December 20, 2018

The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #5 (The Ugly). AIG v Woodman

Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know.  An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.

Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.

At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.

#5 (The Ugly)

AIG Europe Ltd v Woodman & Ors [2017] UKSC 18

This decision represented the first time for almost 15 years in which an aggregation clause had been considered by the UK’s highest court.  We have categorised it as “ugly”, not because we believe it was wrongly decided, but because it represents a missed opportunity by the Supreme Court to clarify an area which, absent that clarification, remains a likely source of disputes between policyholders and insurers.

AIG v Woodman arose out of a professional negligence claim against a firm of solicitors by 214 investors, who had invested in one or other of two developments, one in Turkey and one in Morocco.  A firm of solicitors (“the Solicitors”) were instructed in respect of both developments, and were meant to have a system whereby the investors’ money was only to be released to purchase the development land once adequate security was in place.

Both developments failed.  It transpired that, owing to the Solicitors’ negligence, the security had been wholly inadequate. The investors lost a total of £10m, and sued the Solicitors

The Solicitors had professional indemnity insurances with AIG, with a limit of £3m per claim. The question therefore was whether, in light of the aggregation provision in the policy (“the Aggregation Clause”), the Solicitors were facing one, two or 214 claims. The Aggregation Clause, taken from the SRA Minimum Terms & Conditions, aggregated all claims arising from:

“(i)       one act or omission;

(ii)        one series of related acts of omissions;

(iii)       the same act or omission in a series of related matters or transactions;

(iv)       similar acts or omissions in a series of related matters or transactions …”

It was limb (iv) which was relevant here.

At first instance, the Commercial Court held, and the parties subsequently accepted, that each claim had arisen out of a similar act/omission.  However, that still begged the question of whether each such similar act/omission had occurred “in a series of related matters or transactions”.

The decisions below

At first instance, the Commercial Court held that the Aggregation Clause required the transactions to be interdependent in order for them to be “related”.  On that basis, the claims did not aggregate and there was ample cover to satisfy the investors’ claims.

The Court of Appeal disagreed.  It said that the requirement for interdependence was going too far.  Instead, what was necessary, for transactions to be “related”, was an “intrinsic” relationship – a relationship of some kind between the transactions relied on, rather than a relationship with some outside connecting factor, even if that extrinsic relationship were common to the transactions.  However, the Court of Appeal declined to say whether there was, indeed, an intrinsic relationship here between the various transactions, and decided to remit that issue to the Commercial Court.

The Supreme Court

The Supreme Court allowed AIG’s appeal, and held that the Court of Appeal’s requirement for an intrinsic relationship between the transactions was “neither necessary nor appropriate”, and represented an unwarranted gloss on the terms of the Aggregation Clause.  Instead, it held – somewhat lamely, it might be thought – that the word “related” simply required a “real connection” between the transactions, “or in other words they must in some way fit together”.

On that basis, it was held that all the transactions involving the Morocco development were sufficiently inter-connected, and, likewise, all those involving the Turkey development; but it was not the case (as AIG had submitted) that all the transactions in respect of both developments were inter-related.

There were accordingly two claims and two indemnity limits, and a total of £6m available as compensation for the investors.

All this, however, provides very little guidance to policyholders and insurers in dispute over whether transactions are or are not “related”, other than where the factual situation is very similar to that in Woodman.  During the hearing at the Supreme Court, AIG’s QC had come close to arguing that “related” should not be given any gloss or interpretation, but that instead each time the parties to an insurance contract would themselves have to resolve, or require a court to determine, whether the transactions in question were “related”.

Lord Mance’s response was dismissive:

“Just to leave the clause as it is … is not going to help anyone very much, is it?  It is like saying ‘Brexit is Brexit’.”

It is ironic, therefore, that for the Supreme Court simply to have held that “related” requires some “real connection” was almost as unhelpful.

December 10, 2018

Damages for late payment of insurance claims: some practical aspects

The effects of an insured loss on an insured’s business can be financially devastating. It is in those times of need that policyholders turn to their insurers for help. The longer a policyholder goes without that help the worse the policyholder’s financial situation can become.

