COVID-19 Business Interruption Update: FCA Test Case First Hearing and Guidance for Insurers

First Hearing – Case Management Conference (CMC)

On 16 June the first hearing (Case Management Conference) of the FCA Test Case took place remotely at the Commercial Court.  At the hearing, the court granted an order that the case will be expedited in accordance with the proposed timetable (i.e. with a final hearing from 20 July to 30 July) and that the Financial Markets Test Case Scheme will apply. The court confirmed that the case will be heard by a 2-judge panel consisting of Mr Justice Butcher and Lord Justice Flaux.

There was some early disagreement between the FCA and Insurers as to the scope of the declarations sought from the court by the FCA, in particular whether the court should make any ruling as to the actual prevalence of COVID-19 in the UK during the relevant period, and the extent to which any such finding would depend on fact and/or expert evidence.  These matters will be considered further at the second CMC on 26 June.

The insurers’ Defences are due to be filed on 23 June and at that stage we will see the full extent and basis on which the insurers will resist the declarations sought by the FCA.

The second CMC will be live-streamed on 26 June via https://fl-2020-000018.sparq.me.uk/

Guidance to Insurers

The FCA’s guidance for insurers and intermediaries has now been finalised and came into effect on 17 June. It is equally useful for policyholders seeking to understand the process and how their claim may be affected.  Important points to note include the following.

Summary of Test Case

In summary, the core questions that the test case seeks to resolve are:

i. issues of coverage in relation to ‘disease’ and ‘denial of access’ clauses (including any relevant exclusions); and

ii. causation (including any relevant ‘trends clause’ or equivalent wording).

The test case is not seeking to resolve, in particular:

• coverage issues relating to clauses that have an exhaustive list of diseases which does not include Covid-19
• coverage issues relating to clauses which require the disease to be present on the insured premises
• issues concerning misselling of policies
• other issues flowing from the determination of the questions in the test case such as aggregation, additional causation issues specific to loss of rent and similar claims under a property owner’s policy, and the specific quantum of any particular claims

Policy Review

Insurers are required to examine each of their relevant policy wordings to determine whether the outcome of claims under the policy will be affected by the resolution of the Test Case.

Insurers are to notify the results of their review to the FCA by 8 July.  The FCA then intends to publish a comprehensive list of insurers and policy wordings that will be affected by the outcome of the Test Case.

Claims Review

The guidance also sets out quite detailed requirements for communicating with policyholders during the Test Case.

In particular, by 15 July 2020 insurers should individually notify policyholders whose claims or complaints for business interruption losses related to the coronavirus pandemic under relevant non-damage business interruption policies are outstanding or have already been declined (or had an adjustment or deduction for general causation) of:

• whether their claim or complaint is a potentially affected claim or a potentially affected complaint and the implications of that (including the FCA’s expectations of the insurer in respect of such claims or complaints under this guidance), or
• the reasons why their claim or complaint is not a potentially affected claim or potentially affected complaint, and the implications of that.

Insurers are required to continue to communicate with policyholders as and when any developments occur in the case that may affect the outcome of their claim.

Any policyholder whose claim has been declined or remains outstanding should therefore follow up with their insurer or broker if they have received no communication by 15 July at the latest.

Clock Stopped on Time Limits

Time limits for making claims or taking any other step under policies, or for making complaints to the FOS are suspended from 17 June until final resolution of the Test Case.

Whilst most claims should already have been notified before 17 June, this means that any other time limits expressed in the policy, for example in relation to proving calculations of loss, or taking action against the insurer will not apply while the test case is ongoing. That does not stop policyholders from taking such steps or pursuing their claims.

Settlement

The guidance expressly recognises that claims may be settled between insurers and policyholders while the test case is ongoing.  However, when making any offer to settle, insurers should inform the policyholder about the test case and its implications. In particular, they should tell the policyholder whether the final resolution of the test case may affect the insurer’s decision about their claim, and the implications of accepting or rejecting an offer made on a full and final settlement basis.

Reassessment of Claims following Final Resolution

Upon final resolution of the Test Case, insurers should reassess all potentially affected claims, apply the judgment, and promptly inform the policyholder of the outcome of the reassessment.

