FEDERAL COURT OF AUSTRALIA

Capral Limited v Insurance Australia Limited t/as CGU Insurance [2024] FCA 775

ORDERS

THE COURT ORDERS THAT:

1.    The separate questions be answered as follows:

Question 1:

Whether:

(a)    the amounts paid by the Applicant pursuant to deeds of settlement and release in settlement of claims against the Applicant in connection with 5083 H116 aluminium rolled plate purchased by the Applicant and supplied to its customers;

were in respect of a claim for “Property Damage” in respect of an “Occurrence” within the meaning of the contract of insurance dated 6 November 2019 with policy number 10M 4103251 (the Policy) and/or the renewed contract of insurance dated 12 November 2020 (the Renewed Policy).

Answer: Yes, but noting that the quantification of the amount for which the respondent is liable is reserved for subsequent determination.

Question 2:

Whether the “Additional Costs” (as defined at [14] of the Concise Statement) are covered under clause 1.1, or alternatively clause 1.2, of the Policy and/or Renewed Policy.

Answer: No.

Question 3:

Whether the Applicant’s claim under the Policy or the Renewed Policy is excluded by clause 6.11.

Answer: No.

Question 4:

Whether the Applicant’s claim under the Policy or the Renewed Policy is excluded by clauses 6.14.2 and/or 6.14.3.

Answer: No.

2.    The respondent pay the applicant’s costs in relation to the separate questions.

3.    The matter stand over to 9.30 am on 6 September 2024.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

JACKMAN J:

Introduction

1    On 14 December 2023, I ordered that four questions be heard and determined separately from other issues in the proceedings. Those questions concern the construction of a General Products and Liability Policy (Policy) issued to the applicant, Capral Limited (Capral), by the respondent, CGU Insurance (CGU).

2    Capral manufactures and supplies aluminium products, including for use in the maritime industry. These proceedings concern the supply of aluminium plate to ten customers, each of whom used the plate in construction of their own property. It was subsequently discovered that the plate was defective, and Capral paid $2,197,000 in settlement of the customers’ claims. Capral argues that the Policy is engaged because: (1) the claims were for property damage; and (2) CGU’s liability is not otherwise excluded. CGU disputes both propositions.

Factual Background

3    The relevant facts are set out in the first of two affidavits sworn by Mr Hawkins, the Divisional General Manager of Industrial Solutions and Supply at Capral. CGU did not challenge Mr Hawkins’ evidence.

The Plate

4    From around March 2020 to May 2020, Capral imported batches of “DNV 5083 H116 rolled aluminium plate” (Plate) from a company incorporated in China, Henan Mingtai AL Industrial Co Ltd (Mingtai).

5    DNV AS (DNV) is a company incorporated in Norway that acts as a classification society for the maritime industry. It sets standards known as “Rules for Classification” for the design and construction of marine vessels, including standards for the manufacture, inspection, testing and certification of materials and products. Mintgtai was certified by DNV as an approved manufacturer of 5083 H116 rolled aluminium plate: CB 166.

6    “5083” identifies the alloy or chemical composition of the aluminium: First Hawkins Affidavit, [23]. Each alloy is different and is chosen based on the desired properties for its end use. 5083 is a hard alloy which generally has more magnesium content than soft alloys such as 5005.

7    “H116” is the temper of the plate, being the production process applied to the plate to deliver certain mechanical properties: First Hawkins Affidavit, [24]. H116 is a temper that is specifically used to increase the corrosion resistance of the plate. To be classified as H116 standard, the tempered plate has to be in accordance with “ASTM Standard Specification B928”, which includes the ASTM G-66 and G-67 testing standards. If the plate is not H116 standard, then it does not meet the mechanical properties required for corrosion resistance: First Hawkins Affidavit, [25].

