending to the central government’s response to the Covid-19 pandemic, was found to apply to each company (it was already agreed that there was a composite policy on these particular facts). Furthermore, in circumstances when multiple premises were owned by one insured, there was no basis to treat individual premises as one unit based on the terminology “interference with the Business”, or elsewhere in the relevant wording. Accordingly, the sub-limit applied to “any one claim”, and therefore potentially multiple premises, subject to proving an “incident” within the relevant radius of each of the premises.
Furlough
The issue of furlough was previously considered by the court in Stonegate v MS Amlin & Ors, where it was held that furlough payments were to be taken into account under a savings clause that provided for the reduction of costs normally payable out of turnover that ceased or were reduced as a result of the covered event.
Despite detailed submissions, the court reached the same view on the basis that the issue before it was the same as that considered in Stonegate, a number of the points made had already been rejected, and it was therefore appropriate to follow the decision. In respect of arguments made on causation, the court agreed with insurers that furlough could not be regarded as wholly separate and divorced from the restrictions which were introduced in consequence of the widespread prevalence of COVID-19, which happened prior to the introduction of the CJRS scheme. Furthermore, it was not appropriate to take a different (and stricter) approach on causation in the context of the savings clause than in the context of the insured peril - there was a sufficient proximate causal connection between the insured peril and furlough payments that reduced the wage costs of a business.
What does it mean and what happens next?
This most recent Covid-19 judgment is welcome news for policyholders, again reaffirming the decision in Corbin & King v Axa. However, as noted above, insurers have been granted permission to appeal on causation and we expect that those with wordings affected by this issue will be forced to await the outcome of that appeal, despite now having a number of significant authorities supporting their claims.
In the addition to insurers being granted permission to appeal on causation, policyholders were granted permission to appeal the decision on furlough, which remains of particular importance to the wider insurance market. Hopefully a decision at appellate level will provide the market with closure on a point that sometimes feels almost political – did the government really intend for shareholders of large insurers to benefit from taxpayers’ money?
All other grounds of appeal were refused by the first instance judge, meaning that the parties will have to seek permission directly from the court of appeal. More to come on that as matters progress.
The judgment confirmed a “per occurrence” based recovery for those on the LMIE wordings, with the issue of identifying the relevant occurrences to be determined at a later date. However, as a starter for ten, we anticipate that restrictions such as the nationwide lockdowns and local lockdowns will be the obvious first candidates.
Importantly, the recent judgment will come as particularly welcome news to those with composite polices, who in the absence of specific wording to the contrary should continue to pursue claims for each insured entity, and also multiple premises in certain circumstances.
Authors
Anthony McGeough, Senior Associate
Too Hot to Handle: Everything You Always Wanted to Know About Hot Works Conditions (But Were Afraid to Ask)
Introduction
Hot Works Conditions are a staple of contractors’ public liability policies. They require certain precautions to be taken before, during and after the carrying out of Hot Work activities, each of which are designed to reduce the risk of a fire breaking out.
The language and requirements of Hot Works Conditions vary across the market, and difficult questions often arise as to whether a particular activity engages the precautions, the meaning of “combustible”, and whether the precautions are even capable of being satisfied.
This short article considers some of the key issues.
The nature of Hot Works Conditions
Hot Works Conditions are usually written as “Conditions Precedent to Liability”. Those are fundamental terms of insurance contracts and must be complied with strictly before an insurer can become liable for a particular claim.
In some cases, the condition might not actually include the words “Condition Precent to Liability”, but it will have that effect if the consequences of breaching it are made clear. So, the condition might say: “We [the insurer] will not pay a claim unless you will have complied with the following …”.
The Courts generally treat conditions precedent to liability as onerous or draconian terms. This means that it is incumbent on the insurer to spell out any such terms clearly so that the insured knows precisely what they have to do – or else they are not going to be bound by them.
The meaning of “Hot Work”
Hot Work Conditions often define the term “Hot Work” precisely. Typically, that will cover any activity which uses or produces an open flame, or any other activity which could ignite any combustible or flammable material.
While that may seem relatively straightforward, the question of whether the precautions apply may turn on whether the condition refers to activities that apply heat, or which merely generate it. For example, suppose a contractor wishes to use an angle grinder and the definition of ‘Hot Works’ encompasses activities that only “apply heat”. Strictly speaking, a grinder does not apply heat – it merely generates it – and so the precautions would arguably not apply. Conversely, if the contractor wished to use a gas torch, then that would engage the precautions, as that activity clearly does apply heat.
Actions required in respect of combustible materials
Hot Works Conditions always include a hierarchy of steps which, before starting work, the insured must take in relation to combustible materials. Those are that the insured must:
- Examine the area of works for combustible materials; and
- If the materials are moveable, move them a certain distance away from the Hot Works.
- If the materials are not moveable, cover them with non-combustible materials.
Taking each of the above in turn:
The examination
The requirement to carry out a pre-work examination of the area of work will often be highly circumscribed. For example, it may require a specific individual in the insured’s organisation (usually the fire watcher or ‘responsible person’) to conduct the examination at a particular time, and in a particular way.
On the other hand, the requirement may contain no stipulation as to how the property should be examined, or by whom. In such a case, it would arguably be open to an insured to delegate the examination to someone outside of the insured’s organisation, or to carry out the inspection by way of a desktop study or video link.
In any given case, the insured must satisfy itself that the examination was comprehensive, and that it acted reasonably in carrying out the examination in a particular way.
