Reilly v National Insurance & Guarantee Corporation Ltd

The Claimant Mr Reilly, trading as J & J Services, is a fire protection engineer who is in the business of installing, at clients’ premises, fire detection and protection systems. There was a fire on 12 May 2004 at the premises of one of the Claimant’s customers, Print Design and Graphics Ltd (“PDG”). The Claimant had installed three fire extinguishing systems (described as “local application” systems, because the systems were dedicated to extinguishing fires in a particular limited area, or by reference to a particular piece of equipment) for each of three printing presses at PDG’s premises, and one of them failed to operate.

PDG sued the Claimant, and the proceedings were compromised for £2m (which was the total of the Claimant’s insurance cover), on terms that PDG was entitled to fund and pursue proceedings in the Claimant’s name against his insurers: hence the proceedings against the present Defendants, the National Insurance and Guarantee Corporation plc, or NIG. A preliminary issue was ordered by Flaux J on 11 September 2007 to be tried in respect of the Defendant’s first defence which, if successful, it is agreed would resolve the proceedings, and render unnecessary any of its other defences, namely:

“Is the Claimant’s claim excluded from cover under Tradesmen Insurance Policy number GLA/003910953 issued by the Defendant, by the operation of Clause TP34S?”

It is this issue which I have tried.

A set of facts has been helpfully agreed between the parties for the purposes of the preliminary issue hearing. Paragraphs 2 to 6 describe the structure and operation of the three systems, and for the better understanding of my decision I repeat them:

“3.

The systems were to be operated either:

a)

by the breaking of a glass call point which should in turn have activated an explosive activator fitted to a valve actuator mounted on to the discharge valve in the head of the master cylinder of the relevant system;

b)

manually using a mechanical release lever fitted to the master cylinder.

4.

The principle of operation of the explosive actuator was to force a piston in the valve actuator on to a pin that protruded from the top of the master cylinder discharge valve, which should in turn have caused the cylinder valve to open and allow the cylinder contents to be discharged into the pipe manifold via a siphon tube inside the cylinder. A “detent” pin in the valve actuator housing was intended to latch the piston, and thus the cylinder valve, in the fully open position.

5.

In each supply, the discharge valves of the two “slave” cylinders were connected to the pipe manifold by flexible hosing. The pressure generated in the manifold by the release of liquefied CO2 from the master cylinder was supposed to force pneumatic valve actuators to open the discharge valves of the slave cylinders, which would discharge their contents into the manifold.

6.

The contents of the cylinders were supplied to the presses via rigid branched pipework. Nozzles were located at the ends of pipe branches along the length of the presses. The purpose of the nozzles was to distribute CO ₂ effectively into the semi-enclosed volume of the presses.”

It is assumed for the purposes of the preliminary issue hearing that, following discovery of the fire in press K2, members of PDG’s staff activated the relevant system by the breaking of a glass call point: and that the fire in press K2 ought to have been, but was not, extinguished or sufficiently suppressed by the operation of that system. The significant agreement between the parties, to be assumed for the purposes of this hearing only, is as to the cause of the failure of the fixed CO₂ system for press K2, namely that it was either:

“(a)

insufficient pressure in the master cylinder in the main CO ₂ system for press K2, resulting either from the master cylinder having been incorrectly filled or pressured or leakage from the discharge valve of the master cylinder; or

(b)

failure of the actuator piston on the cylinder valve of the master cylinder in the main CO ₂ system for press K2 to latch. As a consequence of this, CO ₂ escaped through the pilot orifice in the cylinder valve and not the main orifice. This in turn resulted in there being pilot pressure in the manifold but not full pressure and prevented the slave cylinder valves from opening.”

The Tradesmen Policy was incepted on 1 March 2004 for (inter alia) public liability, including product liability. The relevant provisions are:

“ Section 2 : Public Liability

The Company will subject to the Indemnity limit [£2m] ... indemnify the Insured against:

1.

a all sums which the Insured shall become legally liable to pay as damages ...

in respect of the Occurrences stated in this section ...

Occurrences ...

2.

Accidental damage to property ...

Extensions

K Products Liability

Despite Exclusion 8 of this Section the Company will indemnify the Insured against liability in respect of ...

2.

accidental damage to property

occurring anywhere within the Territorial Limits during the Period of Insurance and caused by any Products Supplied in or from Great Britain …

Special Conditions

1.

