DMC Category Rating: Confirmed

Facts
The policy in question was a combined all risks policy 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 covered property against loss and damage during the period of insurance. "Property" was defined to include stock and materials "the property of the Insured or held by the Insured in trust for which the Insured is responsible".

At first instance, the judge held that the phrase "for which the insured is responsible" meant that the insurance responded only if the bailee was liable in respect of the goods. If so, then the bailee could claim their full value. But if there was no legal liability, there could be no claim. The insured appealed.

Judgment
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.

This position has, however, been qualified by various standard phrases which have been recognised by the courts 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). Responsible in this context mean legally responsible (Engel v Lancashire & General Assurance Co Limited [1925] 21 LLR 327.

If the issue had been purely a matter of language, the Court of Appeal acknowledged that it would be difficult to conclude that the goods would only be covered if legal liability were established. However, albeit with some reluctance, the Appeal judges unanimously concluded that it would not be right to overrule the authorities. This form of words had been in use for many years and it would be wrong for the court to interfere unless there was a real reason for supposing the wording was unsatisfactory in practice.

Assuming there was legal liability, what could the bailee claim? The judge at first instance found that the policy would respond as a property policy rather than a liability policy. Insurers would, therefore, have to pay the full value of the goods in the event of their destruction, rather than any lesser amount for which the bailee was liable.

This point was not appealed so could not be taken any further. The Court of Appeal did, however, comment that it was not "necessarily satisfied" that the judge's answer on the amount recoverable would stand.