M J Gleeson Group Plc v AXA Corporate Solutions Assurance SA [04.06.13]
Technology and Construction Court decides endorsement to policy does not constitute stand-alone clause distinct from general insuring clause. Kennedys acted on behalf of the Defendant in this matter.
The court’s ruling confirmed AXA’s assertion that, in the absence of damage to property, the policy did not provide Gleeson with indemnity and the Memorandum did not act as a stand-alone cover for the defective work of sub-contractors.
The bespoke Memorandum, providing for cover on a claims made basis, within a public liability (PL) policy, was inserted into this broker’s wording at the behest of the insured’s insurance manager. This claim was one of four to be brought against insurers for defective work of sub-contractors, by the same insured, long after the works had been completed. Whilst the court found in favour of insurers in this matter, and we managed to ensure that insurer’s costs were recovered, it shows that a careful review by underwriters of an unusual and unique clause needs to be undertaken before it is agreed to and forms part of the wording.
The decision of HHJ Raynor QC is not being appealed.
Gleeson carried out works at the "Lucidus Development" pursuant to a contract dated October 2000. A certificate of practical completion was issued on 17 May 2002, with a defects liability period running for 12 months from that date. A certificate of making good defects was issued in September 2006.
On 25 May 2007, a surveyor’s report produced for the development funders raised concerns about defective works undertaken by two of Gleeson’s sub-contractors, both of whom became insolvent. This resulted in a substantial claim against Gleeson, who sought confirmation from AXA that they would provide cover.
Gleeson took out insurance with AXA in 1999 in respect of contractor’s all risks, public liability, non-negligent liability, employer’s liability and motor. On 25 November 1999, an endorsement was issued for additional cover in respect of the defective workmanship of sub-contractors under s.1 of the PL section of the policy but no wording was produced until the policy period ending on 29 June 2005.
Cover under the policies from 1 July 2002 onwards was provided with a limit of £10 million and whilst the slips, following on from the endorsement, referred to a sub-limit of £1 million for the defective workmanship of sub-contractors, the policies did not. This discrepancy continued for cover thereafter.
The general insuring clause for s.1 provided:
"In the Event of …
- (b) Damage to Property
- (c) Obstruction, trespass or nuisance …
Occurring … the Company will indemnify the Insured in respect of all sums which the Insured shall be legally liable to pay …"
Exception 5 to this excluded Gleeson’s liability:
"For the cost of and expenses incurred in replacing or making good faulty defective or incorrect
- (a) workmanship
- (b) design or specification
- (c) materials goods or other property supplied installed or erected
by or on behalf of the Insured but this Exception shall only apply to that part of the Property which is itself faulty defective or incorrect and shall not apply to remainder of the Property which is damaged as a consequence of such fault or defect."
Memorandum 23 stated:
"This Section of the Policy extends to indemnify the insured in respect of legal liability arising from the defective workmanship of their subcontractors including the cost of making good defective workmanship provided that 1) a claim is first made against the Insured or notification given to the Company by the Insured or notification given to the Company by the Insured of circumstances which might lead to a claim during the Period of Insurance ..."
The scope of cover for sub-contractors' workmanship was disputed, so Gleeson sought various declarations from the court, which ordered a trial of preliminary issues. Prior to trial, in response to AXA’s claim for rectification of the policy to reflect the terms of the slip, Gleeson conceded that, despite there being no reference in the policy to a sub-limit for the defective workmanship of sub-contractors, Memorandum 23 was subject to a £1 million sub-limit.
However, Gleeson argued that Memorandum 23 constituted a self-contained insuring clause, displacing the general insuring clause for s.1. They maintained that it extended cover beyond conventional PL cover, to include pure economic loss and contractual liability, and that if damage to property was intended as a pre-requisite, it would have been stated in this clause. They argued that the trigger for cover was not damage but, on the wording, the making of a claim.
AXA argued that Memorandum 23 did not displace the general s.1 insuring clause: Gleeson’s construction would effectively convert the policy into a guarantee in respect of sub-contractors' work, removing any incentive for them to carry out their works properly. Moreover, exception 5 stated the overarching policy intention, which was to exclude defective workmanship claims absent damage. Memorandum 23 was simply an extension of the s.1 PL cover.
The Technology and Construction Court found that a comparison of the wording of the general insuring clause "the Company will indemnify" and Memorandum 23 "This Section of the Policy extends to indemnify" indicated that the Memorandum was not intended to be a self-standing insuring clause but was an extension to the PL cover and therefore governed by s.1.
It held that it would be "extraordinary extension" of PL cover if the Memorandum provided a guarantee of the sub-contractor’s work irrespective of whether a s.1 event occurred.
Consequently, the court held in favour of AXA that "damage to property" was the gateway through which the Memorandum was triggered. So if other property was damaged due to defective workmanship, the cost of making good the damage and the defective workmanship would be covered but, absent damage, the clause would not operate.