Brit UW Ltd v F & B Trenchless Solutions Ltd

Introduction

The Claimant, Brit UW Limited (“Brit”), acting on behalf of Brit Syndicate 2987 at Lloyd’s, seeks a declaration that it has validly avoided a contractors’ combined liability policy into which it entered with the Defendant, F&B Trenchless Solutions Ltd (“FBTS”), on 19th August 2013 (“the Policy”). FBTS is a specialist tunnelling contractor constructing micro-tunnels.

Brit maintains that it validly avoided the Policy on 21st January 2014 on the ground that FBTS failed to disclose material information to Brit prior to the conclusion of the Policy, namely substantial and progressive earth settlement and a void which occurred in July and early August 2013 at Stoke Lane in Gedling, Nottinghamshire (“the Site”). The void was in an area where FBTS had recently constructed a micro-tunnel beneath a railway line and a level crossing as a subcontractor of Morgan Sindall plc (“MS”). On 27^th August 2013 a freight train pulling wagons loaded with a cargo of diesel derailed when passing over the level crossing (“the derailment”). It is common ground that the immediate cause of the derailment was severe settlement of the railway tracks caused by a void in the ground underneath. The Rail Accident Investigation Board (“the RAIB”) published a full report in April 2015 (“the RAIB report”).

Brit also maintains that it validly avoided the Policy on the separate and independent basis that FBTS made a material misrepresentation to Brit prior to the conclusion of the Policy, namely that FBTS did not carry out (and would not in the future carry out) tunnelling works on railway lines which were active. Alternatively, FBTS failed to disclose to Brit the fact that the railway line crossing the Site had been active during FBTS’ tunnelling works.

FBTS denies that Brit was or is entitled to avoid the Policy, and counterclaims for damages and various declarations which seek to secure an indemnity from Brit for claims arising out of the derailment, including a claim against it by MS for some £2.67 million in respect of remedial works, together with a claim for an indemnity against any claim by Network Rail (“NR”) arising out of the derailment.

FBTS says that this claim has been brought only with the benefit of impermissible hindsight. Whilst, following the derailment, matters look both dramatic and clear, a proper understanding of events as they presented at the time shows that the earth movement and void were not material matters to disclose. No representation as alleged was made in relation to work on active railway lines. In addition to difficulties with causation and inducement, Brit in any event affirmed the policy, meaning that it cannot in any event avoid. FBTS brings a counterclaim for declaratory and other relief, including damages.

There are various potential disputes waiting in the wings of this claim, over and above the claim by MS against FBTS referred to above. They include a dispute between Novae Syndicates Limited (“Novae”), FBTS’ public liability insurers for the period up to 14^th August 2013, and Brit, in the event that Brit is held not validly to have avoided the Policy. The issue would be whether any or all of the damage for which FBTS seeks an indemnity is covered by Novae’s earlier policy in any event. Further, FBTS has issued a letter of claim to its broker, reserving its rights and indicating that in the event that Brit’s claim succeeds, it will bring proceedings against it.

The facts

The broad facts are not in dispute. I set them out in full below, bearing in mind always that when it comes to the question of material non-disclosure in particular it will be necessary to identify and separate out what FBTS knew at any material time.

Between 11th June and 9th July 2013, FBTS carried out work to install a concrete micro-tunnel at the Stoke Lane Site. The micro-tunnel has a diameter of 1000mm, lies at a depth of around 5.7m (measured to the top of the tunnel) and is 53m in length. FBTS based its scheme upon the ground conditions as demonstrated by a borehole, namely sandy gravel down to 7m and from 7-10m mudstone (with occasional siltstone and sandstone bands).

The micro-tunnel was installed with an AVN Herrenkenecht tunnel boring machine (“TBM”) using a closed-face slurry system, which is designed to support the tunnel face using hydraulic pressure. The process involved the construction of a launch shaft and a reception shaft at either end of the tunnel, each supported by concrete caissons (watertight retaining structures). The TBM then drilled a tunnel in the sand and gravel between the two shafts. FBTS installed 2.5 m pre-cast concrete pipe segments as the TBM moved through the ground via hydraulic jacks. The excavated material was liquefied during this process and was pumped back behind the TBM to surface via the thrust shaft. The tunnel constructed by FBTS ran under a road (Stoke Lane) and passed underneath two twin sewer pipes and a level crossing.

On 21st September 2012, Mr Tom Anderson, a Senior Quantity Surveyor at MS (“Mr Anderson”), sent an email to FBTS (for the attention of Mr Paul Willis, FBTS’ Operations Manager (“Mr Willis”)) attaching an invitation to tender for the construction of a tunnel under the railway line (the Nottingham-Newark line) at the Site using an auger boring method. MS had been engaged by Western Power Distribution (East Midlands) Plc (“Western Power”) to construct a new substation at Stoke Bardolph and install power cables connecting the substation to the Nottingham electricity network (which involved crossing the railway line at the Site). A meeting took place on 1st October 2012 at MS’ offices in Nottingham attended by, amongst others, Mr Liam Burke, FBTS’ managing director (“Mr Burke”), and Mr Anderson to discuss the Stoke Lane project.

FBTS sent a proposal signed by Mr Burke to Mr Anderson on 12th October 2012, stating that FBTS could complete micro-tunnelling work (rather than auger boring) at the Site for a price of £168,250 using an AVN Herrenknecht machine. The covering letter signed by Mr Burke stated ;

“As we pointed out at our meeting last week, our proposals will guarantee the crossing, and the proposal is based on the experience we have had in this ground and under this Railway Line…” (emphasis added)

The proposal itself, again prepared by Mr Burke, stated as follows :

“...We have had considerable experience of the ground conditions here, having carried out microtunnelling on the Eltham Road Project for Severn Trent earlier this year.

Ground Conditions are very wet sands and gravels overlying mudstones and siltstones which are encountered at between 7 and 8 meters.

We have actually crossed under this railway line at Colwick in similar grounds…

When we tunnelled at Colwick in the sands and gravels the water pressure at the face was between 0.6 and 0.9 of a bar at 7 metres deep. This means that the soil is liquefied and anything other than a closed face system would not work.” (emphases added)

The proposal went on to state :

“With 5-6m of cover I would estimate settlement to be 2-4mm based on the calculations for the Colwick crossing which is less than the 5mm requirement.”

The reference in the proposal to “the 5mm requirement” was a reference to the fact that NR required all estimates for under-track crossings to show no more than 5 mm of track settlement, as set out in NR’s “Guidelines for Design and Constructions of Undertrack Crossings under Network Rail infrastructure”. This document was not published or disseminated to contractors outside NR, but FBTS was clearly aware of the requirement. The Guidelines contained the following entries :

“5.8

The positioning of UTX beneath level crossings is strongly discouraged due to the problems of installing an effective monitoring system and the disruption to road and rail services should corrective action (packing of track) be required. This could be a very expensive operation as it would require rail and road closures and the removal of the crossing surface…

5.12

The maximum allowable calculated settlement/heave is 5mm. Certain exceptional circumstances will allow for slightly higher values i.e. line speed, track category etc. For large diameter or shall UTXs the design calculations shall also indicate the projected lateral movement of the track due to the UTX installation. On large diameter UTXs pipe ovalisation might also need to be considered within settlement calculations…”

Indeed, Mr Burke’s evidence was that he was expressly asked by MS pre-proposal whether FBTS would “be able to get under the 5mm level of predicted settlement”. If the 5mm requirement could not be met, the project would simply not have gone ahead in its current form.

A further meeting took place on 30th January 2013 at MS’ offices in Nottingham at which Mr Burke and Mr Graham Gibson, FBTS’ Commercial Manager (“Mr Gibson”), and also (it seems) Mr David Sharkey, a shift manager at FBTS, discussed FBTS’ proposal for the Site with Mr Anderson, Mr Danny Kelly and Mr Tony Skelly, all of MS, and also Mr Martin Beasley of Bridgeway Consulting Ltd (“Bridgeway”), the company engaged by MS to design most aspects of the micro-tunnel (such as its size and depth) and to monitor earth settlement at the Site.

On 14th February 2013, Gedling Borough Council closed the road crossing at the Site to traffic. After a period of apparent inactivity relating to the Stoke Lane project, further communication took place between Mr Anderson and Mr Gibson in May and early June 2013.

On 5th June 2013 MS sent Mr Gibson borehole information “which Liam [Burke] confirmed was in line with bore hole information he provided, and therefore based the scheme on”. The Borehole showed sandy gravel at 4-7m and mudstone at 7- 10m with occasional siltstone and sandstone bands.

On 7th June 2013, Mr Anderson sent to Mr Gibson a copy of a subcontract for the tunnelling work at the Site, indicating an estimated price of £140,423. The subcontract provided for a start date of 11th June 2013 and a completion date of 9th July 2013.

The terms of the subcontract provided, amongst other things, for FBTS to provide an indemnity to MS for any liability or loss sustained by the latter as a result of a breach of the main contract with Western Power arising from any act, neglect or default of FBTS and other clauses specifically as follows :

Under clause 1.0 Subcontract Scope, part xxv of Schedule l to the “Subcontract Works Information” FBTS assumed “full responsibility for the ground conditions” on site.

The subcontract included at Schedule 1 (as a document referred to in the body of the contract) FBTS’ proposal to MS as set out above, including the express estimation of settlement at 2 to 4mm, being less than the 5mm requirement.

