In a decision handed down last week, the Technology & Construction Court (TCC) considered the extent to which a notification of a circumstance could cover defects and damage subsequently arising in the context of building works. The key issue was whether certain defects and damage that emerged after the notification and expiry of the insurance cover were effectively the subject matter of the notification. The case illustrates the difficulties that can arise when a circumstance is notified, and, subsequently, further issues emerge which may or may not relate to the earlier notification.
The decision is a reminder that, in such circumstances, a policyholder who is in any doubt as to the extent of a notification should err on the side of caution in terms of what it subsequently notifies. It also emphasises the importance of drafting notifications in clear and precise terms.
Background
Kajima entered into a contract dated 1 October 1999 with the Joseph Rowntree Foundation to design and build a block of flats. Works commenced in September 1999, and were completed in June 2000, although Kajima continued to be involved for the following 5 years.
The Underwriter Insurance Company provided professional indemnity insurance cover to Kajima under a policy with a period of cover from 20 May 2000 to 19 May 2002. The policy was not renewed after 19 May 2002, because The Underwriter ceased writing business. The policy was a ‘claims made’ policy, covering claims first made and notified during the period of cover, as well as circumstances notified during the period of cover “which might reasonably be expected to produce a claim”.
On 22 February 2001, Kajima notified The Underwriter of a circumstance: that certain accommodation pods were settling and moving excessively, causing adjoining roofing, balconies and walkways to distort under differential settlement. There was reference to other possible damage and risk (e.g. risk to service connections and internal damage) and to the fact that an investigation was underway. That investigation subsequently revealed that the problem had been anticipated, and the pod had since stabilised.
The policy with The Underwriter expired, and further instability was reported, leading to further investigations. These investigations revealed serious and extensive problems in the stability of the building, some of which were in the physical area of the matters notified, but others of which were not, and some of which were the same type as or (arguably) directly associated with the subject of the original notification. The flats were eventually deemed at risk of collapse and the tenants were therefore evacuated. Under a settlement agreement, Karijma bought the flats from JRF.
Karijma brought proceedings against The Underwriter and sought guidance from the TCC on the extent to which the defects and damage that subsequently arose were covered by the original notification.
Scope of notifications
The TCC ruled that the original notification was only effective in relation to the specific circumstances that were notified (i.e. the settlement and movement of the accommodation pods).
The notification was not effective in relation to any other matters, unless those matters had caused or related or contributed to the circumstances notified. The defects and damage discovered after the expiry of the period of cover had not related to the matters actually notified; therefore any claim relating to them did not arise out of notified circumstances. In other words, there needed to be some causal - as opposed to coincidental - link between the notified circumstance and any subsequent claim.
The TCC followed a strong line of existing case law requiring a notification of circumstances to be construed objectively, on the basis of the words used, having regard to the factual context in which it was made. Therefore, it was irrelevant how The Underwriter and its brokers behaved in dealing with the ever-growing list of defects in the period following the expiry of cover; to rely on such an argument, Kajima would have needed to have made a plea of estoppel, or similar.
On its face, in context and objectively, the circumstance notified was excessive settling and movement of certain accommodation pods (which caused adjoining roofing, balconies and walkways to distort under differential settlement). As such, it was not a “hornet’s nest” or “can of worms” set of circumstances, where there is uncertainty around the time of notification as to the precise problem(s), and where there may potentially be numerous types of claim of unknown quantum and character at the time of notification.
Neither was it a notification of an investigation into a general problem - it was an investigation into a specific problem. Nobody even knew that there was a general problem until much later on. Little further investigation was carried out, other than keeping a “weather eye” on whether settlement was continuing. Therefore, the investigation that revealed the serious problems was not, as the claimants argued, a “continuum”, arising from the investigation originally notified.
Comment
The case provides useful guidance on situations where a circumstance is notified, and a policyholder attempts to rely on that notification to cover a loss arising later down the line.
The salient lessons for policyholders are:
1. Notifications should be carefully drafted. Where there is genuine uncertainty as to the nature and cause of a problem that ought to be notified, the notification should be drafted sufficiently widely. Where the problem is clearer, notifications should include all the matters of which the policyholder is aware.
2. When notifying, the policyholder should identify any areas of uncertainty. If and when matters progress and the nature and cause of the problems become clearer, the policyholder should inform insurers (both the current year insurers and previous years’ insurers, to whom a circumstance has been notified). If appropriate, further or separate notifications should be made.
3. Notifications should be timely, as prompt notification is often a condition precedent to cover.
Although the rules for the notification of circumstances might at first glance appear overly burdensome for policyholders, it is instructive to consider the justification for such rules:
- For reserving purposes, insurers need certainty in knowing, by the end of the period of cover, or very soon thereafter, what claims have been made against the policyholder and what circumstances might later turn into claims.
- Insurers aim to investigate circumstances at the earliest possible stage, so that they can take speedy action to minimise any potential exposure.
- For these reasons, insurers want to avoid the uncertainty of long-tailed future claims arising out of unreported circumstances.
Further reading: Kajima UK Engineering Ltd v Underwriter Insurance Company Ltd [2008] EWHC 83 (TCC)
