Horbury Building Systems Ltd. v Hampden Insurance NV

A products liability indemnity covers liability for damages in respect of physical damage caused by the insured’s product after it has left the insured’s control. The cover may extend to economic loss consequential upon that physical damage, such as lost profits resulting from closure of the damaged premises. It does not extend to economic loss caused by a precautionary closure of undamaged premises while similar defects are investigated or remedied. The insurer’s liability is not necessarily co-extensive with the insured’s liability to third parties, particularly where the liability is exclusively contractual.

Horbury sought declarations concerning the extent of cover under a Contractors All Risks policy issued by Hampden. A ceiling installed by Horbury collapsed in one auditorium of a cinema complex. The operator closed the entire complex while the cause was investigated, other auditoria were inspected, and remedial work was undertaken.

Horbury sought declarations that the policy covered liabilities including physical damage, consequential loss of profits from the whole complex, and damage to ductwork. The claim was brought under CPR Part 8 before any third-party claim against Horbury had been determined. The central issue was whether loss of profits attributable to closure of undamaged parts of the complex was loss or damage within the products liability insuring clause.

1. The declarations were refused or held unnecessary. The proposed declaration concerning lost profits for the complex, other than auditorium 6, failed. The declarations concerning matters that Hampden did not genuinely dispute, subject to proof of liability and the policy exceptions, were unnecessary.
2. On the proper construction of clause 4.1, read with the policy definitions, the product had to cause physical damage to material property, and Horbury had to be liable at law for damages in respect of that damage. By clause 5.3, exclusively contractual liability was excluded. The policy therefore did not make Hampden’s liability co-extensive with every liability Horbury might owe to a third party.
3. The collapsed ceiling was a product which had ceased to be under Horbury’s control. The collapse physically damaged property including seats, carpets, decorations, walls, floors, the roof and ductwork, where applicable. Calling the damage damage to the cinema complex did not enlarge the physical damage or the resulting cover.
4. Damages for profits lost through closure of auditorium 6 could fall within the policy because they were economic consequences of physical damage. The same could apply to another auditorium if defective fixings caused physical damage which caused its closure.
5. Losses attributable to closure of the remainder of the complex were outside the cover. That closure resulted from a prudent and foreseeable decision to investigate the collapse, inspect other areas and carry out remedial works. It was neither physical damage nor a consequence of physical damage within the meaning of the policy. The result was the same whether the closure was voluntary or required by the licensing authority.
6. The reasoning in A S Screenprint Ltd v British Reserve Insurance Co Ltd [1999] Lloyd’s Rep. I.R. 430 (CA) and Rodan International Limited v Commercial Union [1999] Lloyd’s Rep. I.R. 495 supported construing the words in their contractual structure, language and context, and confining products liability cover to physical consequences caused by the product.

Not stated in the judgment.