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BAILEE'S "ALL RISKS" INSURANCE:
PROPERTY OR LIABILITY COVER?
The above question fell to be considered by the Commercial Court in the recent case of Ramco (UK) Ltd -v- International Insurance Company of Hannover Ltd (October 2003, as yet unreported).
Background
Stock and other goods were damaged or destroyed as a consequence of a fire in May 2001 at industrial premises occupied by the claimants. At the time of the incident the claimants were insured with the defendant insurers under a Combined "All Risks" policy of insurance which covered loss, destruction or damage to property insured as a result of fire. It was common ground that the fire occurred without fault on the part of the claimants, and it was not disputed that the insurers were liable to indemnify the claimants in respect of lost or damaged property which belonged to them. There was, however, a dispute regarding the insurers' liability in respect of goods in the claimants' custody which were the property of their customers.
The relevant section of the policy, headed "Material Damage - 'All Risks'", provided as follows:
"IN THE EVENT OF the Property Insured described in the Schedule being accidentally lost, destroyed or damaged during the Period of Insurance the Insurers will pay to the Insured the value of the property at the time of its loss or destruction or the amount of the damage or at the Insurers' option reinstate or replace such property or any part of it."
The policy definition of "Property Insured" included:
- "Buildings
- Contents therein and thereon the property of the Insured or held by the Insured in trust for which the Insured is responsible
- Stock and Materials in Trade therein or thereon the property of the Insured or held by the Insured in trust for which the Insured is responsible."
Supplementary Conditions, which also formed part of the policy, included an average clause which entitled the insurers to reduce the level of indemnity in respect of any property insured for less than its value.
The Dispute
The Commercial Court ordered the trial of the following preliminary issues concerning the insurers' liability in respect of the destruction or damage of goods belonging to third parties which had been bailed to the insured:
- Did the policy provide cover only if the insured had some legal liability to the third party in respect of the damage or destruction, or were all goods bailed to the insured covered?
- If the policy provided cover only if the insured had some legal liability to the third party, were the insurers liable to pay the full value of the goods lost or destroyed (or the amount of damage suffered by them), or only to indemnify the insured against their liability?
The answers to these questions depended on the wording of the particular policy. However, before approaching the task of its construction, Mr Justice Andrew Smith observed that it was settled law that bailees in the position of the claimants in question may insure goods in their possession for their full value and, in the event of their loss or destruction, recover their full value (Tomlinson -v- Hepburn (1966)). It has also long been accepted that bailees can effect such insurance whether or not they are liable, or potentially liable, in respect of the goods. (However, if a bailee insures goods bailed to him and recovers from insurers more than any loss that he suffers, he is required to account to the owners of the goods - or other persons bearing the loss - for the excess.)
The Construction of the Policy
As the judge pointed out, the crucial definition of "Stock" in the policy, and in particular the reference to goods "held in trust for which the Insured is responsible", reflects language that the courts have considered on several occasions in the past, as it has been used in insurance policies of this type since the 19th century.
It was clear from the old cases that the words "goods in trust" have no strict technical meaning and referred simply to goods which had been entrusted to the insured. However, was the insured "responsible" for goods bailed to them only if they incurred legal liability in respect of them, or was the word used in this context in a different and more general sense, as was suggested in Petrofina (UK) Ltd -v- Magnaload Ltd (1984)?
In the judge's view, the word "responsible" connotes legal liability so that, naturally interpreted, the words "for which the Insured is responsible" referred to the insured's legal liability for loss of or damage to bailed goods and limited the insurers' liability accordingly. Notwithstanding the views expressed by Lloyd J. in Petrofina, the judge was not disposed to re-interpret the expression in a manner that differed from that adopted in North British & Mercantile Insurance Co -v- Moffatt (1871), Engel -v- Lancashire & General Assurance Co (1925) and by Roskill J. at first instance in Tomlinson -v- Hepburn.
The next question, therefore, was whether the policy provided liability cover. It seemed to the judge that, in its natural and ordinary meaning, the policy provided only property insurance. The insurers' obligation to pay the amount of damage or the value of the property at the time of its loss or destruction was not apt for liability insurance. Nor was the average clause. There was nothing in the policy that indicated that the cover was a "hybrid" or "composite" insurance, or that it included liability cover. In such circumstances the judge considered that he should not conclude that the policy provided liability insurance, unless he was driven to do so by authority. He did not believe that there was such contrary authority - noting that, after the decision of the House of Lords in Tomlinson -v- Hepburn, the courts should be reluctant to interpret policies of this kind as providing liability insurance.
It was, therefore, the court's judgment that the policy provided property cover only: it did not provide liability insurance. Property belonging to a third party that was on the claimants' premises was covered - but only where the claimants were legally liable to the third party in respect of its loss or damage. In those circumstances the policy would respond to the full value of any such property that was lost or destroyed, or to the amount of any damage suffered by it, subject to any right of insurers to reinstate or replace the goods in question. (However, on the other hand, since it provides property cover only, the policy would not respond to claims in respect of risks which might be covered by a liability policy, such as a claim for loss of use by the owner of the damaged or destroyed goods.)
If you have any queries concerning the above, please do not hesitate to contact Christopher Chatfield.
November 2003
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