HT-2023-000254 - [2024] EWHC 2063 (TCC)

I now turn to the Insolvency Point directly. The claim on the Policies is one subject to section 5 of the Limitation Act and, therefore, as a contractual claim it must be brought within six years from breach. The question as to when there was a breach requires an analysis of the contractual terms. But subject to those terms, time in contract does not run from the date of loss, or the date when a claimant might know it had a claim or the date on which it could assess or quantify the extent of its loss. None of this is in dispute.

It is also common ground that a claim on an insurance policy, being a claim under a contract of indemnity, is a claim for unliquidated damages for breach of the insurer’s obligation to hold the insured harmless against an insured peril. As soon as the insured peril occurs, the insurer is in breach, because it had agreed to hold the insured harmless against it.

In Callaghan v Dominion Insurance Co Ltd [1997] 2 Lloyd’s Rep 541 (a fire insurance case), Sir Peter Webster said at p.544, after referring to a number of authorities including The Fanti [1991] 2 AC 1 at [35] per Lord Goff (a liability case):

NHBC contend that this is accurately summarised in Colinvaux & Merkin’s Insurance Contract Law at C-0236 in these terms:

This passage, as I interpret it consistent with Callaghan upon which it is based, confirms that time runs from when insured loss is suffered, and this occurs by the happening of the event insured against.

This general principle is not in dispute, namely that it is necessary to determine the event which is being insured against. The parties referred to a number of authorities which illustrate the principle:

However, these are merely illustrations. The loss under Option 1 is a financial loss. The present claim is not one of property damage insurance, and NHBC accepts that the cover under Option 3 is materially different from Option 1.

A further helpful illustration is British Credit Trust Holdings v UK Insurance [2004] EWHC 2404 (Comm). In that case, the insured provided credit for vehicles to borrowers under hire-purchase contracts. It insured the risk of there being a shortfall between the loan outstanding and the value of a repossessed vehicle:

Morison J had to consider when the cause of action accrued. As a matter of construction, he held that the insured loss was for the sum of the outstanding loan less the recoveries (actual or hypothetical), and not the earlier date of termination of the hire-purchase agreements. At [25] he described the termination of the agreement as being the trigger for potential recoverable loss, but not the moment at which the loss occurred. Time ran from the date of sale if there was one within the 90 days, otherwise it ran from day 91. Adopting that language, Peabody says that the contractor insolvency (or fraud) is the trigger for potential recoverable loss, but loss under Option 1 is the having to pay more to complete because of that insolvency (or fraud).

The issue therefore raised by the Application is, essentially, what was the insured peril (or the “event insured against”) for the purposes of Option 1, in respect of which NHBC had promised to hold the insured harmless. Was the insured event or peril the mere insolvency of the contractor, as NHBC contends? Or was it the loss of the amount paid to the contractor or, in this case, the having to pay more to complete the works, in each case caused by the insolvency, as Peabody contend? This is a matter of construction of the Policies.

In my judgment, NHBC are wrong to say that time runs from insolvency. Taking their arguments in turn.

First, the heading to the relevant part of the Policies (which I have labelled [A] above) describes Option 1 as “insolvency cover”. That is of course true. However, Option 1 indemnified Catalyst/Peabody if (a) it lost money paid to Vantage or (b) if it had to pay more to complete the buildings, in both cases because the contractor (i) is insolvent or (ii) commits fraud: see the passage at [B]. Peabody’s claim is not of course brought on the basis that it lost money paid, but rather on the ground that it had to pay more to complete the project, and it claims the reasonable extra cost of doing so. It says the extra costs arose because of the contractor’s insolvency. It does not allege the cause to be contractor fraud. Nonetheless, as a matter of construction, it is quite apparent in my judgment that the heading to Option 1, and similar expressions such as “contractor insolvency cover” (in e.g. the Policy Confirmation/cover sheet dated 2 March 2016), are very much a shorthand for the cover in fact provided by Option 1.

Secondly, NHBC submitted that the fact of insolvency necessarily meant that an insured would have to pay more to complete the buildings than under the original contract. I do not accept that necessarily follows either as a matter of fact or, more relevantly, construction.

As far as the facts are concerned, Peabody disputes this, and say there is no evidential basis for NHBC’s assertion, which it is for NHBC to prove, that the insolvency meant that it was impossible to complete the development without paying more. Peabody also points out, if only forensically at this stage, that NHBC’s case on the merits is understood to be that the insolvency and the Stack contract did not give rise to extra costs over and above what would have been paid to Vantage.

