Note: this decision has  been upheld by the Court of Appeal in a judgment delivered on 27 May 2004. For a note of the Court of Appeal judgment, click here

Facts
The policy in question was a combined all risks policy of insurance covering Ramco and Resource Industries against loss, destruction or damage to property as the result of fire. During the policy period, a fire broke out at industrial premises occupied by both insured and stock and other goods were destroyed or damaged by the incident. There was no question of fault on the part of either Ramco or Resource.

The insurers did not dispute liability in respect of property owned by the insured. But some of the goods damaged or destroyed were bailed to them. Were insurers liable in respect of those goods and, if so, on what basis?

The material damage section of the policy provided:
"In the event of the Property Insured…being accidentally lost, destroyed or damaged during the Period of Insurance the Insurers will pay to the Insured the value of the property at the time of its loss or destruction or the amount of the damage or at the Insurers' option reinstate or replace such property or any part of it…"

Property included stock, which was defined as "Stock and Materials in Trade therein or thereon the property of the Insured or held by the Insured in trust for which the Insured is responsible".

Although bailed goods remain the property of the owner, it has long been established that a bailee may insure goods in his possession for their full value (Tomlinson v Hepburn [1966] AC 451). If the goods are destroyed or damaged, the bailee will be able to recover under the policy, regardless of whether he is liable or potentially liable to the owner, but he will have to account to the owner for the proceeds over and above his own loss.

The question whether such a policy covers the value of the goods themselves, or only the bailee's liability in respect of the goods, is a question of construction. Over the years, standard phrases have been accepted by the court as having certain meanings. Where the policy states it covers goods held "in trust", this has been taken to mean that the policy covers the full value of the goods (Waters v Monarch Fire and Life Assurance Company (1856) 5 E&B 870). But if the policy covers goods "in trust for which [the insured] is responsible", the insurance only covers the bailee's liability in respect of the goods and not the goods themselves (The North British and Mercantile Insurance Co v Moffatt (1871) LR 7 CP 25).

Judgment
The judge found that the ordinary and natural meaning of the phrase "for which the insured is responsible" was that insurers' liability would be limited to instances where the insured was responsible, and the natural meaning of responsible in this context was where the insured had a legal liability in respect of the goods. The court would be very reluctant to re-interpret what has become a common expression in this type of insurance.

But if the insured did have a liability to a third party and so could recover under the policy in respect of bailed goods, would the policy cover the full value of the goods or only the insured's liability for them? In other words, would the policy respond as a property policy or as a liability policy?

The judge found that it would respond as a property policy. Under the policy, insurers had to pay the value of the property in the event of its destruction, or for the amount of the damage. "Damage" in this context clearly meant damage to property, not liability to pay damages. Insurers had an option to reinstate or replace property and there was an average clause in cases of under-insurance. None of these provisions was appropriate for a liability insurance, and there was nothing in the policy to suggest it was some sort of hybrid that provided property cover in respect of property belonging to the insured but liability cover in respect of property for which the insured was responsible.