Interpretation of Insurance Policies — NHBC v Peabody Trust [2025] EWCA Civ 932

Background

Catalyst Housing Limited (Catalyst) engaged Vantage Design and Build Limited (Vantage), pursuant to a JCT Design and Build Contract dated 20 November 2015, to build 175 new dwellings at the former RAF Stanbridge site at Bedfordshire. This included 88 social housing units. The total contract sum was almost £23.8 million, of which the cost attributable to the 88 social housing units was £10.3 million.

The NHBC Buildmark Policy

Vantage provided a Buildmark NHBC Insurance Policy dated 2 March 2016. It related solely to the 88 social housing units (the Policy).

Option 1 of the Policy confirmed that in the event of a contractor's insolvency before practical completion the Policy will provide cover if:

"… you lose the amount paid to the contractor in accordance with the building contract or have to pay more to complete the building of the home(s), because the contractor is insolvent or commits fraud…"

The Policy went onto confirm that:

"the most we will pay for all claims under Option 1 is 10% of the original contract price. We deal with all claims in the order they are made. When the overall limit is reached, we will not pay further claims.”

Contractor's Insolvency & NHBC Notice

Vantage commenced work on or around 14 December 2015, but administrators were appointed on 29 June 2016 prior to completion of the works. It is common ground that the appointment of the administrators meant that, pursuant to the Policy, Vantage was insolvent.

Catalyst appointed Stack London Limited as construction manager to procure the completion of the works by individual trade contractors. Catalyst informed the NHBC of Vantage's insolvency and that it intended in due course to make a claim under Option 1 of the Policy. Later, Catalyst informed NHBC of the forecast additional cost to complete the works (circa £1.3m). Practical completion was eventually achieved on 19 January 2021. 

Subsequently, Peabody acquired Catalyst and pursued the claim ultimately commencing proceedings in July 2023 claiming the ascertained additional cost of completing the works in the sum of £913,555.36 plus interest.

The Technology and Construction Court Decision 

Peabody claimed that it was entitled to recover the additional cost incurred under the Policy because:

• It was common ground between the parties that an insolvency had occurred for the purposes of the Policy.
• Peabody had complied with the notice / formalities of the Policy.
• Peabody has incurred additional cost to complete the construction works
• The claimed sum was within the liability cap threshold.

NHBC made an application to strike out the claim on the basis that:

• Time had started to accrue for Peabody's cause of action in contract on 29 June 2016 being the date of Vantage's insolvency.
• More than 6 years had elapsed between Vantage's insolvency and the Claim being issued in July 2023.
• The claim was therefore statute barred under section 5 of the Limitation Act 1980 the proceedings having been issued more than 6 years from the accrual of the cause of action.

The Judge decided that he did not have sufficient time to decide all issues in dispute and instead of adjourning the claim, proceeded to issue a decision on when the cause of action accrued only. The Judge's key findings were that: 

• NHBC was wrong to say that time runs from insolvency.
• NHBC was wrong to suggest that the fact of insolvency necessarily meant an insured would have to pay more to complete the works. An administration, in particular, might be successful and allow the completion of the project without undue difficulty, and without any extra spend by the insured.
• The judge accepted that the cover did not apply if the insured did not “have to pay more to complete” the works, and that the event insured against was not the insolvency per se but rather the insured having to pay more than the contract price to complete.
• He accepted Peabody’s submission that it was not commercially sensible for the Policy to be interpreted to mean that the insurer would be liable to indemnify the insured at the moment of the insolvency regardless of whether there was in fact any loss caused by it.

NHBC Appeal

The NHBC appealed the decision on a number of grounds the key one being that Peabody’s cause of action under the policy of insurance accrued on the date of Vantage’s insolvency.

In dismissing this appeal, Coulson LJ, in his leading judgment, identified two criteria to be met to trigger liability under the Policy:

1. the insured must “have to pay more” to complete the building of the homes.
2. the payment of “more” must be because of the insolvency (or fraud) of the contractor.

In the Coulson LJ's view this was significant because the Policy was only engaged “if you…have to pay more to complete the building of the homes”. It is a condition without which Option 1 of the Policy cannot apply.

Whilst it is necessary to fulfil both criteria for the Policy to be engaged the words “if you…have to pay more” make plain that what is being insured against is a particular financial loss and that, without that eventuality, there can be no cause of action.

On this reasoning, Coulson LJ held that:

"… it seems to me that the proper construction of Option 1 is that the cause of action accrued if Peabody “have to pay more” as a consequence of the insolvency of Vantage. The insolvency point is not the natural meaning of the words used and is not a commercial outcome. I would therefore reject Ground 1 of the appeal."

Conclusions and Takeaways

As confirmed by Coulson LJ, "It is trite law that the cause of action under an insurance policy accrues on the happening of the event insured against".  Thereafter, the insured benefits immediately from a contractual right under the policy to be put by the insurer into the same position in which the insured would have been had the event not occurred. 

The task for the court was to apply the usual principles applicable to the interpretation of contracts to ascertain the event insured against and, in turn, to ascertain the date of the accrual of the cause of action.

Applying these principles to the precise wording of the Policy, Coulson LJ had no difficulty in concluding that the occurrence of the need to pay more by Peabody to complete the project was the event insured against rather than the earlier date of Vantage's insolvency.  Put simply, "the words 'if you...have to pay more' make plain that what is being insured against is a particular financial loss and that, without that trigger, there can be no claim".

This conclusion was reinforced by considerations of commerciality.  Where the interpretation espoused by NHBC was a possible alternative interpretation it was in principle a legitimate exercise to test the relative commerciality of each interpretation.  Coulson LJ acknowledged that Peabody's interpretation resulted in some uncertainty.  In particular, did the cause of action accrue when it was possible, likely, probable or foreseeable that extra costs would be incurred, or alternatively when Peabody actually spent more to complete the project?  However, this needed to be weighed against the far more significant uncertainty that would result from the NHBC interpretation which would mean that a cause of action accrued at a time when the consequences of the insolvency were entirely unknown. 

However, in his supporting judgment Lewison LJ downplayed the importance of considerations of commerciality as an aid to interpretation.  He stated, "Commercial common sense does have a role to play in the interpretation of contracts, but its importance must not be overstated" and referred to Lord Neuberger's warning in the Supreme Court decision of Arnold v Britton[1] against over-reliance on commercial common sense to interpret the wording of a contract.  Lewison LJ, therefore, approved Peabody's interpretation of the Policy in reliance on the plain words of the Policy rather than giving undue weight to the relative commerciality of the alternative interpretations.

This provides a key lesson for parties engaged in conflict over the meaning of commercial contracts.  In such circumstances there can be a tendency, with an excess of hindsight, to overplay in negotiations what might have been the parties commercial intentions whilst relegating the natural meaning of the words used to a supporting act.  In fact, the reverse is the correct approach and, as explained by Neuberger LJ in Arnold v Britten, "The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed". That approach applies however imprudent the terms of agreement might appear with the benefit of hindsight.