As to construction, this has to be determined as at the date of the contract, without knowledge of the actual subsequent facts. It is not in dispute 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. See Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] UKSC 1 at [47].

As I have already remarked (paragraph 9 above), an insolvency as that term is defined (particularly if it were merely the appointment of a receiver or manager over certain property) might not lead to more having to be paid at all, or the loss of a payment made; nor would a contractor fraud necessarily result in the loss of money paid, or more having to be paid to complete the units. An administration, for example, might be successful, and allow the completion of the project without undue difficulty, and much might depend on when and in what circumstances the administration or other insolvency event occurred. It is also possible that the works might be abandoned and not completed, with the result that no extra costs would be incurred. At times, Mr Grant appeared to accept that it was possible that an insolvency might not have the consequence of extra costs, though he said it was very unlikely not to do so.

In my judgment, Option 1 cover does not apply (i.e. is not triggered) if the insured did not “have to pay more to complete” the units, or if the insured did not lose any money paid to the contractor, despite the contractor going insolvent. The event insured against is not the insolvency (or fraud of the contractor) per se, but rather the insured being required to pay more above the contract price to complete. The requirement to pay more must have been caused by the insolvency (or fraud) of the contractor, but the insolvency (or fraud) itself is not the risk which is covered. Peabody is correct therefore in its submission that the insured losses (the extra costs, or lost payments) are an essential and definitional part of the insuring clause itself [B], and not matters which simply go to the delineation of quantum [D]. It would have been easy enough to draft [B] to make clear that the claim arose on insolvency itself, regardless of whether any extra expense (or lost payment) was caused by it, if that had been intended.

Further, I agree with Mr Casey that it is not a commercially sensible construction of the Policies to say that an insurer would be liable to indemnify at the moment of the insolvency (as defined), regardless of whether there was in fact any loss caused by it. I do not accept Mr Grant’s submission that at the point of insolvency, a claim arises, an estimate of ‘reasonable extra cost’ [D] must be calculated and paid. That is an uncommercial outcome, in circumstances where no loss may arise at all, or any actual costs which ‘have to be paid’ will crystallise later. The limitation under the Policies to ‘reasonable extra cost’ is intended as no more than a cap on a claim based on actual costs.

NHBC invokes the language of the passage in Colinvaux, to which I referred at paragraph 44 above, to say that the insolvency was the event which “directly results in the loss”. In my judgment, this submission conflates the identity of the insured peril or event insured against, and issues of causation. The insured peril is the having to pay more (or the loss of a payment made); extra construction costs (or damages reflecting any lost payment) can be claimed if those extra costs (or lost payment) are caused by insolvency (or fraud).

NHBC also relies on the ‘When you can claim’ language [C]. This provides a cut-off date, being that of the Buildmark Choice Certificate, but does not, in my judgment, state at least in clear terms the start or accrual date. The wording does tell the insured to “Contact us and tell us if you have lost the amount you paid to the contractor or the contractor has not completed the home(s)”. However, it is not NHBC’s case that the non-completion of the homes is the accrual point. Furthermore, it is significant that this wording does not require the insured to notify the contractor insolvency (or contractor fraud) itself. I take the point that [C] does not require contact where extra costs have been or necessarily have to be paid (Peabody’s case as to when accrual occurs), but notification clauses (which I consider [C] to be an example of) often require early notification of circumstances from which a claim might arise. I accept Peabody’s submission that the relevant part of [C] is a notification or information provision. It is not an “entitlement” clause, as Mr Grant put it. For those reasons, [C] does not assist NHBC.

For completeness, I note that NHBC submits that it would be a rare outcome that a court would conclude that a claimant can itself dictate (or choose to defer) when time starts running for a breach of contract claim: see Legal Services Commission v Henthorn [2012] 1 WLR 1173 at [31] (Lord Neuberger) and HHJ Pelling KC’s discussion of that principle (and the Court of Appeal decision in Manchikalapai v Zurich Insurance [2019] EWCA Civ 2163), in Griffiths (supra) at [15]. I respectfully agree with that observation, although it remains a question of construction in any particular case what the insured peril is. It is not Peabody’s case on the Insolvency Point that it can dictate or defer the timing. Mr Grant is right though to say that the judgment of Coulson LJ in Manchikalapai (supra) may well be of some importance in relation to the alternative case in due course.

For these reasons, in my judgment NHBC are wrong on the Insolvency Point.