One for the home team.
This time last week the Queensland Court of Appeal handed down its decision in Selected Seeds Pty Ltd v QBEMM Pty Ltd & Anor. Barry & Nilsson ran the appeal on behalf of QBE who were successful in having the judgement entered against it set aside. The case ultimately turned on the courts interpretation of an "Efficacy Clause" contained in a QBE broadform liability policy. But really this case was about much more than efficacy clauses and broadform liability policies. It goes to the very heart of policy interpretation and the confidence that insurance companies can place on clearly worded products and their ability to price a risk accordingly. Our case report follows.
Selected Seeds Pty Ltd v QBEMM Pty Ltd & Anor  QCA (22 September 2009)
POLICIES OF INSURANCE – CONSTRUCTION – BROADFORM LIABILITY POLICY – INSURING CLAUSE – EFFICACY CLAUSE.
Selected Seeds Pty Ltd (the insured) carried on business as a grain and seed merchant. It acquired what it thought was Jarra Grass seed from a Northern Territory supplier in late 2002, which in fact was predominantly Summer Grass seed. The difference was significant. Jarra seed was used to grow premium stock feed, while Summer Grass was a much lower quality stock feed. To the naked eye they looked identical.
After the insured acquired the seed the following the chain of supply took place:-
- Insured sells "Jarra seed" to S&K Gargan [February 2003].
- S&K Gargan plant the seed, resulting in a crop of grass and seed. S&K Gargan sell the "Jarra seed" to Michael Gargan [July 2003].
- Michael Gargan undertook a similar process and on sold what he thought was Jarra seed to Landmark Operations Ltd, a farming merchandise supplier [October 2004].
- Landmark Operations Ltd sold the seed to Mr and Mrs Shrimp [December 2004].
The Shrimps planted the seed expecting Jarra grass to shoot. After ascertaining that they in fact had a paddock full of Summer grass, the Shrimps issued proceedings against Landmark Operations in the Federal Court claiming damages for breach of contract, misleading and deceptive conduct and negligence. Ultimately the insured was joined to the proceedings. The Shrimp's loss was said to be:-
- The cost of eradicating the Summer Grass from 340 hectares of the property.
- Loss of use of the land during the eradication program (expected to take two years).
- Loss of profits that would have been derived from the sale of Jarra Grass and seed.
- The diminution in the value of their land (which was sold after proceedings were instituted).
The Federal Court proceedings were settled in March 2008. The insured contributed $150,000 to the settlement. It incurred some considerable expense in doing this - $685,806.32 in legal costs and outlays. The insured then sought to recover what it had paid to the Shrimp's plus its defence costs from QBE under the broadform liability policy.
THE POLICY WORDING
The insuring clause was a typical broadform provision which provided:-
"Liability We will pay
(a) all sums which You become legally liable to pay by way of compensation; and
(b) all costs awarded against You;
in respect of Personal Injury or Property Damage happening during the Period of Insurance and caused by an Occurrence within the Territorial Limits in connection with Your Business."
"Occurrence" was defined in a standard fashion:-
An event which results in Personal Injury or Property Damage, neither expected nor intended from Your standpoint. All Personal Injury or Property Damage arising out of continuous or repeated exposure to substantially the same general conditions shall be construed as arising out of one Occurrence."
The policy also contained the following Efficacy Clause which read:-
"The following additional EXCLUSION is added to this Policy:-
This Policy does not cover any liability arising directly or indirectly from or caused by, contributed to, by or arising from:-
1. the failure of any Product to germinate or grow or meet the level of growth or germination warranted or represented by the insured; or
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."
THE DECISION AT FIRST INSTANCE
His Honour Justice McMurdo said that there were three questions to be answered:-
- Were the circumstances within the insuring clause?
- If so, was the plaintiff's liability within the efficacy exclusion?
- If both points were resolved in favour of the insured, was the insured entitled to all of its Federal Court costs?