The Enterprise Act 2016 amended the Insurance Act 2015 (the “Act”) to create a new right for insureds to claim damages against their insurers for the late payment of insurance claims.

This article revisits this new right in a practical context with a view to encouraging all interested parties to bear its provisions in mind when dealing with insurance claims that have, or may, run on for far too long.

Damages for late payment

Section 13A of the Act now provides that it is an implied term in all contracts of insurance entered into from 4 May 2017 that payment of sums due under an insurance contract must occur within a ‘reasonable time’.

There is no guidance on what is meant by ‘reasonable time’. We wait for the courts to consider that question in this context. For now, we can say with certainty that what is reasonable in the context of contracts of insurance very much turns on its facts. Whilst not an exhaustive list, consideration will be given to the type of insurance contract, its complexity, any regulatory or third party issues and the conduct of all parties. In other words, some claims will reasonably take longer than others to investigate.

Others may be delayed as a result of the unreasonable conduct of insurers, however. It is in those cases that policyholders should seek to rely upon the right created by section 13A.

Whilst the right can be relied upon even where the claim has been paid, a decision as to whether or not to pursue such a claim should be made quickly. A one year limitation period applies and the clock commences from the date that payment is made in full.

The insured’s burden

An insured will be required to prove that it has suffered actual loss as a result of the delay by its insurers.

In addition, the insured must demonstrate that its loss was reasonably foreseeable at the time the policy was entered into. That presents a higher burden than demonstrating foreseeability from the date of the breach and may also have the practical effect of limiting any recovery for late payment.

Furthermore, there is an obligation on insureds to mitigate losses caused by any delay. For example, this might include securing a line of credit during any period of delay to overcome any short term cash flow problems. In such circumstances insureds should make the insurer aware of the fact that additional lines of credit may have to be sourced contrary to the business’ intentions and solely as a result of the insurer’s delay and that any losses associated with that will be sought from the insurer under section 13A of the Act. The prospect of an increased exposure to the claim may spur the insurer into action.

Effects on insurer behaviour

Insurers now have to act expeditiously when investigating the merits of a claim under their policies in order to ensure that claims are settled in a ‘reasonable’ period of time. This may present opportunities for insurers to reflect on their claims handling processes and technical skills. Such outcomes can only be seen as a positive effect of the new remedy.

Disputes may take some time to resolve and the loss caused to a policyholder whilst an unsound declinature or restriction on cover is unwound may fall within the scope of section 13A. In other words, handling claims efficiently and ensuring that claims adjusters reach the correct conclusions in a reasonable period of time (and putting in place systems and training to achieve those outcomes) will: (a) ensure that insurers avoid this additional unnecessary exposure to claims liabilities; and (b) ensure that policyholders receive the cover to which they are entitled in a timeframe to be reasonably expected.

Insurers may also be more inclined to make early commercial decisions in order to resolve claims more swiftly than a full coverage investigation or litigation might allow.

Contracting out

The insurer and insured can agree between themselves to contract out of section 13A of the Act. Such a clause would be enforced by the Courts providing that it is clear, unambiguous and brought to the policyholder’s attention before the contract is agreed.

We mention this simply to emphasise that brokers and policyholders should check their policy wordings carefully to ensure that: (a) there are no such contracting out provisions; and (b) if there are, those provisions preserve a right to claim damages for the late payment of a claim and are more advantageous than the right conferred by section 13A.

An attempt by an insurer to contract out of the provision would amount to a request to be at liberty to unreasonably delay in payment of claims. That is quite a brazen request that insureds are unlikely to want to accede to.


The usefulness of section 13A of the Act to policyholders is its ability to be deployed in communications with an insurer as an incentive to resolve claims more quickly. Even if the complexity of a claim merits a period of significant investigation by the insurer, reference to section 13A, alongside drawing an insurer’s attention to financial loss caused by the delayed payment itself, may at the very least elicit an interim payment. Interim payments can in themselves keep the wolf from the door.

