England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE QBCMF 96/0924/B

(MR JUSTICE WALLER )

Royal Courts of Justice

Strand

London WC2

Thursday 26 March 1998

B e f o r e:

LORD JUSTICE HOBHOUSE

LORD JUSTICE BROOKE

SIR JOHN VINELOTT

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MUNICIPAL MUTUAL INSURANCE LIMITED

Plaintiff/Respondent

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1. SEA INSURANCE COMPANY LIMITED

2. COMMERCIAL UNION ASSURANCE COMPANY PLC

3. ROYAL INSURANCE (GLOBAL) LIMITED

4. MARITIME INSURANCE COMPANY LIMITED

5. NAVIGATORS & GENERAL INSURANCE COMPANY LIMITED

6. INSURANCE COMPANY OF NORTH AMERICA (UK)LIMITED

7. PRUDENTIAL ASSURANCE COMPANY LIMITED

8. PEARL ASSURANCE PLC

9. THE LONDON ASSURANCE

10. ALBION INSURANCE COMPANY LIMITED

11. GUARDIAN ROYAL EXCHANGE ASSURANCE PLC

12. GENERAL ACCIDENT FIRE AND LIFE ASSURANCE

CORPORATION PLC

Defendants/Appellants

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(Transcript of the handed down judgment of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 421 4040

Official Shorthand Writers to the Court)

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MR S TOMLINSON QC and MR D BAILEY (Instructed by Messrs Alsop Wilkinson, Liverpool L2 ONH) appeared on behalf of the Appellants.

MR A LAYTON QC and MR T LORD (Instructed by Messrs L Watmore & Co, London) appeared on behalf of the Respondent

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J U D G M E N T

(As approved by the Court)

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©Crown Copyright

JUDGMENT

LORD JUSTICE HOBHOUSE: This is an appeal by the defendant Reinsurers from a judgment of Waller J sitting in the Commercial Court in favour of the Plaintiffs Municipal Mutual Insurance Limited. The trial concerned three facultative reinsurance contracts placed by the Plaintiffs with the Defendants. Each was contained in or evidenced by a slip presented to the various reinsurers by the Plaintiffs' brokers and initialled for various proportions by the relevant reinsurer's underwriter. There were twelve Defendants in the action. Not all of them subscribed to all of the slips. From one year to another the proportions in which they subscribed varied. The judgment which was entered against them was in fact eleven judgments for distinct sums against each of the first to eleventh Defendants. The twelfth Defendant, which subscribed to only one of the slips (the first), escaped liability.

The Contractual Scheme :

Each of the slips was in similar, but not identical, terms. The first was:

"TYPE: LEGAL LIABILITY INSURANCE

FORM: MAR

ORIGINAL

ASSURED: PORT OF SUNDERLAND AUTHORITY

PERIOD: 12 months at 24th June, 1986

INTEREST: To cover the Legal Liability of the Port of Sunderland in their activities as Port Authority

SUM

INSURED: LIMIT: £2,500,000 Excess of £500,000

CONDITIONS: R/I of the Municipal Mutual Insurance Limited and to follow their settlements.

Conditions as Underlying .

PREMIUM: £4,000 p.a. "

The second slip was the same except that the period was "12 months at 24th June 1987 inclusive GMT". The third slip was the same except that the period was "12 months at 24th June 1988 inclusive GMT" and the sum insured was "Limit: £3,500,00 excess of £1,500,000" and the premium was £2,800 p.a.

Each of these slips evidences or contains distinct independent contracts of reinsurance between on the one hand the Plaintiffs and on the other each individual reinsurer. Further, each contract is a time contract covering a defined period of twelve months. The contract of original insurance underwritten by the Plaintiffs and referred to in the slips was not of the same character. It was a policy whereby the Plaintiffs undertook to insure the Port of Sunderland in successive years subject to the payment of annual premiums renewing the cover. The policy issued by the Plaintiffs to the Port of Sunderland dated from before and continued until after the three years covered by the reinsurance slips and with which this action is concerned. In 1986 the policy issued by the Plaintiffs to the Port of Sunderland was in the following terms (so far as material).

"Third Party Policy

The Insured having applied to the company for insurance, the Company undertakes to provide such insurance as hereinafter set out, subject to the terms (which expression shall include the General Conditions and Exclusions declared to be incorporated herein) of this Policy.

The Company will indemnify the Insured against all sums which the Insured shall become liable to pay in their capacity as Harbour Authority for Sunderland as compensation for -

(a) accidental and bodily injury or illness ..... and/or

(b) accidental loss of or damage caused to property not belonging to nor hired leased or loaned to the Insured.

