February 8, 2019

Zagora Management Ltd v Zurich Insurance Plc

Buy to let investors complained that there were defects in their new-build flats. As part of these proceedings, they sought to recover their costs of remedying these defects from the insurer which had issued building warranties known as “Standard 10 Year New Home Structural Defects Insurance Policies”. Accordingly, Davies HHJ was required to consider the scope of cover provided by these policies. Much of the case turns on the particular facts, and policy terms, but the judge made some general observations as well. These included the following:

1) When interpreting an insurance policy, it is sometimes permissible to take into account what the policy "ought" to cover.

The starting point is the natural and ordinary meaning of the words used, and that cannot be overridden by what the insured may have reasonably believed was being covered. However, "where the words used leave reasonable room for doubt as to what was intended, a construction which would unreasonably limit the scope of the cover which it was the clear purpose of the policy to provide is to be avoided.  That applies particularly where the insurer has put forward a policy which contains exclusions from cover which is otherwise afforded which are genuinely ambiguous…"

2) The judge also commented that "words of exclusion are to be construed narrowly".

3) Prior caselaw has established that where loss is caused concurrently by an insured and an uninsured peril, the insured can recover. However, where loss is caused concurrently between an insured and an excluded peril, the insured cannot recover. The judge commented that "In this case it is not as easy as it might be to identify whether the items listed under the side of the page entitled “what we will not pay” are items which are uninsured or which are excluded or otherwise.  The language “what we will not pay” is more obviously consistent with a description of items which are uninsured rather than exclusions.  However, some of the items might be said only to make sense on the basis of being exclusions from or limitations upon cover otherwise provided".

4) The policy covered the "reasonable cost of rectifying or repairing physical damage". “Physical damage” was defined as “a material difference in the physical condition of the new home from its intended physical condition". One of the issues was whether the element is in its intended physical condition, even though that intended condition arises from defective design or a defective construction process. The judge held that, on the wording of the policy, there was cover.

5) Was an indemnity only available where rectification or repair works will be undertaken? The claimants referred to the recent decision of Hodgson v NHBC, in which the judge cast doubts on obiter comments made in Great Lakes v Western Trading and held that "There is no decided authority that where the claim is in respects of defects in or damage to property, such loss cannot include the cost of remedial works if the remedial works will not be carried out. The views expressed in the Great Lakes case are obiter and at odds with the views expressed in a leading textbook".

In this case, the judge emphasised the need to consider the particular terms of the policy in question. Unlike the position in Great Lakes, the policy here contained an express reinstatement clause, and as there was no express provision requiring the rectification or repair to actually take place (or requiring the insured to prove it had a genuine, settled and achievable intention to reinstate), that would not be implied into the policy.

6) The judge concluded that compliance with a notification clause in the policy was not a condition precedent to cover. The clause appeared in a part of the policy were no consequence for breach was spelt out (other sections in the policy expressly provided that "we will not pay" and so amounted to conditions precedent). The insurer was unable to show that it intended the notification clause to be a condition precedent.

COMMENT: This case bucks the recent trend in caselaw supporting the view that policy exclusions do not always have to be construed narrowly (see the Supreme Court decision in Impact Funding v AIG ). As the judge in Crowden v QBE Insurance explained, unlike exemption clauses in ordinary contracts, "The position in respect of insurance contracts is wholly distinguishable in that an exclusion clause in an insurance policy is not designed to exclude, restrict or limit a primary liability on the part of the insurer; instead, it is intended to define the risk which the insurer is prepared to accept by way of the insurance contract". The exclusion in that case was an exclusion of that nature. However, in this case, the judge held that exclusions should be construed narrowly. This is particularly noteworthy given that the insureds were not consumers.

This case also makes it clear that, if a reinstatement clause is included in a policy, it will be necessary to spell out if the insurer wishes the proceeds to actually be applied to reinstatement.