Public liability insurance: no cover for defective work of sub-contractor
A recent Technology and Construction Court decision has demonstrated that the courts will be reluctant, absent express wording to the contrary, to construe policies of public liability insurance as providing cover for the defective work of subcontractors, absent any wider damage to property.
Gleeson was engaged by Frogmore Developments Limited in relation to a development in Watford. It, in turn, engaged sub-contractors to carry out various works at the development. Following a letter complaining of defects in the development, a substantial claim was intimated against Gleeson.
Gleeson was insured under two relevant policies with AXA. Section 1 of each policy provided public liability cover for all sums that Gleeson was legally liable to pay in compensation arising out of, inter alia, damage to property. There was an exclusion clause in Section 1 in respect of any costs incurred in making good or replacing defective workmanship but the exclusion only applied to the part of the property that was defective and not to the remainder of the property where the same was damaged as a result of the defective workmanship. Subject to certain conditions, Memorandum 23 extended the cover available to include the insured’s liability arising out of the defective workmanship of subcontractors, including the cost of making good defective workmanship.
Gleeson sought confirmation that its public liability cover would respond to the claim. This led to a dispute with AXA over the scope of cover provided for in Memorandum 23 (amongst other issues).
Gleeson argued that Memorandum 23 was effectively a stand alone insuring clause, providing cover in respect of the costs of making good the faulty workmanship of its subcontractors, even where such defective workmanship had not caused damage to other property.
AXA contended that Memorandum 23 did not provide such stand alone cover, but extended Section 1 to provide indemnity for the costs of rectifying defective workmanship of subcontractors where there had been wider damage to property (the logic being that rectifying such defects would prevent damage from occurring in the future and, in turn, further claims under the policy). Relying on the decision in Tesco Stores v Constable  EWCA 362, AXA argued that (unless there is express wording to the contrary) by its very nature, public liability insurance only covers tortious liability and (potentially) concurrent contractual liability to third parties. If Memorandum 23 was intended to cover the cost of remedying subcontractors’ defective work, it would effectively amount to a guarantee that the subcontractors’ works complied with the relevant contractual requirements. There was nothing in the language of the memorandum to suggest that this was the case.
His Honour Judge Raynor QC agreed with AXA’s interpretation of Memorandum 23. In his view, it was implicit that Memorandum 23 was intended to cover the legal liabilities set out in Section 1 (including damage to property), given that it was stated to be an extension of the public liability cover in that Section.
Memorandum 23 did not provide stand alone cover for subcontractors’ defective workmanship. To give the Memorandum this construction would be to turn the clause into a guarantee of the subcontractor’s workmanship which would be an “extraordinary extension of public liability cover” requiring “clear words” and possibly “some other description of the cover”.
He also considered that there was “force” in the argument that there was a distinction between those Memoranda (including Memorandum 23) which contained the words “This Section of the Policy extends to indemnify” and those which stated “This Company will indemnify”, in that the former indicated that the relevant Memorandum was not intended to be a stand-alone insuring clause.
The case demonstrates that, when construing the terms of public liability policies, it is likely that the court will be reluctant to stray from the general purpose of such cover, which is to provide indemnity in respect of tortious (and possibly concurrent contractual) claims from third parties. Where there has been damage to property as a result of defects in design or workmanship, the nature of the cover normally provided under public liability policies means that express wording will be required before the insured can claim that it is entitled to recover the costs of repairing such defective design or workmanship, particularly where no wider damage has been caused.
This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission.
To avoid situations like this, make sure you are properly covered with the right contractors' insurance.