The Court of Appeal’s recent judgment in Laker Vent Engineering Limited v Templeton Insurance Limited is a reminder of the importance of being aware of (and complying with) the disclosure and notice requirements of an insurance policy.
In this case, LVE first notified its insurers, Templeton, of a potential claim under its legal expenses policy (arising out of a dispute between LVE and a third party) on 20 January 2005, three days after the policy for the 2005 policy year had been renewed. The policy was on a “claims made” basis (the relevant provisions of the policy are set out in an annex to the Court of Appeal’s judgment). The circumstances that gave rise to the dispute had been the subject of discussion between LVE and the third party since around October 2004.
Templeton argued that it was not liable to pay the claim because, in contravention of the terms of the policy, LVE failed to disclose the “material fact” of the potential claim prior to renewal of the policy and LVE failed to notify the claim “immediately”.
The Court of Appeal commented that construction contracts are inherently contentious and held that, on the wording of this particular policy, a claim was only notifiable when it became likely or, more probable than not, that adjudication, arbitration or litigation was likely to be required. On the facts, LVE had notified the potential claim at the correct time and therefore the Court of Appeal held that LVE was entitled to its claim for legal expenses under the insurance policy.
Although LVE was successful in this case, it is an important reminder to construction companies of their obligations under insurance policies. In addition, given the current trend showing an increase in construction disputes, legal expenses insurance is becoming a more important risk management tool and should not be regarded as something which is peripheral to a construction company’s core activities.
Here are some practical points, which may help construction companies stay on the right side of their insurers:
Risk management. Consider putting in place internal risk management policies that identify the person who will be responsible for maintaining/renewing insurance policies; who will act as a principle point of contact with insurers and brokers and be responsible for disclosing material information; and who will be responsible for ensuring that project managers are aware of the main terms of all relevant policies, including legal expenses insurance.
Notification. Always check when notification is necessary under the terms of the policy. It is important to carefully consider the specific wording of each policy in this regard, as there is a difference between notifying that a claim may arise and notifying one that is likely to arise. In relation to legal expenses insurance consider the notification requirements whenever a contentious issue arises.
Check what the policy covers. In relation to legal expenses insurance, check what your policy covers before commencing formal dispute proceedings. In particular, does it cover:
- The costs of an adjudication, including the adjudicator’s fees?
- The costs of the other side (if you are ordered to pay them)?
- Your costs, if they are unrecoverable. If you do recover some of your costs, to what extent will the policy cover the shortfall?
- The costs of an appeal?
- The costs of any enforcement proceedings?
Dealing with the insurers. Once a claim has been notified, keep the insurer up to date in respect of any matters relevant to the claim. In addition, keep records of all dealings with the insurers, underwriters and brokers so that it is clear what matters have been notified to the insurer and when.