Tesco Stores Ltd v Constable & Ors

A public liability policy ordinarily responds to tortious liability to third parties for physical interference with persons, property or property rights. It does not ordinarily cover an insured’s contractual liability for a third party’s pure economic loss unless the wording clearly provides for that risk.

In a cover for liability in respect of specified harm, those words mean liability for that harm. They do not extend cover to loss merely caused by, consequential upon, or connected with damage to another’s property. A contractual-liability extension remains subject to that limiting requirement unless it clearly enlarges the underlying cover.

During works to construct a supermarket over a railway cutting, part of a tunnel collapsed and the railway line was closed for 51 days. Chiltern Railway Co Ltd had only a contractual licence to operate trains over Network Rail’s track. It suffered no damage to its own property or proprietary interests.

Under a deed of covenant, Tesco agreed to compensate Chiltern for losses arising directly or indirectly from the works. Tesco settled Chiltern’s substantial claim for lost passenger revenue and sought an indemnity under its excess public liability policies.

Field J answered two preliminary issues against Tesco: the liability under the deed was not damages within the insuring clause and was not indemnified: [2007] EWHC 2088 (Comm). The appeal concerned whether a contractual liability for pure economic loss was within public liability cover for liability in respect of property damage, obstruction, loss of amenities, nuisance or like causes.

1. Appeal dismissed unanimously. Lord Justice Tuckey, with whom Lord Justice Thomas and Lord Justice Hughes agreed, held that the policy did not indemnify Tesco for its liability under the deed of covenant.
2. The policy had to be construed as a whole, according to its ordinary and natural meaning in its contractual and commercial setting. Its character as public liability insurance was a significant pointer. Such insurance normally covers tortious liabilities to the public at large, rather than contractual liabilities for pure economic loss. The insuring clause identified familiar forms of tortious harm arising from physical interference with a person, property or property rights. It could extend to contractual liability co-extensive with that tortious liability, since a contrary construction would be uncommercial, but it went no further.
3. The words in respect of meant for, not merely caused by, consequential upon or connected with. Thus, liability for property damage had to be liability to the person whose property was damaged. Liability for loss suffered by another person as a consequence of that damage was outside the cover. This limiting construction was supported by the product-liability authorities, including Rodan v Commercial Union [1999] Lloyds Rep IR b499 and Horbury Building Systems v Hampden Insurance [2007] Lloyds Rep IR 237.
4. The contractual-liability extension did not create general cover for liabilities assumed by contract. It remained subject to the insuring clause. It could cover, for example, assumed liability for tortious harm caused by another participant in the project, but did not cover Chiltern’s independent contractual claim for economic loss. The exception for penalties and liquidated damages did not alter that conclusion.
5. Chiltern’s loss arose under the deed of covenant. It had not suffered damage to its own property or property rights and had no tort claim for the asserted obstruction, loss of amenity or nuisance. Tesco’s liability was therefore not liability in respect of the specified harm, but contractual liability for pure economic loss. The preliminary rulings were upheld.

• Court of Appeal (Civil Division): Tesco’s appeal was dismissed. The court upheld the conclusion that the excess public liability insurers were not liable to indemnify Tesco: [2008] EWCA Civ 362.
• Queen’s Bench Division (Commercial Court): Field J answered both preliminary issues against Tesco, holding that the claimed liability under the deed of covenant was outside the public liability cover: [2007] EWHC 2088 (Comm).