The world’s first LEG3 Court decision, and what it means for the Builders’ Risk market
Introduction
27 years after the London Engineering Group (“LEG”) introduced its suite of defects exclusions, a Court in the District of Columbia in the USA has delivered the world’s first Court decision on the most generous of the three LEG clauses, LEG3, in the case of South Capitol Bridgebuilders v Lexington Insurance Company, No. 21-cv-1436, 2023 US Dist. LEXIS 176573 (D.D.C. Sep 29, 2023). That fact that the Builders’ Risk market (or what we in the UK would call the Construction All Risks, or “CAR” 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 Builders’ Risk insurers, particularly in the US, which could negatively affect the interests of policyholders. That would be a great shame, as the availability of appropriate Builders’ Risk insurance is essential for the global construction community. This article therefore attempts to take a step back from the eye-catching language used by the Judge in SCB, and to discuss what a constructive response to the case might look like.
The facts
I’ll start with a very brief description of the facts. The policyholder, SCB, was hired to build the new Frederick Douglas Memorial Bridge, which is a stunningly designed bridge which crosses the Anacostia River in Washington DC, and which is the biggest public works project in the history of the District of Columbia. The design involves three consecutive steel arches on either side of the bridge, which are supported by concrete abutments on either side of the river, and by two v-shaped concrete piers which provide support towards the centre of the river.
The concrete was placed in each of the abutments and piers in separate pours, with workers standing within the formwork and vibrating the concrete in order to achieve even placement. Due to the vibration being carried out inadequately the concrete never achieved even placement, and when the concrete had dried and the formwork was removed, the policyholder saw that the concrete contained voids, referred to as “honeycombing”. The honeycombing diminished the concrete’s weight bearing capabilities, and meant that the concrete had to be repaired so that an even distribution of concrete, without honeycombing, could be achieved.
The policyholder had the benefit of a Builder’s Risk insurance policy issued by Lexington, which contained the 2006 version of the LEG3 defects exclusion. The policyholder submitted a claim to the insurer on the basis that the honeycombing of the concrete constituted “damage” which triggered the main insuring clause of the policy, which was not excluded by LEG3. The insurer refused indemnity on the basis that, in order for there to be damage which triggered the policy it was not sufficient for the honeycombed concrete components to have been in a defective condition from time they were made. Rather, for there to be damage, a subsequent alteration in the physical condition of the concrete components was required.
The insurer also argued that, even if the concrete was damaged, the LEG3 clause excluded coverage because the whole of the remedial works constituted an improvement, on the basis that “if something broken gets fixed, hasn’t that thing been improved?”.
Based on the above the Court (which, although it was in the District of Columbia was applying Illinois Law) was required to address the following questions:
- Did the honeycombing of the concrete components constitute damage, so as to trigger the main insuring clause of the policy?
- Is the meaning of the LEG3 clause unambiguous?
- If the meaning of the LEG3 clause is ambiguous, how should that ambiguity be resolved?
I’ll explain what the Court held in relation to each issue, and add some comments of my own, in turn.
Did the honeycombing comprise damage?
Lawyers from common law jurisdictions who work regularly with policies which are triggered by property damage, whether in relation to works under construction, completed works, or products, will be familiar with the extensive body of authority from around the world in relation to the question of what constitutes “damage”. In this respect it is common for the Courts of a variety of different jurisdictions to look to decisions in other jurisdictions to help inform that issue, not because decisions from other jurisdictions are binding, but because they can be helpful in understanding an issue which has received a significant amount of prior judicial attention.
The insurer in SCB appears to have drawn a significant amount of authority to the Court’s attention, but the Judge could not have been less interested in it (“Lexington does not bother to explain how these non-binding cases are analogous, or why the Court should consider them persuasive”). Ouch. Had the Judge taken the view that the damage authorities were persuasive then the outcome of the case would almost certainly have been different, because most common law jurisdictions clearly do regard damage as a “happening” (which requires a change in physical condition), as opposed to a “condition” (which does not require a change in physical condition). In SCB’s case, there was no change in physical condition, as the concrete components contained honeycombed voids from the outset. According to the authorities in most common law jurisdictions, and certainly in England & Wales, the honeycombing would therefore have meant that the concrete components were in a defective condition from their creation, and the lack of a subsequent change in physical condition would therefore have meant that they didn’t suffer damage.
However, the Judge in SCB not only took the opposite view, but did so in the clearest terms. Asking himself the question of “whether ‘damage’ is properly understood to include the costs of fixing the concrete flaws that weakened the bridge”, he found that “the answer is unambiguously, yes”. So, how did he reach a view that for lawyers in other jurisdictions would find so surprising?
The reason starts with the fact that “damage” was not a term that was defined in the policy issued by Lexington. That meant that under Illinois Law the way to understand the meaning of the term was not to consider any authorities, but to look instead to “plain, ordinary, and popular meaning of the term”. To determine that meaning the Judge looked at Black’s Law Dictionary (10th ed., 2014), which defined damage as “loss or injury to person or property” or “any bad effect on something”.
Applying the above definition, the Judge found that the policyholder’s inadequate vibration of the concrete “caused a decrease in the weight bearing capacity of the bridge and supporting structures”, and that “a decreased weight bearing capacity is surely an injury, or at the very least a bad effect, on the bridge and its support structures”. That analysis may be true as far as it goes, but it can only be justified on the basis that the “decreased capacity” exists in comparison with the intended capacity, and not as compared with a capacity which existed before a change in physical condition which resulted in the decrease. The problem with that approach, is that a decreased capacity as compared with an intended capacity is describing contract works which are in a defective condition, and Builders’ Risk policies are not intended to cover the cost of repairing defective but undamaged property. That is a commercial risk for builders which the Builders’ Risk insurance market isn’t, and never has been, prepared to insure.
That problem is not a small one, in practice. If it is right that, under Illinois Law, property which is in a defective condition triggers an insuring clause which requires “damage”, it gives rise to a risk that Builder’ Risk insurers in that jurisdiction (and other similar jurisdictions) will use another way to ensure that they aren’t required to pay for the cost of repairing defective but undamaged property. One way to do so would be to withdraw the availability of the more generous LEG clauses (LEG2 & LEG3), and restrict cover to LEG1, which excludes the cost of repairing any damage which is caused by mistakes of any kind. That would be a significant backward step for the Builders’ Risk market, and would be a terrible development for affected policyholders.
Fortunately, there is a simple fix, which is that if a Builders’ Risk policy is issued in a jurisdiction which, like Illinois, looks to the dictionary definition of damage if it isn’t defined by the policy, rather than to any of the damage authorities, then insurers and brokers need to ensure that their policies do include a definition of damage. I would suggest the following (other formulations are available):
“Damage means an accidental change in physical condition (whether permanent and irreversible, or transient and reversible) of insured property, which impairs either the value or the usefulness of that property”.
