Australia: Product Liability: PI exclusions in PL insurance to be read narrowly

Insurance update
Last Updated: 22 June 2012
Article by Nicole Wearne and Lauren Ritchie

CGU Insurance Limited v Major Engineering Pty Ltd [2012] HCATrans 69

Major Engineering Pty Limited (Major) held a broadform liability policy with CGU which provided public and product liability cover and an additional benefits extension providing cover for certain legal costs. Major sought indemnity under the policy for a claim brought against it by Timelink Pacific Pty Ltd (Timelink).

Timelink's claim for damages arose out of the failure of two hydraulic cylinders supplied by Major and fitted to the keel of the 'Skandia' during the 2004 Sydney to Hobart yacht race. This caused the yacht to capsize. The crew had to abandon the yacht and considerable loss and damage were caused to the yacht.

Timelink sued Major seeking damages for loss suffered due to the failure of these hydraulic cylinders. It alleged that Major had agreed to design, manufacture and sell a hydraulic system and it had breached this agreement in that the hydraulic cylinders were not reasonably fit for purpose. Timelink was unsuccessful. Having incurred significant costs in defending the claim, Major commenced a proceeding against CGU in the Victorian Supreme Court seeking indemnity under the costs extension provisions of the policy of about $1M, net of costs recovered from Timelink.

The policy contained the following exclusions:

We will not indemnify you against the following:

19. Treatment, Design and Professional Risks Liability caused by or arising out of Your performance or failure to perform the following:

a) The rendering of professional advice or service.

.....

c) Making or formulating a design or specification within the domain of the ... engineering profession.

At first instance

His Honour found that the policy did not respond as Timelink's claim was not a product liability claim. Timelink never contended that there was any defect in the hydraulic cylinders. Rather, Timelink alleged that they were unsuitable for their intended purpose. This finding was made despite CGU conceding that Timelink's claim was a claim for a 'defect' within the meaning of the policy.

The trial judge further held that, even if the claim had been a claim of product liability, the exclusions clauses outlined above would have operated to exclude cover under the costs extension clause.

Court of Appeal

On appeal, CGU conceded that Timelink's claim against Major was a product liability claim for the purposes of the policy, and the only issue was whether the exclusions applied.

The Court of Appeal found that in order to determine whether the costs extension applied, Major "must prove that Timelink's claim against it, if it had been successful, would have resulted in a liability in respect of which Major Engineering would have been entitled to an indemnity under the policy".

The Court of Appeal warned against giving too much weight to the way that a claim is initially articulated by a claimant, as pleadings are frequently pitched more widely than the final address to a Court. Having regard to Counsel for Timelink's outline of closing submissions, the relevant claim in this case was the supply of hydraulic cylinders which did not meet specifications. The Court of Appeal concluded that if Timelink's claim had been successful, it would have been covered under the operative clause of the policy.

CGU argued that exclusion 19(a) applied because a professional service was being provided, namely the performance of its contract to supply the hydraulic cylinders which Timelink alleged were defective. However, the Court of Appeal found that Major performed no service other than to supply a particular product. This could not be characterised as "professional" or a "service". In the context of a product liability policy, the Court of Appeal considered such an exclusion should be given a narrow meaning. Otherwise, the purpose of a product liability policy would be considerably compromised as there would be few products supplied by Major that would not be excluded.

The Court of Appeal also held that exclusion clause 19 (c) did not apply because the claim which was ultimately heard by the court was not based on the early design allegations and Major was never involved in the design of hydraulic cylinders for the particular application.

Application to the High Court for special leave to appeal

CGU made an application for special leave to the High Court, which was heard on 9 March 2012 by Justice Crennan and Justice Keifel.

CGU argued that Timelink was not alleging that the hydraulic cylinders were defective but that it had been in receipt of a professional service from Major, which involved, amongst other things, the specification of the hydraulic cylinder that failed. Indeed, Major had provided advice to Timelink regarding the suitability of the hydraulic cylinders.

Keifel J stated that the true question 'is how one characterizes the claim of Timelink and it is either characterized as one in which the goods were unfit for the purpose for which they were required, or their claim was one for faulty advice or design, the latter two coming within the exclusion". Her Honour went on to state that Timelink's claim was one for breach of contract in failing to meet a required specification and that CGU was trying to come within the exclusion on the basis of a claim which was not made.

Their Honours were not satisfied that there were sufficient prospects of success and refused CGU's special leave application.

Comment

This decision demonstrates that:

  • It is not sufficient to consider the pleadings or initial description of the proceeding. The case as it was ultimately argued is the appropriate reference point.
  • In construing an exclusion clause in a policy, courts will look closely at the business of the insured and what the insurer knows about that business, and will construe the terms of the policy to give it a commercial operation.

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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