If your name’s not down…: no policy cover where developer incorrectly named

Sehayek and another v Amtrust Europe Ltd [2021] EWHC 495 (TCC) (5 March 2021)

A failure to correctly name the developer on a certificate of insurance has entitled insurers to avoid liability under a new home warranty policy.

The homeowner claimants had the benefit of insurance that covered them for the cost of remedying defects in their new build property at the Grove End Garden development in St John’s Wood.

Under the policy, “developer” was a defined term, being an entity registered with the new home warranty scheme from whom the policyholder had entered into an agreement to buy the new home, or who had constructed the new home.  Cover was available under the policy for the cost of rectifying defects for which the developer was responsible, but had not addressed for various reasons including its insolvency.

Following the discovery of significant defects at their property, the claimants sought to bring a claim under the policy.

The certificate of insurance named a particular company called Dekra Developments Limited (Dekra) as the developer.  Dekra was an established developer and had been registered with the new home warranty scheme since 2005. One of Dekra’s directors had confirmed to insurers that it was the developer of the Grove End Garden development. However, in fact, the developer was an associated company of Dekra set up for the purpose called Grove End Gardens London Limited.

Insurers therefore declined the claim on the basis that Dekra did not meet the policy definition of developer, being neither the entity named as seller on the sale agreement, nor the builder of the new homes. Its insolvency was not therefore a trigger for cover.

The homeowners sought to argue for an implied term extending the definition of developer to include its associated companies, and brought alternative claims based on estoppel and waiver.

Their claims did not succeed.  The court found that this was not a “misnomer” case, in that the claimants were not able to demonstrate that there was a clear mistake on the face of the certificate of insurance as an objective reading of the evidence was consistent with cover having been agreed between Dekra and the insurer.  Further, the proposed correction to imply the words “associated companies” was not a clear correction nor one that would be understood by an objective reader as needing to be made.

The alternative case based on estoppel and waiver also failed as no representation was made by the insurers to the effect that the cover extended to associated companies of Dekra.  Nor did the initial rejection of the claim by insurers on other grounds amount to a waiver of the right subsequently to refuse cover on a different ground.

While undoubtedly legally correct, this was a harsh result in circumstances where Dekra effectively held itself out as being the developer, both to insurers and the world at large. This case highlights some of the challenges claimants under new home warranty policies can face as a result of the fact that, despite being the policyholders and having the benefit of the insurance, they are not involved in placing the policies. Nor will they necessarily be aware of the complex corporate structures common in the construction industry, including the use by developers of special purpose vehicles for different projects. The mismatch between the entity named on the sale agreement and that referred to on the certificate of insurance may however be one that they, or their conveyancing solicitor, might have been expected to identify and query at the time of purchase.

Joanna Grant is a partner at Fenchurch Law


Waste not, want not: recycling plant’s claim for cover upheld

Zurich Insurance PLC v Niramax Group Ltd [2021] EWCA Civ 590 (23 April 2021)

Finding that the ‘but for’ test is insufficient to establish inducement, the Court of Appeal has dismissed an insurer’s claim that it would not have underwritten the policy had the material facts been disclosed.

Zurich’s appeal was from a first instance decision that had found largely in its favour in respect of cover for losses arising out a fire at the policyholder’s waste recycling plant. Zurich challenged a finding of partial cover in respect of mobile plant on that basis that, as with the policyholder’s claim for the fixed plant that had not succeeded, it had similarly been induced by a material non-disclosure to underwrite the Policy renewal.

The main focus of the appeal was on whether, in circumstances where the premium charged would have been higher had full disclosure been made, the judge at first instance had been wrong to hold that inducement had not been established. Zurich argued that the increase in premium that would have resulted was of itself sufficient to meet the causation test for inducement, irrespective of the amount of the increase or the thought process by which the additional premium would have been calculated.   Niramax contended that the non-disclosure had to be an effective and real and substantial cause of the different terms on which the risk would have been written if full disclosure had been made and there was no such causation on the facts.

The Court of Appeal found that the relevant test is whether the non-disclosure was an efficient cause of the difference in terms: it is not sufficient merely to establish that the less onerous terms would not have been imposed but for the non-disclosure.

The distinction is of particular relevance on the facts of this case because the impact of the non-disclosure was that the premium was calculated by a junior trainee who made a mis-calculation. Conversely, had the disclosure been made, the risk would have been referred to the head underwriter who would have priced the premium correctly. The non-disclosure therefore fulfils a ‘but for’ test of causation in that it provided the opportunity for a mistake to be made in the calculation of premium that would not otherwise have been made.

