Horbury v. Hampden Insurance

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Horbury Building Systems Ltd v Hampden Insurance NV
English Court of Appeal: Peter Gibson, Mance and Keene LJJ.: 7 April 2004
Nicholas Davidson QC, instructed by DLA, for the appellant, Horbury
Graham Charkham QC, instructed by Davies Arnold Cooper, for the respondent insurers
This case illustrates that insureds frequently (and erroneously) assume that cover under their product liability policy will be co-extensive with their potential liability to third parties. But these policies are so worded that any consequential losses must result directly from physical damage caused by the defective product. It is not sufficient that the loss merely has a connection with that event.

DMC Category Rating: Confirmed

This case note is based on an Article in the May 2004 edition of the ‘Bulletin’, published by the Marine and Insurance teams at the international firm of lawyers, DLA. DLA is an International Contributor to this website

This insurance claim related to a new 16-cinema complex in Manchester built for AMC. The main contractors, Galliford, sub-contracted the work of providing partition walls and ceilings to Horbury, the insured. The complex opened on 19 December 2001. Two days later, the suspended ceiling of cinema 6 collapsed. No one was hurt, and the damage caused did not physically prevent the use of the rest of the complex. But AMC was, understandably, concerned about safety and closed the whole complex for a month while it carried out investigations and repairs.

AMC wrote to Galliford notifying it of its intention to claim for the cost of physical repair and loss of revenue and costs arising from the closure of the complex. Galliford, in turn, notified the insured of its intention to pass on any claims made against it by AMC. The insured notified its insurers, but they denied the claim on the basis that the policy did not cover the losses claimed. The insured issued these proceedings for declarations as to insurers' liability.

The insurance cover
The product liability section of the all risks policy covered the insured:
"against liability at law for damages and claimant's costs and expenses in respect of injury to any person and loss of or damage to Property occurring within the Territorial Limits during the period of insurance and caused by any Products after they have ceased to be in the custody or under the control of the Insured".

Products were defined as "any goods or products…sold supplied erected repaired altered treated or installed or work carried out by or on behalf of the insured…". Property was defined as "material property".

The policy excluded cover for inherent defects, unsuitability of the products supplied and liabilities assumed by the insured under contract, unless the liability would have attached in any event

Assumptions for the purposes of the hearing
Unusually, no proceedings had yet been issued by AMC against Galliford or by Galliford against the insured. Causation and liability had, therefore, not been established. The insured did not seek to identify the basis of its potential liability, whether in contract or in tort, nor even to whom it would be liable.

For the purposes of this hearing, however, the court was asked to assume a number of facts: that the insured had negligently used the wrong washers in several suspended ceilings in the complex and it was these washers that had caused the ceiling in cinema 6 to collapse; that AMC's investigations revealed the wrong washers had also been used in four other auditoria; that the ceiling of cinema 6 had to be reconstructed and the suspension systems in the other four reconnected using the correct washers; and that, had these measures not been taken, it was probable that some or all of these other ceilings would have collapsed at some point.

Loss of profits claim
The central issue was whether the insured's potential liability for loss of profits from the closure of all 16 cinemas in the complex was covered by the policy.

At first instance, the judge found that it was not. The policy provided an indemnity against liability in respect of physical damage. The only physical damage was caused to cinema 6. The policy would, therefore, cover the insured's liability in respect of that damage and for loss of profits arising from the closure of cinema 6. But damages that might be awarded by a court for loss of profits for the whole complex were not damages "in respect of" the damage to property. The insurers’ liability under the policy was not intended to be co-extensive with the insured's potential liability to third parties.

The insured appealed, arguing that "in respect of …damage to Property…caused by any products" imposed no limitation on the extent of the cover, but merely identified the causal event giving rise to the insured's liability.

The Court of Appeal disagreed. A number of recent product liability insurance cases have determined that the words "in respect of" limit the extent of the cover to liability relating to physical damage to property (AS Screenprint Limited v British Reserve Insurance Co Limited [1999] Lloyd's Reports IR 430, Rexodan International Limited v Commercial Union [1999] Lloyd's Rep. 495).

In Rexodan, 80 tons of soap powder manufactured by the insured and sold to Newbright were defective. Once packaged, the powder’s liquid constituents stained the cardboard carton and attracted moisture from outside, which, in turn, caused the powder to cake. The policy covered liability "in respect of any occurrence", which was defined as "loss of or physical damage to property not belonging to the insured…". The Court of Appeal held that "in respect of" limited the cover to the physical consequences of the occurrence. The insured could not recover under the policy in respect of their liability for Newbright's future loss of profits.

In Horbury's case, the reason for the closure of the rest of the complex was AMC's concern that there might be similar defects in the ceilings of the other cinemas, not actual physical damage caused to those other cinemas. The complex was closed, not because of the damage but because of a need for inspection and, in some cases, remedial work. The damage in cinema 6 was no more than the factor that brought that need to light.

Consequently, although the policy would respond to a claim in respect of damage to and closure of cinema 6, insurers would not be liable for the wider loss of profits claim.

In another recent product liability case, Pilkington United Kingdom Ltd v CGU Insurance plc [2004] EWCA Civ 23, the Court of Appeal held that liability for the cost of closing the Eurostar terminal for safety checks could not be recovered under the insured's product liability policy because no physical damage had actually been caused to the terminal. The policy did not cover inherent defects in the glass panels supplied.


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