Tesco Stores Ltd v David Constable & Ors

Field J had to consider certain preliminary issues on the interpretation of a public liability insurance policy. Tesco had taken out this insurance as part of a standard project insurance package in relation to its plans at Gerrards Cross to install concrete tunnel sections over a railway cutting and to build a supermarket on top of the site. The company operating the railway was Chiltern. Tesco entered into a Deed of Covenant with Chiltern granting the following contractual indemnity whereby Tesco would pay Chiltern:

"on demand such sums as shall from time to time fairly compensate them for all and any costs, losses or expenses arising out of or resulting (directly or indirectly) from … the carrying out of the works … on its existing and/or future railway passenger business."

A section of the tunnel collapsed and part of the railway line was closed for 51 days. Chiltern made a claim for losses which included loss of revenue and loss of business. Tesco agreed to pay Chiltern under the Deed but maintained they were entitled to an indemnity under the public liability section of their insurance policy. The defendant underwriters disagreed. The relevant section of the insurance policy stated that:

"The insurers will indemnify the insured against all sums for which [Tesco] shall be liable at law for damages in respect of (a) death of or bodily injury to or illness or disease of any person (b) loss or damage to material property … (c) obstruction, loss of amenities, trespass, nuisance or any like cause"

There was an extension which covered liability assumed by Tesco under contract or agreement.The underwriters argued that the public liability section of the policy only covered the liability of Tesco to third parties who, as a result of the carrying out of the project works had suffered the kind of losses that would give rise to an action in tort. Underwriters said that Chiltern did not suffer such harm because it lacked a sufficient proprietary interest in the railway track to make a claim in negligence or nuisance. Thus, the damage suffered by Chiltern was pure financial loss which was not covered within the public liability cover.

Tesco argued that the words "liable at law" were broad enough to include liability in contract as well as in tort. Tesco said that as a matter of common sense, if one asked whether there had been an obstruction or loss of amenities or similar consequent on the tunnel collapse that had caused Chiltern damage, the answer would be yes.

Underwriters argued that the wording was a standard public liability policy wording. The traditional view was that such wording did not cover liability to the public for damage solely to economic interests. This liability would only arise in contract. If any other liability was intended to be covered, it should be clearly spelt out in the insuring clause. Reading the insuring clause as a whole, the type of damage referred to was that protected by the law of tort, for example, nuisance, trespass and property interests. The contractual extension was there to deal with situations where there was co-extensive liability in contract and tort. The contractual extension did not require the insuring clause to be given a fundamentally different meaning. In construing the policy, Field J adopted the words of Langley J in the case of Tioxide Europe Ltd v CGU International Insurance:

"The general principle is that the above construction is to be determined by the ordinary and natural meaning of the words used in the contractual commercial setting in which the words appear. The niceties of language may have to give way to a commercial construction which is more likely to give effect to the intention of the parties."

The Judge accepted Underwriters' submission that public liability policies are generally regarded as not affording cover against liability in contract for pure economic loss. The clause had to be read as a whole. Paragraphs (a) and (b) contemplated harm for which there was liability in tort and paragraph (c) referred to nuisance and trespass which were well-recognised torts. In other words, the clause described types of harm for which compensation would lie only in tort. The Judge also agreed that the policy covered liability in contract which was co-extensive with the liability in tort comprehended by the insuring clauses. It was not intended that the meaning of the insuring clauses should differ depending on whether the contractual liability extension clause applied. Underwriters' construction made sense of a commercial package and fitted in with the ordinary traditional notions of the public liability insurance. Accordingly, Tesco was not entitled to be indemnified under the insurance policy.