New Home Warranty Insurance - Mind The Gap

Conveyancing - The Devil Is In The Detail

In the course of delivering CPD training to conveyancing solicitors in Northern Ireland I am frequently asked questions about new home warranty insurance and the protection such policies afford purchasers of new build properties.

In light of this I was interested to read a judgment delivered by Recorder Andrew Singer QC sitting as a Judge of the Technology and Construction Court in the case of Sehayek & Anor v Amtrust Europe Ltd [2021] EWHC 495 (TCC) (05 March 2021)URL: https://www.bailii.org/ew/cases/EWHC/TCC/2021/495.html

The case serves as a warning to purchasers of new build properties and highlights the difficulties faced by their solicitors when considering the protection being offered by a developer when providing an insurance backed home warranty product. As the conveyancing solicitors representing Mr and Mrs Sehayek in the purchase of their property pithily observed in the course of their deliberations regarding the home warranty policy These schemes do actually vary significantly if you look at their policy documents so there are no 'normal standards

The Judgment

The judgment addressed the interpretation of a policy of insurance underwritten by the Defendant ("the Policy") for defects relating to a new build property in Grove End Gardens, St John's Wood, London ("the Property"). The Property is owned by the Claimants whose claim for sums they say are payable by way of indemnity under the Policy has been rejected by the Defendant giving rise to the substantive proceedings in this Court. Secondly, the preliminary issues raise questions of estoppel and/or waiver alleged to arise in favour of the Claimants.

From an insurance perspective it was affirmed The burden of proof is on the Claimants to show that they are entitled to the benefit of the Policy on the balance of probabilities

Serving to highlight the complexity of the insurance dispute and how matters arising from the Developers representations prior to inception of the policy can potentially negatively impact on the cover provided to a subsequent purchaser it was stated:

The preliminary issues are as follows:

(a) Were the Rules incorporated into the Policy?

(b) Is the provision of cover under the Policy conditional upon the Developer complying with the Rules?

(c) Are the Claimants entitled to the benefit of Section 3.2 of the Policy in relation to the Property given the definition of "the Developer" within the Policy?

(d) Is the Defendant:

(i) estopped from asserting that DPD was not the Developer in relation to the Property for the purposes of the Policy; alternatively

(ii) estopped from asserting that the Rules had not been complied with by the inception of the Policy; alternatively

(iii) estopped from relying on the strict terms of the Rules and/or Policy to assert that the Property was not covered by the Policy on the basis that DPD was not the Developer; alternatively

(iv) has the Defendant waived any breach of the Rules and affirmed the Policy by incepting the Policy and dealing with the Claimants' asserted claim thereunder?

The Facts

In outline the following facts were determined by Recorder Singer QC:

