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We have a client, a builder, who was joined to a legal case where it was ultimately found that the damage was due to incorrect engineering calculations that caused a property's foundations to slump. 

Our client was found not liable by the court but incurred substantial legal fees. Our client's insurer has declined to cover the legal costs on the basis that since the insured was found not liable there is nothing for the policy to respond to. 

"Therefore, defence costs are not covered as there is no cover under the policy because the Insured was not responsible for the defective design/construction works which forms the basis of this claim."

To me, this fundamentally misunderstands how defence costs cover works, as the liability policy does respond to allegations that if proved would be covered. The insurer would choose to defend the insured (and incur legal costs) and if the outcome was the client is found not liable the defence costs are still covered by the policy.

They have accepted that if our client had been found liable then the policy would have responded!

Can they deny coverage for the legal costs in this situation?


Steve Jacques:

Generally a GL policy will provide cover to defend a third party claim where it has not yet been established whether the Insured is legally liable.

Unless incurred by the insurer, for defence costs to be payable they need to be approved by the Insurer prior to being incurred, did this happen?

If indemnity to the Insured under the policy had not been decided at the time proceedings were issued, agreement regarding defence costs would normally be put in place, eg. the Insured to meet defence costs until indemnity is established and provided their is cover defence costs would be reimbursed.

Pauline Davies:

You are correct in principle as to how things normally work, but I would be interested in the answers to two questions. The first is, why did the insurer not defend on your client's behalf? I am wondering whether the claim was correctly notified so that the insurer had an early opportunity to consider its position and step in, if it thought the claim would be covered in the event of liability being found. The second question is the same as Steve's - was the insurer's consent obtained to the incurring of defence costs? Presumably the answer may be related to the first issue, if the insurer was not aware of the claim.

Sept 2023

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