Major held products liability insurance with CGU providing cover
for an occurrence caused by an unknown defect in Major's
products, pursuant to which CGU was obliged to pay Major's
legal costs in respect of such claims.
Major supplied two hydraulic cylinders for a yacht owned by
Timelink. The piston rods on the canting keel buckled, broke and
caused the keel to detach from the hull during a race resulting in
damage to the yacht and consequential loss. Timelink sued Major for
damages essentially on the ground that the cylinders were not fit
for purpose, that they had relied on Major's skill as a
specialist hydraulic engineering company, and that Major had
supplied the cylinders which were not appropriate for their
intended use. In essence, Major contended that it merely provided a
component which it did not design, and which was specified by
Timelink's own engineer.
Major sought indemnity for Timelink's claim from CGU under
the public liability policy. CGU denied liability pursuant to an
express exclusion in the policy excluding liability arising from
the rendering of professional advice or service.
Major successfully defended the Timelink proceeding at first
instance and on appeal, and then sought its defence costs from CGU
under its public liability policy.
The Victorian Supreme Court held the policy did not respond.
Pagone J, started with the proposition that CGU's obligation to
pay Major's defence costs depended upon the character of
Timelink's claim against Major and whether, if Timelink's
claim were successful, CGU would have been obliged to indemnify
Major for any liability.
This required the Court to consider the true nature of the
claim, as well as the intention of the parties in relation to the
purpose of the insurance contract.
His Honour stated that the obligation to provide legal costs for
a defence must be judged in this policy upon the assumption that
Timelink's claim would succeed.
It was clear that the policy was intended to expressly include
cover for unknown product defect, and to expressly exclude
liability for design and professional risks resulting from the
rendering of professional advice or service.
As Timelink did not contend that the cylinders were inherently
defective, but contended that Major should not have supplied the
cylinders for the purpose which Timelink had sought, the claim was
properly characterised as one where the wrong cylinders were
allegedly supplied in the context of allegations about the
rendering of professional advice of service. Such a claim would be
expressly excluded under the CGU policy.
In the alternative, Timelink also alleged that Major had caused
loss from its performance or failure to perform the making or
formulating of a design. This claim would also have come within
another exclusion relating to the formulation of design or
specification. In circumstances where CGU would not be obligated to
indemnify Major for such a claim, CGU was also not obligated to pay
Major's defence costs.
This case highlights that the paramount consideration in
determining whether a claim falls within the terms of a policy is
the nature and not the form of the claim.
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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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