Manchikalapati v Zurich Insurance Plc (t/a Zurich Building Guarantee and Zurich Municipal)  EWCA Civ 2163
1st May 2020
A contractual limit on an indemnity was construed as being the value off all of the leasehold units in a development rather than being the value of the properties owned by the claimants. An insurance contract was to be construed in a manner consistent with the purpose of insurance not in a manner repugnant to that purpose.
The claimants were the long leaseholders of a number of flats in a development, the defendant their insurer who had provided an indemnity for certain works in the event of defects in the building. A number of flats had been retained by a company associated with the developer and had not sold.
The building was defective and had to be abandoned in 2017, it required substantial remedial works to be made safe, the repairing obligation lay, in the first instance, with a management company under tripartite leases. The long leaseholders brought a number of claims against various parties including the Zurich Insurance Plc (‘Zurich’) who had provided insurance against, inter alia, structural defects. The contracts of insurance provided for cover to be limited, the contracts were ambiguous as to whether this limit was to the purchase price of the individual claimants flat or to the total purchase price of all of the flats in the development covered by the policies.
On appeal the issues were:
- The construction of the maximum liability cap, this was the principle issue on appeal
- Whether the leaseholders could recover sums that would in practice be used to pay legal fees or other claims expenses rather than remedial works
- Whether the claimants were obliged to incur the cost of remedial works before claiming them
- Whether liability was excluded by the leaseholders having the right to “some other form of compensation or damages” by being able to bring a claim against the freeholder or management company of the development
There were various other fact specific issues that are not of general importance.
At first instance the High Court, HHJ Stephen Davis, found that the liability cap provided for in the contract of insurance served to cap liability at the cumulative purchase price of the flats of the claimants. On the other matters the trial judge found in favor of the leaseholders.
Decision on Appeal
On the maximum liability clause:
The clause was ambiguous. As this was a case of real doubt and the court should construe the provision in a manner consistent with, not repugnant to, the purpose of the insurance contract, Cornish v Accident Insurance Co Ltd (1889) 23 Q.B.D. 453,  8 WLUK 25 and Impact Funding Solutions Ltd v Barrington Support Services Ltd (formerly Lawyers At Work Ltd)  UKSC 57,  A.C. 73,  10 WLUK 597 applied. This construction was supported by the surrounding clauses and circumstances.
On the probable use of money to be paid for matters other than re-instatement:
A contract of insurance may specify how money paid out under the policy is to be applied. If it does not do so it is not a matter for the insurer how the insured uses the money paid under the policy. Law Guarantee Trust & Accident Society Ltd, Re  2 Ch. 617,  6 WLUK 83 applied.
On whether the claimants were obliged to incur the costs of remedial works before claiming them:
A contract of insurance may contain such a restriction, this one did not. If followed from the insured being at liberty to apply the money as they wished that they were not, absent a requirement to do so in the contract, obliged to incur any particular expense to invoke the insurance cover.
On whether liability was excluded by the leaseholders having the right to “some other form of compensation or damages”:
This was a restriction on cover provided for by the contract. It would be inconsistent with the purpose of insurance cover to take this expression as meaning any unpursued course of action, however uncertain, such as might be taken against a freehold management company. The clause referred to an entitlement providing a similar level of protection and certainty to a contract of insurance and was principally directed at statutory compensation or some form of performance bond or guarantee.
While the majority of the matters in issue in this case were fact specific the thread running through the leading judgement of Sir Rupert Jackson, with whom the other members of the court agreed, appears to be that the purpose of a contract of insurance is to provide insurance against the insured peril and that ambiguous clauses will not be construed against that purpose lightly.
Expertise: Landlord & Tenant
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