Insolvency cover clarified – Peabody Trust v NHBC

The High Court has clarified – in a case involving a social landlord – when a cause of action accrues under insurance policies providing contractor insolvency cover, and therefore when the limitation period begins. William O’Brien and Alicia Ogborn explains the ruling.

The judgment in Peabody Trust v National House-Building Council [2024] EWHC 2063 (TCC) relates to NHBC’s building warranty cover for new social homes, Buildmark Choice. NHBC offers contractor insolvency cover to local authorities as an optional extra to Buildmark Choice, for which an additional premium is paid.

NHBC’s cover terms vary from year to year, but in this case the key details of the cover terms were as follows:

• The cover “applies if you… have to pay more to complete the building of the home(s), because the contractor is insolvent”.
• In that circumstance, NHBC agrees to “pay you the reasonable extra cost above the contract price including professional fees, for work necessary to complete the home(s) to the NHBC requirements” and in addition, to “pay the cost of reasonable precautions to secure the work… against unauthorised entry, theft and vandalism until work resumes”.
• Cover is limited to 10% of the original contract price..
• ‘Insolvent’ was a defined term, and it was defined widely, including the contractor’s entry into administration or liquidation, as well as the appointment of a receiver over any of the contractor’s assets.
• The contract was a ‘simple contract’ (not a deed), there were no express terms addressing limitation, and therefore court claims in contract under the policy must be brought within six years of accrual of a cause of action.

Peabody were redeveloping a former RAF site in Bedfordshire to provide 175 new homes, of which 88 were affordable housing (rent or shared ownership), and those 88 homes were covered by the contractor insolvency cover. In 2015, they employed a Design and Build (D&B) contractor to do construct the new homes. That contractor entered administration on 29 June 2016.

Peabody secured the works, then proceeded to procure completion of the works, which was eventually carried out under a Construction Management (CM) form, rather than D&B. The works were completed in January 2021. Peabody’s commercial nous in opting for CM in this instance was vindicated because, despite the insolvency, Peabody completed within the 10% financial limit allowed by the NHBC insolvency cover.

Peabody had contacted NHBC shortly after the insolvency occurred, and stayed in contact with NHBC over the following years as the works progressed and were completed. Eventually, in July 2022, NHBC denied cover for reasons that do not relate to the judgment, and Peabody instructed Devonshires to commence the pre-action protocol which is the necessary prior step before a court claim.

After that protocol had concluded, NHBC raised a new argument. The new argument was that before the protocol had started – and days before NHBC had issued its rejection of cover – the limitation period for Peabody’s claim had, in fact, expired. NHBC argued that the limitation period began when the D&B contractor entered administration in June 2016; the six years therefore expired in June 2022; and therefore NHBC had an absolute defence and Peabody had no claim.

Peabody felt that argument, and the position this left Peabody in, was not right. Peabody did not have a claim to make until Peabody had suffered a loss and its costs increased as a result of the insolvency of the D&B contractor. Peabody therefore proceeded with service of its legal claim. In response, NHBC applied for summary judgment in NHBC’s favour and/or strike-out of Peabody’s claim on the basis that the claim was time barred.

As it was presented to the court at a hearing in June 2024, NHBC’s position was that the cause of action (and six-year period started) when the D&B contractor entered administration; Peabody’s position was that that cannot be right, it must be when Peabody “had to pay” more to complete the works, and Peabody put forward a number of other dates when it might have been said to have occurred, and acknowledged the matter may require expert evidence to finally resolve. Some of the points NHBC brought to bear were striking in the wideness of their application; as recorded by the Judge at paragraph 22, NHBC openly stated that extra costs of completing new homes “were capable of assessment ‘by putting the work out to competitive tender’ or ‘by arranging for an assessment by an independent quantity surveyor’”. This suggested – indeed, it inexorably followed from NHBC’s submissions – that Peabody could have obtained a payout from NHBC many years ago.

Mr Andrew Mitchell KC, sitting as a Deputy High Court Judge, disagreed with NHBC that time ran from the date of insolvency. The Judge stated that the contractor insolvency cover indemnifies the policyholder if it had lost money paid to the D&B contractor, or if it had to pay more to complete the homes, because the contractor is insolvent or commits fraud; the Judge held that “the insured losses (the extra costs, or lost payments) are an essential and definitional part of the insuring clause itself, and are not matters which simply go to the delineation of quantum”. In particular, the fact that the contractor may be ‘insolvent’ if a receiver was appointed over assets which had no impact on the contractor’s ability to fulfil its obligations under the works contract, and the Judge did not accept it was an inevitability that insolvency meant costs increased.

Peabody was therefore successful in defending the application. It remains to be seen if NHBC will appeal the decision. Peabody’s claim proceeds against NHBC.

Subject to any appeal, any local authority or registered provider with the benefit of contractor insolvency cover, from NHBC or any other insurer or warranty provider, should carefully consider this judgment. In particular, if a local authority or registered provider has made a claim under contractor insolvency cover and had either the entire sum or any part rejected on limitation grounds, specific legal advice should be obtained to see if this judgment is of assistance in extending the period of the insurer’s liability. In wider terms, NHBC has shared its interpretation of the operation of these policies and policyholders should note that the position adopted by NHBC that extra costs were capable of assessment at an early stage, prior to practical completion, by competitive tender or by an independent quantity surveyor.

William O’Brien is an Associate and Alicia Ogborn is a solicitor at Devonshires.