In M J Gleeson Group Plc v Axa Corporate Solutions Assurance SA (2013) the court considered the terms of a public liability insurance policy when determining preliminary issues in a claim by a building contractor against its insurer, including the scope of the indemnity cover for defective workmanship of subcontractors. His Honour Judge Raynor QC sitting as a judge of the High Court concluded that for the purposes of the indemnity in respect of defective workmanship of subcontractors, "Damage to Property" had to have occurred as an essential pre-condition of coverIn M J Gleeson Group Plc v Axa Corporate Solutions Assurance SA (2013) the court considered the terms of a public liability insurance policy when determining preliminary issues in a claim by a building contractor against its insurer, including the scope of the indemnity cover for defective workmanship of subcontractors. His Honour Judge Raynor QC sitting as a judge of the High Court concluded that for the purposes of the indemnity in respect of defective workmanship of subcontractors, "Damage to Property" had to have occurred as an essential pre-condition of cover.
The dispute arose out of a development known as the "Lucidus Development" carried out by M J Gleeson Group Plc (Gleesons) under a contract made in October 2000 with Frogmore Developments Limited in relation to a site in Watford (the Works). Gleeson engaged two subcontractors in relation to the windows, roofing and cladding aspects of the Works, Airedale Glass and Glazing Limited and Boundary Roofing Services. The Works were completed on 17 May 2002 and a certificate of Making Good Defects was issued in September 2006.
Axa Corporate Solutions Assurance SA (Axa) issued successive policies of insurance to Gleeson from 1999 until 2008 which included additional cover in respect of the defective workmanship of subcontractors under the Public Liability section of the policy. It was this additional cover that gave rise to the dispute.
On 25 May 2007 the funders of the Lucidus Development, the Strathclyde Pension Fund, wrote to Gleeson through Arlington Property Investors raising concerns in respect of the installation of the cladding and areas of the roof. On 10 July 2007 Gleeson forwarded a copy of the letter and the accompanying surveyor's report to loss adjusters acting for Axa and indicated that it was "only asking you to note an interest in this matter as we are still carrying out investigation works into both the cause and the responsibility of the problems that are highlighted". In September 2007 remedial works were proposed but Gleeson and the building owners were unable to reach an agreement in relation to the scope of the necessary remedial works, resulting in a substantial claim against Gleeson who in turn sought Axa's confirmation that it would provide cover. Airedale Glass and Glazing Limited and Boundary Roofing Services were subsequently dissolved. Depending upon when the claim was first made, there were two policies which potentially applied for the periods 1 December 2006 to 30 June 2007 and 1 July 2007 to 30 June 2008, the terms of which were identical.
The court was asked to consider five preliminary issues, the second and fourth of which were resolved between the parties and fell away:
- Whether on proper construction of the policies, Axa was obliged to provide indemnity to Gleeson in respect of the claims regardless of whether "Damage to Property" had occurred; or on the basis that "Damage to Property" had to have occurred as an essential pre-condition to cover?
- Was the claim first made by Gleeson during the period of insurance from 1 May 2006 to 30 June 2007 by, at the latest, the letter of 25 May 2007? (It is unclear from the judgment why the policy period was stated as commencing on 1 May 2006 when it is referred to elsewhere as commencing on 1 December 2006.)
- If the policy for the period 1 December 2006 to 30 June 2007 did contain a sub-limit, whether such sub-limit has been eroded and, if so, to what extent?
The first issue involved the construction of the general insuring clause under Section 1 and Memorandum 23 (Subcontractors Workmanship) of the relevant policy for Public Liability. The general insuring clause under Section 1 provided:
"In the Event of
a) Personal Injury to any person
b) Damage to Property
c) Obstruction, trespass or nuisance, denial or access, interference with any quasi easement or right of air light water or way of interference with any other amenity, disclosure or information of a personal, confidential or commercial nature.
Occurring within the Territorial Limits the Company will indemnify the Insured in respect of all sums which the Insured shall be legally liable to pay as compensation arising out of such Event. The liability of The Company for compensation shall not exceed the limit of Indemnity in respect of any one Event."
Memorandum 23 (Subcontractors Workmanship) provided:
"This Section of the Policy extends to indemnify the insured in respect of legal liability arising from the defective workmanship of their subcontractors including the cost of making good defective workmanship provided that
1) a claim is first made against the Insured or notification given to the Company by the Insured of circumstances which might lead to a claim during the Period of Insurance.
2) this indemnity shall only come into effect after the expiry of any maintenance period by contract or when any contractors all risks insurance taken out by or on behalf of the contractor and/or subcontractor applicable to the carrying out of the work concerned has expired if earlier
3) this Memorandum shall not apply
a) until all practical sources of recovery from sub-contractors or their insurers have been exhausted
b) in respect of Damage to the property or defective workmanship for which an indemnity is provided for under a previous policy or Period of Insurance."
Axa's case was that Memorandum 23 did not displace Section 1 and cover was only provided under the former where the defective workmanship of the sub-contractors caused Damage to Property other than the part of the defective workmanship. Gleeson argued that Memorandum 23 constituted a self-contained insuring clause and there was no requirement for Damage to Property.
