Public Liability Insurance
Cases
Rohan Construction Ltd and Rohan Group PLC v Insurance Corporation of Ireland Ltd
1984 No. 5032 P
High Court
7 March 1986
[1986] I.L.R.M. 419
(Keane J)
KEANE J
delivered his judgment on 7 March 1986 saying: In the year 1977 a company called Agrivest Ltd decided to become involved in what seemed at the time the promising market of selling molasses to farmers in the South West of Ireland. With this in view, they proposed to store the molasses in a tank to be specially constructed for the purpose in a dry dock which they occupied under a lease from the Limerick Harbour Commissioners. The storage tank was constructed by the first-named plaintiffs under their then title of Sitecast (Ireland) Ltd.
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The project unfortunately proved disastrous for nearly everyone concerned. For reasons which I will discuss in a moment, large quantities of water percolated into the tank and Agrivest Ltd were unable to use it for the storage of molasses. They alleged that, as a result, they suffered serious financial losses and they accordingly instituted proceedings in which a number of parties, including the first-named plaintiffs, were ultimately joined. In these proceedings, the sum of £2.6 million damages was claimed by Agrivest Ltd and Co-operative Molasses Traders Ltd.
The plaintiffs were insured by the defendants under two Professional Indemnity Policies (Nos. SP. 1420 and SP. 1425) and notified the defendants of the claim being made against them. Because of the relatively small Irish market in such insurance and the scale of the risks involved, it was customary in the insurance business to lay off such risks and, accordingly, the defendants had effected reinsurance under both these policies in London. The London underwriters adopted the position that it had not been established to their satisfaction that these policies did apply and inconclusive correspondence and discussions took place on this matter over a considerable period of time. During the course of these discussions, the Irish solicitor for the underwriters suggested that the risk in question might be covered by a Public Liability Policy which the plaintiffs also maintained with the defendants, but which was not reinsured with the underwriters.
The uncertainty as to the plaintiffs’ insurance cover did not, of course, delay the progress of the action brought against the plaintiffs and the other parties who were alleged to have been responsible for the defects in the storage tank. The defendants, while maintaining that their liability or that of the reinsurers to indemnify the plaintiffs under any of the policies had not been established to their satisfaction, appointed a firm of engineers, Messrs Rooney McLoughlin and Associates, to investigate the allegations against the plaintiffs and prepare a report and also nominated senior counsel to appear on their behalf.
The report prepared by Messrs Rooney McLoughlin and Associates concluded that the work carried out by the plaintiffs had complied with the drawings and specifications and that the problems were caused by a failure in design. The consulting engineers responsible for the design, Messrs Ove Arup and Partners, and the consulting architects to the project, Messrs Frank Murphy and Partners, had also been joined in the proceedings. On the basis of Messrs Rooney McLoughlin’s report, it seemed as though the plaintiffs had a reasonably good prospect of resisting the claim made against them. When the trial loomed nearer, however, as so often happens, matters became less clearcut, particularly since it transpired that the consulting engineers retained by Agrivest Ltd, Messrs M. J. O’Connor and Associates, took a radically different view and were assigning a significantly greater part of the blame for what went wrong to the plaintiffs. It also was becoming obvious to all concerned, and their legal advisers, that, having regard to the complexity of the technical issues and the magnitude of the claim as to damages which had to be investigated, the case would probably be relatively lengthy. This gave an added stimulus to the eve of trial negotiations and ultimately the case was settled. The damages were scaled *422 down to £735,000 and, of this, the plaintiffs agreed to pay £150,000, together with an appropriate proportion of the costs. The greater part of the damages was paid by Messrs Ove Arup and Partners, Messrs Frank Murphy and Partners also making a contribution. The defendants were aware of the plaintiffs’ proposal to settle the proceedings, but reserved their position as to their liability under the respective policies. The defendants having failed to admit liability under these policies, the present proceedings were instituted in which the plaintiffs claim a declaration that the defendants are liable to indemnify them under one or other of these policies.
The first issue that arises for determination is as to whether the settlement effected by the plaintiffs was in the circumstances a reasonable and prudent compromise of the proceedings brought against them. The material facts on this aspect of the case can be shortly summarised.
The plaintiffs carried out the works in question under a sub-contract with a firm called Fairclough Mulcahy Ltd. All the relevant works were, however, sub-contracted. It followed that the main contractors were in a position to transfer any liability they might be under to Agrivest Ltd, to the plaintiffs and/or other parties. The other parties concerned were the consulting engineers, the consulting architects and a firm called Rucon Ltd who supplied the waterproof lining of the tank. But although the last-named firm were joined in the proceedings, it was accepted during the course of the settlement negotiations that no blame attached to them and they did not contribute in any way to the settlement.