What does “combustible” mean in this context?
As a matter of science, almost any material is combustible if heat is applied at a sufficiently high temperature. However, “combustible” has to be construed in the context of a commercial insurance policy, and with regard to its natural and ordinary meaning.
The Oxford Dictionary of English (3rd Ed.) defines “combustible” as “able to catch fire and burn easily” and other dictionaries give similar definitions. Accordingly, it is that meaning – not its scientific meaning – to which a Court must have regard. That is supported by the decision in Wheeldon Brothers v Millenium Insurance [2018] EWHC 834 where the Court held, when referring to the term “combustible”:
“If the underwriters had intended “combustible” to have a meaning other than that understood by a layperson interpreting the Policy, it was for underwriters to make that express in the Policy. I find that “combustible” as used in the Policy is the meaning which would be understood by a layperson. To take the example given by the experts, a layperson would not consider diamonds and metals to be “combustible.”
The question then arises as to whether “combustible” should also be interpreted with regard to the specific hot works being undertaken. For example, a gas torch is a more potent source of ignition than an angle grinder, and a given material may be readily combustible in the presence of a gas torch, but not in the presence of a spark from an angle grinder.
In our view, therefore, the nature of the hot work activity should be taken into account when considering whether a material is combustible (and therefore whether it should be moved or covered), as that makes more commercial sense in the context of an insurance policy.
Finally, an insured must have reasonable knowledge that a material is combustible in order to take the required precautions. So, an insured would be expected to know that an oil-soaked rag is combustible and so would need to move it. By contrast, if a non-combustible material had secretly been doused in petrol without the insured knowing (nor being reasonably capable of discovering that), the obligation to remove or cover it would not apply.
The requirement to move or cover up combustible materials
Several points arise on the construction of this requirement.
Firstly, while it may go without saying, the requirement to move combustible materials applies only to materials that are within a certain distance of the hot work activities (usually 6 or 10 metres). Therefore, there is no requirement to remove or cover material which is further away.
Secondly, the requirement to cover up combustible material would apply only to material that is not being worked upon. That is supported by the decision in Cornhill Insurance PLC v D E Stamp Felt Roofing Contractors Ltd [2002] EWCA Civ 395, in which the Court agreed with the Insured roofing contractor that it would be “absurd” to cover up a plywood deck of a roof over which roofing felt was to be laid.
Finally, consideration must be given to whether it is even possible to remove or cover the combustible material at all. In Milton v Brit Insurance [2016] Lloyd’s Rep IR 192, in which the Court considered the meaning of a condition which required insured premises not to be ‘left unattended’, it was held that the condition “clearly only applies to the extent possible, without requiring the insured to fulfil an impossible obligation … it would make no commercial sense for the clause to require the insured to do something which was impossible …”
So, imagine a roof consisted of two layers, the inner layer of which was made of combustible timber and was inaccessible. In that situation, it would plainly not be possible to cover the timber layer, and so, applying Milton, an Insurer cannot decline a claim on the basis that the requirement has not been satisfied.
The requirement to take reasonable precautions
Hot Works Conditions frequently include a requirement that the insured takes “reasonable precautions to prevent damage”. It is well-established principle of insurance law that an insurer can only rely on a reasonable precautions clause where it shows recklessness by the insured. In particular, in Fraser v Furman [1967] 1 WLR 898, the Court held that it must be “shown affirmatively that the failure to take precautions … was done recklessly, that is to say with actual recognition of the danger and not caring whether or not that danger was averted”.
So, acting carelessly will not be sufficient. The requirement is that the insured must be reckless and not care about its conduct.
Other precautions
As stated above, the requirements of Hot Works Conditions vary across the market but will typically include a requirement to appoint a fire watcher, to have a fire extinguisher available for immediate use, and to carry out a thorough post-work fire check for a period of no less than 30 minutes.
A detailed examination of those requirements is beyond the scope of this note, but whether an insured has satisfied the requirements is likely to be fact sensitive.
The consequences of breaching a Hot Works Condition
If an insured breaches a particular term of a Hot Works Condition, then, applying Section 11 of the Insurance Act 2015 (“Section 11”), Insurers will still have to pay the claim if the insured can show that any breach could not have increased the risk of damage occurring in the circumstances in which it occurred.
Section 11 is intended to prevent an insurer from relying on a failure to comply with a policy term where the loss that occurred is unrelated to the breach. So, it would prevent an insurer from relying on a breach of a burglar alarm where the loss is caused by falling debris from an aircraft. While that example is relatively straightforward, the position is more complicated in the context of breaches of hot works conditions and fire, because there is a link between the term in question and type of loss.
There are currently no authorities on the meaning and effect of Section 11, and its precise operation is a matter of legal debate. In particular, it is unclear whether the test requires there to be a causal link between the breach and the loss, or not.
Absent any authorities, it is open to an insured to argue that Section 11 that the test is one of causation. So, if an insured could establish that a fire started as a result of a discarded cigarette for example, and notwithstanding the fact that it had not complied with the Hot Works Condition strictly, it would be open to argue that compliance made no difference, and that Insurers must pay the claim.
Summary
The consequences of Hot Work activities can be devastating for a contractor, which may face large claims against them if property is damaged or destroyed. While public liability insurance is intended to protect an insured against that risk, insureds nevertheless need to be fully aware of their obligations under these conditions, and the consequences which could follow in the event of a non-compliance.
Alex Rosenfield is an Associate Partner at Fenchurch Law