PROVIDED THAT such injury illness loss or damage is caused by any act of commission or omission negligence or error of judgment by the Insured or their servants or employees or other persons for whose acts the Insured may responsible or by any latent deficiency in cranes equipment or port installations or through the failure or omission of the Insured or their servants and others for whom they are responsible to properly light or buoy or remove any wreck or obstruction in the waters over which they exercise control or keep channels and approaches properly dredged lighted and buoyed and the waters adjacent to wharves piers quays and berths free of obstructions or through the omission to give appropriate warnings to shipping of any abnormal hazards or in any consequence of any breach of duty whatsoever and arises during any period of insurance under this Policy.

LIMITS OF INDEMNITY

(a) £5,000,000 in respect of all compensation payable to any claimant or any number of claimants in respect of or arising out of any one occurrence or in respect of or arising out of all currencies of a series consequent on or attributable to one source or original cause

(b) £/Unlimited in respect of any one period of insurance.

The Company shall not be liable to pay more than the Limits of Indemnity specified in the schedule to this Policy but in addition to such limits the Company shall pay all costs incurred with its written consent in defending any claim or claims also any costs awarded against the Insured in any proceedings solely for the recovery of damages in respect of injury on this loss or damage as covered by this Policy. The Company shall not be liable for more than that proportion of such costs as the relevant limit of indemnity bears to the total amount of compensation awarded. Notwithstanding anything contained herein to the contrary no liability shall attach to the Company for the first £500 of any amount payable under the Policy for loss or damage the cause of which occurs on or after [24.6.76]."

Those were the material terms of the policy issued by the Plaintiffs to the Port of Sunderland throughout the three material years save that with effect from 12th August 1987 the excess of £500 referred to in the last paragraph I have quoted was, by an endorsement to the policy, agreed to be inoperative. In return for the payment of a reduced premium the Port of Sunderland had agreed "to continue the insurance for the period expiring on the renewal date" up to 1994 provided that the insurers could "at any annual renewal date" prior to 1994 revise the terms of or the premium payable in respect of the policy and in that event the insured would be released from the obligation to continue the insurance. It was this agreement which provided the qualified contractual obligation of both the Plaintiffs and the Port of Sunderland to renew the policy annually.

Since the policy contemplated that it would be renewed annually and since there was no annual limit on the liability of the Plaintiffs under the policy, the date when a liability was incurred, provided that it preceded the lapsing or cancellation of the policy, would not be material. The policy proviso uses the phrase "during any period of insurance under this policy". This phrase does not relieve the insured of the need to show that the loss or damage occurred whilst the Plaintiffs were on risk but recognises that there may be successive periods of cover which render any distinction between them immaterial. They would not of course be immaterial if, as happened from time to time, the terms of the cover were varied, for example by increasing the limit or (as occurred,) removing an excess. Thus although "periods of cover" remained part of the contractual structure of the original policy they were unlikely materially to affect the position as between the Plaintiffs and the Port of Sunderland, and, as I will explain, did not affect the position which has given rise to the present litigation.

But the fact remains that the original policy issued by the Plaintiff to the Port of Sunderland and the three reinsurance slips presented to and accepted by the reinsurers were not in all respects identical. The latter were time contracts whereby the cover provided was defined inescapably by reference to a period of time whereas the manner in which the Plaintiffs and the Port chose in fact to conduct their relationship rendered in practice the distinction between one year and another irrelevant.

It must however be commented that this need not have been so. Thus, as at 24th June 1986 the reinsurers were not to know whether the original policy would or would not be renewed in June 1987. What the reinsurers were reinsuring then was the risk under the original policy which had been renewed for a further twelve months. If in June 1987 the Plaintiffs chose to alter the terms of the original insurance or increase the premium charged to the Port or simply to agree with the Port that the cover should not be renewed, that would be of no concern to the 1986 reinsurers nor could they know about it in June 1986. It is also the fact that the Plaintiffs were under no obligation to reinsure any of the risks under the original policy in any succeeding year or to do so on any particular terms. By a parity of reasoning the reinsurers in one year would not know what the reinsurance position would be in any other subsequent year nor would it be any concern of theirs. In all probability it would be a pure matter of chance whether they knew anything about the Plaintiffs' reinsurance arrangements for earlier years which likewise would be no concern of theirs.

It was also common ground between the parties before us that the Limit in each of the reinsurance contracts was not an overall contract limit but was to be applied as if it was incorporated in a Limit of Indemnity clause using the same words as that clause in the original policy and permitting whatever element of aggregation was permitted by that clause. Thus it would read for the first reinsurance contract - "£2,500,000 excess of £500,000 in respect of all compensation payable to any claimant or any number of claimants in respect of or arising out of" etc following the wording of that clause.

