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Construction Law - A Sweet Decision for Commercial Risk Insurers

By : James Watthey

The Commercial Court has recently held that a product liability insurer was not liable to indemnify the Claimant assured in respect of a claim by a third party for consequential financial suffered due to lost business following the supply of contaminated sugar. Rather, the indemnity was confined to losses "directly related" to physical loss and damage.

 

James Budgett Sugars Ltd v Norwich Union Insurance Ltd
[2002] EWHC 968 (Comm), [2002] All ER (D) 222 (May)
(unreported elsewhere)

The decision will be of importance to members of the product liability insurance market and to their advisers. In addition, the robustness of the Judge's approach ought to serve as forewarning to proposed assureds not to accept unquestioningly an off the shelf policy, because they may well find the courts unwilling to bend wordings in their favour.

Background

This case involved a dispute over the extent of coverage for indirect economic loss of third parties in a product liability insurance policy.

JBS was a trader and distributor of sugar, and was insured by G PLC, whose business was later taken over by NU.

In late 1996, JBS sold to K Ltd a 200 tons consignment of raw cane granulated sugar, which K Ltd used in the production of mincemeat. The sugar was found to be contaminated with magnetite, with the result that the mincemeat had to be withdrawn and replaced. K Ltd issued a claim against JBS for breach of contract, claiming among other things for business interruption on the grounds that 2 customers had ceased trading with K Ltd allegedly as a result of the contamination. JBS denied liability to K Ltd, saying that K Ltd's loss of customers had not been caused by the breach of contract and that such a loss was in any event too remote.

The claim

As a result of the pending action by K Ltd, JBS issued proceedings under CPR Part 8, seeking a declaration that NU would be bound to indemnify them if they were found liable to K Ltd in respect of the loss of business. Accordingly, the claim concerned only the Liability section of the Policy.

The Policy

The Policy was a combined commercial policy, and used a form of wording covering a wide range of heads, which allowed a proposed insured to choose the cover which best suited its requirements. In 1996, JBS renewed its cover under the Material Damage, Business Interruption, Liability, and Trade All Risks sections of the Policy.

The Liability section provided cover for both public and product liability up to an indemnity limit of £1 million, although JBS had excess of loss cover protecting it for a further £4 million.

The Liability section of the policy contained, so far as is material, the following definitions:

"Damage means physical damage ..

Property means material property";

and further provided as follows:

"Event

In the Event of accidental … Damage to Property …

Indemnity

In respect of such an Event the Company will provide indemnity against

1. legal liability for compensation up to the Limit of Indemnity

and

2. Costs and Expenses"

JBS's submissions

It was submitted by counsel for JBS that the words of the Policy were broad and clear and that an indemnity must be given as long as it was established that an event had occurred which gave rise to a legal liability of whatever nature to a third party.

It was common ground that an Event in the nature of damage to physical property had occurred. It was further accepted that, if and in so far as K Ltd was entitled to recover damages from JBS, that could only be because its loss was regarded in law as having been caused by the supply of the contaminated sugar. In those circumstances, observed Mr Justice Moore-Bick, NU would certainly be required to indemnify JBS.

NU's submissions

NU's counsel, meanwhile, argued that the policy was not intended to provide cover against this type of consequential loss.

It was submitted that "Event" was effectively defined by the Policy to mean physical loss of or damage to property and that the expression "In respect of such an Event" limits the scope of the indemnity to liability for the physical loss and damages itself and its direct consequences.

Accordingly, it was submitted, the Policy did not extend to liability for losses resulting from decisions on the part of K Ltd's customers to cease trading with it or to renegotiate existing contracts, even where this could be regarded as flowing from JBS's breach of contract.

The Authorities

Mr Justice Moore-Bick considered this question in the light of two authorities.

In AS Screenprint Ltd v British Reserve Insurance Co Ltd [1990] Lloyd's Rep IR 430, a policy provided an indemnity

"against all sums which the Insured shall become legally liable to pay in respect of … loss or damage … caused by goods …"

Screenprint (the Insured) supplied printed card to LMG Ltd, who made it into confectionery packaging for supply to Mars. Mars said that sweets had been contaminated by the card and subsequently claimed against (and ceased trading with) LMG. LMG sought to recover from Screenprint both the sums paid to Mars in settlement of the dispute and the profit lost as a result of the loss of custom. Screenprint, in turn, sought a declaration that BRIC was liable to indemnify them. In the High Court, the Judge decided that there was no obligation to indemnify, because the loss claimed for was caused not by the defective goods but by Mars's decision to cease trading with LMG. In the Court of Appeal, Lord Justice Hobhouse (with whom the rest of their Lordships agreed) reached the same conclusion but also noted that the policy provided for an indemnity in respect of loss or damage, which he took to refer to physical loss or damage. There must be added one caveat: their Lordships did not consider that a liability to pay compensation in respect of an economic loss arising from a loss of goodwill could never be treated as a loss in respect of physical loss or damage.

