and the Underwriters will, in addition to any loss recoverable hereunder, reimburse the Assured for any charges properly and reasonably incurred in pursuance of these duties.’

[1020] Yorkshire Water Services Ltd v Sun Alliance & London Insurance Plc [1997] 2 Lloyd’s Rep 21 (CA)

[As the result of the failure of an embankment owned by YWS, sewage from its sewage works was deposited in the river Colne. One of the neighbouring property owners claimed against YWS for damage to its business and property that resulted from the flooding, and similar claims were expected from other property owners. To reduce the likelihood of such claims, YWS undertook flood alleviation works at a cost of over £4m. YWS sought to recover this expenditure under a public liability policy issued by Sun Alliance, which provided cover ‘against legal liability for damages’ in respect of accidental loss of or damage to material property and ‘all other costs and expenses in relation to any matter which may form the subject of a claim’. YWS also sought recovery under a policy issued by Prudential, which indemnified ‘the insured against all sums which the insured shall become legally liable to pay as damages or compensation in respect of…loss of or damage to property…happening in connection with the Business’].

Stuart-Smith LJ:

‘…Mr Griffiths [counsel for YWS] relied first on two English decisions, The Knight of St Michael [1898] P 30 which was approved by the Court of Appeal in Symington & Co v Union Insurance Society of Canton Ltd (1928) 97 LJKB 646 at p 650. These are cases of property insurance under marine insurance policies. In The Knight of St Michael the interest insured included inter alia the freight to be earned on delivery of a cargo of coal. The coal overheated and there was imminent risk of fire, so that much of it had to be unloaded and the freight lost. The perils insured against were “fire and all other perils loss and misfortunes”. Mr Justice Barnes held that in the light of the imminent danger of fire it was a loss ejusdem generis and covered by the words “all other losses and misfortunes”. The case is of no assistance in considering a public liability policy.

In Symington’s case a cargo of cork was awaiting loading when fire broke out on the jetty and in order to prevent the fire spreading, the port authority jettisoned a quantity of the cork and sprayed the remainder with sea water. The policy covered — “…loss or damage to the interest insured which may reasonably be attributed to fire.”

It was held that the fire was an imminent peril and the proximate cause of the damage to the cork and thus the claim fell within the policy wording. Both cases are concerned with loss or damage to the property or interest insured and are not concerned with expense incurred by the insured to preserve the property. Even if such expenses were recoverable under such a policy, there is an important distinction between property and liability insurance. Recovery under the former is limited to the value of the property insured; any expense incurred in its preservation is therefore subject to the same limit. But in the case of expenses incurred by the insured to prevent liability to third parties for damage or further damage it is impossible to quantify such damage, since ex hypothesi it has not occurred. Accordingly the expense of the alleviation works may greatly exceed any possible or likely damage to third parties and the limit of indemnity is wholly inappropriate in such circumstances.

In my judgment these cases do not assist the plaintiff and they turn, as one would expect, on the words used in the policy and do not lay down any doctrine…Mr Griffiths also sought to rely on a number of American authorities to support his contention. The earliest of these is Desrochers v New York Casualty Co (1954) 99 NH 129; 106A 2d 196, a decision of the Supreme Court of New Hampshire. The language of the public liability policy was that the —

“…insurer agreed to pay all sums which insured should become legally obligated to pay as damages because of injury to property.”

It is very similar to that in the Sun Alliance and Prudential policies. The insured failed to recover the costs and expenses of complying with an injunction to restrain damage to third parties. It is therefore against the plaintiff’s contention in this case. Mr Griffiths cited a number of cases where the decision has gone in favour of the insured. Leebov v United States Fidelity & Guaranty Co, 165 Atlantic Reporter 2d series 82 (1960) Supreme Court of Pennsylvania. The Court distinguished the language of the policy from that of Desrochers; but there is no satisfactory analysis of the actual wording: the case seems to turn on the proposition that:

“…it is folly to argue that if a policy owner does nothing and thereby permits the piling up of mountainous claims at the eventual expense of the insurance contract, he will be held blameless of all liability, but if he makes a reasonable expenditure and prevents a catastrophe he must do so at his own expense.”