Aaron Le Marquer is a partner at Fenchurch Law

Endurance Corporate Capital Limited v Sartex Quilts & Textiles Limited [2020] EWCA Civ 308 – Indemnity on the Reinstatement basis

In its decision earlier this year, the Court of Appeal confirmed that, absent a contractual provision to the contrary, an insured does not need to show a genuine, fixed and settled intention to reinstate in order to recover on the reinstatement basis under a property policy.

Background

Sartex Quilts & Textiles Limited (“Sartex”) was the owner of a factory at Crossfield Works, Rochdale (‘the Property’), from which it had manufactured textiles.

A serious fire occurred at the Property in 2011 destroying it and the plant and machinery it contained. Sartex was insured by Endurance Corporate Capital Limited (“Endurance”).

Endurance accepted liability for Sartex’s claim, but the parties disagreed as to the basis on which Sartex was entitled to indemnity. Specifically, Sartex claimed that it was entitled to the cost of reinstating the Property to the condition that it was in immediately before the fire, whereas Endurance argued that Sartex was only entitled to (significantly lower) sums representing the diminution in market value of the Property as a result of the fire.

The matter originally came before David Railton QC, sitting as a Deputy High Court Judge, in May 2019. He concluded that Sartex had a genuine intention to reinstate the Property, and that accordingly, reinstatement was the appropriate measure of indemnity. The Deputy Judge also rejected Endurance’s argument that there should be a discount for betterment.

The Appeal

Endurance appealed the decision on the basis that the Deputy Judge was wrong to assess damages on the reinstatement basis, when Sartex had not demonstrated a genuine intention to reinstate. In this regard, it asserted that Sartex’s ongoing failure to achieve reinstatement, 8 years after the fire, showed that it had no such intention.

Further, if Endurance failed on its primary case, it argued that the Deputy Judge was wrong not to make a deduction for betterment.

The Court’s decision

The measure of indemnity

Leggatt LJ observed that in indemnity insurance, damages were intended to put the insured in the same position it would have been in had the loss not occurred. What an insured actually intended to do with the damages was generally irrelevant.

There were two bases on which the court could award damages: (a) the cost of repair; or (b) the reduction in the market value of the property. Endurance argued that the latter applied, and relied on the decision in Great Lakes Reinsurance (UK) SE v Western Trading [2016] EWCA Civ 1003, in which a listed building was destroyed by a fire. Unusually in that case, the value of the property increased following the fire because its listed status was revoked, thereby improving its development potential. In Great Lakes, Clarke LJ commented that the basis of indemnity was “materially affected by the insured’s intentions in relation to the property”. He went on to say that “the insured’s intention need to be not only genuine, but also fixed and settled. And that what he intends must be at least something which there is a reasonable prospect of him bringing about (at any rate if the insurance money is paid)”.

The Court of Appeal in Sartex said that these comments did not assist Endurance. It was only in rare cases such as Great Lakes, where the property had gone up in value, that there was a need to demonstrate a fixed and settled intention to reinstate. No such issue arose in this case. Therefore, to put Sartex in an equivalent position as if the fire had not occurred, it was necessary to award it the cost of repairing the buildings and buying replacement plant and machinery.

Betterment

Endurance asserted that a percentage deduction should be applied to any award of damages, representing the alleged betterment arising from the replacement of the original building with modern materials. The Court of Appeal agreed that a deduction could, in principle, be made for savings if the building or the new machinery would have generated lower running costs; however, it was incumbent upon the insurer to identify and justify those savings. In this case, Endurance had made no attempt to do so, and simply advanced notional deductions for betterment that were unsupported by evidence. Therefore, absent any evidence, the Deputy Judge had been right to reject Endurance’s argument.

Implications of the decision

The decision in Sartex is good news for property owners, who, subject to any alternative provision in a policy, will not be required to show an intention to reinstate in order to recover on the reinstatement basis. The insured’s intentions will only be relevant in exceptional circumstances, which did not apply on the facts.

As to betterment, although property owners may, in some instances, be required to give credit for savings made as a result of reinstatement, the “blanket percentage” approach will be impermissible. A deduction will only be allowed where insurers can prove and quantify the lower running costs of the new building or the greater efficiency of the new plant and machinery.

Alex Rosenfield is a Senior Associate at Fenchurch Law

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

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.

2. 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.

3. 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.