The works done by the plaintiffs consisted mainly of the erection of the storage tank within the dry dock by constructing a number of reinforced concrete retaining walls, pouring ‘no-fines’ concrete on the floor and sides of the tank to receive the waterproof lining and constructing two lines of transfer pipe work under the tank which would allow the remaining dry dock to be empty of water when required. (That portion was being retained by the Limerick Harbour Commissioners who envisaged requiring it for use as a dry dock from time to time.) The contract drawings required that these pipes be laid on the north and south sides of the tank, but because of difficulties experienced in rock-blasting it was decided to alter this arrangement and to lay the pipes in one trench on the north side. It was also decided to substitute for the two wavin pipes a single ogee concrete pipe, this change being necessitated by the unavailability of the wavin pipes or the alternative spigot and socket type of concrete pipe. It also appears that the level of the transfer pipe work was lowered at the same time. It was not in dispute that these alterations had the approval, tacit or express, of the consulting engineers who were responsible for the design and supervision of the project.
Mr Michael O’Connor, the consulting engineer who was retained by Agrivest Ltd as an independent expert, gave evidence of tests which had been carried out in order to establish why water had penetrated the lining of the tank. His conclusion was that the penetration was due to three factors:
(1) the transfer pipes had not been laid in the correct manner;
(2) the concrete surround of the pipes was not as specified; *423
(3) in certain cases, the concrete was not of the quality specified.
Mr O’Connor said that, had he been apportioning liability as an arbitrator, he would have attributed 75% of the responsibility for the subsequent mishaps to the plaintiffs. He said that the fact that the works were being supervised by consulting engineers and architects did not relieve the sub-contractors as an experienced firm from their duty to perform the work in a reasonable manner and alert the engineers and architects to any risks that were inherent in the way the work was being done.
Mr Dermot Rooney, who as has been noted was retained by the defendants to protect their interests, took a different view. He considered that the work carried out by the plaintiffs complied with the drawings and specifications and that such deviations as there were, were minor in nature and not the cause of the problems. He considered that the main problem was one of design. Some degree of infiltration of water was to be expected, but the drainage system as designed did not adequately cater for its disposal. The position and levels of the pump sumps were one contributing factor, but the unsuitability of the ‘no-fines’ concrete was, in his view, the main factor. He said that the designers had not checked that the permeability characteristics of this concrete were such as to ensure that it was of sufficient strength to support the loads from the material held in the tank while at the same time allowing drainage of the infiltrating water into the sumps.
Mr Cormac Daly, the solicitor for the plaintiffs in the present proceedings and in the proceedings brought against them by Agrivest Ltd, gave evidence that the action against the plaintiffs was compromised in the knowledge that evidence substantially to the effect given by Mr O’Connor in the present proceedings would be given on behalf of Agrivest Ltd, and on the advice of counsel.
It is, of course, unnecessary for me to attempt to resolve this conflict of expert evidence in the present proceedings. It is sufficient to say that I am satisfied that the settlement entered into by the plaintiffs was reasonable and prudent in the circumstances. Indeed I would go further and say that, in the light of the evidence given in these proceedings, it would have been folly in the extreme for the plaintiffs to have rejected the advice of their lawyers and committed themselves, and the defendants whom they were hoping would indemnify them, to litigation which would be protracted, expensive and, from their point of view, at best uncertain in its outcome.
The second issue is as to whether the defendants are liable under either or both of the policies to which I have referred to indemnify the plaintiffs in respect of the agreed damages paid by them together with the proportion of the costs for which they agreed to be liable and their own costs.
It is clear that policies of insurance, such as those under consideration in the present case, are to be construed like other written instruments. In the present case, the primary task of the court is to ascertain their meaning by adopting the ordinary rules of construction. It is also clear that, if there is any ambiguity in the language used, it is to be construed more strongly against the party who prepared it, i.e. in most cases against the insurer. It is also clear that the words *424 used must not be construed with extreme literalism, but with reasonable latitude, keeping always in view the principal object of the contract of insurance. (See MacGillvray and Parkington on Insurance Law , 7th ed., at p. 433 et seq. )
I shall deal first with the Professional Indemnity Policies. There were two of these, numbered SP 1240 and SP 1245. The principal difference between them was in the definition of activities and duties in respect of which cover was given. In SP 1240 they were defined as:
(1) Design, specification, supervision and/or the provision by the insured of advice or technical information.
(2) The management of works under the direction of architects, engineers, surveyors and/or project or contract managers.
(3) Such additional activities as are stated under item 10 of the schedule.
