Professional indemnity insurance — Question as to liability covered by policies — Plaintiffs, a firm of chartered surveyors, were associated through one of their partners with another firm which included three other members, a chartered quantity surveyor and two chartered engineers — The object of this other partnership (Merak) was to provide clients with a unified service embracing the combined expertise of the different professional qualifications involved — The question of liability arose out of a fire causing damage to a superstore for the design and supervision of construction of which Merak was responsible — Merak was sued, together with other defendants, for alleged negligence or breach of contract in respect of defective design or inadequate inspection, supervision or advice — Merak joined the plaintiffs as third parties, claiming that the relevant work had been subcontracted to them — The present action and appeal, however, were not concerned with the merits of the main or the third party claim, but only with the cover afforded to the plaintiffs by the professional liability policies in respect of any liability to which they might be subject — The policies contained a general clause which stated the cover in very wide terms, but the issue concerned the effect of two memoranda which restricted the width of the cover — The question was whether the wording of the memoranda excluded protection for the plaintiffs against the third party claim by Merak — The first memorandum, which related to work carried out by the plaintiffs for and on behalf of Merak, provided that it covered only claims ‘by independent third party firms or individuals’ — The second memorandum was less clear but was held by Hobhouse J below and by the Court of Appeal not to say anything inconsistent with the first memorandum — Held that the policies did not cover a third party claim by Merak against the plaintiffs, but only claims against the plaintiffs by independent firms or individuals — Appeal dismissed
No cases are
referred to in this report.
This was an
appeal by the plaintiffs, Cooke & Arkwright, a firm of chartered surveyors,
from a decision of Hobhouse J rejecting the plaintiffs’ construction of the
terms of four policies of professional indemnity insurance. The defendant
(present respondent), Nicholas Charles Haydon, was a representative underwriter
in respect of all four policies.
Gavin Lightman
QC and John Whittaker (instructed by Phillips & Buck, of Cardiff) appeared
on behalf of the appellants; Gordon Langley QC (instructed by Reynolds Porter
Chamberlain) represented the respondent.
Giving the
first judgment at the invitation of O’Connor LJ, NEILL LJ said: This is an
appeal from the decision of Hobhouse J dated February 9 1987 concerning the
construction of four policies of liability insurance.
The plaintiff
firm, Cooke & Arkwright (‘C & A’) is a partnership of chartered
surveyors carrying on business in a number of towns in the United Kingdom. The
defendant is a representative underwriter for all four policies.
Some years ago
Mr Fuge, a partner in C & A, became a partner in the Merak Partnership
(Merak) together with three other partners, one being also a partner in a firm
of chartered surveyors, and the other two being partners in a firm of chartered
engineers. The object of Merak was to provide to clients a combined service
covering the expertise of all three professions, and it was intended that Merak
would, as occasion required, employ the respective professional firms as the
subcontractors of Merak. Merak was to be non-profit making.
In 1981 Merak
was engaged by CRS Ltd (CRS) to design and supervise the construction of a
superstore in Swansea. On August 26 1982 the superstore was damaged by fire. In
October 1984 CRS informed Merak that they were holding Merak at least partly
responsible for the damage caused by the fire. In April 1986 CRS issued
proceedings against Merak and other defendants including the building
contractors. In these proceedings it was alleged that Merak were in breach of
contract or negligent in respect of defective design or inadequate inspection,
supervision or advice. Merak then joined C&A as third parties, alleging
that the relevant work was subcontracted by Merak to C & A and that C &
A were responsible for the matters complained of both to Merak and to CRS. CRS,
however, have not joined C & A as defendants in their proceedings.
At this stage
we are not concerned with the merits of the claim by CRS against Merak or of
the third party claim by Merak against C & A. The sole question is whether
the policies cover C & A against any liability they may be under in respect
of the claim by Merak.
The printed
terms of the cover contained the following provision under the heading
‘Insuring Clauses’:
Now we,
Insurers, to the extent and in the manner hereinafter provided, hereby agreed:
1 To indemnify the Assured against all loss
to the Assured arising from any claim or claims which are first made against
them during the period specified in the Schedule in respect of any description
of civil liability whatsoever incurred in connection with the conduct of any
professional business (as stated in the Schedule) carried on by or on behalf of
the Assured.
It is common
ground that the cover provided by this clause was very wide and, had it stood
alone, would have extended to the claim brought by Merak against C & A in
the third party proceedings. Each of the policies, however, contained two typed
memoranda which had the effect of restricting the cover which would otherwise
have been afforded by clause 1 of the insuring clauses.
The memoranda
attached to and forming part of policy no 808/344075 were in the terms set out
below.
Memorandum 2
in the other three policies was in slightly different terms, but it was agreed
that the difference in the wording was irrelevant for the purpose of the
present case.
