In this newsletter we follow on from our February newsletter with further top tips for contractors seeking to maximise their insurance recoveries. This newsletter deals with what you should be aware of if the claim is accepted or rejected. Click here for a link to our February newsletter for Tips 1-6.
Tip 7: Understand subrogation and how it might affect policyholders
In essence, the effect of subrogation is that, once insurers have indemnified the contractor (as policyholder) they stand in the contractor's shoes and are entitled both to any recovery which it makes and to prosecute third party claims in its name. They have this right even if commercially the contractor would prefer not to lend its name to the action (for example because it is involved in other projects with the relevant party).
It is important for insurers that rights of subrogation against third parties are not prejudiced. The terms of the policy are therefore likely to include express provisions as to the conduct and settlement of claims and the preservation of rights against third parties. The risk of prejudice is increased if the insured is in long-standing commercial relationships with other parties to the construction projects (and thus are or may be in other disputes with them) or are otherwise dealing with each other in a way that might affect the insurance cover (through, for example, settlement of a related claim).
Even where insurers are not providing a full indemnity and there are uninsured losses there may still be policy terms dealing with third party recoveries.
Subrogation waivers (see Tip 1 in the February newsletter), whilst commonly given, can give rise to difficult issues over the extent of the rights that are waived, particularly in complex construction projects where there may be many parties with different interests insured under a project policy.
Tip 8: Understand any reservation of rights
For so long as insurers are properly able to investigate the claim or any policy defences, they may proceed under a "reservation of rights" in relation to coverage. This may be a "general" reservation while the facts of the claim are investigated or a specific reservation while identified issues are explored. While the reservation of rights is in place, insurers may assist with the defence of any third party claim.
Any such reservation of rights should be specific as to the outstanding issues under investigation, but in practice they are frequently imprecise. You may need to seek clarification from the insurer since a reservation of rights should only remain in place until the insurer can make an informed decision on whether a particular defence is available, not indefinitely.
You must continue to comply with all policy terms while a reservation of rights is in place, so as not to give an insurer an alternative basis for declining cover.
Tip 9: Understand the policy consequences if the claim is not accepted
Insurers may decline the claim for a range of reasons, some of which will require you to take immediate action in relation to your ongoing insurance protection:
- Avoidance of the policy for material non-disclosure or misrepresentation: you will need to contact your broker immediately to obtain replacement cover, if necessary on a contingent basis, while the avoidance is challenged.
- Breach of warranty: the cover will be immediately terminated, so contact your broker immediately to arrange a replacement cover, as above.
- Loss not covered by policy or subject to exclusion: claim declined.
- Breach of condition precedent to liability: claim not payable.
- Breach of bare policy condition: claim payable, but reduced if insurers have been prejudiced by the breach.
In all cases, consider seeking legal advice on the policy issues raised, even if your broker or claims consultant is assisting you in dealing with the insurer(s), as there may be valid grounds for a challenge.
Tip 10: Act to protect the position of the policyholder
You should, generally, continue to comply with policy terms even if the claim has been declined.
Insurers might decline a claim on a ground which, when contested, is found to be unsustainable. However, if you have not complied with the rest of the policy provisions, the insurer might subsequently decline the claim on the basis of the subsequent failures to comply with the policy provisions. You should therefore continue to pay the insurance premium when it falls due and provide claims information as required under the policy.
Where the policy affords the insurer a right to approve or control actions or the defence of claims, it will almost always be prudent to continue to consult insurers unless they make clear expressly that no such communications are required.
Tip 11: Bring a claim in time-limitation
It is always essential for the policyholder to check and monitor applicable limitation periods.
Under English law the limitation period under insurance contracts, as under general contract law, is usually six years. Time starts running under property policies from the date of the loss. Under liability policies, time generally does not start to run until the policyholder's liability is established through judgment or settlement.
Shorter contractual periods for bringing claims are permissible under English law and will generally be enforced by the Courts. Periods of two or three years are not uncommon. Where the policy is not governed by English law, the risk of a shorter limitation period applying is greater (sometimes with a limitation period as short as one or two years). If a claim is not brought within the relevant limitation period then it will be time barred.
Again, if the policy benefits a number of Project entities, it is important to make sure that the claims handling requirements are clear and that they are all complied with.
Tip 12: Understand the policy consequences if a claim is to be paid
Even if the claim is to be paid there may, in complex construction projects, be an issue as to who the monies are to be credited to. It is important that these issues, and insurance claims handling issues generally, are considered at the contract stage.
When settling the claim, it is also important to make sure that all other necessary matters are dealt with in addition to payment of the claim, and there is a clear record of how matters will proceed going forward. In many cases it will be prudent to obtain legal advice on the terms of the settlement agreement.
We hope that this checklist is helpful. If you have any queries in relation to Project Insurance generally, our team would be happy to help.