Kajima UK Engineering Limited v The Underwriter Insurance Company Limited
Kajima was the main contractor employed by the Joseph Rowntree Foundation to design and build a block of flats in Leeds. The development was part of an affordable housing scheme and the design consisted of stacked, pre-constructed accommodation "pods".
Work finished in June 2000. That autumn, the Foundation complained that water was "ponding" in the walkways and asked Kajima to investigate. In February 2001, Kajima concluded the problem was being caused by excessive settlement.
Kajima's professional indemnity insurance provided cover for claims and "circumstances which might reasonably be expected to produce a claim" notified to insurers during the policy period.
On 22nd February 2001, Kajima notified insurers of the problem as a circumstance, reporting that the pods were "settling and moving excessively; causing adjoining roofing and balconies and walkways to distort under differential settlement". Insurers were informed there was a risk of other damage and that investigations were underway to identify or confirm the cause and its potential effect.
By April 2002, however, Kajima was satisfied that the movement had stabilised. On 10th April, this was reported to insurers, although they were asked to keep their file open for 12 months to see if the settlement remained static. The policy period of the insurance ended on 19th May 2002.
Further investigations over the following months and years, however, revealed a host of serious and extensive defects, some connected with the original problem, some not. In September 2005, the flats were found to be at risk of collapse and unfit for human habitation.
Kajima ultimately reached settlement with the Foundation by agreeing to purchase the flats. It now sought an indemnity under the insurance policy, but insurers argued that most of the defects were not covered by the February 2001 notification.
The judge found the notification was only effective as regards the specific circumstances notified and the consequences of those circumstances. It could not be expanded to cover unrelated defects coincidentally discovered as a result of further investigations.
Guidance on notifying circumstances was given recently in Kidsons v Lloyd's Underwriters [2007].
That decision confirmed that a notifiable circumstance is something that creates a reasonable and appreciable possibility that it will give rise to a claim against the insured. But the insured can only notify circumstances of which it is actually aware. The scope of the notification depends on the objective interpretation of the notice and the reasonable understanding of the recipient.
In this case, the judge acknowledged it was possible for an insured to notify a "can of worms" type of circumstance where the full extent of the problem was not yet known. But the insured must be aware of the circumstances it is notifying – it cannot simply say "there may be some unknown and unidentified defects".
Here, the notified circumstances were quite specific - the settlement or movement of the pods and the distortion of the adjoining balconies, walkways and roofing. It was not a generalised "can of worms" set of circumstances. At that time the insured had no reason to believe any wider problems existed.
The aim of the investigation that followed was equally specific – to identify the cause of the settlement or movement. If, during the policy period, the investigation had revealed other, unrelated defects, these would have had to have been notified to insurers as separate circumstances.
The case is another reminder to insureds to be vigilant about the terms of any notifications they make to insurers where ongoing problems are likely to occur - and to review those notifications as problems emerge.
Clearly, a balance needs to be struck between being so specific that the notification is limited to a very narrow circumstance and wording it so vaguely (as in the Kidsons case) that a reasonable recipient would not realise what, if any, circumstance is being notified.
The key issue is the insured's awareness at the time of the notification. In this case, Kajima did not yet know (or even have a suspicion of) the wider problems before the policy period expired, so it is difficult to see how it could have validly notified them to insurers.
As a result, even though it kept insurers well informed about the growing list of defects over the following years, most of those defects were not covered by the insurance.