8    The 5083 H116 plate is a specially manufactured plate which is particularly corrosion resistant. That corrosion resistance is very important for marine-grade-applications like shipbuilding. If the plate is not H116 standard, it is not suitable for use in marine-grade applications: First Hawkins Affidavit, [25]–[26], [32]; Harold Bushfield et al, “Marine Aluminium Plate — ASTM Standard Specification B 928 and the Events Leading to its Adoption” (CB 148).

9    DNV certification of plate is “extremely important” to Capral, especially when the plate is being supplied to Capral’s marine customers: First Hawkins Affidavit, [34]. Some of Capral’s larger customers require all products to be DNV-certified so that they can obtain DNV certification of their completed vessels.

10    Capral’s purchase order forms for the Plate, and Mingtai’s corresponding invoices to Capral, confirmed that the Plate was “5083 H116” with a DNV certificate: CB 231.

The Supply of Plate to the Customers

11    From about 29 June 2020 to 19 October 2020, Capral sold and delivered the Plate to its customers. Ten of those customers, hereafter referred to as the “Customers”, made the claims which are the subject of these proceedings.

12    The Customers used the Plate, or supplied it to their own customers, as marine-grade plate in the construction of ships, boats, barges, and a water tank (the Vessels).

Using and Removing Plate

13    5083 H116 plate is generally used in construction by welding the plate together with other plate or extrusions. Filler alloy, also known as welding wire, is usually used to weld the plate into a structure: First Hawkins Affidavit, [31].

14    For welded plate to be removed from a vessel or water tank, it must be cut out at suitable points using a saw or oxy-torch: First Hawkins Affidavit, [92]; see CB 836. That involves cutting not only the plate and alloy used in the welding process as a joiner, but also damaging surrounding plate and extrusion.

Discovery that the Plate was Non-Compliant

15    In or about late September 2020, a Customer discovered that its plate failed the ASTM G-66 and G-67 testing standards. Capral engaged an independent product testing company, LMATS Pty Ltd (LMATS), to test the batches of Plate. Thereafter, LMATS confirmed that each batch failed the ASTM G-66 and G-67 test requirements.

16    Early in the morning of 5 November 2020, Mingtai sent an email to Capral identifying the reasons for the Plate’s non-compliance. The email explained that due to a failure in the production process at Mingtai, the Plate did not undergo the requisite heat treatment necessary to pass the corrosion resistance requirements of the DNV Rules for Classification: CB 349.

17    Later that day, DNV notified Capral that it had suspended Mingtai’s status as an approved manufacturer: CB 346.

18    On 12 November 2020, DNV issued a letter to Capral stating that: (1) all rolled plate produced by Mingtai in 2020 and used in DNV-classed vessels was to be tested for compliance with the ASTM G-66 and G-67 standards; (2) where either test failed, the DNV product certificate for that batch was revoked and the material was considered non-compliant; and (3) in general, non-compliant plate should not be used in DNV-classed vessels: CB 351.

19    On 5 March 2021, DNV sent an email to Capral attaching a memorandum regarding the defective Plate. The memorandum was also provided to the Customers. The memorandum relevantly stated that “DNV’s general approach is that aluminium plates in grade 5083 (or other alloys) delivered in the H116 or H321 tempers found not to comply with ASTM G66 or G67 should not be applied in DNV classed vessels” (emphasis in original): CB 526.

20    The upshot is that the Plate did not comply with the H116 standards for corrosion resistance, was not compliant with DNV’s Rules for Classification, and was not certified by DNV.

Effect of the Plate’s Non-Compliance

21    Mr Hawkins gave unchallenged at [90] of his first affidavit that (emphasis added):

Capral’s customers who required their marine vessels to be DNV-certified would not have been able to obtain DNV-certification of their vessels if the non-compliant Plate was used in construction. Further, while the Plate could have still technically been used to construct marine vessels or other water-based structures at least in the short term, the useful life of the Plate was severely impacted because the Plate did not possess the corrosion resistance qualities required by the ASTM G-66 and/or G-67 testing method standards. For example, the Plate would have been prone to corrosion far quicker than it should.

