UK: Financial loss

Welcome to the fourth article in our series investigating the cover available under third party liability (TPL) polices for construction businesses. 

Introduction

In this article we will consider a common TPL policy extension, financial loss (FL). 

This is commonly defined as a loss for which the insured is legally liable, that does not arise from property damage, bodily injury (including death and disease), nuisance, trespass or other similar liability perils which are routinely listed in a TPL policy operative clause.

However, it is important to understand that these financial losses do not include those arising purely under contract where, as distinct from tortious negligence claims, there is no need to address the foreseeability issue when determining whether a legal liability is established.

We have already written an article addressing the cover provided under contractual liability extensions and in many respects, the question of FL cover is closely linked with many of the same considerations applying across both subjects.

Junior Books Ltd v Veitchi Co Ltd (1983)¹

In order to better understand the requirement for FL cover, we need to travel back to the 1980s and consider the textbook case of Junior Books Ltd v Veitchi Co Ltd [1983]. Junior Books (JB) was a printing business and had employed a construction company to refurbish its premises. The project included the installation of a new floor, which had to be laid to a strict specification to accommodate the low tolerances required by the printing presses that were housed within the building.

To deliver this new floor, the contractor engaged a specialist firm, Veitchi (V). These works were ultimately determined to be defective which resulted in JB suffering a loss of profit as its presses were unable to operate as intended until the floor was remediated. JB sued V in common law as it was only in contract with the unnamed contractor, which was for some reason not involved in the proceedings.

The tortious liability landscape was different in the 1980s. If this case was heard in today’s courts we could expect that the decision would favour V as the fourth of the negligence tests would not be passed. In this case the property did not suffer damage and JB’s losses stemmed simply from the floor being out of tolerance. The losses would be deemed to be too remote and not recoverable in tort.

Notwithstanding this, in 1983 the court felt that there was a sufficient proximate relationship between JB and V that, despite the absence of a contract, the claim succeeded in negligence.

The threat of negligence-based claims for non-damage losses arising outside of contract caused understandable concern in the contracting community. The insurance market responded by providing FL cover for these eventualities; non-damage or injury related losses incurred in negligence as opposed to in contract.

Subsequent caselaw

In reality, these concerns were short lived; the courts failed to follow the Junior Books decision in subsequent cases, most notably in the landmark case of Murphy v Brentwood District Council [1991]². In this case, contrary to the Junior Books decision, the courts found that the building owners could not recover their losses for defective buildings in tort as these were considered to be pure economic losses and therefore only recoverable in contract.

This subsequent decision catalysed a paradigm shift in the UK construction market; the development of the collateral warranty. This extra-contractual arrangement created a link between the building owner (or successor) and those in the construction supply chain with whom there would otherwise be no contractual nexus with the owner.

Conclusion

This whole chapter of cases and decisions has left us with an interesting policy legacy; FL cover, which is often misinterpreted as providing some form of contractual loss protection.  In fact, it remains as a “vestigial limb”, protecting against liabilities which the courts no longer consider to be applicable. However, the nature of the English legal system determines that these decisions can occasionally arise, so FL protection remains in policies in the event of another “rogue” judgement in the vein of Junior Books.

References

1. _{https://www.oxbridgenotes.co.uk/law_cases/junior-books-v-veitchi} ↩︎
2. _{https://www.oxbridgenotes.co.uk/law_cases/murphy-v-brentwood-dc} ↩︎

Previous articles

• Introduction to TPL insurance
• Products liability & completed operations liability
• Contractual liability cover

_{The information contained herein is based on sources we believe reliable and should be understood to be general risk management and insurance information only. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such.}