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Scottish Court of Session Decisions
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Cite as:  ScotCS 5
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OPINION OF LORD HAMILTON
in the cause
CHURCH COMMISSIONERS FOR ENGLAND AND OTHERS,
SCOR UK COMPANY LIMITED AND OTHERS,
20 May 1998
The St Enoch Centre comprises a substantial shopping complex in Glasgow. In 1986 it was in the course of construction. Practical completion was expected in 1989. The persons having a proprietorial interest in the premises (and prospectively in the developed complex) were the Church Commissioners for England (the present first pursuer), Sears Property Glasgow Limited (the present third pursuer), the Scottish Development Agency and the Scottish Amicable Life Assurance Society.
Alexander Stenhouse UK Limited ("Stenhouse") acted generally as insurance broker for the Church Commissioners. In 1986 Stenhouse was instructed by them, acting for the consortium of proprietors, to make arrangements for insurance of the complex, including the placing of building guarantee insurance (now commonly referred to as "inherent defects" insurance).
Inherent defects insurance in respect of buildings was in the early 1980s a matter of common experience in France where cover for the first ten years of the existence of most commercial buildings was as a matter of general law compulsory. In the United Kingdom it was at that time relatively rare. It was introduced to the British market by Norman Insurance, a British subsidiary of a French insurance company. Among other insurers the SCOR group, which was the market leader in France in the reinsurance market for inherent defects cover and had wide experience of it, later began to make available to building owners in the United Kingdom and the Republic of Ireland insurance for inherent defects.
On 9 May 1986 Mr Nicholson, the Glasgow director of Stenhouse, received by arrangement from SCOR UK Limited (the first defender in this action) a copy of the form of policy wording then in use by the first defender for its building guarantee insurance (as it was then styled). Arrangements were subsequently made whereby the three defenders to this action would in certain proportions provide building guarantee insurance to the owners of the St Enoch Centre. In April 1987 an insurance slip was initialled on behalf of each of the defenders to the effect that they would on certain terms provide such insurance for a period of ten years from the issue of the Certificate of Practical Completion for the development.
On 11 September 1989 the relative policy of insurance ("the Policy") was issued on behalf of the defenders in favour of the four proprietors. Towards the front of the Policy was a page headed "INFORMATION" on which there appeared the following:
"This Policy consists of the:
(i) SCHEDULE - describing who is insured, at what premises, the business carried on and the amounts insured;
(ii) ENDORSEMENTS - detailing extensions in cover;
(iii) INSURANCE SECTION - giving precise details of the cover subject to any variation by endorsement;
(iv) POLICY EXCLUSIONS - detailing exclusions which apply to the whole Policy;
(v) SPECIAL POLICY CONDITIONS - defining terms which apply to the whole Policy;
(vi) ATTACHMENTS - Certificates of Practical Completion and Approval issued at end of Works."
That page was followed by one headed "INHERENT DEFECTS INSURANCE POLICY". Below that heading appeared:
"In consideration of the Insured named in the schedule hereto paying the premium mentioned in the said schedule...
The Insurers severally agree each for the proportion set against its name to provide insurance subject to the terms conditions and exclusions of this policy up to the amounts detailed in the schedule specifications and appendices as sums insured or limits of liability during the period of insurance...
This Policy and its Schedule, specification, appendices and endorsements shall be read together as one contract and any word or expression to which a specific meaning or definition has been given shall have such specific meaning wherever it may appear".
It was then signed and dated by an authorised representative of the Insurers.
There followed a section headed "DEFINITIONS" in which a number of expressions were defined for the purposes of the Policy. No definition of "the deductible" or "the deductible amount" appeared in that section.
There followed a section headed "INSURING AGREEMENT" which opened as follows:
"The Insurers agree to indemnify the Insured against the cost of repairing, replacing, renewing and/or strengthening the Premises following and consequent upon an Inherent Defect discovered and notified to Insurers during the Period of Insurance and not excluded herein causing:-
(a) destruction of the Premises or damage to the Premises or which renders them unstable;
(b) threat of imminent collapse arising from such Inherent Defect that may be considered to cause (a) above within the period of insurance.
the cost of which exceeds or is estimated to exceed the deductible stated in the Schedule at the date of discovery."