22    CGU drew my attention to the fact that Mingtai identified a possible fix for its non-compliance, namely the application of anti-corrosion paint. However, the merit of that suggestion was criticised in an independent report prepared by Maritime Engineers Pty Ltd for the solicitors of one of the Customers: CB 1200. The report indicated that Mingtai’s suggestion would not be entirely suitable for a number of reasons, including that:

(1)    the suggested coating would be at risk of quickly breaking down, exposing the bare aluminium plate to sea water;

(2)    anodizing the Plate would not be feasible due to the size of the relevant boats; and

(3)    the initial preparation, application, long term maintenance and reapplication of protective coatings for the lifetime of the boat would be entirely unacceptable for the owner of a new boat.

The Customer Claims

23    The present dispute between Capral and CGU concerns the claims made by ten customers. Each is discussed in turn below.

Austal Ships Metal Pty Ltd (Austal)

24    Austal used the Plate as material for the construction of multiple marine vessels, including patrol vessels for the Royal Australian Navy: CB 692. At the relevant time, Austal was constructing ships for DNV certification: First Hawkins Affidavit, [97]

25    On 16 February 2021, Austal gave notice to Capral of an “Aluminium Remediation Claim”: CB 682. That notice relevantly contained the following:

2.    Aluminium supplied to Austal by Capral (originating from Mingtai Aluminium Co., Ltd) and used and incorporated by Austal in the construction of several vessels (further specified in Attachment 1 to this letter) did not satisfy the corrosion resistant specifications required by DNV-GL and Austal.

…

5.    The non-conformity and subsequent recall by Capral of the material was brought to Austal’s attention at a stage where the hull structures of various vessels were already under construction or nearing completion. Due to the non-conformance and recall, Austal had no option but to remove parts and structures containing non-conforming material, construct new components and incorporate those new structures into the hulls.

26    The report attached to the notice concluded as follows:

The financial implications of remediating the defective aluminium, both in material and labour cost, are substantial. There is also a heightened risk of contractual issues with Austal and the client due to the delayed delivery of their vessels; not just the immediately affected vessels, but the entire project fleet. To summarise, the non-compliant aluminium is expected to cost Austal $2,829,048 to rectify excluding any outstanding material costs associated directly with Capral. Austal intends to recover all damages due to the issue detailed in this report.

27    On 30 March 2023, Capral and Austal entered into a deed of settlement. Recital D noted that Austal had “made claims for loss and damage in respect of the supply of the Rolled Plate and property damage to the End Products”, the End Products being “marine vessels”: CB 914. In settlement of Austal’s claim, Capral agreed to supply additional aluminium, collect the scrapped Plate, and pay $1 million.

Echo Marine Group Pty Ltd (Echo Marine)

28    Echo Marine used the Plate in the construction of a large ship. Like Austal, Echo Marine was constructing ships for DNV certification.

29    On 20 October 2021, Capral and Echo Marine entered into a deed of settlement on substantially the same terms as that entered into between Capral and Austal: CB 1165. The settlement amount was $650,000.

Indigo Wave Pty Ltd t/as Razerline (Razerline)

30    Razerline used the Plate in the construction of multiple fishing boats: First Hawkins Affidavit, [132].

31    On 11 March 2021, Razerline commenced proceedings against Capral in the Supreme Court of Western Australia: CB 1229.

32    On 12 November 2021, Razerline and Capral entered into a deed of release. Recital B noted that “Razerline alleges that the Product was defective and caused Razerline to suffer loss and property damage”: CB 1247. The settlement sum was $250,000.

SFM Marine Pty Ltd (SFM)

33    SFM used the Plate in the construction of two mussel harvesting vessels: CB 1270.

34    On 2 September 2021, the insured’s loss adjusters noted that the basis of SFM’s claim was “the cost to rectify the vessels”: CB 1345.

