Midland Mainline Ltd & Ors v Eagle Star Insurance Company Ltd

The Hatfield rail disaster of 17^th October 2000 was caused by a broken rail, which in turn was caused by gauge corner cracking (“GCC”), a type of rolling contact fatigue (“RCF”) which can occur in the head section of rails. Immediately after the derailment Railtrack PLC (“Railtrack”), the owner and operator of the UK mainland railway network, set about imposing a series of emergency speed restrictions (“ESRs”) on all sites across the network where GCC was known to exist and which had previously been identified for renewal. A consequence of that was to disrupt the timetables of the companies operating rail services on the parts of the network affected by the ESRs. The claimants in the action, the respondents to this appeal, are five such companies which claimed to be entitled to recover in respect of business interruption losses under an insurance policy effected with the defendants (“the CGNU policy”).

Similar issues of construction having arisen in two different actions in the Commercial Court, those issues were tried and determined by Mr Justice David Steel, who gave judgment on 17^th July 2003, his judgment being reported at [2004] 1 Lloyd’s Rep IR 22. We are only concerned with one of those actions, Folio 1062 (“the CGNU action”). Moreover, only one of the defendants to that action, Eagle Star Insurance Co Ltd (“Eagle Star”), which had a 25 percent line on the CGNU policy, has appealed to this court. Permission to appeal was refused by the judge but was granted by Lord Justice Mance on consideration of the documents.

The reported judgment of the judge having fully stated the material facts, the material terms of the CGNU policy and the issues arising in the CGNU action, it is unnecessary for any of these matters to be restated except in so far as is necessary for an understanding and the determination of the questions arising on this appeal.

By his order made in the CGNU action the judge made a declaration that, on a true construction of the CGNU policy:

“The Claimants are each entitled in principle to indemnities from each of the Defendants, each for its respective proportion under the Policy, in respect of any loss of revenue and/or additional increases in the costs of working which the claimants have incurred or which they may incur as a result of any emergency speed restrictions or line closures imposed by Railtrack (following the Hatfield derailment, in the light of the existence or apprehension of RCF) in the period between 12.23 pm on 17^th October 2000 and midnight on 31^st October 2000…..”

One of the defences raised by the defendants at the trial was based on a general exclusion of damage caused by wear and tear. The exclusion was in the following terms:

“This policy does not cover

1 DAMAGE or CONSEQUENTIAL LOSS caused by or consisting of:

1.1

inherent vice, latent defect, gradual deterioration, wear and tear, frost, change in water table level, its own faulty or defective design or materials.”

The judge held (paras 105 to 109) that RCF, though it was “a paradigm example” of wear and tear, was not a proximate or (which is the same thing) an effective cause of the claimants’ losses. The primary question we have to decide is whether that holding was correct.

The remedial measures taken by Railtrack have been referred to collectively as the Railtrack programme. We were told by Mr Harvey QC, who has appeared for Eagle Star both here and below, that the principal issue at the trial (issue (2) – see judgment para 22) was whether, for the purposes of the denial of access extension (see below), the decision to implement the Railtrack programme was an occurrence (or deemed incident) or whether each ESR was an occurrence (or deemed incident). The judge preferred the latter alternative. He found that each ESR was a separate occurrence separately caused. There has been no appeal against that finding. One of its consequences, submitted Mr Harvey, is that in considering the question of proximate cause it is each individual ESR that must be looked at, not the ESRs collectively. He submitted that the question to be asked at that stage is: Was the loss caused by each individual ESR caused by wear and tear in the part of the network affected by that ESR?

The judge dealt with proximate cause in para 109:

“The wear and tear exclusion would only be operative if the excluded peril was the proximate cause of the loss. But I agree with the claimants that wear and tear was not the proximate cause of the losses in the present claim. The proximate or effective cause of the claimants’ losses was the imposition of the various ESRs. The issue is sometimes put forward as essentially one of common sense. What brought about the loss? RCF was a known feature of the network (albeit the scale of it was not). It was formerly dealt with as part of routine maintenance with little, if any, disruption to the timetabled services. The losses are brought about by the myriad of ESRs imposed to try and bring the network back to a safe shape as soon as possible. The gradual development of cracks in numerous RCF sites was no more that the underlying state of affairs providing the occasion for action. It was not the event that triggered the cover.”