Is the meaning of LEG3 unambiguous?
Both policyholder and insurer argued that LEG3 was unambiguous. The policyholder argued that LEG3 unambiguously provided cover for the cost of repairing the honeycombed concrete components, and the insurer argued that LEG3 unambiguously excluded cover. The Judge disagreed with both parties, finding that “LEG3… is ambiguous, egregiously so”. Ouch (again). Is it, though?
Again, it is important to remember that the Judge was applying Illinois law to the question of ambiguity, and Illinois Law in this respect isn’t necessarily going to be the same as other jurisdictions. It certainly isn’t the same as the approach that would be taken by the English Courts, which only find that a clause is ambiguous if there are competing interpretations which the Court is unable to choose between. According to the Judge in SCB, however, under Illinois Law a clause is ambiguous if it is “subject to more than one reasonable interpretation”. That is a very low bar, and the Judge may well have been right that the low bar was met in this case. Of course, that does not mean that a Judge applying a different test, with a higher bar for ambiguity, wouldn’t have been able to make a finding about what LEG3 does actually mean. However, the SCB Judge’s (too) scathing comments about the drafting of LEG3 may have the positive effect of prompting a re-draft of the clause which addresses an issue with the clause which clearly exists in theory, but which thankfully I haven’t yet seen in practice.
The specific problem with the way in which LEG3 is drafted is that it mixes up causation on the one hand, and the condition of the relevant property, on the other. Defect exclusions should be concerned with either causation (which is the intended focus of LEG1 and DE1) or with the condition of the relevant property (which is the intended focus of DE2, DE3, and DE4), but not with both. The problem with LEG3 is that the exclusionary words which begin the clause (“all costs rendered necessary by [mistakes]…”) are concerned with causation. That part of the clause is a full exclusion for the cost of fixing mistakes of all types, whether workmanship, design, materials, specification, or plan, just as with LEG1 or DE1. There is then a write back (“should damage … occur to any portion if insured property containing any of the said defects…”) which brings back cover for the cost of fixing damage to insured property where the mistakes have been built into the works (with the end of the clause limiting the write back so that it only excludes improvement costs). The problem with that is that the write back is not expressed to extend to cover the cost of repairing damage caused by mistakes which are sustained by property which is not in a defective condition prior to the occurrence of the damage. A literal reading therefore suggests that LEG3 provides greater cover for the cost of fixing damage to defective insured property than it does for the cost of fixing damage to un-defective insured property. That was clearly not the intention of the LEG committee when drafting LEG3, and it is not how CAR insurers in the UK approach LEG3, but unfortunately it is what LEG3 actually says.
Given that damage is required to trigger the insuring clause of a Builders’ Risk policy then, as long as damage is properly defined, the cost of fixing defective but undamaged property should never trigger the insuring clause, and so does not need to be excluded. That being the case, the intention of the current LEG3 clause (which is to only exclude improvement costs) could be achieved by the following much simpler formulation:
“The insurer shall not be liable for that cost incurred to improve the original material workmanship design plan or specification”.
Wouldn’t the above formulation be much easier for policyholders to understand? Clearly yes. In my view nothing useful from the current clause would be lost, but I would be very interested to hearing from anyone who takes a different view (david.pryce@fenchurchlaw.co.uk).
Resolving the “ambiguity”
Having found that LEG3 was ambiguous, the consequence under Illinois Law was that the clause must be “construed against its drafter”, which in this case meant that the clause needed to be construed against the insurer, Lexington. That was the case notwithstanding that, of course, LEG3 is a standard clause that wasn’t in fact drafted by either of the parties in SCB, but by the LEG committee in London, and has been commonly used by parties to Builders’ Risk insurance policies across the world for more than a quarter of a century.
Outcome & final comment
Given the above, the Judge found wholly in favour of the policyholder. As a policyholder representative I can only applaud the effectiveness of the arguments made by SCB’s attorneys, but I am concerned about the potential for the outcome to have a negative effect on Builders’ Risk policyholders in the future. I hope the suggestions above can help those who, like me, want to ensure that doesn’t happen.
I’d like to finish with a final comment on a point that didn’t ultimately affect the outcome in SCB, but which touches on a point of general importance, which is the issue of how to assess improvement costs, which the Judge addressed in an interesting, and quite neat, way. What constitutes improvement costs is an issue that comes up frequently in practice, and there remains no clear guidance from the Courts on how improvement costs should be determined.
In SCB the insurer argued that fixing property which had been defective before the damage occurred must necessarily constitute an improvement. The extension of that argument is that the cost of fixing design mistakes which have resulted in damage must all constitute improvement costs. That interpretation is not only contrary to the intention of LEG3, but is also wrong as a matter of principle for the reasons explained in our previous article (“You have to be pulling my LEG(3)"). The way the Judge dealt with the point in SCB was as follows:
“The context of [LEG3] suggests that to improve means to make a thing better than it would have been if it were not for the defective work”.
That formulation, in my view, works well as far as it goes, and is a useful way to look at what constitutes improvement costs where damage has been caused by workmanship failures. However, it is less clear that it works for damage which is caused by design mistakes, which need to repaired by utilising a superior and more expensive design the second time around. It remains my view that the best way to assess improvement costs is by adopting the three-stage test outlined in our earlier article.
David Pryce is the Managing Partner at Fenchurch Law
Bubble Trouble: Aerated Concrete Claims and Coverage
Reinforced autoclaved aerated concrete (“RAAC”) is a lightweight cementitious material pioneered in Sweden and used extensively in walls and floors of UK buildings from the 1950’s to 1990’s. Mixed without aggregate, RAAC is ‘bubbly’ in texture and much less durable than standard concrete, with an estimated lifespan of 30 years. The air bubbles can promote water ingress, causing decay to the rebar and structural instability.
RAAC is often coated with other materials and may be difficult to detect from a visual inspection. Invasive testing will often be required to investigate the condition of affected areas and evaluate operational risks. In some instances RAAC structures have failed with little or no warning, posing a significant risk to owners, employees, visitors and occupants. Aging flat roof panels are especially vulnerable from pooling rainwater above.
Buildings insurance is designed to cover damage caused by sudden and unforeseen events, whilst ordinary ‘wear and tear’ is treated as an aspect of inevitability and usually expressly excluded. Where damage occurs, it will be a matter of expert evidence as to the relative impact of contributing factors. English law recognises a critical distinction between failure due to inherent weakness of insured property, and accidental loss partly caused by external influences. Depending on the specific policy wording, unexpected consequences of a design defect or flawed system adopted by contractors may provide the requisite element of fortuity, notwithstanding the concurrent effects of gradual deterioration under ordinary usage (Versloot Dredging BV v HDI Gerling (The DC Merwestone) [2012]; Prudent Tankers SA v Dominion Insurance Co (The Caribbean Sea) [1980]).
