Brian Leighton (Garages) Limited v Allianz Insurance Plc [2023] EWCA Civ 8
The Court of Appeal has recently handed down judgment in relation to a dispute between Allianz and its insured arising from the interpretation of a Pollution and Contamination Exclusion in a commercial insurance policy.
The judgment is of interest as it provides a helpful reminder of the meaning of “proximate cause”, as well as illustrating the courts’ approach to the interpretation of exclusions in commercial insurance policies following the Supreme Court decision in Financial Conduct Authority v Arch Insurance & Others [2021] UKSC 1.
Brian Leighton (Garages) Ltd (“BLG”) operated a garage and petrol station in Yorkshire. In June 2014 a leak occurred from a section of pipe connecting an underground fuel tank to the forecourt fuel pumps. It was caused by the pressure of an object (such as a sharp stone) on the pipe, under pressure from the weight of the concrete slab under the forecourt. The fuel contaminated the forecourt and parts of the garage, leading to the closure of the business.
BLG claimed under the material damage and business interruption sections of a “Motor Trade Policy” issued by Allianz (“the Policy”). Allianz declined cover on the basis that the claim was caught by a Pollution and Contamination Exclusion, which excluded cover for (underlining added):
“Damage caused by pollution or contamination, but [Insurers] will pay for Damage to the Property Insured not otherwise excluded, caused by:
(a) pollution or contamination which itself results from a Specified Event
(b) any Specified Event which itself results from pollution or contamination.”
The definition of Specified Event included fire and escape of water, but notably did not refer to escape of fuel.
Following commencement of declaratory proceedings in the High Court, Allianz applied for summary judgment. BLG contended that the Exclusion was not engaged. It argued that while the effect of the leak may have been pollution or contamination, the cause of the damage was the sharp object which punctured the pipe. The court accepted Allianz’s argument that on an ordinary reading of the Exclusion the damage was caused by pollution and contamination, and thus granted summary judgment.
BLG appealed. At the hearing in the Court of Appeal, it became common ground that the loss was caused by a process of contamination or pollution as part of the causative chain, but the “proximate cause” of the loss was the sharp object rupturing the pipe, which was not itself pollution or contamination. The case therefore turned upon whether the words “caused by” in the Exclusion connoted proximate cause or some looser causal connection.
Lord Justice Popplewell gave the leading judgment. He referred to the general principles of construction of contractual documents, as recently explained in FCA v Arch, namely that “an insurance contract, like any contract, must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean.”
Again following FCA v Arch, the relevant commercial context included the fact that this was a policy for small to medium-sized enterprises (SMEs). In this case, BLG’s business involved operating a petrol filling station, and the risk of leakage of fuel was an obvious risk for which the operator of such a business would desire cover.
Later in the judgment, and of particular note, Popplewell LJ stated that the background knowledge available to the parties also included a familiarity with the basic principles of insurance law and the meaning of terms which have been the subject of consistent judicial authority. This is because these are matters which could be explained to SMEs by their brokers and legal advisers. Accordingly, insured SMEs would be expected to understand the principle of proximate cause in an insurance contract.
Popplewell LJ acknowledged that, due to its historical origins, the expression “proximate cause” is apt to mislead and went on to provide a helpful reminder that proximate cause is the “dominant, effective or efficient cause”. There may be more than one proximate cause (as illustrated in FCA v Arch, where each individual case of Covid 19 was held to be a proximate cause of the government’s lockdown measures). It is generally presumed that the parties to an insurance contract intend that the insurer will be liable only for losses proximately caused by a peril covered by the policy. However, that presumption can be displaced by language in the contract indicating a contrary intention, typically wording such as “directly or indirectly caused by”.
Applying these principles to the dispute at hand, Popplewell LJ held that the Exclusion was limited to losses proximately caused by pollution or contamination. He started by considering the words in the first part of the Exclusion (i.e. “Damage caused by pollution or contamination”), finding that taken on their own, it was tolerably clear that proximate cause was intended. He then went on to analyse the “write back” of cover contained in paragraphs (a) and (b) but did not consider that this wording displaced the presumption that proximate causation applied. He acknowledged that this construction resulted in a narrow scope for the Exclusion and an even narrower scope for the write back. However, this was no reason to reject that construction, particularly as the risk of fuel leakage was an obvious risk which a business such as BLG would wish to cover. Accordingly, since the proximate cause was the sharp object which had punctured the fuel line rather than the resulting contamination, the Exclusion was not engaged. Nugee LJ concurred, so BLG’s appeal succeeded by a bare majority of 2 to 1.
Males LJ dissented on the issue of construction of the clause. Interestingly, he agreed that the first part of the Exclusion, if taken on its own, suggested an intention to exclude damage proximately caused by pollution. However, he placed greater emphasis on the write back provisions (which included escape of water and fire but not escape of fuel as Specified Events). In his view, on a natural reading of the whole clause, this was sufficient to displace the presumption that the Exclusion applied to damage proximately caused by contamination. Finally, he observed that it was only during oral submissions in the Court of Appeal that the argument clearly emerged that the Exclusion was concerned only with damage proximately concerned by contamination. He considered that this provided powerful confirmation that the trial judge’s interpretation better accorded with the natural meaning of the Exclusion as it would be understood by the ordinary policyholder suitably advised by a broker or lawyer familiar with the basic principles of insurance law.
The decision provides an interesting illustration of how courts will interpret commercial insurance contracts that are held by SMEs. In particular, when considering the relevant commercial context, it appears that SMEs such as BLG will be deemed to have had access to advice from their brokers or lawyers and thus be familiar with the basic principles of insurance law. There is perhaps some irony in the fact that at first instance it was held that Allianz’s argument on the degree of causal link better reflected the ordinary meaning of the clause, whereas the focus on proximate cause at appeal favoured BLG. Presumably, that principle “cuts both ways”; and if the dispute had concerned, say, an extension of cover rather than an exclusion, an insured might find the same legal principles cutting down the scope of cover. SMEs and their brokers will therefore need to carefully consider the terms of their cover in light of the basic principles of insurance law.
The case also highlights that questions of construction are highly fact-sensitive, and will depend to a large degree on the language used in the particular contract. The outcome of such an enquiry can be difficult to predict, as clearly illustrated by the diverging views expressed by the court of first instance and indeed the members of the appellate court.
If insurers wish to avoid such uncertainty and to exclude policy liability for such losses, this can be achieved by using more restrictive wording in the policy. As touched upon in the judgment, the phrase “caused directly or indirectly” suggests a looser causal link than proximate cause and may well have led to a different result in this case. Another common form of words is “caused by or consisting of”, which, if used in the Exclusion in this case, would have excluded policy liability for contamination without the need for an assessment of the degree of causal link between the damage and the contamination.
If you have any questions, or would like more information, please contact, Edwin Millburn, Partner, Property Risks and Coverage.
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