Euro Pools Plc v Royal And Sun Alliance Insurance Plc

This is a claim which arises out of two policies of professional indemnity insurance underwritten by the defendant (“RSA”) in favour of the claimant.

The claimant company was founded by Mr David Wyllie. He remains its managing director and sole shareholder. It is now in administration. The claimant specialised in the installation and outfitting of swimming pools.

The subject matter of the claim relates principally to mitigation works carried out by the claimant following problems encountered with its movable floors and its booms system (the “Floors Claim” and the “Booms Claim” respectively). Movable floors are horizontal platforms that move vertically through the water to vary the usable water depth for the various activities that take place in the pool. Booms are vertical walls that divide a pool into different swimming zones, with the walls designed to rise and fall so that a pool can be used in different configurations.

Separate issues arise in respect of the claim to be indemnified for third-party claims and mitigation works arising out of the failure of the diving pool floor at Leeds.

There is also a claim for costs incurred in respect of third-party litigation against White Young Green, the consultant engaged by the claimant to carry out design work for moveable floors (the “WYG litigation”).

Although the claimant was insured with the defendant for many years prior to the matters which form the subject matter of this claim, the relevant policies for the purposes of this claim are the professional indemnity insurance policy which the claimant entered into in June 2006 (for the purposes of this judgment referred to as the “First Policy”) with the defendant which covered the period from 30 June 2006 to 29 June 2007 and the policy of insurance (referred to in this judgment as the “Second Policy”) which covered the period from 30 June 2007 to 29 June 2008. Apart from the amount of the Insured’s Contribution, so far as material to the issues before this court, the First Policy and the Second Policy were on the same terms. The policies were professional indemnity insurance policies pursuant to which the defendant would indemnify the claimant against liability for damages in respect of third-party claims such as negligence arising out of its professional activities. The limit of indemnity for each policy was £5 million. The broker in relation to the policies of insurance was AON.

Condition 2 required the claimant to give notice to the insurer:

“as soon as possible after becoming aware of circumstances… which might reasonably be expected to produce a Claim… Any Claim arising from such circumstances shall be deemed to have been made in the Period of Insurance in which such notice has been given”

The claims in these proceedings, insofar as they relate to a claim for mitigation works carried out by the claimant, arose pursuant to insurance clause 5 of the policy:

“The Company will indemnify the Insured against costs and expenses necessarily incurred in respect of any action taken to mitigate a loss or potential loss that otherwise would be the subject of a claim under this Insurance. The onus of proving a loss or potential loss under this Insurance shall be upon the Insured who will be obliged to give prior written notice to the Company during the Period of Insurance of the intention to take action that will incur such costs and expenses.”

It is common ground that the Floors Claim was validly notified to the First Policy and the issues which remain to be determined in relation to the Floors Claim are:

In relation to the Booms Claim the issues that fall for determination can be expressed as follows:

In relation to the Leeds diving pool floor (“LDPF”) claim the issues that fall for determination are as follows:

The issues referred to above under the Floors Claim in relation to the Insured’s Contribution, the overhead rate and limitation are equally applicable to the Booms claim and the LDPF claim.

In relation to the WYG litigation, the pleaded case of the claimant is that it was an implied term that if the defendant decided to bring proceedings against third parties in the name of the claimant then the defendant:

For the claimant I heard evidence from Mr Wyllie and expert evidence, as set out below.

For the defendant I heard evidence from Mr Douglas Murphy, Mr Chris Dunn, Ms Linda Moir, Ms Rebecca (formerly Trevor) Goddard. Mr Murphy originally worked for Crawford and Co., loss adjusters, instructed by the defendant. Mr Dunn, Ms Moir and Ms Goddard worked for the defendant at the material time. Ms Goddard headed up the team but no longer works for the defendant. Mr Ward (who did not give evidence) reported directly to Ms Goddard. Mr Dunn and Ms Moir were below Mr Ward in the hierarchy.

There were two witness statements before the court from Mr Murphy, one of which was unsigned and prepared by the claimant’s solicitors. In relation to the unsigned statement Mr Murphy confirmed that he had had an opportunity to read the unsigned statement and he approved it at the time and the contents of that statement were true (subject to a correction he made).

Jill Gough was the account manager at AON who dealt with the 2006/2007 renewal but did not give evidence.

The court also had the benefit of expert reports from quantity surveyors: Mr Champion instructed by the claimant and Mr Hunter instructed by the defendant. These reports are detailed below. The court also had reports from engineering experts: Dr Kirby instructed by the claimant and Mr Cotterill for the defendant. Mr Cotterill produced a report dated 28 September 2017 and Dr Kirby a report dated 1 November 2017. A joint statement was dated 15 November 2017 and Mr Cotterill produced a supplemental report dated 24 November 2017. All the experts gave oral evidence and were cross-examined.

The documentary evidence (other than the pleadings, witness statements and expert reports) before the court was voluminous but had been helpfully reduced to 2 core bundles. A daily transcript was also produced. It is neither practicable nor necessary in my view to recite all the evidence on which a party relies in support of a specific issue and it should not be inferred that evidence has not been taken into consideration in reaching a conclusion merely because it has not been expressly referred to.

I deal first with the Booms Claim. The claimant is seeking to recover the costs of mitigation works carried out by it in relation to booms. In summary, on the evidence before the court, the first time the defendant was told of a problem with booms was at a meeting in February 2007 when a problem was identified with the stainless steel tanks which, when filled with air, raised the booms. The evidence established that, having been told of the problem with tanks at the meeting in February 2007 (and after a further communication of June 2007), Ms Moir opened a claim file in June 2007. The claimant replaced the tanks in some of the pools with inflatable bags but the claimant encountered problems with the inflatable bags and in May 2008 told the defendant, through its broker, that it wanted to change to a hydraulic system. It is the claimant’s case that the notification in May 2008 amounted to a notification under the Second Policy. At the time (August 2008) the defendant accepted the proposed change to hydraulics but took the view that the claim had been notified to the First Policy.

Counsel for the claimant submitted that there was a valid notification of circumstances in May 2008 and it is not necessary to consider whether there was a valid notification in the prior year as the claimant is not pursuing a claim under the First Policy. However in any event, Counsel for the claimant submitted that the notifications made by the claimant in February 2007 could not extend to the booms claim because by June 2007, no booms fitted with bags had failed. Therefore it was not possible for the claimant to know that there was a problem with the bags. By June 2007 the claimant did not know that its air drive system for raising and lowering booms was flawed: after June 2007 the claimant continued to install booms fitted with an air drive system. Counsel for the claimant relied on the dicta of Akenhead J in Kajima UK Engineering Limited v The Underwriter Insurance Company Limited [2008] EWHC 83 (TCC) at [99 (d) and (h)] and [2008] 1 All ER (Comm) 855:

“It is only circumstances of which the Insured is actually aware which can be the subject matter of a notification.”

“The factual context is important, not only as a matter of interpretation of the notification but also, because it is only matters of which the insured is aware that can form the basis of a valid notification.”

Further counsel for the claimant submitted that there must be a causal link: Akenhead J at [99 (f) and (i)]:

“There must be some causal, as opposed to some coincidental, link between the notified circumstances and the later claim.”

“The claim which is later pursued must arise not only from the notified circumstances but also only from the circumstances of which the Insured was aware. It can not arise from any other circumstances which may have happened or been discovered either after the notification or in any event after the expiry of the insurance cover.” [emphasis added]

Counsel submitted that had any third party claims been made against the claimant for the cost of replacing booms, such claims would not have been causally connected to the notification that the steel tanks it had previously fitted were leaking.

Further counsel rejected the defendant’s submission that the claimant was notifying circumstances which amounted to a “hornets’ nest”, a set of circumstances identified by Akenhead J: counsel submitted that it was insufficient that there was a continuum of investigation which “coincidentally” revealed a number of defects or deficiencies (Akenhead J at [111 (d)]).

Counsel for the defendant submitted that the test of materiality for notice is a weak one (J Rothschild Assurance Plc v Collyear [1999] Lloyd's Rep. I.R. 6 at 22) and it is possible to give a blanket notification (McManus v European Risk Insurance Co [2013] EWHC 18 (Ch) and [2013] Lloyd’s Rep IR 533). In McManus, the insured, partners in a solicitors’ firm, sent a notification of circumstances in relation to every file conducted by a firm whose work it had acquired. Based upon 32 sample files the insured took the view that there was a consistent pattern of breaches in the form of failures to report to lenders and evidence that some of the fee earners were not admitted solicitors who might not have had sufficient expertise to deal with the conveyancing transactions. The insured therefore notified about 5000 files and the court held that the insurer was wrong insofar as it appeared to require each particular transaction to be identified and notified to the insurers as a separate circumstance.

Further counsel for the defendant submitted that there is a low threshold for knowledge and the circumstances may be “symptomatic” of a design flaw: Kajima para 111. Counsel for the defendant submitted that flaws in the claimant’s air fed system were apparent to the claimant by early 2007. The constant pressurisation and depressurisation of tanks caused them to flex resulting in cracks and weld failures. The claimant endeavoured over time to rectify the problems engaging in a series of efforts including modifying tanks, use of airbags, modifying airbags and using a fibreglass tank. These continuing efforts led to the installation of a hydraulic system and later to the replacement of the hydraulic equipment. Any third party claim against the claimant arising from flaws in the boom system would have been causally connected to circumstances notified in February and/or June 2007.

Counsel for the defendant further submitted that the circumstances were notified in the First Policy and the claim therefore attached to that policy. Counsel for the claimant objected that the defendant had not pleaded any reliance on Exclusion 18 of the policy which excludes (inter alia) the consequences of any circumstances notified under any prior insurance or known to the insured at the inception of the insurance. Counsel for the defendant submitted that it “informed” the construction of clause 5 such that if an insured notifies circumstances capable of giving rise to third-party claims in one year, it must be covered for mitigation action which it takes after the end of that year. If circumstances are notified to the First Policy, then it was submitted the deeming provision in the Second Policy cannot attach them to the Second Policy because it would create an immediate conflict with Exclusion 18.

Mr Wyllie sent an email to Ms Gough on 19 February 2007 [1/680]. The email is headed “Movable Floors and Booms” and there are references in the email to “floors and booms” but it is clear in my view that the email is dealing with the problems encountered with the movable floors in particular rope failures, specifically at Swiss Cottage, Crawley and Newport, and problems with the control system at West Tallaght. This led to a board meeting of the claimant held on 15 February 2007 and again although the email states it was to “fully review movable floors and booms” [emphasis added] the conclusion set out in the email was in relation to floors rather than booms as well. The email stated:

“We have concluded that our systems have a major design fault and should be changed to stainless steel rope and hydraulics.… We have appointed White Young and Green to redesign our new floors and these will all work on stainless steel rope with hydraulics. However, we have the problem with the working floors and the ones installed with winches yet to be commissioned....We feel that there is no immediate danger to our floors...put in place a security survey plan to monitor all floors on a monthly basis....

“…Due to the seriousness of the problems and the urgency of the work required we need to make a claim on our insurance to cover the cost of the works and any other associated costs.” [Emphasis added]

Ms Gough forwards the email from Mr Wyllie to the defendant on 20 February 2007:

“…you will see from the detail provided below that this matter has the potential to be huge...the insured wishes to be transparent with his clients regarding the situation with the movable floors and booms…” [Emphasis added]

Although Ms Gough therefore referred to both movable floors and booms, she is forwarding the email referred to above and, it does not, in my view, in substance extend to a problem with booms.

A meeting was held on 23 February 2007 at which (amongst others) Mr Wyllie, Ms Moir and representatives of AON were present. The meeting notes of Ms Moir are largely concerned with the problems with the floors [1/812]. However page 13 of the notes has a subheading “Booms” and states that at West Tallaght and at Crawley:

“the bottom of the ballast tanks in the booms has failed. ”

It notes that the claimant’s plan was to cut a hole in the bottom and brace them, that it:

“looks like failure is of original bracing.

Other option is to install what looks like a balloon/bag into tanks”

the note continues:

“discussed [policy] response. Sep N/C [separate new claim]”

but that the insured did not expect it to exceed the self insured amount.

Minutes prepared by Garry Hill of the same meeting [1/843] contained a section at the end stating that Mr Hill phoned Mr Wyllie for his views on the remainder of the meeting as Mr Hill had left the meeting early. Mr Hill noted

“DW confirmed that a further circumstance was notified to LM/CD [Linda Moir/Chris Dunn] concerning a weakness in booms inherited on the Thermelek projects. LM has noted her file and will open a separate claim for. GH will notify JG of this matter....”

On 27 February 2007 Mr Goddard emailed Ms Gough stating that he had instructed Crawfords to assist the defendant [1/892]. The body of the email is not specific although the heading is “Movable Floors and Booms.” However in an email shortly before that email was sent, Mr Goddard instructed Crawford dealing only with the floors [1/890]:

“...I confirm your instruction in relation to the new matter which requires urgent expert mechanical engineering input. Our insured Europool designs and installs swimming pools equipped with movable floors. The mechanism for floor movement is based on a rope and winch system which has suffered various forms of failure in several different pools over the past few months. The insured has now concluded that the design is fundamentally flawed and wish to embark upon a programme of replacement works...they have notified the problem to us under their D&C PI policy which contains a loss mitigation clause.….”

When the claimant completed a proposal form on 9 June 2007 [1/1581] to renew its PI insurance with the defendant, the form required the claimant to state

“any circumstances which may give rise to a claim”

and the claimant, as well as noting an issue in relation to rubber lining, stated

“tanks on booms but we are fixing these with inflatable bags”

On 15 June 2007 Ms Gough forwarded to Mr Goddard an internal email at AON which attached a copy of the proposal form and noted:

“…David Wyllie has advised that he did mention the matter to Linda...when they had the meeting regarding the drive systems for the movable floors. In view of this can you please check with R&SA whether this issue is already included within the earlier notification referred to.”

