The Court of Appeal's approach to the limits of a structural defects insurance policy

06 décembre 2019

The Court of Appeal (CA) decision in Manchikalapati & others v Zurich Insurance PLC (T/A Zurich Building Guarantee & Zurich Municipal) and East West Insurance Company LTD [2019] has just been handed down.

We report on this key judgment in relation to new home warranties and highlight what you need to know.

*Note - amounts referred to below are approximated.



Background

This dispute relates to the construction of two blocks of flats in Manchester known as New Lawrence House, comprising of 104 flats in total.

  • Construction started in June 2007.
  • Zurich Insurance plc and associated companies (collectively called Zurich for ease of reference) were closely involved - approving the builder, providing inspection services during construction and, in due course, issuing Zurich structural defects insurance policies to the purchasers of long leases of the flats (the Policies).
  • From 2012, it became clear that there were serious building defects.
  • Claims were made under and relating to the Policies firstly by the leaseholders and secondly, the freeholder who was by that time Zagora Management Ltd.
  • Following a dispute that went to the Court of Appeal over who had the right to control the development, the decision was that Zagora and the leaseholders had that right.
  • Negotiations between Zagora, the leaseholders and Zurich broke down as Zurich were not prepared to cover the costs of the remedial works required.
  • Zagora and 26 of the leaseholders (the Leaseholder Claimants) then commenced these proceedings.
  • At some point, East West took over the liabilities of Zurich (together referred to as the Insurers for ease of reference) and will pay whatever is ordered by the Court of Appeal to be due to the Leaseholder Claimants.

TCC decision

The claims in these proceedings were wide-ranging and many failed. This review focuses on the Leaseholder Claimants' claims which succeeded at first instance, further to a Technology and Construction Court (TCC) judgment issued on 30 January 2019.

The key findings of the TCC were as follows.

  • The structural steelwork lacks fire protection, a defect covered by the Policies in principle.
  • The cost of fireproofing is £4.7m.
  • The "maximum liability cap" under the Policies is the total purchase price of all of the Leaseholder Claimants' flats - £3.6m.
  • The Leaseholder Claimants were entitled to recover £3.6m plus interest under the Policies, even though no remedial works had been carried out and regardless of whether or not they intended to carry out remedial works.

Court of Appeal decision

The Leaseholder Claimants appealed against the TCC's finding that recovery under the Policies was capped at £3.6 million, arguing that the maximum liability clause in the Policies provided that liability was capped at the total purchase price of all 104 flats at New Lawrence House, not just the 30 flats owned by the Leaseholder Claimants.

Various cross-appeals were commenced by the Insurers.

The central issue in the appeal which was the operation of the maximum liability cap (the MLC).

The relevant MLC in the Policies setting out the MLC is set out within the Definition of Maximum Liability:

"(b)...for a New Home which is part of a Continuous Structure, the maximum amount payable in respect of the New Home shall be the purchase price declared to Us subject to a maximum of £25 million.

Where the combined value of all New Homes within a Continuous Structure exceeds £25 million, the total amount payable by Us in respect of all claims in relation to the New Homes and the Continuous Structure shall not exceed £25 million."

In summary, the central claim of the Leaseholder Claimants was successful as the CA found that, whilst the MLC is not clear in all respects, it operates to limit Insurers' liability to the Leaseholder Claimants to the total purchase price of all 104 flats which is £10.8m.

The MLC

Key aspects of the CA decision relating to the MLC are set out below:

  • The finding by the TCC was that the cap was the purchase price of the new homes of the insureds claiming under the Policies, subject to a maximum of £25m.
  • Sir Rupert Jackson in the CA described the MLC as "not well drafted" and interpreted it in the context of other parts of the Policy.
  • The first limb of the clause was ambiguous and must therefore be construed "in a manner which is consistent with, not repugnant to, the purpose of the insurance contract".
  • The court could also have regard to the "obvious commercial purpose" of the Policy.
  • Sir Rupert Jackson favoured the Leaseholder Claimants' interpretation and held that the cap was the total purchase price of all of the flats ie £10.8m. In considering the effect of relevant provisions, the CA focused on the fact that the cost of rectifying a present or imminent danger to the health and safety of occupants (as provided for in the Policies) could easily exceed the purchase price of an individual flat, as in this case.

Insurers' cross-claims

In summary, the cross-appeals of the Insurers were unsuccessful and commenting overall on the interpretation contended for by the Insurers, Lord Justice Coulson described it as "a strained and artificial construction…with the result that it becomes impossible to see any circumstances in which [the Insurers] would every pay out under the terms of the policy".

Key points:

  • If cover under the Policy was intended to be limited to costs actually incurred, it should state that - this Policy did not contain that limitation.
  • The fact that under the funding arrangement, monies ordered to be paid out would in the first instance go to cover the Leaseholder Claimants' funders and lawyers did not prevent recovery under the Policies. Adopting the Insurers' approach would "unreasonably restrict access to justice".
  • The Insurers contended that the Leaseholder Claimants had to pursue all other claims against 3rd parties before liability under the Policy attached - this was "a manifest lack of reality" in this approach in the CA's view.

Commentary

Once again, we see a strong Court of Appeal judgment emphasising "the natural and ordinary meaning of the words used". These Policies have been widely used in the industry to date so in specific terms, the extent of potential liability under the Policies should be noted.

From a wider perspective, be cautious when considering the interpretation of an ambiguously worded clause - the starting point must always be the ordinary meaning of the words used; it may well be the ending point too.


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