GREAT NORTH EASTERN RAILWAY v AVON INSURANCE PLC

An offer to renew an insurance policy ordinarily refers to the previous policy terms. Different wording supplied during negotiations is incorporated only if the parties objectively agreed to the change. The commercial background and subsequent conduct may establish whether a term was agreed, although subsequent conduct cannot assist in construing an agreed term.

An exclusion is not repugnant merely because it substantially restricts one element of an all-risks policy. The repugnancy doctrine permits an exclusion to be disregarded only where the contract as a whole would otherwise be virtually reduced to a declaration of intent. A court cannot delete an exclusion simply to create broader cover than the parties agreed.

Great North Eastern Railway Ltd claimed business interruption losses following a derailment caused by faulty manufacture of a wheel by non-employees. The previous policy wording excluded loss caused by faulty workmanship generally. A request for quotations prepared by the insured's new broker limited that exclusion to specified workmanship by the insured or its employees.

His Honour Judge Dean QC determined preliminary issues in the Commercial Court by holding that the renewed insurance remained subject to the previous wording. The insured appealed. The central questions were whether the broker's revised wording had been incorporated into the renewal and whether the wider exclusion was repugnant to the agreed provision of breakdown cover.

1. Appeal dismissed unanimously. Lord Justice Longmore delivered the leading judgment. Sir Philip Otton and Lord Justice Chadwick agreed. The answers given by His Honour Judge Dean QC to the preliminary issues were upheld.

2. The insurance contract for 1998–99 was a written contract. The search for its terms began with the broker's fax of 5 March 1998, signed and returned by the underwriter. Its reference to renewal of the policy meant renewal on the previous year's terms, namely the Fenchurch wording.

3. The broker's request for quotations did not incorporate the revised exclusion. The trial judge had found that the document was neither read nor discussed at the renewal meeting and that the broker did not draw the proposed change to the underwriter's attention. Objectively assessed in its commercial setting, nothing said or done indicated agreement to wording different from the existing policy.

4. The factual-matrix approach in Reardon Smith Line Ltd v Yngvar Hansen-Tangen, The Diana Prosperity [1976] 1 WLR 989 applied when determining whether a suggested term was incorporated. The trial judge could also consider the broker's subsequent provision of the previous wording to his claims colleagues. The rule in Miller v Whitworth Estates [1970] AC 583, which prevents reliance on subsequent conduct to construe a contract, does not prevent such evidence from showing whether an alleged term was agreed.

5. The faulty-workmanship exclusion was not repugnant to the breakdown cover. Under Tor Line AB v Alltrans Group of Canada, The TFL Prosperity [1984] 1 WLR 48, an exception may be disregarded only where it would reduce the contract as a whole virtually to a declaration of intent. It was impermissible to isolate breakdown cover and its attributed premium from the written all-risks contract. The exclusion also left meaningful cover for breakdown caused by operational error and external perils.

6. Deleting the exclusion for breakdown would have remade the parties' contract. The appeal was therefore dismissed with costs, and leave to appeal to the House of Lords was refused.

1. Court of Appeal (Civil Division): The insured's appeal was dismissed unanimously. The answers to the preliminary issues were upheld, with costs, and leave to appeal to the House of Lords was refused.

2. High Court of Justice, Queen's Bench Division (Commercial Court): His Honour Judge Dean QC held that the insurance was renewed on the previous Fenchurch wording rather than the revised wording contained in the broker's request for quotations.