UK: The Court Of Appeal Confirms The Interpretation Of The Expression ‘‘Sudden And Accidental Breakdown'

Last Updated: 13 January 2016
Article by Clyde & Co LLP

The Court of Appeal confirms the interpretation of the expression "sudden and accidental breakdown" in a commercial insurance policy.

In a recent judgment1, the Court of Appeal confirmed in full a decision of the Superior Court interpreting the word "accident" in a commercial insurance policy and ruled that the insured should be indemnified for the cost of repair and loss of profit related to the shutdown of turbines. The Court also discussed the possibility for an insured to claim from its insurer the salaries paid to its employees to repair the insured property.

The insured operated a hydroelectric plant in which one of three turbine shafts broke further to premature cracking caused by a design defect. Its insurer agreed to indemnify it for the cost of repairs and the loss of profit resulting from the interruption in production of this turbine (#3) but, however, refused to pay for the preventive repair of the two other turbines (#1 and #2) on which the insured had discovered similar cracks.

Further to comments provided by a specialist on turbines #1 and #2, the insured was concerned and shut down their operation two months after stopping #3 and decided to replace the one that was the most damaged (#2). As the insurer refused to pay for the replacement of turbine #2, the insured decided to put turbine #1 back into operation for a year in order to limit its loss of revenue, after which it was finally replaced.

In first instance, in order to determine whether the damages to turbines #1 and 2 were covered by the policy, the judge dissected the expression [translation] "sudden and accidental breakdown" comprising part of the definition of "accident" and concluded that it did not contain any ambiguity. In its literal sense, it consisted of a [translation] "breakdown occurring when a mechanism stops functioning or can no longer fulfill its role and which occurs in a very short period of time or in an instant and in an unforeseen manner".2 The judge specified that the presence of damages requiring repairs on the turbine was not sufficient to trigger coverage. For there to have been an "accident" within the meaning of the policy, the turbine had to be incapable of accomplishing its function. Citing foreign judgments, the judge added that the definition of [translation] "breakdown" did not exclude human intervention. For example, if [translation] "the operator notices that the equipment can no longer function normally and that it was foreseeable that it could break or fail",3 the shutdown of the equipment does not preclude the existence of a [translation] "breakdown". The judge acknowledged that there could also be a breakdown if [translation] "the break, the failure or the incapacity to function normally becomes apparent while the equipment is already shutdown, such that it cannot be put back into service".4

The Court of Appeal specified the criteria permitting a conclusion of breakdown in a situation of voluntary shutdown of a machine:

1. the insured must have noted an impossibility for the machine to fulfill its function; and

2.  a prudent and diligent person would unavoidably have come to the same conclusion.

In this case, considering that the propagation of the cracking on turbine #2 was unforeseeable, that its breakage was inevitable and that such breakage would be dangerous, the first instance judge concluded that the turbine could not fulfill its function, that it could not be put back into service, that it had suffered an accident and that, consequently, the insurer was required to indemnify the insured. With respect to turbine #1, the judge found that the progression of the cracks was less advanced and that following its preventive shutdown, it had been put back into service and had continued to fulfill its function for a year until its planned shutdown and replacement. Consequently, this turbine did not sustain a breakdown, and the insured could not be indemnified in its regard. The judge seems to have concluded that by being overly concerned for the minimization of its losses, the insured prejudiced its chances of being indemnified.

Regarding the costs of replacing the intermediate shafts (which are to be distinguished from the turbine shafts), given that their damage was principally the result of a preexisting assembly defect and that they were not the cause of the breakdown of the turbines, the judge did not grant them. The shutdown of the turbines was simply the occasion upon which these damages were discovered, which damages were not covered in any event.

The costs of designing new turbines (for both the new turbine shafts and the new intermediate shafts) were considered replacement costs and granted in full because the cause of the damage was a design defect and because it had not been established which portion of these costs were incurred exclusively for the design of the intermediate shafts. The judge had also granted the cost related to the addition of parts to the turbine even though the policy only covered the cost of putting the equipment back into the state it was in before the breakdown since these parts were required to ensure the normal functioning of the equipment and that [translation] "the addition of a part to a piece of equipment does not necessarily mean that its quality has been changed."5

Finally, it is worth noting that the insurer had refused to indemnify the insured for the hours that its own management and employees had spent dismantling and reassembling the turbines. The insurer submitted that this claim had already been indemnified under [translation] "loss of profit". The Superior Court rejected this argument, however, and granted the claim because the policy covered [translation] "the amounts actually paid by the insured for the replacement or the repair of the damaged property"6 and that the salaries claimed had indeed served this purpose.

Footnotes

1 Aviva, compagnie d'assurance du Canada c. Ayers ltée, 2015 QCCA 2000.

2 Ayers ltée c. Aviva, compagnie d'assurance du Canada, 2014 QCCS 350 at para. 48.

3 Ibid. at para. 53.

4 Ibid.

5 Ibid. at para. 113.

6 Ibid. at para. 117.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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