After a number of minor amendments were apparently made to the subcontract it was signed by Mr Burke on 14th June 2013.

A pre-start meeting took place at MS’ offices in Nottingham on 27th June 2013, attended by, amongst others, Mr Gibson, Mr Kelly of MS (“Mr Kelly”) and Mr Beasley of Bridgeway. On the same date, Mr Gibson sent an application to MS for a first interim payment under the subcontract, totalling £77,171.35.

FBTS started work constructing the thrust shaft at the Site on 11th June 2013. The driving of the micro-tunnel began on 6th July 2013 and continued 24 hours each day until 8th July 2013. During the tunnelling period, NR imposed a speed restriction of 40 mph on the railway line (the normal speed for the line is 60 mph). Settlement of the railway tracks was monitored by Bridgeway from 6th July. Bridgeway monitored the level of both the rail tracks and the road every 3 hours until 12th July, after which they monitored the levels twice a day. Bridgeway’s monitoring included three measurement points on each rail on the level crossing.

The tunnelling machine was lifted out of the reception shaft on 9th July 2013 and the speed restriction on the railway line was lifted by NR.

Mr Burke visited the Site on 9th July 2013. It is common ground that on that occasion he was informed by Mr Kelly that there had been 11-12mm of track settlement above FBTS’ micro-tunnel.

On the same day, Mr Gibson attended a pre-renewal meeting with Mr Cooke of NSCB Limited (“NSCB”) (“Mr Cooke”), FBTS’ retail insurance broker, to discuss FBTS’ insurance needs for the 2013/14 policy year.

In the light of the settlement revealed to him on 9^th July 2013, Mr Burke asked Mr Peter Emery, a design engineer, with whom Mr Burke had previously worked, to carry out a surface settlement assessment. Mr Emery emailed Mr Gibson on 11^th July 2013 as follows :

“Please find attached surface settlement assessment Liam has asked for (no job title I’m afraid).

Cover 5.7m in wet sands/gravel 1220mm OD jacking pipe 5mm overbreak and 2% face loss. The attached assessment is based on these input parameters. This give[s] a settlement of roughly 10mm.

Liam has also asked for 10mm overbreak and for this, surface settlement would increase to about 15mm.”

On 11th July 2013, FBTS removed its equipment from the Site (although the thrust and reception shafts would need to be refilled once MS had run cables through the micro-tunnel). FBTS submitted an application to MS on 12th July 2013 for a second payment for work at the Site, totalling £68,340.58 plus other sums to be determined.

Mr Gibson attended a meeting at the Site on 17th July 2013 in order to discuss the payments due to FBTS. It is common ground that during this meeting, Mr Gibson was informed by Mr Anderson:

On 26th July 2013, MS paid FBTS the sum of £88,828.42 as payment on account of Payment Application 1.

Since the completion of the micro-tunnel, Bridgeway had continued to monitor the road and the railway line for settlement. The RAIB report notes that: “By 31st July, the maximum road and rail settlements had increased to 22.7mm and 11mm respectively”. The RAIB report states:

“Network Rail, Morgan Sindall Utilities and Bridgeway Consulting met on 1 August to discuss the increasing rail settlement and how to rectify it. Network Rail stated that the track would need to be packed with ballast up to its normal level.”

This remedial work was needed in order to avoid temporary speed restrictions and was planned for 9th September 2013.

At 4 p.m. on 8th August 2013 Mr Gibson received an email from Mr Kelly of MS entitled “Void in Road – Stoke Lane” stating:

“Please see attached photographs. This is an area that STW [i.e. Severn Trent Water] excavated prior to the tunnelling starting to determine the depth of the sewer. The result of which returned a depth to top of 1.7m; and depth to bottom of 2.9m. Any thoughts on cause of void, from a tunnelling perspective? I await response from STW. ”

The photographs were, inadvertently, not attached.

The RAIB report indicates that Bridgeway called an urgent site meeting on 8th August 2013 with representatives of MS and Nottinghamshire County Council to discuss the void in the road. The report suggests that MS and Bridgeway believed that the void had probably been caused by inadequate backfilling of the trial hole by Severn Trent Water, but Nottingham County Council remained uncertain as to the cause.

Mr Gibson replied to Mr Kelly’s email on 9th August stating that he and Mr Burke had been in Scotland that week but that Mr Burke would visit the Site on the following Tuesday to inspect the void. He also noted that the photographs were not attached. Photographs of the void were sent to Mr Gibson by Mr Kelly by email on 12th August 2013.

Mr Burke visited the Site on 13th August 2013 and inspected the void visually. His evidence is that he concluded that the void had been caused by Severn Trent Water, and not by FBTS’ micro-tunnelling works.

On 21st August 2013, Messrs Burke and Gibson, and also Mr Willis, attended a meeting at the Site with Mr Anderson and Mr Keith Gregory of MS. The purpose of the meeting was to inspect and discuss the void in the road. During the meeting Messrs Burke, Gibson and Willis were informed that the track settlement had now increased to 22mm, and if it increased to 25mm or more, NR would impose speed restrictions on the railway line.

After that meeting, Mr Willis sent a long, detailed email to Mr Anderson of MS seeking to explain why he thought that the data gathered during the tunnelling work suggested that FBTS could not be held responsible for the void in the road. Mr Gibson sent an email on 22nd August 2013 asking Mr Anderson to confirm receipt of Mr Willis’ email and asking Mr Anderson urgently to provide NR Form 002 and the calculations supporting that document (which related to anticipated track settlement). Notes made by Mr Gibson suggest that, on the following day, he spoke to Mr Anderson by telephone and the latter stated that MS were considering their position regarding the second payment to FBTS in connection with the Stoke Lane project.

The ground stability at the Site continued to deteriorate prior to the derailment. The RAIB report notes the following:

“Between 1 and 27 August the maximum settlement of the track varied from day to day but remained between 13 and 23mm. However, the road settlement increased during this period to between 14 and 19mm. The centre line of the road [i.e. the ground immediately above the micro-tunnel] continued to show the greatest amount of settlement.”

For the policy year 2012/13, FBTS insurance cover was provided by Novae. The cover apparently expired on 14th August 2013. Thus FBTS was without any insurance cover for 5 days until 19th August 2013, in breach of their sub-contract with MS.

For the policy year 2013/14, Mr Cooke provided Mr Andrew Wigg of FSJ Broking (“FSJB”), a specialist Lloyd’s broker, with details of the risk on 21st June 2013. Mr Cooke provided Mr Wigg with updated details of the risk by an email on 11th July 2013, which included the following :

“Risk Name – F and B Trenchless Solutions Limited…

Trade : Tunnelling Contractor and Civil Engineering

Trading since 2008

FORECASTED FIGURES 2013-2014

Heat welding on site 5%

Steel fixing 1%

15 metre height limit max

Depth limited – unlimited – av depth limits 10 to 15 metres

Domestic works 33%

Commercial 34%

Ind/Agriculture 33%

Rail works – av 4 times per year max – no lines active, controlled by Network Rail, working on rail for drainage and cables, no installation of train lines …

Airport works – 1 job in last 4 years – Drainage, runway not active

PL £10m

EL £10m…”

The statement (“the alleged misrepresentation”):

“Rail works – av 4 times per year max – no lines active, controlled by Network Rail, working on rail for drainage and cables, no installation of train lines …”

contains the misrepresentation alleged by Brit, namely that Brit did not (and would not in the future) carry out tunnelling works on active lines. Mr Gibson’s evidence was that he did not see this statement before it went out on FBTS’ behalf or at any material time. It did not reflect the information that he had given to Mr Cooke.

On or around 31st July 2013, Mr Steven Terrell of FSJB provided Mr Tompson with the written details of risk which had been emailed to Mr Wigg by Mr Cooke on 11th July 2013 with various additions. The alleged misrepresentation remained in the document so provided.

Mr Tompson annotated his copy of the written risk details on 31st July 2013, and again on 1st August 2013 (after having carried out a more detailed calculation of the premium). On 6th August 2013, Mr Tompson gave a quote which offered FBTS cover on the SUCON2010 wording and for a premium of £17,500 plus insurance premium tax.

FSJB/NSCB initially sought to place the risk with Berliner Versicherung AG (“Berliner”). On 19th August 2013, MS objected to the use of Berliner on the basis that Berliner’s credit rating was not satisfactory.

Accordingly, FBTS concluded the Policy with Brit on 19th August 2013.

There was initially a dispute between the parties as to the date on which the Policy was concluded. However, Brit now accepts that the Policy incepted on 19^th August 2013. This is important, since it means that the events of 21^st August 2013 set out as above when, amongst other things, FBTS was told that track settlement had increased to 22mm, do not fall for consideration when assessing whether or not there was material non-disclosure by FBTS.

By email on 19th August 2013, Mr Wigg informed Mr Tompson that FSJB wished to place the risk with Brit on the basis of the quote provided on 6th August 2013, and asked for FBTS to be held covered pending a firm order (which Mr Wigg said might come later than 5pm). On the same day, Mr Tompson responded stating that Brit would hold FBTS covered if required. By an email to Mr Wigg, Mr Cooke confirmed that FBTS wanted to place the risk with Brit. Mr Wigg then informed Mr Cooke that Brit had agreed to provide cover with effect from 19th August 2013. The slip was scratched by Mr Shaun Randall of Brit on 21st August 2013.