Contractual liability

In so far as concerns liability assumed by the Insured under agreement which would not have attached in the absence of such agreement, this Section will only apply if the Company retains sole conduct and control of any claim.

Extension K will not apply to liability assumed by the Insured under agreement other than under any condition or warranty of goods implied by law unless such liability would have attached in the absence of such agreement ...

Exclusions

8.

Liability arising out of Products Supplied other than:

a food or drink sold or supplied for consumption …

b the disposal of furniture and office equipment ... which is no longer required …”

The relevant exclusion clause in issue in these proceedings is in Section 2 of the Schedule:

“TP 34S

This section does not indemnify the Insured in respect of any claim arising out of:

(i)

work on or in connection with computers by the Insured or the Insured’s Employees

(ii)

the failure of any fire or intruder alarm switch gear control panel or machinery to perform its intended function.”

It is the second subclause of TP34S which is, as set out above, the subject of this preliminary issue.

A number of contemporaneous documents has been considered in the course of this hearing. Clearly significant is the NIG Tradesmen Prospectus & Proposal. This contained a summary of cover and the application form for the policy. The policy itself provided that “The proposal and any information supplied by or on behalf of the Insured shall be incorporated in the contract”. There are the following relevant matters contained in the Prospectus & Proposal, under the heading “Summary of Cover”:

The Underwriting Guide, to which I have referred, was made available by the Defendant to its brokers and was not to be seen, nor was seen, by the Insured. The “Important Notes” at paragraph 5 included an instruction to the broker that they “may not grant cover without prior reference to the company for any risk ... not included on the list of Eligible Trades”. The list of Eligible Trades in the Guide did not include Alarm Installers: there were two different kinds of “Electricians” included in the list. By Important Note number 9, under the heading “Cover Restrictions” it was provided:

“Where specific exclusions or limitations apply an endorsement number is shown alongside the particular trade – the full wording of such endorsement appears at the back of this Guide.”

Against both kinds of Electricians L34 appeared as the relevant endorsement, i.e. such that it could be automatically applied to such a tradesman. The list of endorsements is at the back of the Guide, and L34 is in the same terms as TP34S.

The other documents to which reference has been made in the course of these proceedings are very few, and have not in the event been of great assistance, not least because no oral evidence has been called to explain their provenance, and most of them appear to be post-contractual. At best they appear to show that the brokers, Kirkintilloch Insurance Services, may well have agreed to accept the business, even though the description of such business did not fall within the list of Eligible Trades, before 1 March 2004, and not consulted the Defendant until after 1 March, at which point the Defendant decided that, although it did not fall strictly within the list of Eligible Trades, they would accept the business. The documents to which reference was made in the proceedings are:

There was a witness statement which stood as evidence in chief (and was not subjected to cross-examination) from a Ms Christensen of NIG, who had no personal involvement and does not disclose her source of information or belief as to what she does say. I derived little benefit from it.

There was of course little difference between the parties as to the jurisprudence to be borne in mind in relation to the construction of an exemption clause such as TP34S. One issue which may not be relevant or at any rate material in this case is whether, and to what extent, the clause was a standard form clause. Insofar as it derives from L34, it is plainly standard in the sense of being one of a series of endorsements which may be applicable, and in some cases must be applicable, to the Policy, according to the Defendant’s Underwriting Guide. However, this is complicated by the fact that, in this case, the Claimant’s business did not fall within one of the trades to which L34 would be automatically applicable, and, as referred to above, I am unable to resolve the circumstances in which the Policy came to be granted by the brokers, i.e. as to whether this was or was not a special application of “L34 Efficacy wording” to this Policy: and the question of whose agents the brokers were has not arisen for determination. There is thus no basis for any finding that this was a ‘special’ insurance, outside the ordinary ambit of the Tradesmen Policy.

Leaving that issue aside, it was common ground that assistance could be gained from the words of Longmore LJ in Absalom v TCRU Ltd [2006] 2 Lloyds Rep 129 at paragraph 7, and from the principles summarised by Mr Tozzi QC for the Claimant in his skeleton argument, including the following:

“(a)

Ordinary Meaning . There is a presumption that the words to be construed should be construed in their ordinary and popular sense, since the parties to the contract must be taken to have intended, as reasonable men, to use words and phrases in their commonly understood and accepted sense. [See also paragraph 7(i) – (iii) in the judgment of Longmore LJ and in particular: “The object of the enquiry is not necessarily to probe the ‘real’ intention of the parties, but to ascertain what the language they used in the document would signify to a properly informed observer.”]

