Mabey and Johnson Ltd -v- Ecclesiastical Insurance Office Plc and Others [2003]
The case concerned the question of whether there were one or two claims under a mitigation costs extension to a professional indemnity policy.
Facts
The Insured ("Mabey") was an engineering company whose activities included the design and supply of steel bridges worldwide. During the 1996/97 policy year, one of the structures that Mabey had supplied to an Italian company collapsed. This led Mabey to review the design and construction of a number of their bridges, including nine steel bridges commissioned by the Ghana Government. In rectifying the actual and potential faults in the Ghana bridges, Mabey incurred costs which exceeded the £2,000,000 policy limit for a single claim. In doing this, Mabey successfully avoided any claim being made against it by the Ghana Government and sought to recover the cost of remedial works under the Policy.
The Policy provided the Insured with indemnity cover against costs and expenses necessarily incurred in respect of any action taken to mitigate a loss or potential loss that otherwise would be the subject of a "Claim" under the Policy.
Arguments
Mabey argued that it had two separate claims under the Policy because there were two separate design and supply contracts for the nine bridges in Ghana; the first contract in August 1992 for the Ghana I bridges and the second in April 1995 for the Ghana II bridges, albeit that both contracts were with the same client, the Ghana Government.
The Insurers argued that Mabey had just one claim and so were not entitled to recover any more than the £2,000,000 limit of indemnity. In support of their argument there was only one claim, the Insurers said that:
- if the remedial works had not been undertaken, there would have been but one claim from the Ghana Government because the Government was informed of the problems with the nine bridges at the same time and the design and supply of the Ghana II bridges were carried out as a variation and extension of the contract to design and supply the Ghana I bridges;
- the same design concept was used for both the Ghana I and Ghana II bridges and that there was no separate negligence when it came to the design of the Ghana II bridges.
The court was unconvinced by Insurers' arguments.
Result
The Judge held that the "reality of the position" was that Mabey undertook to do the designs for bridges under two different contracts. Although much of the design work was common to both sets of bridges, it remained Mabey's contractual duty to design each set of bridges carefully and properly. They failed to do this. The designers of the original set of bridges had been negligent in making their calculations, and the designer of the second set of bridges was negligent in not adequately checking the original calculations before relying upon them.
Hence the Judge held that there were two claims under the Policy. The fact that Mabey had originally told the Insurers there was only one claim did not affect the substance and reality of the true position.
Key points
- Where an insured is making a claim under its policy to recover mitigation costs incurred to avoid a potential loss that would otherwise be the subject of a claim under an indemnity policy, the court will examine the underlying facts in order to assess whether there are one or more claims, and in particular will look at the characteristics of the insured's claim including the number of potential claimants, the number of contracts and their relationship with one another, the nature of the potential claims and the timing of the claims.
- In such a situation the Court will not have the benefit of looking at how the claim would have been formulated by the potential third party claimant(s). Although this factor is often a useful starting point when the claim has been formulated, it is not determinative of the question whether there is one or more claims. What is paramount is the reality of the position, looking at the underlying facts.
- In this case, the reality was that the Insured undertook to do the designs for bridges under two different contracts. Although much of the design work was common to both sets of bridges, it was the obligation of the Insured to its client to design each set of bridges carefully and properly.
- The engineers designing the second set of bridges were not entitled to rely upon the (defective) design calculations for the first set of bridges without checking them. The engineer responsible for the design of each bridge had to ensure that the design was fit for purpose. The fact that some of the design work for the first and second set of bridges was standardised did not relieve any of the engineers of their duty to make accurate calculations for themselves of what was needed to produce a design fit for purpose, and to have all of their work checked to verify their calculations.
- The fact that the Insured had at one stage suggested there was only one claim under the policy in order to avoid having a second deductible applied did not bind them or affect the substance and reality of the true position, which remained that there were two claims.
For further details of the case, please contact Sonia Tame at sonia.tame@cms-cmck.com or on +44 (0)20 7367 2955.