The Policy provided cover from 19th August 2013 to 18th August 2014 for employers’ liability, public liability and product liability, each up to a limit of £10 million, subject to an excess of £2,500 each and every claim. The public liability section of the Policy stated:

“The Insurers will indemnify the Insured and any Additional Insured:1. Against legal liability and for damages and claimant’s costs and expenses in respect of: … B. Damage to Property; C. Nuisance; happening during the Period of Insurance within the Territorial Limits in connection with the Business.

2.

In respect of Legal Costs incurred with the written consent of the Insurers in connection with any Event which is or may be the subject of indemnity under section 1 above.”

“Damage” was defined in the Policy as “physical damage and/or physical loss”. “Nuisance” was defined as “nuisance, trespass or interference with any … easement … [or] right of way”.

Condition 1 of the Claims Conditions provided :

“...As a condition precedent to liability, the Insured shall notify the Insurers…immediately the Insured is aware of any occurrence or circumstances which may give rise to a claim…”

The Policy wording suggests that it excludes legal liability arising from or in connection with “tunnelling” and “excavations below 5 (five) meters in depth”. However, this was an inadvertent error on the part of Mr Tompson. The Policy schedule makes it clear that the depth limit does not apply, and the parties are agreed (for obvious reasons) that the tunnelling exclusion would also not apply.

The Nottingham-Newark railway line had in fact been closed by Network Rail on 19th July 2013, in order to enable re-signalling work to be carried out. The line was first reopened to freight trains on 26th August 2013.

At approximately 04:27 on 27 August 2013, a freight train (operated by DB Schenker) consisting of a Class 66 locomotive and 30 tank wagons loaded with a cargo of diesel derailed when passing over the level crossing at the Site. The train was travelling westbound towards Nottingham at around 53 mph when the Derailment occurred. The derailment consisted of the trailing wheelsets of the 26th and 28th wagons leaving the track and running for around 800m before the train came to a stop. All of the wagons on the train remained upright, but damage was sustained to both the track and the wagons.

It is common ground that the immediate cause of the derailment was severe settlement of the railway tracks caused by a void in the ground. After the derailment occurred an extensive void was discovered beneath the railway track around 2.5m in length and 0.7m in depth. Numerous other voids were also discovered around the thrust and reception shafts, and along the line of the tunnel constructed by FBTS. The railway remained closed for repairs until 8th September 2013.

As already indicated, in April 2015, the RAIB published its report on the derailment.

The summary of the RAIB report states:

“The immediate cause of the derailment was a severe dip in the track which developed rapidly under the leading portion of the train. After the derailment, severe dips of about 100mm were found in both rails of the affected line, where the rails had deformed over a large void in the ground which had left the track unsupported over a length of about 3 metres. The void under the railway and other voids found under the adjacent road surface were caused by excessive ground loss during the recent construction of a micro-tunnel along the road centre line. The RAIB investigation has interpreted the available evidence in order to identify the most likely cause of the voids. Although some alternative explanations cannot be completely discounted, the RAIB considers that the most likely explanation for the ground loss is that it was as a result of over-mining of the ground during the construction work.”

When discussing over-mining as a possible cause of the voids, the RAIB report states:

“The positioning of the voids above the path of the micro-tunnel … is the strongest indication that the voids had been caused by over-mining of the ground during the tunnelling activity. Most of the voids along the road and across the railway between the launch and reception shafts had migrated from the depth of the tunnel to a level just below ground level. Normally such voids would be expected to break through the surface soon after the tunnelling had been completed but the road and its foundations effectively bridged the voids, except for one hole which appeared in the road on 8 August … The deep voids found below the railway and each of the twin siphons do not appear to have risen higher because they were bridged by those structures.”

The RAIB criticised FBTS (and MS) for not measuring the quantity of material excavated from the ground during construction of the micro-tunnel. The RAIB also criticised FBTS for failing to add bentonite to the slurry mixture used in the TBM, which it said increased the risk of overmining. Various other criticisms of FBTS were made by the RAIB, including:

FBTS admits that it is potentially liable to MS for any loss sustained by the latter as a result of the Derailment.

FBTS was informed by MS of the derailment shortly after it occurred and Mr Burke attended the Site to investigate the voids that had been discovered under the railway line. Mr Gibson informed Mr Cooke of the derailment by email on 27th August 2013 and asked him to notify Novae of the situation. The email stated, amongst other things:

“We had a call this morning to say that the rails had settled 8” (200mm) whilst a freight train had been going through the level crossing. Our Managing Director Liam Burke attended site and Network Rail organised excavations under the rails and found large voids (about the size of 2 cars).”

On 29th August 2013, Mr Gibson sent an email to Mr Cooke referring to the Site and noting the following:

“There has been lots of investigation on site on Monday and Tuesday with probably 50 – 100 people from different organisations. These investigations are continuing today and both our Managing Director and Operations Manager are locked in to these investigations.”

Mr Cooke notified Novae of the derailment and the voiding, but Novae responded on or around 29th August 2013 stating that the Novae Policy expired on 14^th August 2013 and that the damage at the Site had occurred after that date. Mr Cooke’s email to Mr Gibson on 29th August 2013 informing the latter of that fact stated:

“I refer to your email that works were completed on 8th/9th July 2013, however what date were F&B notified of the potential problem was this verbally or in writing[?]”.

In response, on 29th August 2013, Mr Gibson sent an important email to Mr Cooke setting out a brief history of the critical events at the Site prior to the derailment. It read as follows :

“...Everything has been verbal no formal notification.

History of events.

Micro tunnel breaks through on 8^th July.

Liam Burke (Managing Director) visits site on 9^th July and is advised by Danny Kelly of Morgan Sindall that there has been some settlement of the tracks around 11-12mm but this was not cause for concern at the moment. Settlement can and does occur and is permitted by [NR] within acceptable ranges.

On 17^th July the undersigned visited Tom Anderson of [MS] at their offices to discuss the final account and was told that Morgans were concerned about the settlement which was now at 15-18mm as if this got any worse then speed restrictions may have to be imposed by [NR].

On the 8^th August we received an email from Danny Kelly advising that one of the trial holes in the road (excavated and reinstated by others prior to our works) some distance from the railway had developed a void. Liam Burke visited and viewed this void on 13^th August and stated that he did not think this was our problem. On 21^st August Liam Burke, Paul Willis and the undersigned visited the site and met with Tom Anderson and Keith Gregory (Morgans’ Operations Manager) to further review the void. During discussions Mr Gregory raised the settlement issue on the railsay and stated at the moment it was 22mm and if it went further over 25mm then [NR] would have to impose speed restrictions and undertake remedial works. The track then settled by 200mm on 27^th August causing a partial derailment…”

Mr Gibson’s email was forwarded by Mr Cooke to Mr Wigg on 29th August 2013. FSJB forwarded the email to Mr Tompson at Brit on 29th August 2013. Mr Tompson passed the information on to Brit’s claims department and, on 30th August 2013, Brit appointed Mr Keith Wise of the Garwyn Group (“Mr Wise”) as its loss adjuster to investigate the claim.

On 29th August 2013, Mr David Clayton of MS who was at the Site, told Mr Burke that, in light of their investigations, MS believed that FBTS’ tunnelling had caused the voids at the Site. By email on 30th August 2013, Mr Anderson informed Mr Gibson that MS intended to withhold any further payments to FBTS in respect of the project. The email stated, amongst other things:

“We confirm this action [i.e. withholding further payments] will be taken as a consequence of the ground failure at the Stoke Lane Rail Crossing, and also the additional ground failure that has appeared adjacent to the Severn Trent Trial Hole. F&B representation has been on-site as [sic] various times this week and are aware that the three voids (confirmed to date by surface inspection only) all sit along the line of the tunnel route. ”

Mr Wise met Mr Gibson at FBTS’s offices in Doncaster on 2nd September 2013 to discuss the situation at the Stoke Lane Site.

On 4th September 2013 Mr Anderson sent an email to Mr Gibson stating that MS considered FBTS’ work at the Site to be defective and asking FBTS to return to the Site to fix the problems by 5th September 2013. The email stated:

“As you are aware investigations into both the Stoke Lane rail crossing incident [of 27th August 2013] and the void upon the highway along the line of the tunnel route are on-going. We record that the investigation to date has revealed that the grouting of the annulus of the shaft (outside diameter between the caisson and the ground) to both launch and receive pits has either not been undertaken in full, or is now defective. ”

On 5th September 2013, Mr Gibson told Mr Anderson that FBTS would return to the Site “once all investigations are complete and the reasons for the disappearance of the ground and grout are established”.

Cunningham Lindsey, the loss adjusters appointed by MS’ insurers, commenced investigations at the Site on around 8th September 2013 in order to ascertain the cause of the voids and the earth settlement. On 6th September 2013, Mr Gibson sent a letter to MS asserting that FBTS was not responsible for the voids at the Stoke Lane Site and asking MS to provide FBTS with certain information.

On 10th September 2013, Mr Burke sent an email to Mr Anderson stating: “We request an urgent meeting with yourself and a Director in light of new damaging information with regard to the settlement at Stoke Lane”.