Original designers and contractors responsible for RAAC elements in affected buildings in many cases will no longer exist, adding further complexity to potential liabilities. Given that the widespread use of RAAC ended in the 1990’s, it is likely that limitation (even under the new 30-year period for Defective Premises Act claims, if applicable) will have expired, though a fresh period for bringing such claims can be triggered where subsequent refurbishment works have been carried out. To the extent that RAAC related claims are not time barred, professional indemnity insurance may respond subject to operation of any relevant policy exclusions.
Structural problems associated with RAAC were first identified in the 1980’s and multiple collapses have been reported in recent years at public buildings including schools, courts and hospitals. The Institution of Structural Engineers has advised that many high rise buildings in the private sector with flat roofing constructed in the late 20th century may contain RAAC, which could include residential blocks, offices, retail premises and hotels. Landlords and designated duty holders responsible for ‘higher risk buildings’ should factor RAAC assessments into safety case reports pursuant to the Building Safety Act 2022.
RAAC represents another unfortunate legacy issue in the UK construction landscape requiring urgent steps from government and industry stakeholders, to implement a coordinated and transparent approach to proactively manage safety risks.
Amy Lacey is a Partner at Fenchurch Law
Developments for Developers: Court of Appeal Guidance on Building Safety Act Claims
In a landmark decision providing guidance on limitation issues and application of the Building Safety Act 2022 (“BSA”), the Court of Appeal has held that:
- Developers can recover economic loss from professional consultants responsible for negligent design, despite having sold the buildings prior to discovery of defects;
- Developers that commission construction works may be owed duties under s.1(1)(a) of the Defective Premises Act 1972 (“DPA”), whilst simultaneously owing duties to owners or occupants under s.1(1)(b);
- Extended limitation periods introduced by the BSA apply to ongoing proceedings, as if they had always been in force; and
- Developers can establish contribution claims against professional consultants based on notional liability to property owners for the ‘same damage’, without any formal claims having been commenced against the developers by the owners.
Background
BDW Trading Ltd (“BDW”) as developers engaged URS Corporation Ltd (“URS”) as consulting engineers in relation to various blocks of flats across the UK. Cracking reported in 2019 in the structural slab of a building designed by URS led to BDW undertaking a review of all related projects, and discovering that Capital East, on the Isle of Dogs, and Freemens Meadow, in Leicester, had been negligently designed. Whilst no cracking or other physical damage was identified at these developments, the existing structures were found to be dangerously inadequate and residents in part of Capital East were evacuated.
Freemens Meadow had achieved practical completion in 2012 and Capital East in 2008. By the time that defects came to light, BDW no longer had any proprietary interest in the buildings but decided, as responsible developers, they could not ignore the problem and incurred millions of pounds in costs to carry out investigations, temporary works, evacuation of residents and permanent remedial works.
Proceedings
BDW commenced proceedings against URS in 2020 based on claims in negligence. Contract claims were outside the standard 6 years limitation period at that time, whilst section 14A Limitation Act 1980 (“LA”) allows the time period for claims in tort to be extended if the claimant only had the necessary knowledge to bring the claim within the last three years (subject to a longstop of 15 years from the date of breach).
URS applied unsuccessfully to strike out BDW’s claims. This was followed by two related appeals on behalf of URS, against: (1) an Order answering various Preliminary Issues in favour of BDW; and (2) permission granted to BDW in 2022 to amend its pleadings, to rely upon longer limitation periods for DPA claims introduced by s.135 of the BSA.
Substantive Appeal
URS maintained that BDW suffered no actionable damage having sold at full value, and were not liable to carry out remedial works given the limitation defence available to potential claims by purchasers, so the loss fell outside the scope of URS’s duty of care.
Lord Justice Coulson observed that this was a kind of legal ‘black hole’ submission similar to the defendant’s argument in St Martin’s v McAlpine [1994], where the original employer sold its interest even before any breach of contract. The consequential “formidable, if unmeritorious” argument that the original employer had suffered no loss was ultimately rejected by the House of Lords, confirming that a defects claim does not always require an ownership interest in order for the cost of remedial works to be recoverable.
The Court of Appeal concluded that URS were under a clear duty to protect BDW from the risk of economic loss caused by structural deficiencies, and BDW’s liability to purchasers at the point of sale was not extinguished by any limitation defence - which operates as a procedural bar only (Kajima v Children’s Ark [2023]). URS’ argument that its duties to BDW were limited by the agreement to provide collateral warranties to individual purchasers was also misconceived, given the advantages of a consolidated claim:
“…there are many practical reasons why the existence of a claim on behalf of the individual purchasers by a major corporate entity like BDW which would cover the whole building and not just individual parts is an important benefit to those purchasers, regardless of the terms of any individual warranties in their favour. The difficulties that defendants can place in the way of individual claimants in large residential blocks can be seen in Manchikalapati v Zurich [2019]” (paragraph 61).
BDW’s motivation in carrying out the work was irrelevant and URS’ attempt to portray the losses as ‘reputational’ was rejected: “to adopt such a characterisation in relation to damages of this type would be dangerous in the extreme. It would be contrary to public policy because it might dissuade a builder from rectifying defective work” (paragraph 223).
On the question of when damage was suffered by BDW, in the sense of being worse off as a result of URS’ breach of duty, the Court of Appeal held that in cases of economic loss arising from inherent design defects that do not cause physical damage, the cause of action accrues at the latest when a building is practically completed (Tozer Kemsley v Jarvis (1983); New Islington v Pollard Thomas & Edwards [2001]), consistent with the House of Lords decision in Murphy v Brentwood [1991] and the limitation period for statutory claims under s.1(5) of the DPA. URS’ argument that BDW’s claim in negligence did not arise until the defects were discovered was dismissed.
Lord Justice Coulson’s judgment also summarises relevant authorities in relation to defects giving rise to physical damage, in which case the cause of action in tort arises when damage occurs, regardless of the claimant’s knowledge of it (Pirelli v Oscar Faber [1983]). The Courts of New Zealand and Australia have adopted a different approach, based on accrual of the cause of action when defects become discoverable (Sutherland v Heyman (1985), Invercargill v Hamlin [1996]); whereas English law developed an alternative solution to potential injustice arising from strict application of the primary limitation period, pursuant to section 14A LA (implemented by the Latent Damage Act 1986).