The email then notes:

“…the insured has advised that three pools are affected by this problem, which relates to potential fatigue of cross braces in the tanks due to water and air not been able to drain out quickly enough (sic). The insured have had a solution devised by a specialist company which involves the use of an inflatable bag… Total cost £15,000 which is under the current policy excess of £30,000. However, the insured wish to ensure the matter is logged on a precautionary basis should there be any future problems.” [Emphasis added]

Mr Goddard responded on the same day [1/1658]:

“...I recall the floors claim was badged as “movable floors and booms” when first received, suggesting a fit with the circs mentioned below? In any event, the matter described below can be set up as separate circs and acknowledged....”

Ms Moir emailed Mr Goddard on 19 June 2007, in relation to the proposal form stating that:

“[tanks on the booms] was advised to Chris and me when we first called at Europools back in February. The issue was a simple one, in that the floating cuboids used as booms were letting air out and so water in, and were not therefore floating. The insured were installing inflatable bags as liners and no claims were anticipated. This should properly have been registered as a circumstance at the time, but with no reserve as there was (and is) no suggestion of any claim by a third party, or any cost to the insured beyond the SIA.” [Emphasis added]

On 22 June 2007 Ms Moir emailed Ms Gough referring to the email of 15^th June 2007 to Mr Goddard:

“I confirm that David Wyllie… had advised me of this matter in February.…

“My understanding is that a simple and inexpensive solution to the booms problem has been identified, there are no claims against the Insured and no risk of any claim exceeding the £30,000 self-insured amount. On that basis, I have marked the matter as a circumstance, with a nominal £1 reserve.…

The claim number relating to this matter is VF89FV” [emphasis added]

On 12 March 2008 Mr Wyllie emailed Ms Gough [2/3281]. He sought her advice on whether the claimant should make a claim on the booms. He noted that the stainless steel tanks were:

“not the best due to the weld failure through bending”

and that having changed to inflatable bags they were now having problems with the bags. He said that they were currently getting a glass reinforced plastic tank built to replace bags. This was reiterated in his email of 7 April 2008 again to Ms Gough [2/3461]:

“it appears that we have further bad news. The original tanks were made of stainless steel and with the constant flexing of the sidewalls with inflation and deflation the welds began to fail. Some tanks went before others but there is a problem with all tanks. We thought that we had a solution using an inflatable bag and we changed some of these tanks over and undertook repairs using these bags.… These bags are now failing after a few months.

… I am thinking of going hydraulic…”

On 2 May 2008 Mr Wyllie sent an email to Ms Gough that:

“the bags for the booms at Cardiff are beginning to fail. How are we placed with RSA. Can we tell the client that we want to change to hydraulics or do we need to wait on RSA and Douglas Murphy” [2/3606]

Ms Gough then informed Mr Goddard that:

“the original remedial works have now failed”

Mr Goddard responded on 2 May 2008 that he was instructing Douglas Murphy to contact Mr Wyllie to discuss:

“this latest event and thereafter report to RSA (to include advice on policy response and potential application of new claim excess).

If the insured wish to act in the interim they are of course at liberty to do so although you will appreciate that I can give no commitment at present that any costs they incur in doing so will be indemnified.

Douglas: please call me if needed in relation to this potentially new matter. Otherwise I will await hearing from you once you have discussed it with David Wyllie”. [Emphasis added] [2/3603]

Notes of the meeting between Mr Murphy and Mr Wyllie on 15 May 2008, prepared by Mr Murphy, recorded Mr Wyllie’s belief that the bags were “notfit for purpose” [2/3654]. It also recorded that the claimant notified the insurer of the booms in 2007:

“told them of the defect – thought the bags were to be the solution”

£30,000 deductible

did not expect to exceed it

went from tanks to bags for a solution and now the bags are failing”

There was a meeting on 4 June 2008 between Mr Murphy and Mr Goddard following which Mr Goddard emailed Mr Murphy [2/3742]:

“Our discussion today refers. Europools notified a problem with floating booms not being watertight to us in February 2007 and we set a file up under the above reference with a nil reserve. Prior to 2007/08 renewal, we were advised as follows by email from AON dated 15.6.07:

“The insured has advised that three pools are affected by this problem, which relates to potential fatigue of cross braces in the tanks due to water and air not being able to drain out quickly enough. The insured have had a solution devised by a specialist company which involves the use of an inflatable bag….”

We have had no further information on this matter until receipt of David Wyllie’s email of 2 May 2008...

…it is important that you establish the correct chronology and design phases booms and are able to advise us in due course whether this is solely a design problem…

For now I will be placing a costs only reserve of £20,000 on the file.…” [Emphasis added]

Mr Murphy wrote a report on 21 July 2008 to the defendant on “Booms/Bags” [1/3985]. In that letter he referred to a

“deterioration in the position in relation to booms/bag since the original notification was provided to you by AON.”

He referred to the original design: the inclusion of angle/box sections secured to the cross frame which formed tanks. When air was introduced into the tanks this would provide sufficient buoyancy to rise within the guides fitted to the pool structure. Mr Murphy recorded that:

“having identified that this system was not working satisfactorily following reports/complaints from clients, the insured’s view was that the air and tank system was flawed and a single pipe system does not cater for the equal distribution of air to each of the tanks within the boom… This has the effect of causing the boom to rise unevenly...

...furthermore, examination of reported problems with the tank system, revealed that welds in the tank structure were failing, this being attributed to the “constant” and uneven pressurisation and depressurisation as a result of the lift/lower procedure. The insured attempted, over a period of time after the initial reports, some remedial measures which included the installation of additional bracing for the tanks, particularly at Crawley, but this again proved unsuccessful.” [Emphasis added]

The letter recorded that similar problems were experienced at West Tallaght. The claimant then devised a procedure utilising air bags and whilst they worked satisfactorily at first, so that the procedure was adopted at other locations including Clondalkin, Leeds and Cardiff, there were reports of difficulties which suggested that their rectification attempt had not been entirely successful. Ultimately none of the procedures in relation to the bags was successful and the claimant believed that they had exhausted all possibilities in relation to the operation of the booms by means of introducing air whether by tank or bag and the only remaining option was to install a system of hydraulics.

Following that report, Mr Murphy wrote a further letter to Mr Goddard on 15 August 2008 [2/4164]. It noted that the claimant had concluded that the only realistic option was to install a hydraulic system and sought Mr Goddard’s approval to confirm to the claimant that this was in order. Mr Goddard responded to Mr Murphy on 15 August 2008 confirming his agreement and stating

“this claim was notified to the same policy year (2006/07) as the “main claim” for movable floors. The insured’s excess will therefore be £30,000. Note that the policy has an aggregate LOI £5 million, albeit even with the expected total cost of the main claim, that figure should not… be threatened by this one in addition.”

On 1 October 2008 there was a meeting between Mr Murphy and Mr Wyllie at which the various claims were reviewed. In relation to Booms, Mr Murphy in his notes of the meeting recorded:

“Booms accepted and agreed. Hydraulics Principle accepted.”

The engineering experts were instructed to consider what types of defects in design and operation developed in the booms over the relevant periods and what in the opinion of the respective experts, were the causes of those defects.

The experts agreed that welds in the tanks were failing. In his report Dr Kirby attributed this to weld preparation leading to corrosion in the weld. Mr Cotterill was of the view that cyclic pressurisation and depressurisation of the tanks was causing cyclic stressing of the tank walls resulting in the cracking of the welds and the failures in the tank system were related not only to poor weld preparation but also the design and inadequate bracing of the tank side walls and/or the solid welding of the tanks to the frame.

Dr Kirby said in cross-examination that the tank walls would flex outwards but not inwards and that metals will not fail on compression. His evidence was that the cyclic load was not sufficient to cause a failure of the welds. He said that fatigue was caused either by low cyclical/high stress as in a paperclip bending or low stress/high cycle which would cause a distortion of the entire tank. He said there was no evidence of gross distortion of the tanks having occurred. Counsel for the defendant referred Dr Kirby to Mr Wyllie’s description of tanks “bellowing”. Dr Kirby explained that tanks would expand outwards and then return to shape but again referred to the fact that none of the photos showed permanent distortion of the tanks.

Counsel for the defendant put to Dr Kirby that at the time, the view of the claimant, as reported in the report of Mr Murphy, a contemporaneous document, was that the

“single pipe air system does not cater for equal distribution of air.”

Dr Kirby explained that it is only when tanks are 75% full that they start to rise and he did not see how there could be an increase in pressure to one area only as this is counterintuitive. He explained how the tanks are trying to displace water by forcing in air and if one tank has a greater volume of air, it self corrects as it applies pressure. Once it achieves 75%, there will be an up thrust and there was no reason why the boom would not rise evenly. It should slide up.

Counsel for the defendant put it to Dr Kirby that the claimant attributed the failures in the tanks to repeated pressurisation not weld failures. Dr Kirby responded that the claimant was not a metallurgist and there had been no destructive analysis to determine the exact cause of fatigue or corrosion [day 6/766]. It was put to Dr Kirby that he was relying on one photograph of one tank which had some signs of poor weld preparation. Dr Kirby repeated that there were not enough cycles to cause low stress/high cycle fatigue. It would require 100,000 load cycles and assuming the booms were raised once a day, that was only 365 loads per year.

Counsel for the defendant asked Dr Kirby about paragraphs 1.13 – 1.15 of Mr Cotterill’s report (page 114). Dr Kirby accepted that attachment points of the welds would penetrate but disagreed that the weakness could lead to a tear in the material. He said that there could be cracking in the tank but the weld would have to be of poor quality.

Dr Kirby was asked about the cross bracing used in the tanks which was separate from the seam on the outside of the tank and the fact the failure was ascribed by the claimant to the water/air exchange. Dr Kirby’s evidence was that this did not make sense as an explanation.

Counsel for the defendant put to Dr Kirby that it was reported by Mr Murphy that Mr Wyllie’s view in August 2008 was that neither dual airbags nor tanks would give an even lift so the air drive system could not be based on tanks or airbags [Day 6 Page 783 Line 17 to Page 784 Line 4]. Dr Kirby said that if the claimant had got to the root cause, that is the welds, there was no reason why the system could not work.

The defendant’s expert, Mr Cotterill’s, evidence in cross-examination was that the problem with the tanks was that the construction as a cuboid was flawed from the outset because the sides would bulge and put the welds under strain. If the weld failed, air would leak out and if air leaked out there would be a problem with the way the tanks rose.

Mr Cotterill was asked why there was no problem with the tanks at Braunston. Mr Cotterill replied that he did not know. He was asked about paragraph 10 of the joint statement (page 96) that booms were jamming after the switch to bags: Mr Cotterill accepted that in the second witness statement of Mr Wyllie, his evidence was that there was no problem with tanks jamming prior to the weld failure.

Mr Cotterill was also asked about the failure of the internal cross bracing causing fatigue. His evidence was that it was only once the trial had actually started that he found out that the tanks had internal bracing. He said it was “chicken and egg” and the problems with internal bracing could exacerbate the failure on the welds and increase the amount of pressure stress.

Mr Cotterill agreed with Dr Kirby’s evidence that the proposal of the claimant to cut a hole in the bottom of the tank would be to allow access to the inside of the tank to fix the internal bracing.

Mr Cotterill’s evidence was that using inflatable bags was “staying with the air drive system”; it was just a different form of buoyancy [Day 6/819]. He also agreed that in the hydraulic system, hydraulic rams were connected to the bottom of the booms which lifted and pulled down the booms and that “air” had nothing to do with that system [day 6/823].

The principles to be applied in determining whether there has been a proper notification of circumstances are helpfully summarised by Akenhead J in Kajima at [99]:

“As a matter of construction and in the light of the observations of Mrs Justice Gloster in the Kidson case, I make the following observations applicable to the current case: ”

(a) There is no restriction in condition 1 as to what circumstances might be notified. They may be specific or general. They may relate to damage, symptoms of damage, or actual, potential or perceived defects, liabilities or losses. It is not necessary that the notified circumstances will probably give rise to a claim; it is enough that they might reasonably be expected to do so…

(c)

It is possible for the insured to give notice of a 'hornets' nest' or 'can of worms' type of circumstance.

(d)

The insured must be aware of the circumstances which it is notifying to the Underwriters. It would not be enough to say: "I think it is possible that there may be some unknown and unidentified design deficiencies in a particular building". That would not be a good notification because the insured would not be aware of the circumstances; the insured would simply be guessing that there might be circumstances. That is not good enough. It is only circumstances of which the Insured is actually aware which can be the subject matter of a notification.

(f)

If there has been a proper notification of circumstances, any claim arising from those notified circumstances, of which the Insured was aware, will be considered to have been made within the requisite Period of Insurance. Any claim which arose consequently from the notified circumstances would arise from those circumstances. There must be some causal, as opposed to some coincidental, link between the notified circumstances and the later claim.

(h)

I do not consider it helpful to talk in terms of a narrow or broad interpretation of the notification. It will be interpreted objectively on the basis of the words used, having regard to the factual context in which it was served. The factual context is important, not only as a matter of interpretation of the notification but also, because it is only matters of which the insured is aware that can form the basis of a valid notification.

(i)

The claim which is later pursued must arise not only from the notified circumstances but also only from the circumstances of which the Insured was aware. It can not arise from any other circumstances which may have happened or been discovered either after the notification or in any event after the expiry of the insurance cover. Put another way, a subsequent claim which relates to matters of which the Insured was not aware at the time of the notification would not and could not arise from the notified circumstances and, to that extent, would not be covered by the policy.

