Insurance: key principles shed light on structural defects policies

United Kingdom

In construing a Maximum Liability Clause (MLC) in a new-build structural defects policy, the Court of Appeal has helpfully restated the key rules when interpreting policy wordings.

A new-build block of flats at New Lawrence House, Manchester, was found to have significant defects. The developer had entered insolvency so the Claimants – the freeholder and certain leaseholders – claimed against their structural defects insurance policy on the basis that the defects were an imminent danger to the residents. The leaseholder Claimants owned 30 of the 104 flats in the building.

The Claimants successfully challenged the declinature of the claim but appealed on the interpretation of the liability cap in the policy.

The MLC stated that under the policy “for a New Home which is part of a Continuous Structure, the maximum amount payable in respect of the New Home shall be the purchase price declared to [Insurers]…

At first instance, HHJ Davies held that the MLC limited the Claimants’ recovery to £3.634m, as the total purchase price of the Claimants’ flats. The Court of Appeal overturned that decision, holding that the Claimants were entitled to £9.7m, being the total purchase price of all the flats in the block.

The Court confirmed the key principles when interpreting insurance policies:

  • The starting point is the express wording of the Policy – what would a reasonable person in the position of the parties have taken the wording to mean?
  • Only where the wording is ambiguous can we look beyond this to consider the wording in its documentary, factual and commercial context.
  • If still unclear, the policy should be interpreted in line with the purpose of an insurance policy i.e. to provide cover for particular risks. This usually means that policy exclusions are interpreted narrowly, and insuring clauses widely.

While these principles are in line with the general law on interpretation of contracts, it is helpful to have further clarification of how these should be applied in the context of insurance policies.

In this case, the Court of Appeal considered that the meaning of ‘purchase price’ in the MLC was genuinely unclear as to whether it was the price for the claiming policyholders only or the covered properties as a whole. They chose the latter - against the surrounding clauses, the clear intention was that for a defect causing an imminent danger a single policyholder could claim for the full cost of rectification. The maximum liability should therefore also relate to the full purchase price of the insured properties. In contrast, other claims for damage included a clause stating each policyholder could recover only their proportional share of any remedial costs – the MLC would then refer to the individual purchase price for their own property.

The Court also confirmed policyholders did not need to have incurred the costs of rectification before they could claim against the policy. While turning on the interpretation of the particular clause in this policy – and the reference to ‘reasonable’ costs rather than actual/incurred costs – the Court also commented that making insurers’ liability dependent on policyholders first paying out remediation costs would undermine the purpose of the policy i.e. to protect policyholders against such costs.

Further Reading: Manchikalapati v Zurich Insurance PLC [2019] EWHC Civ 2163.