Facts
Tesco was building a supermarket over a railway cutting near
Gerrard's Cross station. The railway was to be enclosed in a tunnel
and the new store built over it. On 30th June 2005, part of the
tunnel collapsed and the line was closed for 51 days.
No one was injured, but the track and signalling equipment
belonging to Network Rail were damaged. The train operator,
Chiltern Railway, suffered considerable economic losses as a result
of the line being obstructed.
Chiltern operated the line under licence from Network Rail. In
addition, it had the benefit of a deed of covenant with Tesco,
under which Tesco agreed to pay Chiltern compensation for losses
and expenses "arising out of or resulting (directly or indirectly)
from … the carrying out of the Works". Tesco did not show this deed
to its public liability insurers.
Tesco settled Chiltern's claim under the deed of covenant and
sought to recover from its public liability insurers. Insurers
denied the claim on the grounds that the loss was not covered.
Policy terms
Tesco's public liability cover formed part of a package of
insurance covering the construction project. It provided an
indemnity:
"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 material property …
(c) obstruction, loss of amenities, trespass, nuisance or any
like cause
happening or consequent upon a cause occurring during the
Construction Period or any extension thereof and arriving out of
and in connection with The Project".
A "contractual liability" extension stated: "liability assumed
by the Insured under contract or agreement and which would not have
attached in the absence of such contract or agreement shall be the
subject of indemnity under this section only if the conduct and
control of any claims so relating is vested in the Insurers and
subject to the exceptions and extensions of this section".
An exception to the cover said insurers would not be liable
for liability arising solely under fines, pre-determined liability
or liquidated damages clauses in any contract or agreement.
High Court judgment
The judge agreed with insurers that the loss was not covered by
the policy.
Public liability insurance provides cover against liability to
the public at large for claims in tort (bodily injury, damage to
property, or interference with property rights). This was the "core
meaning" of the insuring clause.
In the judge's view, the policy also covered any contractual
liability co-extensive with such liability in tort. This was
supported by the exception clause, which ensured that heads of
damage not recoverable in an action for tort would be excluded from
the cover.
But in this case, no property belonging to Chiltern had been
damaged, nor had Chiltern's property rights been affected. It could
not have brought a claim against Tesco in tort. Its loss was purely
economic and arose solely under the deed of covenant. The policy
did not provide cover against contractual liability for "pure"
economic loss.
Tesco appealed.
Court of Appeal judgment
The Court of Appeal upheld the decision. Public liability arises
in tort and, as a general rule, a claim in tort cannot be founded
on pure economic loss.
The judge was also right to conclude that the policy effectively
covered contractual liabilities co-extensive with the liability in
tort – this was the commercial reality and reflected the intention
of the parties.
The wording indemnified the insured against liability to a third
party for ("in respect of") a tort or the effect of a tort. It did
not cover the insured's liability to another third party for
economic loss suffered indirectly as a consequence of that tort.
Chiltern's loss was only the consequence of damage to the property
and the property rights of Network Rail.
The contractual liability extension did not broaden the cover to
include pure economic loss. It was closely tied into the insuring
clause by the words "shall be the subject of indemnity under this
section". Any contractual liability assumed, therefore, still had
to be "in respect of" the physical impact on the third party's
person, property or property rights.
Commentary
The judgment confirms that a typical public liability wording
will not cover a "standalone" contractual liability unconnected
with any liability owed to the third party in tort.
There is, of course, nothing to prevent a policy from covering
contractual liability for pure economic loss - provided it says so
clearly. Such cover would more usually be described as contract
liability, financial or consequential loss cover.