(The full stop after "insurance" appears to be an error in punctuation).
Certain other provisions followed in this section of which it is necessary to note only that headed "LIMIT OF INDEMNITY" which was in the following terms:
"The liability of the Insurers shall not exceed in respect of each item which appears in the Schedule the final sum insured shown in relation to that item in the Schedule or in the whole the total sum insured shown in the Schedule for the period of insurance unless cover has been either increased or reinstated by endorsement and the appropriate additional premium paid excluding in respect of each and every claim the amount specified in the Schedule in accordance with Special Condition 10."
The next section was headed "EXCLUSIONS" in which were stipulated causes of loss, destruction, damage or threat of collapse in respect of which cover was excluded.
Thereafter a section headed "SPECIAL CONDITIONS" contained among other provisions the following:
"10. DEDUCTIBLE AMOUNT
The deductible amount is that part of the risk insured which remains at the Insured's own expense and the said amount will be applied to each and every claim after the application of Average where appropriate and not to the aggregate of claims occurring during the period of insurance.
No insurance may be contracted to cover the deductible amount without the prior agreement of the Insurers."
The Total Sum Insured is reduced by the amount of each and every loss in excess of the deductible from the date of first notification of each and every claim to the Insurers..."
Endorsement No.01 provided, in so far as material, as follows:
"Where the Insured has elected and paid the appropriate premium:-
(iii) The deductible stated in the Schedule shall be increased annually by the percentage indexation factor shown in the Schedule."
The Schedule to the Policy inter alia identified the interest of the Insured in the premises as "Owners" and against the headings "LIMIT OF INDEMNITY" and "DEDUCTIBLE AMOUNT" stated respectively "£20,000,000 each and every loss and in aggregate for the policy period" and "£1,000,000 each and every loss".
In this action the pursuers, who are two of the four original owners referred to in the Policy and a third company which subsequently acquired a proprietorial interest, seek to be indemnified under the Policy in respect of certain costs (presently estimated at £2,500,000) which they have incurred or will incur in repairing what they maintain is an inherent defect in the premises - related to the ingression of rainwater through its glazed envelope. The defenders deny liability; their defence on the main issue has not yet been fully developed in the pleadings but, from preliminary hearings on the commercial roll, it seems likely to be founded on a contention that the problems with the building do not constitute an inherent defect within the meaning of the Policy.
An issue, however, has arisen of construction of the Policy. The pursuers contend that, in the event of the relative costs exceeding the scheduled "deductible amount" the defenders are bound to indemnify them in respect of the whole costs of repair. The defenders contend that any liability to indemnify the pursuers is restricted to that part of the costs which exceeds the scheduled "deductible amount". The defenders' averments, in addition to referring to the terms of the Policy, include statements as to the understanding in the insurance market at certain times of the meaning of the expression "deductible amount". They also aver that, in the event of their contention on construction of the Policy as written being rejected, the Policy falls to be rectified. A counterclaim for rectification based on section 8(1)(a) of the Law Reform (Miscellaneous Provisions)(Scotland) Act 1985 was lodged. The issues of construction and of rectification were sent to a preliminary proof, the defenders being ordained to lead. At the proof certain evidence was led by the defenders; the pursuers led no evidence. In the course of the hearing on evidence Mr Brailsford for the defenders intimated that they no longer insisted on the counterclaim, which might accordingly be refused of consent. It is accordingly unnecessary to consider that aspect further.
