Laker Vent Engineering Limited v Templeton Insurance Limited
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The insured, Laker Vent Engineering, was working as a sub-contractor carrying out specialist piping work at Cottam Power Station in Nottinghamshire.
During the autumn and winter of 2004, various issues arose between the insured and its employer over the progress of the works, an extension of time and the additional costs that the extension would incur.
On 19th January 2005, the employer wrote disputing the insured's claims for additional payment and stating that, unless agreement could be reached, the dispute should go to arbitration. The insured contacted its legal expenses insurer the following day and submitted a claim form on 17th February.
The insurer, however, sought to avoid the policy on the grounds that there had been an ongoing dispute since October 2004 and that this was a material fact that should have been disclosed when the insured renewed the cover in January 2005.
It also argued that the insured had breached the notification clause in the policy, which was a condition precedent to the insurer's liability.
The policy terms
Laker Vent was insured for legal expenses risks under a constructors' protection policy. The insurance was a "claims made" policy, so that it responded to claims first made against the insured during the policy period.
The notification clause said it was a condition precedent to insurer's liability that "we are notified in writing immediately the insured is aware of any cause, event or circumstance which has given or is likely to give rise to a Construction Claim".
A construction claim was defined as "a bona fide Construction Claim arising under a Contract provided always that the Insured shall have first made an application for payment…and the said application … shall have been rejected in writing on at least two occasions either in whole or in part by the Other Party or its agent".
High Court judgment
The judge found there was no material non-disclosure.
A circumstance is material if it would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk. An insurer seeking to avoid the policy must also show that the non-disclosure induced the actual underwriter to enter into the contract on the terms he did.
The evidence showed that the disagreements between the insured and the employer were largely procedural. Despite delays and differences of opinion, however, the relationship between them remained fairly amicable, at least up until the letter of 19th January 2005.
In the judge's view, although the existence of a dispute in a complex building contract could be material, such contracts almost invariably give rise to differences of various kinds. The insurer, as a provider of legal expenses insurance, would be presumed to know that disputes about timing, quality of work and payment were inherent in the construction industry.
For a dispute to be material, therefore, there had to be a real risk that it would have to be resolved by a formal dispute resolution process, not just a possibility that it might do so. This was not the case here. There was also no evidence of actual inducement before the court.
As for notification, the judge found that the definition of a construction claim in the policy was such that the insurer only had to be notified when a dispute had reached the stage when adjudication, arbitration or litigation was likely to be needed to resolve the issue. Again, that was not the case, so the condition precedent had not been breached.
The insurer appealed
Court of Appeal judgment
The Court of Appeal upheld the judge's decision. His conclusion that the ongoing differences between the insured and the employer were not material was a finding of fact based on his assessment of the evidence.
The Appeal Court will not interfere with a judge's findings of primary fact unless satisfied they are plainly wrong. There is perhaps greater scope for challenging the judge's assessment of the effect of his findings. Generally, however, the more the judge's conclusion is based on oral evidence or the overall assessment of a number of factors at trial, the less likely the Court of Appeal is to interfere.
In this case, the Court of Appeal was satisfied that the judge's assessment of the nature of the dispute could not be successfully challenged. His conclusion that, in the sphere of legal expenses insurance, a prudent underwriter would consider a dispute material only if there was a real risk of it escalating to a formal dispute resolution procedure was rational and sound.
Given the definition in the policy, the judge was also correct to conclude on the notification point that a construction claim would only be "likely" (i.e. probable, or more likely than not) if it had reached the stage where there was a real risk that adjudication, arbitration or litigation would be required. The test was an objective one.
On his evaluation of the evidence, the judge concluded the dispute had not reached that stage. His decision could not be characterised as obviously wrong and so the appeal failed.
The Court of Appeal in this case applied a similar approach to the phrase "likely to give rise to a construction claim" as it applied to "may give rise to a loss or claim" in Kidsons v Lloyd's underwriters.
Under either wording, the issue is whether the circumstance could reasonably be regarded by someone in the insured's position as something likely to give rise to a claim. The test is objective and will be determined by the court as a question of fact.