Manchikalapati & Ors v Zurich Insurance Plc (t/a Zurich Building Guarantee & Zurich Municipal) & Ors

Under a structural defects policy, an ambiguous liability cap for a home forming part of a continuous structure must be construed consistently with the policy’s scheme and commercial purpose. The relevant cap was the total purchase price of all flats in the block.

A promise to pay the reasonable cost of rectification does not require the insured first to incur that cost. An exclusion for other available compensation requires a clear recovery comparable to insurance or a performance bond. Consequential condensation remains covered where defective design or construction is the single proximate cause.

Twenty-six leaseholders claimed under structural defects policies covering flats in a development affected by serious construction defects and inadequate fire protection. The Technology and Construction Court awarded £3,634,074.65, holding that the maximum liability was the aggregate purchase price of the claimants’ flats. In a separate judgment, [2019] EWHC 205 (TCC), it awarded pre-judgment interest.

The leaseholders appealed on the liability cap. The insurers cross-appealed on whether rectification costs had to be incurred, the destination of the proceeds, alternative recoveries, coverage of the car park and balconies, condensation and excesses. They also appealed against the award of interest.

1. The leaseholders’ appeal was allowed. Limb (b) of the maximum liability definition was ambiguous as to whether “purchase price” referred to an individual flat or the whole block. Sections 2 and 3 permitted one leaseholder to recover the full cost of rectifying a danger to occupants, although that cost could greatly exceed the price of one flat. Reading the cap consistently with that scheme and the policy’s commercial purpose, it meant the total purchase price of every flat in the block: £10,846,076. Sir Rupert Jackson gave the leading judgment on this issue, with which Coulson and McCombe LJJ agreed.
2. The insurers’ substantive cross-appeal was dismissed. “The reasonable cost” in clauses 3.1 and 3.2 quantified the payment due. It did not mean a cost already incurred. The policy used the word “incurred” elsewhere when that requirement was intended. Requiring advance expenditure would also defeat cover where leaseholders lacked the funds to remedy an imminent danger. Once paid, the insured could ordinarily use the money as it chose.
3. The exclusion for another insurance policy or “some other form of compensation or damages” required a clear and substantially equivalent entitlement, such as statutory compensation, a performance bond or a guarantee. A possible claim against a landlord, contractor, architect or other third party was insufficient. The policy instead gave the insurer its own right to pursue third-party recoveries.
4. The car park was a garage within the policy and was also part of the common parts. Either route brought it within the definition of the new home. The balconies were common parts because they were subject to common maintenance responsibilities and access rights. Both were covered.
5. The condensation exclusion concerned condensation arising ordinarily, comparable to wear and tear. It did not exclude damage where condensation resulted from non-compliant design or construction. On the findings, the absence of a vapour control layer and poor ventilation constituted one proximate cause; condensation was its consequence.
6. An excess depended on each factual item of claim, not the way claims were pleaded. A danger affecting all occupants could be pursued through one claim and attracted one excess. The trial judge’s fact-sensitive calculation of £120,889 disclosed no basis for appellate interference.
7. The success of the liability-cap appeal meant that pre-judgment interest under section 35A of the Senior Courts Act 1981 was no longer claimed. On the contrary hypothesis, the court would have upheld the judge’s award because an insurer must pay after a reasonable period for investigation and interest compensates the insured for being kept out of money.

1. Court of Appeal (Civil Division): The leaseholders’ appeal was allowed. The liability cap was increased to £10,846,076. The insurers’ substantive cross-appeal was dismissed. The basis for pre-judgment interest fell away.
2. Technology and Construction Court: HHJ Stephen Davies awarded the leaseholders £3,634,074.65, treating the aggregate price of their flats as the liability cap. In [2019] EWHC 205 (TCC), he separately awarded pre-judgment interest.