Insurance: construction of policy wordings

A recent Commercial Court case has reaffirmed the well-established principles of policy construction. The case also demonstrates that the courts may interpret the wording of an exclusion clause strictly in insurers’ favour, notwithstanding the insured’s arguments that such an interpretation would be contrary to the commercial object of the insurance cover.

A fire protection system was installed that failed to operate when a fire broke out. The owners of the building claimed against the fire protection engineer who had installed the system. The claim was settled and proceedings brought against the engineer’s insurers.

The claim against insurers failed. The judge held that it fell within the terms of an exclusion clause, which stated that the policy would not cover “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 determining whether the exclusion applied, the judge re-stated and applied established canons for policy construction:

• the words should be given their ordinary and popular meaning;
• a commercial document, such as an insurance policy, should be construed in accordance with commercial principles and good business sense;
• the commercial object or function of a clause in the context of the overall document is relevant in resolving any ambiguity; and
• if the wording is ambiguous, it should be given the interpretation that produces the fairest and most reasonable result.

The engineer argued that, if the exclusion clause applied and the failure of machinery (i.e. his fire protection system) was not covered, for what was he paying his insurance premium? He would effectively have no cover under the policy and such an interpretation ran contrary to the commercial object of the insurance.

However, the judge drew a distinction between the fire protection machinery being defective, such as a valve blowing off and causing damage to property or person, and it failing to perform its intended function, i.e. operating to extinguish a fire. The exclusion applied only to the latter. The engineer therefore had limited cover, subject to the exclusion for claims arising out of the failure of machinery to perform its intended function. The interpretation that the exclusion applied did therefore accord with the commercial object of the cover and made business sense.

Comment

The prospectus and proposal received by the insured referred to the cover providing “protection against the common risks faced by most contractors”. The insured engineer assumed that this would cover the claim in question. The case demonstrates that an insured’s understanding of the cover he purchases will not necessarily be mirrored by the courts’ interpretation of the wording.

Further reading: John Reilly -v- National Insurance & Guarantee Corporation Limited [2008] EWHC 722 (Comm)