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Circumstances Again: When Is a 'Disagreement' Notifiable?
London & Bermuda Newsletter
Insureds may not need to notify or disclose embryonic third-party disputes where their industry sector is one in which disagreements are abound.
In the instant case, Laker Vent, an engineering subcontractor, agreed to manufacture, supply and install pipework for a power plant project. Laker Vent’s remuneration was based in part on the progress of contract works. A disagreement arose in September 2004 concerning the level of progress and the magnitude of remuneration due.
Laker Vent maintained legal expenses insurance with Templeton. It renewed the policy on 17 January 2005 but did not disclose the incipient dispute.
The policy obliged Laker Vent to give notice in writing “immediately [it was] aware of any cause, event or circumstance which [had] given or [was] likely to give rise to a Construction Claim”. The policy definition meant a Construction Claim only arose if (materially) Laker Vent had sought payment under the subcontract and the request had been rejected in writing at least twice. Notification in accordance with the provision was a condition precedent to liability.
On 17 February 2005, Laker Vent filed a claim for legal expenses in connection with the dispute and advised Templeton that it intended to pursue the dispute in arbitration. Templeton sought to avoid the policy for material nondisclosure. Alternatively, it argued the claim was not covered owing to breach of the notification provision.
The judgment
The first instance court rejected both of Templeton’s defences. Templeton appealed.
The non-disclosure defence
Templeton asked the Court of Appeal technical questions about whether a trial judge’s characterisation of his own factual findings could be challenged. The Court of Appeal found in this case they could not.
Of more interest in the context of this article are the reasons why the first instance judge found that the disagreement about remuneration was not material. The judge held that Laker Vent and its counterparty had been addressing their differences in opinion in an amicable and constructive way until after renewal. Additionally, the judge observed that disagreements between building contractors are commonplace on construction projects. In that context, materiality would require “… features of the relationship which, viewed objectively, show a real risk of escalation to the point of formal dispute resolution procedures beyond the risk ordinarily inherent in any complex construction contract”. The judge concluded that the relationship between Laker Vent and the third party contractor “…had not reached the stage where it was properly to be regarded as a material circumstance which required to be disclosed to Templeton”.
The notification of claim defence
Templeton challenged the approach of the judge in reaching his conclusion that the disagreement was not likely to give rise to a Construction Claim (and thus not notifiable).
The judge had taken a two-pronged approach to this question. Whether Laker Vent was aware of a cause, event or circumstance, and the nature of the cause, event or circumstance of which it was aware, was a subjective matter. How a “reasonable person” in Laker Vent’s position would perceive things is irrelevant.
However, the potential for the causes, events or circumstances, of the type that Laker Vent was aware of, to give rise to Construction Claims, was an objective matter. What Laker Vent or Templeton subjectively thought of the potential was irrelevant. It was up to the judge to decide, based on what the “reasonable person” would consider. The judge concluded that a Construction Claim would only be “likely” if the cause, event or circumstance in question (namely the disagreement) had reached the stage where adjudication, arbitration or litigation was likely to be necessary.
The Court of Appeal dismissed the appeal and approved the judge’s objective test of likelihood. The Court of Appeal considered the approach had been endorsed in the recent decision in HLB Kidsons (A Firm) v Lloyd’s Underwriters.
Summary
The courts will adopt a practical approach to the issue of material nondisclosure, taking into account commonplace events in the insured’s specific industry.
Every case turns on its own facts and policy wording, and arguably the outcome here is specific to the case of legal expenses insurance. But this decision affords some authority for the proposition that insureds working in an industry (such as construction) where incipient disputes are frequent may not need to disclose or notify unless those disagreements look likely to escalate into formal dispute resolution procedures. It also provides further guidance as to the objective way in which notification clauses should be evaluated.
An exhaustively objective approach to determining likelihood of a claim (and thus whether a circumstance is notifiable) arguably means insurers can reject notifications of incipient disputes where the insured’s industry sector is one in which differences of opinion are endemic. A minority decision in Kidsons allowed the scope for the insured to have the final say about notifiability where it is difficult to say with confidence either way whether a claim is likely. The more purist approach in this case seems to narrow that scope.
Laker Vent Engineering Limited v Templeton Insurance Company Limited ([2009] EWCA Civ 62)
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