The recent English decision of Coromin Ltd v AXA Re & Ors [2007] EWHC 2818 (Comm) considers topical issues common to first party loss policies including construction and loss assessment. The Court's approach to business interruption loss in this case is a good example of the 'eggshell skull' rule - a party must be taken as it is found. The Court also indicated that if insurers do not want to be held liable for certain losses, provision for this should be made when policies are written.
Facts
Coromin was a captive insurer which had indemnified its insured for damage arising out of an incident in 2005 at a copper mining and processing facility in Chile. The mine had a mill (mill) of which a drive motor (motor) formed part. The mill stopped on 31 March 2005 due to a failure of the motor. The failure was due to a defective 'Stator' which formed part of the motor.
The Stator was temporarily repaired in April 2005. The final repair was undertaken between January and March 2007. By the date of the permanent repairs a new plant, called the Molybdenum Plant, had been constructed at the mine.
Coromin was reinsured under a global 'all risks' policy (Policy). Coromin sought indemnity under the Policy from its reinsurers.
Policy
The Policy, a first party 'all risks' property cover, contained an exclusion for damage caused by defective design. The exclusion excluded damage caused by 'defective design, plan or specification, materials or workmanship'. However, the exclusion did not apply to resultant damage. Thus, the Policy required analysis, when something broke down, to establish whether the item was an identifiable self-contained item or whether it formed part of a greater whole.
The Policy also contained a write-back of cover which reintroduced loss due to defective design subject to certain conditions being met. The write-back offered indemnity to the insured for sudden and unforeseen damage to any machinery from defective design or materials necessitating the repair of such machinery, provided the machinery itself had:
- Been mechanically tested.
- Been commissioned.
- Complied with contract design criteria.
In order for the loss or damage to the motor to be covered, the write-back for defective design needed to be triggered.
Policy construction
In constructing the policy, the Court highlighted the following principles:
- It is necessary to ascertain the meaning of the language of the policy in the context of, and against the background to, the document.
- It is necessary to ascertain what the language used in the policy means to a properly informed observer.
- It is important to look at admissible background material but to exclude the subjective intention of the parties to the policy.
- A commercial document must be interpreted to make business common sense.
Decision
The Court accepted expert evidence that the dominant cause of the motor failure was a lack of rigidity and strength in the Stator, attributable to defective design.
The Court had to decide whether the motor forming part of the mill was machinery within the meaning of the write-back, and had to be satisfied that the conditions of the write-back were met. In considering whether the mill as a whole was machinery or whether one could look at discrete parts of the mill such as the motor, the Court looked at the contractual framework, the nature of the mechanical testing of the mill as a whole and specifically of the motor itself, and that the motor had been purchased from a separate contractor.
The Court concluded:
'...whilst the motor works in conjunction with the mill drum, it remains a discrete, identifiable item of machinery or equipment which drives the mill.'
The Court accepted that the basic requirements of the write-back were applicable to the motor and accordingly Coromin was entitled to recover the costs of its repair. (Issues of 'resultant damage' were not material.)
Business interruption loss
One of the most interesting aspects of this case was the claim for business interruption loss to the so called 'Molybdenum Plant'. The Molybdenum Plant could not be fully operated while repairs were being carried out to the Stator between January and March 2007.
The Policy covered business interruption caused by design defects. The business interruption provisions insured against 'loss resulting from the interruption of or interference with the business.' The business was defined to include all operations and activities of the insured with no qualification or limitation in terms of scope or time.
The Molybdenum Plant had not existed at the time the Policy was underwritten. Accordingly, the reinsurers argued that they were not liable for a risk of which they had no knowledge and which they were unable to rate.
However, the Court held that the reinsurers were obliged to pay the amount of the loss for a period up to 24 months after its occurrence. It did not matter that when the incident in 2005 took place there had been no impact on the Molybdenum Plant because the plant did not exist. The proper analysis was simply that the consequence of the insured damage(in the ordinary course of things) was a business interruption flowing from the repair of the Stator in a three month period in 2007. The need for the repair put the Molybdenum Plant out of action and that was sufficient for the Policy to respond.
The Policy did not require the business which was interrupted to be the business which existed at the time of the incident. The definition of business was wide and it covered such business as the insured carried on, from time to time, whether in the 12 month policy period or in the indemnity period.
The Court rejected the underwriters' argument that they had not been able to rate the cover. The Court noted that the cover had been rated on historic values and that this was the way policies were usually priced. (Ironically, it would be the subsequent insurers which would obtain the benefit of the Molybdenum Plant coming on stream, as the value of the plant would be used as a guide to future rating.) Furthermore no allegation of failure to mitigate the loss was argued in the case - presumably because the repairs actually done were the most expeditious possible.
In the circumstances, Coromin was entitled to recover under the Policy for the damaged Stator, the cost of repair to the motor in the mill, and the business interruption including the loss of interruption to the Molybdenum Plant.
Implications
In Australia, the 'all risks' policy is written by first party loss under ISR forms of contract. Despite the difference in terms, the Coromin case is a good example of how the Courts approach construction and how loss is assessed.
A common problem is assessing loss in a complicated business environment where there are inevitably changes and adjustments to the business as it develops. In the Coromin case, the Court held that the development of a new venture (the Molybdenum Plant) fell within the scope of the indemnity available under the Policy. Importantly, the Court held that if the underwriter wanted to restrict the scope of the Policy, it should have done so in the original wording.
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