REUTERS | Denis Balibouse

Crumbling edifices (again) – defective new homes and the “insurance” problem

You don’t have to be an avid reader of specialist construction magazines to know that the quality of new build housing is a big issue at the moment. Both the national press and social media are awash with stories (often sensationalised) of defects, cracks, subsidence, fire safety issues and all manner of other problems. The housebuilding industry is firmly in the spotlight.

New home buyers have always taken comfort from what is generically known as “NHBC cover”. That is, the 10-year insurance backed warranty schemes offered since 1936 by the NHBC and more recently by a range of other companies including Premier, Checkmate and BLP Insurance. Of course, a primary driver for taking out these warranties is that they are required by mortgage lenders who are members of UK Finance (previously the Council of Mortgage Lenders) in order to obtain a mortgage on a new home. However, they are also seen as a valuable form of consumer protection and have always been marketed as such by the NHBC and others.

Against that background, the Court of Appeal’s recent decision in Manchikalapati v Zurich Insurance plc makes depressing reading. I won’t rehearse the sorry tale that gave rise to the litigation, since this is well summarised in Charlie Thompson’s blog.  My focus is on the reaction of Zurich (and its successor, East West Insurance Company) when faced with the claim, and its efforts – apparently now heading to the Supreme Court – to avoid paying out under the policy.

Grounds of appeal

As Charlie’s blog highlights, HHJ Davies’ decision in the TCC gave rise to a number of grounds of appeal. These broadly fell into two categories, which were considered separately by two of the most eminent members of the Court of Appeal.

The first ground (raised by the claimants) concerned whether the maximum liability cap under the policy should be set at £10.8 million (being the combined value of all the flats in the block) or £3.6m (being the combined value of those flats owned by the claimants only). Sir Rupert Jackson had no hesitation in deciding this issue in favour of the claimants. He noted that Zurich’s interpretation would undermine the commercial purpose of the policy, which was to cover the cost of rectifying a present or imminent danger to the physical health and safety of occupants resulting from a defect in the building. The wording of the policy was unclear, and as a result (in line with previous authority) it should be construed in a manner consistent with its commercial purpose.

The second set of grounds comprised a series of attempts by Zurich to argue that liability should not attach under the policy, even though on the face of it the defects fell within the scope of cover. Points taken by them included that:

  • Costs should only be recoverable once they had actually been incurred;
  • No liability would arise under the policy until the claimants had pursued and exhausted any remedies against third parties;
  • The balconies should be excluded as they were not “common parts”; and
  • Damage due to condensation should be excluded, even if caused by defects of design or construction.

Coulson LJ gave short shrift to all these arguments. He noted that, in effect, Zurich were saying that a policy “ostensibly designed to respond to the very events which have in fact occurred” should be interpreted in such a way as to exclude cover for those events. He described this as “an extremely surprising result”. He also observed that Zurich’s arguments required the policy wording to be given:

“… a strained and artificial construction (often requiring the interpolation of words not present) …”

and that, if adopted,

“… it becomes impossible to see any circumstances in which [Zurich] would ever pay out under the terms of the policy.”

In other words, the policy would effectively be worthless in the hands of leaseholders.

A recurring theme?

Regular readers may detect a theme here. In my January 2018 blog on Ziggurat I railed against the tactics of a surety company in trying to evade liability under a performance bond, when on any common sense analysis it was an open and shut case. I described the surety’s conduct as “eyebrow-raising” and opined that it was:

“… desperate to try and avoid liability, at (almost) any cost.”

I condemned its approach as “defending the indefensible” and suggested that it had been “only too willing to acquiesce in [the] deception” that its product offered “sleep at night” comfort, collecting premiums while fighting claims tooth and nail.

Strong stuff. But at least Ziggurat did not hold themselves out as the consumer’s champion, unlike Zurich… at least at the time.

The building control angle

There is a further point. Not only did Zurich act as insurer of the building under its warranty product; it also provided the building control service, inspecting the works during construction and gaining assurance (for itself and future owners) that the properties were being built in accordance with Building Regulations and to the required standard.

As educated readers will know, it is very difficult for subsequent owners to bring a claim in tort against a negligent building inspector (see Heronslea). But that isn’t the point. As the building control provider, Zurich had ample opportunity to satisfy itself that all was in order before issuing the policy. It will also have charged a fee for this service, in addition to the warranty premium. In the circumstances, it is hard to sympathise with Zurich when faced with the very eventuality for which the policy was designed.

A nice line of business… or not?

The truth is that Zurich (and others) saw the new home warranty market as a potentially lucrative avenue of business. It fitted well with the building control function once that had been opened up to competition, and the time seemed right to break the NHBC’s monopoly in this area.

But perhaps they underestimated the associated risks, and there’s the rub. In 2009, Zurich announced that it was pulling out of the new homes warranty market. It said at the time that its decision was:

“… driven by sound business and financial factors … we must do all we can to protect our profitability and sustainability for the ongoing benefit of all our customers.”

In other words, the venture was losing money.

Of course, this meant that Zurich no longer needed to appear “customer friendly”. The business was in run-off and its only interest was in paying out as little as possible. There can be no other explanation for the seemingly desperate tactics that it has chosen to adopt throughout this sorry saga.

Commercial reality

Nor is it easy to see how Zurich’s stance can be justified from a commercial perspective. When it agreed to insure New Lawrence House, it surely viewed it as a single building, albeit destined for multiple occupation (in the words of the policy, a “Continuous Structure”). It cannot plausibly now argue that it was actually a number of self-contained flats that just happened to sit within a common structure. The reality is that it was insuring the building, not the individual interests of leaseholders within it. To suggest otherwise flies in the face of reality, and leaves a bad taste in the mouth.

A postscript

Since writing the first draft of this blog, the TCC has handed down judgment in the next instalment of the series (Goldman and others v Zurich Insurance plc). In that case, HH Judge Davies decided that the claimants’ allegations of deceit and conspiracy against Zurich were not an abuse of process (since they arose out of evidence given at the original trial) and should be allowed to proceed. Of course, those allegations may not ultimately be proven, but they are clearly very serious and could lead to severe reputational damage for the wider Zurich business. Maybe the pigeons are coming home to roost after all.

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