Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION

[2016] CSOH 43

 

CA65/15

OPINION OF LORD DOHERTY

In the cause

ZURICH INSURANCE PLC

Pursuer;

against

CORALPEAK LIMITED

Defender:

Pursuer:  D M Thomson;  DAC Beachcroft Scotland LLP

Defender:  Edward, Solicitor Advocate;  Maclay Murray & Spens, Solicitors

16 March 2016

Introduction

[1]        On 25 March 2013 a fire destroyed the Glasgow Steiner School, 52 Lumsden Street, Glasgow (“the Property”). The proprietor, Glasgow Steiner School Limited (“the Insured”), was a private company incorporated under the Companies Acts and limited by guarantee. On around 20 December 2012 it had entered into a contract of insurance for the Property with the pursuer.  Following the fire the Insured submitted a claim under the policy for indemnity in respect of its losses. By letter to the Insured dated 2 July 2013 the pursuer’s solicitors intimated that the pursuer declined to indemnify the Insured. The Insured entered into liquidation on 5 September 2013.  In 2014 the defender purchased the Property from the liquidators and was granted an assignation of the Insured’s rights under the policy. In December 2014 the defender intimated to the pursuer that it disputed the declinature of indemnity.  In this present commercial action the pursuer seeks declarator (a) that the Insured failed to comply with its obligations in terms of clause 3 of the General Conditions of the insurance contract; (b) that as a result of that failure the pursuer was entitled to decline to indemnify “for the reasons set out in the letter of declinature dated 2^nd July 2013”; and (c) that it was not obliged to indemnify the defender. The matter came before me for a debate on the commercial roll.

 

The contract of insurance

[2]        The General Conditions of the contract of insurance provided:

“3. REASONABLE PRECAUTIONS

The insured will comply with all regulations imposed by any competent authority and take all reasonable precautions to prevent or minimise accident, injury, loss or damage. In addition the insured will comply with makers recommendations made in respect of plant and machinery wherever reasonably practicable.

…

12. OBSERVANCE

The due observance and fulfilment of the terms and conditions of this Policy by the insured so far as they relate to anything to be done or complied with by the insured will be a condition precedent to any liability of the insurer to make any payment under this Policy.”

 

The letter of declinature

[3]        In the letter of 2 July 2013 the pursuer intimated that the claim was declined.  The letter continued:

“The reasons for doing so are as follows.

 

Background

 

Following the fire as you also know, our clients appointed Dr JH Burgoyne and Partners to carry out a forensic investigation of the cause of the fire. They conclude that whilst no precise cause of the fire could be identified, on the balance of probabilities, it was most likely caused by an incendive electrical fault, probably on the roof area of the building. No other credible explanation exists in their opinion.

  

Their investigations also discovered that within two fuse boards a number of individual fuses had been bypassed using solid copper wire, thereby withdrawing the protection on the particular circuits protected by those fuses.

 

It also came to their notice that there had been two fire risk assessments instructed by the insured, one in June 2006 and the other in August 2011. Both highlighted causes for concern in respect of the standards of maintenance of the electrical facilities in the building.

 

In particular the 2011 survey, carried out by the Asco Fire Group, contained the following advice:-

 

           Site location: Throughout

           Persons at Risk: All

           Risk Evaluation: High

           Further Action: It should be confirmed that the fixed electric system in the building

           has been/will be tested in accordance with IEE regulations (5 yearly).

 

This aspect was considered by them to be ‘Priority 2’ and should have been addressed within a period of one month, presumably from the date of the assessment.

 

There did not appear to have been any attempt at putting these recommendations into place. In light of this further investigations were carried out by their adjusters, Cunningham Lindsey.

 

Investigations

 

These investigations involved the taking of statements from a number of the insured’s personnel, directors and contractors…

 

Our clients are satisfied that the insured as a corporate body either knew of the contents of the Asco report or alternatively ought to have taken steps to know of the content. It was received at some point prior to being noted in the minutes of the School Governance Team on 17^th November 2011.

 

None of the witnesses interviewed were aware of the contents of the 2006 fire survey. Nonetheless our clients consider that as a corporate body the insured ought, through systems of good corporate governance and their duties to comply with the very important legislation in this area, to have kept this under review notwithstanding the changes in personnel.

 

Our clients were also provided with maintenance records of the most elementary nature. Two individuals, whose names appear in the records in relation to electrical items, were unknown to witnesses interviewed by the adjusters. An electrical contractor engaged by the insured to carry out electrical work was aware of the condition of the fuse boxes and reported same to the insured approximately a year ago.

