The case of Tesco Stores v Constable decided by the Commercial Court on 4 September demonstrated the limits of cover of a Public Liability Policy and that it does not usually indemnify for claims to enforce contractual rights.

There are usually a number of insurance policies applicable to works carried out on a building site and each protects against a different risk. Contractors' all risk (CAR) policies provide cover for damage to the works by most causes except defects in design and workmanship. A Public Liability policy provides cover against claims by third parties for personal injury or damage to property arising out of the works. Professional Indemnity Insurance policies may also provide cover to a contractor or designer for claims against him by the Employer in respect of defects in design. These areas of cover are discrete and any anticipated claims falling outside their ambit may need to be the subject of a special extension.

In the case of Tesco Stores v Constable difficulties arose for the developer (Tesco) when it sought to recover from its insurers in respect of losses sustained as a result of a collapse in a railway tunnel. Tesco's plans were ambitious and involved the construction of a new supermarket over a railway tunnel at Gerrards Cross. The tunnel collapsed. Fortunately there were no trains running through it at the time but the damage to tunnel, lines and signalling was substantial. These were owned by Network Rail but the train operator, Chiltern also sustained substantial loss as a result of disruption to services since the line was closed for 51 days.

Although Chiltern had claims against both Network Rail (for lack of track access) and Tesco, Chiltern claimed for convenience against Tesco under a Deed of Indemnity for both its own losses and those it could have claimed for against Network Rail. Tesco in turn claimed against their Public Liability Insurers but at this point they encountered a problem.

The Insurers resisted the claim on the basis that the insuring clause covered liability for (inter alia) loss to property, obstruction, trespass, nuisance or "any like cause", which they argued to mean only liability in tort. They further argued that a contractual liability extension to the policy which covered liability assumed by Tesco under contract which would be "the subject of indemnity under this Section" only extended the policy to cover liability assumed by contract which was equivalent to (and no greater than) such liability in tort. Tesco, on the other hand, maintained that the various types of liability quoted were not intended to be equivalent to claims arising solely in tort and that the contractual liability extension also covered liability arising under the Deed of Indemnity.

The difficulty faced by Tesco was that Chiltern's claims arose in contract under the Deed of Indemnity and were not put forward in tort. As such they were for economic loss which is not recoverable in tort. The loss was purely economic as no property of Chiltern's had been damaged as a result of the collapse.

The Court decided that the policy was intended to be interpreted in the restrictive way for which the insurers contended. All the instances of liability quoted were matters which given their ordinary interpretation related to tortious claims, and "any like cause" must be interpreted in the same way. As for the contractual liability extension, this was intended to deal with a situation where Tesco may have assumed liability in contract but to no greater extent than they would already be liable for in tort. This was consistent with the overall intention of a public liability policy which responds to claims for personal injury or damage to property rather than economic loss. Were it otherwise, then the policy would be a private liability policy relating to contractual rights.

The case is a useful reminder of the distinction between physical and economic loss. Economic loss is not recoverable in tort and once the Court had decided that the policy effectively only provided cover for tortious losses, it was inevitable that Tesco could not recover in respect of Chiltern's claims. The position could have been different had both types of claim been brought by the same party, as economic loss immediately consequent on physical loss is recoverable in tort, but in this case the liability was split as a result of the train operating regime.

Contracting parties should therefore beware. If it is anticipated that as a result of the particular circumstances of any likely claimant, losses may arise solely in contract, then a more specifically worded contractual extension to the policy should be sought (no doubt at greater cost) to cover also that wider potential liability. The contractual extension in this case proved inadequate as it was held to be worded in such a way as to extend only to tortious liability or the equivalent in contract.