If a building contractor becomes insolvent, but the build is covered by an NHBC Buildmark warranty providing insolvency cover, when does time start to run for the insured to start proceedings against an insurer who fails to pay a claim?

The Technology and Construction Court (TCC) has recently considered this question in the context of an application for summary judgment made by the NHBC, in Peabody Trust v National House-Building Council [2024].

The NHBC had contended that the claim was time-barred, since more than six years had elapsed between the event of insolvency and the date that Peabody issued its claim form against NHBC. The TCC dismissed the application, holding that the insured's cause of action did not accrue on occurrence of the insolvency event, but rather on the date on which the additional costs caused by the insolvency were incurred (which was later).

With insolvencies in the construction sector remaining high, this decision provides clarity as to the period within which an insured can bring proceedings against an insurer who refuses to pay out in breach of their obligation to provide an indemnity under an NHBC policy providing protection against insolvency.

We examine the background to the case and the TCC's decision in more detail below. The judge specifically noted that there was no property damage insurance element to the dispute and the judgment does not therefore address coverage under Option 3 of the Buildmark policy (in respect of physical damage caused by defects) – but relates solely to insolvency cover.

Background

  • Vantage Design & Build Limited ("Vantage") were engaged in 2015 by Catalyst Housing Limited ("Catalyst") to construct 88 social housing units within a larger development at a former RAF site. Vantage ceased work just over six months into the project and administrators were appointed on 29 June 2016.
  • Following Vantage's administration, the works were completed by another contractor, and practical completion occurred in 2021.
  • Peabody Trust (the "Claimant") had succeeded to Catalyst's rights under policies of insurance issued by NHBC. These were NHBC "Buildmark" policies which provided, under Option 1, "Insolvency cover before practical completion".
  • Broadly speaking, this gave the insured the benefit of cover if it had to " pay more to complete [the units]" because of Vantage's insolvency. It was not in dispute that the appointment of administrators amounted to an insolvency event under the terms of the policies.
  • Peabody commenced proceedings on 24 July 2023 claiming over £900,000 in respect of the additional costs said to have been incurred over what would have been paid to Vantage, as a result of using alternative contractors to complete the build.
  • NHBC applied to the court for summary judgment / strike out of Peabody's claim, contending that it was time-barred.

Insolvency insurance and the applicable limitation period

Buildmark cover – and particularly section 1 (insurance against the builder's insolvency before completion) – is a form of insurance contract.

In this case, the relevant section of the policy provided:

"[A] Option 1 – Insolvency cover before practical completion

[B] When the section applies

This section applies if you lose the amount paid to the contractor in accordance with the building contract or have to pay more to complete the building of the home(s), because the contractor is insolvent or commits fraud."

The court explained that claims against an insurer for failing to pay a claim under an insurance policy are claims "under a contract of indemnity". They are claims for damages for "breach of the insurer's obligation to hold the insured harmless against an insured peril".

As with all contractual claims, they are subject to section 5 of the Limitation Act, which requires claims to be brought within six years from the date on which the cause of action accrued.

The TCC decision

The TCC dismissed NHBC's application for summary judgment, rejecting its argument that the claim was time-barred.

It was first necessary to determine the insured peril (or the "event insured against") for the purposes of Option 1. Was this:

  1. The "mere insolvency" of the contractor (as contended by NHBC); or
  2. The loss of the amount paid to the contractor, or the need to pay more to complete the works – which in both cases was caused by the insolvency of the contractor? (This was Peabody's position).

The TCC agreed with Peabody, holding that:

  • The insolvency cover did not apply (i.e. was not triggered) if the insured did not "have to pay more to complete" the units, or if the insured did not lose any money paid to the contractor, despite the contractor going insolvent.
  • The event insured against was not the insolvency per se, but rather the insured being required to pay more above the contract price to complete the works: "the requirement to pay more must have been caused by the insolvency (or fraud) of the contractor, but the insolvency (or fraud) itself is not the risk which is covered."

Time therefore did not start to run, i.e. the cause of action in contract did not accrue on, the date of the insolvency event itself.

The judge declined to deal with all the arguments put forward by counsel during the hearing, and the factual evidence will be examined during the full trial in due course to determine the precise date on which the cause of action accrued in this case.

How will this affect your future claims?

This decision clarifies that time does not begin to run on the date of the insolvency for the purposes of bringing a claim against an insurer who fails to pay a claim under section 1 of a NHBC policy (insurance against the builder's insolvency before completion) in breach of the terms of that policy. Time will not run until such time as the additional costs caused by the insolvency are incurred.

It is nevertheless important to remember that this decision does not affect the separate obligation on the insured to notify a claim under the policy in accordance with policy terms and conditions, which will require the insured to advise the insurer in writing of the insolvency of the builder as soon as reasonably practicable and, within the period of insolvency cover shown on the policy schedule.

Furthermore, even though – following this decision – insured parties under such policies may have more time to issue proceedings against their insurers, it is still not advisable to sit on claims for long periods of time. If there are concerns or questions about limitation, seek legal advice as soon as possible.

If you have any questions about the issues raised in this article, please contact Ruth Griffin or Samantha Holland.