 

A schedule of works was we understand prepared by a property committee in December 2012 and reported to the Board, with the intention that these be carried out in the Easter holiday period. This ought to have involved a consideration of the findings of the Asco report.

 

The Legal Background

 

A number of statutory provisions and regulations apply to the carrying out recording and furtherance of fire risk assessments. In particular we refer to the Fire (Scotland) Act 2005 and to the Fire (Scotland) Regulations 2006. The insured has a non-delegable duty to take steps to comply with such statutory provisions.”

 

Under the heading “Policy” the letter then recited General Conditions 3 and 12.  It continued:

“Reasons for Declinature

The insured are in breach of both elements of General Condition 3 above. The insured is a corporate entity and requires to function through Directors as agents of the Company. It is the insured as a statutory body that is charged with the various statutory duties, above.

 

The insured had a statutory duty to ascertain the contents of each of the surveys and to act upon them. It cannot disconnect itself from the failings if (sic) any its contractors or employees.

 

The insured’s breach is twofold.

 

Firstly as set out above a failure to

 

… comply with all regulations imposed by any competent authority.

 

Secondly to

 

…take all reasonable precautions to prevent or minimise accident, injury, loss or damage

 

For the avoidance of doubt our clients are aware of the approach of the courts to the interpretation of “reasonable precautions” as between insurer and insured. Our clients consider that the measures highlighted in the Asco report required to be acted upon as a matter of some urgency and taken together with the poor standard of maintenance of electrical items evident from their investigations and the responsibilities the insured had for the care of young children, there has been a departure from the standard of reasonable care and of reasonable standards of corporate governance amounting to recklessness in the circumstances …”

 

The pleadings

[4]        The terms of the letter of declinature are incorporated brevitatis causa by the pursuer in article 4 of condescendence.  In article 5 the pursuer avers that it was entitled to decline the claim. It avers that the cause of the fire was an incendive electrical fault in the roof; and that the fact a fuse operated and that there were incorrectly wired fuses was consistent with that having been the cause.  In article 6 the pursuer avers that the Insured had commissioned a fire risk assessment in 2006; and that in the Hazards section it had been noted “All electrics overloaded and should be inspected by electrical engineers”. The pursuer further avers “So far as the pursuer has been able to establish the insured did not implement the foregoing recommendation …”.  In article 7 the pursuer avers that in 2011 the defender instructed Asco Fire Group (“Asco”) to carry out a fire risk assessment on the premises and that Asco produced a report dated 22 August 2011. It avers:

“In Section 4 of the 2011 Fire Risk Assessment it was stated that ‘taking into account the fire prevention measures observed at the time of this risk assessment, it is considered that the hazard from fire (probability of ignition) at’ the Property was ‘medium’. The 2011 Fire Risk Assessment further stated, in respect of the entirety of the Property, that ‘it should be confirmed that the fixed electric system in the building has been/will be tested in accordance with IEE regulations (5 yearly)’. That advice was categorised as ‘priority 2’ advice which meant that it should have been addressed by the insured within a period of 1 month. The ‘risk evaluation’ in respect of that advice was stated to be ‘high’. The Insured did not take the steps required to comply with this advice, far less did it do so within a period of one month from the date of the 2011 Fire Risk Assessment. … In or around May 2012 … Mr Kennedy had told the Insured of the need for a full survey of the electrical installation wiring in the Property to be carried out.”

 

In article 9 the pursuer avers:

“The Insured failed to comply with the obligations which were imposed on it by clause 3 of the General Conditions of the Contract. … In terms of the Electricity at Work Regulations 1989, the Fire (Scotland) Act 2005, and regulations made thereunder the Insured was obliged inter alia to obtain fire risk assessments, to act upon any recommendations made therein, and to keep such matters under review. Those obligations fell within the scope of the obligation, under clause 3 of the General Conditions of the Contract, to comply with regulations imposed by competent authorities. The Insured did not comply with the foregoing statutory obligations. It thus did not comply with the obligation imposed on (sic) by clause 3 … Moreover, the Insured’s failures to comply with the recommendations made in the 2006 Fire Risk Assessment and the 2011 Fire Risk Assessment were reckless…Those failures amounted to a failure to take reasonable precautions to prevent or minimise inter alia loss and damage, as required by clause 3 …”

 