Amendments Appeal
URS claimed that the wrong test had been applied by the Judge at first instance in allowing BDW to amend its pleadings, to include claims under the DPA and Civil Liability (Contribution) Act 1978 (“CLCA”), without determining the disputed points of law as to when BDW’s cause of action accrued. This was rejected by the Court of Appeal: the arguments raised could not be described as short points of law of the type identified in Easyair v Opal [2009] and there was no question of a relevant limitation period having expired. The test had correctly been described as one of reasonable arguability, as to whether the amendments had some prospect of success, and the Judge was permitted to exercise discretion in leaving the substantive issues to be decided at trial.
For completeness given the wider implications, Lord Justice Coulson went on to consider the arguments raised in relation to the DPA and CLCA claims. In particular, URS argued that: (i) the longer limitation periods permitted by the BSA do not apply to parties to ongoing litigation; (ii) developers are not owed duties under the DPA; and (iii) BDW had no legal right to make a claim for contribution when no claim had been made or intimated by any third parties against BDW. All of these arguments were unsuccessful.
The Court of Appeal confirmed that the BSA, including retrospective limitation periods under section 135, applies equally to parties involved in ongoing litigation, subject to the carve out for any claims settled by agreement or finally determined prior to the new legislation coming into force. There is no reason why a party who started an action promptly, before the BSA came into force, should be disadvantaged, and ‘Convention rights’ are preserved: “So if, for example, URS could show that, in 2016, they had destroyed some critical documents which might have provided a defence to the claim under the DPA, because they assumed that under the existing law any relevant claims were statute-barred, then they may be able to deploy that fact at trial” (paragraph 170).
As to the scope of duties under the DPA, the relevant provisions are set out in section 1:
“1. Duty to build dwellings properly
(1) A person taking on work for or in connection with the provision of a dwelling (whether the dwelling is provided by the erection or by the conversion or enlargement of a building) owes a duty –
(a) if the dwelling is provided to the order of any person, to that person; and
(b) without prejudice to paragraph (a) above, to every person who acquires an interest (whether legal or equitable) in the dwelling;
to see that the work which he takes on is done in a workmanlike or, as the case may be, professional manner, with proper materials and so that as regards that work the dwelling will be fit for habitation when completed.”
The Court of Appeal held that URS did owe a duty to BDW under s.1(1)(a) of the DPA, based on the ordinary meaning of the language used. The category of persons to whom a duty is owed under this section must be different to s.1(1)(b), otherwise the sub-section would be otiose, and the Law Commission Report which gave rise to the DPA did not limit those requiring protection to individual purchasers (as opposed to commercial organisations, including developers). Application of the DPA is not binary: as with a contractual chain, where the main contractor owes duties to his employer, whilst being owed duties by sub-contractors; so a developer owing duties to purchasers can at the same time be owed duties by professional consultants.
A further submission that no duty was owed to BDW under the DPA because URS were providing an entire development was also rejected. Rendlesham v Barr [2014] establishes that work “in connection with the provision of a dwelling” includes the structure and common parts; and the absence of previous claims by developers under the DPA did not mean that such claims were inherently unlikely (as with statutory inspectors in Herons Court v Heronslea [2019]), given that the DPA “has been significantly under-used in its lifetime so far” and has a higher threshold than claims in contract or tort. Recoverability of damages under the DPA is not limited by property ownership and BDW’s sale of the buildings was irrelevant.
In relation to the CLCA claim amendment, the Court of Appeal held it was irrelevant that individual property owners had not commenced any formal claims against BDW. A crystallised claim from a third party ‘A’ is not required before a party ‘B’ has the right to claim a contribution from another party ‘C’ in respect of the same damage. B’s right to claim can anticipate the making of a claim by A against B and in circumstances where B’s liability has already been discharged, a notional liability is all that is required. For purposes of the LA, which provides a 2 year period for CLCA claims to be brought from when the right to claim accrued, the reference to ‘payment’ in section 10(4) could encompass the situation where remedial works were carried out instead.
Conclusion
The outcome is policy driven, encouraging builders and developers to act responsibly in remediating residential property defects.
Parties to existing disputes will be reviewing their pleadings and applying to amend in many cases, to incorporate retrospective DPA claims against parties responsible for sub-standard work. The trend for greater reliance on the DPA looks set to continue, where claimants can demonstrate substantial inconvenience, discomfort or risks to health & safety of occupants, which could include defective shower trays in some instances given the impact on ability to wash (an example given by the Court of Appeal).
Latent defects policies for new build homes often exclude losses recoverable from third parties and policyholders should consider potential claims against all relevant members of the construction project team. Similarly, landlords are required under section 133 BSA to take all reasonable steps to obtain monies available through insurance, third party claims or other means, such as Building Safety Fund grants, prior to seeking recovery of remedial costs through service charges.
It remains to be seen if permission will be requested for a further appeal on preliminary issues and whether the case will proceed to final determination on the substantive claims.
URS Corporation Ltd v BDW Trading Ltd [2023] EWCA Civ
Amy Lacey is a Partner at Fenchurch Law
Webinar - Sky Central Case Update
Agenda
The High Court has handed down the hotly anticipated judgment in Sky & Mace v Riverstone, which concerned a claim by Sky and Mace for the cost of remedial works to the roof at Sky Central. We will be covering the key issues in dispute and the Court’s findings, which are likely to be of general interest to contractors and CAR practitioners (and enthusiasts!).
Speaker
Rob Goodship, Associate Partner
Cladding PI Notifications - A View from Down Under
A recent decision in the Federal Court of Australia provides guidance on broad professional indemnity insurance notifications for external cladding works, confirming that a wide problem may be validly notified with reference to appropriate supporting information - MS Amlin Corporate Member Ltd v LU Simon Builders Pty Ltd [2023] FCA 581.
A full copy of the judgment can be found here.
The Policies
LU Simon Builders Pty Ltd and LU Simon Builders (Management) Pty Ltd (the “Policyholders”) operated a construction and project management business. Professional indemnity (“PI”) insurance was arranged through local Australian and London placing brokers for the 2014/2015 period, including excess layers.
The insuring clause provided cover for civil liability arising from claims first made against the Policyholders during the policy period, and reliance was placed upon section 40(3) of the Insurance Contracts Act 1984, whereby an insurer is also liable for claims made after expiry of the period of insurance:
“where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired”.
This creates a statutory mechanism similar to the common position in the English PI market, where claims made covers are frequently extended to allow notification of circumstances known to the policyholder that may give rise to a claim: if notification of circumstances is made during the policy period then the third party claim itself – even though it may actually come in at a later date – is deemed to have been made during that same policy year.
