Insurance contract – Exemption clause – Claimant installing fire-extinguishing system – Fire breaking out at customer’s premises – System failing to operate – Customer claiming damages – Whether exclusion clause in insurance policy excluding cover – Whether failure of system constituting failure of machinery under terms of policy – Claim dismissed
The claimant was a fire protection engineer installed fire detection and protection systems. A fire broke out at the premises of his customers (PDG) when one of three fire-extinguishing systems failed to operate.
PDG sued the claimant and the proceedings were compromised for £2m (the total of the claimant’s insurance cover) on terms that PDG was entitled to fund and pursue proceedings in the claimant’s name against his insurer (the defendant). The proceedings were commenced and a preliminary issue was ordered to be tried, which, if successful, would resolve the issue.
The court was asked to decide whether the claimant’s case was excluded from cover under the insurance policy by operation of an exemption clause whereby the policy did not indemnify the claimant in respect of any claim arising out of “the failure of any fire or intruder alarm switch gear control panel or machinery to perform its intended function”. In particular, the question was, inter alia, whether the failure of the system to operate and to extinguish the fire, which had been caused by problems with the master cylinder, actuator pistol or cylinder valve, constituted a failure of “machinery”.
The claimant argued that a failure of, or connected to, any of those items would not be a failure of machinery because none of them constituted machinery. The defendant submitted that a failure of any of those items that resulted in the breakdown of the system would amount to a failure of machinery to perform its intended function.
Held: The claim was dismissed.
In construing a clause in a contract, the words to be construed should be given their ordinary and popular meaning. A commercial document, such as an insurance policy, should be interpreted in accordance with sound commercial principles and good business sense. The commercial object or function of the clause and its relationship to the contract as a whole would be relevant in resolving ambiguous wording. If a clause were ambiguous, and one reading produced a fairer result than the alternatives, it would be presumed that the parties, as reasonable men, would have intended to include reasonable stipulations in their contract: Absalom v TCRU Ltd (formerly Monument Insurance Brokers Ltd) [2005] EWCA Civ 1586; [2006] 2 Lloyd’s Rep 129 applied.
In the present case, the parts could not be considered in isolation. If the system failed, the machinery had failed to perform its intended function owing to the identified breakdown of one of its parts, that machinery would be deemed to have failed. Consequently, if the exclusion clause applied, the system, including its parts, constituted machinery and its failure resulted from a failure of machinery.
On its true construction, the exclusion clause provided limited cover for all those insured under the particular policy, with exclusion of cover for any claim arising out of the failure of any machinery to perform its intended function. On the particular facts of the instant case, that included the failure of the fire protection/suppression/extinction system to perform, in that it had failed to extinguish the fire in PDG’s premises. Accordingly, the preliminary issue would be resolved in favour of the defendant.
Nigel Tozzi QC and Alexander Gunning (instructed by Dewey & Leboeuf LLP) appeared for the claimant; Graham Eklund (instructed by Keoghs, of Bolton) appeared for the defendant.
Eileen O’Grady, barrister
