While the attitude of insurers to policy interpretation has never been strictly uniform - with some prepared to show leniency where others would be swift to repudiate liability - there is no doubt that a harder line has been taken across the board by all insurers in the past 12 months. This seems to have had a knock-on effect for, among others, contractors in the building industry.
At a time when the construction sector is under increasing financial pressure, some contractors within the industry are finding themselves without cover when their insurers repudiate liability for claims worth millions of pounds after the insurers of their sub-contractors decline to cover a claim arising in the same circumstances. Although a standard condition of many policies, contractors rarely verify whether their policies contain a warranty obliging them to retain only sub-contractors that have, and maintain, a comparable or specified level of insurance. Yet even those that do check their sub-contractors' insurance policies can still face the prospect of losing their entitlement to indemnity, since they lack control over their sub-contractors' actions away from the project on which they are working and, consequently, their effect on cover. This means contractors cannot guarantee their insurance and are left trying to police the impossible.
In a recent case, a design and build contractor encountered a dispute with its insurers as a result of this increasingly hardline approach - and almost suffered dire consequences. In 2007, two men fell through a roof on one of the DBC's construction sites. Both were seriously injured and one man was left paralysed from the neck down. Although the men had been working under the direction of their employer - a demolition sub-contractor that we will call firm A - the DBC was still potentially liable under the Health & Safety at Work Act.
After a criminal prosecution had taken place, the paralysed worker brought a civil claim for damages in excess of £2m against the DBC and Firm A. The DBC's insurers agreed to indemnify it and instructed its solicitors to defend the claim. Firm A's insurers, by contrast, refused to cover the claim. It later transpired that it had only agreed to insure a gentleman known as Mr Y, who had been a sole trader specialising in demolition but was made bankrupt. Mr Y persuaded a friend to set up the new company, Firm A, so that he could continue trading, but failed to tell his insurers about this arrangement or, indeed, of his bankruptcy.
These events had serious repercussions for the DBC. Its insurance policy included a condition that all sub-contractors retained by it had to have, and maintain, insurance on terms no less onerous than its own. Furthermore, this condition was expressed as a warranty, which meant that any breach of it would immediately deprive the DBC of cover not only for the injured man's claim, but for any other claims under its policy as well. Because Firm A was not covered for the claim and was, therefore, not 'maintaining' its insurance, the DBC was in breach of the warranty.
The first it knew of this was when, at the end of June last year, it received a letter out of the blue from its solicitors (purporting now to act for its insurers) declining cover for the claim and advising that it would have to deal with two applications itself four days later to set aside a default judgment and defend the injured man's demands for an immediate payment on account of damages of £750,000.
A bloody battle between the DBC and its insurers followed. The insurers insisted that the warranty had been breached and that its handling of the matter was justified. The DBC maintained it could do no more than carry out reasonable checks that its sub-contractors had and were maintaining adequate insurance. The DBC had carried out these checks before hiring Firm A for the demolition works, but it failed to spot that anything was wrong, because the insurance certificate presented to it by Mr Y on Firm A's behalf was misleading. It referred to the insured as the "company named below" and named Firm A in the available space.
The lessons learnt from this case are that now, more than ever, insurers are not prepared to turn a blind eye to those clients that have failed to read their terms and conditions properly. Tough love is the name of the game and contractors simply must ensure that they always check the details of their sub-contactors' insurance policies, even if these checks might seem onerous and time-consuming.
Contractors may feel, as the DBC did, that a warranty should be understood as a promise to implement a system of checks and not as an agreement to continually police sub-contractors' business activities to ensure they do not break the terms of their own insurance. Indeed, that interpretation is a common sense and purposive one that might well find favour in court.
However, the prevailing attitude of insurers at the moment is that leniency is something that cannot be allowed, given the current market conditions. A literal interpretation of all policy terms and conditions, especially warranties, should be expected. Therefore, to avoid drawn-out legal battles with their clients over the small print in their policies, insurers must ensure they do all they can to bring to their clients' attention the terms and conditions, as well as warranties, involved in their policies, and that the obligations they seek to convey are not only clear, but also commercially realistic.
- Ed Lewis is head of construction at law firm Weightmans.