Contractors’ All Risks Insurance: Where are the limits? A lesson from the Bahamas

Cozen O'Connor
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In a rare foray into insurance law, London’s Privy Council considered the interpretation of a Contractors’ All Risk (CAR) policy in Sun Alliance (Bahamas) Ltd v Scandi Enterprises Ltd (Bahamas),[1] and overturned the decision of the Court of Appeal of the Bahamas.

The Judicial Committee of the Privy Council in London is the final court of appeal for several former British colonies. Its decisions are binding on those jurisdictions and are also considered to be of very persuasive authority in the UK and in former British jurisdictions now possessing their own final courts of appeal, such as Canada, Australia, Singapore, Hong Kong and many others. Its members are drawn mostly from the UK Supreme Court.

In this case Scandi (the insured) had purchased a dilapidated two-story building with 12 apartments on Grand Bahama, intending to improve and lease the apartments. The insured discussed its coverage requirements directly with the insurer’s agent. The insurer declined to provide the usual physical risks property policy because the building was unoccupied. The agent instead suggested that CAR cover be purchased. That advice was accepted by the insured who purchased a CAR policy with an insured limit of B$700,000. The building was then extensively damaged by fire and an insurance claim made. There were two issues before the court.

The first was whether the building (as opposed to the works) was insured. The second was whether the policy was a valued policy.

Whether Pre-Existing Building Covered under CAR Policy

The “property insured” under the policy was “The Contract Works (which term shall include Temporary Works and all materials belonging to the insured or for which they are responsible, all situate on the Contract Site in connection with the performance of the contract.” The “Contract Works” were the works described in the policy under the heading “Contract”. The policy distinguished between permanent and temporary works, the former being structures to be created under the building contract and the latter being those required to carry out the permanent works but not forming part of them. The Privy Council noted, with apparent approval, that an English court[2] had construed a similar policy and declined to allow a claim for damage to a retaining wall which was part of the original structure but not part of the works:

“In order to determine whether the retaining wall was included in the permanent works one has have regard to what the plaintiffs were actually going to do under the contract. If they had been going to rebuild the retaining wall, then the retaining wall would have been part of the permanent works. But they were not. At the moment when the wall collapsed they had no intention of doing anything to the wall other than to improve its appearance. In those circumstances it seems to me that it would be a misuse of language to describe the wall as part of the works. To take an analogy which was mentioned in the course of argument: suppose a contractor agrees to build a wing on to an existing mansion. It seems to me that the works would consist of the new wing but would not include the mansion-house. It is to my mind essentially the same position here. Nor do I think that the answer would be any different if the contractor had agreed to give the existing mansion-house a coat of paint.”

On the facts of the present case the trial judge had found that no works had been carried out by the time of the fire, apart from some renovations to two of the 12 units and some minor work on the building done by a plumber and electrician. That work was for less than B$5000 and no claim was made for it, rather the claim related entirely to the pre-existing building, which was not covered. The Bahamas Court of Appeal reversed that decision and found for the insured. It did not construe the policy but appears to have relied heavily on the discussions between the insured and insurer’s agent before the policy was taken out. It also believed that because the figure of B$700,000 was too large to have represented the value of the works it must therefore must have represented the value of the buildings. In other words, it found that the CAR Policy did indeed cover the damage to the whole property. The Privy Council found that the Bahamas Court of Appeal’s approach was wrong, stating that:

“The Board [i.e. the Privy Council] has the strongest reservations about the admissibility of this material [the pre contract discussions] for any purpose of interpretation, let alone for the purpose of contradicting the express language of the insuring clause. But they are satisfied that it would be irrelevant even if admissible. In the first place, the value of the contract works was the difference between the value of the building with and without the renovations. The sum insured against Item 1 represented the maximum amount of that difference. It could be expected to increase as the works progressed. It would also be affected by movements in the value of property generally. There was no evidence as to what the maximum difference might be once the works were approaching completion, and no reason to believe that it could not amount to B$700,000, especially when it is borne in mind that the works included the addition of a third storey. … Thirdly, if material of this kind is to be admitted, it must be admitted in its entirety. In the evidence about the placing of the insurance the cardinal fact is that Mr Ward expressly refused to insure the buildings.”

The Privy Council therefore found that the claim was not covered.

Whether Policy Valued

Having found there was no coverage it was not necessary for the Privy Council to consider if the policy was valued or not but it went on to do so nevertheless to avoid “misconceptions on the point in future cases.” It held that a contract of insurance is a contract of indemnity and that in the ordinary course, the insured must prove the amount of his loss. By way of exception a valued policy is a policy in which the parties have agreed in advance the value of the property insured irrespective of the actual value. The following passage from MacGillivray on Insurance Law was held to be ‘beyond controversy’:

“The policy may state an amount for which the object is insured, but if it is not an agreed value policy this cannot bind the insurer, the only effect of such a statement is to fix the maximum amount for which the insurer can be held liable, and the insured will still have to prove the extent of his loss.”

The Privy Council added that “an agreed value is unlikely to be practical proposition in a CAR policy where the property is contract works whose value will necessarily increase over time, and where the values at risk will depend on how far the works have advanced when the casualty occurs.” But, practical or not, it was clear that that B$700,000 mentioned was not an agreed value but merely the maximum sum insured. It followed that the insured was required to prove what it had lost. This view was reinforced by a general condition which required the insured to specify the amount of loss attributable to each item damaged or lost.

Comment

First, the Privy Council’s finding is a useful reminder of the need for precision in identifying if damaged property truly is part of the contract works for the purposes of coverage under the CAR policy. Pre-existing property in, on, or around which the contract works itself are being carried out will not necessarily form part of the insured contract works. Arguably this is a statement of the obvious but confusion on this point does arise in practice.

Second the decision reemphasizes the primacy of the policy language itself. The Privy Council was politely scathing about the Court of Appeal’s reliance on the pre-contractual discussions to wrongly infer that pre-existing structures were intended to be included by the CAR policy.

Finally, the case succinctly re-states the essential difference between valued and unvalued policies. Although the difference is well settled in law, in practice there can often be confusion around this issue, particularly where policies contain declarations of ‘values’ as opposed to sums insured. All policies will need to be considered under their own particular terms but the Privy Council was clear that an “agreed value is unlikely to be a practical proposition in a CAR policy where the property is contract works whose value will necessarily increase over time, and that a policy requirement that insured must prove the amount of its loss is inconsistent with a valued policy.

 

 

[1] [2017] UKPC 10

[2] Rowlinson Construction Limited v Insurance Company of North America (UK) Ltd [1981] 1 Lloyd’s Rep 322 at 366

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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