For those few cases where insurers are not persuaded to act by their increased exposure to damages arising from late payment, we look forward to seeing the Courts intervene to underline to insurers, at last, that delay does not pay.

James Breese is an associate at Fenchurch Law

November 9, 2018

The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #4 (The Good). The Orjula

Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.

Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those are cases that can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.

At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.

#4 (The Good)

Losinjska Plovidba v Transco Overseas Ltd (The Orjula) 14 June 1995

In a useful decision for policyholders under construction all risks insurance, the Commercial Court in The Orjula determined that the spillage of hydrochloric acid onto a vessel requiring decontamination was “damage”, even on the assumption that there was no corrosion. Although decided in the context of a negligence claim, the case opened up the possibility of greater recoveries under policies triggered by damage, demonstrating that even transient or reversible physical changes to insured property should suffice.

The decision

The claimant was a bareboat charterer of a vessel which operated a liner service. Two containers each containing 72 drums of acid were loaded on to the vessel in England, for transportation to Libya. The second defendant, whose application to strike out the claimant’s claim was being determined by the Court, was the physical supplier of the drums to the first defendant, the named shipper in the Bill of Lading.

On its route to Libya the vessel docked in Holland, where one of the containers was discovered to be leaking. On inspection it was found that the drums inside were damaged and required replacement and reloading, with the boat having to be decontaminated and the drums repacked inside the containers.

The Court, in refusing to strike out the claim against the second defendant, held that although it was only necessary to wash the acid off the boat before it could again be in a useable condition, a specialist cleaner had to be employed for this purpose before the vessel could again set sail. As a result, the claimant had suffered actual damage, not pure economic loss (which would not have been recoverable from the second defendant in negligence[1]).

The second defendant’s solicitor argued that there was no physical damage to the vessel. The contamination could be and was cleaned off with a soda solution and the only loss was the financial cost of the operation. The Judge summed up the defence argument as being, in effect, that prior to the cleaning the vessel remained undamaged albeit with a layer of hydrochloric acid over part of her deck or hatch.

Taking guidance from civil and criminal authorities, the Court considered whether there had been “injury impairing value or usefulness” of the property in question, and the need for effort and expense to restore the property to its former usable condition. The Judge rejected the submission that there was no damage, noting:

“Here, specialist contractors were engaged in undertaking the decontamination work using soda to neutralise the acid before washing the deck and hatch covers down with fresh water; further, it is pleaded, perhaps not surprisingly, that the vessel was required to be decontaminated of the hydrochloric acid before she could sail from the special berth to which she had been directed after discovery of the leakage. On these alleged facts, I would have no hesitation in concluding that the vessel should be regarded as having suffered damage by reason of her contamination”.

The alleged contamination of the vessel was held to constitute damage sufficient to enable the claimant to claim in tort against the second defendant for recovery of its loss and mitigation costs arising from negligence in the stowage of the containers.


In determining that damage was suffered in these circumstances, the Court acknowledged the reality that “injury impairing value or usefulness” (the dictionary definition of damage) can be sustained without there having been a permanent change to the damaged material.

The question of whether damage has occurred is often contentious in CAR insurance claims and this case is helpful in support of improved outcomes for policyholders, subject to expert evidence in appropriate cases and applicable policy wording.

[1] Murphy v Brentwood District Council [1991] 1 AG 398

November 8, 2018

Fenchurch Law expands coverage dispute team with triple hire

Fenchurch Law, the leading UK firm working exclusively for policyholders and brokers on complex insurance disputes, has made a trio of hires to further increase the capacity of its coverage dispute team.

Laura Steer joins as a Senior Associate from Holman Fenwick Willan (HFW). She was recently seconded by HFW to Marsh where she was responsible for handling complex coverage disputes for policyholders. Laura has extensive experience in representing policyholders, insurers and reinsurers in complex and high value, insurance and reinsurance coverage disputes. She has a particular focus on energy and property risks but has a broad range of experience across many classes of business in the energy, property damage, business interruption, marine hull and machinery sectors.

