News

February 12, 2019

Pallister Limited v (1) Fate Limited (in liquidation) (2) The National Insurance and Guarantee Corporation Limited (3) UK Insurance Limited

In this recent decision in the Queen’s Bench Division, the court examined the meaning of “property belonging to” in the context of a landlord’s insurance policy. The court also examined the scope of the decision in Mark Rowlands v Berni Inns Ltd [1986].

Palliser Limited (‘Palliser’) was the lessee of the three upper floors of 228 York Road, London (‘the Building’), which contained 7 flats. The Building was owned by Fate Limited (‘Fate’), which also operated a restaurant on the ground floor. Under the terms of the lease, Fate agreed to take out insurance that covered damage to the Building.

On 1 January 2010, a fire occurred in the restaurant as a result of Fate’s negligence, causing extensive damage to the three upper floors.

In 2016, Palliser sued Fate. The claim settled in 2017 after Fate became insolvent. Following a case management conference in March 2018, the claim was allowed to continue against Fate’s insurers (‘the Insurers’) under the Third Parties (Rights Against Insurers) Act 2010 (‘the Act’).

Palliser claimed an indemnity from the Insurers under the Public Liability section of Fate’s policy (“Section 6”), for losses suffered as a result of the fire. Two heads of loss were claimed: (1) refurbishment costs; and (2) lost profits, on the basis that Palliser had lost the opportunity to sell the 7 flats and reinvest the proceeds in subsequent developments.

There were three issues for the Court to decide:

1. Did Fate’s policy cover its liability to Palliser (the First Issue)?

2. Under the lease, did Palliser impliedly exclude Fate’s liability for negligence because Fate agreed to take out insurance that covered damage to the Building (‘the Second Issue’)?

3. Did Palliser establish that it had suffered a loss of profits?

Palliser’s claim for lost profits failed on the facts, and this article concentrates on just the First and Second Issues.

The First Issue

Fate’s policy (‘the Policy’) stated that the insured was “Fate”, its business was “restaurant”, and the risk address was “228 York Road, London”.

Section 6 provided cover for “Accidental Damage to Property not belonging to you or in Your charge or under Your control or that of any Employee”. The question to be answered, therefore, was whether the three upper floors fell within this designation.

Palliser argued that “not belonging to” had a different meaning to “not owned by”. In this regard, it said that, because it had control and exclusive possession of the flats, the property did not belong to Fate, in that sense. Further, Palliser said that the Buildings section of the Policy (“Section 9”) did not cover the flats as they were not occupied for the purposes of the business.

The Insurers argued that Section 6 did not cover Palliser’s loss, as the whole building was owned by Fate. They argued that “not belonging to you” was synonymous with “not owned by you”, and that the granting of exclusive possession to Palliser did not mean that Fate, as the landlord, was no longer an owner. They also argued that, because Section 9 provided cover for the Building, the exclusion in Section 6 for property belonging to Fate made perfect sense.

The Judge agreed with the Insurers, and found that the Building did indeed “belong to” Fate as the freehold owner. Further, the Judge said that Section 6 and Section 9 should be viewed as fitting together, with cover for the buildings (which included the upper-floors) being dealt with in Section 9, not Section 6. Accordingly, Palliser’s claims failed, subject to a small portion of the refurbishment costs for fixtures and fittings (£8,500) which unquestionably did not belong to Fate. However, that smaller sum would still be dependent on the Judge’s finding on the Second Issue.

The Second Issue

The Judge referred to this issue as the ‘Berni Inns’ defence (in reference to the case of Mark Rowlands Ltd v Berni Inns Ltd [1986] QB 211). There, a lease provided that a landlord would insure a building against fire and lay out the insurance monies to rebuild it, while the tenant was to contribute to the cost of the premium by an “insurance rent”, and was relieved from its repairing obligations in the event of damage by fire.

The building was destroyed by a fire as a result of the tenant’s negligence, following which the landlord’s insurers (using their rights of subrogation) sued the tenant in negligence. The Court of Appeal held that the covenants in the lease meant that the buildings insurance was effected for the benefit of the tenant as well as the landlord, and that the contractual arrangements precluded the landlord from recovering damages in negligence from the tenant.

Palliser submitted that Berni inns was distinguishable, as here it was the landlord which had been negligent, not the tenant. However, even if it was wrong about that, Palliser argued that the Berni Inns defence did not apply because Fate underinsured the building.

The Insurers argued that the Berni Inns defence did apply, making reference to the fact that Palliser had not paid for the insurance, and that the covenants in the lease were very similar to those in Berni Inns.

Although the Judge agreed that Berni Inns was significantly different to the present case, he did not decide whether the defence applied, and instead held that that its application had to be qualified because the building was underinsured. He held that it could not be correct that the tenant had impliedly excluded the landlord’s liability in negligence, since, if it were, there would be an implied exclusion even where the landlord failed to take out buildings insurance at all. As a result, Palliser was at least entitled to recover the £8,500 refurbishment costs.

Conclusion

The case is an interesting example of how the Act will work where insurers run coverage and liability defences at the same time.

So, on the First Issue, because the damage was covered by the property damage section, rather than the third-party liability section of the Policy, the Act did not apply.

