Construction professionals: disclosure to insurers

A recent case gives guidance on what constitutes circumstances that construction professionals should disclose to insurers at renewal.

A Mechanical and Electrical Sub Contractor, LVE, did not disclose problems it was having with its contractor to its legal expenses insurer, Templeton, at renewal. Shortly after renewal, it did notify the problems as a potential claim. Templeton denied cover as it claimed that (a) LVE failed to disclose material circumstances known at renewal and (b) LVE failed to comply with the claims notification procedure - a breach of condition precedent under the policy entitling Templeton to decline an indemnity.

HHJ Hegarty QC, in finding against Templeton, and deciding that LVE was entitled to cover, held:

• By the date of renewal of LVE’s policy, the relationship between LVE and the contractor had not deteriorated to the stage where it was properly to be regarded as a material circumstance that was likely to give rise to a claim, which would have required notification to Templeton
• A formal claim would have appeared ‘likely’ if discussions and correspondence had indicated that the differences between the parties would lead either to adjudication, arbitration or litigation
• A threat from the main contractor to ‘replace’ LVE as sub-contractor did not, on these facts, constitute a material circumstance that would be likely to lead to a claim
• Complex construction contracts inevitably give rise to disputes as to the progress of works, sums due to the contractor and quality of the work. This project was no different, and discussions to resolve such disputes between the contractor and LVE on the project in question appeared to be amicable and constructive
• An insurer is presumed to be aware of the general risk that construction contracts may give rise to disputes and differences between contracting parties. Therefore, something more serious is required before a particular problem is to be regarded as a material circumstance that must be disclosed at the time of initial proposal or renewal. Otherwise insurers must expect to be bombarded with notifications on every single construction issue
• A letter from the contractor to LVE after renewal, which said, “unless we are able to reach mutual agreement, this will have to be referred to arbitration in accordance with the contract”, did constitute a material circumstance that should be disclosed to insurers.

The court therefore took a pragmatic and sensible view of what should and should not be disclosed on the particular facts of the case.

Although the decision is a welcome dose of common sense in the notification process, we could speculate as to whether the decision might have been slightly different if:

• It had been a condition (rather than a condition precedent) that a material circumstance likely to give rise to a claim should be notified. Making such a notification a condition precedent is particularly onerous as it is, practically, very difficult to know what constitutes such a circumstance, (click here to link to our notification guidance)
• Templeton had been a ‘new’ insurer rather than insurers on the previous year’s policy. If the claim been notified when Templeton said it should have been, the policy would have responded and Templeton would have paid out anyway.

Ultimately, construction professionals must consider issues that have arisen on projects carefully before deciding what issues should and should not be disclosed or notified to insurers. The general rule remains that it is “better to be safe than sorry” and certainly any indication of either adjudication, arbitration or litigation should be notified as soon as possible. Equally, however, insurers must bear in mind that a court is likely to construe onerous notification requirements against it, particularly when it comes to notifying circumstances.