(b)

Businesslike Interpretation. It is an accepted canon of construction that a commercial document, such as an insurance policy, should be construed in accordance with sound commercial principles and good business sense, so that its provisions receive a fair and sensible application. [See also the words of Lord Diplock in Antaios Compania Naviera v Salen Rederierna AB [1985] AC 191 at 201 cited in paragraph 7(iv) by Longmore LJ: If a “detailed semantic and syntactical analysis of a word in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense”.]

(c)

Commercial Object . The commercial object or function of the clause in question and its relationship to the contract as a whole will be relevant in resolving any ambiguity in the wording.

(d)

Construction to avoid unreasonable results . If the wording of a clause is ambiguous, and one reading produces a fairer result than the alternative, the reasonable interpretation should be adopted. It is to be presumed that the parties, as reasonable men, would have intended to include reasonable stipulations in their contract.”

All these principles, and those of noscitur a sociis (or its closely parallel construction tool eiusdem generis) and contra proferentem, are drawn by Mr Tozzi QC from MacGillivray on Insurance Law (10^th Edition) at Chapter 11.

I turn therefore to the construction of TP34S. There were two issues between the parties, the first of which can loosely be called the ‘fire alarm’ issue, and the second the ‘machinery’ issue. In their skeletons and in oral arguments, Counsel, Mr Tozzi QC with Mr Gunning for the Claimant, and Mr Eklund QC for the Defendant, took their arguments on the fire alarm issue first, and those on the machinery issue second. I have however concluded that it makes for a more comprehensible judgment if I deal first with the machinery issue. Thus, if the system (and/or its parts), photographs and sketches of which I have seen, is not machinery, then TP34S does not bite. If it is machinery, then, on the Claimant’s case, in order to fall within TP34S it must be fire alarm machinery (fire alarm being used adjectivally), and this is not.

The agreed facts which I am asked to assume for the purposes of this hearing are, as set out in paragraph 4 above, that the failure of the system to operate, and thus to extinguish the fire in Press K2, is to be ascribed to the master cylinder (assumed fact (C)(a)) or the actuator piston or the cylinder valve (both in (C)(b)). The Claimant submits that a failure of, or connected to, any of these items would not be a failure of machinery, because neither the master cylinder, nor the actuator nor the valve constitute or amount to machinery. The Defendant submits that a failure of any of these items with the result that the system failed would amount to a failure of machinery to perform its intended function. This obviously depends upon the definition of the word ‘machinery’.

There are three authorities to which my attention has been drawn by the parties which assist in part:

The Claimant submits that one must look at each (assumed) failed part in isolation. The master cylinder cannot be machinery: a cylinder, for example a cylinder containing calor gas bought and taken home by someone for a barbeque, cannot be machinery, and is no more machinery because it is a cylinder containing CO₂ which is slotted into a pre-prepared position in the fire detection system. A valve was not machinery in the case of Arsa, and it is difficult to see a defective or missing or insufficiently tightened valve or nut or bolt or pin or nail, which forms part of a system which fails, as being machinery of itself. This is an argument which may not apply so forcibly if it be the actuator, which is plainly an integrated moving part, which, as one of the three possible causes, would be the origin of the failure of the system. But as Mr Eklund QC for the Defendant points out, the cylinder here was an integral part of the system, as was the actuator and the valve. In Lovelidge the shaft was found to be a dangerous part of the machinery, but it was in my judgment plainly, as part of the machinery, machinery itself, as opposed to being a machine. The parts cannot be looked at in isolation. If the system has failed, or there has been a failure to perform the intended function of the machinery – a fortiori a system containing moving parts such as this one – by virtue of the identified failure of one of the parts of that machinery, even a valve, then there has been a failure of the machinery.

