LVE, a mechanical and electrical subcontractor, had legal expenses cover through Templeton under a Constructors’ Protection Service Policy. The policy renewed in December 2005 and, shortly after renewal, LVE notified a potential new claim seeking an indemnity for legal expenses incurred in connection with a dispute that had arisen out of a construction contract between it and a German company, GWUG. Templeton declined the claim on the basis that: (a) LVE had failed to disclose a material circumstance known to LVE at the time of renewal (namely, an escalating dispute with GWUG 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.’ The court interpreted this provision to mean that:

‘During the period of insurance, Templeton is bound to provide cover in respect of any claims notified to it but is entitled to insist on prompt notification of likely claims if it is to be held liable. But it is not bound to renew the insurance; and at the time of any proposed renewal, it is entitled to be informed of any circumstance material to the risk, most obviously any situation which may well give rise to a claim under the policy, if renewed, even though it may not have developed to the point where it would have to have been notified as a likely claim during the preceding period of cover.’

Templeton asserted that the fact that LVE’s delay claim against GWUG had been rejected several times in writing, and also orally at a meeting, meant that, prior to renewal, the relationship had reached such a stage that a claim was likely. The 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.’ In the court’s view, insurers writing this type of policy must be presumed to know this. In any event, it was ‘obvious’ that any dispute or difference of this kind might possibly give rise to a formal process of dispute resolution, whether in the form of adjudication, arbitration or litigation. 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.’ Something more is required before any particular problem is properly to be regarded as a material circumstance that must be disclosed at the time of the initial proposal or renewal:

‘There must be features of the relationship which, viewed objectively, show 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’ and their differences of opinion were being addressed in a reasonably amicable and constructive manner, despite the arguments about the precise causes of the delays that had clearly affected the project. LVE remained on site, despite an apparent threat to replace it, and continued to make progress with the works.