As to the Second Issue, although the Judge found in favour of Palliser (albeit only for a small sum), it is unclear whether the outcome would have been different had the Building been adequately insured.

Alex Rosenfield is an associate at Fenchurch Law

February 11, 2019

Webinar: Notifying circumstances to claims-made policies

Partner Jonathan Corman talks about the thorny issue of notifying “circumstances” to PI and D&O policies, including:

The distinction between “loss occurring” and “claims made” policies.

The importance of being able to notify a “circumstance” as well as “claims”.

What is a “circumstance”? What’s the difference between a circumstance defined as one which “might” give rise to a claim and one “likely” to do so?

How detailed must the notification be?

What about “block” or “blanket” notifications?

The consequences of notifying late.

Watch here

January 20, 2019

Building a Safer Future: Regulatory Reform on Combustible Cladding

Following publication of the Hackitt Report in May 2018, the government has been under increasing pressure to implement effective reform of building regulations in the UK, with a focus on cladding systems to high-rise developments. Legislation has recently been introduced aimed at improving fire safety and accountability, with a range of further measures anticipated.

Building (Amendment) Regulations 2018

Regulations came into force on 21 December banning the use of combustible materials in external walls of buildings above 18 metres in height, including residential dwellings, boarding schools, student accommodation, registered care homes and hospitals (SI 2018/1230). The new rules also apply where building work is a “material change of use” that brings an existing building within one of these categories. Commercial buildings, including hotels and offices, are excluded.

The ban does not apply retrospectively to existing structures, including where a building notice or initial notice has been given to, or full plans deposited with, a local authority before the legislation commencement date, provided that building work has already started or starts within two months thereafter.

The press release announcing the ban confirms the government’s “full backing” for local authorities to enable them to carry out emergency work on private residential buildings with unsafe cladding, including financial assistance, although local authorities will be expected to recover the costs from building owners. This is not mentioned in the Regulations and seems to indicate support for councils in using their existing powers relating to unsafe buildings, pursuant to the Building Act 1984.

Approved Documents 7 (Materials & Workmanship) and B (Fire Safety)

Regulation 7 of the Building Regulations 2010 requires that materials used in building work are appropriate for the circumstances. A new sub-section 7(2) has been introduced, directing that all materials which become part of an external wall, including “specified attachments” such as balconies and solar panels, achieve European fire safety classification (A2-s1, d0) or (A1), meaning only limited combustibility or non-combustible materials will be permitted. Certain limited components are exempted by regulation 7(3), including gaskets, sealants, windows and any part of a roof.

Approved Document B has been updated to include additional guidance at paragraph 12.6 that insulation products and filler materials used in external walls in buildings of 18 metres or more “should be of limited combustibility or better”. It is no longer permissible therefore to incorporate combustible materials within masonry or concrete walls to new high-rise buildings, such as the Reynobond polyethylene core ACM panels that were used on Grenfell Tower.

Further changes to Approved Document B come into effect on 21 January 2019, clarifying the role of assessments in lieu of testing for cladding and fire safety systems. In accordance with Hackitt recommendations, use of desktop studies should be restricted to appropriate situations backed up with sufficient test evidence, with those undertaking assessments able to demonstrate suitable competence.

The government has launched a wider call for evidence to gather views on (1) more extensive changes to Approved Document B technical requirements, and (2) how residents and landlords can work together to keep their homes and buildings safe. A new Standards Committee is being established to advise on applicable rules, together with a Joint Regulators’ Group to trial proposed legislative changes.

Prescriptive Requirements

The outcomes-based approach to building regulations in the UK puts the onus on companies to operate safely, allowing flexibility and seeking to ensure that emerging risks are addressed without the need for new legislation. However, problems have been highlighted around the lack of clarity in applicable rules, with insufficiently stringent oversight to avoid low standards and damaging conflicts of interest.

Changes to Approved Document B signify a departure from the level of discretion allowed under the previous regime, and moves towards a more prescriptive regulatory framework. The use of combustible materials has not been eliminated entirely though and many commentators believe the proposals do not go far enough. A stricter system of building control applies in some other jurisdictions such as France, Germany and North America, with significantly more emphasis on prescriptive baseline requirements to protect the life safety of building users.

Industry groups are lobbying for the 18 metres requirement to be reduced and the Scottish government has pledged a similar ban for buildings over 11 metres in height, including entertainment and assembly buildings. Related concerns around sprinklers, alarm systems and alternative means of escape in high-rise buildings merit urgent reconsideration as part of integrated reforms.

Future Developments

The second phase of the Grenfell Tower Inquiry is unlikely to start until the end of 2019, according to its chairman Sir Martin Moore-Bick, with some 200,000 documents (including in relation to installation of the cladding and insulation) still to be disclosed. The first phase centred on the night of the incident, and the second will examine wider issues surrounding the fire.

Disputes over remediation of private blocks affected by potentially dangerous cladding materials are ongoing in many cases, exacerbated by complexities in proving clear breaches of applicable building regulations in order to establish liability. Stakeholders in affected properties should consider whether existing insurance, warranties or guarantees can meet the costs of cladding replacement, and seek appropriate advice from policyholder coverage specialists.

Amy Lacey is a partner at Fenchurch Law