Tesco Stores Limited v Constable and Others
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Tesco was building a supermarket over a railway cutting near Gerrard's Cross station. The railway was to be enclosed in a tunnel and the new store built over it. On 30th June 2005, part of the tunnel collapsed and the line was closed for 51 days.
No one was injured, but the track and signalling equipment belonging to Network Rail were damaged. The train operator, Chiltern Railway, suffered considerable economic losses as a result of the line being obstructed.
Chiltern operated the line under licence from Network Rail. In addition, it had the benefit of a deed of covenant with Tesco, under which Tesco agreed to pay Chiltern compensation for losses and expenses "arising out of or resulting (directly or indirectly) from … the carrying out of the Works". Tesco did not show this deed to its public liability insurers.
Tesco settled Chiltern's claim under the deed of covenant and sought to recover from its public liability insurers. Insurers denied the claim on the grounds that the loss was not covered.
Tesco's public liability cover formed part of a package of insurance covering the construction project. It provided an indemnity:
"against all sums for which the Insured 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
happening or consequent upon a cause occurring during the Construction Period or any extension thereof and arriving out of and in connection with The Project".
A "contractual liability" extension stated: "liability assumed by the Insured under contract or agreement and which would not have attached in the absence of such contract or agreement shall be the subject of indemnity under this section only if the conduct and control of any claims so relating is vested in the Insurers and subject to the exceptions and extensions of this section".
An exception to the cover said insurers would not be liable for liability arising solely under fines, pre-determined liability or liquidated damages clauses in any contract or agreement.
High Court judgment
The judge agreed with insurers that the loss was not covered by the policy.
Public liability insurance provides cover against liability to the public at large for claims in tort (bodily injury, damage to property, or interference with property rights). This was the "core meaning" of the insuring clause.
In the judge's view, the policy also covered any contractual liability co-extensive with such liability in tort. This was supported by the exception clause, which ensured that heads of damage not recoverable in an action for tort would be excluded from the cover.
But in this case, no property belonging to Chiltern had been damaged, nor had Chiltern's property rights been affected. It could not have brought a claim against Tesco in tort. Its loss was purely economic and arose solely under the deed of covenant. The policy did not provide cover against contractual liability for "pure" economic loss.
Court of Appeal judgment
The Court of Appeal upheld the decision. Public liability arises in tort and, as a general rule, a claim in tort cannot be founded on pure economic loss.
The judge was also right to conclude that the policy effectively covered contractual liabilities co-extensive with the liability in tort – this was the commercial reality and reflected the intention of the parties.
The wording indemnified the insured against liability to a third party for ("in respect of") a tort or the effect of a tort. It did not cover the insured's liability to another third party for economic loss suffered indirectly as a consequence of that tort. Chiltern's loss was only the consequence of damage to the property and the property rights of Network Rail.
The contractual liability extension did not broaden the cover to include pure economic loss. It was closely tied into the insuring clause by the words "shall be the subject of indemnity under this section". Any contractual liability assumed, therefore, still had to be "in respect of" the physical impact on the third party's person, property or property rights.
The judgment confirms that a typical public liability wording will not cover a "standalone" contractual liability unconnected with any liability owed to the third party in tort.
There is, of course, nothing to prevent a policy from covering contractual liability for pure economic loss - provided it says so clearly. Such cover would more usually be described as contract liability, financial or consequential loss cover.