QCR Summer 2019: Principles for interpreting an insurance policy
Zagora Management Ltd and Others v Zurich Insurance Plc, Zurich Building Control Services Ltd, and East West Insurance Co Ltd -  EWHC 140 (TCC)
Although not a shipping case, some important observations were made in this decision relating to the interpretation of terms in a structural defects insurance policies. Complaint were made by buy-to-let investors in relation to defects found in their new-build flats. Building Regulations final certificates were issued when the development was not yet fully completed and included flats yet to be built. The claimants sought to recover their costs of remedying the defects from the insurer who issued the building warranties known as “Standard 10 Year New Home Structural Defects Insurance Policies”. This policy was taken out to cover structural and other major defects in the development.
The claims against the first defendant, Zurich Insurance (“Zurich”) and the third defendant, East West Insurance Co Ltd were in contract and pursuant to insurance policies. The claims against the second defendant, Zurich Building Control Services Ltd, a Building Regulations approved inspector, were in deceit.
The freeholder, Zagora Management Ltd (Zagora), failed in its claim against the first defendant 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,) 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, which had inspected and certified the approval of the development, failed on the facts.
The case turns on its particular facts, and policy terms, but the following general observations are worth noting:
- Construction of words of exclusion
When interpreting an insurance policy, it is sometimes permissible to take into account what the policy "ought" to cover.
Under 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”.
In submissions, the claimants contended that the proper construction of the policies ought to proceed from the premise that the policies were intended to provide effective building warranty insurance to individual flat owners both for their individual flats and for their common parts and that any particular terms of the policy which might have the effect of abrogating or limiting or restricting that cover in a material degree ought to be given a restrictive interpretation.
In contrast, the insurers contended that this was a straightforward insurance policy entered into between an insurance company and individual property owners which contained a number of detailed terms and conditions which ought to be construed in accordance with their natural and ordinary meaning and without any presumption about what the policy “ought” to cover.
The judge noted that the language “what we will not pay” is 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.
The starting point is the natural and ordinary meaning of the words used, and that cannot be overridden by what the insured may have reasonably believed was being covered. However, "where the words used leave reasonable room for doubt as to what was intended, a construction which would unreasonably limit the scope of the cover which it was the clear purpose of the policy to provide is to be avoided. That applies particularly where the insurer has put forward a policy which contains exclusions from cover which is otherwise afforded which are genuinely ambiguous…".
2) Compliance with conditions precedent
The judge considered inter alia whether the claim notification condition in the policy was a condition precedent to cover. The judge concluded that it was not, as the relevant section of the policy did not describe it as such and did not specify any consequences for non-compliance with the notification clause. The clause appeared in a part of the policy where no consequence for breach was spelt out (other sections in the policy expressly provided that "we will not pay" and so amounted to conditions precedent).
3) indemnity for reinstatement costs
The policy covered the "reasonable cost of rectifying or repairing physical damage". “Physical damage” was defined as “a material difference in the physical condition of the new home from its intended physical condition". One of the issues was 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 emphasised the need to consider the particular terms of the policy in question, and as the policy contained an express reinstatement clause, and as there was no express provision requiring the rectification or repair to actually take place (or requiring the insured to prove it had a genuine, settled and achievable intention to reinstate), that would not be implied into the policy.
The judgement is noteworthy, particularly in the context that the insureds were not consumers, and it was held that exclusions should be construed narrowly. The decision emphasises that parties’ intentions must be clearly expressed in policy wordings. The judge construed the policy using common sense and the ordinary meaning of the language used. Whilst considering whether certain items are excluded or uninsured under the policy wording, the implications for coverage need to be taken into account where a potential concurrent cause may be excluded. In circumstances where “what we will not pay” sounds like it is introducing a list of uninsured items but certain items listed make more sense on the basis of being exclusions, it is necessary to ascertain the status of the item itself by focusing on the wording used and its relationship with the rest of the policy.
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