(j)

The claim subsequently brought can relate to new damage flowing from or consequences of the properly notified circumstances which had not occurred by the time of the expiry of the insurance cover because the claim would arise from the notified circumstances.” [emphasis added]

Was there a valid notification of circumstances in May 2008? Following the email in May 2008, Mr Murphy was instructed by Mr Goddard in his email of 2 May 2008, to investigate the Booms claim and report back to the defendant. In his email of 2 May 2008, Mr Goddard referred to it as a “potentially new matter” and made it clear that he gave no commitment to the claimant that it would be indemnified under the policy if it took any steps in the interim. Even though therefore in August 2008 Mr Goddard took the view that the claim was notified to the First Policy, the defendant appeared to accept that the notification in May 2008 was a valid notification of circumstances under the Second Policy.

The defendant has not pleaded reliance on Exclusion 18 of the policy but sought to argue that the circumstances notified in May 2008 could not be notified to the Second Policy if the circumstances had been notified to the First Policy. In the Amended Defence at paragraph 49, the defendant admitted that the notification that bags were beginning to fail was sent on 2 May 2008 but asserts that the issues arose from circumstances notified in February and/or June 2007. Counsel for the claimant submitted that in 2007 any notification was only in relation to tanks and in 2008 the claim under the policy was a claim for changing both bags and tanks to a hydraulic system.

In the Re-Amended Particulars of Claim the claimant drew a distinction between what it termed the “steel tanks notification” under claim number VF89FV and the Booms claim under VF89RV. Ms Moir’s evidence was that the notification in February 2007 was not registered on the system until she did so in June 2007. At that point the claim number which was automatically generated was VF89RV. In her witness statement (paragraph 40) Ms Moir stated that the reference in her email of 22 June 2007 to a claim reference ending “FV” was “a typographical error”. Ms Moir’s evidence was that she checked the defendant’s system in the week before the trial and the system did not find any record of a claim under reference VF89FV. Mr Dunn’s evidence was also that the claim number VF89FV was not allocated to a professional indemnity claim. His evidence was that several hundred claims were registered every day with numbers and letters being allocated in chronological order and therefore these two claim references would have been registered within a maximum of a week. On the evidence, I find that the reference to a different claim number in 2007 namely “VF89FV” is, likely to have been a typographical error, as asserted by Ms Moir, and there was no separate claim recorded in relation to “steel tanks”.

On the evidence the problem with tanks was mentioned at the meeting in February 2007 and was notified in February 2007. The evidence of Ms Moir (as recorded in her notes) is that the matter was raised at the meeting but the defendant did not set up the claim on the system until she did so in June 2007. Mr Wyllie’s evidence in his witness statement (paragraph 25 (as amended) and 26) is that Ms Moir’s note was only to record:

“concluding comments which were made in passing and by general observation and not in connection with any claim that was being made.”

Further Mr Wyllie suggested that the note prepared by Mr Hill incorrectly recorded what was discussed and that the relevant paragraph (set out above) was produced

“sometime after the event and for reasons specific to AON.”

In cross-examination Mr Wyllie insisted that he told the defendant about the tanks as a “snagging item” and he told the defendant that he did not wish to give a notification because he was dealing with it as a snagging item. In relation to the note produced by Mr Hill, Mr Wyllie’s evidence was that AON inserted the reference to a further circumstance being notified “in order to rewrite history for their own benefit.”

No one from AON was called to give evidence but weighed against the other evidence, in particular the contemporaneous meeting notes of Ms Moir, Mr Wyllie’s assertion that he described this problem with the tanks as merely “snagging” lacks credibility and given that the note prepared by Mr Hill and the notes of Ms Moir are consistent that there was a notification in relation to booms, there is no evidence to support Mr Wyllie’s assertion that AON had rewritten history for their own benefit.

I find therefore on the evidence that the claimant made a notification of circumstances in February 2007.

The scope of the notification in February 2007 is dependent on the state of knowledge of the claimant as is clear from the passages from the judgment of Akenhead J in Kajima cited above. The question is therefore what circumstances the claimant was aware of which might reasonably be expected to produce a claim. Only matters of which the insured is aware can form the basis of a valid notification.

I do not accept Mr Wyllie’s evidence in his witness statement (paragraph 87) that the problem with tanks in February 2007 was a “maintenance issue” as the policy would only operate in relation to design problems and not to performance of work so this would not explain why he chose (notwithstanding his evidence to the contrary) to notify the issue to his insurers.

Counsel for the defendant submitted that it was significant that Mr Wyllie considered that the problems in mid-2008 related back to the circumstances originally notified in February 2007: Mr Wyllie’s email of 23 September 2008 [2/4322] in which he described the booms claim as “one claim” made in February 2007 and his evidence that the “bellowing effect” put pressure on the welded joints. However I reject the defendant’s submission that Mr Wyllie “knew more about the defects with booms than anyone”. As referred to above, this point was addressed expressly by Dr Kirby in cross examination who pointed out that Mr Wyllie was not a metallurgist and had not carried out tests to determine the cause.

The problem identified by Mr Wyllie in February 2007 (as recorded in the notes of the meeting referred to above), was a failure of original bracing. He was looking at options to install a balloon/bag but at that stage he did not know of problems with bags. He knew he had a problem with the tanks at some but not all sites. This evidence does not support the defendant’s contention that flaws in the air drive system were apparent to the claimant at this point.

This conclusion is supported by the evidence of Ms Moir in cross-examination. Her evidence was that Mr Wyllie told her it was a small problem which should be covered by the excess [day 5/630]. Accordingly there was no need to investigate the matter or to instruct a loss adjuster. She said she would have made a note if Mr Wyllie had said there was a problem with the air drive system. Her evidence was:

“the mitigation clause could not be triggered because it could only be triggered in circumstances where there was a risk of third-party claims, which Mr Wyllie had told me there was not. The mitigation clause could not be triggered at that stage, so there was no reason for them to be telling us in writing or otherwise that they were spending money. We would not been interested in mitigation that was not avoiding claims that would otherwise be subject to indemnity under the policy.” [Day 5/631] [emphasis added]

The evidence of Mr Dunn was that the defendant took the view in February 2007 that booms were not going to be a “major issue” [Day 5/511].

This conclusion is supported by the evidence of the proposal form [1/1578] completed in June 2007, in which Mr Wyllie stated that he was proposing to switch to bags; he was in effect sticking with the air drive system. Mr Cotterill accepted that using bags was staying with an air drive system.

As to the expert evidence, neither expert had had an opportunity to examine the tanks and relied on photographs. Dr Kirby was criticised by counsel for the defendant in referring on a couple of occasions to conversations that he had with Mr Wyllie in preparing his report which were not referred to in his report. In addition Dr Kirby had not had access to all the documentation which Mr Cotterill had been given. Nevertheless it seems to me that the evidence of Dr Kirby, a metallurgist, in relation to the reasons why problems were experienced with the tanks was based on scientific explanations of fatigue which were not dependent on any examination of the tanks. Further Dr Kirby’s evidence was not dependent on what he was told by Mr Wyllie, rather he disagreed with the explanations advanced by the claimant at the time for the failure of the tanks. Mr Cotterill’s evidence that the construction of the tanks as a cuboid was flawed from the outset was acknowledged by him not to be a problem with the bags which were spherical. However he could not explain why only some of the tanks had failed if his explanation was correct and he acknowledged that when compiling his report he had been unaware of the internal bracing. Given these limitations I prefer the evidence of Dr Kirby which I accept. The evidence of Dr Kirby in my view does not support the defendant’s case that the problem with the tanks was caused by the pressurisation and depressurisation of tanks such that it could be said that there was a flaw in the air fed system so that it was notification of “symptoms”. Dr Kirby’s evidence was that had the problem with the welds been identified, the air drive system would have worked. Therefore in my view on this evidence there was no causal link between the failures in the tanks and the decision to abandon an air drive system and move to hydraulics.

Counsel for the defendant submitted that the claimant cannot maintain that there was merely a coincidental connection between the problems notified in February and June 2007 and the decision to install hydraulics in May 2008. The defendant submitted that the claimant would not have been proposing a change to hydraulics if it had not had this series of problems in booms with tanks in the first place.

Even if Mr Cotterill’s evidence were to be preferred (namely that the pressurisation of the tanks caused the weld failures) on the causal link between the tank failures and the subsequent claim for the move to a hydraulic system, the claim which was later pursued (the claim for the move to hydraulics) must arise from the circumstances of which the claimant was aware and in my view, for the reasons set out above, the requirement of knowledge of circumstances was not satisfied at the time of the notification in February 2007: the claimant was only aware of a problem with the tanks and not with a wider problem with an air drive system. In accordance with Kajima the claim which is later pursued must arise from the circumstances of which the insured was aware. I find that on the evidence the claimant was not aware in February 2007 of problems with the air drive system such that it could not notify the circumstances which led to a claim for the expenses of the move to a hydraulic system.

By May 2008 the claimant was aware it had a problem with all tanks and the bags were beginning to fail. I find that there was a valid notification of circumstances in May 2008 under the Second Policy.

In 2007 the claimant was the subcontractor installing a diving pool at Leeds. The main contractor was Sir Robert McAlpine Ltd (“SRM”). The pool floor was installed using a drive system designed by WYG. On 25 October 2007 the movable floor jammed and on 26 November 2007 the claimant gave formal notification of circumstances which may have given rise to a claim against it. The claimant claims for the cost of the remedial works to the Leeds dive pool floor following the failure in October 2007. Third party claims from Leeds City Council and from SRM were settled directly by the defendant making payments to Leeds City Council and to SRM. Originally the claimant’s position was that the claim should attach to the First Policy whilst the defendant’s position was that it should attach to the Second Policy. The parties have now reversed their respective positions.

The key events, so far as material to the issues, in my view were as follows:

In his email of 19 February 2007 Mr Wyllie reported the problem with the floors to Ms Gough [1/681]. He explained how hydraulics was the normal way of moving floors with stainless steel ropes but the hydraulics that were installed on other projects were designed wrongly and the claimant was looking for a method that was reliable with no or little maintenance. Stainless steel rope failed after a number of years due to corrosion, work hardening and other factors. The claimant used the Vectran rope which was stronger than stainless steel and “should have been ideal for our application.” However rope failures had occurred at Swiss Cottage, at Crawley and at Newport. At Swiss Cottage and Wolverhampton the rope was to be changed for stainless steel rope, at Crawley new pulleys were to be installed and double ropes provided, and at Newport pulleys were to be replaced. Mr Wyllie also referred to problems with the controls at Newport and West Tallaght: that one theory in relation to Newport was that the depth of floor was wrongly transmitted to the computer; and in relation to West Tallaght the signal on the winches was being distorted resulting in the floor not working. Mr Wyllie summarised the main issues with the winches, the ropes and the controls but noted that “on the positive side” at the installation at Finglas, hydraulics with stainless steel rope had worked for two years and installations they had maintained using hydraulics and stainless steel rope had been working for more than five years. He noted that the industry standard was hydraulics and stainless steel rope. He therefore concluded that:

“our systems have a major design fault and should be changed to stainless steel rope and hydraulics. This will also correct the bad signal problem…”

On 6 August 2007 Mr McKnight of the claimant sent an email to WYG:

“...we have a potential issue on the Leeds dive pool floor.”

The floor has a bulge of about 100 mm in the middle, which is showing as a sort of dome effect across the whole floor. The bulge was previously worse, but the dive team tensioned up the middle pulldown points to try and alleviate this. The outer pulldown points now have no tension on them and the dive team are concerned that the middle PDP’s are doing all the work. Their thoughts are that the buoyancy layouts are wrong.

Can you review the design of this floor immediately...we are now under extreme pressure to get this issue resolved ASAP” [1/2032]

There was then a further email the same day from Mr McKnight:

“as an add-on to this, we have had six anchor bolts pull out of the floor already, which is a major concern…”

Mr McKnight then sent a further email that day:

“after discussions with David, I should point out that the anchors were pulled out because of uneven tensioning on the ropes during filling of the pool. David was trying to show that if there is uneven tensioning between the inner and outer PDP’s, then there is the potential for the floor to pull anchors out of the concrete…”

WYG responded that the layout for the blocks was incorrect and the effect of having the extra blocks was to produce an uneven floor with some doming in the middle and at the edges. [1/2029]

On 27 September 2007 SRM wrote to the claimant expressing concern over the failure of two rope connectors and subsequent damage to the ropes under the diving pool floating floor [1/2170]. The claimant responded by letter of 4 October 2007 expressing the conclusion that the cause of the failure was twists installed on the cables at the time of installation and as the floor moved, the twists had moved down the rope causing the failure of the connections. [1/2195]

On 25 October 2007 there was a “catastrophic failure” of the pool floor (Mr Cotterill’s supplementary report at 2.6). In a letter from SRM dated 31 October 2007 SRM recorded that the claimant had advised SRM that it believed the primary cause of the failure was a stainless steel cable which became trapped due to a design failure which omitted any requirement for the pulley to have a “restraining bar” to prevent the cable becoming trapped. [1/2315]

Mr Wyllie took the view that the failure of the Leeds dive pool floor arose from the circumstances notified to the First Policy. On 19 November 2007 he wrote to Ms Gough referring to the LDPF:

“…I consider the failure as a design error with WYG on the hydraulics. The design was part of the replacement work currently being undertaken and I see this as part of that claim.” [2/2459]

On 26 November 2007 Ms Gough wrote to Mr Goddard:

“… [David Wyllie] has given me instructions to make a formal notification of circumstances which may give rise to a claim against Europools in respect of the distortion of the pool floor and bracket failure at the Leeds pool as a result of the displacement and subsequent snagging of two cables.

Whilst we do note your comments on proximate cause and have prompted the insured to notify the circumstances, we would however like to reserve the insured’s right to indemnity under the 2006/7 policy period should it subsequently be identified that this matter arises out of the same act error or omission as the notification made in February 2007.” [2/2554].

