In brief - Meaning construed more strictly in an exclusion clause than in a coverage clause
In the recent case of British Waterways v Royal & Sun Alliance Insurance Plc [2012] EWHC 460 (Comm) , the English High Court construed the words "arising out of" in an insurance policy exclusion clause. The decision provides guidance as to how Australian courts may interpret the phrase in future.
Tractor capsizes into canal, causing death of two men
A single Judge in the English High Court of Justice1 was asked to construe the words "arising out of" in the context of an insurance policy exclusion clause. The relevant policy had been put in place to cover, among other things, death or bodily injury in connection with the use of an insured vehicle.
The case involved the use of a tractor which had capsized into an adjacent canal while reversing alongside it on a towpath. Two men were killed in the accident and a series of proceedings ensued.
The Judge considered a significant number of authorities and ultimately concluded that the words "arising out of" in an exclusion clause carry a stricter "proximate cause" test than when the words appear in a coverage clause. It was not clear just how strictly the "proximate cause" test should be applied, though the facts here did not trigger the exclusion clause, based on the strict test.
The decision may be open to scrutiny in the future and it remains unclear whether the stricter test will be accepted in Australia.
Contractors cutting shrubbery and hedgerows along canals
The case involved a web of factual circumstances. The claim originated as a result of an accident involving Messrs Mark and Luke Wells, father and son, who had been riding in a Ford hedge-cutter tractor. Messrs Wells had been contracted by British Waterways to cut shrubbery and hedgerows along the Kennet and Avon Canal near the town of Devizes, in Southern England.
Mr Justice Burton in the High Court of Justice accepted evidence that Messrs Wells had been reversing along the banks of the canal, after having finished their hedge-cutting work. This finding of fact, which had been contested, proved crucial to the ultimate findings in the case.
It was not contested that while reversing, the bank of the canal had collapsed and caused the tractor, along with Messrs Wells, to drop into the canal. As a result, both men were unfortunately killed. Two sets of proceedings were initially commenced.
In one set, British Waterways admitted guilt for falling short of required safety standards under the Transport Act 1962 (UK) and were fined £100,000. In the other, the estates and families of Messrs Wells alleged liability against British Waterways, though the matter was resolved by way of a negotiated settlement for a total payment by British Waterways of £185,204.
Exclusion clause in insurance policy
Leaving aside other complex facts of the case, British Waterways sought to claim for the above financial liability under its "Fleetshield Policy" of insurance, which had been issued by Royal & Sun Alliance. Section 2 of the Fleetshield Policy noted that:
The Insurers will indemnify the Policyholder [British Waterways] in respect of legal liabilitiy incurred for damages and claimant's costs and expenses in respect of accidental
(a) death of or bodily injury to any person
...
in connection with the use of the Insured Vehicle including loading or unloading.
However, an exception to section 2 of the Policy was set out in subsection 1B, noting that:
The Insurers shall not be liable
(i) for liability arising out of
...
(i) the operation as a tool of the Insured Vehicle or attached plant.
...
except as required by any road traffic legislation [emphasis added].
Despite arguments from Counsel for British Waterways that the meaning of section 2 should be limited to fit with relevant road traffic legislation, it was held by the Court that the deaths of Messrs Wells were "in connection with" the use of the tractor. Although discussion on that point in the case is notable, the key issue of the case was whether the exclusion under subsection 1B would operate.
As emphasised in the above extract, subsection 1B would operate to exclude claims "arising out of" the operation of the tractor (or its attached plant) as a tool. This was referred to in the judgement as the "Tool Exclusion".
Tractor not operating as a tool at the time of the accident
Mr Justice Burton noted that the evidence as to whether Messrs Wells were "operating" the vehicle as a tool was unclear at best. Two inspectors had attended the scene following the accident, and gathered evidence for the Transport Act 1962 (UK) prosecution. Based on records from that prosecution and photographic evidence, his Honour ultimately held that:
it is not proved that the operation of hedge-cutting was still continuing, and, if anything, I am satisfied that it was not. (At [40])
Having satisfied himself that Messrs Wells were not operating the tractor as a tool at the relevant time, his Honour moved to the question as to the meaning of "arising out of" in the exclusion clause of the Fleetshield Policy.