1. Dekra Penthouse Developments Limited ("DPD") was incorporated on 8th March 2001. Mr and Mrs Cunnington were the directors of DPD and Mr Cunnington was its sole shareholder.
2. In late 2004/early 2005 LABC (a trading style of MD Insurance Services Limited who acted as agents for the Defendant in these proceedings) issued an initial Certificate of Insurance for a development at Trinity Road, London SW17... The Developer was listed as "Dekra". Correspondence was with Mr Cunnington of "Dekra". On 1st March 2005 Mr Cunnington on behalf of Dekra sent an Indemnity Agreement and Rules of Registration to the Defendant's agents which resulted in June 2005 in a Certificate being issued to "Dekra". The final Certificate when issued was also in favour of "Dekra".
3. On 28th April 2005 Dekra Developments Limited ("DDL") was incorporated with the same directors and ownership as DPD. On 29th April 2005 Dekra Holdings Limited ("DHL") was incorporated. In that company's case Mr and Mrs Cunnington were equal shareholders.
4. In October 2007 "Dekra" entered into a Deed of Indemnity in respect of a development at Wellington Court in St John's Wood. When dealing with that development, the present managing agent (again acting for a different insurer) referred to Dekra as an existing developer.
5. In January 2008 LABC sent an email to Mr Cunnington in respect of a third development at the Terraces, St John's Wood. That email reads: "Further to your enquiry regarding the above new site. If GD Investments are the developers we will require a Contract Notification Form and Registration Form being filled in by and signed by them. If Dekra Developments are to be the builder, this should be under contractor information on the Contract Notification Form and if they just put reference that Dekra are already registered with LABC New Home Warranty than[sic] this will be taken into consideration when rating.I have attached the necessary forms if you wish to pass these on to GD Investments. If you have any further enquiries please do not hesitate to contact me."This third development was, I was told and accept, different to the usual developments because there was a third party (GD Investments) who were the developer whereas Mr Cunnington/Dekra's usual approach was to be both developer and builder.
6. On 7th May 2013 Mr Cunnington applied to LABC/the Defendant in the name of Dekra in respect of a development at Grove End Gardens. That is the development which includes the Property the subject of these proceedings. The Contract Notification Form includes the following. In Section 5 of the Form in answer to the question "Who will carry out the building works?" is stated "Dekra". Likewise, the name of the builder is "Dekra". The LABC Warranty Registration Number is given as 004279. In answer to the question "Are you connected with a developer who is already registered with LABC Warranty?" the answer is given "Yes". In addition, in handwriting is written (probably by Mr Cunnington): "Dekra are a building company that do their own developments. We have been building for 30 years: see sheets attached."In addition in handwriting the following had been written (also probably by Mr Cunnington):"Company - Dekra
7. In a document generated internally by the Defendant's managing agents which is undated but must have been produced after 7th May 2013 and before 11th June 2013 the developer is described as Dekra Developments. That document also makes clear that the developer is an existing developer, ie one that has been insured before...
8. On 11th June 2013 LABC sent a Quotation for the Grove End Gardens development in which the client was named as DDL. The Quote Details noted that the client was an "existing developer under 19376" which is the reference to Wellington Court. The quote also required the Contract Notification Form to be "completed and signed in the full developer name". Further, a "suitable cross-company guarantee" was to be provided in respect of cover for Section 3.2 of the Policy. It was noted that: "We are unable to issue any Certificates without receipt of the Cross-Company Guarantee."
9. A Developer's Indemnity Agreement was entered into on 26th June 2013 between DDL and the Defendant. DDL confirmed receipt of the LABC Rules on 1st July 2013.
10. On 12th December 2013 GEG and DPD entered into a JCT Building Contract for DPD to construct the penthouses at Grove End Gardens, one of which is the Property. Sales brochures were issued in 2014 marked "Dekra" penthouses for sale at Grove End Gardens. In May 2014 Davenport Lyons solicitors, prepared an Information Sheet which states that the vendor was GEG and that "GEG will provide LABC cover for the Development." A "Certificate of Registration" of the Development was included in the Information Pack. The First Claimant could not recall whether he read this at the time and made clear by his evidence that he sought to rely entirely on his solicitors in acting for him in the purchase of the Property. The Developer was named as DDL consistent with the Initial Certificate.
11. In November 2014 the Claimants' then solicitors sent a letter of advice to the First Claimant who accepts that the letter was sent but said he did not believe he had read it very carefully at the time. He did however agree having been told by his own solicitors that the vendor of the Property was GEG. There were also pre-contract negotiations between the Claimant's solicitors and the solicitors acting for the vendor. That included discussions as to the insurance cover to be provided with the Policy. It is clear that the Claimants' solicitors considered the best form of cover would be provided by NHBC insurance. They were unfamiliar with the LABC Policy and asked to see a copy of the same. They also noted that "These schemes do actually vary significantly if you look at their policy documents so there are no 'normal standards'."
12. On 28th July 2016 GEG's solicitors sent a Notice to Complete to the Claimants (dated 27th but not sent until 28th) and included the LABC New Homes Warranty Certificate of Insurance. The Certificate of Insurance which includes cover for defects insurance, structural insurance, contaminated land and additional cover for Local Authority building control functions states on its face that the Developer was DDL.
13. the Policy provides that a Developer is:"Any person, sole trader, partnership or company who is registered with the LABC New Home Warranty and has registered the New Development and (i) with whom the Policyholder has entered into an agreement or contract to purchase the Housing Unit on either a freehold or leasehold basis; or (ii) who constructs the Housing Unit and with whom the Policyholder has entered into an agreement or contract to purchase the Housing Unit on either a freehold or leasehold basis."
14. In early 2017 DDL and DPD went into insolvent liquidation
15. On 20th February 2019 the Claimants sent a Letter of Claim to the Defendant. There was an inspection carried out on 22nd May 2019 but no substantive reply to the Letter of Claim was received and these proceedings were issued on 29th October 2019 seeking damages of approximately ￡735,000.
16. Paragraph 31 of Mr Sehayek's statement reads:"It is of note that in none of these communications did LABC assert that the Policy was invalid for non-compliance with the rules. Nor was it ever asserted that we did not have the protection of the insurance provided by the LABC Warranty. Until the Defendant served in these proceedings, it has always been the LABC's position and understood by us that the bases for rejecting the claim were (i) an agreed reduction in the purchase price based on prior knowledge of defects, and (ii) there being a contractual dispute with the developer. This position has not altered in pre-action correspondence as the Defendant simply failed (despite various promises) to reply to our letter of claim. It was on this basis that we instructed our solicitors to pursue this claim. I accept that that evidence is accurate and reflects the Claimants' honestly held understanding.
17. Paragraphs 14 and 15 of Mr Smith's witness statement provide:"I can confirm that we issued cover for Dekra Developments Limited at Grove End Gardens on the basis:(a) It was registered under the Scheme (a copy of Registration and the Scheme Rules are exhibited hereto at ROS5);(b) We obtained the signed Developers Indemnity Agreement (a copy of which is exhibited hereto at ROS6);(c) Escrow security was provided by Dekra Developments Limited (a copy of the agreement is exhibited hereto at ROS7); and(d) We had a cross-company guarantee from Dekra Holdings Limited for the defaults of Dekra Developments Limited (a copy of which is exhibited hereto at ROS8).15. I have been shown a copy of the Agreement to Lease between the Claimants and Grove End Gardens (London) Limited (a copy of which is exhibited hereto at ROS9). The document demonstrates Dekra Developments Limited was not the entity that entered into a sale agreement with the Claimants and therefore that Dekra Developments Limited does not appear to meet the Policy definition of 'Developer'. The entity entering into the contract was Grove End Gardens (London) Limited.