The Facts :

I now turn to the facts which have given rise to this litigation. In 1985 the Port of Sunderland agreed that two partly dismantled dragline excavators should be delivered to the Port by sea. These are very large pieces of equipment used for open cast mining. It was contemplated apparently that their then owners, a company called Concorde, would find a buyer for them to whom they would then be delivered. They arrived at the Port of Sunderland in May of 1985 and were placed at some four locations within the Port area. It seems that the larger parts were unprotected save partially by tarpaulins but some of the smaller parts were in containers. The Port covers a large area with a long boundary. The dragline parts were left in the open on various pieces of flat land some adjoining the dockside some elsewhere. By March 1987 the dragline parts were still there. There was a report that they had been disturbed. The parts included a lot of electrical equipment including electric motors which contained copper parts which were very attractive to thieves. In March 1987 an engineer, Mr Nolan, inspected the dragline parts and found that although there had been some minor pilferage nothing more serious had occurred at that date. When a representative of Concorde inspected the dragline parts in September 1988 - they were still there then - he found that they had been very extensively damaged by theft and vandalism. Most but not quite all of the electric motors had been taken and many other parts had been removed or damaged. Concorde held the Port of Sunderland liable for this loss and damage.

The Port of Sunderland had from May 1985 been the bailees of these goods and it appears that they never took any steps to discharge their duties as bailees nor had they ever taken the obvious steps to protect themselves from liability for such loss and damage. In October 1988 the Port notified the Plaintiffs of the claim which had been made against them and thereafter the Port were guided by the Plaintiffs in the handling of it. The liability of the Port to Concorde was disputed and, when legal proceedings were threatened by Concorde in February 1989, the Plaintiffs took over the defence of those proceedings accepting that, save for unforeseen circumstances, they were liable under their policy to indemnify the Port in respect of the claim. Concorde in due course issued a writ against the Port and the action came on for trial in March 1992 before His Honour Judge Stephenson sitting as a Deputy High Court Judge. Judge Stephenson held that the Port were liable to Concorde and gave judgment against the Port for the sum of £1,765,000 plus interest and costs.

In accordance with their acceptance of their liability to indemnify the Port, the Plaintiffs had made various payments to the Port's lawyers and had financed two payments into Court. After judgment had been entered against the Port, the Plaintiffs provided the sum necessary to satisfy that judgment including interest and costs and paid the remaining costs which had been incurred in the Port's defence in the action.

The upshot was that the Plaintiffs had to pay the following sums-

Judgment Debt including interest £2,580,570.42

Loss Adjusters £51,091.98

The Port's Solicitors and Counsel £77,739.56

Concorde's legal costs £450,000

Total £3,159,401.56

Nothing turns upon the dates upon which these various payments were made. It is agreed that liability under the original policy is not defined by reference to the dates when the assured (Concorde) makes payments nor when the claims were made upon it or it was held liable to make the payments: the cover is defined by reference to physical loss or damage to property which arises during any period of insurance. It is also agreed for the purpose of these proceedings that no distinction should be made between the judgment debt and the other sums paid by the Plaintiffs: they are to be allocated pro rata to the loss and damage which was the subject matter of the judgment debt. Thus the total amount of the physical loss and damage is to be valued at £3,159,401.56 and fractions of it are to be valued accordingly.

Since, as Judge Stephenson held, "the huge bulk of the damage must in all probability have occurred between March 1987 and September 1988" it follows that it is this period with which we are concerned in the present action, not any later period. This was common ground between the present parties. Further, the Plaintiffs never took any point against the Port on the £500 excess in the original policy. It may be that there was some doubt about its applicability but more probably it was regarded as too trivial to be worth raising. The settlement of the claim of the Port against the Plaintiffs was clearly on a basis which waived the £500 excess and to which any distinction between the various years of original cover was immaterial. There was not, nor did there need to be, any apportionment nor any allocation of the claim of Concorde to any periods within the overall period March 1987 to September 1988.

The Action :

It was not until May 1992, after they had had the judgment of Judge Stephenson that the Plaintiffs, through their brokers, first notified the reinsurers and indicated that they were making a claim against them. The reinsurers disputed their liability. The writ in this action was issued in April 1994. It is agreed that the relevant facts relating to the occurrence of the loss and damage to the draglines is to be taken from the judgment of Judge Stephenson.

The Plaintiffs' Points of Claim went through a number of refinements. As previously mentioned, the Plaintiffs sued 12 Defendants being the reinsurance companies which had subscribed to one or more of the three relevant contracts of reinsurance, that is to say, the slips for respectively 1986/87, 1987/88 and 1988/89. Originally the Plaintiffs made a simple factual allegation that it should be inferred that one sixth of the loss and damage to the goods was suffered in the first reinsurance year, two thirds in the second reinsurance year and one sixth in the third reinsurance year. This might be called the 'straight line' approach since it adopted the assumption that the loss and damage was spread evenly over the 18 month period involved; the claim was based on this factual allegation. This approach gave a monetary loss of £526,566.92 in the first and third years. After the deduction of the £500,000 excess for the first year there would be a recovery of £26,566.92 and in the third year the excess of £1,500,000 would be too great to give any recovery under the reinsurance contract. For the second year the loss would be £2,106,267.68 which after deduction of the excess of £500,000 would give a recovery of £1,606,267.68. Having split these sums between the various Defendants in proportion to the lines which they had written in each year, they made appropriate claims against each of them. However, in various amendments the Plaintiffs refined the way in which they put their claims against the various Defendants. They alleged that the true construction of the reinsurance contracts or alternatively the terms to be implied in them had the effect that they -