"Arising out of" - stricter test for exclusion clauses
It was noted above that the "Tool Exclusion" would operate if it could be shown that liability "arose out of" use of the tractor as a tool. However his Honour took this point one step further and accepted that the "liability" would not attach until there was an injury or death. Accordingly, the important question to ask was whether Messrs Wells' deaths arose out of the operation of the tractor as a tool. If this could be proven, then the Tool Exclusion may apply.
A number of English, Scottish and Australian decisions were assessed by his Honour in determining the meaning of "arising out of" in the context of an exclusion clause policy. The issue posed by his Honour on this point was whether:
there is a different meaning of the words "arising out of" in an exclusion clause [as compared to] a clause relating to cover... (at [42], emphasis added).
The cases considered by his Honour contained different interpretations as to whether "arising out of" meant that the factual scenario (here, the operation of the tractor as a tool) had to be:
- the "proximate cause" of the deaths
- more remote than the "proximate cause" of the deaths, or
- a sufficient causal link
His Honour accepted the "proximate cause" test, but noted that the trend in more recent cases was to construe the test more strictly when used in an exclusion clause context, as opposed to when used in a coverage clause context. Accordingly, his Honour held that "arising out of... the operation as a tool" was subject to a strict "proximate cause" test.
Court adopts narrower view of causation in exclusion clause context
The facts and legal arguments in the case were complex. From a practical perspective, the decision may be summarised in the following points:
- The words "arising out of" mean the incident or factual circumstance must have been the "proximate cause" of liability.
- In this case, it was the deaths themselves that had to "arise out of" the operation of the tractor, because liability could not attach without the deaths (or injury) under the policy. This is likely to depend on the policy wording itself.
- The "proximate cause" must be more focussed in an exclusion clause than in the broader tests that are applied in a coverage clause. In a coverage clause, the "weaker causal connection" may be permissible, though his Honour was not required to decide this point.
- His Honour was not satisfied that the deaths (and the liability for the deaths) arose out of the operation of the tractor as a tool.
- Here, the deaths (and liability) "arose out of the collapse of the bank when, after completing that phase of the operation, the [t]ractor was being reversed" (At [47]).
- The Court adopted a much narrower view of causation in the exclusion clause context. This was more akin to an "immediate cause" test than a "weaker causal connection" test.
Insurers and insureds need to consider wording of insurance policies
It will be important for insurers and insureds alike to consider the wording of their policies to determine whether an exclusion will apply in certain factual circumstances. The English High Court of Justice has now applied a stricter test for exclusion clauses. However, this test may be loosened when determining the meaning of "arising out of" in a coverage or other context.
The reasons behind this aspect of the decision, although not explained in great depth by his Honour, may imply a desire to construe policies more permissively, to prevent exclusions from being too broadly applied to insureds.
In Australia, authorities such as the New South Wales Court of Appeal decision of Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243 have indicated that Australian courts are adopting a pragmatic approach to construction of exclusion clauses in policies of insurance.
In the Gordian Runoff case, it was held that:
"The prepositional phrase "arising out of" can be seen to be somewhat wider than the prepositional phrase "by reason of" used in [the insuring clause]. That difference in wording tends against the submission... that [the exclusion] should be seen as limited to circumstances where the claim arises only out of the performance of construction work and not out of design work. So to restrict the clause would tend to make [the exclusion clause] devoid of real operation..." (At [253])
The current Australian trend seems to be slightly more permissive than the trend of authorities from England such as in the British Waterways case and the authorities it considers.
Given the number of differing opinions available in both Australia and England, it appears that although the stricter approach is gaining favour in England, the actual approach courts are likely to take will be very much context dependent. Where a strict interpretation would render the exclusion "devoid of real operation", it is unlikely to be construed strictly.
It appears that a court is likely to tend further towards the commercial operation of the exclusion and policy as a whole than towards any strict construction of the words as they appear on the page.
Regardless, it appears that the majority of authorities, including the British Waterways case, indicate that the words "arising out of" are likely to be construed more strictly in an exclusion clause than in a coverage clause.
An earlier version of this article first appeared in the June/July 2012 edition of Insurance & Risk Professional.
1 The High Court of Justice is the superior Court of first instance for England and Wales. It is equivalent to the State Supreme Courts in Australia. This contrasts with terminology used in Australia where the High Court in Canberra is the ultimate Appellate Court.