Accordingly, he concluded that the general exclusion did not provide a defence to the claim.

The use of the definite article (“the proximate cause of the loss”) in three places might suggest that the judge thought it was necessary to identify a single proximate cause. But it is well established by authorities of which he would have been well cognisant, e.g. Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350 and The “Miss Jay Jay” [1987] 1 Lloyd’s Rep 32, that there can be more than one proximate cause of loss. I therefore agree with Mr Flaux QC, for the claimants, that in the penultimate sentence of para 109, by describing the gradual development of cracks in numerous RCF sites as “no more than the underlying state of affairs providing the occasion for action”, the judge was saying that wear and tear was not a proximate cause of the loss.

The question is whether that view was open to the judge. In my opinion it was not. The most helpful of the authorities cited to us is Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corporation Ltd [1974] 1 QB 57, where equipment for the storing and conveying of liquid wax in a factory making plasticine had been designed and installed by the plaintiffs. The installation was dangerously defective. It was switched on and left unattended overnight before it had been tested, and early the next morning it caught fire and the factory was destroyed. The Plaintiffs claimed indemnity from the defendants under a public liability policy which contained an exception in respect of liability consequent upon “damage caused by the nature or condition of any goods…… sold or supplied by or on behalf of the insured”. It was held that there were two causes of the disaster: first, the dangerously defective nature of the installation; second, the conduct of the plaintiffs’ employee in switching it on and leaving it unattended throughout the night at a time when the installation had not been tested. Lord Denning MR and Roskill LJ (the approach of Cairns LJ was rather different) held that it was the first of these causes that was the proximate cause of the loss and that, since it was plainly within the exception, the plaintiffs’ claim failed.

At p 66 Lord Denning MR, having referred to earlier authorities, said:

“Since the Leyland case it has been settled in insurance law that the ‘cause’ of the loss is that which is the effective or dominant cause of the occurrence, or as it sometimes put, that which is in substance the cause, even though it is more remote in point of time such cause to be determined by common sense: see Gray v Barr [1971] QB 554, 567.

So I would approach this case by asking which of the two causes was the effective or dominant cause? I should have thought that it was the first cause, the dangerous nature of the installation, and thus within the exception. So that the defendants were not liable under this policy. ”

At p 74 Roskill LJ said:

“But in the present case I think this apparatus was so defective that what happened thereafter, though aggravating the defects and precipitating the ultimate result, never prevented the defective nature of the apparatus from being the effective cause of this loss…… So, like Lord Denning MR, I take the view that the proximate cause of this loss falls within the exception…..

But even if I am wrong in this view, there seems to me, as it does to Lord Denning MR, to be a further difficulty in the plaintiffs’ way. I find it impossible in any event to say that the sole proximate cause of this disaster was the switching on and leaving unattended of the heating tape. This being so, even if I am wrong in saying that the defective nature and condition of the apparatus was the sole proximate cause of the disaster, there were at best for the plaintiffs two effective proximate causes.”

Although his approach was rather different, it is also instructive to consider what Cairns LJ said at p 68:

“But for my part I do not consider that the court should strain to find a dominant cause if, as here, there are two causes both of which can be properly described as effective causes of the loss. Mr LeQuesne recognised that if there are two causes which are approximately equal in effectiveness, then it is impossible to call one rather than the other the dominant cause. I should prefer to say that unless one cause is clearly more decisive than the other, it should be accepted that there are two causes of the loss and no attempt should be made to give one of them the quality of dominance.”

Similarly in the present case, there were two causes of each loss: first, the wear and tear; secondly, the ESR. It was the wear and tear that caused the ESR to be imposed and, although the ESR was the immediate cause of the loss, I would, like Lord Denning MR and Roskill LJ hold that the wear and tear was the proximate cause of the loss; alternatively, like Cairns LJ, that they were both proximate causes, in which event it is well established that the insurers can still rely upon the exception.