James Breese joins as an Associate and will draw on his varied background to advise clients on the best tactical approach to resolving disputes. James has considerable experience in insurance disputes, litigation and regulation and joins from Clyde & Co where he acted for insurers. He also previously worked for a Medical Defence Union mutual in a claims handling role.

Daniel Robin also joins as an Associate. Daniel has experience of working for the London insurance market in most aspects of the commercial insurance industry as a panel solicitor for insurers, as an insurance broker, and as an insurance claims handler. He has direct experience in advising policyholders on insurance disputes in relation to a range of insurance policies including professional liability, property damage, commercial combined policies and financial lines policies. Daniel joins Fenchurch Law from DWF.

Managing Partner of Fenchurch Law, David Pryce said: “We are continuing to invest in the growth of what is already the UK’s largest team of policyholder – focused insurance disputes solicitors. Fresh from retaining our Tier one ranking in the Legal 500, and being described as a “genuine leader in our field, we’re excited about the range of skills and experience that Lauren, James and Daniel will bring to our clients”.

October 23, 2018

Fenchurch Law awarded Investor In Customers “Gold” Award for client experience

Fenchurch Law, the UK’s leading firm of policyholder-focused insurance dispute lawyers, have achieved a ‘gold’ award from the independent Investor in Customers (IIC) assessment process for a second year running.

Comments from clients included:

“You receive a proactive, knowledgeable and professional service better than any competitor.”

“My dealings with the firm were extremely professional and the key contacts and partners were always approachable. These points are invaluable to me.”

“In all of my interaction with Fenchurch Law they make me believe that my concern / issue is right at the top of their pile. They listen and respond within a reasonable period of time (not too quick otherwise I’d fear they haven’t considered it properly!).”

“I feel this team is a true example of a modern law firm where client care and results are at the forefront of everything it does.”

“We brokers know how to deal with most claims, but we sometimes need expert help when the insurer is being difficult. We are comforted to know that Fenchurch Law are right behind us and our clients to provide the legal guidance and advice when required.”

IIC is an independent assessment organisation that conducts rigorous benchmarking exercises.  These exercises determine the quality of customer service and relationships across several dimensions, including how well a company understands its customers, how it meets their needs and how it engenders loyalty.  IIC also compares the views of staff and senior management to identify how embedded the customer is within the company’s thinking.

Sandy Bryson, Director at IIC, commented: “Fenchurch Law has recorded another exceptional assessment score of its client experience, resulting in our Gold award for the second consecutive year. Not only that, the individual results from all 4 audiences who completed the assessment questionnaires: their clients; their employees; senior managers and IIC, were also rated as a “Gold”. I am delighted for David and his team. These results are testimony to the absolute commitment from the whole Fenchurch Law team to put their clients first. Furthermore, they will be implementing the insights from this years’ assessment to continue improving their client experience.”

David Pryce, Managing Director at Fenchurch Law added: “Providing an exceptional service is extremely important to us, but we know that we can always do better. That’s why we use the IIC process. To understand what we can improve, and to make sure that these improvements do happen”.

October 5, 2018

Important decision for anyone involved in coverage disputes or Brokers’ E&O claims

Dalamd Ltd v Butterworth Spengler Commercial Ltd [2018] EWHC 2558 (Comm)

Judgement by Mr Justice Butcher was handed down on 12th October.

One of the key messages (see paras 133-134 of the judgment) is that, where an insurer declines indemnity, there is a very significant distinction between (i) the situation where the policyholder challenges the insurer’s stance and goes on to reach a reasonable settlement with it; and (ii) the situation where the policyholder simply accepts the declinature and sues the broker for the uninsured loss.

In the first scenario, the policyholder can sue the broker for the difference between the amount of the settlement and what it would have recovered under policy, without having to establish in the action against the broker that the insurer’s coverage defence was necessarily a good one.

By contrast, in the second scenario (where the policyholder does not settle with the insurer before suing the broker), it will be required in the action against the broker to establish as a matter of fact or law that the insurer’s coverage defence was correct. Butcher J rejected the claimant’s submission that it could instead simply establish the “loss of a chance” to have claimed on the insurance policy.