The defendant took the view that the Leeds floor was a separate claim: responding to the email correspondence from Mr Wyllie and Ms Gough on 19 November 2007, Mr Goddard in an email dated 20 November 2007 stated that:

“there is clearly a new notification of circumstances to be made to the current policy year.… The proximate cause of the latest problem encountered in the Leeds pool remains to be established but it would appear that the displacement and subsequent snagging of two cables lead to distortion of the pool floor and consequent bracket failure...

The point in relation to the insured’s professional indemnity insurance policy is that the Leeds floor has been designed and installed as part of the rectification work approved following the insured’s request for indemnity made to the expired policy year. The proximate cause of that loss was, I think it is agreed, the design deficiency inherent in the use of rope cables. To the extent that any deficiency with the redesigned floor may result in a professional negligence claim… that seems to me to be a new claim in relation to new circumstances (including a new design) with a different proximate cause. Hence it requires to be notified to the current policy year…” [2/2540][emphasis added]

The claimant maintained its view that the LDPF claim attached to the First Policy: on 23 September 2008 Mr Wyllie wrote to Ms Gough and referring to the LDPF said:

“we see this as part of the original claim.…

“WYG designed floor with 12 pulldown points working in a group of four points. Each group had a different load applied to it.… This imbalance of the loads was the start of the problem. The cables stretch as the load applied to the cables. As the loads are different the length of stretch is different… When the two cables jammed, one on each system the floor at these point (sic) travelled at the distance of the ramp i.e. a one-to-one ratio. The remaining pulldown points travelled at a 2: 1 ratio. The result was the floor started to arch until the joint connecting the beams together failed and then a chain reaction started of brackets failing. WYG were appointed to design hydraulics and they failed to install cable retainers. Had these been fitted then the cables could not have come off the pulley and no damage to the floor would have happened. Accordingly, there were two reasons why the WYG design caused the failure. The first is the uneven load distribution and the main reason was the lack of cable retainers. As the hydraulics design was part of the main claim and this was what caused the failure this is the reason why I came (sic) that it should be treated as part of the main claim not a separate claim.” [2/4322][Emphasis added]

The defendant maintained the contrary view: as expressed in an email from Mr Goddard on 10 October 2008 to Ms Gough, in his view the hydraulics design was either:

“the solution to the original design deficiency (the use of Vectron rope) and therefore a deficiency in the design solution is a new claim attracting a new excess, or the hydraulics design was itself a separate design to the use of Vectron rope and therefore, again, a separate claim.” [2/4372] [emphasis added]

There were a number of reports into the causes of the failure. For example a report from the claimant in February 2008 listed a number of matters: the speed of the rams to the acceleration of the floor permitting slack in the two cables which permitted them to fall off the pulley; the load on the cables; the two pulleys jammed and then failed to snap back onto the pulleys; and the increased angles in the cables which induced turn.

As in relation to the Booms claim, counsel for the claimant submitted that whether the claimant is entitled to recover under the First Policy is of little relevance and the question is whether the claimant is entitled to recover under the Second Policy. Counsel for the claimant submitted that in any event there would have been no cover for the LDPF claim under the First Policy: the costs claimed are for fixing the floor and the claimant could not give notice of costs prior to the failure in October 2007; in February/June 2007 the floor had not been installed let alone failed and the claimant could not therefore have notified defective design; the scope of the notification in February 2007 was a flaw in the rope and winch system and the LDPF did not use the rope and winch system but was a hydraulic system; the circumstances notified in February 2007 could not be said to be reasonably expected to produce a claim as it was a problem with the rope and winch system which might reasonably be expected to produce a claim; the claim for the LDPF was not causally linked to the failure of the rope and winch system.

Counsel for the defendant submitted that the claim can only attach to one policy and the claim in relation to the LDPF all arose out of circumstances notified in February 2007. Counsel for the defendant submitted that the February 2007 notification in relation to pool floors was of broad scope relating to a wide range of failures at different sites which were causing pool floors not to rise properly. The claimant informed insurers of a revised design package to eliminate the risk of future problems. Thus the claimant notified the defendant of its failure to develop a working design for pool floors and put the defendant on notice of the fact that this circumstance could give rise to third-party claims. The Leeds dive pool failed in October 2007 because the claimant had still failed to develop a working pool floor design.

The defendant pleads that the email of 26 November 2007 did not constitute a notification of circumstances and further the relevant circumstances had already been notified by the claimant to the defendant by way of the February 2007 notification. The evidence of Ms Goddard in cross-examination was that she accepted it as a notification of circumstances to the second policy year. [Day 6/702]

The question whether the notification of circumstances in February 2007 encompassed the failure of the LDPF such that the claim could be said to attach to the First Policy, applying the principles in Kajima set out above, depends firstly on the claimant’s state of knowledge and secondly on whether there was a causal link.

Dealing first with the principle that only matters of which the insured is aware can form the basis of a valid notification, in my view, on the evidence, in February 2007 the claimant had identified a problem with its winch and rope system and this was to be contrasted with a system using stainless steel ropes and hydraulics which according to Mr Wyllie (as stated in his email of 19 February 2007 referred to above) was both industry-standard and had been working for a number of years. The scope of the notification of circumstances in February 2007 was not therefore a failure to develop a working design for pool floors; the evidence is clear that at that time the claimant believed that there was a valid alternative system of using stainless steel ropes and hydraulics.

Further there were no circumstances that the claimant was aware of which might reasonably be expected to produce a claim in relation to the LDPF. The claim has to arise from the circumstances of which the insured was aware; it cannot arise from other circumstances which relate to matters which the insured was not aware at the time of notification.

As noted in Mr Cotterill’s supplemental report (para 2.3), WYG was involved with work to develop new floor designs as early as October 2006 and WYG was involved in design of hydraulic systems by December 2006. Mr Cotterill described this work as being done “in parallel” with the ongoing modifications to the Vectran rope and winch system. He then refers to emails between WYG and the claimant in April, May and August 2007 which in his opinion suggested that the claimant:

“was still in the process of developing a working pool floor for Leeds as late as August 2007. It did not actually finalise a working design which could be put to use by the public until after the catastrophic failure…”

At paragraph 2.8 of that supplemental report he concludes:

“therefore, the Vectran rope and winch system went through a whole series of iterations, all of which failed for different reasons before it was finally decided that it could not be made to work. In parallel, the hydraulic drive system (to replace the Vectran system) for Leeds pool also went through a series of iterations which failed for a multitude of reasons before a working design were settled upon. A working pool floor design for Leeds was first realised only after the catastrophic failure in October 2007.”[Emphasis added]

The fact that WYG was already working on a design for the LDPF cannot of itself link it to the circumstances of which Mr Wyllie was aware in February 2007 which might reasonably be expected to produce a claim (and which he notified) that is the problems with the rope and winch system. It seems to me therefore clear on the evidence that the development of the Leeds pool was being worked upon “in parallel” to the iterations of the rope and winch system and there were no circumstances that the claimant was aware of in February 2007 which might reasonably be expected to produce a claim in relation to the LDPF.

In February 2007 the claimant was aware of a problem with winches and ropes and not a failure to develop a working design for pool floors. The additional problems with the computer/control system whilst not wholly understood at the time do not in my view justify an inference of a broader problem with pool floors and cannot extend to an inference that there was an overall failure to design pool floors when it is clear that at that point a system using stainless steel rope and hydraulics appeared to be working satisfactorily.

Further there was in my view no causal connection between the circumstances notified in February 2007 and what happened in October 2007 in Leeds.

Mr Wyllie took the view that the hydraulics design was part of the main claim. His explanation in cross-examination that he knew nothing about insurance or the terms did not strike me as a satisfactory explanation given the detailed email exchanges that took place between Mr Wyllie, its broker and the defendant. However it would in my view be a logical inference that his motive for so doing was he was seeking to avoid paying the higher excess which attached to the Second Policy (and was expressly referred to by Mr Goddard in his email of 10 October 2008 above) given that at that point he did not anticipate the limit of indemnity being exceeded. It is more persuasive, though not conclusive, that Ms Goddard who at the material time was the technical claims manager heading up the professional finance team took the view that it was a new matter and that there was a sufficient break in the chain of causation [Day 6/702].

For the defendant it was submitted that there were a number of lesser failures in the months preceding the failure in October 2007 and the failure of 25 October 2007 whilst the most serious, was only one of the sequence of failures which showed that the claimant had not developed a working pool floor design for the LDPF. In cross-examination Mr Wyllie categorised these problems prior to the failure in October 2007 as commissioning problems and not design failure.

Mr Cotterill’s evidence in cross-examination was that the problem with the original rope and winch system was that there was excessive wear on the Vectran ropes and that excessive wear resulted in the ropes failing. Mr Cotterill confirmed that his understanding was that the LDPF was never fitted with Vectran ropes and the LDPF was installed with a hydraulic system. [Day 6/804]

Dr Kirby’s evidence in cross-examination [day 6/798] was that the problem at Leeds was a problem in relation to a failure of the design to provide for cable retainers on the hydraulic hammerhead pulleys and other design features which had allowed the cables to become slack.

Counsel for the defendant sought to rely on the expert evidence of Mr Cotterill [C2/1/19 at 2.52] that:

“the catastrophic failure of the pulley mechanism …cannot be separated from the ongoing remedial works to replace the Vectran rope.”

and that

“…the absence of retaining bars within the new hydraulic design …was all part of the remedial process of moving from the Vectran rope drive design to the hydraulic drive design” [Joint statement at paragraph 18]

However in cross-examination Mr Cotterill’s evidence was that the failure of the LDPF could not be separated “chronologically” from the claim for the replacement of the rope and winch system but he did not agree that they could not be separated from a “causative” point of view. His evidence was that there were:

“entirely different types of causes for the actual failures.… The engineering failures were different in each case.” [Day 6/810]

I find therefore on the evidence and the reasons discussed above that:

Given my findings above on the LDPF, it is not necessary for me to consider the issue of whether the defendant is estopped from asserting that the LDPF claim attaches to the Second Policy.

Condition 4 of both policies provided:

“The Company shall be entitled to take over and conduct in the name of the Insured the defence or settlement of any Claim or to prosecute in the name of the insured for its own benefit any Claim and shall have full discretion in the conduct of any proceedings and in the settlement of any Claim.”

It is the claimant’s pleaded case (paragraph 63 of the Re-Amended Particulars of Claim) that it was an implied term that if the defendant decided to bring proceedings against third parties in the name of the claimant then the defendant:

In closing submissions counsel for the claimant expressed its case as an express agreement made by Mr Murphy acting with the defendant’s authority or in the alternative as a consequence of the defendant deciding to pursue its rights of recovery. The former does not accord with the pleaded case and I do not therefore propose to consider it. The latter appears to relate to the implied term although no arguments were advanced as to why such term was necessary or obvious.

Counsel for the defendant submitted that the test for an implied term is whether it is an obvious incident of the contract or commercially necessary: Marks & Spencer v Paribas [2015] UKSC 72 and [2016] AC 742. The defendant says that the term which the claimant seeks to imply is not necessary or obvious. A claim under condition 4 is one which the defendant pursues, with the defendant funding the claim and paying the lawyers directly.

The defendant did accept (paragraph 53B of the Amended Defence) that there was an implied term that if the defendant exercised its right to prosecute a claim under condition 4, it would indemnify the claimant for its liability under costs orders made in the proceedings subject to the following:

On 29 September 2010 Mr Dunn wrote to Mr Murphy:

“…I also confirm agreement for you to start efforts at recovery/contribution from White Young Green.” [2/6294]

On 7 October 2010 Mr Wyllie emailed Mr Murphy copied to Mr McFarlane at Semple Fraser:

“… You will help us to start the case against WYG. RSA will need to approve your full involvement but Douglas has OK your involvement to get things started.” [6302]

There was a meeting on 8 June 2011 between Mr MacFarlane of Semple Fraser, Mr Murphy and Mr Wyllie at which the WYG litigation appears to have been discussed. Mr Murphy’s unsigned witness statement at paragraph 73 states that Mr Murphy participated in number of meetings with the claimant and Semple Fraser in order to assess “the viability of the recovery action”. Mr Murphy’s evidence in that witness statement is that he reported back to the defendant on these developments.

On 1 October 2012 Semple Fraser wrote to Mr Murphy in relation to White Young Green noting that proceedings had been commenced in Scotland and asking to be put in funds to be able to issue proceedings in the English courts. The letter included the following warning:

“please note that the cost to take this matter to trial will be substantial… but we will keep you informed and will advise you in advance of each step what those costs are likely to be. You should also note that upon the issue of the proceedings, there is a potential exposure to the costs incurred by WYG in defending the action.” [2/7545(II)].

Mr Murphy’s evidence in cross-examination on this letter was that he knew proceedings had been commenced in Scotland and he confirmed that he had given authority for proceedings to be issued in Scotland. Mr Murphy also confirmed his understanding that the reason that the proceedings were to be issued in the English courts were in part for the potential benefit of the defendant.

The email of 1 October was followed by an email on 3 October from Semple Fraser chasing for confirmation of instructions to commence proceedings and Mr Murphy responded on the same day:

“confirming instructions to proceed.”

On 5 October 2012 an email from Mr Wyllie to Semple Fraser states:

“I have spoken to Douglas today and agreed that we will make the payment to you today and RSA will reimburse me in the next payment.” [2/7547(II)]

In his unsigned witness statement Mr Murphy made reference to a report dated 20 November 2012 in which he reported to the defendant that the claimant had commenced legal action against WYG. However in his oral evidence Mr Murphy stated that he believed that that letter was a draft and was never sent. The version which was sent in January 2013 made no reference to the legal proceedings.

