UK: BLG Construction and Property Professionals´ Briefing - Notification Under The Spotlight

Last Updated: 12 November 2008
Article by Patrick Perry and Jonathan Scragg

Professionals engaged in the construction and property sectors will know that the landscape has been changing over the course of the last 18 months. The economic climate is deteriorating and there has already been a significant downturn in the property development sector. This will bring greater pressure on funding and profit margins for larger construction projects and is likely to increase the risks in relation to the solvency of suppliers and sub-contractors.

We expect these factors will exacerbate the number of claims and disputes within the industry, which in turn will likely lead to an increase in the incidence of construction and property professionals turning to their indemnity insurance for protection.

On renewal

Laker Vent Engineering Ltd v Templeton Insurance Company Ltd (2008)

The insured, Laker Vent, notified its insurers, Templeton, of a claim which took the form of an arbitration that had arisen under a construction contract between Laker Vent and a third party contractor. Laker Vent sought an indemnity from Templeton in respect of its legal costs arising out of the arbitration. Templeton rejected the claim on the grounds that Laker Vent had knowingly failed to disclose a material circumstance (the escalation of the dispute) prior to renewal of the policy, and said that this failure meant that Laker Vent had not adhered to the contractual notification procedure under the policy, which entitled Templeton to decline cover.

The High Court rejected Templeton's arguments and found in Laker Vent's favour. Laker Vent was entitled to insurance cover since, at the time of renewal, it owed Templeton the usual duty of disclosure as codified by statute and imposed by the general law. The fundamental question was whether the various matters of which Laker Vent was aware before renewal amounted to circumstances which were so material that they would have affected the judgment of a reasonable insurer in fixing the premium or determining whether he would take the risk. The Court considered that, at the point of renewal, Laker Vent's relationship with the third party contractor had not deteriorated sufficiently to qualify as a material circumstance.

In a note that will strike a chord with many construction and property professionals, the Court observed that it was inevitable for complex construction contracts to be vulnerable to a variety of disputes and that an insurer should, therefore, be aware of the general risks that arise from such contracts. The Court said that something more substantial was required before warranting disclosure to insurers as a material problem; and in applying Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd (1995), the Court said that even if the matters relied upon by an insurer were material, the mere fact that they were not disclosed would not necessarily entitle the insurer to avoid the contract of insurance as it was necessary for the insurer to show that he had been induced to enter into the policy by the non-disclosure.

When circumstances exist that might give rise to a claim

HLB Kidsons v Lloyd's Underwriters (2007) and Kajima UK Engineering Ltd v Underwriter Insurance Company Ltd (2008)

In Kidsons, the insured firm of accountants sought an indemnity from their insurers in respect of claims arising out of tax avoidance schemes. The policy contained a deeming provision that "the Assured shall give to the Underwriters notice in writing as soon as practicable of any circumstance of" a claim. The insured made an initial communication to the insurers of what was described as "material information" in relation to the schemes in August 2001, and subsequently made more expansive notifications. The insured contended that the claims arose out of circumstances which had been notified during the policy period. The court held that Kidsons had failed to make a valid notification of circumstances and that, consequently, the claims were not covered under the policy.

In Kajima, the policy included cover for circumstances "which might reasonably be expected to produce a claim" that were notified within the period of insurance. The claimant insured contractor employed to design and build a block of pre-constructed apartments notified the defendant insurers that the apartments were settling and moving excessively. The notification referred to other possible damage and to the fact that an investigation was underway. Further issues arose with the apartments in subsequent years and a coverage dispute arose as to the extent to which claims relating to defects discovered after the February 2001 notification fell within the scope of the original notification. The court held that the notification was only effective in relation to the specific circumstances notified and a number of the claims arising were not covered.

Taking Kajima and Kidsons together, the following principles emerge:

  • Any claim for which indemnity is sought must arise from the notified circumstances. There must be a causal, as opposed to coincidental, connection between a notified circumstance and a later claim;
  • The wording of the notification will be construed objectively, having regard to the factual context in which it was made. What an insured may have intended (but failed) to notify by the wording used is immaterial;
  • An insured must be subjectively aware of the circumstances it is seeking to notify and the possibility that they might give rise to a claim; and
  • General "hornet's nest" notifications can be made but they are subject to the "awareness" requirement.

Kajima and Kidsons both emphasise the need for insured professionals to consider carefully the extent of problems they seek to notify, and to ensure that this is properly reflected in the wording used in the notification. This is especially important for construction and property professionals who may find themselves involved in complex projects that deteriorate, but which subsequently evolve in different (and often unforeseen) directions, due often to the multiple number of parties and issues involved. In such situations, insured professionals may need to make additional notifications as their understanding of a troublesome matter develops so as to ensure that appropriate insurance cover is available should a troublesome matter later develop into a claim.

An appeal in Kidsons has recently been heard, and the Court of Appeal's judgment is expected shortly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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