4. 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

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

Bluebon Ltd (in liquidation) – v – (1) Ageas (UK) Ltd (2) Aviva Insurance Ltd (3) Towergate Underwriting Group Ltd (2017)

What was the proper construction of an electrical installation inspection warranty?

Bluebon Limited (‘Bluebon’) brought proceedings against their insurers, Ageas and Aviva (‘the Insurers’), and their broker, Towergate, following a fire at their premises at the Star Garter Hotel, West Lothian (‘the Hotel’) on 15 October 2010.

Bluebon had purchased the Hotel in December 2007, and the relevant insurance policy (‘the Policy’) incepted on 3 December 2009, for a period of 12 months.

The Policy contained the following Electrical Installation Inspection Warranty (‘the Warranty’):

“It is warranted that the electrical installation be inspected and tested every five years by a contractor approved by the National Inspection Council for Electrical Installation (NICEIC) and that any defects be remedied forthwith in accordance with the Regulations of the Institute of Electrical Engineers.”

The last electrical inspection at the Hotel had taken place in September 2003.

The insurers asserted that there had been a breach of the Warranty since no inspection had been carried out in the 5-year period immediately prior to inception, with the result that the Policy was either voided or suspended from inception.

At a hearing of preliminary issues, the Judge, Mr Justice Bryan, was required to determine the following:

1. The proper construction of the Warranty – was the five-year period to be calculated from the date of the last electrical inspection, or from Policy inception?
2. Was the Warranty a True Warranty, a Suspensive Warranty, or a Risk Specific Condition Precedent, and what was the consequence of a breach?

The First Issue

The Insurers argued that the natural meaning of the Warranty was that the 5-year period had to be calculated from the date of the last inspection, and, if no inspection had been carried out in the last 5 years, the inspection would have to be undertaken prior to or immediately upon inception (with there being no cover until such inspection had taken place). In support of that analysis, they said that the Warranty did not require the inspection to occur within 5 years of inception, and that a reasonable person, having all the background knowledge available to the parties, would know that inspections needed to be undertaken regularly.

Bluebon argued, perhaps optimistically, that the proper construction of the words “be inspected and tested every five years” meant “every five years starting with the date of imposition of the stipulation” i.e. from Policy inception. In support, Bluebon said that the language of the Warranty was “forward-looking”, and that if the Insurers had intended otherwise, the Policy could have stated “has been inspected and tested” or “is inspected and tested.”

The Judge found that Bluebon’s construction made no commercial sense in the context of a 12-month policy, and rendered the Warranty meaningless, since there would be no requirement for an electrical inspection until (at least) after the fourth annual renewal. This provided no protection from the risk of fire and, unsurprisingly, Bluebon’s construction was rejected. It followed that Bluebon had not complied with the Warranty.

The Second Issue

The Insurers’ primary case was that the Warranty was a True Warranty i.e. a term which took effect as a condition precedent to the existence of any cover, such that the breach rendered the Policy void from inception. Alternatively, they said the warranty was a Suspensive Warranty, which had the effect of suspending cover during the period of the breach. Neither construction required a causal link between the breach and the fire, and, accordingly, the Insurers asserted that they had no liability to Bluebon.

Bluebon, by contrast, argued that the Warranty was a ‘Risk-Specific Condition Precedent’ i.e. a term which required compliance as a condition precedent to the Insurers’ liability to provide cover in respect of risks relating to the electrical installation. Put another way, Bluebon said that unless the fire was caused by the electrical installation, their breach was irrelevant.

The Judge again rejected Bluebon’s argument, finding that it would be entirely unbusinesslike for the Warranty to suspend cover in respect of losses arising from defects in the electrical installation (pending inspection of the installation), but not for losses arising out of the fire generally. The Judge’s interpretation was that, while the Warranty was breached, there could be no cover for any losses arising out of fire.

Having regard to his findings on the proper meaning of the Warranty, the Judge found that the Warranty was a Suspensive Condition.

Insurance Act 2015 implications

Although the outcome in Bluebon may not be particularly surprising, it is interesting to consider whether it would have been decided differently under the Insurance Act (‘the Act’).

The Act does not change what an insurance warranty is, but does change the effect if breached. Under Section 11 of the Act, an insured will be protected in the event of a breach of warranty. Providing that it can show that the term was ‘totally irrelevant to the loss’ i.e. the breach “could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.”

