Lancashire County Council v Municipal Mutual Insurance Ltd

An insurance policy’s reference to compensation is construed in its contractual context. The term may include exemplary damages where the policy covers torts that naturally attract such awards, particularly if a narrower reading would produce unjust or impractical consequences for costs, settlement or lump-sum awards. Ambiguity in an insurer’s wording is resolved against the insurer. Public policy bars indemnity for the insured’s own liability arising from crime, subject to compulsory-insurance exceptions, but does not ordinarily bar cover for liability that is solely vicarious. The courts should not create a new rule preventing indemnity for exemplary damages where policy considerations conflict and the legislature has not established one. Public policy may influence construction only where one available meaning would preserve validity and another would make the contract or clause ineffective.

Municipal Mutual Insurance Ltd insured Lancashire County Council under a public liability policy. Endorsement 5(c) extended the policy to the Chief Constable and to claims involving assault, wrongful arrest, malicious prosecution and false imprisonment. The insurer repudiated liability for exemplary damages in claims concerning police misconduct and alleged abuse at a children’s home.

On 23 May 1994, Judge Kershaw QC declared that the Section A indemnity included sums payable by way of exemplary damages and dismissed the insurer’s public-policy counterclaim. The insurer appealed, arguing that the word compensation excluded exemplary damages, that indemnity was contrary to public policy, and that the policy was unenforceable in such cases.

Appeal dismissed with costs. Simon Brown LJ gave the leading judgment. Staughton LJ agreed, and Thorpe LJ agreed with both judgments.

1. Construction. The word compensation was capable of bearing either a narrow legal meaning, confined to sums repairing the claimant’s loss, or a broader meaning covering damages paid to the victim, including exemplary damages. In the policy’s actual context, Endorsement 5(c) expressly covered torts likely to attract exemplary awards. The broad construction was supported by the costs provisions, the usual use of single lump-sum awards, the practical difficulties of settlement and conflicts of interest, and commercial common sense. Any remaining ambiguity was resolved against the insurer under the contra proferentem rule applicable to insurance contracts. The reasoning drew on Riches v News Group Newspapers Ltd [1986] 1 QB 256, The Antaios [1985] AC 191 and Etherington v Lancashire & Yorkshire Accident Insurance Co [1909] 1 KB 591.
2. Public policy and construction. Public policy could affect construction only where the competing meanings included one which would preserve the validity of the clause or contract and another which would make it void or ineffective. It was not a general basis for rewriting private contracts.
3. Criminal conduct and vicarious liability. The court accepted the principle that a person cannot insure against liability consequent on his own criminal conduct, subject to cases such as compulsory insurance. That principle did not extend to a Chief Constable or employer whose sole liability was vicarious. Section 48 of the Police Act 1964 imposed liability in a manner equivalent to the master’s liability for a servant. The court declined to determine hypothetical cases where the individual constable was also sued and might himself claim indemnity.
4. Exemplary damages. English law contained no established rule making indemnity for exemplary damages contrary to public policy. The competing considerations included deterrence, the claimant’s prospects of recovery, residual financial consequences for the insured, contractual certainty, insurers’ ability to exclude the risk, and the burden on ratepayers. Courts should be cautious about creating new public-policy rules, particularly while the future of exemplary damages remained under legislative consideration.
5. Later endorsement. The 1990 pollutant endorsement did not imply that punitive damages were otherwise covered merely because they were expressly excluded. There was no presumption against surplusage in such an endorsement. The endorsement also varied and renewed the policy, creating fresh terms to be construed as a whole; the principle in James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 572 was not extended to that situation.

1. Court of Appeal (Civil Division) dismissed the insurer’s appeal with costs on 3 April 1996: [1996] EWCA Civ 1345.
2. Queen’s Bench Division, Manchester District Registry—Judge Kershaw QC, sitting in the Mercantile List, had declared on 23 May 1994 that the Section A indemnity included exemplary damages and had dismissed the insurer’s public-policy counterclaim.