[5]        In Answer 5 of the defences most of the pursuer’s averments in article 5 are not known and not admitted by the defender. The rest are met with a general denial. The defender goes on to aver that the electrical systems in the Property were similar to those in place in many properties of similar age and character throughout Scotland;  that routine maintenance of the electrical system was carried out by Sam Kennedy, Electrician, from around early 2012;  that Mr Kennedy did not observe any problem with the electrical system in the Property of the nature condescended upon by the pursuer, and that if he had done so he would have recommended that it be rectified immediately;  that the IRS Incident Report in respect of the fire stated that the cause and source of the fire were not known;  that part if not all of the wiring was routed at room level rather than through the roof;  that it was incorrect to suggest that the only likely explanation for the fire was incendive electrical fault involving wiring through the roof. Answer 5 concludes:

“Further explained and averred that by way of works in progress questionnaire dated 2 July 2009 the Defender (sic) informed the Pursuer that works to the contract value of £556,000 covering inter alia roof works, stone repairs and internal alterations were to be carried out to the property. The pursuer increased the Policy premium to cover such works. Such works were continuing at the date of occurrence of the said fire. Any upgrade to the electrical system in the Property would have required to be carried out in the context of the said larger project for renewal and repair of the Property.”

 

In Answer 6 the defender admits that the Insured commissioned the 2006 Fire Risk Assessment. The Assessment is referred to for its full terms beyond which no admission is made. Otherwise the pursuer’s averments are denied.   In Answer 7 the defender admits that the Insured commissioned the 2011 Fire Risk Assessment and it admits the circumstances leading up to that commissioning. The Assessment is referred to for its full terms beyond which no admission is made. Otherwise the pursuer’s averments are denied.  Answer 7 concludes:

“Explained and averred that the Insured in or around January 2013 asked Sam Kennedy, Electrician to check the full electric wiring installation in the Property. Sam Kennedy confirmed that he would attend to this during the school Easter holiday 2013. As hereinbefore condescended upon, the Property was destroyed by fire on 25 March 2013 before any works could be carried out. In the circumstances, the Insured took reasonable precautions, in terms of the Policy, to comply with the terms of the 2011 Fire Risk Assessment and Condition 3 …”

 

In Answer 9 the defender denies any failure by the Insured to comply with the statutory provisions referred to by the pursuer and denies any breach of General Condition 3.  Answer 9 concludes:

“Explained and Averred that as hereinbefore condescended upon, the actions of the Insured amounted to reasonable precautions taken to comply with the terms of condition 3 aforesaid. Further said Condition 3 being general in its terms, the actions of the Insured amounted to reasonably substantial compliance therewith. In any event, any failure on the part of the Insured to comply with the said obligations under Clauses 3 and 12 of the General Conditions of Contract was not reckless.”

 

Submissions for the pursuer

[6]        Mr Thomson submitted that the starting point was that, as a matter of construction of the contract, compliance by the Insured with General Condition 3 was a condition precedent to liability of the pursuer to indemnify the Insured. That was clear from General Condition 12.  Reference was made to MacGillivray on Insurance Law (13^th ed., 2015), para. 10‑037.  Given that compliance with General Condition 3 was a condition precedent it was of no moment whether or not the breach of the condition caused the fire.

[7]        No relevant defence had been stated by the defender to the pursuer’s case that the Insured did not take all reasonable precautions to prevent or minimise accident, injury, loss or damage (General Condition 3). In particular there was no relevant defence to the pursuer’s case that the Insured had not taken any steps to comply with the recommendations given in the 2011 Fire Risk Assessment within the suggested timescale of one month; or, indeed, at any time before the fire.  The pursuer recognised that mere negligence on the Insured’s part would not give rise to a breach (Fraser v Furman [1967] 1 WLR 898, per Lord Diplock at p. 903;  Gordon Leslie Ltd v General Accident Fire and Life Assurance Corporation plc 1998 SLT 391, per Lord Cameron of Lochbroom at pp. 393E-G, 394K-395D;  Wilson v Norwich Union Fire Insurance Society Ltd 1999 SLT 1139, per the Opinion of the Court at p. 1140C-L);  it averred that the Insured’s failures to comply with the recommendations made in the 2006 Fire Risk Assessment and the 2011 Fire Risk Assessment were reckless.  While the defender denied that the Insured had been reckless, it was clear from the admissions which it did make that there had been recklessness on the Insured’s part.  The defender admitted that the Insured had commissioned the 2006 Assessment and that it had instructed the 2011 Assessment.  It admitted that Asco produced the 2011 Assessment.  That assessment had identified steps which Asco recommended be taken within one month.  The steps had not been taken within that period or at any time before the fire. Such explanation as the defender averred for the recommended steps not being carried out was incapable of displacing the inference of recklessness, and of the Insured having knowingly and deliberately courted danger, which was raised by the admitted facts.  It appeared that Mr Kennedy was not asked to check the full electrical wiring installation until January 2013, and that the arrangement was that it was to be done during the Easter 2013 holiday.  It followed that the defences were irrelevant; they should be repelled, and decree de plano granted.