The Claims
In 2019 proceedings were commenced against the Policyholders by developers and owners of Atlantis Towers in Melbourne, alleging that unsuitable ”Alcotex” aluminium composite panels (“ACP”) were used as cladding for the building (the “Atlantis Claims”). The Policyholders sought indemnity for the Atlantis Claims, and excess layer insurers applied for a declaration that the PI policies would not respond.
The Atlantis Claims came about following investigation by the Metropolitan Fire Brigade (the “Fire Brigade”) and Municipal Building Surveyor for the City of Melbourne (the “Municipal Surveyor”) into a fire on 25 November 2014 at Lacrosse Tower, another building constructed by the Policyholders. The investigation found that ACP at Lacrosse Tower (Alucobest) was not compliant with the Building Code of Australia, and had contributed to the rapid spread of fire.
The Victorian Building Authority (the “Building Authority”) subsequently commenced an investigation and audited around 170 high-rise buildings in Melbourne. The Building Authority concluded that ACP on the Atlantis Tower (Alcotex) was combustible, and Building Orders were issued requiring replacement.
The Notifications
The dispute centred around two notification emails headed “Potential Claim”, sent to insurers in May 2015, neither of which identified Atlantis Towers or the Alcotex brand of ACP which had been used in its construction.
The first notification email referred to: “a notification of circumstances that may result in a claim under [the Policyholders’] Policy … Really most of the noise is around the press release … No formal claim has been made against [the Policyholders] at this point in time”.
The email attached: (1) a newspaper article dated 28 April 2015, referring to the Building Authority’s investigation into the Policyholders’ building practices, to identify whether non-compliant ACP had been used elsewhere; and (2) a document headed “Lacrosse Apartments - Docklands” including commentary from the managing director of the Policyholders in relation to ACP having been widely used in Australia for decades with “no like product passing the test for combustibility”, and referencing a potential class action by owners of Lacrosse Tower.
The second notification email attached a report on Lacrosse Tower by the Fire Brigade entitled “Post Incident Analysis Report”, together with the design and construct contract. The report stated that the Fire Brigade was not aware of any competitor aluminium / polyethylene panel product which had satisfied combustibility tests, and expressed the Fire Brigade’s firm opinion that ACP without appropriate accreditation / certificates of conformity represented an unacceptable fire safety risk, given the need to prevent similar incidents. The Fire Brigade’s report contained hyperlinks to four media reports, suggesting that the Building Authority’s audit had revealed a pattern of poor compliance with regulations, and that “buildings may be a risk to occupants in a fire situation”.
The Decision
His Honour Justice Jackman concluded that the notification emails clearly pointed to a wider problem than one confined to the Lacrosse Tower, or to Alucobest products. The reference to broader investigations, alongside the proposal form statement that 100% of the Policyholders’ work in the last financial year related to high-rise buildings, had the effect of conveying to insurers that there was (at least) a real and tangible risk of the Policyholders facing claims for rectification of that aspect of its work on this building, and on others that it had constructed.
Applying principles discussed in P&S Kauter Investments Pty Ltd v Arch Underwriting at Lloyd’s Ltd [2021] NSWCA 136, the Court acknowledged notification need not be given in a single document, nor the likely claimant(s) identified. Information included by hyperlinks formed part of the notification, since the task of clicking “is not significantly more demanding than turning a physical page” - provided that the link is to a specific page or document. Opinions expressed by public authorities with appropriate expertise (such as the Fire Brigade or the Municipal Surveyor) were held to be capable of constituting “facts” for the purpose of s.40(3), despite the contrary Federal Court decision in Uniting Church (NSW) v Allianz Australia Ltd [2023] FCA 190.
Given a clear causal connection between investigations reported in the notification emails, and later proceedings against the Policyholders, the Court concluded that insurers had been notified before expiry of the policies of facts giving rise to the Atlantis Claims, within the meaning of s.40(3).
English Law
Australia is a common law jurisdiction originating from the English legal system, applying statutory provisions enacted by its various states and federal governments.
Policyholders are similarly able to make “hornets’ nest” notifications under English law, i.e. general notification of a problem even where the cause of the problem or its potential consequences are not yet known (HLB Kidsons v Lloyd’s Underwriters [2008]; Kajima UK Engineering v The Underwriter [2008]; Euro Pools plc v RSA [2019]).
The operation of notification of circumstances provisions under liability policies is often contentious, and careful consideration should be given to the content and timing of notices to insurers, with supporting documents, to maximise the scope of cover. Policyholders should be mindful of precise wording in their PI policy conditions on the knowledge threshold for notifications (whether based on “may” or “likely to” give rise to claims language), and ensure that the trigger remains consistent between policy years and insurance layers where possible, in order to avoid potential gaps in cover.
Amy Lacey is a Partner at Fenchurch Law
Reach for the Sky? – judgment handed down on Sky Central
Sky UK Limited & Mace Limited v Riverstone Managing Agency Limited & Others [2023] EWHC 1207 (Comm)
Summary
The High Court has handed down the hotly anticipated judgment in Sky & Mace v Riverstone, which concerned a claim by Sky and Mace for the cost of remedial works to the roof at Sky Central, Europe’s largest flat timber roof. The sums claimed for the two remedial schemes put before the Court were both in excess of £100m.
Whilst Sky, as principal insured and loss payee under the building contract, has been awarded an indemnity in principle, the quantum of that indemnity is subject to either agreement or, failing that, determination by the Court, given Mr Justice Pelling’s finding that none of the remedial schemes put before the Court sufficiently represented the remedial works necessary to address the damage as at the end of the Period of Insurance. That said, the Judge found that one of the schemes presented by insurers “most closely approximates” to the damage in need of remediation at the end of the Period of Insurance, and has encouraged the parties to agree the quantum of the appropriate temporary works which need to be added to that scheme.
Issues
The full judgment is worth a read for all CAR practitioners (and enthusiasts) but the real take aways are:
DE5
Whilst Sky is the first court decision anywhere in the world to consider the DE5 defect exclusion, it actually does no more than provide (at paragraph 29) a slightly clearer articulation as, based on the Judge’s findings, he didn’t need to consider what actually constituted an additional cost of any additional improvement works.
The reason for that is because his judgment was premised on one of insurers’ schemes being the most appropriate (in the circumstances) which (unsurprisingly) did not include any improvements to the original design, plan, specification, materials or workmanship.
Co-insurance
Sky follows closely after the Court of Appeal’s decision in RFU that was handed down in April (https://www.fenchurchlaw.co.uk/worth-a-try-judgment-handed-down-on-rugby-football-union-appeal/).
The Judge followed the reasoning in the first instance decision in RFU which Lord Justice Coulson said was “unassailable” by the Court of Appeal. Here, Mace was found to be a co-insured under the project policy but, as a result of the building contract entered into with Sky, only to Practical Completion (“PC”) and not to expiry of the Maintenance Liability Period (“MLP”) - only Sky had the benefit of that cover.