"provided that loss or damage which arose over a period spanning more than one period of insurance under the underlying policy was to be treated for the purposes of determining the amount of reinsurers' liability either:

(i) by reducing the Plaintiffs' liability under the underlying policy by the amount of the excess applicable in respect of each year and then apportioning the resulting figure on a "time on risk basis" between the periods of insurance over which such loss and damage had occurred, or

(ii) by apportioning the Plaintiffs' liability under the underlying policy on a "time on risk basis" between the periods of insurance over which such loss and damage had occurred and then reducing the resulting figures by the amount of the excess applicable in respect of each year."

Alternative (i) gave the Plaintiffs a more favourable basis of recovery. It included an element of aggregation as between the three years and reduced the impact of the respective excesses in each of the three reinsurance contracts. It is also to be noted that on neither of these bases is the apportionment of the loss between the three reinsurance contracts founded upon any factual allegation or inference but upon what is alleged to be the true construction of each of the contracts of reinsurance or the effect of terms to be implied in each of them.

Thus the way in which the Plaintiffs made their claims addressed two problems. One was how the claim of the Port which they had paid was to be allocated as between the three reinsurance contracts and the second was how the excess provisions in each of those contracts was to be applied to the claims which were to be allocated to those respective contracts on reinsurance. The case of the Plaintiffs depended in part upon factual allegations and in part upon legal submissions as to the correct understanding and effect of the three respective contracts of reinsurance. At the trial they put the latter in the forefront of their argument.

The Defendants at the trial disputed the bases upon which the Plaintiffs were putting forward their various alternative cases. They disputed the factual inferences and the legal submissions. They further contended that there were in truth a whole lot of individual acts of pilferage and vandalism none of which exceeded the excess stipulated in the reinsurance contracts and that accordingly none of them was sufficiently large to attract any liability under the Limits of Indemnity clause incorporated into each of the reinsurance contracts. They rejected the right of the Plaintiffs to aggregate the loss and damage resulting from these individual acts of pilferage and vandalism.

Waller J handed down a reserved judgment on 17th April 1996. Having introduced the facts he turned to the relevant contracts. At pp.10-11 he recognised and accepted that "the reinsurance contracts were annual contracts either with different reinsurers or reinsurers for different percentages". He said:

"In my view in the context of the reinsurance the starting point for any potential liability has to be to consider whether the relevant event gave rise to an obligation to indemnify has occurred within the relevant period covered by the reinsurance contract under which liability is claimed."

On the Defendants' argument that there were a succession of losses each subject to a separate excess, the Judge was clearly strongly influenced by the decision of the Court of Appeal in Axa v Field [1996] 1 Lloyds 26, the appeal from which to the House of Lords had been heard but judgment not yet given: see now [1996] 1 WLR 1026. He referred to what Sir John Donaldson MR had said in Thorman v NHIC [1988] 1 Lloyds 7 about what claims against an architect might properly be regarded as "a single claim". He concluded:

"Coming back to the language of the particular policy [ sic] with which I have to deal, what was payable under the policy was "the compensation" for legal liability which could in no way be split between the individual acts of vandalism. The position might well have been different if individual acts of vandalism or theft had been assessed and/or if individual failures by individual employees which led to individual acts of theft had been assessed. Thus if one act of vandalism had led to an order being made against Sunderland to pay compensation for that act, then it would have been appropriate to apply a deductible to that "amount". But the judgment of His Honour Judge Stephenson makes clear that he is awarding compensation to Concorde in relation to the value of the draglines, or the cost of replacement, flowing from many individual acts but which could in no way be divided up by reference to the individual acts. The entitlement to indemnity relates to "compensation" for which the insured is liable and it is to that amount alone to which a £500 [ sic] deductible should be applied." (p.19)

This passage does seem to disclose some confusion about what the Defendants' point was but, this said, it appears that the Judge approached this issue by looking to see whether Concorde had made a single claim or more than one claim against the Port and, having concluded that it was the former, he considered that there was only one claim which was being made by the Port against the Plaintiffs. He then seems to assume that this meant that the Plaintiffs could make one aggregated claim against the Defendants.

