A crop of low-quality grass and a battle over product liability
insurance has given the High Court an opportunity to emphasise the
need to read exclusion clauses properly and in context
(Selected Seeds Pty Ltd v QBEMM Pty Limited  HCA
The wrong seed, the crop of weeds, and the battle over
Selected Seeds acquired seeds which it believed would produce
Jarra grass, which is used as stock feed for all types of stock.
Unbeknownst to Selected Seeds, the certificate of analysis was
wrong and there was a substantial amount of Summer grass seeds in
the product. Summer grass is low-quality and is regarded as a weed
when present in commercial hay and seed crops.
The seed went through various hands until it ended up with the
consumers, the Shrimps. They planted the seed, got a crop of Summer
grass, and sued the seller and Selected Seeds for the costs of
eradicating it from their land and the loss of use of the land
during that period.
Selected Seeds settled the claim for $150,000 and turned to its
insurer, which refused to pay out on the claim.
What the insurance policy said
The policy indemnified Selected Seeds for "property
damage" which included "physical damage to or loss or
destruction of tangible property including any resulting loss of
use of that property".
An Efficacy Clause excluded "any liability arising directly
or indirectly from or caused by, contributed to by or arising from
... the failure of any Product to correctly fulfil its intended use
or function and/or meet the level of performance, quality, fitness
or durability warranted or represented by the Insured."
The insurer argued the seed's function was to produce Jarra
grass, it didn't, and therefore the liability arose from a
failure to correctly fulfil its intended use or function. As a
result, the settlement cost was excluded.
The Queensland Court of Appeal agreed with QBEMM. The Efficacy
Clause had to be read broadly, excluding any liability which has
any connection with the failure of the product to fulfil its
Why the insurer couldn't rely upon the Efficacy Clause
The High Court disagreed.
The first problem for the insurer was that the seed didn't
just fail to produce Jarra grass. It actually produced a weed that
had to be removed. It was this property damage and loss of use of
the land that was the basis of the Shrimps' claim, and thus of
Selected Seeds' liability.
The High Court considered that the question posed by the
Efficacy Clause was whether the liability of Selected Seeds for the
damage to the Shrimps' land arose out of the failure of the
seeds to fulfil their use or function. The Court concluded that the
answer must be "no". That liability was not caused by the
failure of the seeds to produce Jarra grass. It arose by reason of
the direct effect of the seeds upon the land.
This distinction (between failure to achieve your purpose, and
causing actual harm) has been made before in product liability
cases, most notably in the English case John Wyeth &
Brothers Ltd v Cigna Insurance Company of Europe SA/NV 
EWCA Civ 175.
What this means for other efficacy or exclusion clauses
The High Court's decision in Selected Seeds is a sensible
one for insureds, and a clear reminder of one of the basic issues
in insurance: policies are to be read as a whole, and exclusions
are to be read in context.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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