The Court of Appeal has affirmed the controversial decision
of the High Court in Tesco Stores Ltd v Constable and Others,
which took a narrow view of a contractual liability extension,
effectively restricting cover to liabilities in tort.
The court held that, although there was no reason per se why
contractual liability could not be covered in a public
liability policy, the particular wording used in the policy was
insufficient to do so.
This decision reaffirms the message that any insured or broker
who wishes to secure cover under a public liability policy for
purely contractual liability must take steps to ensure that
specific wording is agreed to cover the potential claims
envisaged by the contract in question.
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Public Liability Insurance – Coverage For Contractual Liabilities
Background
Tesco had obtained public liability cover under a project
policy in respect of works at Gerrards Cross which included the
construction of a tunnel over a railway line. The relevant
insuring clause provided that "The insurers will indemnify
the Insured against all sums for which the Insured shall be
liable at law for damages in respect of: (a) death of or bodily
injury to or illness or disease of any person (b) loss or
damage to physical property... (c) obstruction, loss of
amenities, trespass, nuisance or any like cause".
A Contractual Liability Extension provided that liability
assumed by the insured under contract which would not have
attached in the absence of such contract would be the subject
of indemnity under that section only if the conduct or control
of any such claim was vested in the insurers.
The dispute arose following the collapse of the tunnel just
outside Gerrards Cross station, which resulted in 51-day
closure of the line. The Chiltern Railway Company, the operator
of the train line, brought a claim against Tesco under an
indemnity given in a contractual Deed of Covenant for the
losses caused by this collapse. Tesco settled the claim with
Chiltern Railways in June 2007, with the settlement including
sums for lost revenues suffered as a consequence of the
collapse following the re-opening of the line.
First instance decision
Tesco argued that the sums they had paid out in settlement
(which arose solely under the Deed of Covenant) were sums which
Tesco was "liable at law" to pay and that this
liability arose out of "obstruction, loss of amenities,
trespass, nuisance or any like cause", or, alternatively,
that the Contractual Liability Extension should respond. The
court disagreed, and took a narrow approach to construction,
effectively restricting cover to losses of a tortious nature.
This meant that Chiltern's claim was not covered, as it
had suffered no material damage to its property, nor did it
have a sufficient legal interest in the railway (which was
owned by Network Rail) to support a claim in respect of
obstruction, loss of amenities, or nuisance.
To read our law now on the first instance decision
click here.
Tesco appealed against this decision, arguing that the judge
had placed too much importance on the fact that public
liability insurance was involved, that it was unfair to
construe the insuring clause so as to confine cover to tortious
liability, and that (as a matter of ordinary language) there
had been obstruction, loss of amenity and nuisance as a result
of the collapse.
Decision of the Court of Appeal
The Court of Appeal affirmed the first instance decision.
Tuckey LJ confirmed that the first instance judge was right to
say that the fact that this was public liability insurance was
important, and that such policies do not generally cover
liability in contract for pure economic loss. Although not
conclusive, this would be a strong pointer to the meaning of
the words used in the policy.
Turning to the specific policy wording, he noted that it was
common ground that the words "shall be liable in law"
were wide enough to include liability in contract. However, the
critical question was what the liability had to be for. In this
instance, it had to be in respect of the classes of liability
set out at (a) – (c) of the relevant insuring clause.
This wording made it clear that the cover was in respect of
liability in tort, and there was nothing to indicate that
liability arising pursuant to a contract of indemnity such as
the Deed of Covenant was intended to be included.
The meaning of "in respect of" was key, as it meant
"for", not "caused by", "in connection
with" or "consequential upon". It required
"loss or damage to physical property" to be physical
damage to the third party claimant's property and
"obstruction, loss of amenities, trespass, nuisance or any
like cause" to be to the person who has the right to
claim. Chiltern had not suffered material damage to its
property. Tesco was not liable to Chiltern in tort for any
damage to property nor was it liable in contract in respect of
liabilities defined by the law of tort. Chiltern's
claim was a straightforward contractual claim for economic
loss.
It was common ground that the Extension was not a general
extension to the cover provided pursuant to the insuring
clause. For it to apply, the contractual liability assumed had
to be in respect of the classes of liability identified at (a)
to (c). It also, therefore, failed.
Tuckey LJ also noted that if Tesco had wished to cover the
liability it had undertaken under the Deed of Covenant, it
could have provided insurers with a copy of the contract and
agree with them a simple clause to cover it. It is also clear
from the decision that there is no reason per se why a public
liability policy should necessarily apply only to claims
capable of being brought in tort; it is simply that clear words
would be needed to achieve this result.
CMS Cameron McKenna LLP acted for The Chiltern Railway
Company in the underlying claims under the Deed of
Covenant.
Further reading: Tesco Stores Ltd v Constable and Others
[2008] EWCA Civ 362
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
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 31/07/2008.
