Insurance policies provide a secure safety net, but that can disappear pretty quickly if you keep the insurers in the dark when things go wrong

The recent decision in the case of Aspen Insurance UK vs Pectel highlights the pitfalls faced by contractors and consultants when deciding whether to notify insurers about problems which might give rise to a claim later on.

The facts are these. Pectel, a specialist in the removal of asbestos from underground facilities, was engaged by Amec in February 2004 to strip two deep-level tunnels beneath Manchester which were used by BT for its telecommunications network. Preparatory work in the cross-over section between the tunnels was suspended briefly towards the end of March that year, during which time a fire broke out, causing extensive damage costing approximately £15m to put right.

The fire started in a fluorescent light fitting, damaged by Pectel during its preparatory work. The fire’s destruction was exacerbated by the flammable polythene sheets being used by Pectel to limit the spread of asbestos dust. The sheets did not meet the required specification, but that was not known at the time.

BT and Amec started an investigation into the cause of the fire straight away. They removed Pectel’s equipment for testing and got their lawyers to interview Pectel’s employees. Pectel asked Amec whether it should be worried. Amec said no. Six months later, however, BT obtained a report which condemned Pectel’s materials. BT asked Pectel to explain how it intended to overcome “this serious issue”. Pectel did not provide a satisfactory answer.

The matter then went quiet until November 2006, when BT informed Amec that a claim was imminent. Amec’s lawyers wrote to Pectel suggesting that Pectel notify its insurers. Pectel ignored the letter. A few months later, BT served its letter of claim upon Amec, blaming Pectel for the fire. Pectel passed a copy to its broker on 9 March 2007. The broker finally told Pectel’s insurers about the claim two weeks later.

Pectel had public liability cover with Aspen (and other insurers). It was required to give the insurers “immediate” written notice of any occurrence which might give rise to a claim, and the insurers’ obligation to indemnify was conditional upon, among other things, observance by Pectel of all the policy’s terms and conditions. The insurers refused to cover the claim, citing Pectel’s failure to comply with those policy requirements.

Ask yourself: is there a real possibility I might get caught up in a claim?

Pectel challenged the insurers’ decision in the commercial court, relying principally on Amec’s statement made in April 2004 that Pectel had nothing to worry about.

The judge decided the insurers were right. It was common ground that “immediate” notice meant “with all reasonable speed considering the circumstances of the case”. The fire had been very serious and the repair costs substantial. The investigation into what started the fire focused upon Pectel’s work and equipment and at the time of Amec’s reassuring statement to Pectel, a cause had not then been identified. In fact, the investigation was barely under way.

In short, Pectel was wrong to have relied upon Amec’s statement alone and ignored everything else going on around it. In the judge’s view, a reasonable man would have been unable to dismiss the possibility that the fire was in some way connected with Pectel’s work. There was therefore a real possibility that a claim might be brought against Pectel in due course and that in order to protect itself, Pectel would seek an indemnity from its insurers. Accordingly, the judge concluded that Pectel should have given written notice to its insurers of the fire and a possible claim by early April 2004.

Does that sound harsh? Well, you might think so, but bear in mind why the insurers’ obligation to pay out was conditional upon immediate written notice of a possible claim. The same or similar language is common in most insurance policies and it is intended to provide insurers with an opportunity to investigate a potential claim promptly and to take action to minimise the extent of any required indemnity.

So, don’t make the same mistake as Pectel. If something goes wrong on a project, ask yourself this question: is there a real possibility I might get caught up in a claim (even if I believe that I am not at fault)? If the answer is yes, it would be wise to notify your insurers straight away.