Cladding claims: can the insurer be pursued?

Cladding is a hot topic in the housebuilding industry at the moment, often requiring freeholders and leaseholders to spend substantial sums on remedial works.

Can those costs be recouped from insurers?

In the wake of the Grenfell tragedy in June 2017, the construction industry has one eye firmly on cladding disputes in the courts. The uncertainty in cladding claims exists due to the difficulty faced in apportioning blame once a building is found to be in breach of the Building Regulations (particularly Approved Document B which deals with fire safety in dwellings). Many potential routes of recovery are now being tested in the courts for the very first time.

The recent case of Zagora Management Ltd v Zurich Insurance Plc [2019] EWHC 140 (TCC) has provided some guidance on whether the insurer can be pursued for remedial costs incurred in removing and replacing combustible materials at a high-rise development. Much of the case turns on the particular facts and policy terms, but the Judge made some observations to be noted in general practice.

This case provides for two particular claims totalling £10,900,000 (plus VAT) from both the Freeholders and the Leaseholders. The first action was against Zurich Insurance plc (“ZIP”) who had issued building warranties known as “Standard 10 Year New Home Structural Defects Insurance Policies” (the “Policies”) to cover structural and other major defects in the development. The second action was for deceit (or fraudulent misrepresentation) against Zurich Building Control Services Ltd (“ZBC”) who inspected and issued final certificates (the “Certificates”) for the development under the Building Regulations as Approved Inspector.

Whilst the two defendants are separate limited companies, that separation was solely for regulatory compliance reasons and did not reflect any substantive separation between the two businesses.

First Action

In response to the first action, ZIP contended that:

(a) the Policies did not go as far as to indemnify the cost of repairs that the claimants never intended to carry out; and
(b) the claims were subject to a maximum liability clause (the “Cap”) which limited each leaseholder’s claim to the declared purchase price of its flat, with the result that the total maximum liability was the declared value of 30 flats i.e. £3,630,000.

The Policy provided that ZIP would pay “the reasonable cost of rectifying or repairing the physical damage [or] the reasonable cost of rectifying a present or imminent danger”. In the Judge’s view, the term “reasonable cost” was neutral as to whether it was an incurred cost or a cost to be incurred, and ZIP’s argument failed. Thus, the leaseholders were entitled to recover regardless of whether they would be financially able to undertake the remedial works.

The Judge found that the property contained serious defects and was sufficiently unsafe from a fire safety perspective as to justify the evacuation of the residents. Accordingly, the leaseholders were entitled to recover the reasonable cost of repairs.

Despite the Judge noting that “words of exclusion are to be construed narrowly”, he ultimately agreed with ZIP’s argument that the Cap was not an unreasonable limitation to have for a 10-year policy. As a result, the leaseholders were only able to claim a £3,630,000 contribution to the remedial works.

Second Action

For the claimants to make a successful claim in deceit they were required to show not only that ZBC knew that the representations in the Certificates were untrue or were reckless as to their truth, but that they relied on those representations either prior to exchange or prior to completion.

The claimants argued that ZBC knew that the statements made in the Certificates were not true, or knew that there were no reasonable grounds for believing the truth of the statements or was reckless as to their truth. They contended that they would not have acquired the properties had they known that the representation made in the Certificates were false.

Whilst the Claimants were able to evidence deceit, the claim failed as the Judge held that it was “impossible…to conclude that [the Approved Inspector] intended, in the legal sense, [for] a subsequent purchaser of the freehold such as Zagora to rely upon the [Certificates] over 2 to 3 years later”.

This decision is heavily reliant on the point that there was no evidence demonstrating that the leaseholders were provided with any of the Certificates prior to exchange or completion.