- Corporate and commercial
Partner - London. United Kingdom
Modern methods of construction (MMC) increasingly requires integration of new technologies in construction processes and management, providing more efficiency, less contamination, more manageable data, and a wider scope of control on construction systems solutions and products.
New solutions provide improvements to design and construction stages, but also assume the acceptance of new risks arising from the implementation of new technologies, diversifying tasks and procedures. IA, software solutions, digital tools, new materials and alternative supply chains, are definitively defining a new framework for the construction sector.
Consequently, coverage disputes relating to new risks and commercial disputes on contractual issues are expected to grow, as implementation of MMC is challenging traditional risk assessment methods and requires new approaches for understanding how they fit in traditional legal solutions.
The recent Court decision nº 208/2020 dated 26 May 2020 analysed below from the Valencia Court of Appeal (Section 11) provides an example of such coverage issues and legal implications that arise while the dispute itself refers to new technology issues.
The factual background of the case was the following. A company had in place two policies covering business and industrial risks. An industrial folding machine of its facilities stopped working due to an internal failure. The insured company claimed against the insurer requesting coverage under machinery breakdown provisions.
The machinery breakdown was caused by a software failure; and there was no possibility for reloading the program or resetting the software. Expert evidence stated that replacement of the software was the only way forward, and that the loss was due to internal failure or the handling of the machine's automaton that had produced the deletion.
The insured had a maintenance contract for the machine, but it did not include specific maintenance for the software. The company insured had in place two policies providing coverage for industrial activity (Wording One) and business activity (Wording Two). The main requirements under both policies were:
The two main questions were (i) if the software loss should be considered “material damage”, and therefore whether it was covered under machinery breakdown provisions, and (ii) whether the possible lack of maintenance suggested that the loss was not “sudden and unforeseen”.
The first instance court dismissed the claim concluding that the loss of software was not covered because a loss of software cannot be considered as material damage. The court ruled that, although it implies a loss of utility, it cannot be considered as a material damage to the machine that is the consequence of a sudden, unforeseen and foreign event (definition of loss)”.
The Appeal Court (Audiencia Provincial) overruled this decision, stating that:
Implementation of new technology solutions to construction processes (as IA solutions, software applications and BIM) may give rise to new risks that require new approaches when assessing risks or providing evidence on coverage disputes.
The terms under policy wordings should be carefully considered and eventually reviewed or redrafted as traditional wordings or provisions may be insufficiently updated for MMC and new technologies.
When facing court or arbitration disputes in Spain, expert reports clarifying technical issues linked to wording provisions are required for providing assistance to the court as non-specialised Spanish courts are unfamiliar with these technical issues.