UK: Non-Disclosure Arguments For Construction Insurers? Consider Laker Vent First

Last Updated: 24 March 2009
Article by Patrick Perry and Warren McIntosh

The Court of Appeal's decision in Laker Vent was handed down on 11 February 2009. It considers two fundamental insurance principles, non-disclosure and notification, in the context of a construction dispute, and is the first time that the Court of Appeal has reviewed and applied its own decision in HLB Kidsons v Lloyds Underwriters (2007).

Laker Vent, a specialist mechanical engineering contractor, notified its insurer, Templeton, of a potential claim under its policy (the 'Policy'). The potential claim arose out of a disputed construction contract between Laker Vent and a third party contractor (the 'Contract') which later became the subject of arbitration. Laker Vent subsequently sought an indemnity from Templeton in respect of its legal costs in connection with the arbitration.

Templeton rejected cover on two grounds. First, that Laker Vent had failed to disclose a material circumstance known to it at the time of renewal (17 January 2005), namely the escalating contractual dispute. This, it was argued, entitled Templeton to avoid the Policy ab initio. Second, that Laker Vent had failed to comply with the claims notification procedure under the Policy, which, as a breach of a condition precedent, entitled Templeton to decline cover.

The High Court at first instance disagreed and found for Laker Vent on both issues. Templeton appealed.

Non-disclosure

The High Court held, and the Court of Appeal agreed, that Laker Vent owed Templeton the usual duty of disclosure at the time of renewal. The test comprises two parts: firstly, whether the matters known to Laker Vent were so material that they would have influenced the judgement of the reasonable underwriter in accepting the risk or in fixing the premium; and secondly, whether their non-disclosure did in fact influence the underwriter.

Materiality

The High Court accepted that it was inevitable for complex construction contracts to be vulnerable to a variety of disputes and differences of opinion between the contracting parties. Insurers are presumed to be aware of these general risks. If this were not the case, the Court observed that virtually every aspect of a major construction contract would have to be the subject of disclosure upon inception or renewal. Accordingly, the fact of disputes between the contracting parties would only be material to be disclosed if there were features of the dispute which, viewed objectively, showed a "real risk" of escalation to the point of formal dispute resolution procedures beyond the risk ordinarily inherent in construction contracts.

On the facts, the High Court held that, although there were significant issues being discussed in relation to completion of the Contract, the relationship between Laker Vent and the third party contractor had remained amicable, and the various disputes capable of resolution by agreement, up until at least 19 January 2005 (after the renewal date). The relationship between the parties had not escalated to such an extent that it could objectively be said that there was a real risk of the dispute escalating to the point of formal dispute resolution, whether by arbitration, adjudication or litigation. Templeton had, therefore, failed to establish materiality such that it would be entitled to avoid cover. The Court of Appeal upheld this decision.

Inducement

Although it was not necessary to decide the point, both the High Court and the Court of Appeal confirmed the existing position that, if an insurer wishes to avoid a policy for nondisclosure, then it must prove that the actual underwriter concerned was in fact induced to conclude the Policy, or offer the terms made, because of the non-disclosure.

In this case, both the High Court and the Court of Appeal held that, since Templeton had not put forward any factual evidence from the relevant underwriter, it had failed to prove on the balance of probabilities that the underwriter was in fact induced by Laker Vent's non-disclosure to conclude the renewal on the terms offered.

Notification

The High Court also held that Laker Vent had not failed to comply with the notification provision of the Policy. The provision required notice in writing 'immediately the Insured is aware of any cause, event or circumstance which has given or is likely to give rise to a Construction Claim'. The parties agreed that the word 'likely' in this clause meant 'probable' or 'more likely than not'. The Court therefore adopted this meaning to determine the substantive issues between the parties.

Due to the partial definition of 'Construction Claim' in the Policy, a construction claim could not arise until the insured had first made an application for payment or asserted a defence under the relevant contract, and the application or assertion 'shall have been rejected in writing on at least two occasions either in whole or in part by the Other Party or its agent.' As a result, the Court held that notification would only be required under this particular Policy when a dispute had reached the stage where adjudication, arbitration or litigation was 'likely' to be required (i.e. was 'probable' or 'more likely than not'). The Court of Appeal upheld this decision.

The Court of Appeal considered the test applied in HLB Kidsons & Ors v Lloyd Underwriters (2007), which had not been available to the High Court at first instance. In that case, the Court of Appeal held that the first issue to determine is whether circumstances have come to the attention of the assured during the policy period so that he is aware of them (a subjective test); and the second issue - whether a circumstance may give rise to a loss or claim - should be determined objectively.

In Laker Vent, the Court of Appeal held that, whilst the wording of the notification clause in the present Policy was different to that in the Kidsons case, the question of whether a construction claim was 'likely' was to be determined objectively based on the facts and circumstances, rather than subjectively according to the views of the actual insured or insurer. The Court of Appeal agreed that, on this basis, the dispute between Laker Vent and the third party contractor had not reached the stage where adjudication, arbitration or litigation was 'likely' to be necessary to resolve their differences. As a result, Laker Vent had not failed to comply with the notification provision.

Practical implications

Construction projects, by their nature, can lead to aggressive, and potentially critical correspondence being generated between the parties involved. The margins are tight and, in a highly demanding and timeprecious environment, the parties often feel compelled to protect their position in writing, or to build up a potential entitlement to further money (or time to complete). What Laker Vent illustrates is that if underwriters to construction projects required disclosure of all such communications, they would be inundated with material. The clarification in this case that circumstances are only sufficiently material once there is, objectively, a "real risk" of escalation to formal dispute resolution, will mean that construction insurers will have to think very carefully before arguing that policies should be avoided for non-disclosure.

The case is also a helpful reminder that once materiality is established, insurers need to prove that the non-disclosure of the material circumstance did act as an inducement to the actual underwriter involved. The courts are unlikely to conclude that the insurer was induced unless evidence from the actual underwriter indicating that in fact he or she was induced, is produced.

Finally, in relation to the construction of notification provisions, the courts will continue to assess whether an insured is aware of a cause, event or circumstance, subjectively but Laker Vent confirms that the issue of whether, within the terms of the policy, the cause, event or circumstance requires notification will be determined objectively. This does mean that a speculative notification (possibly by an overly cautious insured) may well be susceptible to challenge.

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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