Mr Justice Pelling rejected Mace’s argument that a distinction should be drawn, and that it therefore benefited from, being a named in the policy (as opposed to falling into a prescribed category) as being “unprincipled and unsupported”. He found that there was “ample authority” that when deciding the scope and extent of the insurance cover available, it was necessary to consider the scope that the contracting insured agreed to procure, and that cover will not generally extend beyond what is contained in that agreement.
Mr Justice Pelling confirmed (at paragraph 58), and in line with the thinking of the majority in Gard Marine, that the effect of this particular contract was that neither Sky nor insurers can recover any pre-PC loss or damage against Mace, but that Mace was required to remediate and has no entitlement to a sum beyond that which was recovered under the policy.
Physical damage
The judge rejected insurers' definition of physical damage as occurring at a ‘tipping point’ when “structural change of such severity as to require replacement of the affected timber” as being "impermissibly narrow".
Instead he found that the physical damage occurred once water entered the roof cassettes on the basis that “the entry of moisture into the cassettes during the Period of Insurance is in my view a tangible physical change to the cassette as long as the presence of the water, if left unattended, would affect the structural stability, strength or functionality or useable life of the cassettes during the Period of Insurance or would do so if left unremedied”.
In relation to the timing of the occurrence of damage, this is arguably in line with Tioxide where it was found that damage occurred once the environmental conditions where damage was liable to occur were present.
The articulation in Sky is potentially wider than that though, which is likely to be very helpful for policyholders when there is ambiguity over the timing of the damage occurring, as it permits the earliest possible date on which damage is liable to occur if left unattended, which is frequently a source of dispute, particularly in relation to water ingress claims.
Aggregation/ deductibles
The other major battle ground between Sky/Mace and insurers, and a point that this is increasingly being taken by CAR insurers in relation to modern methods of construction (including cassettes and modular pods), was the applicable number of deductibles which was determined by the number of ‘events’.
Insurers’ position was that the damage to each of the 472 cassettes was an ‘event’, whereas the Claimants said that there was one event, namely the decision not to use a temporary waterproofing system when installing the roof cassettes, which permitted water ingress during construction.
Mr Justice Pelling said that, in this policy, the “single unifying event must be an error or omission in the design plan specification materials or workmanship of the property Insured that has suffered damage as a result of such defect” when a claim was recoverable under DE5.
Applying the unities of time, place and cause, and following Mr Justice Butcher's finding in Stonegate (https://www.fenchurchlaw.co.uk/court-hands-down-judgment-in-much-anticipated-covid-19-bi-cases-the-takeaways-for-policyholders/) that a decision (or plan) was capable of being an event if it satisfied those unities, the judge agreed with Sky and Mace that there was only one event and, therefore, one deductible was to be applied to Sky's claim.Appropriate remedial scheme
The claim presented by Sky and Mace was slightly unusual given that the remedial works had not taken place by the time the claim got to trial, which seemingly resulted in the Judge being in some difficulty when determining the appropriate indemnity. Helpfully for policyholders though, Mr Justice Pelling’s instinct in response to assertions that Sky and Mace’s claims had failed as neither of their schemes were ultimately awarded was that it would be “counter intuitive” that an insured which had proved some damage would be left without remedy.
The actual quantum of Sky’s claim remains unresolved, but the judge saw no difficulty in principle with the various schemes being ‘mixed and matched’ in order to identify the appropriate indemnity.
Comment
Although the judgment does not delve into the correct interpretation and application of DE5 as perhaps hoped, it does contain a number of helpful nuances in relation to typical coverage issues under CAR policies, which will be helpful to property and contract works policyholders generally.
Rob Goodship is an Associate Partner at Fenchurch Law
Webinar - Tackling Co-Insurance: Court of Appeal hands down judgment in Rugby Football Union
Agenda
Associate Partner, Rob Goodship will be delving into the tricky issues of co-insurance for contractors, including an analysis of the recent decision of the Court of Appeal and some tips for avoiding disputes.
Speaker
Rob Goodship, Associate Partner
Worth a Try? – judgment handed down on Rugby Football Union appeal
FM Conway Limited v The Rugby Football Union, Royal & Sun Alliance Insurance PLC, Clark Smith Partnership Limited
The Court of Appeal has handed down its judgment following FM Conway’s appeal of the High Court’s decision that it did not enjoy the same level of cover as its employer. Our previous article commenting on the first instance judgment can be found here.
Summary
The decision regards the potentially complicated factual and legal issues about the nature and extent of insurance cover obtained by one party on behalf of another. It was common ground at the first instance hearing that FM Conway was an insured under the project policy secured for the refurbishment of Twickenham stadium, but the extent of that cover was disputed by insurers.
FM Conway’s appeal was rejected by the Court of Appeal, with the leading judgment from Lord Justice Coulson providing a firm endorsement of Mr Justice Eyre’s decision that FM Conway was not insured under the project policy for damage to existing structures caused by its own defective work, but cover was instead restricted to specified perils in accordance with the (unamended) JCT Option C.
It is clear from the judgment that Lord Justice Coulson was in full agreement with Mr Justice Eyre, referring to his decision as “careful”, “unassailable” and “entirely in accordance with the authorities”.
Issues
The background facts are contained in our previous article but, in short, the underlying claim includes a subrogated claim by RSA in relation to the cost of remediating damaged cables, for which it had indemnified RFU as principal insured. FM Conway raised a co-insurance defence to that claim, asserting that it enjoyed the full benefit of the project policy obtained on its behalf by RFU.
FM Conway appealed the first instance decision on five grounds, albeit ground 1 was clearly FM Conway’s primary argument: whether the High Court applied the correct test for ascertaining the necessary authority and intention of the insuring party, the RFU. It was submitted on behalf of RFU and RSA, and then accepted by Lord Justice Coulson, that if ground 1 failed then so too must grounds 2, 3 and 4 as they were largely variations of the first ground and/ or were contingent on that ground succeeding.
It was held by the Court that Mr Justice Eyre did apply the correct test, given that he “paid particular attention to the underlying contract between the RFU and FM Conway. In that, he was following what Lord Toulson said was the correct approach in Gard Marine”. Lord Justice Coulson went on to say that “in any case where there is an underlying contract … it would be counter-intuitive if that was not at least the starting point for any consideration of authority and intention” to insure.
Lord Justice Coulson went on, as Mr Justice Eyre had in the first instance decision, to make clear that whilst the pre-contractual discussions between representatives for Conway and the RFU, respectively, regarding insurance arrangements could be taken into account (which were the main thrust of Conway’s argument that it had wider cover), they could not displace the clear interpretation of the building contract.
