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The recent decision in the case of Aspen Insurance UK vs Pectel highlights the pitfalls faced by contractors and consultants when deciding whether to notify insurers about problems which might give rise to a claim later on.

The facts are these. Pectel, a specialist in the removal of asbestos from underground facilities, was engaged by Amec in February 2004 to strip two deep-level tunnels beneath Manchester which were used by BT for its telecommunications network. Preparatory work in the cross-over section between the tunnels was suspended briefly towards the end of March that year, during which time a fire broke out, causing extensive damage costing approximately 拢15m to put right.

The fire started in a fluorescent light fitting, damaged by Pectel during its preparatory work. The fire鈥檚 destruction was exacerbated by the flammable polythene sheets being used by Pectel to limit the spread of asbestos dust. The sheets did not meet the required specification, but that was not known at the time.

BT and Amec started an investigation into the cause of the fire straight away. They removed Pectel鈥檚 equipment for testing and got their lawyers to interview Pectel鈥檚 employees. Pectel asked Amec whether it should be worried. Amec said no. Six months later, however, BT obtained a report which condemned Pectel鈥檚 materials. BT asked Pectel to explain how it intended to overcome 鈥渢his serious issue鈥�. Pectel did not provide a satisfactory answer.

The matter then went quiet until November 2006, when BT informed Amec that a claim was imminent. Amec鈥檚 lawyers wrote to Pectel suggesting that Pectel notify its insurers. Pectel ignored the letter. A few months later, BT served its letter of claim upon Amec, blaming Pectel for the fire. Pectel passed a copy to its broker on 9 March 2007. The broker finally told Pectel鈥檚 insurers about the claim two weeks later.

Pectel had public liability cover with Aspen (and other insurers). It was required to give the insurers 鈥渋mmediate鈥� written notice of any occurrence which might give rise to a claim, and the insurers鈥� obligation to indemnify was conditional upon, among other things, observance by Pectel of all the policy鈥檚 terms and conditions. The insurers refused to cover the claim, citing Pectel鈥檚 failure to comply with those policy requirements.

Ask yourself: is there a real possibility I might get caught up in a claim?

Pectel challenged the insurers鈥� decision in the commercial court, relying principally on Amec鈥檚 statement made in April 2004 that Pectel had nothing to worry about.

The judge decided the insurers were right. It was common ground that 鈥渋mmediate鈥� notice meant 鈥渨ith all reasonable speed considering the circumstances of the case鈥�. The fire had been very serious and the repair costs substantial. The investigation into what started the fire focused upon Pectel鈥檚 work and equipment and at the time of Amec鈥檚 reassuring statement to Pectel, a cause had not then been identified. In fact, the investigation was barely under way.

In short, Pectel was wrong to have relied upon Amec鈥檚 statement alone and ignored everything else going on around it. In the judge鈥檚 view, a reasonable man would have been unable to dismiss the possibility that the fire was in some way connected with Pectel鈥檚 work. There was therefore a real possibility that a claim might be brought against Pectel in due course and that in order to protect itself, Pectel would seek an indemnity from its insurers. Accordingly, the judge concluded that Pectel should have given written notice to its insurers of the fire and a possible claim by early April 2004.

Does that sound harsh? Well, you might think so, but bear in mind why the insurers鈥� obligation to pay out was conditional upon immediate written notice of a possible claim. The same or similar language is common in most insurance policies and it is intended to provide insurers with an opportunity to investigate a potential claim promptly and to take action to minimise the extent of any required indemnity.

So, don鈥檛 make the same mistake as Pectel. If something goes wrong on a project, ask yourself this question: is there a real possibility I might get caught up in a claim (even if I believe that I am not at fault)? If the answer is yes, it would be wise to notify your insurers straight away.