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