On 11th September 2013, Mr Anderson sent a letter to FBTS stating that it did not intend to make any further payments to FBTS for the work at the Site and that it intended to recover from FBTS its costs and losses resulting from the defective work (at that stage estimated at £72,669.12). The letter stated:

“We consider that your Subcontract Works are defective in that railway failures have occurred due to 3 voids appearing along the tunnel route and that the voids have arisen as a consequence of your inadequate/defective grouting of the shafts.”

On 11^th September 2013 Mr Wigg sent Mr Cooke a cover note dated 3^rd September 2013 with the policy documentation. This was forwarded to Mr Gibson on 16^th September 2013.

On 12th September 2013, MS’ solicitors sent a letter to FBTS stating that: (i) MS believed that FBTS’ defective work at the Site had caused or contributed to the derailment; (ii) its investigations at the site were ongoing; (iii) it did not intend to pay FBTS for the work; and (iv) it intended to recover from FBTS any loss sustained as a result of the derailment (including losses resulting from a claim by Western Power against MS for breach of the main contract).

On 12^th September 2013 Mr Tompson signed an endorsement to change the name of the insured on the Policy.

On 13^th September 2013 Mr Wise provided to Brit a preliminary report on the outcome of his investigations to date. Under the heading “Policy Liability” , Mr Wise advised:

“….As the rail track collapse/train derailment occurred after policy inception, we anticipate that any damages associated with these incidents would fall within the scope of policy cover. We will, however, fully investigate all of the circumstances preceding the train derailment. If the Insured knew or indeed ought to have known about the voids and/or the risk of earth collapse, then Underwriters might not be prepared to provide an indemnity on this occasion. Specifically, if the Insured failed to take reasonable care and/or precautions to prevent the train derailment from occurring. Also, if the Insured knew of but failed to disclose the possibility of the earth collapse at policy inception. We will, therefore, comment further upon policy liability issues once we have had the opportunity to review the full policy wording. Also, after all of the circumstances preceding the train derailment has been established.”

Mr Wise went on to make the following recommendations, amongst others, :

“ …

5.

Liaise with all interested parties to determine when any risk was first detected to the railway tracks.

6.

If this was before inception of policy cover, then investigate whether there are grounds for disputing the operation of policy cover in respect of the train derailment incident.

7.

Review the policy wording once this can be provided together with the full Underwriters file and establish whether a policy indemnity can be provided for any of the losses arising from this incident.

8.

Issue a reservation of rights whilst our investigations are continuing.”

On 17^th September 2013 Mr Tompson cancelled the endorsement of 12^th September, which cancellation NSBC accepted.

On 18^th September 2013, MS sent a letter requiring FBTS to remedy the defects in the tunnelling work at the Stoke Lane Site within 7 days pursuant to the terms of the subcontract. On 26th September 2013, Mr Willis attended the Site and was informed by MS that the latter intended to re-grout the thrust and reception shafts itself.

Mr Burke sent a letter to MS on 27th September 2013 denying that FBTS had failed properly to complete the thrust and reception shafts at the site.

On 3rd October 2013, Mr Wise and Ms Monique Brostek, of Clyde & Co LLP (Brit’s solicitors) attended a meeting at FBTS’ offices in Doncaster with Messrs Burke and Gibson. There is a conflict of evidence about what was said during the meeting, specifically as to whether or not any reservation of rights was made on behalf of Brit. Brit’s case is that its rights were expressly reserved on this occasion.

Ms Brostek took a full and contemporaneous note of the meeting. Mr Gibson also made a note of salient points raised. Ms Brostek’s typed notes state:

“KW [i.e. Keith Wise] also advising that Brit might think that their failure to tell them about the void, which occurred on 8 August, is non-disclosure and this might also allow Brit to pull cover, but it depended on whether this is something which would be material information for the underwriter to make a decision on, on whether or not to provide cover to F&B.”

Her manuscript notes record :

“KW Why not tell us? Brit

Defence most imp but might be no cover”

The notes of the 3rd October 2013 meeting made by Mr Gibson state:

“First void would have to be Novae. Derailment would have to be Brit but they may say that we never advised before renewal

But if not our problem then doesn’t matter anyway…”

On 11^th November 2013 Mr Cooke emailed Mr Gibson attaching two letters of indemnity for the Policy on NSCB notepaper confirming cover.

On 3^rd December 2013 Brit’s solicitors wrote to NSCB in the following terms :

“...Our instructions relate to the validity of the contract of insurance in light of information that was in your client’s possession prior to inception of policy. These issues were initially raised at our meeting with your client and [Mr Wise] on 3 October 2013.

Whilst these investigations are ongoing it is necessary for Brit to fully reserve its rights with respect to the validity of the policy until such a time as Brit has sufficient information to determine its stance. All investigations and steps which we undertake in the meantime are wholly without prejudice to that reservation. For the avoidance of doubt, Brit’s reservation of its rights will remain in place until we inform you and your client otherwise in writing…In the meantime, Underwriters are content for their representatives (ajdusters/lawyers) to continue assisting in the defence and handling of the claim so as not to prejudice your client’s position. Such assistance should not be construed as indicating that they affirm the contract in any way and nothing in this letter should be considered as representing Brit’s final position.”

On 13^th and 14^th January 2014 there was an exchange of emails between Mr Cooke and Mr Wigg as to whether or not the Policy would cover an individual to be trained and accredited to test lifting equipment. Mr Wigg advised that he would be.

By letter dated 21^st January 2014 Brit’s solicitors wrote to NSCB purporting to avoid the Policy in the following terms :

“We have now finalised our investigations and Underwriters regret to advise you that it is their unequivocal opinion that your client is responsible for a material non-disclosure, which renders the policy void ab initio. This means that your client is without insurance cover going back to 19 August 2013. Whilst Underwriters expressly reserve the right to rely on further facts and circumstances, we summarise below the material information that was within your client’s knowledge following the completion of its sub-contract tunnelling works for [MS] at [the Site] but was not disclosed : We understand that F & B were advised by [MS] of settlement in or around the vicinity of their works when they visited site on 9 July 2013. [MS] made your client aware that the settlement was worsening on or around 17 July 2013 and raised the possibility of speed restrictions being imposed on the railway line. Your client was advised in writing on 8 August 2013 that a void had developed in the vicinity of their works (namely at a trial hole in the carriageway although not necessarily part of F & B’s works). Your client physically viewed the void on 13 August 2013. A meeting or visit took place on 21 August 2013 when Liam Burke, Paul Willis and Graham Gibson of your client met two representatives of [MS] to further review the void. [MS] indicated that settlement had further increased and was now at 22mm. F & B were advised that ifsettlement was to go over 25mm then [NR] would impose speed restrictions and undertake remedial works. This letter is not intended to set out Underwriters’ position in full, nor is it intended to be an exposition of English law on material non-disclosure… Underwriters do consider that the appearance of the void in the road together with worsening of the settlement of the tracks subsequent to completion of your client’s tunnelling works to be material as they would influence the judgment of the underwriter…”

Brit offered the return of the policy premium, which FBTS accepted on 21^st January 2014. That position was withdrawn on 23^rd January 2014, and Brit has not taken any related point.

In February 2014 MS carried out remedial work, consisting of permeation grouting, to fill the voids at the Site and stabilise the ground.

On 26th March 2014 Reynolds Porter Chamberlain LLP (“RPC”), MS’ new solicitors, sent a letter before action to RLS Law, FBTS’ solicitors. RPC suggested that the earth settlement and voiding at the Site occurred as a result of, amongst other things, FBTS’ failure to use bentonite to support the tunnel face during drilling operations, which led to inadequate pressure at the tunnel face and, therefore, over-mining as well as its failure to monitor the volume or weight of material removed from the tunnel.

In the pre-action letter, RPC relied on the fact that the earth settlement at the Site was significantly more than the 5mm track settlement permitted by NR and was also more than the 2-4mm predicted settlement stated in FBTS’ proposal to MS. RPC’s letter stated that MS intends to bring a claim for breach of the subcontract against FBTS in order recover its losses, including any liability to third parties (said to be over £3.67m in total), arising from FBTS’ defective work at the Stoke Lane Site. RLS Law replied to RPC’s letter before action on 11th April 2014 asking for an extension of time within which to provide a response, and requesting disclosure of various documents.

On 24th April 2014, the Environment Agency informed FBTS of its intention to send it an invoice in order to recover costs incurred in seeking to prevent a rupture of the sewerage pipes at the Site, which were apparently £10,592.10. Severn Trent Water sent a letter to MS on 2nd May 2014 stating that it would seek to recover its costs of preventing a collapse of the sewerage pipes at the Site, said to be £471,844.150. The letter stated:

“Our investigations have concluded that the voids were caused by over-mining during the Works. In other words, your method for constructing the tunnel removed excessive material from the ground, causing, through natural settlement of material, the voids to appear.”

RLS Law sent a response to RPC’s letter before action on 9th June 2014 denying the allegations that MS had made against FBTS. In summary, the letter suggested that the voids at the Site occurred because the micro-tunnel constructed by FBTS was too close to the sewerage pipes, and FBTS denied responsibility for that fact.

FBTS relies heavily on certain track standards issued by NR. I will address their relevance in due course, but it is convenient now to identify the matters raised. Notably, none of the documents referred to are directly in evidence and have not been disclosed by FBTS. They were therefore never actually in FBTS’ possession or control. Rather, their content is to be gleaned from references taken by FBTS from the RAIB report, which I am asked to assume is accurate in this regard.

