Court of Appeal finds no requirement to incur cost of rectification work before claiming under new home warranty

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In a judgment handed down on 5 December 2019, the Court of Appeal found that it was not necessary for the claimant leaseholders of a new build block of flats to have incurred the cost of rectification work before they could claim under their structural defects insurance policy. Martin Scott and Paul Hargreaves, who acted for the successful claimants, consider this aspect of the judgment and its practical implications.

What was the case about?

Manchikalapati & others v Zurich Insurance plc [1] concerned a new build block of flats in Manchester. The claimants had bought long leases of 30 of the 104 flats in the development. Each was issued with a Zurich Standard 10 New Home Structural Defects Insurance Policy. During 2012 and 2013 it became apparent that there were serious defects in the building, including major fire safety defects and a roof requiring replacement. Zurich was not willing to meet any of the cost of the substantial remedial works required and the leaseholders and freeholder commenced court proceedings.

The relevant policy clauses provided that Zurich would pay for ‘the reasonable cost of rectifying…’. At trial, Zurich argued that it had no liability because the cost of rectification work had not yet been incurred. It said that ‘the reasonable cost’ should be read as meaning ‘actual’ or ‘incurred’ cost. The judge rejected that submission, finding (among other things) that: there was no obvious reason why the provision should be construed so that any such limitation should be implied; the obligation was neutral as to whether it was a cost already incurred, a cost to be incurred or a cost which may never be incurred; unlike other policy provisions the word “incurred” was not used and there was no express proviso that the insured had first obtained Zurich’s written consent to the costs being incurred; and one of the policy’s conditions was wholly inconsistent with Zurich’s construction of the clauses in question.

On appeal, Zurich maintained that that the judge was wrong in reaching those conclusions, and that its liability was only triggered when the claimants spent their own money and incurred the cost of any remedial work.

What did the Court of Appeal decide?

Lord Justice Coulson, with whom the other two Court of Appeal justices agreed, rejected Zurich’s submission for a number of reasons. He concluded that Zurich’s interpretation: was not in accordance with the express language of the clauses; would require the interpolation of words which could have been but were not used; and would deprive the policy of its purpose. Here are the key points from the judgment:

  • There was nothing about the expression ‘the reasonable cost of rectifying…’ which indicated that the cost must be a cost already incurred.
  • If an insurer wishes to limit its liability to costs actually incurred then it is entirely possible for it to do so – ironically, the possibility of drafting a clause which does require the actual incurring of costs as a trigger for the insurer’s liability was emphasised by the policies in issue in the authorities on which Zurich relied during the appeal.
  • ‘Reasonable cost’ was plainly used to represent the appropriate quantification of the sums which Zurich was bound to pay to those claiming under the policy – it was a means by which the precise amount due to the insured could be calculated.
  • Other clauses that Zurich sought to rely on demonstrated that, if the fact that costs are ‘incurred’ is important to the working of the policy, the policy will say so. Additionally, requiring the claimants to obtain Zurich’s prior consent to ‘such costs being incurred’ did not mean that they would have to wait until after those costs had actually been incurred before Zurich was liable to pay.
  • Various other parts of the policy not only provided no support for the contention that the words ‘reasonable cost’ had to be construed to mean costs incurred or actual costs – they also added further support to the contrary interpretation.
  • On Zurich’s interpretation, even if there was an imminent danger that the building would collapse, the policy would not respond until tenders for the necessary remedial works had been sought, contracts let, and payments made to contractors – that was not what the policy was there to provide for.
  • In a situation where remedial works are too expensive for the claimants to pay for themselves, for example because the occupiers of a large number of flats are not insured or they do not contribute by way of service charge, on Zurich’s interpretation the claimants’ inability to fund the works would mean that they would never take place, and therefore Zurich would have no liability at all to pay anything under the terms of the policy. This was not how the policy was intended to operate – it would allow insurers to take advantage of the leaseholders’ impecuniosity to avoid liability altogether.
  • The authorities referred to the Court of Appeal supported, rather than undermined, the conclusion reached. Zurich’s contention that its liability did not crystallise until the costs had actually been incurred by the claimants was not supported by the authorities on which it relied. Among other things, this was not a policy in respect of loss and damage, but one involving an express obligation on the part of the insurer to pay a certain type of cost.

WM Comment

This decision provides welcome clarity and comfort for policyholders in a similar position to the claimants, facing pushback from their insurers and fearing that they have no choice, if they can afford it, but to pay for remedial works with no guarantees that they will ever get that money back. The Court of Appeal gave short shrift to Zurich’s arguments in this case and made clear that the claimants did not have to spend their own money before liability could be triggered under their insurance. Concerned policyholders should review their policies and seek legal assistance where required.

Should you have any queries about any of the issues raised in this briefing, please do not hesitate to contact Martin or Paul, who will be very happy to help. A further briefing covering other aspects of the judgment will follow in due course.


[1] [2019] EWCA Civ 2163