There are two interpretations of how Section 11 might have applied in Bluebon (or for that matter generally), both of which have been postulated by the Law Commission.

Under the ‘non-causation’ interpretation, the Insurers would have been entitled to rely upon the breach of the Warranty, because the absence of an electrical inspection might have made a difference, given the type of loss that occurred i.e. a fire. It would not have been open to Bluebon to argue that the fire would have started even if the electrical inspection had taken place.

Under the ‘causation’ interpretation, it would have been open to Bluebon to establish that the fire was due to some other cause, so that the Insurers would be liable under the Policy. That is because, in that scenario, the ‘circumstances’ of the loss were such that compliance with the Warranty would not have made any difference.

Of course, unless and until the true meaning of Section 11 is determined by the Courts (and, given its importance, the point is likely eventually to end up at the Supreme Court), the interpretation will doubtless remain a matter for debate.

Alexander Rosenfield is an associate at Fenchurch Law

BAE Systems Pension Funds – v – RSA

Third Parties (Rights against Insurers) Act 2010

An analysis of the first judgment on the Third Parties (Rights against Insurers) Act 2010 (‘the Act’)

BAE Systems Pension Funds Trustees Limited (‘the Claimant’) brought proceedings against 4 Defendants following the construction of a large warehouse. The damages sought exceeded £10 million.

Protective proceedings were issued against the Defendants on 24 August 2016. In February 2017, the third Defendant, Twintec Limited (‘Twintec’), went into administration, and a few weeks later Twintec’s solicitors revealed that it was insured by RSA. The Claimant accordingly applied to join RSA to the claim.

RSA resisted the application on the grounds that:

1. They were not in fact liable to indemnify Twintec for the claim;
2. The policy and any dispute as to coverage was subject to French law and must be determined by arbitration or by the French courts.

The First Ground

It was uncontroversial that Twintec had become a ‘relevant person’ under section 1 of the Act i.e. it had incurred a liability to the Claimant, and had become insolvent in one of the ways specified by the Act.

Section 2 entitled the Claimant to bring proceedings directly against RSA seeking a declaration as to Twintec’s liability and/or a declaration as to RSA’s potential liability to the Claimant.

RSA argued, somewhat ambitiously, that Twintec was not entitled to indemnity because of an exclusion for pre-existing circumstances, and, if there was thus no cover, section 2 was not engaged.

The Judge, Mrs Justice O’Farrell DBE, found that Section 2 was engaged even where there was a dispute as to coverage. This did not require the Claimant to establish that there was a relevant insurance policy which necessarily responded to the loss – all that was needed was for the Claimant to make a claim that there was such a policy.

RSA argued that a number of difficulties could arise if Section 2 was engaged where cover was disputed. In particular, they suggested that this could pave the way for any insurer to be joined to an action, or possibly an insurer who had provided cover for a previous irrelevant period. The Judge gave short shift to this point, and stated that the Court, in these circumstances, could simply strike out those proceedings as having no prospect of success. The Judge’s decision was obviously right. Were it otherwise, the 2010 Act would not avail a Claimant where an insurer had denied indemnity.

RSA also suggested that there was an irreconcilable conceptual difficulty insofar as they would be faced with defending a claim for a declaration, when, in their view, the Claimant did not have the right to step into Twintec’s shoes. Again the Judge was unpersuaded, and found that it was entirely a matter for RSA as to the submissions they wished to make in response to the Claimant’s claim (and whether they wished to take any substantive part in the proceedings at all).

The Second Ground

The policy contained two dispute resolution clauses. The first clause provided for any dispute between the parties to be referred to the French courts and “shall be subject exclusively to French legislation”.

The second clause provided that, in the event of a dispute regarding the activation of cover, the parties agreed to refer their disputes to two arbitrators chosen by each party.

The claimant argued that the coverage dispute was caught by neither of the clauses. RSA, by contrast, argued that the coverage dispute was caught by both clauses.

The Judge was satisfied that the coverage dispute would be covered by one or other of the clauses i.e. it should be decided by either the French courts, or by arbitration. It did not, however, affect her finding as to whether section 2 was engaged.

