Regulating the NHBC Buildmark Cover: Part 2
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In the first post, we explained the NHBC Buildmark Cover and two particular difficulties that leaseholders faced in claiming under the extended warranty where a failure to comply with building regulations causes dangerous conditions: NHBC’s failure to engage, and denial of liability when building control inspection has not been carried out under NHBC auspices (which we call the ‘NHBC Inspector requirement’).
In this post we discuss whether there are regulatory measures that can help leaseholders facing these obstacles, starting with rules placed on licensed insurers applicable in both contexts, and then turning to more specific measures relevant to the ‘NHBC Inspector requirement’.
Insurance Regulation: the FCA and FOS
As explained in the previous post, section 4 of the Buildmark Cover is an insurance contract and the NHBC is normally acting as an insurer for regulatory purposes. It is within Financial Conduct Authority (FCA) control, Financial Ombudsman Service (FOS) review, and importantly, the specific FCA rules on insurance claims.
ICOBS 8.1.1 provides a series of high-level rules.
‘An insurer must:
- handle claims promptly and fairly;
- provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress;
- not unreasonably reject a claim (including by terminating or avoiding a policy); and
- settle claims promptly once settlement terms are agreed’.
This imposes statutory duties on the insurer that are often absent from the contract. Against private parties: ‘an insurer cannot claim to be entitled to exercise a right to reject a claim under a policy of insurance otherwise than in accordance with ICOB standards’.
An insurer that does not respond properly to a claim will be in breach even if it was entitled to reject that claim. An insurer that simply enforces the contract as written may be in breach, if that rejection is unreasonable. We discuss these below, alongside other measures.
Regulation and the ‘NHBC Inspector Requirement’
The extended cover in section 4 explains NHBC’s obligations:
‘…when NHBC Building Control Services Limited or an Approved Inspector registered with NHBC has issued a Building Control Final Certificate … and:
- Your Home does not comply with the requirements of certain Building Regulations; and
- Because of that there is a present or imminent danger to the physical health and safety of the occupants of your Home and
- You notify us of a claim under this section within the relevant notification period…’
The certification requirement is part of the definition of the risk. Under the terms of the contract, the NHBC does not have to actively deny cover if the inspector is not ‘approved’, as the loss falls outside the promise made. It is the responsibility of the insured to show that the loss is within the terms of the insurance cover.
Risk Terms as Unfair Terms under the Consumer Rights Act 2015
The Consumer Rights Act 2015 came into force on 1 October 2015 but develops a regime for challenging unfair contract terms that dates back to 1994, and which applies to consumer insurance contracts. This post focusses on the 2015 Act.
The Consumer Rights Act 2015 subjects contract terms to a test of unfairness, with the exception of certain types of issue that were left to the market. Section 64 states that a term may not be assessed for fairness under section 62 to the extent that (a) it ‘specifies the main subject matter of the contract’ and (b) provided that it is ‘transparent and prominent’. A term that is unfair is not binding on the consumer.
How does the ‘main subject matter’ part of the exclusion apply to insurance? The Unfair Terms Directive 1993 (which paved the way to the 2015 Act) included a form of soft guidance in its recitals: ‘in insurance contracts, the terms which clearly define or circumscribe the insured risk and the insurer's liability shall not be subject to such assessment since these restrictions are taken into account in calculating the premium paid by the consumer’. This was often read as making any clause that defines the insurer’s liability fall within the section 64 exclusion of terms that ‘specif[y] the main subject matter of the contract’ and thus outside the assessment for fairness if ‘transparent and prominent’.
It is not so simple. You cannot argue that the insurer should have covered a particular type of loss but it may be possible to challenge other aspects of those clauses. The risk being covered is better viewed as one where a building that has been inspected and certified by a suitably qualified inspector nonetheless fails to meet Building Regulations and presents a present or imminent danger. That is the risk related part of the clause and cannot be challenged using the ‘fairness’ test. But the requirement that certification is by a NHBC Inspector is only risk related if other means of showing competence are absent.
There is a further possible challenge. To be exempt from review for fairness, the term must be ‘transparent and prominent’, which requires it to be ‘brought to the consumer’s attention in such a way that an average consumer would be aware of the term’. Further, European caselaw says this means it must be set out transparently so that the consumer can evaluate its consequences. Given what is explained in the previous post about the purchaser’s knowledge it is unlikely to be seen as transparent and prominent, and therefore can be assessed for fairness.
Those Buildmark Contracts that pre-date the 2015 Act will be covered by the earlier Unfair Terms in Consumer Contracts Regulations 1999. There are some differences in the wording, and the transparency argument differs, but the key argument about the main subject matter is essentially the same.
Although the requirement for certification by a suitably qualified inspector probably cannot be challenged, the additional NHBC Inspector requirement might simply be channelling work to those traders. That aspect might well be unfair, if it cannot be shown to be controlling the level of risk insured.
For contracts made after 12th August 2016 this provision may provide further assistance. It was intended to prevent insurers relying on irrelevant technical requirements in insurance contracts. For example, if the insured failed to get its sprinkler system inspected on time, and the property is then damaged in a rain storm, the insurer should not be able to point to the sprinkler issue to deny payment.
For the NHBC policy, it will be difficult to satisfy the section if the court treats the clause as one single provision. But (as with the unfair terms rules), it is better viewed as a requirement to have (a) a properly issued certificate and (b) the use of an NHBC inspector. The requirement to have a qualified inspector defines the ‘entirety of the risk’ as non-compliance would increase the risk of building defects. That is outside the scope of the statute and a matter for the insurer. But the reliance on the ‘NHBC inspector’ element where the certificate was issued by an equally qualified independent inspector might well be reviewable.
Insurance Regulation: the FCA and FOS
When can an insurer reject a claim under ICOBS? Under 8.1.1 the insurer may not ‘unreasonably reject a claim’. ICOBS provides examples of what this means, but 8.1.1 remains the overarching test. Under 8.1.2(3) the insurer can only reject claims for breach in situations where ‘the circumstances of the claim are connected to the breach’. This deals with situations where the insured has some duty to perform to maintain cover, and has breached. The NHBC issue is different: cover is contingent on an NHBC issued certificate, rather than written as a duty on the insured. It might be argued by insurers that 8.1.2(3) does not apply as this is part of the definition of cover and not a duty on the insured. But 8.1.2(3) is just an example of unreasonably rejecting a claim, it is not exhaustive. Even if correct, NHBC would still need to show that rejecting a claim was not unreasonable under 8.1.1 where the consumer had no effective knowledge of the requirement, no control over compliance, and it had no effect on the likelihood of loss.
Before a court, this technical issue might need to be tested. However, the FOS applies a different standard: what is ‘fair and reasonable’ and can make awards that are binding on insurers up to £350,000. The Ombudsman might well be persuaded that this an unreasonable rejection of the claim.
The NHBC was absolutely entitled to require that a properly issued Final Certificate was in place before agreeing to cover losses from defects. This limits the risk. It is much less obviously entitled to reject claims where an equally qualified inspector issued the certificate. The purchaser is often not aware of the NHBC Inspector requirement or whether it has been complied with. As a matter of simple fairness, reliance on precise contractual limits in these circumstances might be ill advised.
How to cite this blog post (Harvard style)
Bright, S & Davey, J. (2021). Regulating the NHBC Buildmark Cover: Part 2. Available at: https://www.law.ox.ac.uk/research-and-subject-groups/property-law/blog/2021/03/regulating-nhbc-buildmark-cover-part-2 (Accessed [date]).
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