FBTS refers to three standards as follows :

The principal issues can be summarised as follows:

The law is essentially non-controversial. Brit must establish on the balance of probabilities that it was induced to provide cover to FBTS on the terms agreed as a result of a material non-disclosure or misrepresentation (see for example Garnat Trading & Shipping (Singapore) Ptd Ltd v Baominh Insurance Corp [2011] 1 Lloyds’ Rep 589 (“Garnat Trading”) (at paragraph 135b)).

The principles governing non-disclosure and the duty of utmost good faith in connection with insurance contracts are well established. Section 18(1) of the Marine Insurance Act 1906 (“the Marine Insurance Act”) provides that:

“…the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known to him. If the assured fails to make such disclosure, the insurer may avoid the contract.”

For non-marine insurance cases, the common law is to the same effect (see Pan Atlantic Insurance Co. Ltd and another v Pine Top Insurance Co. Ltd [1995] 1 A.C. 501 (“Pan Atlantic”) at 518 and 554).

Information is material, and must therefore be disclosed to an insurer prior to the conclusion of a policy, if it “would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk” (see section 18(2) of the Marine Insurance Act). Whether a circumstance is material or not is a question of fact to be determined in each case. The decision rests on the court’s own appraisal of the relevance of the disputed fact to the subject-matter of insurance. It is not something which is settled automatically by current practice or the opinion of insurers. The court makes its own evaluation (see McGillivray on Insurance Law (12th ed., 2014) (“McGillivray”) (at paragraphs 17-041 to 045).

For a fact to be material, an insurer is not required to prove that a hypothetical prudent insurer would have refused cover (or would have refused cover on the same terms) but for the non-disclosure. As Lord Mustill stated in Pan Atlantic (at 550) :

“A circumstance may be material even though a full and accurate disclosure of it would not in itself have had a decisive effect on the prudent underwriter's decision whether to accept the risk and if so at what premium. ”

The relevant question is simply whether the circumstance would have had “an effect on the mind of the insurer in weighing up the risk” (as Lord Goff stated in Pan Atlantic (at 517)). When giving a summary of the relevant principles in Garnat Trading Christopher Clarke J stated (at paragraph 135c) :

“…in general terms, a fact or matter is material if it would have been taken into account by a hypothetical prudent insurer when assessing the risk.”

The reason why an insured fails to disclose a material fact to an insurer is not relevant, whether it is as a result of mistake, fraud or for some other reason (see McGillivray at paragraph 17-017). It is also well established that the question whether a circumstance is material is to be determined objectively from the perspective of a hypothetical prudent insurer. It does not depend upon the assured's own appreciation or assessment of its potential importance (see McGillivray at paragraph 17-038).

Section 20(1) of the Marine Insurance Act spells out the general common law rule that parties must avoid making misrepresentations:

“Every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true. If it be untrue the insurer may avoid the contract.”

Materiality has the same meaning as for non-disclosure: “A representation is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk” (see section 20(2) of the Marine Insurance Act). As with non-disclosure, to be material a misrepresentation need not have a decisive influence on the mind of a hypothetical prudent insurer, it is sufficient that the prudent insurer would have taken the matter into account (see Lord Mustill in Pan Atlantic at 550). There is no requirement for an insurer to prove that the insured’s misrepresentation was negligent or fraudulent (see for example Colinvaux’sLaw of Insurance (10^th Ed.) (2014) (“Colinvaux”) at paragraph 6-030).

Again, the question whether a fact misrepresented is, or is not material, is one of fact to be determined, if necessary, with the assistance of expert evidence. Materiality can, however, be determined without evidence being called, and the ultimate decision depends upon a critical assessment of the evidence by the trier of fact (see for example AC Ward & Son ltd v Catlin (Five) Ltd [2010] Lloyds Rep IR695 at paragraph 218).

The existence and meaning of an express or implied representation must be determined objectively. As Toulson J stated in IFE Fund SA v Goldman Sachs International [2006] 2 C.L.C. 1043 (at paragraph 50) :

“In determining whether there has been an express representation, and to what effect, the court has to consider what a reasonable person would have understood from the words used in the context in which they were used. In determining what, if any, implied representation has been made, the court has to perform a similar task, except that it has to consider what a reasonable person would have inferred was being implicitly represented by the representor's words and conduct in their context.”

Thus the proper construction of a representation is to be judged objectively, according to all the circumstances and in context. A representation of a matter of fact is true if it is “substantially correct” (see s.20(3) of the Marine Insurance Act).

Where a representation is ambiguous, then the burden is on the representee to prove in what sense he understood the representation and that, in that sense, it was false (see Spencer Bower, Actionable Misrepresentation (at paragraphs 82 and 83). The starting point is that where the meaning is not clear, the representation should be given the meaning intended by the maker, or which he knew or ought to have known the recipient would put upon it (see McInerny v Lloyds Bank plc [1974] 1 Lloyd’s Rep 246 at 254).

In Pan Atlantic Lord Mustill stated (at 550) :

“…if the misrepresentation or non-disclosure of a material fact did not in fact induce the making of the contract (in the sense in which that expression is used in the general law of misrepresentation) the underwriter is not entitled to rely on it as a ground for avoiding the contract.”

Accordingly, an insurer is only entitled to avoid a policy if the material non-disclosure or representation was a substantial cause affecting the underwriter’s decision to enter into the contract, or to do so on the terms agreed. As Clarke LJ said in Assicurazioni Generali SpA v Arab Insurance Group [2003] 2 CLC 242 (at paragraph 62) :

“In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant non-disclosure or misrepresentation, he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of his doing so.”

Whilst there is no presumption in law that an insurer was induced to enter into a policy by a material misrepresentation or non-disclosure, the facts may be such that inducement can be inferred from materiality (especially if the fact in question was clearly material). If a material fact, had it been known to the insurer prior to the conclusion of the policy, would have led to an increase in the premium, inducement is established even if the amount of the increase is uncertain (see New Hampshire Insurance Co. v Oil Refineries Ltd [2003] 1 Lloyd’s Rep. 368 at paragraphs 45 to 46).

It is well established that an insurer may lose its right to avoid a policy as a result of affirmation or waiver by election. In such cases, the burden of proof rests on the insured to establish that the insurer, having full knowledge of its right to avoid a policy for misrepresentation/non-disclosure, has made an unequivocal election by words or conduct to keep the policy in force (see for example Colinvaux at paragraph 6-142). Colinvaux (at paragraph 6-140) states :

“Waiver arises where the insurer, faced with the conflicting choice of avoiding the policy or maintaining it in force, adopts the latter approach: waiver thus consists of an election between contrasting outcomes, and once the election has been made unequivocally the insurer is unable to go back on it.”

Whether an insurer’s words or conduct amount to an affirmation of the policy “depends upon how a reasonable person in the position of the assured would interpret the insurer’s words or conduct” (see Colinvaux at paragraph 6-142).

For affirmation to apply, the insurer must, at the time of the communication or conduct in question, have had knowledge not only of the facts giving rise to its right to avoid the policy but also of its legal right to avoid (see Colinvaux at paragraph 6-148 and for example Moore Large & Co Ltd v Hermes Credit and Guarantee plc [2003] Lloyd’s Rep IR 315 at paragraph 92).

Finally, avoidance is a draconian remedy and should not be granted lightly. In Kausar v Eagle Star[2000] Lloyd’s Rep IR 154 Staughton LJ stated at 157-158:

“Avoidance for non-disclosure is a drastic remedy. It enables the insurer to disclaim liability after, and not before, he has discovered that the risk turns out to be a bad one; it leaves the insured without the protection which he thought he had contracted and paid for. Of course there are occasions where a dishonest insured meets his just desserts if his insurance is avoided; and the insurer is justly relieved of liability. I do not say that non-disclosure operates only in cases of dishonesty. But I do consider that there should be some restraint in the operation of the doctrine. Avoidance for honest non-disclosure should be confined to plain cases.”

Mr Tompson, the relevant underwriter at Brit, presented as intelligent and experienced in the insurance industry, albeit relatively new to underwriting. He was a fair and honest witness. Where he had made a mistake, he accepted it. He came across as someone who understood his job at the time, and as someone who took that job and the ultimate decision to avoid the Policy very seriously. He emphasised how exceptional it was for Brit to avoid a policy. It was something done only once every 3 to 4 years.

Mr Wise, Brit’s loss adjuster, was also an impressive witness, with 22 years of industry experience. Again, he made fair concessions and did not overstate his case. He gave his evidence in a compelling way when he had a direct recollection. A good example was his clear memory of advising FBTS to get its own legal advice at the very first meeting he attended with FBTS.

Ms Brostek, Brit’s solicitor who attended the meeting of 3^rd October 2013 with Mr Wise, was a more nervous witness but nevertheless a careful one.

Mr Gibson, FBTS’ commercial director, came across as a hardworking and experienced commercial director. However, despite being charged with responsibility for FBTS’ insurance matters, his understanding of insurance matters appeared limited. His understanding of FBTS’ duty of disclosure to insurers in particular was limited, if not flawed : it was to the effect that generally notification was required only when damage had actually occurred. He was reluctant to answer on some questions, but in general answered questions in a straightforward manner. The overriding impression throughout was, however, that his focus was at all material times on “the money”. This was most striking in his behaviour after the tunnelling had finished. His primary concern then was to achieve payment for FBTS. Despite the following settlement results and MS’ worries, he did not proactively follow up any monitoring results, nor respond to queries from MS, for example, about the void.