It was affirmed by the Court that “extraneous evidence” of a contrary authority or intention to insure could be relied on (similarly to Mr Justice Eyre’s finding that “compelling evidence” could be relied on), but the relevant investigations “will start (and possibly finish) with the underlying contractual arrangements agreed between the parties”.
The Court also made frequent reference, contrary to FM Conway’s reliance on the witness evidence which it said demonstrated an authority and intention of the RFU to secure wider cover, that both parties were represented by legal and insurance professionals such that had there been an intention to secure wider cover beyond that in Option C of the JCT Contract then it would have been reflected in the building contract ultimately agreed. Lord Justice Coulson said that to adopt FM Conway’s attempt to rely on early/ pre-contract discussions was “untenable” as it would enable a party to “ignore any subsequent stages of the actual negotiations”.
Guidance on co-insurance generally
Following his summary of the law in this area generally, Lord Justice Coulson provided (at paragraph 53 of the judgment) the following guidance in relation to co-insurance:
“53.1 The mere fact that A and B are insured under the same policy does not, by itself, mean that A and B are covered for the same loss or cannot make claims against one another;
53.2 In circumstances where it is alleged that A has procured insurance for B, it will usually be necessary to consider issues such as authority, intention (and the related issue of scope of cover). Such issues are conventionally considered by reference to the law relating to principal and agent …
53.3 An underlying contract between A and B is not a necessary pre-requisite for a proper investigation into authority, intention and scope …
53.4 On the other hand, where there is an underlying contract then, in most cases, it will be much the best place to find evidence of authority, intention and scope …
53.5 That is not to say that the underlying contract will always provide the complete answer. Circumstances may dictate that the court looks in other places for evidence of authority, intention and scope of cover”
Comment
Whilst the result is not surprising (especially as Lord Justice Coulson said that the first instance decision was in accordance with the existing authorities), it represents a clear articulation of the principles in this often complex area.
For policyholders in FM Conway’s shoes, it is key that if there is an intention for contractors to enjoy the same level of cover under the project policy as the employer/ principal insured, that the contractual documents make that clear and, where necessary, any standard forms are appropriately amended. That way, there is no need to look for other compelling or extraneous evidence to demonstrate that wider authority and intention which, as is made clear in the facts of this case, might be difficult to do.
Rob Goodship is an Associate Partner at Fenchurch Law
Building a safer future: the courts’ approach to fire safety cases
The Grenfell tragedy in 2017 has prompted safety investigations in myriad buildings across the UK, with owners and occupiers questioning whether other settings are similarly defective. Many disputes have arisen, with a handful of cases now determined following trials in the Technology & Construction Court. Overall the courts have adopted a robust approach to responsibility for cladding defects, rejecting typical defence arguments around scope of duty, causation and assessment of loss.
Recent Judgments
Martlet Homes Ltd v Mulalley & Co. Ltd
In July 2022, the claimant was awarded £8 million in damages to remediate high rise residential blocks in Gosport where a “StoTherm Classic” cladding system, including combustible expanded polystyrene insulation, had been applied to external walls during refurbishment in 2005 - 2008. This was held to contravene fire safety standards (the specification breach case), and the system had been defectively installed with inadequate fire breaks (the installation breach case). Costs incurred in removal and replacement of the cladding with a non-combustible alternative could be recovered, together with expenses of a waking watch fire patrol interim measure.
St James’s Oncology SPC Ltd v Lendlease Construction (Europe) Ltd & another
In October 2022, a company set up by Leeds Teaching Hospitals NHS Trust to deliver a new oncology centre was successful in its £5 million claim against Lendlease, based on fire safety and electrical engineering defects to an internal plant room. The defendants’ argument that derogation from applicable standards had been approved by all parties in a revised fire strategy document was rejected, given the overriding contract obligations: “Lendlease was at all times responsible for the design of the Works and for achieving compliance with the requirements of the D&B Contract, irrespective of any review, approval or comments made by Project Co and/or the Trust. This seems … to render the question of approval otiose”.
LDC (Portfolio One) Ltd v George Downing Construction Ltd & European Sheeting Ltd
In December 2022, the owner of student accommodation blocks in Manchester secured judgment in excess of £21 million for remedial works and lost rental income, against a specialist sub-contractor responsible for inadequate fire stopping/barriers, and composite cladding defects which led to substantial water ingress. The claimant and first defendant agreed to settle the claims between them for c. £17 million shortly before trial; the second defendant was insolvent and unrepresented at the hearing, which proceeded in any event as the liquidator could not consent to judgment being entered.
Performance Standards
The defendant contractors were in each case appointed pursuant to JCT Design and Build Contracts, with terms including an unqualified design and specification duty, obligation to comply with statutory requirements, and duty to exercise reasonable skill and care.
The judgments include discussion on performance standards and reaffirm the MT Hojgaard [2017] UKSC 59 principle, that - if there are two clauses imposing different or inconsistent design requirements, the courts are likely to interpret the less demanding clause as a minimum obligation, since treating it as qualifying the other clause gives a meaning which effectively renders the more demanding provision redundant.
The St James’s Oncology and LDC (Portfolio One) cases illustrate how bespoke amendments to standard form contracts may be used to improve prospects for recovery down the contractual chain, through “back to back” requirements for sub-contractors to indemnify the employer against liability arising under the main contract as a result of sub-contract breaches, and acknowledging that associated losses are within the parties' contemplation.
Building Regulations
The analysis of statutory requirements is particularly illuminating, in view of ubiquitous disputes over interpretation of relevant provisions now acknowledged by the government to have been “faulty and ambiguous”.
In Martlet v Mulalley, the judge concluded that Approved Document B (“ADB”), Fire Safety, 2000 edition (with 2002 amendments) does not mean that whatever was not expressly prohibited was permitted and acceptable; and ADB, 2006 edition, marked a significant change in guidance from the earlier regime, with only materials of limited combustibility to be used as external wall insulation in buildings over 18 metres.
Further, the Building Regulations 2000, Schedule 1, B(4)1 requirement for external walls to “adequately” resist the spread of fire, having regard to a building’s height, use and position, turned on whether the contractor had followed guidance in BRE 135 (2003), which recommended that combustible cladding should not be used on high rise residential blocks unless it met the Annex A performance standard in accordance with the test method set by British Standard 8414-1. It was not sufficient to “blindly” rely on a British Board of Agrement (BBA) certificate for the cladding system.
Negligence
The selection and use of a cladding system with combustible EPS insulation in Martlet v Mulalley was in breach of the contractor’s obligation to exercise the degree of skill and care in its design of the work as would an architect or other professional designer.
