Court orders Zurich to pay out under new homes insurance policy following insolvency

What does a recent High Court case tell us about how the court will interpret the terms of a Zurich new-homes insurance policy after the developer enters administration?

Original news

Bache v Zurich Insurance [2014] EWHC 2430 (TCC)

In Bache, Mr and Mrs Bache entered into agreements for lease with Gold Homes to buy flats in a block that was yet to be built. Gold Homes was required to construct and complete the flats. This never happened. By letter dated 16 February 2010, Mr and Mrs Bache’s solicitors wrote to Gold Homes, purporting to accept its failure to complete the construction as repudiation of the agreements for lease and seeking the return of the deposits, totalling £357,800, and costs.

Gold Homes was placed in administration on 8 April 2011 and dissolved in early January 2013.

Mr and Mrs Bache had the benefit of a Zurich Insurance PLC (Zurich) insurance policy provided at the behest of Gold Homes. Zurich provide a competitive insurance product comparable to the NHBC cover which—at least at one stage—provided the only well-known 10 year cover for newly built dwellings.

The Zurich cover related to two periods, first up to the time when the building in question had been acceptably completed and the second thereafter. For the first period, Zurich said in the introduction to the policy that ‘the policy protects you if your developer goes into liquidation…against the loss of contract exchange deposit…’

Zurich did not pay out for the deposits paid by Mr and Mrs Bache to Gold Homes.

What did the policy say?

The introduction to the policy states:

'By way of summary, and subject to the conditions and any endorsements printed on the certificates the policy protects you if your developer goes into liquidation or is made bankrupt against the loss of contract exchange deposit and the repair of certain types of damage caused by building defect in the first 2 years or one year if your new home include a conversion…'

The relevant section of the policy (section 1) read:

'What we will pay before the new home is completed:

1. We will pay where, due to the developer’s bankruptcy, liquidation or fraud, the developer fails to complete the construction of the new home in accordance with the requirements and the buyer loses a deposit paid to the developer under the terms of the purchase contract for the new home, we will at our option

(a) Pay the reasonable cost of completing the home to the original specification; or

(b) Pay to the buyer the amount of any such lost deposit.'

Zurich refused to pay out under the policy while Gold Homes was in administration. It was, however, accepted by Zurich that liquidation included the subsequent dissolution of Gold Homes.

What did the court decide?

Zurich had sough to defend the claims on the basis that the loss of the deposits was triggered by the rescission of the contracts.

The High Court decided, as a preliminary issue, that subject to the other defences and proof of the assumed facts, Mr and Mrs Bache were entitled to claim under the policy, because:

their acceptance in the letter dated February 2010 of a repudiation on the part of Gold Homes of the agreements for lease was not in any way a bar to recovery under the policy

the fact that following such acceptance Gold Homes enters liquidation or is dissolved was not a bar to recovery under the policy—liquidation or dissolution of the developer vendors represented the time when the policy was engaged

technically, the fact that at the date of the acceptance of the repudiation, Gold Homes was as a matter of fact insolvent and/or such insolvency was the reason it had not started or completed the development was not in itself a bar to recovery under the policy

the answer was the same whether or not Gold Homes was insolvent at the time of the acceptance of the repudiation

One area of the case that may have been useful to other policyholders who find themselves in a situation where the insolvent developer remains in administration long term was whether the Gold Homes must enter liquidation or whether insolvent administration was sufficient. However, this argument fell away when Zurich accepted that liquidation did include the dissolution of Gold Homes. The court did, however, note that insolvency of the developer is not in itself a an event that engages the policy—not least because there are different tests for insolvency but that it may also be technically momentary and fleeting insolvency and it is not identified in the policy as such an event. Its relevance was simply as a matter of background in the interpretation of section 1 of the policy because insolvency was the primary reason why the a developer fails to complete the construction. Instead the court found that section 1 of the policy is only engaged on bankruptcy, liquidation (including dissolution) or fraud.

What are the lessons for lawyers?

With the number of developers entering administration in recent years, a number of policyholders have found themselves in a similar situation to Mr and Mrs Bache, commonly because the policy terms did not include the 'administration' of the developer. The decision in Bache will be welcomed by residential buyers with Zurich policies but lawyers reviewing transactions should be careful to ensure that the definition of insolvency in any policy documents is sufficiently wide.

Further reading

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Joanna Bhatia, solicitor in the Lexis®PSL Property team and Anna Jeffrey, solicitor in the Lexis®PSL Restructuring & Insolvency team.

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