Insurance is often thought of as a safety net to catch the fallout when things go wrong. But insurers are professional risk takers who expend much effort considering whether or not they are obliged to pay out.The limitations of one particular policy were recently explored by the Court of Appeal in Horbury Building System v Hampden Insurance (7.4.04).The case illustrates that an insured party may well find themselves potentially liable for things not covered by their insurance policy.
Horbury was a subcontractor that provided the ceilings throughout a 16-cinema complex in Manchester.Two days after the complex opened, the ceiling of Auditorium 6 collapsed.
Thankfully this happened when the building was unoccupied.
The cinema operator closed the whole complex. It stayed closed for several weeks, and the operator lost money.
Everyone agreed that the collapse of the ceiling in Auditorium 6 did not physically prevent the use of the rest of the complex, nor did the collapse cause physical damage to other parts of the building.
Horbury's insurance policy was called an all-risks policy, but it was in fact insurance for liability to third parties, including product liability. As such, the policy covered it for liability 'in respect of ' loss of, or damage to, property caused by products.
Horbury wanted to know whether this cover included all the operator's loss of profit. Horbury argued that the closure of the whole complex, insofar as it was not directly caused by the collapse in Auditorium 6, was the result of a prudent and foreseeable response to the collapse.As such, it said, all the loss of profit should be covered by the policy.
When Horbury started the proceedings against its insurer, the operator had made no claim, so the basis of any possible liability of Horbury to the operator was uncertain.
The court proceeded on the basis of many assumed facts.
Those included that the cause of the collapse was the use of the wrong washers. As a result, individual hangers disconnected, and with each disconnection the load on adjacent hangers increased. The wrong washers had been used in four other auditoria.
The Court of Appeal decided that the insurance policy covered Horbury for its liability for the physical damage done by the collapsed ceiling in Auditorium 6 - in other words the damage to the seats, decorations and so forth, and the economic consequences of that physical damage.That was limited to the loss of profit arising from the necessary closure of Auditorium 6 itself. The loss of profit arising from the closure of the whole complex was not 'in respect of ' the damage that had occurred.
The Court of Appeal said that the words 'in respect of ' limited the extent of the insurance cover. The words did not simply identify that the loss should have some connection with the causal event.While in one sense the collapse of the ceiling in Auditorium 6 had caused the closure of the whole complex, the real cause of closure was the operator's concern about the possibility of similar defects in the complex.
To interpret matters otherwise would transform a productliability insurance contract into something far broader.
In reaching this conclusion, the Court of Appeal hypothesised about what the policy would have covered if the problem had been discovered before the collapse.The answer was nothing; there would have been no damage to property. There would be no cover for loss of profit caused by the closure of any part of the building.
So if the policy had meant what Horbury said it did, that would mean that if there was some actual damage to part of the building and the operator chose to close the whole building to investigate, all the loss of profit from closure would be covered.
However, if there was no physical damage, but something else put the operator on notice that there was a problem and they opted to close the building, in that case there would be no cover for loss of profit.
The Court of Appeal decided that such a result would be capricious.The intention of the parties had been that there would be cover for losses caused by the physical damage, and that was limited to the losses related to Auditorium 6.