35    On 18 November 2021, Capral and SFM entered into a deed of settlement on substantially the same terms as that entered into with Austal: CB 1350. The settlement amount was $125,000.

Madson Mechanical Maintenance Pty Ltd (Madson)

36    Madson used the Plate in the construction of two barges.

37    On 17 May 2021, Capral and Madson entered into a deed of settlement. Recital C noted that the “Customer has made claims for replacement material for the Rolled Plate and compensation of AUD$106,116.94 for the property damage to the End Product”, the End Product being “2 barges”: CB 1378. Capral agreed to supply replacement material, issue a credit, and pay $30,000.

Westerberg Aluminium Boats Pty Ltd (Westerberg)

38    Westerberg used the Plate in the construction of a trailer boat: CB 1393.

39    In an email dated 9 December 2020, Westerberg informed Capral that the vessel was “faulty” and discolouration was “evident”: CB 1390. Westerberg’s customer opted to be provided with a new vessel, and Westerberg sought cost of the replacement from Capral. In making that claim, Westerberg accepted that it would make deductions for the equipment and fixings that could be used in the second build.

40    On 2 June 2021, Capral and Westerberg entered into a deed of settlement. Recital C noted that “Customer has made a claim for compensation of AUD$88,910.00 for the property damage to the End Product”, the End Product being a “vessel”: CB 1407. Capral agreed to issue a credit and pay $50,000.

Australian Aluminium Supply Pty Ltd (AAS)

41    AAS supplied the Plate to its client, United Industrial Solutions (UIS), who used the Plate in the construction of a 6.1 metre centre console boat: CB 1427.

42    On 1 June 2021, Capral and AAS entered into a deed of settlement. Recital C noted that “AAS has made a claim for replacement material for the Rolled Plate and compensation of AUD$81,816.37 for the property damage to UIS’ End Product”, the End Product being a “vessel” (CB 1431). Capral agreed to supply replacement material, issue a credit, and pay $44,000.

Oceanic Fabrication Pty Ltd (Oceanic)

43    Oceanic used the Plate in the construction of a boat that was subsequently delivered to a customer: CB 1437.

44    On 19 August 2021, Capral and Oceanic entered into a deed of settlement on substantially the same terms as that entered into with Westerberg: CB 1478. The settlement amount was $20,000.

Steeleco Pty Ltd (Steeleco)

45    Steeleco used the plate in the construction of a demo boat for the new boat-building side of the company’s business: CB 1484.

46    In an email dated 21 December 2020, Steeleco informed Capral that it was impractical to replace the items that used the Plate. Each part of the boat was welded or fixed to those items in some way, such that the only feasible option was to remake the boat hull.

47    Capral and Steeleco entered into a deed of settlement on 2 February 2021 on substantially the same terms as that entered into with Madson: CB 1497. The settlement amount was $20,000.

Rocklea Pressed Metal Pty Ltd (Rocklea)

48    Rocklea supplied the Plate to its client, Bell Environmental (Bell). Bell used the Plate in the construction of a water tank, which was subsequently affixed to a fire truck.

49    In an email on 5 March 2021, Rocklea informed Capral that it specifies “5083” for marine properties when fabricating aluminium water tanks. There was no guarantee that only fresh water would be stored in the vehicle, because in an emergency situation firemen will draft water from any available source. In that context, Rocklea concluded that the best course of action was to construct a new water tank: CB 1508.

50    In a letter that was attached to an email dated 12 March 2021, Rocklea set out the costs that it was requiring to be reimbursed: CB 1519.

51    On 16 June 2021, Capral, Rocklea and Bell entered into a deed of settlement on substantially the same terms as that entered into with Madson: CB 1551. The settlement amount was $8,000.

Other Customers

52    Around 50 of Capral’s customers received the Plate, but very few made claims that have not been identified above. Those few other claims were minor and resolved. For example, Custom Quip Engineering used Plate to construct a truck (which Mr Hawkins points out is not a marine application). Capral resolved that claim by agreeing to pay for the truck to be painted.