The facts established at the proof additional to those narrated in the opening paragraphs of this Opinion may be stated shortly. In the British insurance market the expression traditionally used in relation to any contract of insurance to describe the part (if any) of a claim which remained at the risk of the insured was the "excess". From at least the 1960s that expression was sufficiently familiar even among lay insured with commonly issued policies, such as household or motor insurance policies, as not to require any explanation from a broker or otherwise. The expression "the deductible" (as a noun) was used in the North American insurance market to express the same concept. In about the 1970s, with the entry of a number of North American insurance companies into the British market, the expression "the deductible" in that sense came into British insurance parlance. By the mid-1980s it was in common use in London among persons, such as brokers or underwriters, professionally engaged in the placing or writing of insurance. When the Policy was issued in September 1989 an experienced broker or underwriter coming across the expression "the deductible" or "the deductible amount" in an insurance policy, including in an inherent defects policy, would readily have understood it to mean the same as the traditional expression "the excess". Mr Nicholson, the Glasgow manager of Stenhouse, and Mr Veale, the manager of Stenhouse's construction insurance department in London (the person in general charge of the team at Stenhouse which negotiated the terms of the Policy on behalf of the Church Commissioners and the other proprietors), both as at 1989 understood the expression in that sense.
A few years later (in 1992) The Insurance Institute of London published the report of the deliberations of its Advanced Study Group entitled "Insurance Against Inherent Defects in Buildings". In a glossary of legal and insurance terms appended to that report "Deductible" was explained as meaning "Self-insured first amount of claim". In the text (at paragraph 6.9.1) it was explained that policies "will always contain a deductible, which is in effect the self insurance by the proposer of the first portion of a loss". In the Preface it was stated that
"...practice varies between policies in the use of the terms 'deductible' and 'excess' for the first amount of the loss to be borne by the insured. Again, for practical reasons, we have generally used the term 'deductible' in the report but in many instances this may be taken to refer to either deductible or excess as appropriate".
These statements reflected the general understanding had from prior to 1989 by professionals involved in inherent defects insurance.
It was not positively established in evidence that the Insured under the Policy themselves had the understanding which their broker had; nor was it established that they had any different understanding. It is questionable whether evidence of such private understandings would, on the issue of construction, have been admissible. As at 1989, however, if any of the Insured under the Policy was ignorant or uncertain of the meaning of "the deductible", it could readily have been apprised of the usage by enquiry of its broker, Stenhouse.
In the 1960s it was not uncommon for insurance companies to offer under certain policies a form of cover under which the insurer would have no liability until a defined threshold was passed but, in the event of it being passed, would be liable for the whole loss arising. An example of such cover was a public utility policy under which, in the event of failure of the public electricity supply, the insured would not be indemnified for losses arising as a result of a failure which persisted for less than a prescribed period (commonly thirty minutes) but, in the event of the failure persisting beyond that time, would be indemnified for the whole losses arising by reason of the failure. Such cover was generally referred to in the British insurance market as a "franchise". By the 1980s such cover was less common than it had been earlier. The expression "the deductible" was never used in the British insurance market to refer to a franchise style of cover.
Mr Brailsford submitted that on a sound construction of the Policy read as a whole the defenders were not bound to indemnify the pursuers except to the extent that the relevant cost exceeded £1,000,000 (subject to any indexation factor). The provision whereby the Insurers agreed to indemnify required to be read and construed along with the other provisions of the Policy, particular reliance being placed on several of the provisions quoted earlier in this Opinion. Reference was made to the principles of construction identified in MacGillivray on Insurance Law (9th Edition) at paragraphs 11-1, 6, 7, 8, 20, 21, 22, 27, 35 and 38. It was not contended that "deductible" was a technical term; it was rather a word of ordinary English. Reference was made to Webster's New World Dictionary (3rd Edition - 1988) where deductible as a noun is defined as "a clause in an insurance policy stating that the insurer will pay that portion of a loss, damage, etc. remaining after a stipulated amount, to be paid by the insured party, is deducted." This was particularly significant having regard to the North American origin of the usage as established by the evidence. It was proper for the purposes of construction to have regard to what had been established as the industry's understanding in 1989 and to the circumstance that the Insured were commercial parties with property development interests (with an ultimate value in excess of £70,000,000) who had sought to protect their investment by insurance obtained through a broker. The principles of construction identified by Lord Hoffmann in Investors Compensation Scheme Limited v West Bromwich Building Society  1 All ER 98 at pps.114-5 were adopted. There was to be attributed to a contracting party not only his actual knowledge but knowledge to which he had wilfully shut his eyes or which he reasonably could have obtained. Reference was made to Youell and Others v Bland Welch & Co Limited and Others  2 Ll.L.R. 127, per Staughton L.J. at p.133. The knowledge of the pursuers' agent, the broker (Stenhouse), was moreover to be attributed to the pursuers. Reference was made to Bowstead and Reynolds on Agency (16th Edition) at para.8-204 and to El Ajou v Dollar Land Holdings plc and Another  2 All ER 685, per Hoffmann L.J. at pps.702-3. If it was not legitimate for the purposes of construction to take into account some or all of the extrinsic facts relied on but the court found the instrument to be ambiguous, it was then legitimate to take such extrinsic facts into account; in that event, the ambiguity was clearly resolved in the defenders' favour.
