CA Blackwell (Contractors) Ltd. v Gerling Allegemeine Verischerungs Ag

A defect exclusion in a contractors all risks policy turns on whether the insured property was in a defective condition when the fortuity occurred. It does not exclude loss merely because defective workmanship caused the damage. The insurer must establish a relevant defect in the condition of the damaged property, attributable to design, plan, specification, materials or workmanship. Property insured may be divisible. For extensive earthworks, it is confined to the part that suffered damage, so a remote and unrelated defect cannot defeat cover. A failure to take protective steps, such as pumping or channeling water, is not itself a defect in the condition of the protected property.

Blackwell, an earthworks subcontractor, claimed under a contractors all risks policy for damage to capping and sub-formation during motorway construction. Gerling relied on a defect exclusion clause. HHJ Mackie QC held that the insurers had not shown that the exclusion applied, in a judgment reported at [2007] EWHC 94 (Comm). He also held that the policy was an all risks policy, that the damage had the necessary element of fortuity, and rejected an allegation of wilful misconduct. Those conclusions were not appealed. The appeal concerned the construction and application of the exclusion, including whether temporary drainage formed part of the insured property and whether the damaged property was in a defective condition.

1. Appeal dismissed. The Court of Appeal upheld the conclusion that Gerling had not established that the exclusion clause applied.
2. The purpose of the clause was to exclude the cost of replacing, repairing or rectifying insured property that was already in a defective condition when the insured fortuity occurred, where the defect arose from design, plan, specification, materials or workmanship. The exclusion was not directed to loss caused by defective workmanship. The cause of the loss was therefore irrelevant if the property itself was not in a defective condition.
3. The clause had to be construed according to its own terms. The history and purpose of similar industry wordings could not be used as an aid to construction. Walker Civil Engineering Pty Ltd v Sun Alliance and London Insurance plc & ors involved materially different wording and did not assist. Skanska Construction Limited v Egger Barony Limited concerned a contractual obligation to insure and likewise did not assist.
4. The references to the insured property, a part of it and other insured property required the insured property to be divisible. In the context of the earthworks, the relevant property was restricted to the part that had suffered damage. An insurer could not avoid liability by identifying a remote defect unconnected with the damage.
5. The sub-formation was not defective. The capping could only be treated as defective because it lacked necessary cuts or channels if that requirement were clearly demonstrated at the relevant stage of the works. The judge’s finding that this had not been demonstrated followed from the evidence. Failure to use pumps, bowsers or other protective measures could not itself be characterised as a defect in the condition of the capping.
6. Alternatively, if the protective drainage measures were themselves insured property and their omission made them defective, they were distinct from the capping and sub-formation. The limitation concerning other insured property would then prevent the exclusion applying. Lord Justices Maurice Kay and Hooper agreed with Lord Justice Tuckey. The order was: appeal dismissed.

1. Court of Appeal (Civil Division) dismissed Gerling’s appeal and upheld the decision below.
2. High Court, Chancery Division (HHJ Mackie QC) held that the defect exclusion had not been shown to exclude the claim, in the judgment reported at [2007] EWHC 94 (Comm).