UK: PI Insurance: Scope Of Cover And Effect Of Contractual Limitation Of Liability

Judgments have recently been handed down in two cases arising from the same facts. The high court considered two issues:

(a) Contractual caps on liability occurring in standard term and conditions of construction sub-contracts; and

(b) The scope of business covered by a professional indemnity policy, where design and build contracts are involved.

Shepherd Homes Ltd employed Encia Remediation Ltd to design and carry out piling works for a residential development to be constructed on reclaimed land known as Eden Park. After several properties showed signs of cracking, Shepherd Homes commenced proceedings against Encia, alleging negligent design.

Encia employed a sub-contractor to carry out the piling, and joined the sub-contractor as a third party to the proceedings. The sub-contract was subject to the sub-contractor’s standard terms, including a cap on liability. Other standard terms were altered during negotiations but the cap on liability was not discussed. During subsequent discussions, the sub-contractor gave an indemnity to Encia in respect of the pile head design and confirmed that it had professional indemnity cover in the sum of £1m in the aggregate. No limit was agreed for the proposed indemnity.

The court considered whether the standard clause limiting the sub-contractor’s liability to the sub-contract price formed part of the sub-contract, whether it was enforceable under the Unfair Contract Terms Act 1977, and whether subsequent discussions about the limit of professional indemnity cover constituted an express or implied revision of the contract.

The court in Shepherd Homes Ltd v Encia Remediation Ltd (Green Piling Ltd, third party) found that the standard clause limiting liability did form part of the contract, as adequate notice of the standard term had been given to Encia. The cap on liability was a fair and reasonable term under the Unfair Contract Terms Act 1977 and was therefore enforceable. The subsequent statement regarding the insurance position bore no effect on the existence of the contractual cap on liability: it related to the proposed indemnity only.

The decision reinforces the need to separate out the issues of contractual liability and PI coverage in respect of it. Assurances given to the effect that a professional has a certain amount of cover - which may have an aggregate limit applicable to all claims in a policy year across a wide range of projects - is not an assurance that the whole of the limit will be available to the relevant client alone.

Scope of business covered

In a separate action, Encia Remediation Ltd v Canopius Managing Agents Ltd, Encia claimed against insurers to ascertain policy coverage. When writing the risk, insurers were presented with information about a company whose business had previously been related to Encia’s business. In the previous policy year, the same insurers had written these businesses as one single risk.

The court considered the scope of business covered by the professional indemnity policy. The case turned on:

(a) the construction of the insuring clause;

(b) the definition of business as stated in the schedule and which (if any) accompanying documents should affect this definition; and

(c) an exclusion in the policy excluding "a claim arising from the provision of advice design or specification where the insured contracts to manufacture construct erect install or supply materials or equipment unless defined in the business as stated in the schedule".

Creswell J found that:

• The insurance policy should be construed using a commercial approach, looking at the words in the context of the clause, the clause in the context of the whole policy and the policy in the context of the background facts.
• The details of the insured’s business set out in the proposal form should be construed as additional to the definition of business in the schedule, rather than as a restriction of that definition.
• The definition of the insured’s business should be construed in the light of information presented to insurers about the related company’s risk for the same policy year, and insurers’ knowledge of both businesses from the previous policy year.

On the facts of Encia the judge found that the insured’s "business" fell within the exception to the exclusion, with the result that the policy covered the insured in respect of the design and specification of the piles, notwithstanding the assumption of contractual construction obligations.
In general terms a court will normally seek to construe the same terms used in different places in an insurance contract in the same way. The present case shows that this is far from being an inflexible rule, however. If the context or a perception of the business intent of the policy demands the words to be construed differently in different places, the court will take that step.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 30/11/2007.