Reilly v National Insurance and Guarantee Corporation Ltd

An exclusion in an insurance policy must be construed by identifying its true meaning in the language and commercial context of the policy. Difficulty of construction does not itself establish ambiguity. Where two meanings remain equally available, a restrictive provision is construed in the manner more favourable to the insured, but the court cannot simply select the most favourable possible meaning.

A reference to “machinery” is context-sensitive and may include a complex mechanical unit operating through moving parts, without extending to every connected component. Liability is excluded only where the machinery itself failed to perform its intended function. Incorrect filling or pressurisation of a gas cylinder, or leakage through a static seal, did not satisfy that criterion.

John Reilly, who supplied and installed fire-protection systems, sought indemnity under a tradesmen’s insurance policy after a carbon-dioxide suppression system failed during a fire and property damage followed. The insurer relied on endorsement TP34S, which excluded claims arising from the failure of a fire or intruder alarm, switchgear, control panel or machinery to perform its intended function.

Burton J, determining a preliminary issue in the Commercial Court, held that the endorsement applied to those items as separate categories and that the system was machinery: [2008] EWHC 722 (Comm). The appeal concerned both the construction of the endorsement and whether the assumed causes of failure fell within it.

1. Appeal allowed in part. The endorsement was not confined to fire and intruder alarms and equipment associated with them. The listed items were separate categories. The absence of punctuation and the position of “machinery” in the list made the appellant’s construction possible, but did not determine the issue.
2. The court applied ordinary language, commercial context and the object of the policy. The prospectus description of cover as wide-ranging did not override the detailed policy wording. The undisclosed underwriting guide was not part of the common background and was irrelevant. A restrictive provision is construed favourably to the insured only where it is equally capable of bearing two meanings. The court must first identify the true meaning on rational grounds.
3. “Machinery” was an ordinary, context-sensitive term. It could encompass devices operating by physical movement to perform a particular function. The master-cylinder valves and actuators, operating as a complex mechanical unit, were machinery. The cylinders and pipework were separate components and were not machinery. An individual part such as a detent pin should not be considered in isolation, but its inclusion within a larger mechanism did not make the whole system machinery.
4. The exclusion applied if the actuator piston failed to latch, because that was a failure of machinery to perform its intended function. It did not apply if the system failed because the cylinder had been incorrectly filled or pressurised: the cylinder remained a container which held and released gas. It also did not apply to leakage through a static seal. Although the seal formed part of the valve and actuator mechanism, the machinery’s relevant function was to release gas through movement, and the seal had not failed in that function.
5. The preliminary question was answered: (a) incorrect filling or pressurisation—No; (b) leakage from the discharge valve—No; (c) failure of the actuator piston to latch—Yes.

• Court of Appeal (Civil Division): allowed the appeal in part and answered the preliminary issue differently according to the assumed cause of failure: [2008] EWCA Civ 1460.
• High Court of Justice, Queen’s Bench Division (Commercial Court): Burton J held that TP34S applied to the equipment as machinery and answered the preliminary question “Yes”: [2008] EWHC 722 (Comm).