So this is the message for any policyholder whose insurer has declined indemnity – only regard a professional negligence claim against the broker as your first and exclusive mode of redress in the clearest of cases, where there is no real doubt that the insurer’s stance is well founded. In any other situation, the policyholder will be well advised first to challenge the insurer’s stance with a view to reaching a reasonable settlement with it, and only then to contemplate a claim against the broker for the shortfall.

Here’s the full judgement:

Jonathan Corman is a partner at Fenchurch Law

May 23, 2018

Wheeldon Brothers Waste Limited v Millennium Insurance Company Limited

In this recent pro-policyholder decision, the Court examined the construction of Conditions Precedent and Warranties. Here, the insurer attempted, rather opportunistically, to import a meaning to these terms which was far more onerous than the common sense approach adopted by the policyholder and ultimately endorsed by the Court.

Wheeldon Brothers Waste Limited (‘Wheeldon’) owned a waste processing plant (‘the Plant’) situated in Ramsbottom. The Plant received a number of combustible and non-combustible wastes, and, via a number of separation processes, produced a fuel known as ‘Solid Recovered Fuel.’

Wheeldon had a policy of insurance (‘the Policy’) with Millennium Insurance Company (‘Millennium’), who provided cover against the risk of fire.

In June 2014, a major fire occurred at the Plant, which was believed to have been caused by the collapse of a bearing on a conveyor. Prior to the fire, Millennium had appointed a surveyor to undertake a risk assessment, which led to the issuing of “Contract Endorsement No 1” (‘CE1’). CE1 required compliance with a number of Risk Requirements, each of which was incorporated into the Policy as a condition precedent to liability.

Millennium refused to indemnify Wheeldon following the fire, relying upon the following grounds (‘the Grounds’):

  1. A failure to comply with the Risk Requirement relating to the storage of Combustible Materials at least six metres from any fixed plant or machinery (‘the Storage Condition);
  2. A breach of warranty requiring the removal of combustible materials at the close of business each day (‘the Combustible Materials Warranty’);
  3. A breach of the condition relating to the maintenance of machinery (‘the Maintenance Condition’);
  4. A breach of the condition relating to housekeeping (‘the Housekeeping Condition’).

Wheeldon issued proceedings against Millennium.

Before addressing the Grounds, the Judge was first required to make a finding on the cause of the fire.

Millennium asserted that the fire was caused by heat or fragments leaving ‘the housing of the bearing’, causing the usual materials that drop through the machine to catch and burn. Wheeldon, however, argued that the fire was the result of smouldering, which was caused by combustible materials falling through a ‘gap’ in the housing of the conveyor, which had been created by the failed bearing.

The Judge rejected Millennium’s explanation. The available photographs and CCTV stills showed no evidence of the material they referred to, and the presence of burn marks (on which Millennium placed huge emphasis) was inconclusive.

  1. The Storage Condition


The Judge approached the issue of whether there had been a breach by dealing with the following questions:

  • Was there combustible waste?
  • Was it in a storage area?
  • Was it within 6 metres?


The parties disagreed as to the meaning of “combustible” in the Policy, notwithstanding that their experts agreed that it had the scientific meaning of “anything that burns when ignited.”

Wheeldon’s expert argued that a lay person would not consider all materials which fell within the scientific meaning to be combustible. By contrast, Millennium’s expert said that the entire process involved combustible materials, and that none of the separation processes would have been totally effective at excluding combustible materials.

The Judge, deploying a reasoning that will be welcome to all policyholders, said that, if Millennium had intended “combustible” to mean anything other than what would be understood by a layperson, it should have made that clear in the Policy.

As to the meaning of “storage”, Millennium said that this meant that “such materials had to be placed (or kept) 6 metres from fixed plant or machinery …” Wheeldon rejected that interpretation, asserting that “storage” meant something deliberate i.e. it was an area in which things were intentionally placed.

The Judge preferred Wheeldon’s construction, finding that “storage” imported a degree of permanence, and a deliberate decision to designate an area to place and keep material.

On the evidence available, the Judge found there was no combustible waste, in any storage area, within six metres of any fixed plant or machinery. Accordingly, there was no breach of the condition.

