Rainfall or No Rainfall

In a judgement dated 25^th January 2023 in the names Knightsbridge Developments Limited vs Citadel Insurance plc, Rik. Nru. 978/08 (TA), the Court of Appeal explained how the exclusion in the insurance policy prevailed over the application of the concept of proximate cause, as it is commonly applied. This decision makes an important contribution to the body of Maltese insurance substantive law.

This case focused on an insurance claim made by the plaintiff against the defendant insurance company under a ‘Contractors All Risk Policy’ that was issued by the defendant insurance company in favour of the plaintiff  in relation to the development of a site at Xemxija Hill, Xemxija (“the Policy”). The claim was made for damages allegedly suffered by the plaintiff on the site in question on the 29^th December 2007.

The defendant insurance company issued the Policy based on the proposal form and the so called “Work Method Statement” that was provided by the plaintiff. Prior to issuing the Policy, the defendant insurance company noted that the geology of the site consisted of blue clay, interspersed with large rock boulders and therefore the danger inherent with such type of geology was twofold, namely that related to temporary danger while excavations were being carried out and that related to the permanent stability of the structure. Therefore, both parties agreed upon a list of precautions that the plaintiff needed to implement while conducting the demolition, excavation and construction works and the Policy was issued subject to the fulfillment of said precautions.  These were recorded in the Policy as warranties, to which the plaintiff was to be bound. Also in view of the geology of the site, the defendant insurance company included an exclusion in the Policy (“the Exclusion”) which provided the following: “Notwithstanding anything contained in the policy to the contrary it is hereby declared that cover under Section 1 – Material Damage and Section 2 – Third party liability will specifically exclude loss, damage and/or liability howsoever arising from subsidence and /or landslip.”

On the 29^th December 2007 there were very heavy rainfalls and subsidence took place on the site in question as a result of which the plaintiff suffered damages which he claimed from the defendant insurance company under the Policy. The plaintiff continuously argued that although there was subsidence, the cause of the damage was the heavy rainfall. On the other hand, the defendant insurance company argued that the circumstances that took place were expressly excluded under the Policy under the Exclusion and therefore there was no cover and consequently no compensation was due to the plaintiff. The defendant insurance company argued that the damage was allegedly suffered by the plaintiff because of subsidence and that it was irrelevant whether the subsidence had occurred due to the rain or otherwise since the Exclusion provided that the loss was excluded independently of the proximate cause of the landslip or subsidence. The defendant insurance company relied on the words in the Exclusion – “howsoever arising” in support of its argument.

MacGillivray & Parkington state that: “A proximate cause is not the first or the last or the sole cause of the loss; it is the dominant or effective or operative cause. The insurer is liable if such cause is within the risks covered by the policy and is not liable if it is within the perils excepted… It is not, however, sufficient for the peril insured against to have facilitated the loss; it must have caused the loss.” [1] Maltese jurisprudence has applied the doctrine of proximate cause found under English law for many years. [2] It is essential that the cause of the damage suffered was proximate in efficiency.  However, where the loss is caused by the action of two concurrent and independent causes, one of which is the peril insured against and the other an excepted cause, the loss is not within the policy, since it may be accurately described as caused by the excepted cause, and it is immaterial that it may be described in another way which would not bring it within the exception. [3]

It is a well-established insurance practice that “the peril insured against is usually described in the policy in general terms, and it is the practice of insurers with the view of qualifying their undertaking, to introduce exceptions which expressly exclude their liability where the loss is caused or the peril brought into operation by certain specified causes” [4] In addition, “It is the duty of the insurers to except their liability in clear and unambiguous terms” [5] as was  the case with respect to the Policy in question which excluded with clear and unambiguous language damages caused by subsidence and/or landslip howsoever arising. Therefore, in this case the court needed to examine the position under English law where the Policy contained an exclusion which was intended to vary the principle of proximate cause and how this was applied in this case.

In view of the above, the allegations made by the plaintiff that the damages were caused exclusively by the heavy rain would still not achieve the result that the plaintiff wished for. It was irrelevant if the rain had facilitated the subsidence or otherwise because the Policy had expressly excluded, in clear and unambiguous words, the damages in case of “subsidence and/or landslip howsoever arising.

The phrase “howsoever arising” changed the usual application of the principle of the proximate cause since said phrase was overriding.  In this case, it was irrelevant as to what caused the subsidence because it was the intention of the insurer that, whatever may have happened and may have caused the incident, there was no cover for any damage suffered if there was subsidence.

To give an example, the risk of deterioration or corrosion or rusting is an “uninsurable risk” because there isn’t a contingency as to whether it will take place or otherwise since deterioration or corrosion or rusting are always going to take place.  Likewise, since the site in question consisted of clay and was known to potentially subside, the defendant insurance company did not accept to offer cover in case of subsidence and/or landslip independently from other causes that could have caused said subsidence and/or landslip.

