In a recent decision, the High Court has provided a view as to when a cause of action accrues for a claim under a contractor insolvency insurance policy.
What has occurred?
On 6 August 2024, Andrew Mitchell KC, sitting as a Deputy Judge in the Technology and Construction Court, handed down judgment in Peabody Trust v National House-Building Council [2024] EWHC 2063.
Peabody Trust (Peabody) made a claim against its NHBC Buildmark Policy for losses which it argued were incurred as a result of the insolvency of its contractor. The National House-Building Council (NHBC) applied to the Court for summary judgment (or alternatively, striking out) on the basis that Peabody was out of time to make the claim. The High Court found in favour Peabody, dismissing the application on the basis that the limitation period had not expired.
The relevant facts
Catalyst Housing Limited (Catalyst) (which later merged with Peabody) appointed Vantage Design and Build Limited (Vantage) as the contractor in relation to the construction of housing units at the former RAF Stanbridge. These units were insured for various risks, including the insolvency of a contractor, by NHBC polices. After beginning works in December 2015, Vantage ceased works in June 2016 and shortly thereafter, had administrators appointed.
Catalyst (by its subsidiary) engaged Stack London Ltd (Stack) as Construction Manager in relation to the project, rather than appointing a substitute contractor. Stack conducted the rest of the project build through individual works contracts and practical completion occurred on 19 January 2021.
Peabody claims that it has incurred losses because of the insolvency of Vantage which caused Peabody to have to pay over and above the amount it would have paid to Vantage for the construction of the units.
The policy
The key part of the policy which was considered was “Option 1 – Insolvency cover before practical completion”, which stated:
When the section applies
This section applies if you lose the amount paid to the contractor in accordance with the building contract or have to pay more to complete the building of the home(s), because the contractor is insolvent or commits fraud.
What we will do
We will pay you the reasonable extra cost above the contract price including professional fees, for work necessary to complete the home(s) to the NHBC requirements; or
We will reimburse the amount paid to the contractor in accordance with the building contract which cannot be recovered from them.
In addition, we will pay the cost of reasonable precautions to secure the work defined in the building contract against unauthorised entry, theft and vandalism until work resumes.
There was a financial limit on the cover which was 10% of the Contract Price. The amount Peabody claims is well within this limit. Further, whether Vantage was “insolvent” or not for the purposes of the policy definition was not contested on the application.
The parties’ position
NHBC’s position was that Peabody’s claim, which was brought on 24 July 2023, was statute barred under s 5 of the Limitation Act 1980. It was NHBC’s view that the cause of action under the contract of insurance accrued at the point that Vantage entered into administration on 29 June 2016, and therefore, Peabody’s claim could not proceed because it had been brought more than six years after the insolvency.
Peabody’s position, which it set out in its claim, was that the cause of action accrued on the date on which it had to pay more for the units to be completed than it would have had to if Vantage had not entered administration.
The judgment
In his judgment, Mr Mitchell KC held that “…time runs from when the insured loss is suffered, and this occurs by the happening of the event insured against.” The event insured against in this instance was the having to pay more to complete the building of the homes. Mr Mitchell KC found that under the policy the “…requirement to pay more must have been caused by the insolvency (or fraud) of the contractor, but the insolvency (or fraud) itself is not the risk which is covered.”
The judgment went on to agree that it was not a commercially sensible construction that an insurer would be liable to indemnify the insured under the policy at the moment of the contractor’s insolvency.
It followed that NHBC’s application for summary judgment was dismissed, based on the finding that time did not start running from the insolvency of Vantage on 29 June 2016.
The alternative case
A significant portion of the judgment was dedicated to discussion of an “alternative case”. This is something of a misnomer because the NHBC did not formally run an alternative case on its application; the basis of the application was simply that the cause of action accrued upon Vantage’s insolvency, not at any other, alternative time (e.g. when the contract was entered into with Stack).
However, the evidence put on by both parties in relation to the application made reference to alternatives times that the cause of action may have accrued. This attracted some criticism in the judgment.
Ultimately, this was not the subject of the application and Mr Mitchell KC concluded that he was “…not prepared on a summary application… with only limited evidence, to determine the complex issues raised by the alternative argument…”. This point was not suitable for summary judgment because it was “factually intensive” (as stated in the judgment) but it has left the door for this point to be considered at hearing.
What is the impact of this?
As contractor insolvency continues to be a persistent problem in the construction industry, this judgment is helpful for developers and registered providers who may need to make claims on policies guarding against losses incurred due to contractor insolvency. This judgment does not provide the silver bullet as to when a cause of action does accrue, but it does assist by concluding that the starting gun for limitation is not wholly tied to the date of the contractor’s insolvency, but rather the financial outcome that follows. In this regard, developers and / or registered providers should be extremely mindful of record keeping around these periods, so that they can clearly point to when (or when it did not) incur a financial loss.
It should be noted however that each situation will differ based on its facts and the drafting of the applicable insurance policy. If you have queries about your specific circumstances, please contact Greg Carter or Edward Green.