UK: The Court of Appeal Decision in Pilkington v CGU Insurance (2004)

The claim arose out of the installation of heat soaked toughened glass panels manufactured by Pilkington and installed in the roof and vertical panelling of the Eurostar Terminal at Waterloo. A small number of these panels proved defective (at most 13 out of 3,000 panels), fracturing in situ.

Eurostar commenced proceedings against Pilkington and, at mediation, settlement was obtained. Following that settlement, Pilkington commenced proceedings against its product liability insurers, CGU, claiming in excess of £500,000.

Under the terms of its policy, CGU agreed to indemnify Pilkington against legal liability for compensation in relation to claims for "loss of or physical damage to physical property not belonging to the insured … caused by any commodity article or thing supplied … by the insured and happening during the Period of Indemnity …".

Before the Court of Appeal, Pilkington had maintained that, in principle, the Eurostar Terminal was physically damaged by the very installation of the defective glass panels and before any breakage in the panels had occurred, let alone a breakage which actually caused damage to other parts of the structure or personal injury to users of the terminal. In other words, it was submitted that the effect of the installation of glass panels which were potentially liable to fracture was not merely to make the Eurostar Terminal less desirable or unsuitable for its particular use, but to render it too risky for use by the public without taking precautions, and that this scenario constituted "physical damage to physical property" sufficient to bring it within the terms of the policy.

Giving the leading judgment, Potter LJ stated that, in his view, whilst the English authorities (most notably the cases of Rodan v Commercial Union [1997] and James Budgett Sugars v Norwich Union [2003]) were not themselves determinative of the issues in this case, they nevertheless made it clear that in order to establish cover in respect of the losses claimed, the insured had to demonstrate some physical damage caused by the commodity for which purpose a defect or deterioration in the commodity was not itself sufficient and the loss claimed must be a loss resulting from physical loss or damage to physical property of another (or some personal injury).

No doubt conscious of the fact that the English authorities were not overly helpful to its position, counsel for Pilkington endeavoured to rely on a number of US authorities in an attempt to substantiate Pilkington’s entitlement to indemnity under the policy. However, Potter LJ was quick to place a judicial marker down as to the usefulness of the US authorities when considering product liability insurance coverage issues under English law. As Potter LJ pointed out, the American courts adopt a much more benign attitude towards the insured and it is a general principle of US insurance law that doubts as to the existence or extensive coverage must generally be resolved in favour of the insured. Such notions are not part of the principles of construction of the contract under English law. These are essentially:-

(i) The words of the policy must be given their ordinary meaning and reflect the intention of the parties in the commercial sense of the agreement.

(ii) A literal construction that leads to an absurd result or one wholly contrary to the real intent of the parties must be rejected.

(iii) Any ambiguity must be resolved in favour of the insured – the contra proferentem rule.

Potter LJ rejected Pilkington’s submissions that, on the facts as presented before the court, physical damage had occurred to the building. In particular, Potter LJ stated that it did not seem to him that, where a product is supplied for incorporation into a building and it is so incorporated without damage of any kind and in a condition such that it and the other components of the building function effectively, subject only to the possibility of some future failure or malfunction, that that constitutes, in any ordinary sense, physical damage in those other components or to the building as a whole.

His Lordship went on to state that damage requires some altered state. It plainly covers a situation where there is a poisoning or contaminating effect upon the property of a third party as a result of the introduction or intermixture of the product supplied. However, in his judgment, it did not extend to a position where a commodity supplied is installed in or juxtaposed with the property of the third party in circumstances where it does no physical harm, irrespective of the fact that there is a risk of possible harm at some late date.

As Potter LJ was quick to point out, the extraction of the glass panels, without damage to the surrounding structure of the terminal, was possible, but would have proved costly, and it was likely that this was the reason that such remedial action had not been taken.

In terms of issues arising out of this judgment, clearly the ease with which the removal of a harmful product can be undertaken will be a valid consideration in determining whether an insuring clause within the product liability policy has been triggered, particularly if the trigger is contingent on "physical damage".

However, if the removal of the "contaminating" product is largely impossible, despite the fact that no physical alteration to third party property may have occurred, then it is potentially arguable, in such a scenario that where the presence of the product renders harmful, in some way, the product/property ultimately produced, that property damage may have occurred. 

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.