A recent case gives guidance on what constitutes circumstances that construction professionals should disclose to insurers at renewal.
A Mechanical and Electrical Sub Contractor, LVE, did not disclose problems it was having with its contractor to its legal expenses insurer, Templeton, at renewal. Shortly after renewal, it did notify the problems as a potential claim. Templeton denied cover as it claimed that (a) LVE failed to disclose material circumstances known at renewal and (b) LVE failed to comply with the claims notification procedure - a breach of condition precedent under the policy entitling Templeton to decline an indemnity.
HHJ Hegarty QC, in finding against Templeton, and deciding that LVE was entitled to cover, held:
- By the date of renewal of LVE's policy, the
relationship between LVE and the contractor had not
deteriorated to the stage where it was properly to be
regarded as a material circumstance that was likely to give
rise to a claim, which would have required notification to
Templeton
- A formal claim would have appeared
'likely' if discussions and correspondence
had indicated that the differences between the parties would
lead either to adjudication, arbitration or litigation
- A threat from the main contractor to
'replace' LVE as sub-contractor did not, on
these facts, constitute a material circumstance that would be
likely to lead to a claim
- Complex construction contracts inevitably give rise to
disputes as to the progress of works, sums due to the
contractor and quality of the work. This project was no
different, and discussions to resolve such disputes between
the contractor and LVE on the project in question appeared to
be amicable and constructive
- An insurer is presumed to be aware of the general risk
that construction contracts may give rise to disputes and
differences between contracting parties. Therefore, something
more serious is required before a particular problem is to be
regarded as a material circumstance that must be disclosed at
the time of initial proposal or renewal. Otherwise insurers
must expect to be bombarded with notifications on every
single construction issue
- A letter from the contractor to LVE after renewal, which
said, "unless we are able to reach mutual agreement,
this will have to be referred to arbitration in accordance
with the contract", did constitute a material
circumstance that should be disclosed to insurers.
The court therefore took a pragmatic and sensible view of what should and should not be disclosed on the particular facts of the case.
Although the decision is a welcome dose of common sense in the notification process, we could speculate as to whether the decision might have been slightly different if:
- It had been a condition (rather than a condition
precedent) that a material circumstance likely to give rise
to a claim should be notified. Making such a notification a
condition precedent is particularly onerous as it is,
practically, very difficult to know what constitutes such a
circumstance, (
click here to link to our notification guidance)
- Templeton had been a 'new' insurer rather
than insurers on the previous year's policy. If the
claim been notified when Templeton said it should have been,
the policy would have responded and Templeton would have paid
out anyway.
Ultimately, construction professionals must consider issues that have arisen on projects carefully before deciding what issues should and should not be disclosed or notified to insurers. The general rule remains that it is "better to be safe than sorry" and certainly any indication of either adjudication, arbitration or litigation should be notified as soon as possible. Equally, however, insurers must bear in mind that a court is likely to construe onerous notification requirements against it, particularly when it comes to notifying circumstances.
Reference: Laker Vent Engineering Limited v Templeton Insurance Company Limited [2008] EWHC B6 (QB)
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 26/06/2008.