Item 10 of the schedule is:
‘work normally undertaken by architects and consultants relative to building and civil engineering, structural engineering, mechanical engineering, electrical engineering, heating and ventilation engineering’.
The only difference in SP 1245 is that clause (2) is in the following terms:
Management of projects, contracts or works, supervision, contract co-ordination, quantity surveying and procurement (of material, equipment, plant, material things and technical services) under the direction of architects, engineers, surveyors and/or project or contract managers.
It was not suggested on behalf of the plaintiffs that they were covered under any clause other than clause (2) in either policy.
An initial question arises in relation to the clause in the later policy (which being in wider terms was naturally relied on more strongly by the plaintiffs), i.e. as to whether the closing words ‘under the direction of architects, engineers, surveyors and/or project or contract managers’ qualify all the words which precede them or simply the words which immediately precede them, i.e. ‘procurement (of material, equipment, etc …)’. It seems to me more probable that they were intended to qualify all the preceding words, since in the earlier version of the clause they are undoubtedly intended to qualify the words ‘the management of works’ and the words after ‘management’ in the second clause seem to be merely an expansion or elaboration of the phrase ‘the management of works’ in the earlier policy. That construction would seem to be somewhat less favourable from the plaintiffs’ point of view, but whichever construction is adopted, I am satisfied that the plaintiffs are not entitled to be indemnified under either policy SP 1240 or SP 1245 in respect of their liability, if any, to the plaintiffs in the original proceedings.
If one takes the individual activities and duties which are covered by clause (2), it is obvious that liability in the present case did not arise under the headings ‘quantity surveying’ and ‘procurement’. Can it then be said that a potential liability arose in the relevant proceedings in respect of the ‘management of projects, contracts or works, supervision, contract co-ordination?’ In this context, it is essential to bear in mind what the duties and activities of the *425 plaintiffs actually were. They were sub-contractors, no more and no less. The allegation against them was not that they had failed in any professional or managerial skills which might reasonably have been expected of them, but rather that they had done their work badly. On the evidence of Mr O’Connor, this allegation would have been supported in two ways, first, by demonstrating that they had in certain respects deviated from the specification and, second, that they had failed to use their own judgment and commonsense as experienced sub-contractors by failing to draw the attention of the consultants on the project to the possible consequences of the design faults. No matter at what level of the hierarchy a person may be employed, he does not become a mere robot: whether he be a highly qualified engineer, a tradesman or even an unskilled labourer, he is expected, in addition to any specialist qualifications he may have, to use his own commonsense and experience in relation to the task he is doing. If it is alleged that he has failed to do so, that, of itself, does not amount to a claim that he has been negligent or in breach of contract in his ‘management’, ‘supervision’ or ‘co-ordination’ of the relevant works.
I think that this conclusion is borne out by the wording of the policy taken as a whole. Its title — ‘Professional Indemnity Policy’ — would not appear at first sight appropriate to a liability such as arose in the case of the plaintiffs in the present case. Moreover, under the heading ‘Litigation’ one finds the following condition 2:
The Corporation will not require the insured to dispute any claim unless a senior counsel (to be mutually agreed upon by the Corporation and the insured) advise that the same could be contested with a reasonable prospect of success by the insured and the insured consents to such claim being contested, such consent not to be unreasonably withheld.
In the event of any dispute arising between the insured and the Corporation as to what constitutes an unreasonable refusal to contest a claim at law, the President for the time being of the professional body of which the insured is a member shall nominate a referee to decide this point (only) and the decision of such referee shall be binding on both parties.
I think that this clause well illustrates what the intention of the parties was in entering into the policy. It is obvious that, in the case of persons in positions of individual professional and managerial responsibility, the effect of litigation on their reputations may from their point of view be an extremely important factor in determining whether a particular action should be compromised. The existence of such a clause in the policy demonstrates very clearly the kind of liability that was being insured against, and it is emphatically not the liability to which the plaintiffs were potentially subject in the relevant proceedings.
I next consider the Public Liability Policy which was dated 3 July 1973. This is headed ‘Public Liability Policy’ and in its operative part provides as follows:
The Corporation will indemnify the insured in respect of accidents happening on in or about any of the places specified in the schedule against all sums … which the insured shall become legally liable to pay as compensation for
(1) accidental bodily injury or disease to any person other than the persons hereinafter defined in the exceptions to this policy
(2) accidental loss of or damage to property other than the property hereinafter defined in the *426 exceptions to this policy caused by or through
(a) the fault or negligence of the insured or of any person in the service of the insured in the course of the said business
(b) any defect in the premises ways works plant or machinery connected with or used in the said business.
