Timing, and knowing your policy details, are critical to insurance claims, says Doug Wass
Architects and other professionals who are ordered to pay compensation to clients as a result of mistakes in their work understandably expect to be able to recover their losses from their professional indemnity insurers, as they will have paid substantial premiums to enable them to do so.
However, this depends on the architect having complied with the terms of the insurance policy.
In the recent case of Milton Keynes Borough Council v Nulty, Mr Nulty, a self-employed electrical engineer, was found to be responsible for having caused a series of fires at a recycling centre by leaving a cigarette end in the area where the first fire started. Nulty expected to be able to recover around £2,000,000 of the damages which he was ordered to pay to the claimant under an insurance policy.
Nulty’s insurance policy required him to notify his insurers immediately when any event occurred which could result in him making a claim. Unfortunately, he failed to notify his insurers of the fires until 18 months after they had taken place.
Most insurance policies expressly state that they do not cover losses suffered as a result of events which have not been notified to insurers within a very short time after the events have occurred. However, fortunately for Nulty, his policy did not include such a provision. The court, therefore, rejected the insurers’ argument that his late notification of the fires meant they had no liability for his losses.
Yes, but no
Nevertheless, the court did accept that Nulty’s failure to notify them earlier amounted to a breach of the policy, which had deprived the insurers of the opportunity to carry out a thorough investigation and seek to demonstrate that the fires were not caused by him (and so were not covered).
The court concluded therefore that the losses Nulty could recover should be reduced to reflect the value of the chance which the insurers had lost. The court accepted that there was ‘no logical way of arriving at an appropriate percentage’ reduction and that it was largely ‘a matter of impression looking at the circumstances of the case as a whole’. On this basis, the court reduced the losses which Nulty could recover under the policy by 15%, meaning that his failure to comply with the notification requirements in the policy left him facing an uninsured liability of £300,000.
This relatively modest reduction reflects the fact that the court was unconvinced that an earlier notification would have been likely to result in the insurers obtaining evidence that Nulty was not responsible for the fires. However, a much higher percentage reduction might be applied if, for example, an insurer could demonstrate that an earlier notification by an architect might have resulted in the insurer obtaining compelling evidence that a construction defect resulted from poor workmanship carried out by a contractor (which would not be covered by the policy) rather than a defective design produced by the architect (which would be covered).
Eye on the detail
There are two important points to note.
Architects should regularly review their insurance policies and ensure that they are complying with their terms. This is particularly important given that this case may well lead to insurers taking a more robust stance in relation to any breach of the terms.
Secondly, architects should ensure that events which may lead to a claim being made under a policy are notified to insurers within any specified timescales.
Douglas Wass is a partner with Mcfarlanes LLP
IN PLAIN ENGLISH
In extreme circumstances frustration can let you out of a contract but there are better ways.
The law will not generally step in to rescue a party from a contract just because events have changed what first seemed to be a good bargain into a bad one.
However, in exceptional cases, where something occurs after the contract has been entered into which is neither party’s fault and either renders it impossible to perform the contract or radically changes the obligation, the doctrine of frustration may allow a party to treat the contract as discharged.
Frustrating events include the destruction of the property on which the works are to be carried out, the works becoming prohibited by law and, in a personal services contract (which may include construction contracts with sole traders), personal incapacity.
Situations which do not generally amount to frustrating events include the destruction of the works themselves, bad weather, strikes and shortage of labour or materials.
The doctrine of frustration is narrow and unpredictable and so if parties to a contract wish to be able to treat their contract as discharged in particular circumstances they should include a ‘force majeure’ clause in the contract setting those circumstances out clearly.