The Result

The Judge granted the Claimant’s application to join RSA to the Claim, and, somewhat predictably, made it clear that in order to engage section 2 of the Act, a Claimant need not establish, as a pre-condition, that there is valid coverage. Were it otherwise the case, insurers would have carte blanche to reject any claims made against insolvent insureds.

Alexander Rosenfield is an associate at Fenchurch Law

Not Too Slender a Thread – Supreme Court decision in MT Højgaard v E.ON

The Supreme Court has upheld an appeal concerning liability to comply with fitness for purpose obligations in a design and build contract, in a case with significant ramifications for policyholders involved in construction projects. The judgment highlights the difficulties which arise when accepted industry practices are exposed as inadequate and reinforces the importance of precise drafting of contract terms, and associated policy wordings, given the literal interpretation likely to be applied notwithstanding potentially harsh consequences for unwary contractors.

The dispute arose from a significant error in an international standard for the design of offshore wind turbines known as J101. The contractor, MT Højgaard (“MTH”), relied on J101 whilst engaged by E.ON to design, fabricate and install foundations for the Robin Rigg wind farm in the Solway Firth, Scotland. Following completion of the works, it was discovered that J101 contained an inaccuracy such that the load-bearing capacity of grouted connections had been substantially over-estimated, resulting in remedial works at a cost of €26 million.

In April 2014, the trial judge held that MTH was liable to E.ON because the foundations were not fit for purpose, in breach of a provision in the Technical Requirements section of the Employer’s Requirements in the contract which imposed an obligation that the design “shall ensure a lifetime of 20 years in every aspect without planned replacement”. This provision applied in addition to less onerous contract terms requiring MTH to exercise reasonable skill and care, and to comply with J101.

The Court of Appeal overturned that decision, concluding that the 20 year service life provision in the Technical Requirements was qualified by compliance with J101 and good industry practice, in light of the inconsistency between that provision and other contractual terms. The relevant wording tucked away in the Technical Requirements was described as “too slender a thread” upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations, viewed in context of the contractual provisions as a whole and commercial implications.

In a unanimous decision, the Supreme Court ruled that MTH was liable for breach of the fitness for purpose obligations, construed either as a warranty that the foundations (1) would have a minimum service life of 20 years, or alternatively (2) be designed to last for 20 years. The court referred to UK and Canadian authorities where contractor warranties to complete works without defects were held to override any prescribed specification, noting: “it is the contractor who can be expected to take the risk if he agreed to work to a design which would render the item incapable of meeting the criteria to which he has agreed”. J101 was expressed to be a minimum standard and the court was not prepared to disregard or give a different meaning to provisions of the Technical Requirements incorporated to the contract.

Construction contracts routinely incorporate schedules and technical documents with less than complete harmonisation as to intended legal standards of design and workmanship. The contract in this case was acknowledged to be of a “complex, diffuse and multi-authored” nature with many “ambiguities, infelicities and inconsistencies”. Nevertheless the court saw no reason to depart from the natural meaning of the fitness for purpose provisions, alongside MTH’s other obligations, in accordance with the prevailing approach of judicial non-interventionism that parties will be taken to mean what they say in their contracts (Arnold v Britton [2015] UKSC 36).

To avoid ambiguity, contracting parties should consider the inclusion of express provisions clarifying whether and how technical schedules are to affect overall obligations as to design and workmanship, clearly distinguishing requirements to exercise skill and care from performance warranties or guarantees of fitness for purpose. This in turn will allow policyholders to properly evaluate the risks assumed under the contract, and liaise with their insurance brokers to ensure adequate professional indemnity and all risks cover for potential liabilities.

MT Højgaard A/S (Respondent) v E.ON Climate & Renewables UK Robin Rigg East Limited and another (Appellants) [2017] UKSC 59

https://www.supremecourt.uk/cases/docs/uksc-2015-0115-judgment.pdf

Amy Lacey is a partner at Fenchurch Law

The 1930 Third Party (Rights Against Insurers) Act – still relevant for years to come

Shirley Anne Redman (suing as widow and administratix of the estate of Peter Redman) v (1) Zurich Insurance Plc (2) ESJS1 Limited

The recent decision of Mr Justice Turner in Redman v (1) Zurich Insurance (2) ESJS1 Limited confirms that the Third Party (Rights Against Insurers) Act 2010 (“the 2010 Act”) does not have retrospective effect.

