CA-2024-002563 - [2025] EWCA Civ 932

Conclusions

For the reasons that I have set out, if my Lords agree, I would dismiss this appeal.

I agree with both judgments.

I agree that the appeal should be dismissed for the reasons given by Coulson LJ. But in deference to the forceful submissions made by Mr Grant KC in support of the appeal, I add a short judgment of my own on the interpretation of the policy. Coulson LJ has set out the relevant terms of the policy; and I will use his lettering.

In Callaghan v Dominion Insurance Co Ltd [1997] 2 Lloyd’s Rep 541, 544 Sir Peter Webster said:

“It seems to me that the best way to define an indemnity insurance is that it is an agreement by the insurer to confer on the insured a contractual right which, prima facie, comes into existence immediately when loss is suffered by the happening of an event insured against, to be put by the insurer into the same position in which the insured would have been had the event not occurred, but in no better position.”

As Colinvaux’s Law of Insurance (13^th ed) puts it at para 10-133:

“There is a consistent line of authority for the proposition that the date on which the assured’s action accrues is the date on which the insured peril occurs and not on the later dates when the loss is manifested, the assured incurs expenditure or the insurers deny liability, the principle being that the insurer has agreed to hold the assured harmless against the occurrence of an insured event so that when the event takes place the insurers are in immediate and automatic breach of contract and are liable for unliquidated damages.”

The critical question, then, is what is the “insured event”? The answer to that question is, in my view, a question of the interpretation of the policy, which is to be interpreted in accordance with the normal principles applicable to the interpretation of contracts. As the Supreme Court put it in Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] UKSC 1, [2021] AC 649:

“The core principle is that an insurance policy, like any other contract, must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean. Evidence about what the parties subjectively intended or understood the contract to mean is not relevant to the court’s task … In the case of an insurance policy of the present kind, sold principally to SMEs, the person to whom the document should be taken to be addressed is not a pedantic lawyer who will subject the entire policy wording to a minute textual analysis (cf Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279, para 59). It is an ordinary policyholder who, on entering into the contract, is taken to have read through the policy conscientiously in order to understand what cover they were getting.”

In many cases the event insured against (or peril) will be defined in terms of some physical event (e.g. fire, storm, flood etc). If a peril is so defined, then as soon as a fire happens or a flood takes place, the insured’s cause of action arises.

But in my view that is not how the insured events are defined in Option 1. The first defined event is “if you lose the amount paid to the contractor in accordance with the building contract.” That is a financial event, namely the loss of a payment already made. The second defined event is “[if you] … have to pay more to complete the building of the home(s).” That, too is a financial event. Both these events are qualified by a causation requirement, namely that the loss (or additional payment) is “because the contractor is insolvent or commits fraud.” This cuts down what would otherwise be the insured event. It is necessary for it to do so in order to avoid the risk that NHBC might be liable on the policy if, for example, the cost of works rises because of variations in the specification. Thus, on the facts that are relevant to this appeal, Option 1 will apply if (a) the employer has to pay more to complete the building of the homes and (b) the reason why it has to do so is the insolvency of the contractor. The second criterion cannot be divorced from the first.

NHBC placed some reliance on the title of Option 1. I consider that there is no real help to be derived from that. In the first place Option 1 covers not only loss caused by insolvency, it also covers loss as a result of the contractor’s fraud. Second, for unexplained reasons, the definition of “insolvent” includes the death of the contractor. It does not matter for this purpose whether the contractor died solvent or insolvent.

That the cause of action does not arise immediately on the contractor’s insolvency is, in my view, confirmed by [C] of Option 1. That box does not instruct the insured to notify NHBC of the contractor’s fraud or insolvency. Rather in the case of the first specified event it requires the insured to notify NHBC “if you have lost the amount you paid to the contractor”; that is to say on the happening of the financial event. In relation to the second specified event, the insured is required to notify NHBC if “the contractor has not completed the home(s)”. Once again, this does not require the insured to notify NHBC of the contractor’s insolvency. NHBC argue that non-completion of the homes will occur on the contractor’s insolvency, not on the employer having to pay more. That, to my mind, is no more than an assertion. As the judge said at [9] and [56], some of the defined insolvency events might have no impact on the eventual construction costs. Or the work might be completely abandoned and not restarted. In addition, bearing in mind that “insolvent” includes a case where the contractor dies solvent, that assertion does not tally with the definitions in the policy.

NHBC next argue that Option 1 applies “if you have to pay more”, not “if you have paid more”. I agree; but I do not see how it advances the case that insolvency alone is the insured event. NHBC assert that the necessity of paying more arises on the contractor’s insolvency. But that, too, is an untested factual assertion. The employer might find an alternative contractor who is actually cheaper than the insolvent one.

NHBC next argue that under the heading “What we will do” they will pay the reasonable extra cost of completing the homes, which is calculable from the moment of insolvency. Again, I do not regard this as self-evidently correct. I would accept that at the date of the insolvency it may well be possible to calculate the reasonable cost of completing the homes, but NHBC’s liability is limited to the reasonable extra cost of completion. In order to calculate the extra costs it would be necessary to have a comparator. That may not be known at the date of the insolvency or, indeed, until the employer had entered into alternative contractual arrangements. Moreover the commercial consequences of this interpretation seem to me to be surprising. If the argument is correct, NHBC would be immediately liable to pay the reasonable costs of completing the homes even if the homes were never completed; or if they were in fact completed at no extra cost.

There are also difficulties in reconciling Option 1 with other parts of the policy. Part C of the policy, for example, (headed “Home damage cover”) states:

“This section applies if there is physical damage to the home(s) because the contractor failed to build the following parts of the home(s) to comply with the NHBC requirements [they are then set out]”

But in the Box “Conditions and limitations” the policy provides:

“You cannot claim for something under this section if you can claim for it under … Option 1, or if you could have done when you first knew about it.”

If the insured event is, as NHBC argues, the contractor’s insolvency, I find it difficult to understand how a claim under Option 1 would interact with a claim under Part C.

NHBC relied on a number of consequences of the judge’s interpretation which they said were contrary to commercial common sense. Commercial common sense does have a role to play in the interpretation of contracts, but its importance must not be overstated. In Arnold v Britton [2015] UKSC 36, [2015] AC 1619 Lord Neuberger warned against over-reliance on commercial common sense. At [17] he said:

“First, the reliance placed in some cases on commercial common sense and surrounding circumstances … should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision.”

The point is all the stronger in a case like the present, where the Buildmark Choice policy is a non-negotiable standard form of policy drafted entirely by NHBC.

At [19] he said that commercial common sense should not be invoked retrospectively; and at [20] he said:

“Fourthly, while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party.”

There are, as Coulson LJ has shown, uncommercial consequences of NHBC’s interpretation of the policy which balance, if they do not outweigh, the uncommercial consequence suggested by NHBC. I prefer, therefore, to rely on the words of the policy.

Ultimately, NHBC say that the event insured against is contractor insolvency. No doubt it could have been defined in that way (although bearing in mind that insolvency includes the death of the contractor it would have been some form of hybrid life insurance policy as well). But the fact is that it was not. I agree, therefore, that ground 1 must fail.