Earlier this year, the Supreme Court handed down its landmark judgment in URS Corporation Ltd v BDW Trading Ltd. The significance of the decision is illustrated by the fact that it was determined by a panel of seven justices and garnered widespread market commentary. In this article, published by Property Week, partner Chloe Derrick and associate Jesal Parekh review what this means for the professional indemnity insurance market.
The Supreme Court reached a decision that supported developers, and sought to progress swifter remediation of fire safety defects by expanding the scope of liability for remediating defects. Developers now have a right under the Defective Premises Act 1972 (DPA) to recover the costs of remediating buildings from their contractors and consultants. They can also benefit from the extended limitation periods arising under section 135 of the Building Safety Act 2022 (BSA).
What might this mean for professional indemnity insurance?
- An influx of claims against construction professionals?
Many insureds (and insurers) have been monitoring the outcome of URS to establish whether they owe potential longtail liabilities to developers. The outcome is that liabilities under the DPA are now considerably wider in scope, and there is likely to be a wave of professional indemnity claims by building owners and developers against their third-party supply chain contractors.
In a similar vein, the decision in URS also confirmed that developers may bring contribution claims against third parties under the Civil Liability (Contribution Act) 1978 even where no other party is liable and no other claim is brought against the developer. Again, this widens the scope of the supply chain’s exposure to developer claims.
- Longtail liabilities
As to what this means in practice, construction supply chain professionals now face similar longtail exposures, with limitation periods of up to 30 years under the DPA. Those businesses should also bear in mind that a developer may opt to conduct remediation works on a building unilaterally, and then later launch a recovery action against the third-party contractors.
- It is (finally) time for coverage to crystallise?
While the industry has been seeking to establish who carries potential liabilities for fire safety remediation costs, many construction insureds who have notified large fire safety exposures have received sweeping general reservations of rights from their insurers, pending claims or developments.
Now that the right for developers to pursue third-party contractor claims has been made clear in URS, coverage stances must crystallise. We are beginning to see an influx of coverage disputes as a result.
Some of the coverage issues that might arise include,
- Notification disputes: potential liabilities where claims are not advanced until sometime later will almost always give rise to insurers considering the notification provisions of the policy and any prior awareness. Many insureds will have already reviewed their involvement in legacy projects and considered their exposure, but it is important that supply chain businesses also now do so.
- Legal liability: whether the remediation costs arose as a result of a legal liability or were incurred “voluntarily” is also a point which may give rise to coverage disputes. The judgment in URS provides some helpful analysis for what costs can be considered “truly voluntary” where there is no realistic alternative but for the insured to carry out remedial works.
- Policy exclusions: the scope and application of any policy exclusions (for example, workmanship exclusions) will continue to be a key battleground when seeking to agree the amount of the indemnity due under the policy.
- Subrogation
An insurer has a right to bring a claim in an insured’s name to recover a loss it has paid under the policy once the insured has been indemnified. For parties able to pursue recovery actions against the construction supply chain, the operation of the policy’s subrogation clause will be highly relevant, particularly where the cost of any remediation works exceeds policy limits. It is not unusual for policies to contain differing subrogation provisions (either favouring the insured or insurer). Insureds should consider the subrogation clause’s terms at the settlement of the underlying claim if third-party recovery actions are envisaged.
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