His Honour Judge Raynor QC approached the construction of these terms with reference to the general principles of contractual interpretation set out in Investors Compensation Scheme v West Bromwich Building Society  1 WLR 896 which advocate a purposive approach, seeking to understand the words in the commercial context in which they were used (the 'factual matrix') and permits all relevant background to be used as an aid to construction. In so doing, he refused to counter evidence as to what was said by representatives of Gleeson in 1999 as to why insurance was sought for defective workmanship of sub-contractors on the basis that evidence of pre-contractual negotiations should not be used for the purposes of contractual interpretation, adopting the reasoning of Flaux J in Excelsior Group Productions Limited v Yorkshire Television Limited  EWHC 1751 (Comm).
Accordingly he accepted the submissions of Axa that "Damage to Property" other than the part of the subject of the defective workmanship had to have occurred as an essential pre-condition of cover for the following reasons:
- The distinction between the words used at the beginning of Memorandum 23 ("This Section of the Policy extends to indemnify") and the words used in Section 1 ("The Company will indemnify") was significant. The judge held that the former expression makes clear that Memorandum 23 was not intended to be a self-standing form of cover but was to be governed by the general insuring clause under Section 1. Consideration of other Memoranda where the same expression was used reinforced his opinion.
Although the wording of Memorandum 23 could have been expressed more clearly, the judge held that the intent of the provision was clear and the cover under Section 1 for Damage to Property arising from defective property was extended in two respects:
- Where other property was damaged as a result of the defective workmanship, Gleeson would be indemnified against the cost of making good the defective workmanship (which would otherwise be excluded under the terms of the policy).
- Gleeson would be covered under Memorandum 23 (subject to its terms) where a claim was made or notification given during the Period of Insurance even though the Section 1 event occurred when there was no insurance in force.
- It was implicit in the terms of Memorandum 23 that the legal liability must be for Personal Injury, Damage to Property or Obstruction, trespass, etc, by virtue of the fact that it was the Section 1 cover that was being extended.
- The cover provided by Memorandum 23 could not be construed as extending in effect to a guarantee of the workmanship of subcontractors, irrespective of whether a Section 1 event had occurred. Such an extension would be highly unusual and require clear words and even possibly (as stated by Tuckey LJ in Tesco Stores v Constable  EWCA Civ 362) some other description of cover.
The issue here was whether the Arlington letter of 25 May 2007 with the accompanying report constituted "a claim… against the Insured" for the purposes of Memorandum 23 during the period of insurance ending on 30 June 2007. It was relevant that significant claims in respect of other projects had been paid by Axa to Gleeson during this policy period, thereby eroding the limit of cover available to meet this claim. Gleeson were therefore arguing that the claim fell under a subsequent period of insurance.
Gleeson argued that the letter of 25 May 2007 did not amount to a claim, relying on the statement of principle in the Canadian case of Reid Crowther and Partners v Simcoe & Erie General Insurance Co (1993) 99 DLR 741, but at best a notification of circumstances that might lead to a claim. Gleeson pointed to the fact that the letter was not from the property owners but their agent and that there was distance between the author of the letter and the commissioner of the report. Gleeson suggested that the letter was merely a request for comments and proposals for rectification of apparent deficiencies and not a demand for rectification.
Axa's case, relying on the dictum of Staughton LJ in Robert Irving and Burns v Stone  LI.R 258, was that the letter, taken together with the report and its clear conclusions that there were defects of design and construction, amounted to a claim against Gleeson for the rectification of the apparent deficiencies in the original building design and construction.
His Honour Judge Raynor QC agreed with Axa that the letter was more than a mere request for information but held that it did not constitute a claim within the meaning of the Policy as it was not an assertion of a right to relief (as Steyn LJ defined a claim in Thorman v New Hampshire Insurance Co  1 Ll.R 7). He held that the letter of 25 May 2007 was the communication of circumstances which might lead to a claim.
There was also an issue as to whether an interest payment made under the policy in respect of another claim eroded the sub-limit for the period 1 December 2006 to 30 June 2007. The issue turned on whether the interest was paid on legal action costs (in which case such limit would not be eroded) or was an interest payment in respect of damages and/or consequential costs (in which case the sub-limit would be reduced). The witness evidence given to the court made it clear that the latter proposition was correct and the judge therefore held that if a claim was made in the policy period 1 December 2006 to 30 June 2007 (contrary to his ruling) the sub-limit would be reduced by that amount.
As the judge observed, the extension of cover in respect of defective workmanship of subcontractors provided by Memorandum 23 to Section 1 of the Axa policy provided cover considerably more extensive than that provided by a conventional public liability policy. As a general rule public liability policies provide cover against liability to the public at large for claims for damages in tort; such policies do not therefore cover liability in contract for pure economic loss unless there is clear wording extending cover to the same.
The case serves as a useful reminder of the court's approach to the interpretation of insurance policies. In determining that on the proper construction of Memorandum 23 "Damage to Property" other than the part the subject of the defective workmanship had to have occurred was an essential pre-condition for cover, the judge made it clear that the policy would be construed by reference to all that it contained including the general insuring clause Section 1.