Reilly v National Insurance & Guarantee Corporation Ltd

An exclusion of claims arising from the failure of machinery to perform its intended function may apply to an integrated fire protection system, including its cylinders, valves and actuators. The components should not be considered in isolation where the system as a whole performs a mechanical function. In construing an insurance exclusion, the court applies ordinary meaning, commercial sense and the clause’s commercial purpose. The presence of other items in a list does not necessarily confine a distinct category such as machinery by eiusdem generis or noscitur a sociis. Limited cover may remain for damage caused by a defective system, while claims based solely on failure to perform its intended function may be excluded.

The claimant, a fire protection engineer trading as J & J Services, installed carbon dioxide fire-extinguishing systems for a customer. One system failed to extinguish a fire, and the customer’s claim was compromised for the claimant’s £2 million policy limit. The customer was permitted to fund proceedings in the claimant’s name against the insurer.

On a preliminary issue ordered by Flaux J, the court had to determine whether the claim was excluded by clause TP34S(ii), which excluded claims arising from the failure of any fire or intruder alarm, switchgear, control panel or machinery to perform its intended function. The central issues were whether the system was machinery and whether the words “fire or intruder alarm” qualified the later categories.

1. Preliminary issue resolved for the defendant. Clause TP34S applied, with the result that the claimant’s claim failed.
2. The court applied the ordinary and popular meaning of the policy language, a businesslike interpretation, the commercial purpose of the clause and, where relevant, the avoidance of unreasonable results. These principles were supported by Absalom v TCRU Ltd [2006] 2 Lloyds Rep 129 and Antaios Compania Naviera v Salen Rederierna AB [1985] AC 191.
3. The carbon dioxide installation was machinery. Its cylinders, valves and actuator formed an integrated system containing moving parts. The relevant question was not whether each failed component was machinery in isolation, but whether the system had failed to perform the intended function of machinery. The reasoning in Lovelidge v Anselm Odling & Sons Ltd [1967] 2 QB 351 supported that conclusion. The ‘Arsa’ [1925] 23 Lloyds List Rep 273, upheld at [1926] 24 Lloyds List Rep 219, was materially different because it concerned a simple storm valve.
4. “Machinery” was a distinct category in the list. The earlier references to fire or intruder alarms, switchgear and control panels did not qualify it. The list could contain overlapping categories, and the suggested application of noscitur a sociis or eiusdem generis did not alter the ordinary construction.
5. The construction did not defeat the commercial purpose of the policy. It preserved limited cover for damage caused by a malfunctioning system, while excluding liability arising solely from failure of the system to do what it was intended to do, namely extinguish the fire.

A preliminary issue was ordered by Flaux J on 11 September 2007. No appellate history was stated in the judgment.