This reasoning of the Judge (influenced as I have said by what the Court of Appeal said in Axa) carried over into his treatment of the main question, the allocation of the claim upon the reinsurers between the reinsurance contracts and the application of the excesses in them to that claim. He did not adopt the factual approach of the Plaintiffs' alternative case. Having asked himself the question, "Can Municipal demonstrate on the balance of probabilities the loss and damage for which Sunderland was held liable to compensate Concorde occurred during the periods of the policies on which Municipal sue?", referring to the judgment of Judge Stephenson, he said as regards the first policy year, 1986/87:

"The finding of the judge was of minimal damage as at March 1987 which would not, as I understand it, have caused any diminution in the value of the draglines: otherwise there is no finding except that such damage as was caused must have happened after March 1987. I do not find that finding is sufficient basis on which to conclude on the balance of probabilities that damage occurred between March 1987 and 23rd June 1987 i.e. within that policy year." (p.28)

As regards the third year, 1988/89, he said:

"Once again there is little if anything in the judgment save that the judge concludes that it must have happened before September 1988. There is, I suppose some presumption that if vandalism has been carrying on over a period it would be likely to continue, but it is difficult to conclude on a balance of probabilities that it has been established that loss and damage occurred between June 1988 and September 1988." ( ib)

As regards the second year he clearly found that some of the damage must have occurred during the second year and he was prepared to characterise it as "material loss and damage".

He then turned to the construction of the reinsurance contracts and said:

"What in my view Municipal should be entitled to say as against their reinsurers on year 1987/88 is that they have indemnified Sunderland in relation to compensation that Sunderland have had to pay for loss and damage to property arising during the 1987/88 policy period. If the reinsurers were to suggest that some of the loss and damage occurred outside their policy period, in my view, that fact, if established, would not lead to the conclusion no liability on that year, provided it had been established (as in my view it had) that "material loss and damage" had been suffered. If reinsurers could establish material loss and damage in periods covered by other reinsurance, that might lead to those reinsurers also being liable and thus having to make a contribution. But in relation to loss or damage prior to that period, there simply is no evidence that any such damage occurred; and as regards loss or damage post that period, in my view the evidence is still not strong enough to establish liability under that cover." (p.29)

In arriving at this conclusion, the Judge was clearly influenced by views he had expressed earlier in his judgment. The relevant passages (pp.22-26) are quite long and I will therefore summarise them. His starting point was the same as that of the Court of Appeal in Axa that the original insurance and the reinsurance should be assumed to be intended to be back to back. He also thought he should concentrate upon the claim which was made upon the Port and the Plaintiffs respectively not upon the occurrence of the loss or damage. He asked himself whether it was necessary to construe the reinsurance policy so as to treat the year in which the physical loss and damage occurred as critical and concluded that it was not. He said:

"However it seems to me that whereas here the reinsurance cover was precisely the same period as the underlying insurance, and where the terms are expressed to be "as underlying", it would be strange if the reinsurance policy was not designed to match the underlying insurance precisely. Again, if one tested it by reference to there being one policy year. If a number of years after the policy year the original insured was compelled to pay compensation arising out of a loss of property of a third party during the relevant year, it is difficult to contemplate that the reinsurance facultatively placed on the basis of conditions as underlying would not be bound to respond. Thus the reinsurance seems to me to cover loss or damage to the property of a third party occurring during the period of the reinsurance." (p.24-5)

He then asked himself which year or years should respond and rejected the construction that every item of loss and damage must have happened within one period as this would leave the reinsured without any cover at all "whereas another construction i.e. loss or damage means some material loss or damage would provide cover but might leave the possibility of two years both being answerable". (p.26) He preferred the latter construction. He recognised that there could not be double recovery but said there should be a right of contribution between those liable. In support of this line of reasoning he postulated the example of a fire which started before the end of a period of cover and continued until after it. He appears to have assumed that, absent his approach to the question of construction, the assured or reinsured would in such a situation be left without cover whether before or after the end/beginning of a policy year.

In this, the Judge had overlooked that the problem of dates in relation to time policies is not a new one and is covered by authority: Knight v Faith (1850) 15 QB 649, Anderson v Marten [1908] AC 334. The loss is attributable to the policy year in which the loss was caused not that in which it was capable of quantification. On the Judge's example it is the earlier year which would have to bear the loss.

Having arrived at the conclusion which he had on a construction of the policy and the rights of recovery which the policy gave he concluded (p.33):

"For what sum should Municipal have judgment?

It will be suggested that Municipal have never put their claim on the basis of 100% liability in relation to the year 1987/88. That is true, but, as it at present seems to me, that should not preclude Municipal covering that part of the claim which it has made in relation to that policy year. Before finally giving judgment, I will listen to submissions on this aspect."

The maximum claim which the Plaintiffs had at that time made under the reinsurance contract for the second year was £1,772,934.30 based upon their construction argument as they had then put it. After the judgment had been handed down, the Plaintiffs appreciated that on the reasoning of the Judge they could do better. They therefore applied for leave to further amend their pleading to make the whole of the claim, that is to say the whole claim for £3,159,401.56, under the reinsurance contract for the second year and to apply a deductible of £500,000, leaving a recovery of £2,659,401.56. The Judge allowed the further amendment despite the opposition of the Defendants and gave judgment against the second year reinsurers in proportion to their lines for that sum. He however awarded the Plaintiffs only half of their costs of the action.

