With the spotlight on fire safety measures in blocks of flats, there is an ongoing problem of new build insurers trying to avoid or restrict payment under their insurance policies for the cost of necessary remedial works, including for works to address the failure to comply with fire safety regulations. In Zagora Management Limited v Zurich Insurance Plc  EWHC 140 (TCC) (Zurich), a claim was brought by the owners of 30 flats in a new build development of 104 flats in Manchester with numerous defects which the developer and new build insurer failed or refused to address.
At first instance, HHJ Davies found that the new build insurer in that case, Zurich, should be responsible to cover the cost of rectifying numerous serious defects, including to remedy defective fire safety measures and a defective roof under the terms of the Zurich Standard 10 New Home Structural Defects Insurance Policy (the Policy). However, Zurich was able to persuade the Court that although the cost of the works was £9.7 million, under the terms of the Policy the amount the leaseholders could recover was restricted to a cap of £3.6 million, due to a Maximum Liability Clause (MLC) cap.
The MLC provided that Zurich's maximum liability under the Policy was limited to the 'purchase price declared... subject to a maximum of £25 million'. Accordingly, at first instance, HHJ Davies found that the MLC limited each of the Claimants' claims to the purchase price of their individual flats (thereby restricting the overall Judgment damages to £3.6 million). This was disputed by the Court of Appeal, with Sir Rupert Jackson holding that the MLC was ambiguous, but should be construed in light of the other provisions of the Policy and the wider commercial objectives of the Policy. Sir Rupert Jackson went on to hold that the MLC operated to allow the Claimants' to be awarded the total purchase price of all 104 flats in the development, which totalled £10.8 million, rather than being restricted to the price of the 30 Claimants' flats. McCombe LJ and Coulson LJ agreed with this interpretation.
The grounds for appeal
Zurich appealed the first instance decision for a number of reasons, relating to the interpretation of the Policy. The Court of Appeal rejected these on the basis that 'what Zurich suggest as the proper interpretation of the words used in their own policy... is a strained and artificial construction... with the result that it becomes impossible to see any circumstances in which Zurich would ever pay out under the terms of the Policy'. Coulson LJ further found on the following points, regarding the correct interpretation of the Policy.
- A claimant is not required to have incurred the costs of the rectification work before they claim under the Policy;
- A claimant who would use some of their recovery under the Policy to pay legal fees or the fees of litigation funders cannot be prevented, as a matter of insurance law, from pursuing their claim;
- A claimant is not required to sue any other third party against whom they may have a claim (such as a claim for professional negligence against the developer's architect) before bringing a claim under the Policy;
- The exclusion of a 'basement or semi-basement' under the Policy did not in fact exclude the development's underground car park;
- The balconies of the development fell within the definition of 'Common Parts' and therefore were covered by the Policy; and
- Condensation caused as a direct result of a defect was not included in the 'condensation exclusion' of the Policy.
Purchasers of new build flats must ask their solicitors to check the provisions of new building warranty policies offered by developers before they buy their flats. As can be seen, many of the insurers offering these policies may try to raise arguments which mean they would never pay out under the policies.
Any leasehold owner who has encountered defects and purchased their flat new build/off plan in reliance on the comfort of a New Home Structural Defects Insurance Policy should ensure that any claims they have under the Policy are properly constituted and the Policy terms are interpreted correctly.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.