In the recent decision of Midland Mainline and Others v Eagle Star Insurance Company Ltd the Court of Appeal confirmed the use of the established principle that where there are two or more causes which operate concurrently and interdependently and lead to a loss, the proximate cause will be the effective or dominant cause, even if it is more remote in time. The Court also went on to confirm the obiter comments made by notable Judges including Lord Denning MR in Wayne Tank v ELAC [1974] that where two concurrent and interdependent causes bring about a loss with equal efficiency, and one falls within the general wording of the policy and the other within an exception, the exception prevails. In so doing the Court of Appeal reversed the first instance decision of Mr Justice Steele who appeared to take the view that only a single cause should be identified in any given case.
The Facts
The facts of this case arise out of the Hatfield Rail disaster of October 2000. The derailment which resulted in that crash had occurred due to a broken rail caused by gauge corner cracking (GCC), a type of rolling contact fatigue (RCF) which can occur in the head section of the rails. In the immediate aftermath of the disaster, Railtrack plc took preventative action in the interests of maintaining public safety and confidence by imposing a series of emergency speed restrictions (ESRs) across all parts of the rail network where GCC was known to exist. This programme of ESRs severely disrupted the timetables of the companies operating rail services. Five of those companies brought proceedings seeking to recover in respect of business interruption losses under an insurance policy effected with the defendant insurance companies. The policy contained the following exclusion:
DAMAGE or CONSEQUENTIAL LOSS caused by or consisting of
Inherent vice, latent defect, gradual deterioration, wear and tear, frost, change in water table, its own faulty or defective design or materials.
The Defendant insurers argued that the loss, which the Claimants were attempting to recover under the policy, was caused by wear and tear and thus fell within this exclusion. At first instance, the Judge held that RCF, a "paradigm example" of wear and tear, was not the proximate or effective cause of the Claimants' losses. He concluded that the dominant/effective cause of the loss incurred by the Claimants was the imposition of the various ESRs. The wear and tear and the GCC were merely the underlying state of affairs providing the occasion for action and was not the event triggering the cover. The wear and tear exclusion would only apply if the excluded peril could be said to be the proximate cause of the loss. Accordingly, the Judge ruled that such exclusion would not apply and the Claimants' losses would be recoverable under the policies. One of the Defendants (Eagle Star) appealed.
The Issue
The issue before the Court of Appeal was whether the Judge at first instance had been right to hold that "wear and tear" was not the proximate cause of the loss and the exclusion did not therefore apply.
The Decision
The Court of Appeal allowed the Defendants' appeal and found that the Judge had been wrong to categorise "wear and tear" as no more than the underlying state of affairs. Although the ESRs were the immediate cause of loss, these had only been put in place as a result of the wear and tear. The Court decided that there were two proximate causes - wear and tear was one of them. The loss incurred by the Claimants therefore was to be regarded as falling within the policy exclusion and was unrecoverable.
The Court of Appeal's Reasoning
The Court of Appeal based its judgment on two leading cases in this area – Leyland Shipping Company v Norwich Union Fire Insurance Society (1918) and Wayne Tank and Pump Co v The Employers' Liability Assurance Corporation (1974).
In the former, the House of Lords clarified the approach that should be adopted where there are two or more events leading to loss, both or all of which might be regarded as being central to the outcome. This decision makes it clear that one of these causes does not have to be singled out and labelled as the only proximate cause for there can be more than one.
The Court relied on the principles in Wayne Tank -v- ELAC, where similar events had occurred. In that case, the insured supplied and fitted for its customer, equipment for use in a plasticine making factory. However, that equipment was incorrectly installed. Subsequently and before the equipment was tested, an employee of the customer left the equipment activated and unattended overnight. The equipment caught fire and the plasticine factory was destroyed. The insured tried to recover under a public liability insurance policy which contained an exclusion for liability resulting from "damage caused by the nature or condition of any goods sold or supplied by or on behalf of the insured". The Court held that there were two causes of the loss. First the defective installation of the equipment, and second the actions of the customer in switching it on and leaving it unattended prior to testing. Lord Denning MR and Roskill LJJ went on to find that the first cause was the proximate cause of the loss even though it was more remote in time. Since this cause fell within an exception to the insurance policy the Claimant's claim failed.
That was enough to decide the case but Lord Denning went on to consider what would be the answer had both the causes of loss been "equal… in their efficiency in bringing about the damage", where one was covered by the policy and rendered insurers liable, and the other was within an exclusion and would exempt insurers from liability. Having referred to some obiter comments from a number of earlier decisions he concluded, "it would seem that the insurers can rely on the exception clause". This reason he gave was that the parties to the insurance contract had freely decided what losses were to be excluded and the only way of giving effect to their agreement was to exempt the loss altogether.
Sir Martin Nourse, delivering the main judgment in Midland Mainline referred to Lord Denning MR's words in Wayne Tank restating the position on proximate cause: "Since the Leyland case it has been settled in insurance law that the 'cause' of the loss is that which is the effective or dominant cause of the occurrence, or as it is sometimes put, that which is in substance the cause even though it is more remote in point of time such cause to be determined by common sense….". He then went on to consider the alternative case, namely that the wear and tear and the imposition of the ESR's were both proximate causes. He said "in which event it is well established that the insurers can still rely upon the exception."
The Court of Appeal pointed out that the Judge at first instance had used the definite article by referring to "the proximate cause of the loss" in three places in his judgment and suggested that this indicated that he might have considered that a single proximate cause had to be identified. As we have seen, cases such as Leyland illustrate that there can be more than one proximate cause of loss. The Court preferred this approach and held that the Judge was not correct to state that the wear and tear was only the underlying state of affairs and not a proximate cause.
Conclusion
This decision confirms the use of the proximate cause rule and the approach the courts will take when faced with a loss that has arisen by the operation of two causes. If the court concludes that there were two equally dominant causes and one is an exception then that will be given effect. It seems the rationale behind this rule is to give effect to the intention of the parties to the insurance contract where they have defined the extent of the insurers obligations by the use of exclusions.
The proximate cause rule can be bypassed by the use of appropriate wording in an exclusion clause. (See, for example, Coxe v Employers Liability Insurance [1916], where an exclusion in a policy covering accidental death was expanded to exclude death directly or indirectly caused by war.)
For further information please contact Sarah Breen at sarah.breen@cms-cmck.com or on 0207-367-2799 or Steve Crabb by email at stephen.crabb@cms-cmck.com or on 020 7367 2087.