…[His lordship referred to several other US authorities.] These cases were for the most part carefully analysed by the learned Judge and I do not propose to do so again. Like him I do not derive much assistance from them. In some cases it is difficult to see how the Desrochers case is distinguishable; but what is clear is that the American Courts adopt a much more benign attitude towards the insured; this seems to be based variously on the “folly” argument in Leebov or “general principles of law and equity”…or that insurance contracts are: “contracts of adhesion between parties who are not equally situated” giving rise to the principle:

“…that doubts as to the existence or extent of coverage must generally be resolved in favour of insured…” or because the Courts have —

“…adopted the principle of giving effect to the objectively reasonable expectations of the insured for the purpose of rendering a “fair interpretation” of the boundaries of insurance cover. [Broadwell Realty Services Inc v Fidelity and Casualty Co of New York, 528 Atlantic Reporter 2d series 76 (Superior Court of New Jersey)]”

For the most part these notions which reflect a substantial element of public policy are not part of the principles of construction of contracts under English law…

In my judgment the fallacy of Mr Griffiths’ argument is that it seeks to elevate the “event” or “occurrence” into the peril insured against, whereas the peril insured against is in fact:

“…legal liability for damages in respect of accidental loss or damage to material property [Sun Alliance]

…all sums which insured shall become legally liable to pay as damages and compensation in respect of…loss or damage to property [Prudential].”

It involves reading in between the words “against” and “legal liability” (Sun Alliance) some such words as “against all such costs and expenses incurred in respect of an event which may give rise to legal liability”. Such a major re-writing of the bargain is not in my view justified.

In my judgment Mr Crowther’s analysis is correct when he submits that there are four steps leading to a claim under the Prudential policy. 1. the original cause; 2. an occurrence arising from the original cause, which is relevant to the limits of liability; 3. claims made by third parties in respect of damage to property; 4. the establishment of legal liability to pay damages or compensation in respect of such sums.

Or to put it another way there are four relevant requirements before an indemnity can be obtained under the policy. 1. Sums 2. which the insured shall become legally liable to pay 3. as damages or compensation 4. in respect of loss or damage to property.

In this context “sums” must mean sums paid or payable to third party claimants. No such sum arises in relation to the flood alleviation works. “Legally liable to pay” must obviously involve payment to a third party claimant and not expenses incurred by the insured in carrying out works on his land or paying contractors to do so and the liability must be to pay damages or compensation. “Damages” means “sums which fall to be paid by reason of some breach of duty or obligation.” See Hall Brothers Steamship Co Ltd v Young (1939) 63 Ll Rep 143 at p 145. “Loss or damage to property” is a reference to the property of the third party claimant and not that of the insured.

Mr Crowther relied on the cases of Post Office v Norwich Union Fire Insurance Society [1967] 2 QB 363 and Bradley v Eagle Star Insurance Co Ltd [1989] 1 AC 957 in which the Post Office case was affirmed. Both cases were concerned with claims where the plaintiff was suing the tortfeasor’s insurer direct under the Third Parties (Rights against Insurers) Act, 1930 and involved the question of what had to be established before the insured tortfeasor had a right to sue the insurer. Lord Denning, MR in the Post Office case said…

“…so far as the ‘liability’ of the insured person is concerned, there is no doubt that his liability to the injured person arises at the time of the accident, when negligence and damage coincide. But the ‘rights’ of the insured person against the insurers do not arise at that time. The policy says that ‘the company will indemnify the insured against all sums which the insured shall become legally liable to pay as compensation in respect of loss of or damage to property’. It seems to me that the insured only acquires a right to sue for the money when his liability to the injured person has been established so as to give rise to a right of indemnity. His liability to the injured person must be ascertained and determined to exist, either by judgment of the court or by an award in arbitration or by agreement. Until that is done, the right to an indemnity does not arise. I agree with the statement by Devlin J in West Wake Price & Co v Ching

“…the assured cannot recover anything under the main indemnity clause or make claim against the underwriters until they have been found liable and so sustained a loss…”

This passage was expressly approved in the House of Lords in Bradley’s case. It is subject to the gloss that the insured is entitled to sue for a declaration that the insurer will be liable to indemnify him, if this is disputed, before payment is actually made and the contract can be specifically enforced so that the insurer can be obliged to pay, (unless there is a “Pay to be paid” clause) without the insured actually having to pay first; but the liability to pay a quantified sum must be established. See per Lord Goff of Chieveley Firma C-Trade Ltd v Newcastle Protection and Indemnity Association Ltd [1990] 2 Lloyd’s Rep 191 at p 202…

Mr Crowther also submitted that there is no logical distinction between preventative steps taken by the insured to avoid liability to third parties in the first place, the expense of which obviously, as Mr Griffiths accepted, cannot be recovered under such a policy, or preventative steps to avoid further damage to a third party who has already suffered some damage, but may in the absence of preventive measures suffer more, or to other different third parties who have not yet suffered any damage. Mr Griffiths submitted that it made all the difference that a third party had already suffered some damage. But I am unable to follow the reasoning that is supposed to lead to this conclusion.

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