The Defendants have appealed to this Court. They challenge the Judge's decision that the Plaintiffs were entitled to aggregate the losses, his construction of the reinsurance contracts and his conclusion of an entitlement to recover in full under the contract for the second year. They also complain about his giving the Plaintiffs leave further to amend to make a claim significantly higher than the maximum claim which they had previously been making in the action against the second year reinsurers. The Plaintiffs seek to support a judgment or judgments in their favour if necessary on the grounds which they previously advanced before the Judge and object to the costs order he made which was adverse to them.

There is no dispute about the facts applicable to this issue. There can be no doubt that the damage to the machinery at the Port occurred over a period of about 18 months and was the result of a whole succession of individual acts of pilferage and vandalism carried out by a number of individuals or groups of individuals probably acting independently of one another. It is impossible for the Plaintiffs to say that any one of these acts caused loss or damage exceeding £500,000. Similarly, it cannot be disputed that the claim made by Concorde upon the Port could be put as a single claim by a goods owner against a bailee and accordingly that the resultant liability was a single liability of the Port.

However this issue arises under a specific clause, the Limits of Indemnity clause, of the original policy which, as the parties agree, is to be treated as incorporated into the respective contracts of reinsurance with the substitution of the excess figure provided for in each of those reinsurance contracts. The cover provided by the original insurance was an indemnity for -

"all sums which the insured may become legally liable to pay ... for ... loss of or damage caused to property ... provided that such ... loss or damage is caused by any act of commission or omission negligence or error of judgment by the insured or their servants or employees ... and arises during any period of insurance under this policy."

The effect of the proviso is that there must have been loss or damage which has arisen during a period of insurance. The Limit of Indemnity clause provides that the limit shall apply to compensation payable

"in respect of or arising out of any one occurrence or in respect of or arising out of all occurrences of a series consequent on or attributable to one source or original cause".

It is into this wording that the reinsurance contract excess is imported. So, for the reinsurance contract for the first year there is an excess of £500,000 for compensation payable in respect of any one occurrence or series of occurrences consequent on or attributable to one source or original cause . If this was a simple 'any one event' clause, the Defendants would have a powerful argument. They could say that each act of pilferage or vandalism was a distinct event. But this clause is not in that basic form. It extends to a series of occurrences "consequent on or attributable to one source or original cause". There is nothing unusual in this type of extension. It adopts a concept of originating cause and gives a right of aggregation which applies for the benefit of both parties to the contract. It is advantageous to the insured or reinsured that he can aggregate in order to show that his loss has exceeded the retention and it is advantageous to the insurer or reinsurer because he can rely upon the relevant limit of his liability in relation to the aggregation of the relevant losses. An oil spill may give rise to a large number of individual losses, some small, some large, and may in the aggregate give rise to a very large total liability. Under this type of clause the retention/excess and limit would fall to be applied to the aggregate of the claims not to the individual claims.

This feature of such clauses was remarked upon in the speech of Lord Mustill in the Axa case, [1996] 1 WLR 1026 at 1035. It requires the Court to look at the cause of the event or series of events. The actual wording with which he was concerned was "arising from one originating cause, or series of events or occurrences attributable to one originating cause or related causes". He contrasted the use of the word "originating" coupled with "cause" and the word "event". He said:

"In my opinion these expressions are not all the same, for two reasons. In ordinary speech, an event is something is which happens at a particular time, at a particular place, in a particular way. I believe that this is how the Court of Appeal understood the word. A cause is to my mind something altogether less constricted. It can be a continuing state of affairs; it can be the absence of something happening. Equally the word "originating" was in my view consciously chosen to open up the widest possible search for a unifying factor in the history of the losses which it is sought to aggregate."

In my judgment what Lord Mustill says covers also the wording with which we are concerned - "one source or original cause". These are wide words. There is a clear unifying factor in the history of all the losses which Concorde suffered as a result of the continuing pilferage and vandalising of their goods. The Port had no adequate regard to their responsibilities as the bailees of the goods; they had no adequate system to protect the goods from pilferage and vandalism; it was their want of care which was the consistent and necessary factor which allowed the pilferage and vandalism to occur. On an ordinary use of language, the acts of pilferage and vandalism were a series of occurrences attributable to a single source or original cause.

Whilst I find the Judge's approach to this issue somewhat difficult to follow it was no doubt contributed to by the very different approach which the Court of Appeal had adopted in the Axa case to that which was subsequently adopted by the House of Lords. The Judge's approach was supported in the argument of the Plaintiffs on this point before us; I have not accepted that argument save in its result. The right approach is to give effect to the clear meaning of the relevant wording and apply it to the relevant feature of the facts of this case. This ground of appeal fails.

It follows that for each policy year under each reinsurance contract the excess is to be applied to the aggregation of the physical loss and damage which arose during that year.

