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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.

February 22, 2018

Avoid getting out of your depth with notifications – the Court considers the scope of notification in Euro Pools plc v Royal & Sun Alliance Insurance plc

In Euro Pools Plc v Royal & Sun Alliance Insurance Plc[1] the Court considered (amongst other things) the scope of notifications made to two successive design and construct professional indemnity policies.

The Insured

The Insured, Euro Pools plc, was in the business of designing and constructing swimming pools. The pools were designed with moveable floors, so that their depth could be increased and decreased, as well as moveable booms by which the length of the pool could be altered. (By raising the boom, a large swimming pool could be divided into two smaller pools.)

The Policies

The Insured had a professional indemnity policy with RSA for the period June 2006 to June 2007 (the “2006/07 Policy”), and a subsequent policy for the period June 2007 to June 2008 (the “2007/08 Policy”). As is usual with professional indemnity policies, they were written on a claims-made basis, with both policies providing that the Insured should notify the insurers:

“as soon as possible after becoming aware of circumstances…..which might reasonably be expected to produce a Claim”.

The Policies provided that any Claim arising from such notified circumstances would be deemed to have been made in the period of insurance in which the notice had been given.

The February 2007 notification to the 2006/07 Policy

The booms operated by way of an “air-drive” system, by which they were raised and lowered by applying or decreasing the air pressure in the booms.

In February 2007 a defect became apparent, whereby air was escaping from the booms and water was entering, resulting in the booms failing to raise and lower as intended. The Insured at this time did not consider that there was any issue with the air-drive system itself, and that instead the issue could be resolved within the Policy excess by inserting inflatable bags into the booms. The Insured made a notification to that effect (“the February 2007 notification”).

The Insured also notified an issue in respect of the moveable floors, which needed urgent attention at a cost which exhausted the 2006/07 Policy limit of £5 million.

The May 2008 notification to the 2007/08 Policy

By May 2008 the Insured had experienced problems with the inflatable bags that had been used in the air-drive system and reached the conclusion that there was an issue with the air-drive system itself, which would need to be replaced with a hydraulic system. The Insured notified this issue to the 2007/08 Policy year (“the May 2008 notification”).

Attachment

The Court considered whether the claim for the costs of replacing the boom system attached to the 2006/07 Policy by virtue of the February 2007 notification or the 2007/08 Policy by virtue of the May 2008 notification. As the 2006/07 Policy limit was already exhausted it was in insurers’ interests for the claim to attach to the 2006/07 year, but was not in the Insured’s.

What was necessary was for there to be both a causal, as opposed to a coincidental, link between the claim as made and the circumstance previously notified (as set out in Kajima UK Engineering Ltd v Underwriter Insurance Co Ltd[2]). In addition, the Insured was only able to notify circumstances of which it was aware at the time of notification.

The Court held that the Insured was not aware of the need to switch to a hydraulic system for the booms at the time of the February 2007 notification, and so could not have notified this issue as a circumstance. In addition, there was also not a causal link between what was notified to the 2006/07 year (an issue with the boom which could be remedied easily and not an issue with the air-drive system itself) and the subsequent claim relating to replacing the air-drive system with a hydraulic one.

The Court upheld the principle of a “hornet’s nest” or “can of worms” notification: where there is uncertainty at the time of the notification as to the precise problems or potential problems, the insured can make a notification of wide scope, to which numerous types of claims may ultimately attach. However, such a notification had not been made in this instance.

Lessons for policyholders

The case again highlights the issues that can arise in respect of notifications of circumstances, especially when made during a developing investigation. The overarching message is that in each case the extent and ambit of the notification and the claims that will be covered by such notification will depend on the particular facts and terms of the notification.

Although in this instance the Insured was aware of an issue with the booms in February 2007, the notification was held to be limited as a result of the Insured’s view that this was not a problem with the air-drive system itself, which was not considered to be the issue until the 2007/08 Policy year and the May 2008 notification. Applying a narrow interpretation of Kajima, the Court determined that it was not enough that the issue with the air-drive system was discovered as part of the continuum of investigations instigated following the initial discovery of issues in 2007.

In Kajima the insured had notified distortion of external walkways and balconies in a housing development due to settlement and, subsequently and following further investigation, discovered separate defects at the development (for instance in relation to the kitchens and bathrooms). The Court held that the defects that were discovered after the notification did not arise from the defect notified as a circumstance so as to attach to the Policy, as there was not a sufficient relationship between the defects notified and the separate defects discovered subsequently. Whilst the same reasoning was applied in the current case, arguably the position differed in Euro Pools as the Insured was aware of the defect (the malfunctioning boom) at the time of the notification, and did notify circumstances in relation to it. It was the cause of the defect of which the Insured was not aware at the time of notification.

This narrow interpretation worked in the Insured’s favour, given that the May 2008 notification was deemed to be valid and insurers did not seek to rely upon a clause within the 2007/08 Policy which excluded the consequences of any circumstances notified under any prior insurance or known to the insured at the inception of the insurance.  However, the narrow interpretation of the scope of the May 2007  notification will not be to an insured’s benefit in other circumstances where, for instance, they do not have cover under a subsequent policy.

Policyholders can seek to avoid uncertainty by ensuring that careful consideration is given to the wording of any notification. If the policyholder intends the notification to have a wide scope so as to cover the widest possible range of claims arising out of a circumstance in a “can of worms” style, then the notification should be drafted in as broad a manner as possible so as to achieve this, subject to the overarching criterion that an insured can only notify a circumstance of which it is aware.

[1] [2018] EWHC 46 (Comm)

[2] [2008] EWHC 83 (TCC)

Tom Hunter is an associate at Fenchurch Law