Although comparison with the facts of the Arsa is not easy for the reasons set out in paragraph 17(i) above, it would appear that this system is nothing like the storm valve in the Arsa, and has much closer similarities to the system/ machinery in Lovelidge. As for Aktion, a computer, with no moving parts, is defined in the Oxford English Dictionary, as set out in paragraph 17(iv) above, as a machine, as would it seems to me be other electronic or computerised or digitalised mechanisms, such that their working parts could also be called machinery. It seems to me that, although once again there is insufficient description of the system in Aktion, a modern approach, in the light of the massive transfer of functionality from mechanical to electronic and digitalised mechanisms, might lead today to Aktion being decided differently, although I do not need to reach that conclusion, because the Claimant’s system had moving parts, and did not consist simply of the transference of electric current. Mr Tozzi QC submits, as a matter of construction (always subject to his primary submissions in respect of the fire alarm issue), that ‘machinery’ cannot be as broad as is thus contended for, because it appears at the end of the list – “Fire or intruder alarm, switchgear or control panel machinery” – so that it must or can be defined by reference to the earlier words. On such submission, machinery would add nothing, because, he submits, if machinery is to be so widely defined, then all the items previously mentioned must themselves be machinery, such that effectively machinery must be construed eiusdem generis. Alternatively, by reference to the principle noscitur a sociis, machinery should be construed as something similar to the earlier items.

I do not agree, and prefer the submissions of Mr Eklund QC. It is plain that the earlier items, control panel etc, may well in a given case not be machinery, but may simply be one-off electronic items, or may refer to, or form part of, a system which, on analysis, is found not to be machinery. But they may, particularly if incorporated in a mechanical system, be machinery. I conclude however that in this list machinery is intended to be a discreet category, irrespective of whether there may be overlap between it and the earlier items in the list.

Consequently if TPS34S applies (which depends upon the resolution of the fire alarm issue), then this system, including actuator, valve and cylinders, was machinery and failure of the system, on any of the three assumptions as to the cause, was due to a failure of machinery.

The Claimant’s case is that the words “fire or intruder alarm” qualify the whole of the clause TP34S, governing each of the words that follow. The Defendant’s case is that the clause contains a list of separate items. If the Claimant is right, then the exclusion clause applies only to fire or intruder alarm systems, and not to fire protection/suppression/extinguishing systems such as those supplied by the Claimant to PDG in this case. The Claimant submits that the clause should be construed, if ambiguous, contra proferentem – and that it would have been simple for the insurer to adopt such wording as was used in Nittan (UK) Ltd v Solent Steel Fabrication Ltd [1981] 1 Lloyds Rep 633, in which the exclusion was “of the failure of any goods to perform their intended function”. The Defendant, Mr Tozzi QC submits, is now having to rewrite the clause, so as to read in either additional words or additional punctuation as follows:

“(a)

The failure of any fire or intruder alarm any switchgear, any control panel or any machinery to perform its intended function.”

(A wording which, he points out, Mr Eklund QC himself used in paragraph 34 of his skeleton argument in order to explain what he says the clause means.)

or

“(b)

The failure of any fire or intruder alarm , switchgear , control panel or machinery to perform its intended function.”

I shall set out the rival contentions.

The Prospectus. The Claimant submits that the words of the Prospectus, set out in paragraph 7(i) above, drive a construction in support of offering wide-ranging cover, and cover which provides protection against the common risks faced by most contractors. The Defendant accepts this, but submits that it does offer wide cover, but it is subject to the L34 Efficacy wording pointed out to the Claimant by his broker, i.e. it is limited in certain respects appearing in the policy. I would add that, in any event, an alarm installer would receive the same Prospectus, and thus on the Claimant’s own case the exclusion would be effective in respect of such alarm installer so as to limit the wide-ranging nature of the cover and exclude some common risks.

The Language. The Claimant’s case consequently is that, as a matter of construction, the words “fire or intruder alarm” govern all the words which follow: fire or intruder alarm switchgear, fire or intruder alarm control panel, fire or intruder alarm machinery. Thus the exclusion clause is appropriate for all – as per the Underwriting Guide – but, particularly as fire protection/suppression system installers are not in the list of Eligible Trades in the Prospectus and Proposal or the Underwriting Guide itself, therefore such systems are not covered by the exclusion clause. As to the Defendant, there is an assertion in the witness statement of Ms Christensen, which is just not explained or justified, namely:

“7.

TP34S and L34 are endorsements which are commonly known as ‘failure to perform exclusions’. There are three types of risk where NIG would automatically apply this exclusion as follows:

(i)

Installers of burglar alarms

(ii)

Installers of fire detection or suppression systems

(iii)

Installers of sprinklers.

As a company NIG tend not to offer insurance for these risks but where we do we always include a failure to perform exclusion.”

