Selected Seeds Pty Ltd v QBEMM Pty Limited  HCA 37 (3 November 2010)
This recent High Court case emphasises the need for returning to the basic principles of construction when interpreting an exclusion clause in an insurance policy. The language of the clause in the context of the whole policy is to be examined, with words to be given their natural and ordinary meaning. Assessing the fairness or otherwise of the resulting cover is irrelevant.
Selected Seeds (the insured) conducted a business as grain and seed merchants. It purchased seed, represented to be Jarra grass seed, from a Northern Territory merchant and subsequently sold some of the seed to S & K Gargan. Unfortunately, the seed was substantially contaminated with summer grass seed, which was an inferior product suitable only for low quality stock and is regarded as a weed when present in commercial hay and seed crops. The contamination was not identified on the accompanying certificate of analysis.
Gargan agreed to grow and harvest the seed and sell it back to Selected Seeds. With the agreement of Selected Seeds, Gargan then sold some seed to another grower, who in turn grew and harvested the seed and sold it to a farming merchandise supplier. The supplier then sold the seed to Mr and Mrs Shrimp.
At each stage the seed was represented to be Jarra grass seed. At each progressive harvest, the presence of summer grass seed increased. The Shrimps suffered considerable losses in eradicating the summer grass, loss of use of the land during this process, loss of value of the land and loss of profits that it would have made from the Jarra grass.
The Shrimps sued the merchandise supplier, and the other parties were subsequently joined in the proceedings. The parties settled the dispute and Selected Seeds contributed $150,000 to the settlement.
Selected Seeds made a claim under its insurance po¬licy but its insurers refused to indemnify it for the loss. The reasonableness of the settlement was not disputed.
At trial it was held that the loss fell within the insuring clause of the policy, as the relevant "occurrence" that caused the "Property Damage" was the planting of the seed on the Shrimps' land.
The insurer however argued that the following Efficacy Clause (exclusion clause) operated to exclude cover:
This Policy does not cover any liability arising directly or indirectly from or caused by, contributed to by or arising from:
2. 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."
At trial, it was held that the property damage was the result of what was done to the land (damaged by planting with Summer Seed) and not what the product failed to do (grow Jarra grass) and therefore the exclusion policy did not apply.
On appeal, the Queensland Court of Appeal upheld the insurer's argument that the seed's function was to produce Jarra grass, and as it did not, the product failed to fulfil its intended use or function and the claim was excluded.
In so doing, the Court of Appeal contrasted the insuring clause, which it said showed a narrow causal relationship between the occurrence and the property damage, with the Efficacy clause, which it considered should be read broadly to exclude any liability having a connection with the failure of the product to fulfil its intended use. By doing so, the Court of Appeal interpreted the Efficacy Clause independently of the insuring clause and the remainder of the policy.
The High Court disagreed with the Court of Appeal and made the following points:
- Examination of the language of an exclusion clause is important, but it must be read in light of whole contract of insurance, thereby giving due weight to the context.
- The Efficacy Clause was drafted so that it would clearly exclude certain occurrences causing property damage that it would normally be liable to pay compensation for.
- It was not the correct approach to consider what cover would remain if the Efficacy Clause did apply and say that the insurer could not have intended to remove so much cover.
The High Court concluded that the liability of Selected Seeds to the Shrimps was for what the seed did; not what it failed to achieve. It arose by reason of the direct effect of the seeds upon the land. The seeds were so contaminated that summer grass only was produced. The Efficacy Clause did not apply and Selected Seeds was entitled to indemnity.
Despite the fact that the insurance company did not succeed, the decision is a positive one for the insurance industry as it provides more certainty for the industry by showing that the courts will construe an insurance policy using the basic principles of construction: namely, that the language of an exclusion clause should be given its natural and ordinary meaning and it should be read in the context of whole contract.
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