Mr Currie for the pursuers submitted that, on a sound construction of the Policy, its effect was that in the event of the relevant loss exceeding £1,000,000 (and any indexation) the defenders were liable to indemnify the pursuers for the whole loss. Mr Brailsford's approach, it was argued, had placed inappropriate emphasis on what was meant by "deductible"; the true issue was the proper meaning of the insuring agreement read in the context of the other provisions of the Policy. The extrinsic facts on which the defenders sought to rely (and in particular the understanding of "deductible" among brokers and underwriters) could not legitimately be taken into account for the purposes of construction. The surrounding circumstances were restricted to those which were at the time of contracting within the actual knowledge of the parties. Reference was made to Gloag on Contract (2nd Edition) at pps.373-4, British Coal Corporation v South of Scotland Electricity Board 1991 S.L.T. 302, per Lord Dervaird at p.310L, Bovis Construction (Scotland) Limited v Whatlings Construction Limited 1994 S.C. 351, per Lord President Hope at p.357C-H, Hiram Walker & Sons Inc. v The Drambuie Liqueur Company (23 January 1997, Lord Penrose, unreported) at pps.54-6 (including the passage there cited from the speech of Lord Wilberforce in Reardon Smith Line v Hansen-Tangen  1 W.L.R. 989 at pps.995-7) and LAW Construction Company Limited and Others v LAW Holdings Limited and Others (9 April 1998, Lord Penrose, unreported). English law was to the same effect. Reference was made to Prenn v Simmonds  1 W.L.R. 1381, per Lord Wilberforce at pps.1384-5. In so far as Lord Hoffmann's principles (1) and (2) in Investors Compensation Scheme Limited v West Bromwich Building Society at p.114 went further, they were obiter and unsupported by authority. Staughton L.J. in Scottish Power plc v Britoil Limited and Others (18 November 1997, Court of Appeal) had not regarded himself as bound by them. There was no proof that the extrinsic facts relied on by the defenders were within the knowledge of the pursuers or of people generally in the position in which the Insured were when placing this insurance. The critical provision for construction was the INSURING AGREEMENT contained in the INSURANCE SECTION described on the INFORMATION page as "giving precise details of the cover...". On a plain reading of that provision it imported an undertaking to indemnify (to hold harmless) in unqualified terms against the cost of certain things where that cost exceeded the relative sum stated in the schedule. This was consistent with SPECIAL CONDITION 10. Neither in that Condition nor elsewhere in the Policy was it stated that the amount payable on a claim was limited to the balance after deducting the scheduled sum. The proper construction was that the scheduled sum was brought into account in ascertaining whether the claim was one which fell within the insuring agreement. If any question of ambiguity arose, it fell to be resolved in favour of the Insured by applying the contra proferentem rule (Hardy Ivamy - General Principles of Insurance Law (6th Edition) at pps.388-90).
In my opinion a useful starting point for the resolution of this issue is a passage from the speech of Lord Wilberforce in Reardon Smith Line Limited v Hansen-Tangen. At pps. 995-6 he said:
"No contracts are made in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as 'the surrounding circumstances' but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating."
