Insurance - Reminder Of Principles Governing Construction Of Policies

In a judgment handed down just before Christmas, the Court of

Appeal reiterated some common principles of construction of

contracts:

there is a presumption that the words used in a clause should

be given their ordinary and popular meaning

a commercial contract, such as an insurance policy, should be

construed in accordance with sound commercial principles and good

business sense

the commercial object of the contract as a whole, or the

particular clause in question, will be relevant in resolving any

ambiguity in the wording

in a case of true ambiguity, the construction which produces

the more reasonable result should be preferred

The court also commented that ambiguity is not the same as

difficulty of construction. The question whether or not a clause is

ambiguous on the one hand, and the rules of construction which

apply to resolve the ambiguity on the other hand, are frequently

merged. It is essential that the clause in question is ambiguous

before the rules can be applied; and this is the same as for the

rule that an ambiguous clause will be construed against the party

who put the clause forward (one aspect of the "contra

proferentum" principle).

The specific clause in question was contained in an

employer's liability and public and product liability policy.

It excluded liability for claims arising out of "the failure

of any fire or intruder alarm switchgear control panel or machinery

to perform its intended function".

The court held that the exclusion referred separately to each of

fire alarms, intruder alarms, switchgears, control panels and

machinery. It was not limited to the switchgear, control panel and

machinery which formed part of a fire or intruder alarm. This

interpretation was, according to the Court of Appeal, the one which

made the most business sense. And because there were "rational

grounds" for preferring this construction, the Court of Appeal

was not prepared to fall back on construing the policy against the

insurer (who put the clause forward).

In this particular case, the loss occurred after failure of a

fire protection system to properly deploy. The court considered

whether or not the fire protection system as a whole was

"machinery" within the exclusion clause. They concluded

that it was not. Rather it was a system made up of constituent

elements, some of which were machinery and some of which were not.

In other words, the fact that a piece of equipment contains

machinery does not make the equipment itself machinery...