53    On 17 December 2020, the insured’s loss adjusters issued a report identifying the issues caused when Capral’s customers used the non-compliant plate in the construction process. That report included the following (CB 497):

6.10    It is important to note that non-compliance with the relevant Standard may not in itself mean that the plate is not fit for purpose and it does not always result in damage to a customer’s property.

6.11    This will depend on the end application of the plate but in the case of those Claimants that we have referred to above it seems almost certain that there will be claims eventuating due to the product’s susceptibility to corrosion.

54    The claims that the loss adjusters had “referred to above” were those of Austal, Echo Marine, Razerline, AAS, and Westerberg. The report had not referred to the claims of the remaining Customers.

Summary

55    In sum, each of the Customer Claims involved the following:

(1)    Plate was used in the construction of property for use in a marine environment (namely the Vessels);

(2)    while the Vessels could still technically have been used in the short-term, their useful life was severely impacted because the Plate did not possess the requisite corrosion resistance qualities;

(3)    upon learning of the Plate’s non-compliance, each Customer elected to remove the Plate and/or reconstruct the Vessels;

(4)    each Customer pursued Capral for damages;

(5)    Capral entered into a settlement deed with each Customer that made express mention of compensation for “property damage”; and

(6)    Capral accordingly paid moneys and provided replacement plate, although it has not made a claim against CGU in respect of the latter expense.

56    The aggregate of the settlement amounts was $2,197,000. This is the principal amount for which Capral says that it was entitled to be indemnified under the Policy.

Salient Terms of the Policy

57    Capral tendered two versions of the Policy: one entered into on 6 November 2019, and one entered into on 6 November 2020. Both versions of the Policy are relevantly in identical terms. There is no dispute as to the period of cover.

58    Clause 1.1.2 of the Policy sets out the applicable insuring clause. It provides (emphasis in original, as for all extracts from the Policy in this section):

1.    The Indemnity

Coverage: In consideration of the Named Insured having paid or agreed to pay the Premium and subject to the terms, Definitions, Exclusions, Conditions, provisions and Limits of Liability set out in this Policy, the Insurer will pay to or on behalf of the Insured, all sums which the Insured shall be legally liable to pay, including for the avoidance of doubt, those assumed under contract or agreement, in respect of:

1.1    Compensation for:

1.1.1    Injury to any person;

1.1.2    Property Damage;

1.1.3    Advertising Injury;

occurring within the Geographical Limits during the Period of Insurance as a result of an Occurrence happening in connection with the Insured’s Business or Products.

59    The relevant bolded terms in the insuring clause are defined in cl 4 of the Policy as follows:

4.5    Compensation means any amount paid or payable at law (including but not limited to amounts owing or liability incurred in respect of or arising out of a claim for recovery or contributions made pursuant to any legislation) by the Insured in respect of any claim for:

4.5.1    Injury;

4.5.2    Property Damage;

4.5.3    Advertising Injury;

Provided that Compensation is only payable in respect of an Occurrence to which this Policy applies.

    …

4.16    Occurrence means an event including continuous or repeated exposure to substantially the same general conditions which results in … Property Damage … where such … Property Damage … is neither expected nor intended from the standpoint of the Insured.

    …

4.19    Product means anything which was, or is deemed by law to have been, manufactured, grown, extracted, treated, produced, processed, sold, supplied, distributed, imported, exported, repaired, serviced, renovated, installed, assembled, erected or constructed in the course of the Business by or on behalf of the Insured, including labels, packaging or containers (other than a Vehicle), and directions, instructions, or advice given or omitted to be given in connection with such Product, after ceasing to be in the possession or under the control of the Insured.