Under the heading ‘Exceptions’ the policy goes on to provide inter alia as follows:
The indemnity expressed in this policy shall not apply to or include …
(2) liability assumed by the insured by agreement unless such liability would have attached to the insured notwithstanding such agreement …
(8) liability in respect of injury or disease loss or damage caused by or in connection with or arising from …
(e) contracts imperfectly inefficiently or improperly fulfilled.
I mention paragraph 8 (e), because it was relied on by the defendants as excluding liability in the present case. I am satisfied, however, on the evidence that this clause was deleted in the original policy and, accordingly, it is unnecessary to consider it further.
Attention was directed during the course of the argument to the use of the expression ‘accidents’ and cognate words in the operative part of the policy, Mr Liston SC submitting on behalf of the defendants that they were inappropriate to the type of liability which arose in the present case. Both Mr Liston SC and Mr McCann SC for the plaintiffs referred me to authorities cited in the relevant volumes of Words and Phrases Judicially Defined and Stroud’s Judicial Dictionary on the meanings which the courts have from time to time attached to these expressions. Counsel accepted, however, that these decisions were of somewhat limited value in the context of the present case, turning as they usually did on the use of the words in life policies. The fact that the damage in the present case was caused by the penetration of water into the tank over a period of time would not, I am inclined to think, deprive it of the character of an ‘accident’, given that the damage in question was not intended or foreseen by the plaintiffs or anyone else and, accordingly, could properly be regarded as ‘accidental’. I do not, however, find it necessary to express any concluded view on that aspect of the case, since it seems to me that clause (2) is conclusive in favour of the arguments advanced on behalf of the defendants.
It was submitted on behalf of the plaintiffs that this clause did not apply in the present case, since (a) the plaintiffs had entered into no contract with Agrivest Ltd or Molasses Co-operative Ltd, the plaintiffs in the original action and (b) their liability to the plaintiffs in those proceedings arose in tort and not in contract.
While this argument is superficially attractive, I am satisfied on consideration that it is fallacious. It was expressly provided that the indemnity was not to include ‘liability assumed … by agreement’. The plaintiffs unquestionably assumed a liability in respect of any defective workmanship when they entered into the sub-contract on 8 December 1977 with Fairclough Mulcahy Ltd. It was as a result of entering into that agreement that they found themselves in a *427 position of potential liability in the original proceedings, either as third parties brought in by the main contractors or as defendants in the event of the plaintiffs making a claim against them in negligence. The fact that from the plaintiffs’ point of view a claim against them also lay in tort in this context not material; the fact that the liability may also have existed in tort does not mean that it is any the less a ‘liability asumed by the insured by agreement’ within the precise meaning of clause (2).
Nor do the words ‘unless such liability would have attached to the insured notwithstanding such agreement’ avail the plaintiffs. They are plainly inappropriate to the circumstances of the present case where liability only arose because the plaintiffs had entered into the sub-contract. There may well be circumstances in which an insured may choose to enter into a specific agreement in respect of his potential liability to third-parties arising out of works he has engaged on and in such circumstances clause (2) may have no application, since the liability might have existed in any event irrespective of the agreement. That is not this case: it is again necessary to stress that had the plaintiffs not agreed to carry out these works they would never have been liable to anyone.
Again, I think that the heading of the policy is of some relevance: the parties in entering into a ‘Public Liability Policy’ were unlikely to envisage an indemnity being provided in respect of what is, in a sense, the obverse of a ‘Public Liability’, viz. a liability arising out of a private agreement. The weight to be attached to that is somewhat reduced by the deletion of the exceptions for ‘contracts imperfectly inefficiently or improperly fulfilled’, and if there were no other features of the policy, the plaintiffs might have been entitled to cover, even though it is not a policy which one would have thought was intended to meet the risk they encountered in the present case. For the reasons I have given, however, I think that clause (2) of the exceptions is conclusive in excluding liability on the part of the defendants under the policy.
I should add that while both the plaintiffs and the defendants laid stress on the attitudes adopted by the various parties concerned as to which policy, if any, the plaintiffs were insured under, I have not treated this as in any sense a material factor in arriving at these conclusions. Thus, it was suggested on behalf of the defendants that the plaintiffs had never seriously attached any significance to the Public Liability Policy, until the Irish solicitor for the reinsurers drew attention to it. Similarly, the plaintiffs contended that the attitude of the defendants at all stages was that, while they could not commit the reinsurers, they were inclined to the view that the plaintiffs were entitled to cover under the Professional Indemnity Policy. So far as the plaintiffs are concerned, however, in the absence of any claim based on estoppel, these considerations cannot avail them. In the end, the case depends on the intention of the parties as expressed in the two policies which I have had to construe and it is for that reason that the plaintiffs’ claim must be dismissed.