News / 26-02-2019 / Structural defects in the policy wording

It was held thatThe freeholder, Zagora Management Ltd (Zagora), failed in its claim against the first defendant, Zurich, due to the fact that Zagora was not an insured under a building warranty The individual leaseholder claimants succeeded against Zurich (or more accurately, the third defendant company which had been transferred this business, East West Insurance Company Limited) on the grounds that the building was seriously defective and required major and expensive repairs which fell within the cover afforded by the relevant building warranties The claims by Zagora and the individual leaseholders against the second defendant, Zurich Building Control Services Ltd, which had inspected and certified approval of the development, failed on the facts Legal Issues FindingsThe key legal points in an approximately 180-page judgment are as followsInbspNot an excluded causeUnder section 2 of the policy, Zurich agreed to pay inter alia, The reasonable cost of rectifying or repairing physical damage caused by the developers failure to comply with the requirements in the construction of the new home The policy contained a list of items under the heading what we will not pay under section 2 The judge noted that the language what we will not pay is obviously more consistent with a description of items which are uninsured rather than exclusions, however certain items may only make sense on the basis of being exclusions from cover The judge therefore considered that it would be necessary to consider the proper interpretation of particular items by focusing on their wording It was important to determine the status of the items under what we will not pay as damage to and deterioration of the structure has been caused by an item under that heading, specifically condensation At the same time however, the damage was also caused by a breach of requirements and regulations, which is a covered peril (in that the condensation formed as a result of the unventilated cold roof design and construction) Ordinarily the concurrent operation of both an excluded peril and an insured peril means that the loss is not recoverable The judge found that the failure by the developer to construct the building in accordance with the ZBG requirements or the Building Regulations was either the proximate cause or at the very least the concurrent cause of the loss It was the proximate cause because without the failure by the developer the condensation loss would not have happened The judge further found that the condensation was on the proper construction of the policy not actually an excluded peril but an uninsured peril Therefore, it was held that regardless of whether the condensation was a proximate or a concurrent cause, the loss was covered as the operation of an uninsured peril and an insured peril will not prevent the insured from recoveryIInbspPhysical damage intended physical conditionAs noted above, the reasonable cost of rectifying or repairing physical damage was covered by the policy Physical damage is defined as a material difference in the physical condition of the new home from its intended physical condition There was a question between the parties as to whether that definition can be applied to design defects ie will there be cover where the element is in its intended physical condition even though that intended condition arises from defective design or a defective construction process which is contrary to the ZBG requirements and which adversely affects its structural ability or resistance to damp or water penetration The judge held that there must be cover and that the intended physical condition must be the physical condition which was intended to result from compliance with the ZBG requirementsIIInbspCompliance with conditions precedentThere was an issue about whether the claim notification condition in the policy was a condition precedent to cover The judge held that it was not as the relevant section of the policy did not state it was such and did not specify a breach for non-compliance with the notification clause There was also a supporting argument in the exclusions, one of which was for additional costs arising from unreasonable delays in reporting a claim either to us or the developer In such cases claims would be paid save to the extent that they include such additional costsIVnbspCost of reinstatementThe remedy for the loss suffered was specified by the policy as the reasonable cost of rectifying or repairing the physical damage, ie reinstatement However a question arose as to whether the policy should respond where the claimants will never undertake the repairs The claimants argued that they are entitled to recover an indemnity even where reinstatement is never actually effected The judge considered previous case law on this issue and found that the policy clearly states that Zurich will pay the reasonable cost of repairing the physical damage and there is no express provision stating that this obligation only applies either if or when rectification has taken place or if the insured can prove that he has a genuine, settled intention to reinstate A condition as to the use of the indemnity could not be implied It was therefore not necessary for the claimants to show that they were going to use the indemnity for purposes of reinstatement VnbspInterestOn 7 February 2019, a supplemental judgment to the principle one was published which addresses whether the successful claimants can claim interest, given that they did not initially include it in their claim The judge held that the Claimants are entitled to claim interest in the total amount of 699,55930 CommentThis case emphasizes that parties must spell out their intentions in the policy wording, whether it be that indemnity shall only be provided if reinstatement of the property is actually going to happen, or whether a claims notification clause should be treated as a condition precedent or whether an item is excluded or simply spelt out as uninsured The judge interpreted the policy using common sense and the ordinary meaning of the language used There are also interesting comments in the judgment on the judge's assessment of witness evidence, and where he will place less weight, say for example where the witness is seeking to argue the case in evidence