In February 2013 there was an exchange between Mr Wyllie and Semple Fraser. This included a request from WYG that the claim should be stayed whilst the claimant complied with the protocol. Mr Wyllie’s response refers to having spoken to Mr Murphy and Mr Murphy is copied in on the exchanges.

In an email in March 2013 Mr Wyllie sent an email to Mr Murphy referring to moving his legal files from Semple Fraser to Weightmans. He states:

“if you need any formal notice etc. please let me know and I will get Stuart to drop you a line.”

Mr Murphy accepted in cross-examination that the reason Mr Wyllie was asking Mr Murphy whether any formal notice was needed was because Mr Wyllie knew that Mr Murphy, wearing his hat as the defendant’s representative, was involved in the proceedings.

In a letter of 12 May 2013 from Mr Murphy to the defendant, Mr Murphy stated:

“it should be emphasised, as discussed at our meeting, that there are reasonable prospects of securing recovery/contribution from the original designers (Whyte Young Green) in relation to the original design deficiencies… We have indicated the views of the solicitors whose services have been retained in connection with the “recovery” procedures and the confidence which they have expressed in respect of the success possibilities...” [2/7815]

In June 2013 Mr Wyllie instructed Mr MacFarlane to stop court action until he had heard from Mr Ward concerning his complaint to the defendant. On 20 June 2013 Mr Wyllie asked Mr Ward to confirm whether the defendant

“wish to take over the court case and put us in funds for the legal costs. “We are happy to continue the case solely under Euro Pools but RSA loss (sic) all rights to the case.”

On 23 July 2013 Mr Wyllie wrote to Mr Dunn noting that the WYG case was back in court the following morning:

“the immediate problem is the legal fees tomorrow. As Euro Pools is out of RSA funds does the RSA wish me to pay the legal fee personally and claim them back from RSA or abandon the case and not appear.”

Mr Dunn responded that there was still enough available to cover the legal costs:

“without prejudice as to whether or not we adopt the legal action costs.”

Mr Wyllie said in response:

“you will note that I allowed the court case to continue today so protecting your valuable position. I will maintain this position for a further two weeks and that should give you sufficient time to obtain your opinion.”

In a letter of 31 October 2014 to Kennedys, Mr Wyllie wrote that Mr MacFarlane had supplied a copy of all documents relating to the WYG case

“for the period that RSA were responsible for the fees…RSA have now no interest in these cases and we have no responsibility to recover any costs that they may have spent…”

In my view the wording of condition 4 is not entirely clear. It refers to “Claim” which in the context of the policy would seem to refer to a third party claim against the insured. The first half of the clause contemplates the insurer taking over the defence of a claim brought against the insured which is consistent with an interpretation of “claim” as being the third party claim brought against the insured. The second half of the clause contemplates the insurer “prosecuting” a claim but in this sense appears to mean a claim against a third party rather than a third party claim brought against the insured. Assuming that is what is intended, condition 4 is nevertheless not by its terms limited to the circumstances when the insurer has paid out under the policy and is seeking to exercise its rights of subrogation by bringing proceedings against the third party.

On the evidence I find that the proceedings against WYG were approved by the defendant for the following reasons.

Accordingly I find on the evidence that the proceedings against WYG were being prosecuted by the defendant in the name of the claimant partly but not wholly for its benefit.

I do not however accept that it was necessary to imply a term that the defendant would indemnify the claimant for any costs and expenses the claimant incurred. The test as stated by Lord Neuberger in Marks & Spencer at [21] is that “necessity for business efficacy” involves a value judgment, that the test is not one of “absolute necessity” but the term can only be implied if, without the term, the contract would lack “commercial or practical coherence”. A term should not be implied merely because it appears fair. Adopting this test, there was no reason why the claimant should incur any costs and expenses if the defendant took proceedings in the name of the claimant. While such a term might therefore be regarded as reasonable I cannot say that it needs to be implied because without it the contract would lack commercial or practical coherence. Payment could be made directly by the defendant of costs and expenses and therefore there is no necessity to imply a term that the defendant would indemnify the claimant for costs and expenses the claimant incurred.

I accept the defendant’s case that it would be necessary to imply a term that the defendant should indemnify the claimant in respect of any adverse costs orders made against the claimant in such proceedings but only if the defendant had prosecuted the claim. Accordingly it seems to me that once the claimant excluded the defendant from the conduct of the proceedings, the proceedings ceased to fall within condition 4 as it could no longer be said that the defendant was “prosecuting” a claim and it no longer retained “full discretion” in the conduct of the proceedings and in any settlement.

Accordingly in my view the implied indemnity for adverse costs orders does not extend to adverse costs orders made at a time when the defendant was no longer prosecuting the claim which I find on the evidence was from around August 2013.

Further the implied term in relation to adverse costs orders would be “necessary” only to cover the proportion of the costs which were related to the claim covered by the policy and would not extend to the costs which related to claims which were outside the scope of the policy.

In the light of my findings above, the first issue to be determined in respect of limitation is the date from which limitation runs under the policy. It is the defendant’s case that any claim for mitigation expenses incurred by the claimant is time-barred to the extent that the relevant expenses were incurred prior to 28 January 2010 (six years before the issue of proceedings).

It is the claimant’s case that limitation runs from breach and the defendant could not be in breach of its obligation to reimburse the claimant for the costs and expenses it had incurred unless and until it had been told the total amount of those costs and expenses. In this case the defendant was never told the total amount of the costs and expenses because in 2013 the defendant was in anticipatory breach of contract when it stated that it would not pay any further amounts to the claimant.

Counsel for the defendant submitted that whilst a cause of action under liability insurance does not accrue until the amount of the liability to the third party is established, the mitigation of loss clause is a first party financial loss which is suffered when the expense is incurred.

Counsel for the defendant referred me to Colinvaux’s Law of Insurance at 10 – 076 [Tab 26]:

“There is a consistent line of authority for the proposition that the date on which the assured’s action accrues is the date on which the insured peril occurs and not on the later date when the loss is manifested, the assured incurs expenditure or the insurers deny liability, the principle being that the insurer has agreed to hold the assured harmless against the occurrence of an insured event so that when the event takes place the insurers are in immediate and automatic breach of contract and are liable for unliquidated damages. Although it has sometimes been indicated that the occurrence of the peril is a breach of contract, the notion that insurers may be in breach of contract several hundred times every day is unattractive and a preferable way of stating the principle is that a contract of insurance is:

“an agreement by the insurer to confer upon the insured a contractual right which, prima facie, comes into existence immediately when loss is suffered by the happening of event insured against, to be put by the insurer into the same position which the insurer would have been had the event not occurred but in no better position.”

In support of his submission that a claim for mitigation costs is a claim for first party financial loss counsel for the defendant relied on Teal Assurance Company Limited v W R Berkley Insurance (Europe) Limited and another [2013] UKSC 57 at [18]- [19] and [2013] 4 All E.R. 643. Counsel also referred to the passage in Lord Goff’s speech in The Fanti [1991] 2 AC 1 at pages 35 to 36:

“once the loss is suffered or the expense incurred, the indemnifier is in breach of contract having failed to hold the indemnified person harmless against the relevant loss or expense.”

In this case the policy provided that the insurer would indemnify the insured in respect of any action taken to mitigate a loss or potential loss (subject to the costs and expenses being necessarily incurred and the loss being one that would otherwise be the subject of a third party claim). Although therefore there is no authority directly on the point, it seems to me that the mitigation of loss clause is a first party financial loss clause and that the general principle as set out in Colinvaux (and referred to above) applies namely that the insurer has agreed to hold the assured harmless against a specified loss or expense and once the loss is suffered or the expense incurred, the indemnifier is in breach of contract for having failed to hold the indemnified person harmless against the relevant loss or expense. Accordingly the right to an indemnity (and the cause of action) arises immediately the expense is incurred to mitigate a loss or potential loss.

Whilst not directly on point, it seems to me that the judgment in Teal Assurance does provide some support for this conclusion. The policy in that case provided that the insurer would indemnify the insured for costs and expenses incurred in rectifying a design defect provided the insured reported the claim as soon as practicable after discovery of the defect and proved that the claim arose out of a design defect. Lord Mance held that as and when the company incurred quantified expenses they fell to be set against the policy retention and deductible.

“[16] Mr Christopher Butcher QC for Teal challenges the proposition that the ascertainment of a claim against the insured exhausts the insured's insurance policy cover pro tanto. …. As regards expenses incurred by BV and covered under Endorsement No 8 to the Lexington policy, he submits that BV as insured can again choose which expenses are paid first and against which claim or claims it sets the self-insured retention or deductible, and, after the retention and deductible are used up, in respect of which claim it claims payment of such expenses from its insurer; in the last situation, it is again only when insurers pay those, rather than any earlier ascertained, expenses, that the cover can be said to be exhausted.”

[17] I cannot accept Mr Butcher's case on these points…

[18] Similar considerations govern the incurring of ascertained expenses where, as here under Endorsement No 8 to the Lexington policy, these fall potentially within the policy indemnity. As and when BV incurs quantified expenses, they fall to be set against the policy retention and deductible; over and above the retention and deductible, any further expenses incurred fall not within the retention and deductible, but within the insurance provided by Lexington (and thereafter, potentially within the successive excess layers).” [Emphasis added]

I do not accept the submission that the insurer needs to have been told the amount that is being claimed before liability can arise under the mitigation of loss clause. There is a requirement under clause 5 of the policy for prior notice to be given to the insurer of the insured’s intention to incur costs and expenses so the insurer will be aware of liability arising under the indemnity and thus there is no legal or practical reason why the cause of action cannot arise from the date on which the relevant expenses are incurred.

For the reasons set out above I find that the claim for costs and expenses is time barred to the extent that the cause of action arose prior to 28 January 2010, the date falling six years before the issue of proceedings.

I therefore need to consider the claimant’s argument that the claimant has allocated (at the time of its opening submissions) lump sum interim payments made to it by the defendant on account of the costs and expenses, as discharging the claimant’s costs and expenses in chronological order, that is paying the claimant’s earliest costs and expenses first.

Counsel for the claimant submitted that the same rules on the appropriation of debts also apply to damages claims. Counsel relied on the judgment of Eder J in Otkritie v Uromov [2014] EWHC 755 (Comm). Further that it was open to the claimant to appropriate monies received “up to the very last moment.” (Chitty on Contracts at [21 – 063]; Seymour v Pickett [1905] 1 KB 715).

Counsel for the defendant submitted that appropriation is a doctrine which applies specifically to the payment of debts and a creditor can only appropriate payments before issuing proceedings (Chitty at [28 – 129]). Further that the case of Teal Assurance establishes that the insured, when receiving an indemnity for particular liabilities to third parties, cannot decide the order in which indemnifying payments of an insurer attach.

It seems to me that Teal Assurance, as referred to above, was dealing with a different point namely that the insured could not affect the order in which claims attached to the policy. The issue of appropriation goes not to the order in which claims for expenses attached to the policy but having accepted that a liability to indemnify has arisen, how interim payments operate to reduce the overall liability.

In my view, an obligation having arisen on the part of the defendant to indemnify the claimant, a right of action for damages for breach of contract has arisen. In awarding damages, it must be right that the court gives credit for sums already paid by the defendant in satisfaction of its obligation to indemnify the claimant. In Otkritie Eder J was dealing with the position where other recoveries had been received by the claimants and he had to determine how these should be allocated to the judgment sum between different defendants. He held that the claimants had a choice as to how the recoveries would be appropriated so long as it was not “obviously unsustainable” (Paragraph 13 of the judgment). By analogy with the approach adopted by Eder J in Otkritie, if the appropriation is made bona fide and without collusion, the claimant has a choice as to how to appropriate the monies received between the different claims.

However I have to consider whether a creditor can appropriate the payment to a time barred debt. Chitty at [28 – 129] suggests that such an appropriation can only be made before the commencement of proceedings. Counsel for the claimant seeks to rely on Chitty at paragraphs [21 – 063] that the creditor’s right to appropriate may be exercised “up to the very last moment”. However I note that in Seymour v Pickett (referred to by Chitty in that paragraph and relied on by the claimant) the debt was not time-barred and Stirling LJ referred in his judgment to Smith v Betty, an action in which the defendant pleaded the statute of limitations and an order was made by which an account was directed in substance excluding statute barred items and the order prevented subsequent appropriation to statute barred items. Stirling LJ said:

“I do not profess to give an exhaustive account of the circumstances which may preclude a creditor from exercising his right of appropriation. All that it is necessary now to say is that, until something has happened which would render it inequitable for the creditor to do so, he is at liberty to exercise his right.”

Accordingly it seems to me that the claimant has not established on the authorities, a right for the claimant to appropriate payments after the commencement of proceedings to a time barred debt. Otherwise it would be open to a creditor to circumvent the rules on limitation and this would appear to be inequitable as referred to by Stirling LJ.

The effect of the claimant being unable to make an appropriation after the commencement of proceedings leaves the question as to how sums paid by the defendant after 28 January 2010 should be treated.

Counsel for the defendant submitted that either costs incurred prior to 28 January 2010 should be treated as time-barred if and to the extent they are not covered by an indemnifying payment which also predates 28 January 2010 or, alternatively, payments made after 28 January 2010 should be divided pro rata between expenses incurred before that date and expenses incurred after that date. Counsel for the defendant submitted that this first approach assumes that payments made by the defendant after January 2010 were made to indemnify costs incurred after that time which, he submitted, accorded with the evidence that at the end of 2009 the defendant had “largely satisfied” the claimant’s subsisting claims. Counsel for the defendant submitted that payments made reflected schedules requesting payments and recommendations about the appropriate level of payment.

