The recent High Court decision in Tesco Stores Ltd v Constable and others [2007] EWHC 2088 (Comm); [2007] PLSCS 196 demonstrates that the scope of public liability insurance has important limits that are relevant in the context of property transactions.
The High Court had to consider a claim that arose out of a project to construct a supermarket above a railway tunnel near Gerrards Cross. The tunnel collapsed, causing extensive damage to the railway and resulting in the two-month closure of the line.
The operator of the line, Chiltern Railway Co Ltd, had a contractual right to run trains along the track. Before starting the project, Tesco had entered into a deed of covenant with Chiltern. This included a wide contractual indemnity in favour of Chiltern, requiring Tesco to compensate the operator for any loss suffered as a result of the works.
When the tunnel collapsed, none of Chiltern’s property was damaged. However, Chiltern did make a claim against Tesco under the deed of indemnity, claiming loss of revenue resulting from the line closure and loss of business and reduced passenger revenues when the line reopened. The claim was settled in June 2007; the sum paid remains confidential.
The rail regulator had required Tesco to take out public liability insurance cover of £155m against death, personal injuries and loss or damage to property. Tesco claimed under the insurance policy for the sums paid to Chiltern. It argued that it was entitled to recover the moneys because it had extended the scope of the policy to include contractual liability.
The underwriters rejected Tesco’s claim. They successfully argued that the insurance policy covered liability in tort, and co-extensive liability in contract. Chiltern had not suffered the type of damage covered by the public liability policy because it did not own the track. It had suffered pure economic loss that was recoverable only in contract, under the deed of indemnity. Consequently, Tesco’s public liability insurance did not cover the sums paid to Chiltern.
The judge refused to allow Tesco to turn its public liability insurance into a private liability policy. Public liability policies provide cover for personal injury or damage to property. They do not provide cover for pure economic loss, unless the insured is also liable in tort.
The decision underlines the need for special care when drafting and negotiating deeds of indemnity in property transactions involving licensees, which are often affected by real estate transactions, even though they lack the requisite property interest. Clients that, for commercial reasons, are willing to provide wide-ranging indemnities against losses that can properly be laid at their door should be warned that their public liability insurance may not fully cover them.
Allyson Colby is a property law consultant