This falls to be discounted by virtue of its generality (see also paragraph 11 above) and I refer to paragraph 12 above. Mr Eklund QC did not place material reliance upon that statement. His case is simply that the words “fire or intruder alarm” do not govern what follows, but are stand-alone, followed by other excluded items: he relies upon the fact that TP34S is indeed apt for all – provided that cover is agreed – and that on that basis there is no significance in relation to fire alarms, but they are simply one of the items failure of which is excluded from the cover offered to any Insured to which cover is offered with the TP34S exclusion.

The Application Form. Mr Tozzi QC points to the application form in the Prospectus and Proposal, and to the fact that the Claimant disclosed that he was in the business of installing fire protection and detection systems. Fire protection systems were then – and notwithstanding – not excluded. Mr Eklund QC points to the same application form, and to the general nature of TP34S, which was not tailored for or special to this particular policy, and submits that it makes no sense that such systems, such machinery, would not be excluded.

The Syntax. As to linguistic construction, Mr Tozzi QC submits that there is no difficulty, particularly given the technical and non-literary nature of the clauses (and for that matter with a side-glance at the point made in paragraph 10(v) above) in his interpretation that fire or intruder alarm governs the words that follow. Mr Eklund QC submits that the adjectival use of fire or intruder alarm is clumsy and unnecessary, and that it is far more likely that the words are used as substantives. It is to be noted that there would be no difficulty in notionally implying commas into the clause (as per paragraph 22(b) above), given that, on both sides’ interpretations, there would need to be a notional comma after the word switchgear.

All the above arguments are made by reference to the first two canons set out in paragraph 13 above. But the most powerful argument made by Mr Tozzi QC is that by reference to the third and fourth such canons. Particularly having regard to the words in the Prospectus & Proposal that the cover “provides protection against the common risks faced by most contractors”, he submits that, if the Defendant’s case is right, then there is effectively no cover for the Claimant under this policy. What, he asks rhetorically, is he paying his premium for, if the failure of any machinery (his fire protection/suppression system) to perform its intended function is not covered? What is the commercial purpose of the cover? The exclusion of such cover “flouts business common sense”.

Mr Eklund QC has an answer to this. He submits that there is a perfectly good commercial rationale for the nature of, and limitation upon, the cover provided. What is covered is malfunctioning of the system so that it causes damage. What is not is a failure to perform its (contractual) function so that it fails to do what the customer expects. This is not a novel or unusual distinction: common form exemptions in sale and purchase conditions may specifically exclude a warranty as to the performance of the product, even if there is a warranty that it would not be defective nor itself cause damage.

Mr Tozzi QC has a reply to that, by reference to Special Condition 1 Contractual Liability, set out in paragraph 5 above. He points out that this provides that Extension K Products Liability (set out in the same paragraph) does apply to liability assumed by the Insured under agreement (with a customer) if it is a condition or warranty of goods implied by law[which] would have attached in the absence of such agreement. This means that the warranty of fitness for purpose is covered.

To this comes Mr Eklund QC’s final riposte. He effectively submits that the cover preserved or restored by Special Condition 1 is itself governed by TP34S. There is cover for unfitness for purpose where it relates to a defect such as a valve blowing off under pressure, independently causing personal injury or damage to property, or to where a system itself causes a fire (when there would then be cover for the consequences of the fire which it caused but which it was not then itself able to put out) or, it could be added, where the system leaks CO₂ and causes suffocation. But a failure of this machinery to perform its intended function – i.e. operating so as to extinguish a fire – is not covered.

This seems to me to be a satisfactory answer to the no commercial purpose and the flouting of business sense submissions of Mr Tozzi QC. To this I would add the further point that if Mr Tozzi is right to assert that the effect of TP34S is to remove any effective cover for any insured who are caught by it, then that would be the case for, e.g. fire alarm installers, who are on any basis caught by TP34S: while Mr Eklund QC’s interpretation would provide (limited) cover for all insured.

I found this an interesting and difficult argument, but I am in the event satisfied that Mr Eklund is right. I prefer each of his arguments on construction, and am satisfied that the result does accord with commercial sense. The proper construction of TP34S is not to exclude fire protection/suppression/extinction systems from its ambit, but such that it provides limited cover for all those insured under the Tradesmen Policy, with exclusion of cover for any claim arising out of the failure of any machinery to perform its intended function, which, on the particular facts of this case, includes the failure of this fire protection/suppression/extinction system to perform, such that it failed to put out the fire in PDG’s premises.

I consequently resolve this preliminary issue in favour of the Defendant which has the effect, as I understand it, that it is accepted that the Claimant’s claim must fail.