Contractors' all-risk insurance policies

In December 2001, AMC Europe opened a cinema complex at The Great Northern Warehouse in Manchester. The construction project consisted of a shell that was partitioned to provide 16 cinemas with a total seating capacity in excess of 3,700. The main contractor for the building works was Galliford Northern, which subcontracted the partition walls and ceilings of all the cinemas, public areas and back of house areas to a company called Horbury on a DOM/2 form of subcontract.
Horbury was to provide and install suspended ceilings throughout the cinema auditoria. This responsibility included installation of hangers suspended from the roof structure, which were carrying not only the false ceilings, but also the electrical trunking and air conditioning duct work installed by others.
During the early hours of 21 December 2001, only two days after the complex had opened, the ceiling of cinema six collapsed. Fortunately, the complex was empty and although there was extensive damage to the fabric of the building in the area of the collapse, nobody was injured. The reason for the collapse was not known at first, but AMC immediately closed the whole complex and it stayed closed until mid-January 2002.
AMC provided assurances to Manchester City Council that the complex would not be reopened until such time as the problem had been fully investigated and a programme of remedial works implemented. The City Council's officers had considered the situation so dangerous that they would not allow council staff on to the premises until they were satisfied with temporary protective measures.
In due course, the cause of collapse of the ceiling in cinema six was identified as being the use of the wrong washers on the hangers. This had caused individual hangers to disconnect, which had increased the load on adjacent hangers. All of the other cinemas were checked. Of these, eleven were discovered to be virtually free from defect. However, it was discovered that the wrong washers had been used in four other cinemas. Had remedial measures not been taken, it is probable that some or all of the ceilings in those other cinemas would have collapsed in due course.
Early in 2002, AMC wrote to Galliford indicating its intention to claim for loss of revenue, the cost of physical repair and additional marketing and advertising costs. The loss of revenue claim related to the whole complex. Galliford, in turn, wrote to Horbury to indicate its intention to pass on any claims made by AMC.
Against this background, Horbury readily accepted that some of its work had been carried out in breach of its subcontract. It therefore turned its attention to its insurance policy. This was a typical contractor's all-risk (CAR) type of policy that had been issued by a company called Hampden Insurance.
Horbury understood that the insurance would not pay for the cost of putting right the defects in the suspended ceilings. That was a cost that would have to be borne by Horbury. But more important to Horbury was the fact that the insurance should provide an indemnity in respect of any liability that Horbury might have in law towards third parties, including AMC and Galliford, in respect of loss or damage to their property.
A dispute developed between Horbury and Hampden as to the extent of the insurance cover for damage to third-party property. Horbury commenced proceedings to seek to resolve those differences. Horbury's case was that the policy covered the full liability Horbury might have to repay the damages incurred by AMC. The collapsed ceiling in cinema six had damaged the ceiling itself, the duct work installed on the suspension system and other items, such as carpets and seats on to which the ceiling had fallen.
Most importantly, according to Horbury, this had prevented cinema six from being used and had also caused the closure of the other 15 cinemas, either because some or all of them suffered from the same fault or it was feared that they might. Accordingly, the "property damaged" in terms of the policy of insurance was the cinema complex as a whole.
Consequently, if Horbury became legally liable, directly or indirectly, to AMC for its loss of revenues for closing the complex, Hampden would be obliged to indemnify Horbury in respect of that liability.
Hampden rejected those arguments. It accepted that it would be liable to pay for the cost of rectification of physical damage to, for example, seats, carpets and walls caused by the collapse of the ceiling in cinema six.
Hampden did not accept, however, that the policy would respond if Horbury was held liable for the business losses of AMC. Apart from cinema six, there had been no physical damage to any of the other cinemas and therefore there could be no claim under the policy.
Deputy Judge Ian Glick QC recognised the difficulty in deciding these issues in circumstances where the liability of Horbury towards Galliford or AMC had not yet been established in law.
As a matter of language, however, he admitted that it was perfectly sensible to say that the damage to cinema six was damage to the complex as a whole. Despite this, however, he held that the closure of the rest of the complex was not the consequence of damage to "material" property. It was instead the consequence of a prudent and foreseeable decision to close the whole complex until the faults that had resulted in the collapse were discovered.
Ignoring that apparent contradiction, that meant that Horbury would not be entitled to an indemnity under its insurance policy in respect of the business losses, profits and other consequential costs claimed by AMC resulting from the closure of the complex as a whole.