In Rexodan v Commercial Union Assurance Co Plc [1999] Lloyd's Rep IR 495, the claimants supplied soap powder to Newbrite, who repackaged and resold the powder under its own brand. Defects in the powder led to caked powder and damaged cartons, and Newbrite obtained judgment against Rexodan with damages to be assessed. Four heads of damages were accepted by Rexodan: (1) the difference in value between good and defective powder; (2) extra expenditure incurred in withdrawing the powder; (3) expenditure on cartons thrown away due to Newbrite's decision not to buy any more powder and to discontinue the brand; and (4) loss of profits over the 18 months it would take to establish a new brand. Rexodan sought an indemnity for these sums from their insurer (CU). The policy provided for an indemnity in respect of:

"All sums which the Insured shall become legally liable to pay for compensation and Claimants' costs and expenses in respect of any Occurrence to which this Cover applies" (emphasis added)

whilst "Occurrence" was described in the Product Liability section as including:

"Loss of or physical damage to physical property ... caused by any commodity article or thing supplied installed erected repaired altered or treated by the Insured".

The Judge held that heads (3) and (4) were covered by the indemnity clause, as damages representing loss of future profits. The words "in respect of any Occurrence" meant that there had to be a connection between the occurrence and the liability, although the Judge did not define this connection. The Court of Appeal disagreed. Lord Justice Hobhouse said that the loss was not "in respect of" an Occurrence, although his reasoning presented a difficult distinction: the phrase "in respect of" was said to involve a requirement that the liability "relate" to the identified Occurrence, and it was not sufficient that there was simply "some connection".

By "relate", Mr Justice Moore-Bick in the instant case did not take Lord Justice Hobhouse to be excluding liability for all consequential loss and limiting liability to pure physical harm. Rather, his Lordship considered the effect of Rexodan to be that insurers could be required to indemnify for consequential losses such as future lost profits, but only where that claim is directly related to physical loss or damage. According to the Judge, the decision on the facts of Rexodan is explained by Lord Justice Hobhouse's conclusion that the consequential losses were directly related only to R's breach of contract.

The Judgment of Mr Justice Moore-Bick

Despite the assistance gleaned from the authorities, the Judge said that each case must be determined according to the precise wording of the policy and noted that the wording here was different to that in Rexodan and AS Screenprint.

Moreover, the words "in respect of" were not a term of art and had to be given their ordinary meaning against the context of the rest of the policy unless there was overriding evidence that the parties intended them to mean something else. The Policy, however, was based on an "off the shelf" wording and was not the result of negotiation between the parties. Accordingly, there was no such evidence, and a simple construction of the Event and Indemnity clauses was called for. His Lordship considered that interpretation was fairly straightforward and that there was not sufficient ambiguity to justify invocation of the contra proferentem rule of construction.

In the Policy, the "Event" which gives rise to the indemnity was not formally defined; as is seen above, the definition clause rather petered out without any substantive definition being given.

The Indemnity clause then provided for an indemnity in respect of legal liability. Unlike the policies in Rexodan and AS Screenprint, there was no express limitation to the indemnity based on the type of liability; hence JBS's submission.

His Lordship considered that the Event and Indemnity clauses were intended to be read together as a single sentence, along the lines of:

"In respect of accidental Damage to Property the Company will provide indemnity against legal liability for compensation up to the Limit of Indemnity and Costs and Expenses"

Further, his Lordship concluded that the words "In respect of" were intended to define and limit the circumstances in which an indemnity will be provided. Given the definitions of "Damage" and "Property", the words limited the indemnity to liabilities in respect of physical loss or damage.

On the facts, the reactions of K Ltd's customers were not losses relating to the physical damage to the mincemeat, but were at best losses relating to JBS's breach of contract.

Accordingly, the Judge ruled that NU were not bound to provide an indemnity.