The two
memoranda, around which the debate before us revolved, provided as follows:
MEMORANDUM 1
It is hereby
understood and agreed that in so far as concerns work carried out by the
Assured for and on behalf of the Merak Partnership, this Certificate is only to
cover the liability (as herein defined) of the Assured for claims first made
against the Assured during the period specified in the Schedule by independent
third party firms or individuals.
MEMORANDUM 2
It is hereby
understood and agreed that this Certificate excludes all claims:
(I) . . .
(II) arising from Associated Companies, other than
work undertaken for and on behalf of the Merak Partnership, as referred to in
MEMORANDUM 1 above.
It was argued
on behalf of Merak both before the judge and in this court:
(1) That it is ‘an accepted
canon of construction that a commercial document, such as an insurance policy,
should be construed in accordance with sound commercial principles and good
business sense, so that its provisions receive a fair and sensible
application’: see MacGillivray & Parkington on Insurance Law (7th
ed) at para 1037.
(2) That possible claims
against C & A fell into three categories:
(a) Claims in tort against C
& A by a client of Merak in respect of work carried out by C & A: these
claims were described by counsel as direct claims.
(b) Claims in tort or
contract against Merak by a client of Merak in respect of work carried out by C
& A which then formed the subject-matter of a claimover by Merak: these
claims were described by counsel as indirect claims.
(c) Claims by Merak against
C & A in respect of loss suffered by Merak independent of any claim by a
client of Merak.
(3) That, as a matter of
commercial sense, one would expect the policies to cover claims in categories
(a) and (b) but not (c). Furthermore, on the proper construction of memorandum
1 ‘Claims . . . by independent third party firms or individuals’ included both
direct and indirect claims by such third parties and therefore claims in both
categories (a) and (b).
(4) That even if there was
some uncertainty about the construction of memorandum 1 the matter was put
beyond doubt by memorandum 2. Thus, although Merak was neither a company nor an
associated company in a strict sense, it was an ‘associated company’ within the
meaning of para (II) of memorandum 2 and the exclusion of claims by associated
companies had a specific exception to include ‘work undertaken for and on
behalf of the Merak Partnership’.
Accordingly, it was submitted, claims by Merak in respect of work
undertaken for and on behalf of Merak were clearly within the scope of the
cover afforded by the policies.
The judge
rejected these arguments. He held that the language of memorandum 1 was clear
and that it was not for the court to remake a bargain freely entered into
between the assured and the underwriter. As to the alternative argument based
on memorandum 2, the judge said this:
There is some
room for argument about the meaning of memorandum 2, because the provision is
ungrammatical. An exclusion upon an exclusion is capable of amounting to an
implicit inclusion. However, the plaintiffs would need to read memorandum 2 as
contradicting memorandum 1, that is, they have to say that memorandum 2,
contrary to memorandum 1, provides for claims by Merak to be covered. However,
the general intent of memorandum 2 is clear. It is to avoid inconsistency with
memorandum 1. The final words in memorandum 2 in either version indicate that
the preceding words ‘other than work undertaken for and on behalf of Merak’ are
a saving of the effect of memorandum 1.
I have no
doubt that the judge reached the right conclusion. I can state my reasons quite
shortly.
First, it is
to be noted that memorandum 1 is concerned only with ‘work carried out by C
& A for and on behalf of’ Merak. Second, memorandum 1 limits the cover to
claims which satisfy two criteria:
(a) They are made against
the assured; and
(b) they are made by
independent third party firms or individuals.
Third, it is to
be noted that the opening words of the relevant part of memorandum 2 contain a
general exclusion of all claims ‘arising from associated companies’.
To this
general exclusion there is an express exception ‘other than work undertaken for
and on behalf of the Merak Partnership’.
Like the
judge, I find the language of memorandum 1 quite clear: a claim in Mr Lightman’s
category (b) does not come within the cover because it is not a claim against
the assured by a third party; I can see no basis for extending ‘claims against
the Assured’ to include claims brought by third parties against Merak which are
then made the subject-matter of a claim by Merak against C & A to an
indemnity or for a contribution.
Moreover,
memorandum 2 contains a further and separate limitation by way of an exclusion
of ‘all claims arising from associated companies, other than work undertaken
for and on behalf of the Merak Partnership’.
In my
judgment, this exclusion includes but is not restricted to claims by associated
companies. Thus in the context it extends to work undertaken by C & A on
behalf of associated companies save that work undertaken on behalf of Merak is
specifically excepted. Accordingly, were it not for the exception for Merak
work, a direct claim by a client of Merak (in category (b)) would be excluded.
Such claims, however, are saved by the specific exception of Merak work in the manner
contemplated by memorandum 1 to which the concluding words of memorandum 2
refer.
For these
reasons, therefore, I would dismiss the appeal.
Before
concluding my judgment, however, I would wish to express my gratitude to
counsel for the clarity and conciseness of their submissions.
O’CONNOR and
RALPH GIBSON LJJ agreed and did not add anything.
The appeal
was dismissed with costs. Application for leave to appeal to the House of Lords
was refused.