Those words, though expressed in a case concerned with a charterparty, are equally applicable to a policy of insurance (see Youell v Bland Welch).
While the expression "surrounding circumstances" is imprecise (as may be "matrix" - Youell v Bland Welch, per Staughton L.J. at p.133), some matters at least can, in my view, be identified in the present case as falling within that expression. In 1986 a consortium of commercial investors in heritable property had commenced development of a substantial shopping complex. The ultimate capital value of that property was then expected to be in excess of £50 million; in the event its value in 1989 exceeded £70 million. Although no evidence was led directly on the matter, would be unrealistic to ignore the fact, obvious from the identities of those investors, that they were not unused to dealing with substantial capital projects involving real or heritable property. In the present case those investors were concerned to effect, among other insurances, inherent defects insurance for the Centre. That insurance would come into effect as from practical completion of the building works; but it was important to make a firm arrangement well in advance. To that end those investors unsurprisingly instructed an insurance broker to act on their behalf to obtain the best terms for this form of cover, which was relatively new in the British market. Following negotiations a firm arrangement was made with a consortium of insurers. Due to the limit of capacity of the market, cover only to the extent of £20 million could be obtained. In due course, when the building was close to completion, the Policy was issued.
It is not disputed that, although the particular provision in issue is the opening sentence of the section headed "INSURANCE AGREEMENT", the Policy has to be read as a whole (MacGillivray para.11-21). The critical sentence bears to identify what it is that the Insurers undertake to hold the Insured harmless against - (broadly) the cost of carrying out certain specified types of work to the Premises following an Inherent Defect causing certain consequences. The critical sentence concludes with the subordinate clause "the cost of which exceeds or is estimated to exceed the deductible stated in the Schedule at the date of discovery". The opening words of that clause take one back to the word "cost" where it first appears in the sentence. Paraphrasing the competing interpretations advanced, it may be said that the pursuers' contention is that the subordinate clause has effect as if it opened "where that cost exceeds...."; the defenders' contention, again paraphrased, is that it has effect as if it read "to the extent that that cost exceeds...". The subordinate clause can on either view be regarded as a qualification on the indemnity.
While each interpretation is as a matter of language arguable, my immediate impression was and remains that the qualification goes to the monetary extent to which indemnity is undertaken in respect of any claim made under the Policy; in other words, it is concerned to introduce an excess which is to be borne by the Insured whatever the amount of the claim. That impression is formed by the terms of the clause as a whole and in particular by the reference in it to "the deductible" stated in the Schedule.
At this stage in the analysis I proceed on the premise that "deductible" as a noun was not at the relevant time a word of common parlance in the English language as spoken on this side of the Atlantic and also on the premise that the knowledge had at that time by professionals in the insurance industry, including their own broker, is not to be imputed to the Insured. However, deductible as an adjective was at the relative time a readily comprehensible word in the English language as spoken in the United Kingdom, meaning that which is or can be deducted or subtracted. There is nothing in the clause positively to suggest that the exercise of deduction or subtraction was intended to be carried out only for the purpose of determining whether there was, in monetary terms, an admissible claim. Had that been the intention, I would have expected express provision to that effect, particularly against the circumstance that there is no suggestion that a provision to that effect was commonly to be found in insurance policies of this or of any other kind. On the other hand, provision for an excess in respect of any claim was a common feature of insurance policies generally. In my view an insured or prospective insured, particularly one experienced in commercial property transactions, reading this clause would have understood it in the latter sense.
