European Group Ltd and Others v Chartis Insurance UK Ltd (formerly known as AIG (UK) Ltd and AIG Europe (UK) Ltd)

Hearing dates: 22 – 23 March 2012, 26 March-30 March 2012, 2 April 2012 and 4 April 2012

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Introduction

This case concerns which of two insurers is liable for losses caused by fatigue stress cracking to tubes in economiser blocks which were installed in a new waste recycling plant at Colnbrook, near Slough. Both insurers provided property insurance to the participants involved in the development of the recycling plant.

The Claimants, together with the Defendant, were the subscribing insurers to an Erection All Risks, Public Liability and Delay in Start Up Insurance Policy (the "EAR Policy") in relation to the project. I shall refer to such insurers collectively as the "EAR Insurers". The Defendant alone was the subscribing insurer to a Primary Marine Project Cargo/Delay in Start-Up Insurance Policy (the "Marine Policy").

Lakeside Energy from Waste Limited ("Lakeside") was the developer of the recycling plant ("the Lakeside Facility"). Lakeside engaged two entities as the engineering, procurement and construction contractors for the development of the Lakeside Facility, namely Itochu Corporation ("Iotchu") and Takuma Corporation ("Takuma"), collectively referred to as "the EPC Contractor". The manufacture of the economiser blocks was subcontracted by the EPC Contractor to Vulcan SA ("Vulcan") in Bucharest, Romania. Fourteen of the sixteen blocks were transported by road from Bucharest to Constanta, by ship from Constanta to Southampton and by road from Southampton to the Lakeside Facility. The other two blocks made the entire journey overland by road.

The EAR Policy named Lakeside and the EPC Contractor as assureds. It provided cover against physical loss, destruction or damage to all items designated for incorporation in the project, together with all consumables. Cover for equipment and materials procured from outside the United Kingdom commenced upon the attachment of lifting gear to such equipment and materials once at the Lakeside Facility.

The Marine Policy named Lakeside and all Lakeside's engineering and procurement contractors (which included the EPC Contractor) as assureds. It provided cover during transit against all risks of loss or damage to plant, equipment, materials and machinery in connection with the project. So far as the economisers were concerned, cover commenced from the time the goods left the factory in Bucharest and terminated on delivery to the Lakeside Facility.

Both Policies provided cover in the event that damage to the property covered by the Policy caused a delay in the start up of the project.

Both Policies also contained a clause ("the 50/50 clause") which provided that in the event it was not possible to ascertain whether the cause of damage to the insured's property occurred before or after the arrival of the property at the Lakeside Facility, the EAR Insurers and the Marine Insurers would each contribute 50% of the Insured's properly adjusted claim.

The Marine Policy incorporated the Institute Cargo Clauses (A) which by clause 4.4 exclude liability for "loss damage or expense caused by inherent vice or nature of the subject-matter insured".

Fatigue crack damage to the tubes was discovered in February 2008, when gas tight tests prior to commissioning led to the detection of leaks. By that time the economisers had been on site at the Lakeside Facility for between four and six months. Upon investigation, the fatigue cracking discovered was in way of the weld joints of cranked tubes to the upper headers in at least nine of the sixteen blocks. In some cases it had penetrated through the full thickness of the tube. It soon became clear, and is common ground in this action, that the fatigue cracking was caused by resonant vibration which must have occurred between the time the blocks left the factory in Bucharest and the discovery of the cracks on site.

There was a claim on both Policies for the costs of repairing the tubes and associated costs. There arose a dispute between the EAR Insurers and the Marine Insurers as to whether damage had been suffered prior to arrival at the Lakeside Facility. The Defendant contended, and maintains, that the necessary vibration could not have occurred during road and sea transport and that it is likely to have resulted from turbulent wind causing the tubes of the economisers to vibrate whilst the economisers were exposed to the elements at the Lakeside Facility. The Claimants contended, and maintain, that the vibration which caused the fatigue failure occurred during transport (predominantly or exclusively the road transport, rather than the sea transport) by reason of missing packing between the rows of tubes in the economisers.

The EAR Insurers settled the claim for £4,600,000 without prejudice to their position that the damage had occurred during transit and was covered under the Marine Policy alone. The Claimants now claim from the Defendant their respective proportions of the amounts paid in settlement of the claim, totalling £3,680,000 (i.e. £4,600,000 less the Defendant's 20% share in its capacity as an EAR Insurer).

The Damaged Economisers

The Lakeside Facility generates energy from waste. The process involves separating the recyclable elements from the waste and then incinerating the remaining waste to generate heat which drives steam turbines to generate electricity.

The heat which drives the steam turbines is generated by two boilers. Each boiler contains an economiser. Each economiser is made up of eight economiser blocks (numbered 1 to 8) which are arranged in two lines of four. The boiler water passes through the tubes in the economiser and hot exhaust air from the waste incinerator is blown around the tubes through the array so that heat is transferred to the water flowing through the tubes.

Each of the eight economiser blocks making up each economiser is about 7m high and consists of 24 rows of 40 vertical steel tubes. The rows of vertical tubes are welded to tubular steel headers at the top and bottom of each row. The vertical tubes have an outer diameter of 42.4mm and a 4mm wall thickness. 12 of the rows of tubes comprise short tubes which are 6.2m long and 12 of the rows comprise slightly longer tubes which are 6.4m long. The rows of longer and shorter tubes in each economiser block alternate so that the adjacent rows within the economiser blocks contain tubes of different lengths.

In service, the blocks of tubes are hung from the upper headers. The upper headers are connected together by welded plates. The lower tubular headers are not connected together and are only restrained by drainage connections. The blocks therefore comprise hanging rows of tubes, each row connected at the top and at the bottom to a tubular header running the length of the row, with the bottom headers alternately hanging a little above or below the level of the parallel one in the adjacent row.

In each economiser block, the 12 outer tubes in each row of 40 are cranked tubes. The crank is a kink in the tube about a third of the way down their length which enables the upper end to be connected to the header which is two rows across from the lower header to which the bottom of the cranked tube is attached. In each cranked tube the part above the crank is parallel with the part below the crank but aligned two header's distance apart. This is in order to interconnect the banks of tubes and to allow water to flow through the economiser.

The arrangement and numbering of the economiser blocks was as follows:

For each block in the above plan, the headers run vertically on the plan, connecting together 40 tubes in that dimension to create rows; there are 24 such rows which stretch across the plan. The cranked tubes are the outermost 12 of the 40 in each row, that is to say in the above plan they stretch across the entire width of the blocks and are 12 deep at the lower part for Blocks 1, 3, 5 & 7 and the upper part for Blocks 2, 4, 6 & 8. The cranked tubes were therefore those on the outside of the economisers and lining the corridor between the two boilers.

The effect is that for a given upper header, it will be connected by 28 straight tubes to the lower header directly below it and by 12 cranked tubes to the lower header two rows across (which at the point where blocks are adjacent will be to the first two rows of the adjacent block).

The original design for the connection of the cranked tubes to the upper tubular headers provided for all of the cranked tubes to be welded using a butt weld to a stub coming out of the upper tubular header. This was referred to as a "set-through connection". The design was changed by Takuma's...