In my respectful view the judge was wrong in categorising the wear and tear as being no more than the underlying state of affairs providing the occasion for action. Moreover, the fact that it was not, in the judge’s words, “the event that triggered the cover” does not mean that it was not a proximate cause of the loss. To adapt the words of Roskill LJ, the track, through wear and tear, was so defective that the ESR, though precipitating the loss, never prevented the defective nature of the track from being the proximate cause of the loss. Alternatively, to adapt the words of Cairns LJ, there were two proximate causes of the loss which were approximately equal in effectiveness without one of them being clearly more decisive than the other.

It was also argued on behalf of the claimants that the derailment was a proximate cause of the loss. That argument must be rejected on the simple ground that it was only the closure of the section of the East Coast main line between Alexandra Palace and Stevenage (see judgment, para 7) that was caused by the derailment itself. Even that did not prevent the wear and tear from being a proximate cause of the loss in respect of that section of the line.

The cover invoked by the claimants was that afforded by the CGNU policy extension headed “DENIAL OF ACCESS IN RESPECT OF TRAIN OPERATING COMPANIES.” The terms of that extension, together with the material preceding provisions of section 2 (business interruption) are set out in full at [2004] 1 Lloyd’s Rep IR 28, except that it is necessary to add that the final para of the basic business interruption cover provides:

“Subject otherwise to the terms conditions and exclusions of the Policy including the Specifications and Clauses.”

The denial of access extension provides:

“The insurance by this Section shall subject to all the terms and conditions and provisions of the Policy extend to include loss resulting from interruption of or interference with the Business carried on by the Insured in consequence of the following occurrences and such occurrences being deemed a Incident subject to the liability under this extension in respect of any occurrence shall not exceed……

The Insured being prevented from or hindered in the use of or access to any station depot or track or other part of the rail network owned or operated by British Rail Board Railtrack Group plc and other CAHA parties and caused by

(a)

the action of the Insured or other competent authority for reasons of public safety other than disease hygiene or sanitation….”

It is common ground that each ESR was an action of Railtrack as a “competent authority for reasons of public safety” within paragraph (a) of the extension.

Under the heading “The wear and tear exclusion” the judge said:

“102.

The threshold issue here is whether the general exclusion of damage caused by wear and tear is applicable to the denial of access provision at all. The claimants placed particular reliance upon the definition CONSEQUENTIAL LOSS:

‘Loss resulting from interruption of or interference with the business carried on by the insured at the premises in consequence of accidental loss or destruction of or damage to property used by the insured at the premises for the purposes of the business.’

103.

It was accordingly submitted by the claimants that, since cover under the extension was triggered by a deemed incident or damage rather than by actual damage or loss, it followed that by definition there could be no CONSEQUENTIAL LOSS caused by or consisting of wear and tear.

104.

I reject this submission primarily on the grounds that the denial of access clause expressly states that the extension is to be ‘subject to all the terms and conditions and provisions of the policy.’ Furthermore, it is common ground that the philosophy of the extension to the basic cover was to substitute a different specified event as a deemed incident. It follows, in my judgment, that losses which are consequent upon the prevention of access are incorporated into the definition of CONSEQUENTIAL LOSS.”

Under a respondent’s notice Mr Flaux argued that the judge was wrong in both his grounds. He repeated the submissions he had made below.

In my judgment the judge’s primary ground was correct. The opening words of the Denial of Access extension (see para 15 above) are:

“The insurance by this Section shall subject to all the terms and conditions and provisions of the Policy extend…..” (emphasis added)

Moreover, the basic business interruption cover (see again para 15 above) was expressed to be subject otherwise to the terms conditions and exclusions of the policy. Again, the Premises Extension (see [2004] 1 Lloyd’s IR Rep 38) provides that the liability under the following clauses (of which the Denial of Access extension is one) shall be subject to “the application of all other terms conditions and provisions of the policy”. I agree with Mr Harvey that these provisions taken together show that the primary ground of the judge’s decision was a powerful and compelling one. On normal principles of construction they cannot be brushed aside. Their effect is plain. Moreover, it seems consistent with the exclusion of wear and tear from the basic cover provided by the policy that the exclusion should apply to extensions of cover as well.

I would affirm the primary ground of the judge’s decision in para 104 of his judgment. That makes it unnecessary to consider the secondary ground, and I do not do so. Having disagreed with the judge on the question of proximate cause, I would allow Eagle Star’s appeal.

I agree

I also agree.