I do not accept the defendant’s first alternative. It is clear on the evidence that the defendant made payment on account of the sums due to the claimant but the interim payments tended to be less than the amount claimed and it was accepted by the defendant’s witnesses that the expectation was that there would need to be a final reconciliation of the overall amount due. It cannot be the case therefore that payments made after 28 January 2010 should be treated as discharging only obligations incurred after 28 January 2010. The second alternative seems to me to be a preferable solution, albeit not a perfect one, accepting (as the defendant accepted in submissions) that the defendant’s payments were not “hypothecated” to particular expenses.

I accept that no payment was made by the defendant in respect of the LDPF claim after 28 January 2010. In relation to the Floors claim and the Booms claim I find, for the reasons set out above, that payments made by the defendant after 28 January 2010 should be divided pro rata between expenses incurred before that date and expenses incurred after that date.

In view of my findings on limitation under the policy, I have to consider the claimant’s case that the claimant and the defendant reached a “freestanding agreement” that where remedial works had been approved by Mr Murphy, the defendant would indemnify the claimant for the reasonable cost of carrying out those remedial works. In relation to the Floors Claim, this issue has additional significance in that the claimant is seeking to recover the full cost of the remedial works which it carried out notwithstanding that the cost of the remedial works exceeds the policy limit under the Second Policy of £5 million.

Counsel for the claimant submitted that there was an express agreement between the defendant and the claimant that the defendant would pay for the remedial works which the defendant had agreed would be carried out. Counsel submitted that the defendant did not have the expertise or the manpower to approve the detail of the works so it made sense for the defendant to appoint its agent, Douglas Murphy to approve the detailed work. Counsel submitted that there was no point in having a loss adjuster if the claimant could not rely on his approval to carry out the works. Counsel submitted that the claimant had a choice whether to do the works and then make a claim for the costs of the remedial work or to seek to agree in advance whether the works are those for which the insurer will pay. Counsel submitted that this is similar to a situation where an insurer opts to reinstate property and a separate contract comes into existence.

Counsel for the defendant submitted that there was no separate agreement that the defendant would pay for works above the policy limit; that Mr Murphy had no actual nor ostensible authority to enter into a freestanding agreement to commit the defendant to pay for works without limit and did not in fact enter into such an agreement. Counsel submitted that the evidence of the witnesses for the defendant was that although the defendant would generally accept the recommendations of Douglas Murphy, ultimately the decision whether to pay was one for the defendant.

The parties referred to a number of emails where the defendant gave the go-ahead for the remedial works.

On 2 April 2007 Mr Goddard sent an email to Ms Gough, the material part of which reads:

“The issue, in a nutshell, is not whether the policy responds but the extent to which it responds… The insured could, of course, simply inform us of, and then proceed with, the remedial action of their choice, but I can understand their preference to agree in advance with us the extent of the indemnity. I intend providing this, at least in broad brush terms, very shortly. Going forward, my intention is that the insured, as the experts in their field, be left to manage the remedial works programme albeit with Crawford staying involved so that, for each pool project, those costs which will be indemnifiable under our policy can be agreed.” [Emphasis added]

On 4 April 2007 Mr Goddard emailed Ms Gough:

“… I have had a long conversation with David Wyllie. I have given him the go-ahead to communicate to clients that rope/winch will be replaced by double steel cable and hydraulics...we discussed the practicalities of Crawfords working with Europools on the ordering of and payment for materials, labour etc., and this is something that Crawfords will work on with David…to agree a sensible framework. I stressed to David that he is nevertheless quite at liberty to take whatever decisions he wants to in this regard, without prior referral to Crawfords or R&SA, the only caveat being that he must satisfy us if required of the reasonableness of the expenditure…” [ 1/1361]

On the same day Mr Wyllie emailed Mr Goddard:

“further to our conversation today I am pleased the full confirmation has been given to proceed with the movable floor works. This will include two stainless steel cables to each pulldown point and the change from winches to hydraulics on existing floors.…”

“It was agreed that RSA will fund the purchase of materials in advance, and we will carry the labour expenses, office and administration costs on a monthly basis.” [Emphasis added]

The evidence was that Mr Murphy would receive from the claimant detailed schedules of work carried out, Mr Murphy would send regular reports to the defendant updating the defendant on the works and requesting payment of the amount which he had assessed based on the schedules and advising when the level of reserve needed to be increased. The defendant would then make payment. For example on 25May 2007 Mr Goddard emailed Mr Wyllie:

“I have asked Douglas to advise R&SA next week on the level of the first interim payment following his review of the schedule you have provided. He will contact you to the extent that supporting documentation is needed for first or subsequent payments. RSA will be putting Crawford and Co in funds to make initial payment(s) to you.”

On 15 June 2007 Mr Goddard emailed Mr Murphy:

“….The payment released is as expected bearing in mind the schedule sent to us by Europools. Could I just remind you, however, of the need to seek our prior approval to all future payments...”

Mr Murphy’s evidence in cross-examination was that the claimant was going to be paid by the defendant for the mitigation works, and he did not envisage that having told the claimant that he was satisfied with the proposed remedial works, the defendant could turn round and say that it would not pay for the works.

The claimant’s case as expressed in the pleadings is on the basis that Mr Murphy had actual or ostensible authority to act on behalf of the defendant in authorising the works carried out by the claimant and that by authorising the works Mr Murphy expressly or implicitly agreed and/or represented that the claimant would be indemnified for the cost of carrying out those works irrespective of the ultimate cost and/or the operation of any applicable limit of indemnity. (Claimant’s Response to the Defendant’s Part 18 Request). In oral closing submissions, the case was presented somewhat differently in my view as an agreement between the defendant and claimant. Counsel for the claimant submitted that:

“The contract is made between RSA and Euro Pools where RSA, when they are presented with a claim under the mitigation costs in relation to each of the three problems, consider it. They look at the various policy issues arising and they agree that Euro Pools can carry out a remedial scheme of works. It is part of that agreement between Euro Pools and RSA that the works that are going to be carried out and treated as mitigation costs will be vetted, as it were, by Douglas Murphy.”

This latter case appears to be consistent with Mr Wyllie’s evidence in cross-examination who when asked whether Mr Murphy had promised him that the programme of works would be paid for by the defendant irrespective of cost, replied that he was instructed to do the work at the outset by the defendant and as a result he expected to be paid for it. He said:

“I thought that was understood by all parties at the start, when we first got instructed, because we are doing it on a time-and actual cost basis of time, material and labour. We were never doing it on a fixed priced quotation basis, so nobody knew what the costs are going to be. The work was instructed and Douglas Murphy is going to check that all costs incurred are reasonable within the cover of the policy and recommend the sums to be paid to Euro pools and RSA, was my understanding, paid on the sums.”

Dealing therefore firstly with the submission that there was an express agreement between the defendant and the claimant that the works would be carried out and paid for subject only to vetting by Mr Murphy. The fact that the claimant wanted to agree the scheme of remedial works in advance and did in fact do so (in the case of the moveable floors, the approval of the move from rope and winch to double steel cable and hydraulics as set out in the emails referred to above), does not establish, or lead to an inference, that the insurer had agreed to waive the overall limit of cover. It seems to me consistent with the operation of an insurance policy for mitigation of loss that the insured will want to check that the cover applies before undertaking a programme of work which it believes is covered by the policy. However there is no email which expressly stated that an agreement had been reached between the defendant and the claimant that work could be carried out even if it was above the policy limit and the defendant would pay for such work. The phrase “with Crawford staying involved so that, for each pool project, those costs which will be indemnifiable under our policy can be agreed” in Mr Goddard’s email of 2 April (referred to above), suggests that the defendant agreed that the works were within the scope of the indemnity not that they would be paid irrespective of the policy limit. Mr Wyllie’s evidence in cross-examination was that he accepted that interpretation of the email but did not accept that the policy controlled everything. However the claimant has not established by reference to other contemporaneous documents that this separate agreement for which it contends had been reached. None of the email exchanges relied upon lead to an inference in my view that the defendant was agreeing to works for which, provided only that Mr Murphy was satisfied that they were necessary, it would reimburse the claimant even if the works were in excess of the policy limit.

The defendant wanted to be satisfied that the mitigation works were necessary and therefore within the scope of the policy. That was Mr Murphy’s role and the fact that the defendant retained overall control and the claimant’s works, though approved as to scope, still had to fall within the limit of the policy is not inconsistent with Mr Murphy’s role. In my view the evidence of Ms Goddard supports this conclusion:

“Q. … It is in everyone's interest, is it not, so there are not arguments later, to reach an agreement as to what works are going to be covered by the policy?”

“A. In the most general sense that is correct, but of course the devil is in the detail.”

Q. Yes, of course. What otherwise might happen is that Euro Pools says, "I have made a claim under this policy"; it charges off and implements a particular scheme and then you have a row with Euro Pools about whether or not that scheme was necessary to mitigate claims or potential claims?

A. Yes, and as I think I made it clear in other correspondence, Euro Pools had the right to do whatever they wanted to do, but if they wanted RSA to pay for it, they needed to satisfy RSA that that was reasonable in the context of the policy cover.

…

A. … it is implicit within the authority sought for a payment that it is an adjusted loss and within that adjusted loss is the level of detail that you are describing.

Q. Adjusted loss being a loss that has been adjusted by Mr. Murphy?

A. Correct.

Q. And by adjusted in these circumstances, we mean considered and reviewed by Mr. Murphy?

A. And then authority sought from RSA. That is the role of the loss adjuster.

…

Q. So that if such an agreement was reached and Euro Pools carried out that work, then there would not be an argument about whether or not that counted as mitigation costs?

A. The agreement in broad terms would be that work is required, but then as I think I have previously explained the actual amount of money changing hands between RSA and Euro Pools would be as a result of a recommendation to RSA from our loss adjuster…

A. Where we had agreed to indemnify for a programme of work, then the costings that were necessary to implement that programme of work were part of the adjusting that Douglas would have done and would have sought instructions from us, guided ultimately by the fact that we are reimbursing for reasonable mitigation costs. It is not a gold-plated replacement at any cost indemnity…

Q. Yes. So far as you are concerned, RSA would be obliged to pay a reasonable amount for those works?

A. On the recommendation of our loss adjuster, to which we would provide authority, yes.

Q. What you could not do is turn around and say, "We are not going to pay anything"?

A. If RSA had committed to a programme of works and implicit within that is that it is the reasonable cost indemnity, then RSA would not be in the business of then saying "we are not going to do that."

Q. No.

A. But I stress that the authority must come from RSA, and nobody else.” [emphasis added]

In my view neither the contemporaneous documentation nor the evidence of the defendant’s witnesses supports Mr Wyllie’s evidence that the defendant had reached an agreement with the claimant that the defendant would indemnify the claimant for the reasonable costs incurred on mitigation works (irrespective of the policy limit) subject to the works being vetted by Mr Murphy.

As to the authority of Mr Murphy and the alternative case that he made an express or implicit agreement within the scope of his actual or ostensible authority, counsel for the claimant submitted in closing that the issue was not whether Mr Murphy had authority to approve the works; it was what was the consequence of him having approved those works. Counsel submitted that if he has approved those works, then the defendant was obliged to pay a reasonable sum for those works, because that was the agreement that was reached. Counsel asked why Mr Murphy was involved and giving approval other than to protect the defendant’s position because the defendant knew that it was paying for the works he approved.

It seems to me that the role of Mr Murphy on the evidence, was to provide ongoing and detailed monitoring of the works. The evidence of Ms Goddard on the role of Crawfords was as follows:

“Q. The purpose of involving Crawford & Co was to try and reach an agreement before the works were done?

A. The purpose of involving Crawford & Co was again …that the scope of investigation needed on this claim was way beyond the capability, the resource of the RSA claims team, so we needed people out there on the ground, meeting Mr. Wyllie, going to these various sites. We needed not only loss adjuster input, which at the broader sense is somebody who is able to collate the information, convert that into a form that they can report to their client, the insurance company, and seek instructions on, but we also needed, and I knew, I think it is clear from this e-mail, at the outset that we would need expert mechanical engineering input as well…”

Neither the fact that Mr Murphy had actual authority on the evidence to agree the detail of work nor the evidence of the expectation on the part of the witnesses that work authorised by Mr Murphy would be paid for by the defendant establishes that an agreement as advanced by the claimant was made by Mr Murphy on behalf the defendant, that payment would be made even if the limit of indemnity had been exceeded. Mr Dunn’s evidence in cross examination was to the effect that Mr Murphy would not have actual authority to commit the defendant beyond the limit of the indemnity.

Accordingly for all these reasons I find on the evidence that the claimant has not established that a separate agreement had been reached between the claimant and the defendant in relation to the movable floors claim to the effect that the defendant (either directly or through Mr Murphy) had agreed to make payment for the remedial works provided they had been approved by Mr Murphy, even though the limit of indemnity under the policy had been exceeded.