I am confirmed in that impression by the remainder of the Policy. Although neither "the deductible" nor "deductible amount" appears as a defined expression in the part of the Policy headed "DEFINITIONS", it is plain that each refers to the scheduled item "£1,000,000 each and every loss". SPECIAL CONDITION 10, while containing a condition prohibiting without prior agreement separate insurance of the deductible amount, explains what that amount is, namely, "that part of the risk insured which remains at the Insured's own expense". I am unable, despite Mr Currie's submission to the contrary, to read that explanation, either generally or in the context of this Policy, as indicating anything other than the traditional concept of an excess. It was not suggested that the meaning given to deductible amount in SPECIAL CONDITION 10 was applicable only to that Condition; and having regard to general principles of construction and to the express statement in the final paragraph of the section headed "INHERENT DEFECTS INSURANCE POLICY", I see no justification for giving it a restricted application. Applying that meaning to the equivalent expression "the deductible" as it appears in the critical sentence in the insuring agreement, I am left in no doubt that the qualification is of the nature of an excess in the traditional sense. Other provisions of the Policy, in particular the "LIMIT OF INDEMNITY" clause and SPECIAL CONDITION 13, tend to the same result.
In these circumstances I find it unnecessary to enter the debate stimulated by Lord Hoffmann's formulation of the modern principles of interpretation of commercial contracts - which formulation, it is to be noted, was accepted without demur by three other members of the Judicial Committee. I make only the following short observations. It is important to recognise that Lord Hoffmann's principles bear to restate prior developments in this branch of the law contained in particular in the speeches of Lord Wilberforce in Prenn v Simmonds and Reardon Smith Line Limited v Hansen-Tangen. In relation to knowledge Lord Wilberforce said in the latter case at p.996:
"It is often said that, in order to be admissible in aid of construction, these extrinsic facts must be within the knowledge of both parties to the contract, but this requirement should not be stated in too narrow a sense. When one speaks of the intention of the parties to the contract, one is speaking objectively - the parties cannot themselves give direct evidence of what their intention was - and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties... It is in this sense and not in the sense of constructive notice or of estopping fact that judges are found using words like 'knew or must be taken to have known'."
Lord Wilberforce illustrated that proposition by reference to two cases, including one which he analysed as showing "that mutual knowledge of extrinsic circumstances, while relevant, is not an essential condition of the admissibility of factual evidence".
Accordingly, when ascertaining contractual intention, one is involved in an objective exercise and must have regard to the hypothetical position of reasonable people placed in the situation of the parties. In my view, a reasonable insurer dealing in 1989 with commercial parties regularly engaged in property transactions would reasonably take it that such parties would understand "deductible" (as a noun) as conveying the same concept as the more traditional expression "excess"; or, if such parties had any doubts about the matter, that they would have resorted to readily available sources of information such as to their own broker or to dictionaries, including, having regard to the not infrequent transmission to the United Kingdom of North American vocabulary, a dictionary explaining North American usage. A reasonable insured would, either immediately or after such enquiry, reasonably have understood the insurer to be using the expression in that sense. That is not, as Lord Wilberforce said in Reardon Smith Line Limited v Hansen-Tangen a matter of "constructive notice or of estopping fact" (and I reject Mr Brailsford's submission that in the present circumstances the knowledge of the agent is to be imputed to the principal) but what is to be taken as the intention which reasonable people would have had if placed in the situation of those Insured. Although perhaps not hitherto so expressed in terms in authority in Scotland, that conclusion is not, in my view, inconsistent with principles of Scots law. I have not, however, found it necessary to rely on that conclusion.
As I have been able to reach a definite view of the meaning of the Policy, no issue of ambiguity arises and it is unnecessary to consider or to apply any canons of construction which would have arisen in that event.
Parties were agreed that, in the event of my reaching the view stated above, I should, rather than sustain any plea at this stage, make an appropriate finding. I accordingly find that, on a sound construction of the Policy, the first £1,000,000 (as adjusted if appropriate for inflation) of each and every claim constitutes an excess and is accordingly to be borne by the pursuers. I shall also of consent refuse the counterclaim. The case will be put out By Order for discussion of further procedure.
OPINION OF LORD HAMILTON
in the cause
CHURCH COMMISSIONERS FOR ENGLAND AND OTHERS,
SCOR UK COMPANY LIMITED AND OTHERS,
Act: Currie, Q.C., Lake
Maclay Murray & Spens
Alt: Braislford, Q.C., Smith
20 May 1998