It was common ground that the process of eradicating the Summer Grass and the loss of use of the land was "property damage" covered by the policy, and notwithstanding that there were a number of persons in between the insured and the Shrimps. His Honour held that the loss had a sufficient connection with the insured's business. The Occurrence was held to be the planting of the seed by the Shrimps. The claim fell within the insuring clause.
His Honour then considered whether the efficacy clause had been triggered so as to take the claim outside cover. It was agreed that only the second limb was potentially relevant. QBE submitted that the second limb applied because the liability arose from the failure of the seed to correctly fulfil its intended use or function ie. that it should produce Jarra Grass and Jarra Seed. His Honour disagreed and held that the insureds liability to compensate the Shrimps arose not from what the product failed to do (grow Jarra grass and seed) but from what it did (propagate Summer grass). He said:-
. . . to favour the construction argued by the insurers would substantially affect the extent of the cover although it would not clearly deny all benefit from the policy. If the exclusion were to apply whenever the insured's product had some impact upon a person or property which it would not have had if the product had fulfilled its intended use, then the extent of the operation of this exclusion would be far reaching indeed.
In my conclusion, upon the ordinary meaning of the words used, the efficacy exclusion does not operate to exclude the insurer's liability in this case."
His Honour went on to hold that the insured was entitled to payment of the $150,000 plus all reasonable costs and expenses incurred in the Federal Court proceedings.
THE APPEAL COURT
The judgment of the Appeal Court was delivered by His Honour Mr Justice Fraser, with whom Justices Holmes and White agreed. Justice Fraser agreed that the claim came within the insuring clause. He then moved on to consider the application of the efficacy clause, and said:-
"The efficacy clause should be given its very broad, literal meaning, particularly because it is in the form of a separate endorsement to the printed policy, thus objectively suggesting an intention to adapt the standard terms of the policy. . . . . .
What was done to the land was the planting of seeds which did not function as intended. If the seeds had functioned as intended or fulfilled their intended use then there would have been no damage to the land."
The insured said that the efficacy exclusion ought to do no more than recognise the fact that the products liability policy is not intended to operate as a product guarantee, and should not extend to a case where a customer suffers loss because Jarra seed was contaminated by something else. The insured effectively argued that this was a case of negligence which the policy was intended and designed to cover. The Court disagreed.
Justice Fraser observed that the rules relating to the construction of insurance policies require exclusion clauses to be independently construed. He intimated a temptation to narrow the meaning of the efficacy exclusion so as to give greater coverage to the insured, however observed that he was obliged to give effect to the plain meaning of a term or provision contained in an insurance policy. The efficacy clause was not ambiguous. There was no scope for construing the policy in favour of the insured. The appeal was allowed, the trial judge's orders set aside and costs awarded to QBE.
Courts, when interpreting insurance policies, can tend toward an interpretation which favours coverage for the insured, particularly when the alternative is to remove a large part of the cover otherwise provided by the policy. Courts are particularly vigilant when it comes to interpreting exclusion clauses. The onus is on the insurer to show that the exclusion clause applies, and Courts will demand clear evidence to be provided in support.
The court must however always look to give effect to the written word, and the fact that a particular insured has interpreted a policy in a particular way is irrelevant. If the language used is clear then effect must be given to it, no matter how unreasonable the result may appear to the court or others. A court cannot rewrite a contract where the agreement is clearly expressed, and it is only where a literal construction would lead to a manifest absurdity that a court is able to reject it in favour of a more liberal construction.
In the matter at hand the Court of Appeal acknowledged that the efficacy clause significantly reduced the extent of cover for products liability, but did not totally obliterate it. The policy remained a broadform liability policy. The fact that much of the product cover ordinarily afforded by these types of policies was taken away by the efficacy clause was no basis for disregarding the clear effect of the exclusion clause. Insurers note: plain meaning means plain sailing, hopefully.
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.