  1. The Combustible Materials Warranty


Wheeldon argued that there was no breach. They said that a visual inspection was always undertaken, and that their employees were required to carry out the necessary cleaning each day.

By contrast, Millennium asserted that the photographs revealed the presence of non-combustible material, and said there was no evidence that those materials had been removed.

Although evidence of a system was, without more, insufficient, the Judge accepted Wheeldon’s evidence that not only was there a safe system in place, but crucially that it had been adhered to. There was therefore no breach of warranty.

  1. The Maintenance Condition


This requirement, a condition precedent, required Wheeldon to maintain all machinery in efficient working order in accordance with the manufacturer’s specifications and guidelines, and keep formal records of all such maintenance.

The Judge found that the failure of the bearing did not, without more, conclusively mean that there was a breach of the Maintenance Condition. In any event, there was no evidence of any breach.

As to the requirement to keep formal records, Wheeldon said that their system of daily and weekly checklists was adequate. Millennium disagreed, and said that (what they described as) “brief manuscript” notes in a diary were insufficient to constitute formal records.

The Judge agreed with Wheeldon, and said that, if Millennium required records to be kept in a particular format, they ought to have prescribed that format in the Policy. As they had failed to do so, there could be no breach.

  1. The Housekeeping Condition


This was also a condition precedent, which required Wheeldon to have procedures in place to ensure a good level of housekeeping at all times, to keep clean all areas of the site to minimise fire risk, to record in a log formal contemporaneous records of Cleaning and Housekeeping in a log book covering areas cleaned.

Wheeldon said that they had a good system of housekeeping in place, which was structured around daily and weekly checklists that covered all the machines, and which focussed on the risks of fire. Millennium disagreed, asserting that there was no evidence of procedures being undertaken at the end of the day to clean up combustible materials.

Once again, the Judge found that there was no breach. The CCTV footage showed that there was regular and effective cleaning, and the Judge found that daily and weekly records were sufficient. As above, if Millennium had a different requirement in mind, they should have spelt that out in the Policy.

As Millennium had failed to make out their case on any of the Grounds, judgment was given for Wheeldon.


This decision in Wheeldon is a welcome one for policyholders, and illustrates that an insurer will be unable to rely on a breach of condition or warranty, if the actions required by the policyholder are unclear or lacking particularity.

Alex Rosenfield is an associate at Fenchurch Law

May 22, 2018

Insurance Cover for Combustible Cladding

Insurance Cover for Combustible Cladding

Dame Judith Hackitt’s Review of Building Regulations and Fire Safety recommends radical integrated change to the regulatory system covering high-rise and complex buildings, reflecting the realisation after Grenfell that previous oversight of the myriad activities and conflicting motivations involved in the construction of dwellings is not fit for purpose, to ensure safety of all occupants.

Focus on delivery and preservation of high quality buildings is of crucial importance for society and stakeholders across the industry. Challenges remain for many property owners and construction businesses affected by combustible cladding to existing structures, and insurers have a significant role to play in facilitating appropriate risk transfer and keeping buildings safe.


The report highlights misunderstanding of ambiguous or inconsistent guidance, lack of clarity on roles and responsibilities, competence issues, lack of transparency in product testing and approval, and inadequate enforcement tools as key problems underpinning the failure, creating a ‘race to the bottom’ culture that does not promote good practice. A clear model of risk ownership is proposed, held to account by a new Joint Competent Authority operating under a simpler and more effective regulatory framework, with audit trails of information throughout the life cycle of a building, from planning to occupation and maintenance. A ban on inflammable cladding is due to be implemented later this year through changes to building regulations, but this will not apply retrospectively where materials have already been fitted.

Remedial Costs

Removal and replacement of unsafe cladding by councils and housing associations will be government funded at a cost of approximately £400 million. Sajid Javid has said that freeholders of private developments have a ‘moral responsibility’ to pay for rectification without levying the costs through service charges, affecting thousands of leaseholders in 130 apartment complexes in England that failed cladding tests since the tragedy in June 2017. The allocation of responsibility in each case will depend on the leasehold arrangements and any latent defects insurance or housing warranty.