[8]        Mr Thomson also advanced a subsidiary argument to the effect that the defender’s averments as to the cause of the fire were irrelevant and ought not to be admitted to probation. Since compliance with General Condition 3 was a condition precedent of liability under the policy the cause of the fire had no bearing on the issues which the court required to determine.  Mr Thomson acknowledged that the declinature letter and the pursuer’s own averments condescended upon the cause of the fire.  He suggested that if the court was not disposed to grant decree de plano, but accepted that compliance with General Condition 3 was a condition precedent, the appropriate course would be to issue an Opinion to that effect and put the case out by order.

 

Submissions for the defender

[9]        Mr Edward moved the court to allow a proof before answer.

[10]      In the first place, it was for the pursuer to satisfy the court that compliance by the Insured with General Condition 3 was a condition precedent to liability of the pursuer. Whether it was a condition precedent was a matter of construction of the contract, having regard to its commercial purpose and any relevant surrounding circumstances.  The court should be slow to accede to the view that the issue was capable of determination without inquiry into the facts.  I asked Mr Edward to identify any relevant surrounding circumstances upon which he founded, and to direct me to any averments of such circumstances, but he was unable to assist me.

[11]      In the second place, it would be wrong for the court to conclude, without inquiry into the facts, that the only possible conclusion was that the Insured had acted recklessly in not seeing to it that the recommendations of the 2011 Assessment were implemented before the fire.  The Insured was a corporate body.  The knowledge and understanding of its officers as to the contents of the 2011 report would be relevant to any consideration of whether it had been reckless.  The defender averred that the electrical systems in the property were similar to electrical systems in place in many properties of similar age and character throughout Scotland; that routine maintenance of the electrical system of the Property had been carried out by an electrician, Mr Kennedy, from early 2012;  that he had not observed any problem with it of the nature condescended upon by the pursuer;  that in January 2013 the Insured asked Mr Kennedy to check the full electrical wiring installation in the Property and that Mr Kennedy confirmed that he would attend to that during the school Easter 2013 holiday.  The defender also averred that a programme of substantial roofworks, stone repairs and internal alterations had been underway at the date of the fire and that any upgrade of the electrical system would require to have been carried out in the context of the said larger project for repair and renewal of the Property.

[12]      In the third place, the criticisms of the defender’s averments as to the cause of the fire were ill-founded. The averments were a response to the pursuer’s averments as to the fire’s cause.  The cause of the fire was relevant if, as the defender contended, compliance by the Insured with General Condition 3 was not a condition precedent to there being an obligation on the pursuer to indemnify the Insured.  Even if that was a condition precedent it could not be said at this stage that the cause of the fire would be a wholly irrelevant consideration when it came to assessing the Insured’s conduct.

 

Decision and reasons

Condition precedent?

[13]      It was common ground that whether or not compliance by the Insured with General Condition 3 was a condition precedent was a question of law to be determined on a proper construction of the contract. In relation to this matter I am not persuaded that any inquiry into the facts is necessary.  Neither party identified any disputed surrounding circumstances which it maintained would have a material bearing on the construction.  Neither party made averments as to the existence of such surrounding circumstances.  Nor was it suggested that ascertainment of the commercial purpose of the contract required inquiry into the facts. Here the commercial purpose of the contract is clear and uncontroversial.  It was to ensure that the Insured would not, because it was covered against loss by the policy, refrain from taking precautions which it knew ought to be taken (Fraser v B N Furman (Productions) Ltd, supra, per Diplock LJ at p. 906;  Wilson v Norwich Union Fire Insurance Society Ltd, supra, at p. 1140F-G).

