General Liability Policies insure liability for property damage occurring during the period of insurance. Up until now it has been unclear how these policies will respond to damage that progressively worsens across several policy periods.
In the recent case of Arrow International Limited v QBE Insurance (International) Limited,1 the High Court was asked to consider two common, but problematic policy coverage issues:
1 When did the damage occur?
2 Did the products exclusion apply?
Facts Arrow was the design and build contractor of an apartment complex in Wellington, which was a leaky building. The apartment owners issued proceedings against Arrow and a number of other parties involved. These proceedings were settled and involved a substantial payment by Arrow.
Construction of the complex started in November 1999 and it was practically completed in December 2000. QBE was on risk as Arrow's general liability insurer between May 2002 and 2005.
In August 2003, a tile on the deck of one of the units collapsed while being walked on. Subsequent investigation revealed extensive damage and water damage. In early 2006, the Body Corporate engaged consultants to investigate. That investigation showed major problems.
The insuring clause of the QBE policy provided that there was cover for Arrow's legal liability for 'accidental physical loss of or damage to any tangible property... happening... during the Period of Insurance...'
When did the damage occur?
Arrow argued that damage to the building occurred during the period QBE was on risk. QBE argued that by the time it came on risk in May 2002, the damage to the building had already occurred.
The essential question was whether, under the QBE policy, there was damage 'happening during the period of insurance'. Arrow's expert said that 10-25% of the damage had occurred before the policy incepted. QBE's expert said that this percentage was 50%. This led to a discussion on whether to apply the 'continuous trigger' theory or the 'single trigger' theory. Arrow submitted that the trigger in terms of the insuring clause is the date of manifestation of the damage ('manifestation'). QBE submitted that the trigger is the point when the damage occurred ('injury-infact').
MacKenzie J found that the policy wording was clear that what is covered is damage happening during the policy period, not damage becoming manifest during the policy period. He also found that it was necessary to find a single point in time at which that damage occurred, favouring the single trigger approach. In order to answer this question, he looked at how the Supreme Court of Tasmania interpreted the word 'damage' in Ranicar v Frigmobile Pty Ltd2 and found:
...the question is when has there occurred an alteration to the physical state of the timber which impairs its value or usefulness as a component in the building.
His Honour said that damage had clearly been suffered when rotting of the timber had occurred, before that rotting had advanced to a point where structural damage resulted. Further, a large part of the settlement sum related to the cost of remedial work to replace rotting timber, where no structural damage had yet occurred.
Based on the evidence from the microbiologists, MacKenzie J was satisfied that the damage had occurred well before 30 May 2002. The stage that the damage had reached by May 2002 was such that the only way of repairing it was to open up all the areas where exposure to moisture was likely and replace the affected timber.
On that basis, QBE's policy did not respond as by the time it came on risk, the damage had already occurred.
Was the building complex Arrow's 'product'?
MacKenzie J also considered the defective products exclusion.
The question here was whether the apartment complex was a 'product'. The exclusion was as follows:
This Policy does not insure against liability for the cost of rectifying any defect in any Product, or the cost of repairing or replacing or making any refund of the price paid for any Product, by reason of the product having proved defective, harmful or unsuitable for its intended purpose.
The definition of 'product' is:
'Products' or 'Product' means any property... manufactured, constructed, erected...sold, supplied or distributed by the Insured, after the property has ceased to be in the insured's possession and control.
QBE argued that the defective products exclusion applied, which meant indemnity for the part of the settlement sum attributable to remedial works would have been excluded. Arrow argued that the apartment complex was not a 'product' and that any ambiguity in the language of the exclusion should be resolved against QBE.
The Court found that a building comes within the definition of 'product' in the policy because the word 'property' is not limited to goods. It therefore found that the defective products exclusion would have applied, so as to exclude liability for the cost of repairing or replacing the defects. His Honour formed this view even though the building work was entirely done by sub-contractors and not Arrow itself.
Implications for insurers
This case provides useful guidance on the exposure of insurers for leaky building claims, especially where successive insurers have been involved. In this case, the work was completed in December 2000 and the Judge was satisfied that the damage had occurred before May 2002.
Whilst we would expect the time taken for rot to occur to vary, it is useful to note that the Judge was prepared to find that the damage had occurred within 18 months of construction.
The case is also provides useful guidance on the application of the products exclusion. The exclusion applies to a developer of a building, even although the developer does not personally carry out any of the construction.
1 23/06/09, MacKenzie J, HC Wellington, CIV 2007-485-74.
2  Tas R 113.
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