The London Residential Property Tribunal ruled in March against residents of the Citiscape complex in Croydon over the management company’s right to recover costs of replacement cladding and fire safety marshals, in circumstances where the leasehold repairing obligations and service charge covenants were co-extensive, before the developer and freeholder stepped in to cover remedial works of around £2 million. At the New Capital Quay development of 1,000 homes in Greenwich, completed in 2014, legal proceedings are reportedly underway between the management company and NHBC warranty provider, to determine liability for c.£40 million costs of Grenfell-style cladding, certified as compliant with building regulations at the time of installation.

LDI and New Home Warranties

Latent defects insurance (LDI) can be obtained affording first party cover to both homeowners and developer from practical completion, to rectify damage or imminent damage arising from pre-existing defects. Insurers typically look to recover the loss from any negligent professional involved in the construction process. LDI can avoid costs and delay associated with apportioning fault where previously accepted industry standards are exposed as inadequate (see also MT Hojgaard), and protect against contractor insolvency risk. Take up has increased in recent years, attracting investors and tenants.

The Council of Mortgage Lenders requires a 10 year warranty or insurance policy to lend for new build residential homes. Standard new home warranties provide cover for homeowners against actual or imminent damage caused by structural defects or breach of building regulations prior to completion, subject to initial 24 months’ period where the developer is liable to rectify. The ‘immediacy’ of damage arising from unsafe cladding will depend on evaluation of the surrounding circumstances including materials used, component parts of the structure, maintenance history and overall safety systems.

Insurance claims may be especially important for owners of property blighted by combustible cladding given the difficulty in law of recovering pure economic loss (i.e. in the absence of physical damage) without a direct contractual relationship or collateral warranty with any party considered responsible for design, installation or certification of unsafe systems.

Next Steps

The first substantive hearings of the Grenfell Inquiry led by Sir Martin Moore-Bick commence today with tributes from friends and family of the 72 victims, as part of a fact-finding process to investigate how such a disaster could have occurred, alongside a police probe into alleged criminal offences.

It is hoped that industry leadership will recognise and wholeheartedly support the cultural shift required, seizing the opportunity to restore public confidence and improve safety standards in the construction and maintenance of buildings for the benefit of all.

The scope of insurance cover for cladding claims is likely be contentious given the scale of market exposure and policyholders should consider specialist advice on applicable wordings, to notify claims broadly and maximise potential recoveries.

Amy Lacey is a partner at Fenchurch Law

April 26, 2018

Contractors Beware: Defects Liability and Project Insurance Coverage

Energy firm SSE Generation has been awarded in excess of £100m damages on appeal over a tunnel collapse nearly ten years ago at the Glendoe hydroelectric power scheme in Scotland (SSE Generation v Hochtief Solutions [2018] CSIH 26). The Inner House, Court of Session, decided by a majority of 2:1 that the contractor was liable for costs of repair due to breach of the requirement that erodible rock encountered in the tunnel be shotcreted if not otherwise protected, despite having exercised reasonable skill and care, as defects were in existence at take-over by the employer. The contractor could not rely on a contractual limitation of liability for design defects as the damage was caused by implementation of the design (i.e. workmanship).

Further, there was no implied term preventing the employer from bringing proceedings against the contractor, notwithstanding a joint names construction all risks policy, in view of express contract terms apportioning liability for claims due to an event at each party’s risk. Consistent with Gard Marine v China National Chartering Co [2017] UKSC 35, it was acknowledged that a requirement for joint insurance could lead to an implied term that claims between contracting parties were not permitted, and the Supreme Court’s use of language in that case such as “inconceivable” and “absurd” when referring to the possibility of a subrogated claim were “powerful contra-indicators”. However, the joint insurance required under the Glendoe contract indemnified loss or damage to the works, not breach of contract by the contractor in failing to carry out repairs, so the policy would not cover the employer’s claim on the facts in any event.