    Product does not include:

4.19.1    former Products that come back into the possession of the Insured or under the control of the Insured at a later time;

4.19.2    food or beverages sold from any canteen or vending machine primarily for use by the Insured’s Employees and/or food or beverages served to Employees or guests for consumption on any Insured’s premises.

    …

    4.21    Property Damage means:

4.21.1    physical injury or damage to or physical loss of or destruction of tangible property including loss of use at any time resulting therefrom;

4.21.2    loss of use of tangible property which has not been physically injured, damaged or destroyed provided such loss of use is caused by or arises out of physical damage of other tangible property.

60    Clause 1.2 of the Policy extends cover to certain matters. It relevantly provides:

1.2    Defence Costs and Supplementary Payments: With respect to the cover provided by this Policy, the Insurer will pay the following costs and expenses in addition to the Limit of Liability:

1.2.1    all legal costs and other expenses incurred with the written consent of the Insurer in the investigation, defence or settlement of any claim or suit, or the bringing or defending of appeals in connection with such claim or suit;

1.2.2    internal costs and expenses incurred by the Insured with the written consent of the Insurer in the investigation, defence or settlement of any claim or suit, including any associated appeals as described in Clause 1.2.1 immediately above;

61    Clause 6 of the Policy excludes cover for a number of matters. The relevant exclusions provide as follows:

6.    Exclusions

The liability of the Insurer to pay any benefit or to indemnify the Insured pursuant to Clause 1.1, 1.2 or to any Endorsement incorporated into the Policy shall not extend to any of the following:

…

6.11    Loss of Use

The loss of use of tangible property which has not been physically injured, damaged or destroyed which results from:

6.11.1    delay in or lack of performance by or on behalf of the Insured of any contract or agreement;

6.11.2    the failure of the Products to meet the level of performance, quality, fitness or durability expressly or impliedly warranted or represented by the Insured. However, this does not apply to loss of use of other tangible property resulting from the sudden, unexpected and unintended physical injury to or destruction of the Products after such Products have been put to use by any person or organisation other than the Insured.

…

6.14    Products and Work Performed

…

6.14.2    the cost of or damages claimed in relation to the withdrawal, recall, inspection, repair, replacement or loss of use of the Products or any property of which such Products form a part, if such Products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein;

6.14.3    Property Damage to the Products if such damage is attributable to any defect in them or to their harmful nature or unsuitability, but this Exclusion 6.14.3:

6.14.3.1    does not apply to Products repaired, serviced or treated by the Insured after such Products were originally sold, supplied or distributed;

6.14.3.2    is restricted to the defective or harmful or unsuitable part of the Product and shall not apply to Property Damage to the remainder of such Product or Products.

62    Capral says that the key terms of the Policy, including the definition of “property damage” and the exclusion in cl 16.4.2, are based on the Comprehensive General Liability (CGL) policy formulated in the United States of America by the National Bureau of Casualty Underwriters and the Mutual Insurance Rating Bureau: see Paper Machinery Corporation v Nelson Foundry Company Inc 108 Wis 2d 614; 323 NW 2d 160 (1982) (Court of Appeals of Wisconsin) at 164; Hartford Fire Insurance Co v California 509 US 764 (1993) at 772. The standard CGL policy is said to have been first published in 1940 and revised in 1943, 1955, 1966 and 1973. According to Capral, the standardised provisions have developed into “boiler-plate” clauses for most liability insurance forms in the United States: see Laurie Vasichek, “Liability Coverage for ‘Damages Because of Property Damage’ Under the Comprehensive General Liability Policy” (1984) 68 Minnesota Law Review 795 at 798.

Principles of Construction

63    An insurance policy is a kind of commercial contract which should be construed according to the principles of businesslike interpretation: CGU Insurance Limited v Porthouse [2008] HCA 30; (2008) 235 CLR 103 at [43] (Gummow, Kirby, Heydon, Crennan and Kiefel JJ). Those principles were relevantly set out by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104 at [46], [47] and [51] to the following effect:

(a)    the rights and liabilities of parties under a provision of a contract are determined objectively by reference to its text, context (being the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose;

(b)    in determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean; that enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract; and

(c)    unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption that the parties intended to produce a commercial result; a commercial contract should be construed so as to avoid it making commercial nonsense or working commercial inconvenience.