On the 7^th July 2017, the First Hall, Civil Court decided that although the architects produced by the defendant insurance company had confirmed that there was subsidence, the defendant insurance company had failed to produce the evidence of a geologist who was the person that was qualified to assess whether subsidence took place or otherwise and hence the court rejected its plea  on the basis that the defendant insurance company had failed to prove that there was subsidence. However, the defendant insurance company appealed from this part of the decision and the Court of Appeal overturned it because it disagreed that only a geologist could conclude whether there was subsidence or otherwise and that the architect, who was also qualified as a civil engineer, was sufficiently qualified to determine said fact or otherwise and had sufficient knowledge about the nature of the terrain. The court of appeal argued that it was obvious that there was subsidence and in addition, said fact was also admitted by the plaintiff itself.

In addition, and without prejudice to the above, the First Hall, Civil Court concluded, and the Court of Appeal confirmed, that the plaintiff had also breached some warranties set out in the Policy which consisted of precautionary works that the plaintiff was required to carry out during its excavation, demolition and construction works which the plaintiff failed to do. Said warranties were included in the Policy on the basis of the plaintiff’s proposal form and the Work Method Statement that was prepared by the plaintiff’s architect and the Policy was issued subject to said warranties being adhered to. Since the plaintiff had failed to take the required precautions and had failed to implement the measures mentioned in the Work Method Statement, there was no cover, and the defendant insurance company was not obliged to compensate the plaintiff.

In fact, after the incident took place, the plaintiff carried out remedial works to avoid having a similar incident, which works should have been carried out before the incident took place. These remedial works were also included under the plaintiff’s claim, but they  could not be compensated for by the defendant insurance company because they did not exist at the time of the subsidence. The plaintiff could not receive compensation for expenses it incurred only after the incident and in respect of which it did not suffer any loss.

The plaintiff once again repeatedly argued that the incident happened because of the heavy rain and not because the precautions were not taken. The court concluded that it may be the case that in the absence of heavy rain, the incident may not have taken place. However, what needed to be analysed was not whether the incident would have happened or otherwise because of the rain but whether the plaintiff had taken the precautions mentioned in the Works Method Statement and under the Warranties or whether it had breached said warranties, regardless of whether said breaches gave rise to the damage or otherwise.

In addition, the Court emphasised that regardless of the warranties, the plaintiff should have taken all the necessary precautions to avoid the incident and the events assured against as though it was uninsured because contracts of insurance were distinguished from other contracts as  they require a higher degree of good faith since contracts of insurance are based on the principle of uberrima fides throughout the duration of the contract and not simply at proposal form stage.

The plaintiff also argued that it was unable to carry out the precautionary works for reasons that were beyond its control. However, the court explained that in such event the plaintiff was obliged to inform the defendant insurance company of said reasons to allow the defendant insurance company the opportunity to re-evaluate the risk and to assess the situation to determine whether it may wish to adjust the premium and/or to possibly make other recommendations. The fact that the plaintiff was unable to take the necessary precautions was a material fact that affected the risk that was being assumed by the defendant insurance company. Said fact was material because it could have influenced the decision of the reasonable and prudent insurer about whether to accept the risk or to change premium or other conditions of cover.

The Policy also provided that “the insured shall at his own expense take all the reasonable precautions and comply with all reasonable recommendations of the Company to prevent loss, damage, or liability and comply with statutory requirements and manufacturers’ recommendation” … “The insured shall immediately notify the Company by telegram and in writing of any material change in the risk and cause at his own expense such additional precautions to be taken as circumstances may require, and the scope of cover and/or premium shall, if necessary be adjusted accordingly.” Therefore, the plaintiff failed to adhere to said obligations.

The First Hall, Civil Court decided the case in favour of the defendant insurance company because the plaintiff breached the fundamental conditions of the Policy, including the warranties, and therefore the plaintiff was not covered by the Policy and the defendant insurance company was not obliged to pay compensation for the alleged damages suffered by the plaintiff. The Court of Appeal agreed with the First Hall, Civil Court and confirmed the decision.

By way of conclusion, the dispute was decided not on the principle of proximity, and therefore on the basis of what had caused the incident. It was decided that the Policy did not cover the incident due to the exclusion of cover in the case of subsidence and because the plaintiff had failed to take the necessary precautions, in  breach  of the warranties under the Policy. It was irrelevant that the rain may have caused the subsidence even if the precautionary works were carried out prior to the incident. In fact, the defendant insurance company never contested that there was heavy rainfall and that said rainfall may have caused the subsidence. However, the fact that there was subsidence in itself and the fact that in itself the plaintiff had failed to take the necessary precautions, whether they gave rise to the incident or not, were sufficient for the liability of the defendant insurer to be excluded under the Policy .

Citadel Insurance plc was represented by Dr. Joseph Borg Bartolo and Dr. Veronica Grixti of Mamo TCV Advocates.