What is so complicated about working next to railway lines?

The main risks include interference with railway infrastructure, the rolling stock and passengers. These range from simple disruption of services to more serious and tragic consequences that can result from damage or derailment. 

Works that are most likely to impinge on the service are carried out in pre-agreed outages, known as track possessions. Unforeseen or overrunning track possessions result in the rail infrastructure owner, such as Network Rail, incurring a liability to train operating companies via contractual mechanisms contained within track access agreements. This is where life starts to get complicated.

It is a well-established principle in English law that claims brought in the tort of negligence cannot be too causally remote from the circumstances of loss. The courts have a rule of thumb to determine remoteness of loss; this involves identifying which losses are consequent upon injury or damage, and which are not. Liabilities are normally established for the former, but not for the latter, best illustrated by the textbook case of Spartan Steel & Alloys v Martin & Co [1973]. This judgment defined financial losses absent of injury or damage as pure economic loss. These are not recoverable in common law.

On this basis, Network Rail cannot expect to recover losses arising from disruption in common law when there has been no damage to its infrastructure. These losses could (and do) arise from many causes such as fires adjacent to the track, the risk of collapse of structures onto the line and so on.

How do infrastructure owners protect themselves in these circumstances?

Any works adjacent to rail infrastructure require a permit from the owner, known as an asset protection agreement or APA. These are lengthy legal documents that establish obligations between the parties in relation to the works being undertaken. One critical element from Network Rail’s standard APA is reproduced below:

“…the Customer shall indemnify Network Rail and keep Network Rail indemnified against any Losses arising from…claims against Network Rail by any third party in relation to the carrying out of the Works and/or the subsequent existence and/or operation of the completed Works (where ownership of the Works is not transferred to Network Rail)…”

This is a requirement to indemnify for any losses and is not qualified by terms such as negligence or fault. As a result, it is a clear extension of the customer’s liability for pure economic loss beyond that which would exist in common law or tortious situations.

“What is the problem?” I hear you ask. “I have a third party liability (TPL) policy that contains a contractual liability extension and I am therefore covered for these liabilities.” This is where we come across another infamous and more recent case, one which has changed the insurance market considerably.

Tesco v Constable

Tesco was building a new superstore in Gerrard’s Cross, which involved the construction of a new tunnel over Network Rail infrastructure. The line was operated by Chiltern Railways, who foresaw the potential for loss in the event that circumstances gave rise to interruption to its service. On this basis, it insisted that Tesco entered into a legal agreement that it would indemnify Chiltern Railways for any losses arising from the project. This was excellent foresight on the part of Chiltern Railways as the tunnel collapsed and the line was closed for several months resulting in a massive loss.

In ordinary circumstances, Chiltern Railways would have to present a claim to Tesco in common law. In this case, there had been no damage to its property. Although a train was forced into an emergency stop at the time of the collapse, there were thankfully no injuries or damage other than to Network Rail’s infrastructure. Using the tests set out in Spartan Steel and Alloys, Tesco would not be liable on the grounds of remoteness of loss.

Tesco was obliged to pay under the terms of the covenant and presented the claim to its TPL insurer citing the contractual liability extension contained with its policy. Needless to say, the claim was declined by the insurer and the courts were asked to resolve the dispute. 

The judgement handed down by the court in this case supported the insurers’ position that the contractual liability extension in Tesco’s TPL policy was only intended to cover liabilities that were co-extensive in tort and in contract, not those which existed solely in contract.

Fast forward to the current day and this presents a very real problem for developers and project owners. The wide contractual indemnity provided to Network Rail and other infrastructure owners goes beyond the bounds of normal TPL insurance.

What has the insurance market done to fill this gap?

Fortunately, the insurance market has responded to this challenge and has developed a solution. Contractual liability insurance (CLI) is a relatively new product only available from a limited number of insurers and provides additional protection over and above traditional TPL coverage. Risks are carefully underwritten by insurers who will scrutinise the nature of the project and the specific contractual indemnities involved before any terms are offered.

What should I do if I am faced with these potential liabilities?

• Engage with a specialist construction broker that understands the unique risks that come with such projects, as well as what the insurance market is offering.
• Be prepared to provide detailed information about your project and the nature of the contractual liabilities. Insurers will not write open ended CLI risks and will insist on understanding the risks the project faces.
• Allow more time for the establishment of the project insurance programme as the market for CLI is limited.
• CLI will increase your project insurance cost so budget accordingly.

For more information about contractual liability insurance, do not hesitate to get in touch.