Knowing when to notify Insurers of a ‘material’ circumstance is always a difficult issue in the context of a construction project, where disputes occur between contracting parties on an almost daily basis. The Court of Appeal in Laker Vent Engineering Limited v In Laker Vent Engineering Ltd v Templeton Insurance Ltd  EWCA Civ 62 has upheld the lower court’s decision that, in the sphere of legal expenses insurance, and in the context of the construction industry, the prudent underwriter will regard as ‘material’ features of a relationship which, viewed objectively, show a real risk of escalating to the point of formal dispute resolution procedures beyond the risk ordinarily inherent in any complex construction contract. To read the judgment click here.
Laker Vent: LVE, a mechanical and electrical subcontractor, had legal expenses cover under a Constructor's Protection Service Policy. In December 2005, the policy was renewed. Shortly after renewal, LVE notified a potential new claim, seeking an indemnity for legal expenses in connection with a dispute arising out of a construction contract with a German company, GWUG. Insurers declined the claim on the basis that: (a) LVE had failed to disclose a material circumstance known to it at the time of renewal (namely, an escalating dispute between GWUG and itself in connection with the contract works); and (b) that LVE had failed to comply with the claims notification procedure.
The policy stipulated that it was a condition precedent to liability that written notification be made ‘immediately the Insured is aware of any cause, event or circumstance which has given or is likely to give rise to a Construction Claim. It is important to note that on any renewal declaration to the Insurers, the Insured must advise the Insurer of any potential claims, not already advised by the Insured and received by the Insurers.’ Insurers asserted that, prior to renewal, the relationship between GWUG and LVE had reached such a stage that a claim was likely. They based that argument on the fact that LVE’s delay claim against GWUG had been rejected several times in writing and also orally at a meeting. The lower court disagreed, noting that construction contracts, particularly complex ones, ‘almost inevitably give rise to disputes and differences of various kinds as to the progress of the works, the sums due to the contractor, the quality of the work and so forth.’ Insurers writing this type of policy must be presumed to know this. In HHJ Hegarty’s view, if differences or disputes of this nature were treated as material circumstances ‘virtually every aspect of a major construction contract would have to be the subject of disclosure upon inception or renewal.’ Since an insurer is presumed to be aware of the general risk that construction contracts may give rise to disputes and differences between the contracting parties, and that these may ultimately become litigious, there must something about the relationship that shows ‘a real risk of escalation to the point of formal dispute resolution procedures beyond the risk ordinarily inherent in any complex construction contract. But I do not accept that this requires a probability that the dispute will go to adjudication, arbitration or litigation….What the insurer is entitled to know is if there are circumstances which increase the risk which legal expenses insurance is intended to cover above and beyond the level inherent in any substantial building or engineering contract.’ Here, the dealings between the parties prior to renewal were seen as ‘absolutely par for the course’.
The Court of Appeal agreed. It concluded that the partial definition of ‘Construction Claim’ in clause 1.5 of the Policy meant that a ‘bona fide 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.’ Given that partial definition, the Court of Appeal held that a ‘Construction Claim’ will only be ‘likely’ if it has reached the stage where adjudication, arbitration or litigation is likely to be required to resolve the differences between the parties. Any other construction that placed the obligation to notify at an earlier stage in the evolution of disputes would fail to give effect to that partial definition.
Interestingly, Insurers failed on inducement, primarily because they failed to call any evidence from the relevant underwriter (who it no longer employed) or from the underwriting clerk, who ‘played a somewhat more important role in relation to the renewal terms than simply acting as Mr Corlett’s amanuensis’. The judge was not prepared to hold that it was ‘obvious’ that Templeton would either have loaded the premium, or imposed other terms, if the fact of the disputes had been disclosed to it. As a result, in the absence of such evidence, Insurers failed to establish inducement. The Court of Appeal concluded that the judge’s reasoning on this issue could not be faulted.
The decision shows not only the sensible approach to notification taken by the courts in the context of the construction industry, where disputes are commonplace, but also the importance of proving inducement when avoidance is raised as a defence.