In my judgment the Judge's approach to the question of construction was radically flawed. Here again he was clearly influenced by the Court of Appeal decision in the Axa and thought it incumbent upon him to construe the reinsurance contracts as being back-to-back with the policy of original insurance. In so doing he clearly thought it right to disregard the fact that whereas the three reinsurance contracts were each distinct and independent contracts under which the cover was defined by reference to the year of cover, the policy of original insurance between the Plaintiffs and the Port was, by reason of its annual renewal, one to which the individual years of cover was not as between those parties material. In the Axa case the problem had arisen as a result of a mismatch between the clauses of the original cover and the reinsurance on the question of aggregation. Lord Mustill, having analysed at some length the character of the facultative reinsurance, said:

"If the syndicate had wished to secure identical measures of loss for its inward and outward contracts it would have negotiated with the reinsurers to that end and taken the obvious course of using the same words in each. They chose not to do so, and thereby accepted the possibility that although in some combinations of facts the outcomes might be the same, in others they might not." (p.1036)

In the present case the mismatch between the Plaintiffs' inward and outward contracts was not so much in their wording but in the way in which the Plaintiffs chose to place and operate them. The Plaintiffs chose to enter into distinct and independent annual reinsurance contracts. They were not always placed with the same reinsurers or with the same size of lines. The terms were not always the same. By contrast in their dealings with the Port the Plaintiffs chose effectively to disregard policy years. The various changes that they made to the terms of the cover were on occasions applied with effect from dates other than the anniversary date. They do not appear always to have taken steps to re-rate the risk at the renewal dates. All this was no doubt an adequate and satisfactory way for the Plaintiffs to conduct their business with the Port but it gave rise to a discrepancy between that and the way in which they did their business with those who were from time to time their reinsurers. It is wrong in principle to distort or disregard the terms of the reinsurance contracts in order to make them fit in with what may be a different position under the original cover. The words "conditions as underlying" cannot contradict either the period or limit provisions of the individual reinsurance contracts. However, as I have pointed out, the difficulty for the Plaintiffs arises not from any conditions of the original policy but from the way in which they chose to operate it and the way in which they chose to place their reinsurance cover.

Therefore it was incumbent upon the Judge to recognise (as he appeared to be ready to do in the earlier part of his judgment) and give effect to the essentially annual character of each reinsurance contract. Applying the wording of the original policy to each reinsurance contract it is necessary to ask whether or not the relevant physical loss or damage arose during the relevant period of cover. The Judge came to the surprising conclusion that each reinsurance contract covered liability in respect of physical loss or damage whether or not it occurred during the period covered by the reinsurance contract and he went on expressly to contemplate that the same liability for the same physical loss or damage might be covered under a number of separate contracts of reinsurance covering different periods. This is a startling result and I am aware of no justification for it. When the relevant cover is placed on a time basis, the stated period of time is fundamental and must be given effect to. It is for that period of risk that the premium payable is assessed. This is so whether the cover is defined as in the present case by reference to when the physical loss or damage occurred, or by reference to when a liability was incurred or a claim made. Contracts of insurance (including reinsurance) are or can be sophisticated instruments containing a wide variety of provisions, but the definition of the period of cover is basic and clear. It provides a temporal limit to the cover and does not provide cover outside that period; the insurer is not then 'on risk'. It will be appreciated that the Judge's suggestion that there could or should be contribution between those signing the different slips for the different years is likewise radically mistaken.

I should mention that the Plaintiffs in support of their argument on construction cited a line of United States cases which adopt a different approach, in particular Keene Corp v Insurance Co of North America 667 Fed Rep 2nd 1034 and Stonewall Ins Co v Asbestos Claims Management Corp 73 Fed Rep 3rd 1178. Interesting though they are, I am not assisted by these cases. They arise from the special problems of liability for asbestosis claims arising from long periods of potential exposure and are clearly governed by policy considerations relevant to special factors affecting that part of the insurance market in the United States. I do not consider that they provide guidance for the much simpler questions raised by the present case which are already covered by established principles of English law and authority.

In my judgment, for the reasons which I have given (which do not fully accord with the submissions of the Defendants), the Judge's reasoning and the ground upon which he decided in favour of the Plaintiffs cannot stand. It also follows that the more sophisticated approach of the Plaintiffs to the application of the excesses also cannot be sustained. The correct approach is to see to what extent the Plaintiffs have established that they are entitled to recover from the relevant Defendants under each of the three contracts of reinsurance.

In order to recover the Plaintiffs must satisfy the Court that there has been physical loss or damage which has occurred in the year covered by the relevant contract of reinsurance which exceeds the excess applicable to that contract. Thus, for the contract for the first year the Plaintiffs must satisfy the Court on the balance of probabilities that there was loss and damage which occurred during the three months between 23rd March 1987 and 23rd June 1987 which exceeded in the aggregate £500,000. For the second contract they must prove that on the balance of probabilities during the twelve month period 24th June 1987 to 23rd June 1988 loss or damage exceeding £500,000 occurred. For the third contract the Plaintiffs must prove on the balance of probabilities that loss or damage occurred during the three months between 24th June 1988 and 25th September 1988 which exceeded £1,500,000. If the answer to any of these questions is 'no', then the Plaintiffs have failed to show an entitlement to recover under that reinsurance contract. If the answer for any contract is 'yes', then the question arises what, on the balance of probabilities, was the amount of the loss or damage which occurred during that period.