In relation to the LDPF, counsel for the claimant relied on the email of 25 July 2008 from Ms Goddard to Mr Murphy as evidencing an agreement being reached between the claimant and the defendant to pay for the mitigation works:

“please confirm to the client and to Jill Gough that RSA will indemnify for necessary rectification costs. As you know we are holding a reserve of £320,000 against this notification. If an interim payment of say £150K (or an alternative figure to be recommended by you) can be justified for indemnifiable expense incurred or committed so to date, I am willing to arrange this either direct to the client… or via Crawfords in the usual manner…”

However this email has to be read in conjunction with the letter from Mr Murphy dated 24 July 2008 to which this is a response. This letter set out the background to the issues which had arisen in relation to the LDPF and concludes:

“it is the case at present that Euro Pools are carrying a significant level of expense in relation to the Leeds issues. On the basis of the information supplied to date… I am satisfied that it is indeed properly considered as a design issue and thus admissible under the terms of the policy.…”

Reading the exchange in correspondence in context it seems to me therefore that the email of 25 July 2008 from Mr Goddard is evidence of an agreement that the rectification costs in relation to the LDPF fall within the policy and not an agreement to pay the costs of the works provided they are authorised by Mr Murphy, irrespective of the limit of indemnity. That this interpretation is correct is in my view confirmed by the subsequent email of 6 August 2008 from Mr Goddard to Ms Gough:

“Leeds floor:… Douglas confirmed yesterday to David that rectification is indemnifiable consequent upon my instruction to Douglas to do so. Douglas is to advise me of a suitable interim payment amount later today which I shall arrange direct…”

In a further email that day Mr Goddard wrote to Ms Gough:

“Douglas will address the rectification work plan direct with David…”

Accordingly I accept that there was an agreement that the work was necessary to rectify the disintegration of the LDPFand it waswithin the scope of the policy as mitigation works. Further I agree that the precise way the works were to be implemented were to be agreed between Mr Murphy and the claimant. However I do not agree on the evidence of the correspondence that the claimant has established that there was an agreement that the defendant would pay for the works in relation to the LDPF irrespective of the policy limit.

In relation to the Booms claim the claimant relies, in particular, on the email of 15 August 2008 from Mr Murphy and Mr Goddard’s response and an email of 10 October 2008 from Mr Goddard to AON. The report of 15 August 2008 from Mr Murphy proposes to confirm to the claimant that they may proceed to install a hydraulic system [2/4164]. However the report is clear:

“subject to your agreement therefore, we propose to confirm to Euro pools that this is in order, although we are not at this stage providing any confirmation on the specification or costings.”

Accordingly Mr Goddard’s response by email the same day to Mr Murphy confirming his “agreement” to Mr Murphy’s recommendations does not establish any freestanding agreement on costs and the email from Mr Goddard to Ms Gough in October 2008 merely states that

“policy cover and indemnity have been confirmed”

but notes that the design solution has yet to be finalised and

“it is premature to be looking for funding or approval of same at this stage.”

In my view the evidence does not establish a freestanding agreement reached between the claimant and the defendant by which the defendant agreed to reimburse the claimant the reasonable costs of replacing the air drive system on the booms with a hydraulic system.

I now turn to consider the issue of estoppel by representation and/or convention. The elements of estoppel by representation are common ground: (Law of waiver – Wilken and Gahly at 9.02)

Counsel for the claimant submitted that by repeatedly representing to the claimant that a process had been established by which the remedial works would be agreed between the claimant and Mr Murphy and by not objecting to the commitments made by Mr Murphy, the defendant made express and/or implied representations that it would pay the claimant’s reasonable costs of work. Counsel submitted that by virtue of that conduct there was a “common understanding” between the defendant and Mr Wyllie that the defendant would pay the claimant’s costs of the work that was authorised by Mr Murphy, irrespective of the operation of any applicable limit of indemnity.

Counsel for the defendant submitted that the claimant was in effect submitting that Mr Murphy made commitments to the claimant that the defendant would cover mitigation works regardless of expense or time and the proposition that the defendant had agreed to waive its contractual limits of indemnity and provide the claimant with an open-ended commitment regardless of cost was nonsense.

In my view on the evidence there was no express representation by the defendant that it would pay the claimant’s reasonable costs of the work irrespective of the limit provided the work was authorised by Mr Murphy. The email of 2 April 2007 from Mr Goddard to Ms Gough referred to above was an agreement as to the way the project would be managed and not a commitment to pay the reasonable costs. The email of 4 April 2007 (referred to above) from Mr Goddard was dealing with the practicalities of how the works would be controlled and was also not a commitment to pay the reasonable costs of the work. There is a distinction to be drawn between approval of what work was reasonable that is within the scope of the indemnity and a commitment to pay the reasonable costs of the work. I find therefore on the evidence that there was no express representation that the defendant would pay the claimant’s reasonable costs.

Was there an implied representation by Mr Murphy? Ms Goddard accepted that Mr Murphy had authority to approve the works [day 6/696] but Ms Goddard’s evidence was that Mr Murphy did not have authority to authorise the works in a way which would oblige the defendant to pay [T6/689, 693].

“Q. But if you sent Douglas off to liaise with the insured about how the overall scheme is to be implemented at any one site, why is it then open to RSA to say, "Douglas agreed that is how it should be implemented at a particular site, and that is how it has been implemented at a particular site, but we are now going to say that that is not acceptable"?

A. With respect, for the reason I have just given; because RSA did not give Douglas delegated authority to commit RSA. It was always subject to authority from RSA, which may be a different matter. I am not suggesting, certainly in the tenure that I dealt with the case, that there were occasions -- and if there were I cannot recall them – where I went back and said, "No, we are definitely not paying this we are only paying that." Generally speaking, and maybe for the whole time that I dealt with the case, where Douglas Murphy made a recommendation to RSA we tended to accept it.” [emphasis added]

And later:

“Q. Do you see that from Euro Pools' point of view, it understood that if Mr. Murphy had approved an implementation of the scheme at any one site, that was something that RSA was not able to quibble with at a later stage?”

A. I do not accept that as a premise, no. As I say, I can only speak to the time that I dealt with the file and I do not think anyone was under any illusions. That is my belief.”[emphasis added]

And later:

“Q. Then why say to Euro Pools, liaise with Mr. Murphy about this, if he has no authority to say anything that is useful to Euro Pools. It is always open to RSA to turn round and say, "Sorry, I know Mr. Murphy agreed it, but we do not care, we are going to say that work is not payable". What is the point of having Mr. Murphy there at all?

A.

The point of having Mr. Murphy there at all is precisely what I have mentioned on several occasions that it was to provide RSA with the technical input that gave us comfort that the insured's proposals for this remedial work were ones which were reasonable and properly indemnifiable.”

AON understood that the policy was one of indemnity for the costs incurred and approved by insurers. In an email of 3 April 2008 Ms Gough wrote to Mr Goddard:

“…you very kindly agreed that the insured would be put in funds for materials etc before purchase and the insured would carry the labour and expenses for a month…

The insured is scheduled to undertake a further two floors this month which will involve further costs…

Of course it is appreciated that the policy is one of indemnity for costs incurred which are then approved by insurers on advice of the adjuster. However given the agreement to place the insured in funds prior to work being commenced and the incurred amount that remains outstanding although having been approved by adjusters, can you please give consideration to the attached schedule and if necessary press Douglas to formally agree the incurred costs in order that the insured can be placed in funds in the near future…” [Emphasis added] [2/3424].

In an email of 5 May 2008 Mr Goddard wrote to Mr Wyllie referring to the “multiple failures associated with your company swimming pool products” and stated:

“RSA remains committed to assisting to the fullest extent possible by reference to the cover purchased” [2/4062] [emphasis added]

Mr Murphy’s evidence (para 100 of his witness statement) was unchallenged:

“My task was to communicate with the claimant about works it was carrying out or was intending to carry out, to consider its requests for payment and to make recommendations to the defendant.… I would only recommend payments where I was satisfied that the sums requested by the claimant were properly covered under the insurance. Where the defendant approved my recommendations, I would transmit payments to the claimant. The claimant was aware of this procedure at all times.”

The claimant relies on Mr Murphy’s oral evidence that he did not advise the claimant that the works might breach the limit of insurance and therefore not be payable by the defendant. Counsel for the defendant submitted that this is inconsistent with the claimant’s case that there was an unequivocal representation about coverage or limits of indemnity.

Although there were clearly representations by the defendant that the mitigation work was within the scope of the policy and that Mr Murphy would agree the scope of the works to be carried out, I find on the evidence that there was no express or implied representation made by the defendant or Mr Murphy on behalf of the defendant that the defendant would pay the reasonable costs of the works approved by Mr Murphy irrespective of the policy limit. Therefore there can be no estoppel by representation.

Even if I had found that there was an implied representation that the defendant would pay the reasonable cost of the work approved by Mr Murphy, the claimant has not established on the evidence the element of detrimental reliance. Counsel for the claimant submitted that the claimant relied on the representations and carried out the works and the detriment was that he was out of pocket as a result: Mr Wyllie’s oral evidence was that if he was not going to be paid he would not have started the work. However, counsel for the defendant put it to Mr Wyllie in cross examination that, given the risk of third-party claims, even if he had been reminded of the right to be indemnified subject to a limit, Mr Wyllie would not have stopped the mitigation works. Mr Wyllie’s evidence was that he kept doing the remedial works as long as he had money to do so and he stopped work when he could no longer afford to carry on. Accordingly, in my view whilst the claimant has suffered a detriment in the sense that it is out of pocket, the claimant has not established that in carrying out the mitigation works, it relied on any (express or implied) representation to the effect that the limit of the indemnity would not apply and the defendant would pay the costs of mitigation works approved by Mr Murphy provided that they were reasonable.

As to estoppel by convention I find on the evidence that there was no shared assumption that the defendant would pay the costs of the work authorised by Mr Murphy irrespective of the limit of indemnity.

Quantum

Each of the parties instructed an expert in relation to quantum. The claimant instructed Dr Champion and the defendant instructed Mr Hunter. Both experts produced reports dated 28 September 2017 and 26 October 2017 respectively, and a joint report was produced dated 11 December 2017. However discussions continued, Mr Champion produced a second report dated11 December 2017 and updated calculations and Mr Hunter produced a supplemental report dated 30 November 2017 and a letter to the court on the day of giving evidence, 13 December 2017. The experts were instructed to carry out an assessment of the amount claimed in order to determine whether the expense or cost was incurred and related properly to the claims.

The experts agree that the total sum claimed for incurred costs is £9,818,980.46.

In relation to work at each site there was a claim for Labour and Materials. The claim for Labour was a claim for hours worked by employees of the claimant at an hourly rate with an addition for overheads. The experts have now agreed the number of hours allocated to the works and the hourly rate to which that number of hours should be applied. However the overhead rate to be applied to the labour costs is not agreed between the experts.

In relation to “Materials”, this comprised both materials and some services by third-party companies. To calculate the Materials cost an overhead rate was to be added. In relation to the Materials costs, the rate of overhead is not agreed and Mr Hunter for the defendant provided an assessment on two alternative bases: option A and option B [C1/2/197 – 199]. Under option A Mr Hunter assumed a reasonable rate of overhead is 15%. Under option B Mr Hunter assumed that the design and general overhead costs are removed from the Materials but the overhead is increased to 44.6 percent. For the labour rate however he proposes that the rate of 15% overhead is applied.

Mr Hunter then presented option C which was to adjust the overhead percentage to remove items which in his view were not overheads.

The calculations in Dr Champion’s original report have been superseded by the calculations in the joint statement and his second report. In particular the labour rate is now agreed between the experts although, as noted above, the overhead rate as a component of the labour rate is not agreed.

The rate of overhead which Dr Champion determines as appropriate is 44.6% a figure derived from the claimant’s statutory accounts from 2006 to 2014.

In his first report Dr Champion expressed the view that, although overheads as a percentage of direct costs were incurred at 55% in 2010 he reached the view that that amount would be excessive because account ought to be taken of “other income” on the basis that such income was generated in part with overhead involvement. Further the applicable percentage ought to be based on overhead levels as incurred across a number of years. Bearing in mind the bulk of remedial costs were incurred from late 2007 through to 2014 he calculated the overhead rate in that period as 50% which in his view more properly reflected the level of overheads involved. He noted that the percentage for overheads “may appear high” compared to a main contractor for construction work. However his view was that comparisons of this nature were not relevant largely because of the nature of the claimant’s work in particular that the work involved maintaining manufacturing facilities, a design office and a complex involvement in diagnosis of fault involving specialists. He stated that in his experience, specialist fit out contractors with design responsibility can have overhead levels exceeding 60%.

Mr Hunter’s evidence in his first report expressed a concern that there had been double counting in the sums claimed and he noted that the overheads of 55% were significantly higher than he would expect to see for a contracting organisation. He noted that design costs were claimed within the materials invoices and drew the conclusion that design costs should not be treated as part of the overhead percentage added to materials.

By the time of Mr Hunter’s supplemental report he had been provided with a nominal activity schedule setting out the claimant’s expenditure on overheads in the period October 2006 to 1 February 2017. However Mr Hunter noted that there were a number of costs contained with the overheads that did not appear to him to be “relevant to the claims made by the claimant for the pool repairs.” Further he considered that a number of the cost codes related to matters which were “unconnected with the claimed repairs”. Despite having the nominal activity schedule, Mr Hunter said he could not confirm whether the items were costs which have been incurred for the works, necessarily incurred and reasonable in amount. As a result he removed certain costs for which, in his view, there was a lack of supporting material or explanation. These included directors fees, legal fees of £1.8 million, consultancy fees, advertising and sponsorship. He therefore reduced the total overhead costs on the ledger by stripping out these items and reducing the level of overhead claimed from 55% to 28.72%. He was of the view however that this was still a high percentage and on the basis that technical staff costs were outsourced, he reduced the overhead cost further to 22.86%.

