Palliser Ltd v Fate Ltd & Ors: Property insurance by negligent landlord
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Judge considers the scope of the Berni Inns decision where a negligent landlord has insured the property

The defendant owned a restaurant and was the freehold owner of seven flats above the restaurant. A fire which began in the restaurant, and was caused by the defendant's negligence, damaged both the restaurant and the flats. The claimant, which was the leaseholder of the flats under a 999-year lease, brought an action against the defendant, which settled after the defendant went into liquidation. The claimant then sought to bring a claim under the Third Parties (Rights Against Insurers) Act 2010 against the defendant's insurers.

The Public and Products Liability section of the policy provided cover for "Accidental Damage to Property not belonging to you or in Your charge or under Your control…" The claimant argued that this amounted to liability insurance for the purpose of the 2010 Act, but the insurer argued that this section did not apply because the flats did belong to the defendant.

This argument therefore turned on the meaning of "not belonging to". The claimant sought to argue that it was necessary to go behind the technical legal position and look at who controlled the flats and that the other words in the clause - 'or in your charge or under your control' - conveyed the idea that what the clause was excluding were third party claims in relation to damage to property where the third party, not the defendant, had control or possession of the property. That argument was rejected by the judge, who held that the section did not cover the defendant's liability in respect of property for which it was the freehold owner. "Not belonging to" and "not owned by" meant the same thing. That interpretation was also reinforced by the schedule to the policy "and of course the schedule should be seen as part of the whole contract for the purposes of interpretation". Accordingly, the claimant's claim under the 2010 Act failed because there was no liability insurance in place covering the defendant's liability to the claimant leaseholder. (This conclusion was subject to the parties' agreement that a small proportion of refurbishment costs for fixtures and fitting not owned by the defendant were recoverable by the claimant – see further below).

Nevertheless, in case the decision is overturned on appeal, the judge also went on to consider, obiter, the following two issues:

1) Did the 2010 Act claim fail because, even if liability insurance was in place, the defendant had no liability to the claimant. This argument in turn relied on the Mark Rowlands v Berni Inns [1986] decision. In that case, the freeholder of a building had taken out insurance (in accordance with the landlord's covenant in the lease to insure the building) which was intended to enure to the benefit of the tenant as well as the landlord, and for which the tenant paid the premium. It was held that the parties had accordingly agreed to look to insurers to pay where damage was caused by the tenant's negligence (and so, in that case, no subrogated claim could be brought by insurers against the tenant). The issue in this case was whether the Berni Inns defence applied where the landlord, rather than the tenant, was negligent (so that the claimant and defendant could be taken to have excluded the landlord's liability for negligence). This issue rarely arises in practice because it will usually be in the insuring landlord's interest to use the insurance proceeds to repair the building, so the tenant suffers no loss. Furthermore, there was no possibility of a subrogated claim being brought here against the landlord, who is the insured under the policy, because the insurer cannot "stand in the shoes" of the landlord to bring a claim against the landlord.

However, the judge did not need to decide this issue because the defendant had underinsured the property: "It cannot be correct that the tenant can be said to have impliedly excluded the landlord's liability in negligence for damage to the building where the buildings insurance is inadequate". Accordingly, the defendant was liable for the refurbishment costs which were not covered by the insurance policy because of the defendant's underinsurance of the building.

2) Would the claimant have been entitled to claim for its loss of profits? The claimant had argued that it suffered loss of development profits because it had intended to sell the flats and reinvest the sale proceeds in subsequent property developments. The judge summarised the relevant standard of proof required where the assessment of damage rests on hypothetical events: "The correct picture of the law on proof in relation to damages is therefore that where the uncertainty is as to past fact, the 'all or nothing balance of probabilities' test applies. Where the uncertainty is as to the future, proportionate damages are appropriate. Where the uncertainty is as to hypothetical events, the correct test to be applied depends on the nature of the uncertainty: if it is uncertainty as to what the claimant would have done, the all or nothing balance of probabilities test applies; if it is as to what a third party would have done, damages are assessed proportionately according to the chances".

Applying the "all or nothing" balance of probabilities test here, the judge concluded that, on the facts, the claimant had failed to prove that, but for the fire, it would have sold the flats and made the alleged profits which it sought.