Mr Burke was in general an unreliable witness. By way of example, he made a volte face in his evidence in relation to his tender estimate of 2-4mm settlement, stating in oral evidence that it was in fact accurate at the time. At the time of his witness statement, he (or perhaps others within the FBTS team) recognising the potential difficulties in FBTS’ path arising out of its tender estimate, sought to suggest that the estimate was not a true one. Thus, in his witness statement he said :

“5.

In the section headed “Proposal” I provided my estimate of the settlement that would occur – that is 2-4mm…The reason I put this level of settlement down was because this was a competitive tender in that MS wished to do the job using an Auger-Boring technique which, if it could have been done at all would have been much cheaper, and I wished to secure the job for the Defendant. I was conscious that settlement is, for very good reason, a very serious matter for [NR] and accordingly to how any kind of settlement above the minimum is likely to be unacceptable…I expected, based on experience from Colwick that the actual settlement was very likely to be greater and in the region of 10-12mm or so based on the depth of the tunnel shown on the tender drawing.”

In FBTS’ written opening, it was stated that the estimate of 2-4mm was “unduly optimistic”. Mr Burke had “frankly”stated that he gave it in order to secure the job for FBTS.

However, in his oral evidence, Mr Burke said quite the reverse. He stated that the estimate was a genuine one given in good faith and accurate, based on actual calculations. In due course I shall have to choose which version I prefer. He was inconsistent and evasive in other areas of his evidence, including as to his alleged expectations of settlement on the Site beyond the tender proposal.

Mr Rudden gave evidence for Brit. He is a highly experienced underwriter. He was confused (or at least at cross-purposes) in the early sections of his cross-examination when asked to deal with hypothetical situations not based on the present facts. But he was convincing when addressing the actual circumstances surrounding this claim. So for example, he was clear that if there was a possibility of the void being caused by FBTS’ tunnelling he would expect the appearance of the void to be disclosed. To the extent that there were inconsistencies between his discussion of the relevant principles in a vacuum and his opinions on materiality on the facts of this case, I prefer his evidence given by reference to the facts.

Mr Blackburn, who is a broker by trade and not an underwriter, gave evidence for FBTS. It was clear from his evidence that his approach to the issues was essentially (and perhaps understandably given his background) from the perspective of a broker rather than that of an underwriter. Thus, he often answered that he would expect the insured to raise a certain issue with his broker for discussion, but was not clear as to what the outcome of any such discussion from the underwriter’s perspective should have been. His answers were often inconclusive. I find that the thrust of his written opinion that FBTS would only have been under a duty to make disclosure to Brit if the track settlement reached (or was likely to reach) NR’s intervention level of 25mm to be wholly unrealistic. It may have been one that Mr Blackburn felt forced to adopt, given that there was at that stage the possibility that the Policy would be held not to have been concluded until 21^st August 2013 (when FBTS was told that settlement was at 22mm).

Where there is a material difference between the two experts, and in so far as necessary, I prefer the evidence of Mr Rudden. However, as appears below, where ultimately the conclusions on materiality turn on my findings of fact, the outcome on materiality does not depend on this expert evidence, although such evidence informs the outcome.

In the end, expert engineers were not required to give oral evidence, the following matters being agreed between the parties from their evidence :

It is common ground that some settlement was to be expected as a result of FBTS’ tunnelling at the Site. The factual issue raised, at least by FBTS, is what degree of settlement did FBTS expect? On Brit’s case, given the estimate of 2 to 4mm given in FBTS’ tender and referred to in its sub-contract with MS, FBTS’ subjective expectation of settlement levels beyond that is nothing to the point in terms of materiality and objective risk for underwriting purposes. Whether that be correct or not, it is appropriate to make findings on the issue.

A notable feature is that there is not a single piece of written contemporaneous evidence of FBTS’ expectation, other than its proposal to MS. No contemporaneous calculation by FBTS has been produced. No internal working documents within FBTS have been produced (either for the Site or, for example, the Colwick crossing). No minutes or notes of internal discussions as the settlement increased evidencing expectations have been produced.

The starting point then is FBTS’ estimate of 2-4mm in its proposal to MS, referred to and attached within its sub-contract with MS. I accept Mr Burke’s oral evidence that, contrary to his witness statement, the estimate of FBTS of 2-4mm settlement was a genuine one, and not one given deliberately optimistically in order to secure the job for FBTS. He was clear and compelling in his answers to me on this, which answers were spontaneous. It would have been a very serious deliberate misrepresentation to MS, had the estimate not been genuine. For all his opportunism and inconsistencies, I do not think that Mr Burke would have acted in such a manner.

It is to be noted that the proposal did not go on to say that, once the tunnelling was complete, settlement would be much greater and/or monitored in line with Standard 001, or 044 or 0045. The range of 2-4mm was a straight and unqualified estimate, given expressly and repeatedly by reference to FBTS’ experience in this ground on this line. If the true position was, as FBTS suggests, that the 5mm requirement was only relevant for tender purposes (in some purely theoretical way, which itself is difficult to understand), and was expected then simply to fall away to be superseded by references to 15mm or 25mm settlement set out in other standards, then that would have been made clear, if not in the tender, then certainly in the final subcontract.

To the extent that FBTS genuinely anticipated the possibility of some greater settlement at the outset, I find that on any view that Mr Gibson and Mr Burke did not expect settlement levels to be anywhere near as great as the 15 – 18mm settlement reported on 17^th July 2013. I find that, to the extent that FBTS turned its mind to it at all at the outset beyond the 2 to 4mm requirement (which is by no means clear), FBTS’ expectation of settlement was originally closer to NR’s minimum allowable of 5mm than to the “10 to 12mm or so” or “10 to 15mm” suggested by Mr Burke (inconsistently) in his oral evidence. (It was typical of him, when given the option as to which of the two was correct, to elect the greater range of 10-15mm.). By contrast, on 3^rd October 2013 Mr Gibson and Mr Burke are recorded as telling Mr Wise and Ms Brostek that they expected 5 to 7mm of settlement.

In this regard, I attach significance to the fact that when Mr Burke was told on 9^th July 2013 that track settlement was at 10 -12mm, there is no suggestion that he responded by saying to MS that that was no cause for concern at all, since it was exactly what he had been expecting. Had he had a clear expectation of settlement at between 10 – 15mm (or even 10 – 12mm), he would undoubtedly have said so. Instead, at paragraph 16 of his first witness statement he said :

“… [Mr Kelly] told me that the settlement at track level was 11-12mm. That gave me no cause for concern because the ground conditions were wet, sandy gravel and I always expected some degree of settlement, which is an inevitable consequence of micro-tunnelling…I would have been concerned if there had been an immediate settlement of anything above 25-30mm…”

This lack of any fixed expectation on the part of FBTS beyond the 2 to 4mm estimate is demonstrated starkly by Mr Burke’s subsequent (but immediate) request to Mr Emery to carry out a surface settlement assessment for him.

The position is all the more striking, when on 17^th July 2013 Mr Anderson told Mr Gibson (who told Mr Burke) that he was worried about the settlement levels now at 15 to 18mm. Had this been in line with FBTS’ expectations, FBTS would have responded immediately to that effect, seeking to allay MS’ concerns. But there is no suggestion that this is what Mr Gibson did, or that this is what Mr Burke did when he learned of the situation. It would have been the obvious thing to do, had it genuinely represented FBTS’ state of expectation. I reject Mr Burke’s evidence that he would only have been concerned by an immediate settlement of anything above 25 -30mm as quite incredible.

Findings : alleged material non-disclosure : earth settlement and void

FBTS owed a duty to disclose to Brit all material facts known to FBTS, or which ought to have been known to FBTS in the ordinary course of its business, prior to the conclusion of the Policy on 19th August 2013. A fact is material if it would influence the judgment of a prudent insurer in fixing the premium or in determining if he will take the risk, a question of fact to be determined in each case.

For the reasons set out below, I have found myself able to reach conclusions on materiality as a matter of common sense and without recourse to the expert underwriting evidence. However, where relevant, that expert evidence broadly supports those conclusions.

In summary, as at 18^th/19^th August 2013 Mr Gibson and Mr Burke knew of the following facts :

As Mr Gibson fairly conceded, the above facts gave rise to the possibility that MS might at some point make a claim against FBTS, particularly if there was further deterioration. (It was suggested that little weight can be given to such a concession, since it was given with the benefit of hindsight. I do not attach significant weight to the concession, reaching my conclusions independently. But for the avoidance of doubt, I do not accept that the concession was made with the benefit of hindsight. It was made by reference to matters as they stood at the time.)

Mr Burke did not make the same concession. He was asked in cross-examination whether, after the meeting on 21^st August, it was a least a possibility that FBTS’ tunnelling had caused the void. He agreed that it was. FBTS’ counsel then made the perfectly proper intervention that 21^st August 2013 was not the relevant date. This though had the effect of alerting Mr Burke to the significance of his answer. When then asked whether, against the facts known prior to 19^th August 2013 there was again at least the possibility of FBTS’ tunnelling having caused the void, Mr Burke denied it. He was unconvincing when he did so. I do not accept that the developments of 21^st August changed the risk profile to such an extent. There was very plainly a risk that FBTS’ tunnelling had caused the void, given its timing and location.