The Arguments

The main arguments advocated by the parties can be summarised as:

In short, the Claimants' position is that although the Policy refers to DDL as the Developer, that "does not reflect the reality." The Claimants say that the Developer was DDL and/or DDP and/or GEG. Alternatively, that the words "and associated companies" should be implied into the Policy.

The defendants argued that the extrinsic evidence properly relied on shows clearly that the insurance cover for the Property was arranged between the Defendant and DDL and further that even if it is correct that DPD was the Developer under the Policy, that does not satisfy the requirements for cover because of the lack of contractual nexus with the Claimants.

Put simply the Defendant says the position that the Developer named in the Policy does not meet the Policy definition of Developer.

Decision

Rejecting the Claimants claim the Recorder held amongst other things:

In terms of who is the Developer under the Certificate/Policy as a matter of construction or if relevant by implication? the Recorder rejected the Claimants arguments on construction.

It was accepted that extrinsic evidence is relevant and that includes evidence as to the formation of the underlying transaction between the Defendant insurer and the "Developer" leading to the inception of insurance cover. However, that does not assist the Claimants who need to show that the factual background leads to the conclusion that naming DDL as Developer was a clear mistake. The Claimants cannot show such a mistake here where there was no evidence to suggest that when DDL entered into the Developer's Indemnity Agreement and when a cross-company guarantee was provided in respect of DDL's liabilities that was in any way a mistake, let alone one known to either party and certainly not to the Defendant... An objective reading of the evidence leading to the inception of the Policy is clearly only consistent with that cover having been agreed between DDL and Amtrust. Whilst I accept the evidence of previous dealing (by a different insurer) with an entity known as "Dekra", that cannot, as Mr Green in my judgment rightly submitted, be taken on any view to include GEG which did not exist until March 2013. Nor can evidence of previous dealings shed any light on the Claimants' understanding of the position when they completed the purchase of the Property because at that date they did not know anything about the history. Neither, in my view, does the factual background assist in construing the words "DDL" in the insurance as meaning "DDL or any associated company." The factual background does not demonstrate that that particular position had occurred before. Further even accepting, as I have done, that the Claimants believed they were purchasing the Property from "Dekra" does not lead to an objective interpretation of the underlying transaction to which the Claimants were not a party being with an entity other than DDL. Likewise, the fact that the definition of Policyholder does allow for "associated companies" whereas the definition of Developer does not, means that the construction argued for by the Claimants is even harder to justify.

The Claimants fall back arguments in relation to Waiver and Estoppel were also soundly rejected.

Conveyancing Risk

One can readily appreciate how conveyancing solicitors could become embroiled in a dispute in circumstances where a Home Warranty insurer fails to provide an indemnity under the terms of its policy.

In the case cited above both the vendors solicitors and the purchasers solicitors addressed the issue of a Home Warranty policy clearly recognising that it was an essential product underpinning the transaction.

It is unlikely a purchaser would proceed with a transaction to purchase a newly constructed property in the absence of a valid Home Warranty policy.

Similarly a mortgage lender is unlikely to provide finance in the absence a valid Home Warranty policy

Whilst a conveyancing solicitor is not an "insurance expert" there may be arguments that there is a duty to identify and provide information on any obvious material deficiencies in a Home Warranty policy. This might include anomalies in the description/identity of the developer or inadequate limits of indemnity. Such duties are likely to apply equally to a lay client and their lender in circumstances where the solicitor has been retained by both parties.

In conclusion would a new build property that did not have the benefit of valid Home Warranty insurance represent "good marketable title" to a lay client or a secured lender and if not does this create a potential exposure for the conveyancing profession?

Gary Thompson CIP FCII

GT Consulting