COROMIN LTD V AXA RE

[2007] EWHC 2818 (Comm), Queen’s Bench Division, Commercial Court, Mr Justice Cooke, 30 November 2007

Reinsurance – Business interruption – Policy excluding loss caused to defective plant – Electronic and Mechanical Breakdown Extension bringing loss caused to defective plant within scope of cover – Whether condition for “official acceptance” of plant satisfied – Whether business interruption cover extended to plant not in existence during currency of policy but affected during indemnity period

Collahuasi, a subsidiary of Anglo, operated a copper a copper mining and processing facility in Northern Chile. The plant processed copper to produce concentrate and cathodes. The facilities included a Mill. On 31 March 2005 the Mill stopped, due to a failure in its motor. The outcome was damage to a stator in the motor. Temporary repairs were effected, but the equipment failed on two occasions, in March 2006 and November 2006, but ultimately the stator had to be replaced between January and March 2007. Collahuasi suffered both physical damage and business interruption losses. It was not disputed that the incident was the result of a design defect in the motor. Anglo’s captive insurer, Coromin, insured Anglo against both types of loss. Coromin had obtained outwards reinsurance, the Anglo Global All Risks reinsurance, from a number of reinsurers, including Axa. The reinsurance was arranged in layers and was in the sum ofUS$1 billion in excess of US$50 million.  The policy covered both property damage and also business interruption within an indemnity period of two years, and although it excluded damage caused by a defective condition due to design defect the policy also contained an Electrical or Mechanical Breakdown Clause (the EMB Extension) under which cover was granted for loss flowing from unforeseen and sudden damage to any machinery or plant resulting from the defective design of any item, including damage to the item itself together with any business interruption loss in consequence of damage. Simon J referred to the EMB Extension as a form of “buy-back” of excluded defective condition cover. It was common ground that damage caused by a design defect to items other than the item defectively designed was recoverable independently of the EMB Extension, and that the effect of the Extension was to bring within the cover the defective item itself. The EMB Extension was applicable only if certain conditions were met, one of which was that there had been “official acceptance by the insured following formal handover certificate procedure”.  The reinsurers denied liability under the EMB Extension. There were two particular matters in dispute between the parties. The first was the argument by the reinsurers that the “official acceptance” condition had not been complied with by Anglo so that the EMB Extension was ineffective in the circumstances. The reinsurers asserted that the condition applied to the whole of the Mill, whereas Coromin argued that the condition was relevant only to the motor itself. The second was the application of the policy to business interruption losses to a Molybdenum plant which had not existed at the time of the incident or indeed during the currency of the policy: Coromin nevertheless asserted that the policy extended to business interruption losses suffered by the plant in the period between January and March 2007 while the motor was being repaired.