| Date | 18 May 2005 |
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| Judgment | Horbury Building Systems Limited v Hampden Insurance NV, CA 7 April 2004 |
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| The Issue | Interpreting the provisions of a contractor's all-risk policy. |
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| Implication |
A CAR policy of insurance will generally not cover business losses where these losses cannot be described as a physical consequence of defective work. |
printIn October 2003, I reported the case of Horbury Building Systems v Hampden Insurance which illustrated how contractor's all-risk insurance policies rarely cover all the risks that might be met on a construction project, or indeed all the consequences of a risk event occurring. That decision has now been examined in the Court of Appeal. The case concerned the construction of a cinema complex at the Great Northern Warehouse in Manchester. The construction project consisted of a shell which was partitioned to provide 16 cinemas with a total seating capacity in excess 3,700 people. The main contractor for the building works was Galliford Northern who had subcontracted the partition walls and ceilings to a company called Horbury. Horbury was to provide and install suspended ceilings throughout the cinema complex. This responsibility included the installation of hangers suspended from the roof structure, which were carrying not only the false ceilings, but also the electrical trunking and air conditioning duct work installed by others. During the early hours of 21 December 2001, only two days after the complex had opened, the ceiling of cinema six collapsed. Fortunately the complex was empty and although there was extensive damage to the fabric of the building in the area of the collapse, nobody was injured. The reason for the collapse was not at first known, but the developer immediately closed the whole complex giving assurances to Manchester City Council that the complex would not be reopened until such time as the problem had been fully investigated and a programme of remedial works implemented. In due course, the cause of collapse of the ceiling in cinema six was identified as being the use of the wrong washers on the hangers. This had caused individual hangers to disconnect which had increased the load on adjacent hangers. When each of the other cinemas were checked, eleven were discovered to be free from defects, but four others had been installed with the wrong washers. Had remedial measures not been taken, it is probable that some or all of the ceilings in those other cinemas would have eventually collapsed. Horbury anticipated that it would face claims from the main contractor or directly from the developer for reinstatement works and loss of revenues for the closure of the cinema. It accepted that some of its work had been carried out in breach of its subcontract and it understood that it would have to bear the cost of putting right the defects in the suspended ceilings. More important to Horbury however, was the fact that it might be held liable towards the developer or to the main contractor for loss or damage to adjacent property and for the consequential costs of the closure of the cinema. Horbury therefore turned its attention to its insurance policy. This was a typical contractor's all-risk (CAR) type of policy which had been issued by a company called Hampden Insurance. A dispute developed between Horbury and Hampden as to the extent of the insurance cover provided. Horbury commenced proceedings to seek to resolve those differences. Horbury's case was that the policy covered the full liability Horbury might have to repay the damages incurred by the developer. The collapsed ceiling in cinema six had damaged the ceiling itself, the duct work installed on the suspension system and other items, such as carpets and seats onto which the ceiling had fallen. Horbury contended that not only had this prevented cinema six from being used, it had also caused the closure of the other 15 cinemas, either because some or all of them suffered from the same fault or it was feared that they might. Accordingly, Horbury argued that the "property damaged" in terms of the policy of insurance was the cinema complex as a whole and as a consequence, if Horbury became legally liable, directly or indirectly, to the developer for its loss of revenues for closing the complex, Hampden would be obliged to indemnify Horbury under the insurance policy in respect of that liability. Hampden rejected those arguments. It accepted that it would be liable to pay for the cost of rectification of physical damage to, for example, seats, carpets and walls caused by the collapse of the ceiling in cinema six itself. Hampden did not accept however that the policy covered the business losses of the developer. Apart from cinema six there had been no physical damage to any of the other cinemas and therefore there could be no claim under the policy. The judge agreed with Hampden. The closure of the entirety of the cinema complex was not the consequence of damage to "material" property. It was instead the consequence of a prudent and foreseeable decision to close the whole complex until the faults were discovered. In the Court of Appeal Lord Justice Keene agreed with those comments. The closure of the entire complex was not itself damage to "material" property, nor a consequence of damage to "material" property. Accordingly, Horbury was not entitled to an indemnity under its insurance policy for business losses, profits or other consequential losses which might be claimed by the developer resulting from the closure of the cinema complex as a whole. Lord Justice Keene noted that it was proper to assume that the parties had some knowledge of the law and could be assumed to know that a contractor would not be liable in tort to a third party for the economic loss of repairing a defect before any personal injury or damage is caused by the defect. That being the case, the parties to this insurance policy were unlikely to have believed that the cover would extend to the loss of revenue following from the closure of the entirety of the complex, due simply to the possibility of there being defects. The appeal was dismissed.
CJ-0519
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