News

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.

Summary

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.

Recommendations

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