In my judgment, these were matters which clearly would influence the judgment of a prudent insurer in determining the terms of any policy or in deciding whether to take the risk on at all. It was common ground that what would have been important to a prudent underwriter was the degree to which actual track settlement deviated from expected track settlement. As was emphasised for Brit, the exposure to a claim for liability to MS for remedial costs and losses in the future was plain the moment there was a significant deviation from the predicted 2-4mm of settlement. Equally, the exposure to a claim for liability to MS in respect of the void was plain the moment it appeared in the vicinity of FBTS’ tunnelling works absent full investigation ruling out any liability on the part of FBTS. Mr Rudden was unequivocal that the increasing track settlement and the void were material matters which should have been disclosed to Brit. I agree. Mr Gibson himself accepted that the “downside” to disclosing them was possibly “increased premiums”.

FBTS seeks to avoid this conclusion by reference to a number of matters :

Overall, the central flaw in much of FBTS’ defence is to overlook the objective nature of the test for materiality. FBTS’ own opinion of the significance or otherwise of the earth settlement and the road void does not determine materiality, though any subjective concern on its part would be relevant. An absence of subjective concern because, for example, FBTS (and others) had formed the (preliminary) view that FBTS’ tunnelling was not the cause of the void does not relieve the appearance of the void of materiality for underwriting purposes. The question is whether, on an objective assessment, the facts known to FBTS were material. Otherwise, as Mr Rudden point it, FBTS (or others) become “judge and jury” on the risk which the underwriter is contemplating.

For these reasons, and without the use of hindsight or any consideration of subsequent events, I find that there was material non-disclosure on the part of FTS as alleged by Brit.

The question then arises as to whether, had disclosure of all material circumstances been made, Brit would have underwritten the risk on the same terms as it did.

FBTS contends that this is a unique case in a very important respect. The derailment occurred within a couple of weeks of Mr Tompson underwriting the risk. All material facts subsequently relied on by Brit to avoid the Policy were made known to him on 30^th August 2013 when he received and read Mr Gibson’s email of 29^th August 2013. Thus the court can test directly the hypothetical situation as to how the underwriter would have reacted to the relevant information. In this instance, Mr Tompson did not react by thinking that there had been a non-disclosure, despite appreciating the dates set out in Mr Gibson’s email. The thought that there might be an issue of policy validity did not occur to him at this stage. It was Mr Wise who raised the issue. This known absence of reaction on the part of Mr Tompson, says FBTS, means that it is incredible that he was induced by such information.

Despite the attractive way in which the point was advanced for FBTS, I am wholly satisfied that, had proper disclosure been made, Brit would not have written the risk on the terms that it did and that inducement is established.

On the detail, it is to be noted that that Mr Gibson’s email of 29^th August 2013 did not refer to a number of additional material matters, including for example NR’s maximum allowable settlement of 5mm and FBTS’ tender estimate of 2 to 4mm. But, putting that to one side, FBTS’ submission misunderstands Mr Tompson’s mindset at the time when he received and read Mr Gibson’s email of 29^th August 2013. Mr Tompson had no interest in non-disclosure or avoidance issues at that stage. His focus was simply on passing the matter on to the claims department for it to instruct Mr Wise immediately, for him to investigate all issues, including coverage. He turned the email (which itself contained a long chain of emails) round to the claims department within seven minutes of receipt. He knew that Mr Wise would consider all aspects. He said that non-disclosure was “not a point we would raise at that point, at that time. We would wait until we have the loss adjuster’s report to confirm all the information”. He went on to say :

“... at the time I got this email we were looking at claims. We were not looking at a policy point. I was not looking for what the insured told me and going back through the underwriting file to have a look and see if they had been disclosed. This was purely a claim notification. I was forwarding it on to the claims team to make further investigations. As a result of those investigations, policy points were raised.”

He stated that he was literally notifying the claims department of an incident which had occurred. The email was just treated as a claims notification. I accept this evidence.

I do not therefore consider that Mr Tompson’s reaction on 30^th August 2013 undermines his clear evidence that, had he been told about the settlement and the void in the lead up to Brit writing the risk, he would definitely have excluded the Site from the Policy and asked FBTS what it intended to do to prevent any similar issues from arising in the future.

It is common ground that if FBTS represented to Brit that it did not work under or in close proximity to active railway lines, that was false, given that the railway line at the Site was active during the tunnelling period. For ease of reference, the relevant contents of the risk presentation are repeated here :

“Risk Name – F and B Trenchless Solutions Limited…

Trade : Tunnelling Contractor and Civil Engineering

Trading since 2008

FORECASTED FIGURES 2013-2014

Heat welding on sit 5%

Steel fixing 1%

15 metre height limit max

Depth limited – unlimited – av depth limits 10 to 15 metres

Domestic works 33%

Commercial 34%

Ind/Agriculture 33%

Rail works – av 4 times per year max – no lines active, controlled by Network Rail, working on rail for drainage and cables, no installation of train lines …

Airport works – 1 job in last 4 years – Drainage, runway not active

PL £10m

EL £10m…”

It appears from the evidence of Mr Gibson that this document and the offending paragraph relating to rail works was not seen or authorised by him at any time. That is of course nothing to the point for present purposes, since on any view NSCB had ostensible authority to present the risk on behalf of FBTS to Brit.

In my judgment, as a matter of commercial objective construction, a reasonable person would have understood from the words :

“Rail works – av 4 times per year max – no lines active, controlled by Network Rail, working on rail for drainage and cables, no installation of train lines …”

in context that FBTS had not conducted (and would not, during the forthcoming policy period conduct) tunnelling works under or in close proximity to an active railway line. It is common ground that this representation, if made, was false.

I can see no sensible basis for FBTS’ contention that the representation related only to employers’ liability concerning only the risk of its employees working above ground on the railway. There is no such limitation, express or implied, in the representation. The paragraph immediately following refers to public liability first. FBTS was a tunnelling contractor. The reference to rail works is to undertrack tunnelling of the very type under scrutiny here, just as the reference to airport works is a reference to tunnelling under runways. Although the matter is one of objective construction, it is to be noted that Mr Gibson himself agreed that the words represented to Brit that when FBTS carried out its rail tunnelling works, the lines were not active.

Even if there were any ambiguity in the representation, Mr Tompson’s evidence, which again I accept, was that he read the words and understood them to mean that FBTS did not tunnel under active rail lines. When it was suggested to him that the sentence as a whole was talking only about employers’ liability risks he answered :

“it does not mention employers’ liability in there. It is just a risk as a whole…This is a tunnelling contractor…As my statement says, there is inherent risk with tunnelling. That is increased when a train is active on the railway line above it.”

The fact that FBTS had tunnelled in and near an active railway line was also a material matter that ought to have been disclosed to Brit. Both Mr Rudden and Mr Blackburn agreed that that an underwriter would be likely to consider that tunnelling under active railway lines would attract a higher excess or premium than if the tunnelling was taking place under inactive lines. Tunnelling under active lines clearly creates a more hazardous risk.

FBTS makes the fair, though only forensic, point that misrepresentation and alleged non-disclosure of tunnelling under active rail lines were not matters relied upon by Brit at the time of avoidance.

FBTS contends that the Policy would have been entered into on the same terms if the representation had not been made (see Raifessen Zentralbank v RBS [2011] 1 Lloyd’s Rep 123 at paragraph 180), and that inducement cannot be established.

Mr Tompson’s evidence was that, had the words “no lines active” been missing, he would have asked more questions and potentially have increased the rate on the basis that it was a higher exposure for vibration damage. The words “no lines active” really mattered to him. He would not have written the risk at exactly the same premium and on the same terms as he did. I reject FBTS’ contention that the words “no lines active” made no difference. I also accept Brit’s submission that simply to remove those words is a somewhat artificial exercise. The question is whether Brit would have acted differently had it been told that FBTS had been (or would be) tunnelling under active (and not inactive) railway lines. Mr Tompson’s evidence, consistent the expert evidence, is that it would. The risk was being presented as a good one. Amongst other things, FBTS was not working under active railway lines.

FBTS goes on to make a number of discrete points :

Whether by reference to misrepresentation or material non-disclosure, I therefore find that inducement is made out.

Until the closing stages of the trial FBTS raised the possibility that FSJB, the trading name for Ink Insurance, part of Ink Underwriting Agencies Limited, may have been acting in certain material respects on behalf of Brit, as opposed to FBTS. This was in the context of its defence of affirmation (as pleaded in paragraph 63 of FBTS’ Defence). There it was pleaded that Mr Wigg had, in relation to certain allegedly affirmatory activities relied on, been acting for and on behalf of Brit.

Brit riposted vigorously at the outset of trial to counter any such suggestion. The background to FSJB’s involvement was as follows. NSCB was not an authorised Lloyd’s broker authorised to place risks with a Lloyd’s Syndicate such as Brit. Thus NSCB had to engage a Lloyd’s sub-broker, here FSJB, to act for FBTS to place the risk with Brit.