In reaching this decision, the judge rejected defence arguments to the effect that they cannot have been negligent because everyone else was making the same mistakes. On a proper application of the Bolam principle, there must be “evidence of a responsible body of opinion that has identified and considered the relevant risks or events and which can demonstrate a logical and rational basis for the course of conduct or advice that is under scrutiny”. A defendant is not exonerated simply by proving that others were equally negligent (199 Knightsbridge Development Ltd v WSP UK Ltd [2014]).
Negligent design in relation to cladding works means that professional indemnity policies are likely to be triggered, and exclusions for contractual liabilities won’t usually apply.
Failure to comply with building regulations may be strong evidence of breach of a designer’s duty to exercise reasonable skill and care, in the absence of an express clause requiring adherence to statutory requirements, as discussed in LDC (Portfolio One).
Causation
Another defence commonly raised in cladding disputes is that enhanced fire safety standards implemented after completion of the contract works, and/or the changed regulatory perspective post-Grenfell, are the true cause of remedial action undertaken or proposed. This was rejected in Martlet v Mulalley, with the judge suggesting that an “effective cause” test would be more appropriate to a “but for” standard in this case, to avoid the claimant being left without a remedy.
Had the building owner succeeded only on the installation breach, it could have recovered the cost of repairing defects but not those of replacing the cladding. Both the installation and specification breach cases were upheld on the facts, so the owner was entitled to recover replacement costs.
Remedial Costs
In St James’s Oncology, the defendants’ argument that there was no intention to carry out remedial works was dismissed. The court is not normally concerned with how the claimant will use any damages awarded, providing the loss can be established, although intention may be relevant to the reasonableness of reinstatement and thereby the extent of loss. It was legitimate (and prudent) for the claimant to take account of commercial considerations and await conclusion of the proceedings before commencing planned remediation, given the defendants’ complete denial of liability until shortly before trial.
Remedial works to the Gosport towers were already complete when Martlet v Mulalley reached trial. Costs incurred are the starting point for what is reasonable in such cases, especially if works are carried out based on expert advice. The claimant has a duty to mitigate loss, “but the court will not be too critical of choices made as a matter of urgency or on incomplete information”. It is not sufficient that defects could have been rectified more cheaply; the defendant must prove the remedial scheme was unreasonable.
Further, the costs of temporary measures such as waking watch patrols are likely to be recoverable. The judge in Martlet v Mulalley dismissed the suggestion that this aspect of the claim was too remote, saying that any lack of awareness of the potential need for such interim protections in the context of combustible cladding was more reflective of a “culture of endemic complacency” than any reasoned assessment.
Where works of repair or reinstatement result in the claimant having a better or newer building than it would otherwise have had, a deduction for "betterment" will not usually be made if the claimant has no reasonable choice (Harbutt’s Plasticine v Wayne Tank [1970]). This includes betterment resulting from compliance with legislation introduced since the original works were carried out, imposing additional or enhanced standards.
Looking Ahead
The emerging direction of travel underlines the difficulty for designers (and insurers) in defending these types of claims.
The Building Safety Act 2022 provides further impetus on cladding disputes, introducing new causes of action for defective works and construction products, subject to a maximum 30 years’ retrospective limitation period. The Grenfell Inquiry phase 2 report is due for publication later this year, with Sir Martin Moore Bick’s findings expected to significantly impact upon the liability landscape, and potential manufacturer claims in particular.
Owners will look to progress claims swiftly in light of insolvency risks, with expert technical and quantum evidence crucial in justifying schemes of remedial work. Construction professionals with cladding exposures will be keen to extricate themselves through commercial settlements, whilst pursuing possible recoveries. Moving forward, contractors should endeavour to agree supply chains on back to back terms with their main contract, to limit exposures and improve prospects in the event of breach.
The courts’ focus on ensuring that buildings are made safe and compliant with current statutory requirements is closely aligned with public policy. Further developments in this area, including jurisprudence around Building Liability Orders and s.38 of the Building Act 1984, for example, are eagerly anticipated.
Authors:
Amy Lacey is a Partner at Fenchurch Law
Grace Williams is an Associate at Fenchurch Law
(New Home) Buyer Beware
Recent case law highlights the importance of adequate insurance cover for buyers of new homes, to remediate any latent defects identified post-completion, whilst the Building Safety Act 2022 implements significant changes to the new build warranty landscape.
In Griffiths and another v Gilbert [2022] EWHC 3122 (TCC) (6 December 2022), HHJ Sarah Watson (Principal Judge of the Technology and Construction Court in Birmingham) dismissed allegations that a director of the building contractor responsible for construction of the claimants’ property had fraudulently misrepresented that £2 million worth of NHBC cover would be obtained, covering the full build cost, rather than the standard £1 million limit for defects claims under the NHBC Buildmark policy.
After practical completion, a dispute arose concerning building defects and contamination of surrounding land. The claimants referred matters to the NHBC's dispute resolution service but subsequently withdrew from the process, unhappy with the initial response. Court proceedings alleging personal liability for fraudulent misrepresentation were commenced in 2014 and then stayed, pending the outcome of an arbitration pursued by the claimants against the contractor. In 2018 the arbitrator awarded substantial damages and costs to the claimants, which the contractor was unable to meet, and it went into insolvent liquidation. The claimants successfully recovered £1 million under the NHBC warranty, and court proceedings against the director were revived seeking recovery of outstanding losses.
The Judge held that elements of the tort of deceit were not made out in this case and the fraudulent misrepresentation claim failed. The director had confirmed the property would be built to NHBC standards and a Buildmark warranty would be obtained, but premium figures in the contract costings were estimates not representations. It was inherently unlikely the contractor would fraudulently represent the situation to save a small fee on a £2 million contract, knowing this would come to light when the NHBC certificate was provided. Further, NHBC was advised of the sale price at the outset with no question of “underinsurance”, analogous to standard property policies, where claims might be reduced if a building was insured for less than full reinstatement costs.
The judgment illustrates the limitations of new home warranties and how parties can extend the scope of cover for a price. In 2011, NHBC had offered to increase the cover to £2 million for an additional fee of approximately £4,500 but that proposal was not accepted by the claimants.
The importance of sufficient protection for buyers of new homes is also reflected in legislative changes under section 144 of the Building Safety Act. These provisions impose legal requirements on developers to provide new build warranties with a term of at least 15 years (increased from the usual 10 years period applicable previously), in line with the new prospective limitation period for claims under the Defective Premises Act 1972. Regulations are anticipated in 2023 imposing additional requirements on the kinds of defects covered, minimum policy limits, period during which the developer remains responsible, and financial penalties for non-compliance, following further industry consultation. Mandatory parameters of coverage should increase transparency for all concerned, helping to minimise the prospect of disputes.
Amy Lacey is a Partner at Fenchurch Law