In Dr Champion’s supplemental report, Dr Champion set out his reasons why in his view the amount included as overheads ought to include amounts that were consistent with those shown in the claimant’s annual audited accounts. He said that had another contractor priced the work, that is the approach to estimation of the costs that he would have expected, and of the different contexts in which quantity surveyors encounter valuation of work involving overheads, each relies on the overheads in full and not in part. Dr Champion noted that Mr Hunter did not identify any precise items where duplication occurred and Dr Champion said that he had checked the detailed breakdown and save for items that he noted were duplicated and which have now been omitted, none of the amounts claimed in materials or labour also appeared within overheads. In relation to design costs which Mr Hunter omitted entirely, Dr Champion noted that overheads included the cost of three members of staff that were based at head office and were engaged with design, drawing and the like. He noted that those staff members were not claimed elsewhere. He also noted that some specialist advice was engaged that was charged to projects for which the cost did not appear in overheads. He noted that there was a small team at head office engaged in design and additionally consultants hired to address the investigations and repairs but he noted that the costs for both were recorded separately in different cost centres. As to amounts which Mr Hunter removed because they were “unrelated to pool repairs” or “not properly mitigation costs” Dr Champion’s view was that Mr Hunter had misunderstood the true nature of overheads. Dr Champion stated that overheads is a generic term for items of expenditure that cannot be directly related to particular projects or cost centres. He therefore concluded that to exclude costs because they did not appear to be related to pool repairs or not mitigation costs made no sense in analysing overheads. At paragraph 17 he says:

“It seems to me that overheads need only relate to the proper functioning of the business. It is only if part of the overheads was completely unrelated to the ordinary running of the business that, notionally at least, parts might be excluded. In practice, if costs were incurred that were unrelated to the ordinary running of the business they would not be in the audited accounts at all, having been excluded by auditors. Hence, taking the example of director’s fees noted by Mr Hunter at para 17 of his report, it is plain to me that a director will ordinarily be paid. I fail to comprehend why a part of the directors remuneration is not to form part of overheads for the purposes of this claim where it has already formed part of the overheads as part of the audited accounts.”

Dr Champion further noted that the percentage reduction proposed by Mr Hunter was based on the starting point for the ledger which extended over three years beyond that which the claim is made. In relation to the legal fees of £1.8 million, Dr Champion noted that if calculated to the end of October 2014 the amount would be only £708,797 and that amounts, in a business with turnover of say £4 million per year, to legal costs incurred at under 2.5% per year. Dr Champion described expenditure at that level as “modest” and said that he could not see any valid basis for exclusion of this item from overheads.

Dr Champion’s view was that to remove a part or proportion of the overheads in calculating an applicable percentage for recovery would result in recovery that did not sufficiently represent the level of loss incurred. He described Mr Hunter’s proposal to reduce the overhead percentage as:

“invalid in principle and invalid in the manner in which he attempts to calculate the amount. There is no convention or standard practice explained for the reduction sought to be made. In my view, if that adjustment were to be made it would mean that the claimant’s recovery for repairs would be inadequate in that the amount would not reimburse the level of overheads that were being incurred by the business. It would leave the repairs at a significant undervalue.”

In the joint report Dr Champion’s view was that the overhead rate should be 44.6%; Mr Hunter remained of the view that an overhead rate of 15% should be used for labour. Mr Hunter’s view was that he cannot establish whether the percentage and the statutory accounts would result in double counting of costs. His view is that option A is the appropriate valuation on the basis that design is included in the site costs and so the overhead should be at the level of 15%. As an alternative, he proposes option B where he uses invoice costs which in his view would ordinarily feature in overheads and applies an overhead percentage of 44.6% to materials.

In his letter of 13 December 2017 Mr Hunter reiterated that he disagreed with Dr Champion’s approach. His view is that it is unclear from the available information whether the overheads reported in the audited accounts included sums that were double counted. His view was that it was unsound for the overheads to include design costs as it “may lead to risk of duplication.” He also noted that there were many other costs that “are not associated with the pool repairs”. He also maintained that in his experience overhead costs normally fell in the range of 3% to 15% and that unexplained directors fees, costs relating to other disputes and marketing expenses should be excluded. Mr Hunter did not accept the three members of design staff referred to by Dr Champion. He noted that there was no evidence before the court about what these individuals were doing or what projects they were working on. He described the use of published accounts as an unreliable and inappropriate approach.

In cross-examination Dr Champion was asked:

“Is it right also that your report does not reflect any attempt to look at the items forming part of the overheads in the accounts with a view to seeing whether they ought to form part of the overhead percentage reasonably applied in this case?”

Dr Champion replied:

“I did look to see whether there was anything so exceptional that it would fall outside the business they were doing.”

Dr Champion was also asked about the effect of the high overhead figure in 2013:

“Would you expect a business in Euro Pools' line of business to vary its materials charges so dramatically with its overheads?”

Dr Champion replied:

“I would expect them to average, to take an average over a number of years, which is what I have tried to replicate here.”

It was also put to Dr Champion:

“Your approach of simply taking an average does not take account of whether any of these unusual factors we have been talking about occurred so as to influence the overhead in a particular year?”

Dr Champion responded:

“ I think all of this depends on what you mean by unusual. My analysis of unusual was something that was frankly falling outside the ordinary course of the business of putting bits into swimming pools. In the nature of that business, there is always going to be a huge array of activities that will be carried out with a view to selling or securing contracts to install bits in swimming pools. That is going to involve all sorts of marketing. Sometimes they will fall out with customers and it will end up in litigation. Overheads by their definition will carry all manner of stuff.”

Mr Hunter in the course of cross-examination said:

“I have no difficulty with an overhead percentage being applied. That is fundamentally accepted by me. My position is that the overhead percentage, in my experience, is exceedingly high and therefore it needs to be looked at, because it may be that many of those items should have been properly allocated to jobs rather than simply put into the overhead, or they may be double-counted, or they may simply not be appropriate to the claim being made in this action.”

Mr Hunter was asked:

“…What do you mean by the third one, that they may not be appropriate to the claim?”

Mr Hunter responded:

“I will give you an example. There are directors' costs in the overhead and I have no difficulty with that. Directors' costs are required to manage the works. There are directors' salaries and I understand what they are, and that is fine. There is an unexplained significant sum of money for directors' fees and I have not had that explained to me. That may be a bonus to the director arising from some other works carried out, a profitable contract carried out elsewhere. It appears to me that in terms of looking at a general overhead calculation, anything of that nature should not, unless it is properly explained, be included within a non-cost to be added to the base costs. So I have identified it simply, not because I say it is completely wrong but because it has not been explained sufficiently for me to say, "Yes, it goes into that calculation".”

It was then put to Mr Hunter that these were costs which were carried through to the statutory accounts to which he responded:

“Well, I have not done an analysis of how the statutory accounts are made up. So, you know, I cannot say with certainty that the nominal activity codes that are in there have been taken through to the statutory accounts.”

Counsel for the defendant submitted that the average for overheads was distorted by the variation in turnover over the period from 14% to 95% and submitted that the court should seek to find the usual or standard rate not inflated by one year. Counsel submitted that the court should adopt the overhead percentage for 2006/7 at 14% which was close to Mr Hunter’s proposed rate. Counsel further submitted that the overheads in the statutory accounts included items which ought not to feature in the assessment such as legal costs of the WYG proceedings.

Counsel for the claimant submitted that Dr Champion’s reports were measured and well reasoned. Dr Champion did not adopt the claimant’s proposed overheads figure of 55%; he initially adopted 50% and then, when further evidence became available, reduced that figure further to 44.6%. He checked for duplications between overheads and materials and removed those that he found to avoid any double counting. By contrast Mr Hunter’s approach was flawed in that he attempted to identify specific overheads referable to the mitigation works rather than identifying general overheads of the business. Mr Hunter’s evidence amounted to an assertion that the claimant had not proved to his satisfaction that it had got its allocations right. When provided with the nominal ledger, Mr Hunter ignored the fact that the ledger ran until November 2017 which meant that his adjustment excluded costs which were occurred after November 2014. Further having calculated an adjusted figure of 22.86% he did not use it in any of his further calculations.

In my view the claimant is entitled to be reimbursed for costs actually incurred and therefore, once it is established that the claimant has incurred Labour or Material costs which were necessarily incurred to mitigate a loss or potential loss, it should be entitled to claim as part of those costs, overheads which reflect the overheads which it has incurred. I do not accept therefore Mr Hunter’s approach where he removed items which he said were “unrelated to pool repairs”. I accept the evidence of Dr Champion that overheads need only relate to the proper functioning of the business and should only be excluded if they were unrelated to the ordinary running of the business.

Mr Hunter suggested that overheads reported in the audited accounts may have included sums that were double counted but Dr Champion appears to have checked for duplication and therefore this objection on the part of Mr Hunter is not made out.

Mr Hunter’s figure of 15% is based on his view of an appropriate level of overhead but as stated above, in my view the overhead should reflect the actual overheads of the business. Dr Champion has sought to do this by taking an average over the period and I accept his evidence that this is an appropriate approach in the circumstances. To pick a single year would not be a fair reflection of the actual costs incurred over the period.

Mr Hunter’s objection to legal fees related largely to the costs of the current proceedings which fell outside the period used by Dr Champion to derive the average. The amount which relates to the WYG litigation has not been shown to be material to the rate of overhead claimed. Mr Hunter proposed that design costs should be stripped out from Materials because it suggested double counting but third-party design costs have actually been incurred and Dr Champion’s evidence is that there was a separate in-house technical design team. Mr Hunter objected that certain items may be double counting and that certain overheads were unexplained but his concerns did not appear to be substantiated.

Dr Champion appears to have done a careful and thorough analysis and Dr Champion gives reasons in his reports why it is appropriate to rely on overheads as they appear in the statutory accounts and for the reasons set out above I am not persuaded by Mr Hunter’s views to the contrary.

I therefore find that the appropriate percentage rate to be used for overheads and applied for both Labour and Materials is 44.6%.

The policy provides:

“Limit of Indemnity applying to Insurance Clauses 1 – 7

The liability of the Company for damages claimant’s costs and expenses and Defence Costs arising out of all claims notified during the Period of Insurance shall not exceed the Limit of Indemnity specified in the Schedule...”

Clause 5 (Mitigation of Losses) with which these proceedings are concerned is therefore covered by this provision. Under the heading “Exclusions” the policy provides that (Exclusion 14):

“The Company shall not be liable in respect of…the Insured’s Contribution”

There is a dispute between the parties as to whether or not the amount which the claimant is required to pay under the policy, the “Insured’s Contribution”, is to be deducted from the Limit of the Indemnity such that the total amount which the defendant is obliged to pay under the relevant policy is reduced by the amount of the Insured’s Contribution.

Counsel for the defendant relies on the definition of “Insured’s Contribution” in the policy which provides that:

“For the purposes of this Professional Indemnity Insurance…

12 Insured’s Contribution means the amount for which the insured is responsible under insurance clauses 1 2 3 4 (A) 5 6 and 7 of this Insurance in respect of any one Claim made against the Insured….”

Counsel submitted that the fact that the Insured’s Contribution is excluded in relation to clause 4(B) suggests that the Insured’s Contribution is deducted from the defendant’s liability in respect of clause 5. Clause 4 (B) refers to costs and expenses incurred by the insured in replacing or restoring documents which have been lost or damaged up to a maximum of £50,000 and counsel for the defendant submitted that the Insured’s Contribution is excluded in order to prevent that amount eating into the sub- limit.

Counsel for the defendant further submitted that assistance can be derived from Condition 6 which provides that:

“In connection with any Claims against the Insured the Company may at any time pay to the Insured the Limit of Indemnity (after deduction of any sums already paid during the Period of Insurance) or any less amount for which such Claims can be settled and thereupon the Company shall relinquish the control of such Claims and be under no further liability in connection therewith” [emphasis added]

Counsel submitted that the words in Condition 6 “after deduction of any sums already paid during the Period of Insurance” is a reference to the Insured’s Contribution and therefore the limit of indemnity is to be calculated having deducted the Insured’s Contribution.

Counsel for the claimant submitted that the position in relation to clause 4B is simply that no contribution was required of the insured.

Counsel for the claimant submitted that to the extent the meaning of the policy is ambiguous, the ambiguity falls to be construed against the defendant given that the policy wording is its own wording and the limit of indemnity is a provision inserted for its own benefit and referred the court to Colinvaux’s Law of Insurance paragraph 3 – 012.

Counsel for the claimant pointed out that the position adopted by the defendant is not how Mr Ward construed the policy in 2013 when he arranged for a further £78,000 to be paid to the claimant to bring the total aggregate payment to £5 million. Further counsel submitted that to deduct the Insured’s Contribution would lead to a higher deduction from the Second Policy where the Insured’s Contribution was greater.

No evidence has been adduced which would assist me on the purpose of clause 4B and the explanation for why it is excluded in the definition of “Insured’s Contribution”.

In the absence of any evidence of the background context for when the policy was entered into, I do not accept the submission that the fact that the Insured’s Contribution was higher in the second year and thus would have significantly reduced the amount recoverable assists the construction of the clause. It seems to me that this could have been agreed for commercial reasons.

Dealing with condition 6, as a matter of construction of the words used and giving the words their normal meaning, I do not accept that the reference to “deduction of any sums already paid” naturally refers to the Insured’s Contribution. Condition 6 is dealing with the point at which the insurer ceases to be under any liability and it is capable of an interpretation that on payment of an amount equal to the limit of the indemnity, the insurer will be discharged from further liability and in calculating the limit of the indemnity interim payments made by the insurer must be deducted. It is not clear from the words used that this was also intended to refer to payments made by the insured. Condition 6 does not therefore in my view support an inference that the Insured’s Contribution is deducted from the overall limit of indemnity.

The relevant paragraph in Colinvaux states that the contra proferentem rule does not apply if its meaning becomes clear in the context of the overall policy or if there is extraneous evidence relating to the risk to show what the parties intended. In this case no extraneous evidence to show what the parties intended has been adduced; the evidence of what the defendant did in 2013 is after the policy was entered into and is therefore not an aid to construction. For the reasons discussed above in relation to clause 4B and condition 6, in my view, the operation of the Insured’s Contribution is not clear when considered in the context of the overall policy.

Accordingly it seems to me that the policy is ambiguous and should be construed against the defendant as it was open to the defendant to have expressed themselves in plain terms. I therefore find that the limit of indemnity of £5 million operates without a deduction for the Insured’s Contribution in calculating the limit.