As a result, a third party must still bring a claim under the 1930 Act where both the relevant insolvency and the relevant insured liability occurred before the commencement date of the 2010 Act (which is 1 August 2016).

Mrs Redman’s husband worked for a company latterly known as ESJS1 (“the Company”) between 1952 and 1982. On 5 November 2013 he died from lung cancer alleged to have been caused by exposure to asbestos during the course of his employment. On 30 January 2014 the Company was wound up and was eventually dissolved on 30 June 2016.

Mrs Redman sought to recover for her husband’s illness and death in a claim brought against the Company’s insurers, Zurich, under the Third Party Rights regime.

It is well understood that the 2010 Act has advantage over the 1930 Act in this regard. Whereas the 1930 Act requires the liability against the insured to be established (by agreement or judgment, with the latter sometimes requiring the insured first to be restored to the register followed by proceedings against it) prior to the covered claim being brought against the insurer, the 2010 Act allows a claim encompassing both liability and coverage to be made against the insurer alone.

Mrs Redman therefore sought to bring a claim under the 2010 Act. However, both the date of the Company’s insolvency and the date of the Company’s alleged liability had arisen prior to the commencement of the 2010 Act (the date of liability arising at least some thirty years prior) and the 2010 Act provides that the 1930 Act is to continue to apply in such circumstances.

As a result, the Judge struck out the claim, saying that to apply the interpretation of the Act favoured by Mrs Redman (ie, to read into the Act that the relevant date was the date that liability against the insured was established) would be tantamount to ”judicial legislation”.

Accordingly, the 1930 Act will continue to apply to those cases where the insolvency event (and the underlying liability) pre-dates 1 August 2016, with the 2010 Act applying where either event occurred thereafter. As a result, until about 2022 (when any third party liability will be time-barred) the old regime will remain relevant, and insureds, brokers and insurers will have to live with two potentially relevant regimes.

Tom Hunter is an associate at Fenchurch Law

The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #2 (The Ugly). Kosmar Villa Holidays plc

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.

#2 (The Ugly)

Kosmar Villa Holidays plc -v- Trustees of Syndicate 1243 [2008] EWCA Civ 147

The issue in Kosmar Villa Holidays plc was whether an insurer’s conduct in investigating a claim prevented it from subsequently relying on a breach of a condition precedent to avoid liability.

The policyholder, a tour operator, Kosmar, made a claim under its public liability insurance in respect of injuries suffered by an individual who was paralysed after diving into the shallow end of a swimming pool at apartments in Greece operated by Kosmar.

In breach of a condition precedent requiring it to notify the insurer immediately after the occurrence of any injury, Kosmar did not do so for a year.

Once notified, the insurer did not immediately deny liability for breach of condition precedent but sought further information about the accident.

The Court of Appeal had to consider whether in dealing with the claim in this way, without expressly reserving its position or denying liability, there had been a waiver, either by election or estoppel, that meant that the insurer was no longer able to decline indemnity because of the late notification.

The Court found that waiver by election had no application to a breach of a procedural condition precedent. However, where, through its handling of a claim, an insurer made an unequivocal representation that it accepted liability, or would not rely on a breach of a condition precedent, and where there had been detrimental reliance by the policyholder, the doctrine of estoppel would protect the policyholder.

On the facts, there had been no unequivocal communication by the insurer and insufficient reliance or detriment on the part of Kosmar. It was not therefore inequitable for the insurer to rely on Kosmar’s breach of the condition precedent to decline indemnity.

In its judgment, the Court explored the tension between an insurer’s need to have sufficient time to investigate claims and the insured’s need to know where it stands as regards policy coverage. On one hand, insurers were not to be encouraged to repudiate claims or to reserve their rights without asking questions about the claim simply to avoid being taken to have waived their rights in respect of a breach of a condition precedent. To do so would be to push insurers into an over-hasty reliance on their procedural rights. On the other hand, insurers were not entitled to give the impression that they were treating the claim as covered without running the risk of having waived their right to avoid the policy.

The message for policyholders is that, in the absence of an express communication to that effect, it is not safe to assume from conduct alone that an insurer has waived a breach of a procedural condition precedent.