It was, however, necessary to apply the relevant test, namely whether the non-disclosure was an effective, or efficient cause, of the contract being entered into on the relevant terms. On the facts of this case, the process by which the premium was calculated took into account: the amount insured, nature of the trade, and the claims history. The undisclosed facts, which related to Niramax’s attitude to risk, were irrelevant to the rating of the risk. Therefore, the non-disclosure could not have had any causative efficacy in the renewal being written on cheaper terms than would have occurred if disclosure had been made.

The underlying principle is that if a non-disclosure has not had any influential effect on the mind of the insurer, impacting on the underwriting judgment, then there is no connection between the wrongdoing and the terms of the insurance, and no justification for the insurer to be awarded a windfall.

Of note is that this decision is based on the law prior to the Insurance Act 2015, the application of which may have led to a different outcome. Under the provisions of the Act, an insurer has a remedy for a breach of the duty of fair presentation if, but for the breach, the insurer would not have entered into the contract of insurance at all or would have done so only on different terms. Policyholders should be aware, therefore, that under the new law, the ‘but for’ test alone may be sufficient to entitle the insurer to a remedy.

Joanna Grant is a Partner at Fenchurch Law


Insurers bound by the small print? I should cocoa!

ABN Amro Bank N.V. -v- Royal & Sun Alliance Insurance plc and others [2021] EWHC 442 (Comm)

In the latest in a line of policyholder-friendly judgments, this recent ruling from the Commercial Court confirms that underwriters will be bound by the terms of policies they enter into whether they have read them or not.

The court found no grounds for departing from the important principle of English law that a person who signs a document knowing that it is intended to have legal effect is generally bound by its terms. Any erosion of that principle, which unpins the whole of commercial life, it was noted, would have serious repercussions far beyond the business community.

A foregone conclusion perhaps? Indeed the judge commented that prior to this case he would have regarded as unsurprising the proposition that underwriters should read the terms of the contract to which they put their names. What was it then that spurred the 14 defendant underwriters to seek to argue the contrary, apparently oblivious to the irony of their taking a point which routinely falls on deaf ears when more commonly made by policyholders unaware of implications of the small print for their claims?

In brief, the claimant bank, ABN Amro, was seeking an indemnity of £33.5 million under a policy placed in the marine market that unusually, and perhaps unprecedentedly, contained a clause the effect of which was to provide the equivalent of trade credit insurance, and not simply an indemnity for physical loss and damage to the cargo. As such, when the cargo, which in this instance comprised various cocoa products, was sold at a loss following the collapse of two of the leading players in the cocoa market and the default by them on their credit facility, the bank incurred losses that it contended were covered by the policy.

The underwriters submitted that the non-standard nature of this clause was such that clear words would have been required to widen the scope of cover beyond physical loss and damage, given the presumption that marine cargo insurance is limited to such loss.  The court however found that, applying the well-established principles of legal construction, the wording of the clause was clear, and therefore its natural meaning should not be rejected simply because it was an imprudent term for the underwriters to have agreed, given the adverse commercial consequences for them.

The underwriters further submitted that they had not read the policy, and that the particular wording and its effect should have been brought to their attention as it was unfair to expect a marine cargo underwriter to understand the purpose of the clause. The bank contended that it was “frankly bizarre” for the underwriters to be essentially arguing that they, as leading participants in the London insurance market had to be told what terms were contained in the written policy wording presented to them and what those terms meant. The court agreed, finding that the underwriters could not properly allege that the clause was not disclosed to them when it was there in the policy to which they subscribed, and that further, as the bank contended, the insured was under no duty to offer the insurer advice. The insurer was presumed to know its own business and to be able to form its own judgment on the risk as it was presented.

Many other principles of insurance law were raised by this case and are covered in the wide-ranging 263-page judgment including (i) the applicable principles of legal construction; (ii) the incorporation and impact of a non-avoidance clause in the policy (it prevented the insurers from repudiating the contract for non-disclosure or misrepresentation in the absence of fraud); (iii) whether the underwriters had affirmed the policy by serving a defence that was consistent with a position that recognised its continuing validity (they had); (iv) whether mere negligence, as opposed to recklessness, was sufficient to breach a reasonable precautions clause in the policy (it was not); and (v) the scope of a broker’s duty to procure cover the meets the insured’s requirements and protects it against the risk of litigation (which duty had been breached and would have led to a liability on the part of the broker had the claims against the underwriters not succeeded).

However, the key takeaway for insurers, policyholders and commercial contracting parties alike is that a court will not step in to relieve a party of the adverse consequences of a bad bargain: the purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. In other words, it always pays to read the small print.

Joanna Grant is a Partner at Fenchurch Law.