The Court of Appeal has recently dismissed an appeal by NHBC arising from its failed summary judgment and strike out application against Peabody Trust, which was heard by the TCC in June 2024. Our previous commentary on the TCC's judgment can be read here.
The Court of Appeal agreed with the TCC that, when assessing the limitation period applicable for a claim under NHBC's insurance policy for extra costs arising from contractor insolvency, time does not start to run from the date of insolvency, but rather when those extra costs become payable. The judgment provides useful guidance on the interpretation of the applicable clauses under the relevant policy and insurance contracts more broadly.
The appeal
The Court of Appeal disagreed with NHBC's analysis of the law and the insurance contract, and upheld the decision by Mr Andrew Mitchell KC. In dismissing the appeal, Coulson LJ looked to the words used in the contract to establish the following criteria:
- The Insured must have to pay more to complete the building of the homes
- The payment of "more" must be because of the insolvency (or fraud) of the contractor
For Coulson LJ, the condition of having to pay more was pivotal to whether the policy would trigger. Without this financial loss, the cover would not apply. Second to that, the financial loss had to arise because of the contractor's insolvency. Peabody had met both criteria and the appeal was dismissed.
The policy was designed to protect and provide a cause of action to the claimant in the very scenario which Peabody found itself in; suffering financial loss due to the insolvency of the original contractor.
If the cause of action accrued on insolvency alone, it would not serve the natural meaning of the words used in the contract, nor the well-established principle that a cause of action under an insurance policy accrues on the happening of the event insured against. Likewise, it would not be commercially sensible to put control over the claimant's cause of action in the hands of the insolvent contractor, or make the insurer liable to indemnify the insured on the trigger of insolvency when neither party would know if a loss had actually been incurred.
Takeaways
In contractual disputes, it is necessary to identify the risk the contracting party intended to insure against when interpreting a cause of action under indemnity policies.
The Court of Appeal reminds parties of the importance of looking at the natural meaning of the words in the contract, and how the operation of other clauses in the contract can aid an understanding of how the clause in dispute is engaged.
