Introduction
The Full Court of the Federal Court of Australia recently upheld a liability insurer's entitlement to deny indemnity to an insured in a complex manufacturer's liability claim. The case throws up a number of interesting, albeit complicated, indemnity issues.
Facts
The insured, Nuplex Industries (Aust) Pty Ltd (Nuplex), manufactured and supplied a resin that was incorporated into a protective lacquer applied to the inside of tuna cans. After the lacquer failed, the claimant, Siegwerk Australia Pty Ltd (Siegwerk), sued Nuplex in the Federal Court to recover losses in connection with the failed lacquer which caused the tuna cans to corrode. Nuplex sought indemnity under its broadform liability policy (policy) with QBE Insurance (Australia) Ltd (QBE) in respect of the claims made by Siegwerk, together with its defence costs. QBE declined to grant indemnity and Nuplex issued a cross-claim against QBE.
The trial judge, Justice Gray, while dismissing Siewerk's claims against Nuplex, found for Nuplex on the cross-claim and ordered QBE to indemnify Nuplex for its legal costs incurred in its successful defence of Siegwerk's claim. Siegwerk appealed the dismissal of its claims against Nuplex. QBE appealed the cross-claim ruling that Nuplex was entitled to policy coverage. The full Federal Court allowed the appeals on both the claim and cross-claim, ordering a retrial of Siegwerk's claims against Nuplex and declaring that QBE was not required to defend or indemnify Nuplex in respect of Siegwerk's claims.
The Claim
Nuplex manufactured and supplied resin to Siegwerk. Siegwerk used the resin as a component in the manufacture of lacquer. Siegwerk supplied the lacquer to Visy Packaging Pty Ltd (Visy). Visy applied the lacquer to its cans, and supplied the cans to a tuna processing company (PLTP). PLTP packed the tuna into the cans and sold the finished product to Simplot for distribution under the John West brand.
Starting in mid-2004 Simplot received complaints that its tuna cans were leaking. Simplot and PLTP initiated a series of product recalls, withdrawals from sale, and product disposals. Simplot and PLTP made claims against Visy in respect of losses incurred as a result of the recalls. Visy settled the claims for around $7.7 million. Visy in turn pursued a claim against Siegwerk for breach of contract and for misleading and deceptive conduct. Siegwerk settled Visy's claim for approximately $2.25 million.
Siegwerk issued proceedings against Nuplex alleging that Nuplex was liable for breach of contract, for misleading and deceptive conduct, and pursuant to the contribution provisions contained in Part 4 of the Wrongs Act 1958 (Vic). Siegwerk alleged that Nuplex had contracted to supply a specified epoxy resin but had instead supplied a phenolic resin without informing Siegwerk of the substitution. Nuplex admitted breaching the contract by supplying a different resin but defended the proceeding on the basis the can lining failure was caused by other factors, including the incorrect application by Visy of the lacquer.
The Policy
The QBE policy contained a typical public liability insuring clause, in which QBE agreed to indemnify the insured for the insured's liability to pay compensation in respect of property damage caused by an occurrence during the policy period in connection with the insured's business. The policy also contained the usual exclusions for claims relating to product recalls and claims arising from the failure of the insured's product to perform to a standard warranted or represented by the insured.
Justice Robertson, writing for the majority of the full Federal Court, applied the principles from Wilkie v Gordian Runoff Ltd [2005] HCA 17 to interpret the insurance policy. That is, that an insurance policy is to be regarded as a commercial document and is interpreted by focusing on the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure.
The Indemnity DecisionOn appeal QBE argued it was entitled to refuse indemnity on five grounds, three of which are of general application and interest to the wider insurance industry.