[14]      In MacGillivray on Insurance Law, supra, para. 10-037 the authors observe:

“…Where the policy wording demonstrates a clear intention to give a clause the status of a condition precedent the clause will be recognised as such. Either the policy describes an individual clause in such a way as to show that it is a condition precedent… or a general condition precedent clause states that compliance by the assured with the obligations cast on him by the policy is a condition precedent to the insurer’s liability to pay claims. A variety of different formulations have been used to that end, but any ambiguity in the wording will be construed against the insurers…”

 

[15]      In my opinion, on an ordinary reading of the contract it provides that compliance by the Insured with General Condition 3 is a condition precedent to liability of the pursuer to indemnify.  General Condition 12 is clear and unambiguous in its terms.  Mr Edward did not suggest otherwise; nor did he maintain that the nature of General Condition 3 made it inappropriate for compliance with it to be a condition precedent; indeed, he did not articulate any basis or reason for the court construing the contract as not providing that such compliance was a condition precedent.

 

Defences irrelevant?

[16]      In my opinion Mr Thomson goes too far too fast when he suggests that decree de plano should be pronounced. 

[17]      While the defences would benefit from some expansion (e.g. elaboration on the state of mind of the Insured’s officers at the material time, and the reason or reasons why the check of the full electrical wiring installation was not to be carried out until the Easter 2013 holidays), as they stand they are very far from being skeletal or wholly lacking in candour.

[18]      It is for the pursuer to establish the Insured’s state of mind at the material time. It maintains that the Insured was in breach of General Condition 3 because, given the recommendation in the 2011 Fire Assessment, it was reckless of it not to have had the electrical installation inspected within the period suggested, or in any event, before the fire. The defender denies each of those matters.  It admits that the Insured instructed the 2011 Fire Assessment and that Asco produced the Assessment on 22 August 2011;  but it avers that the Insured took reasonable precautions to prevent or minimise accident, injury, loss or damage.

[19]      In Wilson v Norwich Union Fire Insurance Society Ltd, supra, the Second Division observed at p. 1140E-J:

“In relation to a clause in both property and liability insurance providing that the insured should take reasonable precautions to prevent loss or damage, ‘reasonable’ means reasonable as between the insured and the insurer, having regard to the commercial purpose of the contract, which is to indemnify the insured for the consequences of his negligence (Gordon Leslie Ltd v General Accident Fire and Life Assurance Corporation plc, per Lord Cameron of Lochbroom at 1998 SLT, p. 393). The matter was considered by Diplock LJ in Fraser v B N Furman (Productions) Ltd, at [1967] 1 WLR, p 906, where he said:

‘What, in my judgment, is reasonable as between the insured and the insurer, without being repugnant to the commercial purpose of the contract, is that the insured, where he does recognise a danger should not deliberately court it by taking measures which he himself knows are inadequate to avert it. In other words, it is not enough that the employer's omission to take any particular precautions to avoid accidents should be negligent; it must be at least reckless, that is to say, made with actual recognition by the insured himself that a danger exists, and not caring whether or not it is averted. The purpose of the condition is to ensure that the insured will not, because he is covered against loss by the policy refrain from taking precautions which he knows ought to be taken.’

…

The assessment of recklessness on the part of an insured is a question of fact and degree to be decided in the context of all the circumstances of the case. Only if it is an inescapable inference from the facts averred that the insured’s conduct was reckless … can the action be dismissed without any inquiry into the facts.”

 

At page 1140K the court added:

“The standard to be applied in determining whether conduct on the part of an insured is of such a nature as to avoid liability on the part of the insurers, as enunciated by Diplock LJ (supra), is an exacting one.”

 

The court went on to hold that in that case it was not possible to conclude, on the basis of the pleadings and without hearing evidence, that the insured’s conduct necessarily yielded the inference of recklessness and a deliberate courting of a recognised danger.

[20]      In Wilson the insured was the pursuer and the insurer defender sought dismissal: but in my view the same principles fall to be applied mutatis mutandis where the insured is the defender and the insurer pursuer contends that it is an inescapable inference from the defences that the insured’s conduct was reckless.

[21]      I am not persuaded that the only possible inference from the defender’s admissions, read together with its other averments, is that the Insured acted recklessly and that it deliberately courted a recognised danger. In my opinion, whether or not in the circumstances that state of mind should be attributed to the Insured is a matter that cannot be determined on the pleadings without an inquiry into the facts.

 

The averments as to the cause of the fire

[22]      Since I have found that compliance by the Insured with General Condition 3 was a condition precedent to the pursuer having an obligation to indemnify under the policy it is hard to see the relevance of the averments as to the cause of the fire.  I confess to having had difficulty following Mr Edward’s submission that they would have some residual relevance.  The matter can be revisited when the case comes out by order.

 

Disposal

[23]      I shall put the case out by order to enable parties to address the court (i) on an appropriate interlocutor to give effect to my decision; (ii) on any questions of expenses which may arise.