Horbury Building Systems Ltd v Hampden Insurance NV

A products liability indemnity for liability in respect of physical loss of or damage to property is confined to the physical consequences of the insured product or work, together with economic loss flowing from that physical consequence. The words in respect of impose a substantive limit on the cover; they do not merely identify an event connected with the insured’s liability. Closure of undamaged premises for inspection or precautionary remedial work is not itself physical damage, and resulting loss of profits is outside such cover. The court may construe an insurance policy before third-party liability has been finally determined, but declarations based on wholly hypothetical and undefined liability should be approached with caution.

Horbury Building Systems Ltd appealed from a decision of Mr Ian Glick QC, sitting as a Deputy High Court Judge in the Commercial Court, dated 9 September 2003. Horbury had installed suspended ceilings at a cinema complex. After one ceiling collapsed, the whole complex was closed while the other auditoria were inspected and remedial work was undertaken.

Horbury sought declarations concerning a products liability policy issued by Hampden Insurance NV. No claim had yet been brought against Horbury by the cinema owner or main contractor, and the legal basis, extent and quantum of any liability remained unresolved. The central issue was whether liability for loss of profits attributable to closure of the undamaged parts of the complex fell within cover for liability in respect of loss of or damage to property caused by the insured’s products.

1. Appeal dismissed. The court upheld the Deputy Judge’s conclusion that the policy did not cover loss of profits resulting from closure of the parts of the cinema complex where no physical damage had occurred.
2. Clause 4.1 covered liability for the physical consequences of the collapse in auditorium 6 and economic losses caused by that physical damage, such as losses arising from the closure of auditorium 6 itself. The phrase in respect of limited the indemnity. It was insufficient that the loss had some connection with the collapse.
3. The wider closure resulted from concern that similar defects might exist elsewhere and from the need for inspection and remedial work. It was not caused, in the policy sense, by physical damage to the other auditoria. The collapse in auditorium 6 merely brought that need to light. Treating the wider losses as covered would convert a products liability policy into one covering general contractual liabilities.
4. The court rejected the argument that the collapse was the sufficient causal event because the wider closure was prudent and foreseeable. The same closure, inspection and repair costs would have been outside the policy if the defects had been discovered before any collapse. The contractual exclusion for damage to products serviced or treated also supported the court’s construction.
5. The court declined to determine the claimant’s underlying liability to AMC or Galliford. A contractor is not liable in tort for the cost of repairing a defect before it causes personal injury or physical damage to other property; contractual liability was separately limited by clause 5.3. These observations reinforced, but did not independently determine, the construction of the policy.
6. Mance LJ endorsed the caution expressed by Keene LJ about declarations sought on artificial or inaccurate assumptions. The right to indemnity arises when third-party liability has been ascertained and quantified by judgment, award or agreement, although the court may declare the scope of valid cover earlier where practical and convenient. On the assumed facts, however, it was appropriate to hear and determine the appeal.

• Court of Appeal (Civil Division): [2004] EWCA Civ 418, 7 April 2004. Appeal dismissed; the Commercial Court’s construction of the products liability policy was upheld.
• Commercial Court: Decision of Mr Ian Glick QC, sitting as a Deputy High Court Judge, dated 9 September 2003. The court held that cover extended to physical damage and its economic consequences, but not profits lost through closure of the undamaged remainder of the complex.