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A Clear Responsibility?

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In this blog, Associate Katie Edwards and Legal Director Phil Parkinson consider recent case law and the need for clarity and accuracy in insurance certification, notably where there is potentially error, assumption or a clear disconnect in the liability of named parties.

One could be forgiven for providing a robust challenge to the adage of “what’s in a name?” when considering the ramifications for those named on insurance certification, specifically in regard to property transactions and instances where special purpose vehicles (SPVs) are involved.

The recent case of Sehayek v Amtrust Europe (2021) serves as a cautionary example to highlight this.

The case focused on cover under the LABC New Homes Structural Warranty scheme, where homeowners sought new build insurance cover as part of the conveyance process for the purchase of a luxury penthouse apartment. The buyer had purchased from Grove End Gardens Ltd, but the certificate of insurance named the ‘developer’ as Dekra Developments Ltd, an associated company with the same directors and shareholders. The contention arose when the homeowners made a claim for over £700,000 (pursuant to the defects insurance period, not remediated by the developer within the first two years of cover) and the underwriter subsequently denied liability on the basis that the developer named on the certificate (Dekra Developments Ltd) was incorrect and did not meet the definition requirement that it must be a party to the purchase agreement (which stated Grove End Gardens Ltd, of whom the underwriter was unaware).

Supporting the underwriter’s argument, were the insurance clauses which specifically stated:

“Any person, sole trader, partnership or company who is registered with the LABC New Home Warranty and has registered the New Development and i) with whom the Policyholder has entered into an agreement or contract to purchase the Housing Unit on either a Freehold or Leasehold basis….”

Despite the claimants’ argument that it was necessary to imply that the term ‘developer’ should be read to cover ‘associated companies,’ the Court found that the evidence did not support the contention that it was a mistake that Dekra Developments Ltd had been proposed as the developer.

Misnomers, Implied Terms & Mitigation

The judgment noted that there was no clear mistake, nor was it clear what correction ought to be made, as per Liberty Mercian v Cuddy Civil Engineering (2013).

Referencing this case is noteworthy, in that judgment in that instance had found there had been no misnomer and no mistake, either mutual or unilateral, for which rectification could be available where there was a discrepancy as to the naming of contracting party in a construction contract.

With regard to implied terms, proceedings highlighted the necessity test for an implied term, as set out and clarified in Marks & Spencer v BNP Paribas Security Services Trust Co (Jersey) Ltd (2016) where it was noted “the exercise of implying a term in to a contract is not one and the same as the exercise of interpreting a contract, not least because the express terms of a contract must be interpreted before one can consider any question of implication”.

“Obvious” Conclusions?

Fairness or reasonableness alone may not be sufficient to challenge a contractual agreement such as insurance certification. It will be interesting to note whether this decision will be subject to appeal. However, salutary lessons can be learned. The need to be explicit, clear and to avoid “assumption by association” are all highlighted by this case and the supporting authorities – obviousness is a watch word to consider.

The need to ensure diligence when confirming the definitions relevant to the capacity of each party named on the certificate is crucially important. Some beneficial points that can be taken include:

  • When naming the correct contractual parties, it is important to properly understand the company formation and structures with which you are seeking to enter into an agreement or contract with (implied association will not suffice).
  • Exercising due diligence and ensuring all company checks are conducted prior to drafting an agreement or agreeing the policy. Pre-contractual communication will allow discrepancies to be identified and uncertainties clarified via correspondence with the other party before entering into any binding agreements.
  • Ensure the language of the contract is explicit - not implicit, adding context as well as clear definition.
  • If you are uncertain on how to proceed and require support, seek legal advice.

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