It is well-established that a Lloyd’s sub-broker acts as agent of the insured, save only for the receiving and holding of premium and claims monies (see McGillivray at paragraphs 36-008 to 36-010 and, for example, American Airlines Inc v Hope [1974[ 2 Lloyd’s Rep 301 and Anglo-African Merchants Ltd v Bayley and others [1970] 1 QB 311). FSJB’s agreement with Brit, which was in evidence, was wholly consistent with this standard common law position. It can be seen from the document that FSJB’s authority to act for Brit was limited to the receiving and holding of premium and claim monies.

By the conclusion of trial, FBTS realistically conceded that it could not contend that FSJB had at any material time acted as agent for Brit, and was only ever acting for FBTS. This concession makes FBTS’ residual defence of affirmation a very difficult one.

FBTS’ headline position is that Mr Tompson knew, from Mr Gibson’s email of 29^th August 2013 (which he accepted that he received and read on 30^th August 2013) all of the matters relied upon at the time of avoidance. Yet Brit did not avoid until January 2014. (It is to be noted that FBTS focussed on affirmation by reference to the claim for material non-disclosure of the settlement and void. So far as the claim for misrepresentation and non-disclosure of the fact that FBTS had tunnelled under or near active railway lines is concerned, it appears that Brit did not know for certain that the railway line had in fact been active throughout the tunnelling works until April 2014, when FBTS served its Defence. Thus, it is difficult to see how Brit’s right to avoid the Policy in this regard can have been affected on any view.)

Beyond that general submission, FBTS relies on four specific matters as follows :

As for FTBS’ headline position, Mr Tompson’s evidence was very clear. He immediately passed the email of 29^th August 2013 from Mr Gibson on to loss adjusters for their advice on all matters, including policy coverage. He was clear that he would wait for loss adjusters’ advice before taking any position on coverage. No “snap decision” would be taken on the basis of an email such as that from Mr Gibson on 29^th August 2013, the contents of which would need to be verified, for example. He would not even issue a reservation of rights for fear of destabilising the relationship with the insured without advice. This approach is wholly consistent with the views of Rix LJ in Kosmar Villa Holidays plc v Trustees of Syndicate 1243 [2008] Lloyd’s Rep IR 489 (at paragraph 82) :

“…It would not be good practice for insurers to rush to repudiate a claim for late notification, or even to destabilise their relationship with their insured by immediately reserving their position.”

Preliminary advice was given by Mr Wise on 13^th September 2013, recommending a reservation of rights and further investigations, including into policy coverage and non-disclosure issues. Brit was entitled to a reasonable time to investigate as a prudent insurer. The decision to avoid was not taken lightly and, as already indicated, was an exceptional course for Brit to take. A period of 4 to 5 months to carry out investigations, take legal advice and the decision to avoid cannot be said to have been unreasonable. FBTS’ headline position therefore takes it nowhere. There would need to be much more for a defence of affirmation to be established.

As for the first two specific matters relied on :

The meeting between Mr Wise and Ms Brostek for Brit and Mr Gibson and Mr Burke on 3^rd October 2013 then intervenes in the chain of events relied upon by FBTS.

The issue is whether or not Mr Wise in particular told Mr Gibson and Mr Burke that there was a reservation of right in place, or put another way, whether or not Mr Wise told Mr Gibson and Mr Burke that Brit might not ultimately provide cover because of non-disclosure on the part of FBTS.

Mr Wise believed that he expressly used the words “reservation of rights” when he met with Mr Gibson and Mr Burke, but in any event he said that he made it clear that Brit might not be providing cover because of material non-disclosure on the part of FBTS. I find that it is unlikely that Mr Wise used the express words “reservation of rights”. Mr Brostek would have made a note of those words if he had.

Ms Brostek could not remember the words being used, but was very clear that Mr Wise warned Mr Gibson that cover might not be available by reason of material non-disclosure and that investigations would need to be carried out.

I accept the evidence of Mr Wise and Ms Brostek that, whether or not the words “reservation of rights” were used, FBTS was told clearly at the meeting that Brit might not be providing cover because of material non-disclosure by Brit. This is evidenced by Ms Brostek’s manuscript and typed notes, respectively as follows and repeated for ease of reference :

“KW Why not tell us? Brit

Defence most imp but might be no cover”

and

“KW [i.e. Keith Wise] also advising that Brit might think that their failure to tell them about the void, which occurred on 8 August, is non-disclosure and this might also allow Brit to pull cover, but it depended on whether this is something which would be material information for the underwriter to make a decision on, on whether or not to provide cover to F&B.”

As Mr Wise put it, anything else would have been remarkable. He had reported to Brit with a recommendation that Brit reserve its rights, as set out in his preliminary report set out above. Brit had accepted that recommendation and given him instructions to make a reservation of rights. He travelled to Doncaster with Brit’s solicitor, Ms Brostek, for the very purpose, amongst other things, of acting on those instructions. It would have been bizarre for him not to have done so.

Further, I find that Mr Gibson understood the point. Ms Brostek said, and I accept, that, when Mr Wise gave the warning, she put down her pen so that she could look directly at and concentrate on Mr Gibson, to underline the importance of what was being said. I accept the evidence of Mr Wise that Mr Gibson responded by saying words to the effect of : “That’s not good news for [FBTS]”, and Ms Brostek’s evidence that Mr Gibson appeared taken aback by the information.

Moreover, Mr Gibson’s own notes evidence his understanding. In the context of what was a very long and full meeting, Mr Gibson made his own one page note of what he described as “the salient points” from the meeting. They included the following entry:

“First void would have to be Novae. Derailment would have to be Brit but they may say that we never advised before renewal

But if not our problem then doesn’t matter anyway…”

FBTS relies on an email from Mr Gibson the following day to Ms Brostek, which appears unconcerned about and did not mention this coverage issue. There is no support for FBTS there. Mr Gibson was just responding to requests for further information. FBTS was of course at all material times under a duty to co-operate with insurers, reservation of rights or not. Additionally, Mr Gibson was focussing on the merits of his defence. As his notes of the meeting recorded, his thinking was that if FBTS was not at fault, then whether or not there was cover did not matter. As for Mr Gibson’s email to Mr Cooke of 4^th October 2013, Mr Gibson was flagging up an action point for Mr Cooke on the back of Mr Wise’s advice that the derailment claim should be picked up by Novae and not Brit. Mr Gibson required Mr Cooke to action this. There was nothing for Mr Cooke to action in the same way in relation to material non-disclosure on the Policy. The absence of any reference to it is therefore unsurprising.

Mr Burke was of course also at the meeting. His evidence was that he could not recall any mention of these matters, and that he believes he would recall if they had been mentioned. Mr Burke either did not hear the relevant part of the conversation, being preoccupied with the many other matters under discussion going to the substantive merits, or is simply mistaken in his recollection, as evidenced by the notes of not only Ms Brostek but also Mr Gibson.

FBTS also relies on Brit’s formal written reservation of rights by letter dated 3^rd December 2013 letter as demonstrating that there was no effective reservation of rights at the earlier meeting. The letter, set out above, merely refers to the validity of the Policy in light of information in FBTS’ possession prior to inception being “issues initially raised”at the meeting of 3^rd October 2013. Ms Brostek said, and I accept, that the letter of 3^rd December 2013 was to formalise the situation in writing. It does not detract from the fact that the essence of Brit’s position was communicated orally earlier.

It follows from this finding of fact that FBTS’ case on affirmation after 3^rd October 2013 is effectively doomed. All subsequent conduct on the part of Brit must be seen in the context of Brit having made it clear to FBTS that cover might not be available by reason of material non-disclosure, which was a matter being investigated.

The third matter relied upon by FBTS is a) the sending by Mr Cooke to FSJB a request to amend FBTS’ name on the policy and b) the receipt by Mr Gibson of letters of indemnity from Mr Cooke later in the same morning of 11^th November 2013. It is difficult to see how Mr Cooke’s request can possibly lead to affirmation. As for the receipt by Mr Gibson of letters of indemnity from Mr Cooke (who, it is to be remembered, was only ever acting for FBTS), again it is difficult to see how FBTS’ position is to be advanced. FBTS suggests that it is “incredible” that this was done without Brit’s knowledge. Given other failures suggested by FBTS on the part of Mr Cooke (such as not sending on to FBTS Brit’s letter of 3^rd December 2013), it is by no means incredible that Mr Cooke acted without Brit’s knowledge. But in any event I accept Mr Tompson’s clear evidence that the letters were neither signed nor even seen by anyone at Brit.

Then comes the formal letter of reservation of rights dated 3^rd December 2013, to which reference has already been made.

Against the background of the meeting of 3^rd October 2013 and the letter of 3^rd December 2013 and in any event, the final and fourth matter relied on by FBTS, namely emails in January 2014 as to cover for individuals testing lifting equipment, cannot give rise to a defence of affirmation either. Apart from anything else, the emails are only between NSCB and FSJB (acting at all times only for FBTS). And in any event, I accept Mr Tompson’s evidence that Mr Wigg was advising on the scope of the policy without recourse at any stage to Brit.

Accordingly, Brit did not affirm the Policy so as to lose its right to avoid.

For all these reasons, I find that Brit was entitled to avoid the Policy as it did in January 2014 both for material non-disclosure and misrepresentation, and that it has validly avoided the Policy. FBTS’ counterclaim thus falls to be dismissed.

I invite the parties to agree all consequential matters so far as possible, including costs. I will rule on any outstanding matters. I conclude by thanking counsel on both sides for their able and clear submissions.