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Transport legal update: Coverage of Contractors' liabilities under a Public Liability Policy

    • Transport

    09-07-2013

    The purpose of a public liability policy, as the name suggests, is to provide cover against liability to the public at large for any physical damage to property or persons, as opposed to providing cover in respect of private liability for financial losses that might arise under a contract between two, or more, parties.

    Liability to the public at large arises in tort, usually negligence, and public liability policies are generally designed only to cover contractual liabilities to the extent that those liabilities are recoverable in tort.

    The distinction between public liability and private liability underpinned the decision of the court here.

    Background

    The Claimant contractor, MJ Gleeson Group Plc ("Gleeson"), carried out a development of a property on behalf of Frogmore Developments Limited. In connection with the works, Gleeson engaged two subcontractors: one to design, supply and insert walling and windows; and the other to design, supply and install eves, cladding and roof sheeting.

    The main contract was practically complete in 2002 and a certificate of making good defects was issued in September 2006.

    In May 2007 Gleeson was informed that problems had been experienced with work done by the subcontractors, but by this time both subcontractors had been dissolved.

    Gleeson carried out some work to attempt to remedy the defects, but did not reach agreement with the building owners regarding the scope of the necessary remedial works.

    Further work was eventually carried out on behalf of the building owners by another company and a substantial claim was intimated against Gleeson, who sought confirmation from Axa that it would provide cover under its policy ("the Policy"). Axa refused to provide the requested confirmation and Gleeson issued proceedings in order to obtain it.

    The Policy

    The Policy contained three sections: section one provided cover for public liability; section two provided cover for "non negligent liability"; and section three provided cover for employers liability.

    The general insuring clause for section one provided:

    "In the Event of:

    (a) Personal Injury to any person;
    (b) Damage to Property; and
    (c) Obstruction, trespass or nuisance
    Axa had agreed to provide additional cover in respect of defective workmanship of subcontractors under the public liability section of the Policy by way of an endorsement described as Memorandum 23, which provided:

    ….the Company will indemnify the Insured in respect of all sums of which the Insured shall be legally liable to pay as compensation arising out of such Event."

    "This Section of the Policy extends to indemnify the insured in respect of legal liability arising from the defective workmanship of their subcontractors including the cost of making good defective workmanship provided that

    1) a claim is first made against the Insured or notification given to the Company by the Insured of circumstances which might lead to a claim during the Period of Insurance.

    2) this indemnity shall only come into effect after the expiry of any maintenance period by contract or when any contractors all risks insurance taken out by or on behalf of the contractor and/or subcontractor applicable to the carrying out of the work concerned has expired if earlier ..."

    The Issue

    The principal issue addressed by the court was whether Axa was obliged to indemnify Gleeson in respect of legal liability arising from the workmanship of its subcontractors regardless of whether there had been any "Damage to Property".

    Gleeson contended that Memorandum 23 constituted a self contained insuring clause, so that there was no requirement for there to be Damage to Property but only legal liability arising from the defective workmanship of Gleeson’s subcontractors.

    On Gleeson’s case the cover provided was not conventional public liability cover, but also covered contractual liability and pure economic loss. Gleeson argued that the intention to cover these types of liabilities was clear from the wording of other memoranda attached to the Policy and the absence of any express precondition in Memorandum 23 that there had to be "Damage to Property".

    In contrast, Axa argued that contending that cover was provided regardless of Damage to Property having had occurred was inconsistent with the nature of public liability cover.

    Axa contended that Memorandum 23 did not displace the general insuring clause for section one of the Policy but extended it to cover the cost of remedying defective work of subcontractors as well as the cost of remedying damage to property caused by that defective work.

    In support of this contention Axa argued that the section 1 insuring clause provided conventional public liability cover against liability arising out of a specified event (in this case Damage to Property) during the period of insurance. It therefore provided Gleeson, subject to exclusions relevant to section 1, with cover for any physical damage resulting from defective workmanship rather than cover for all legal liability in respect of the defective workmanship.

    Axa pointed to the defective workmanship exclusion applying to section one as illustrating the overarching intention of the Policy, which was to exclude from cover the costs of defective workmanship, design specification and materials, save that if damage to another part of the structure occurred caused by the defect, then the costs of repairing the damage would be covered.

    Memorandum 23 was expressed in terms of being an extension to the insuring clause of section 1 and ought to be construed as extending the cover section 1 provided. It could not be interpreted as providing general stand alone cover for the cost of making good a failure by a subcontractor to comply with the requirements of the contract otherwise the Policy was in effect a guarantee that subcontractors would comply with the relevant contract requirements. This would leave a contractor without any incentive to carry out and complete the works using the requisite workmanship.

    The Decision

    The court accepted Axa’s interpretation of Memorandum 23 and held that it extended section one of the Policy to cover, where property other than the part which is the subject of the defective workmanship of a subcontractor is damaged as a result of defective workmanship, the cost of making good the defective workmanship itself.

    The cover provided had therefore been extended beyond rectification of damage to other property to include rectification of the work done by the subcontractor.

    Comment

    The Policy at issue here was unusual in a number of ways. For example, it was subject to a numerous memoranda some of which clearly were intended to provide stand alone cover for financial loss.

    In addition, Memorandum 23 was clumsily worded in that it referred to "including the cost of making good defective workmanship of subcontractors" carrying with it the implication that this was just one element of the extension of cover it provided. However, in the event, the court found that Memorandum 23 only extended cover beyond making good the defective workmanship of subcontractors because the public liability cover in section 1 was written on an Event occurring basis whilst Memorandum 23 was written on a claims made basis. This meant that a claim could be made under Memorandum 23 for an incident that occurred prior to the period of insurance.

    It seems unlikely that some of the features of the cover were what was intended rather than the result of clumsy and incoherent policy drafting. This provided Gleeson with some ammunition to argue for the coverage of pure financial loss under the public liability section of the Policy.

    It was not in dispute that it was possible to obtain insurance against defective workmanship of subcontractors without it having caused damage to other property, but this is not the usual objective of a public liability policy, which is concerned with liability to the public at large rather than contractual obligations. In the event, the court would not construe an extension to section 1 of the Policy as, in effect, a guarantee of the workmanship of subcontractor without very clear wording signalling that it was the intention of the parties to do so.

    The lesson for insurers, insureds and brokers is the same: a policy should be clearly and coherently drafted to achieve its intended objectives. The use of add ons and short cuts and the employment of different concepts throughout a policy is likely only to lead to confusion and disputes between the parties at a later date.

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