These questions are questions of fact: in so far as the Plaintiffs' submissions sought to treat them as questions of law, they were wrong to do so. As will be appreciated the Judge found the facts against the Plaintiffs on the first and third contracts and by implication found them in favour of the Plaintiffs on the second contract.

The facts must be taken from the judgment of Judge Stephenson. His finding was that no significant loss or damage had yet occurred at the time of Mr Nolan's inspection. The goods had been disturbed but there had been no loss. At the other end of the period which Judge Stephenson identified, the inspection on 25th September 1988, there was very extensive pilferage and damage but there were still some pilferable items which had not yet been stolen. The inference we are invited to draw is that pilferage and vandalism had been continuing to occur right up to September 1988 and was only brought to an end on the insistence of Concorde and by the appreciation of the Port on 25th September 1988 how serious the position was. I consider that the inference is justified and that on the balance of probabilities loss or damage was continuing to occur through into the period covered by the third contract. Indeed it is to be inferred that the thieves having discovered a source of pilferable material would not be letting up in their efforts to steal as much of it as they could. The goods had been stored out in the open at some four different locations within the Port area. Some of the acts of theft must have required the use of cutting equipment and the removal of some of the pieces of machinery, electric motors, must have required the use of a crane and a flat-bed lorry. Apparently none of this was at the time noticed or remarked upon as being abnormal by the employees of the Port. The Judge estimated that a minimum of 300 man hours of work would have been necessary to carry out the thefts and that unless the work were done by the same team of competent thieves the working hours were likely to be considerably longer particularly if done by night. There was a document dated 28th July 1987 when a Port employee noticed "a lot of bits off the crane parts lying about, the vandals are having a field day along there". Apparently some of the crane parts were moved to another site in the Port in November 1987 and there was evidence which suggested that a very substantial amount of damage had then been done to them. The evidence was thus somewhat sparse but it supports the view that the loss and damage had already started before 24th June 1987 and that it was a continuing sequence of occurrences extending through the rest of 1987 and 1988 into September of that year.

I am unable to find that on the balance of probabilities the loss and damage which occurred prior to 24th June 1987 exceeded in value the sum of £500,000. This was also the implicit finding of Waller J. It follows that the claim under the first contract of reinsurance must fail. Turning to the third contract, a similar answer can be given. Although there is evidence which justifies the inference that significant and probably substantial pilferage and vandalism was continuing to occur between 24th June 1988 and 25th September 1988, it is impossible to say that on the balance of probabilities it exceeded in value the sum of £1,500,000 which was the excess applicable to the reinsurance contract covering that period. Indeed, the balance of probabilities is that it did not. Therefore it follows that the claim under the third contract must likewise fail.

This leaves the second contract. This covered a twelve-month period within which pilferage and vandalism was undoubtedly occurring. It had probably started before the beginning of the period and continued through until after the completion of the period. The assessment of how much occurred during this period is very much a jury question upon which one has to make up one's mind realising that one's finding of fact is based upon the balance of probabilities. On this basis I am prepared to find that two thirds in value of the loss and damage probably occurred during this twelve month period. On a straight line basis this would be the resultant fraction. It is clearly possible that not as much as one sixth of the loss and damage occurred prior to 24th June 1987. There is no basis on the evidence for assuming an accelerated level of theft after 24th June 1988. If follows that a fair assessment of the fraction which probably occurred in the contract year 1987/88 is two thirds and I so find. If follows that this is the figure which, after deduction of the £500,000 excess, the Plaintiffs are entitled to recover (in proportion to their lines) from those Defendants who subscribed to the reinsurance contract for the second year. This gives the Plaintiffs a recovery of £1,606,267.68. This was one of the sums claimed in the Plaintiffs' pleading as originally delivered.

It follows that the Defendants' appeal succeeds to this extent. It also follows from this that the question of the Judge's having allowed a further amendment of the Plaintiffs' pleading after judgment does not arise. How my judgment affects the question of costs in this Court and below will, if not agreed, have to be the subject of further argument.

LORD JUSTICE BROOKE: I agree.

SIR JOHN VINELOTT: I also agree.

Order: Appeal allowed in part. Appellants to have half of their costs of the appeal. Plaintiffs to have their costs in the court below except for those relating to the hearing on 24 May 1996. 12th Defendants to have their costs here and below. No Order as to costs in court below. No order as to costs of cross-appeal. Leave to appeal to House of Lords refused.