Firstly, QBE argued that Siegwerk's claim against Nuplex did not fall within the scope of the insuring clause because there had not been an "occurrence". The term "occurrence" was defined as "an event which results in Personal Injury or Property Damage, neither of which is expected or intended from any person's standpoint". QBE's submission focused on the words "neither of which is expected or intended". QBE submitted there was an "occurrence" only when two conditions were satisfied: (1) an "event" which was not expected or intended; and (2) property damage that was not expected or intended. QBE submitted that the events giving rise to the corrosion, including the use of the phenolic resin and the application of the lacquer containing it, were all deliberate steps in the manufacturing chain thus the first pre-condition for an "occurrence" was not satisfied. The appeal court rejected QBE's first submission, deciding that the term "neither of which" referred to the two concepts that immediately preceded the expression, that is, "Personal Injury or Property Damage". This aspect of the decision can now be relied on by insureds to support a policy interpretation whereby there can be an "occurrence" even though the "event" giving rise to the personal injury or property damage was expected or intended (provided the resulting injury or damage was not expected).
Secondly, QBE submitted that Siegwerk's claim against Nuplex did not fall within the scope of the insuring clause because the claim was for economic loss rather than property damage. The insuring clause required QBE to indemnify the insured for compensation claims "in respect of Personal Injury or Property Damage". The policy defined the term "Property Damage" as:
"physical damage to or physical destruction of tangible property including any resulting loss of use of that property; or
loss of use of tangible property which has not been physically damaged, lost or destroyed provided such loss of use is caused by physical damage to or physical loss or physical destruction of other tangible property".
QBE submitted that Siegwerk's claim was, in essence, related to Simplot's and PLTP's claims for lost profits and losses incurred from recalling and disposing of the tuna cans. QBE noted that many of the recalled tuna cans were not damaged. The appeal court rejected QBE's second submission, deciding that the recall-related losses in respect of the corroded cans related to "physical damage to...tangible property...including any resulting loss of use" and the recall-related losses in respect of the undamaged cans related to "the loss of use of tangible property...caused by physical damage to...other tangible property". The court therefore decided that Siegwerk's claims, although for product-recall-related losses, nevertheless fell within the policy's extended definition of "Property Damage".
Thirdly, QBE argued that Siegwerk's claims fell within the exclusion clauses relating to product recalls and the insured's products failing to perform to a warranted or represented standard. The relevant exclusion clause provided as follows:
"This Policy does not cover liability in respect of loss of use of tangible property which has not been physically damaged, or physically lost or physically destroyed resulting from...the failure of Your Products to meet the level of performance, quality, fitness or durability expressed or implied, warranted or represented by You, but this exclusion does not apply to the loss of use of other tangible property resulting from the sudden and accidental physical damage to, or physical loss or physical destruction of Your Products after they have been put to use by any person or organisation other than You."
The appeal court had some difficulty characterising Siegwerk's claim against Nuplex, which was for contribution in respect of a lump sum settlement paid by Siegwerk to Visy without specifying the losses for which Visy was being compensated. The appeal court noted that the majority of Visy's claim was for "loss of stock on hand", and that the amount of that claim alone exceeded the settlement sum paid by Siegwerk. On that basis the appeal court concluded Siegwerk's settlement sum must have been mostly referable to Visy's claim for "loss of stock on hand", which the court considered to be a "loss of use claim" within the meaning of the exclusion clause. The court therefore decided that Siegwerk's claim against Nuplex fell within the first limb of the exclusion clause.
The next issue was whether Siegwerk's claim fell within the exclusion write back for claims resulting from sudden and accidental damage to the insured's products after they were put to use by a third party. Nuplex argued that the write back applied because the alleged failure of the lacquer constituted "sudden and accidental physical damage" to the insured's product that in turn damaged the cans. The appeal court rejected this argument, deciding there was a difference between the insured's product (the resin) and the lacquer made from it. The appeal court decided that the alleged failure of the lacquer did not constitute damage to "Your Products", thus the write back did not apply. The appeal court therefore held that the exclusion clause applied and that QBE was entitled to deny indemnity to Nuplex.
Implications
This case highlights the importance of critically reviewing each term in an insurance policy, both in isolation and in the context of the policy as a whole. The case also demonstrates the difficulties faced by courts when characterising a claim made against an insured for contribution, where it is unclear how the prior settlement was calculated.
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.