The decision is also notable in considering the Works Information requirement for a “design life” of 75 years. Following the Supreme Court decision in MT Højgaard v Eon [2017] UKSC 59, it did not mean the contractor was warranting that the works would in fact last for the specified period without “major refurbishment or significant expenditure”. Rather, the obligation was met if the contractor handed over the works with such a design life and the employer had the whole of the defects period to determine whether the works did in fact have that design life. The question of compliance therefore fell to be determined at the defects date, which may be difficult to assess in some instances, but not here, as the tunnel collapse had already occurred.

This comes hot on the heels of Haberdashers Aske v Lakehouse [2018] EWHC 588 (TCC), providing welcome clarification on the issue of how sub-contractors in the construction industry obtain the benefit of project policies. The Judge identified three different ways of analysing the situation – based on agency principles, a standing offer, or acceptance by conduct – and decided that in any case the roofing sub-contractor did not benefit from cover under the project policy (which included a waiver of subrogation term), given that it had obtained separate liability insurance with a limit of £5m in accordance with express contract terms. It was accepted that cover would otherwise be available under the project insurance to sub-contractors as additional insureds for specified perils including fire damage. The project insurers had funded settlement of claims against the main contractor for £8.75m and the subrogated claim was limited to the extent of the sub-contractor’s insurance, leaving open the question of whether a project policy might (partially) respond to losses claimed against a sub-contractor in excess of separate policy limits.

Performance obligations and insurance requirements in construction contracts must be carefully considered to ensure appropriate allocation of risk, scope of cover and limits of indemnity. If the parties intend to create an insurance fund as the sole avenue for making good the relevant loss, this should be expressed in clear and unambiguous terms. Subject to interpretation in individual cases, a sub-contractor agreeing to obtain separate liability insurance may be exposed to subrogated claims from any project insurer, even if the loss in question was covered by the project policy.

Amy Lacey is a partner at Fenchurch Law

February 27, 2018

The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #3 (The Ugly). Pioneer Concrete

Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.

Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those are cases that can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.

At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.

#3 (The Ugly)

Pioneer Concrete (UK) Ltd v National Employers Mutual General Insurance Association Ltd [1985] 2 All ER 395

As Bingham J put it: “this action raises one question of some interest and importance in the law of insurance.”

The issue here was: does an insurer have to show that it has suffered prejudice, when relying on a breach of a condition precedent?

Pioneer Concrete (UK) Ltd (“the Claimants”) sued East London Ltd (“the Insured”), after they had negligently installed some machinery ten months earlier.

The Insured had a public liability policy with National Employers Mutual General Insurance Association Ltd (“the Insurers”), which contained a condition precedent requiring them to give written notice to the Insurers of “any accident or claim or proceedings immediately the same shall have come to the knowledge of the Insured or his representative” (‘the Condition’).

The Claimants obtained a judgment against the Insured, who then became insolvent. The Claimants then claimed against the Insurers under the Third Party (Rights Against Insurers) Act 1930.

Although the Insurers knew about the original allegations, they said they had not been made aware of the proceedings, and therefore relied on a breach of the Condition to avoid paying the claim. The Claimants argued that the claim should be covered, as the Insurers had not suffered any prejudice.

The decision

It was held, dismissing the Claimants’ claim, that a breach of a condition precedent to liability, however trivial, will entitle an insurer to escape liability for a particular claim. It was not necessary for the Insurers to show they had suffered any prejudice as a result of the breach.

The case laid to rest a line of authorities indicating that insurers could not rely on a breach of a condition precedent when the breach caused no prejudice to them. In our view, this decision was extremely harsh for the policyholder, as the Insurers had always known about the incident, and even the claim itself. While we recognise that the law ought to make a distinction between a condition precedent and a ‘mere condition’, arguably it was open to the Court in Pioneer Concrete to have held that an insurer needed to establish at least some more than minimal prejudice before the draconian effect of a condition precedent was triggered.

Lastly, a point worth mentioning is that, although the Insurance Act 2015 has sought to level the playing field between policyholders and insurers, it is likely that a breach of a condition precedent, however innocuous, would still give an insurer a complete defence to a claim.