64    The insuring clause and any exclusion clause must be read together in a harmonious way so that due effect is given to both, and the right conferred by the former is not negated or rendered nugatory by the construction adopted for the latter: Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2018] NSWCA 100; (2018) 359 ALR 314 at [54] (Barrett AJA) (with whom Meagher and White JJA agreed); Woodlawn Capital Pty Ltd v Motor Vehicles Insurance Ltd [2016] NSWCA 28; (2016) 111 ACSR 377 at [133] (Ward JA) (with whom Macfarlan and Gleeson JJA agreed); Impact Funding Solutions Ltd v AIG Europe Insurance Limited [2016] UKSC 57; [2017] AC 73 at [7] (Lord Hodge) (with whom Lord Mance, Lord Sumption and Lord Toulson agreed); and see generally LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435 at [56]–[57] (Derrington and Colvin JJ) (with whom Moshinsky J agreed).

65    In relation to the construction of exclusion clauses, such a clause is to be construed according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity: Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510 (Mason, Wilson, Brennan, Deane and Dawson JJ). That approach was held to be applicable to the construction of an exclusion clause in a contract of insurance in Selected Seeds Pty Ltd v QBEMM Pty Ltd [2010] HCA 37; (2010) 242 CLR 336 at [29] (French CJ, Hayne, Crennan, Kiefel and Bell JJ).

66    As to the contra proferentem rule, the rule is to be applied only as a last resort after the orthodox process of construction has failed to resolve an ambiguity; it is not a rule which may be applied to resolve “any ambiguity”: LCA Marrickville Pty Ltd at [83]–[102], in which Derrington and Colvin JJ thoroughly reviewed the authorities on the point.

67    A contract of insurance has the object or purpose of sharing the risk of, or spreading loss from, a contingency: Todd v Alterra at Lloyd’s Limited [2016] FCAFC 15; (2016) 239 FCR 12 at [42] (Allsop CJ and Gleeson J).

68    Capral supported its construction of the Policy by relying upon a number of cases decided in North America. In justifying such reliance, Capral eschewed any submission that foreign authorities formed part of the “matrix of commonly known facts”: T24.41–47. Instead, Capral relied on a principle of construction that where language is employed in an insurance contract that has a settled meaning in one jurisdiction, the courts will ordinarily endeavour to adhere to that settled meaning for substantially similar language used in a substantially similar context: JD Heydon, Heydon on Contract (Lawbook Co, 2019) 304 [8.1080], citing McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579 at [74] (Kirby J); Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390, 394 (Kirby P); Federation Insurance Ltd v Banks [1984] VR 525 at 533–4 (Kaye J); see also R & B Directional Drilling Pty Ltd (in liq) v CGU Insurance Ltd (No 2) [2019] FCA 458; (2019) 369 ALR 137 at [71] (Allsop CJ); Perry Herzfeld and Thomas Prince, Interpretation (Lawbook Co, 2nd ed, 2020) 608 [29.260].

69    CGU submits that the principle upon which Capral relies only captures cases which are so notorious that the parties can be presumed to have negotiated on the basis of them: T94.1–7. In the absence of any evidence to that effect, CGU submits that the foreign decisions carried no added force beyond their intrinsic cogency: see Australian Casualty Co Ltd v Federico [1986] HCA 32; (1986) 160 CLR 513 at 525 (Wilson, Deane and Dawson JJ); Cook v Cook [1986] HCA 73; (1986) 162 CLR 376 at 390 (Mason, Wilson, Deane and Dawson JJ); Qantas Airways Ltd v Leonie’s Travel Pty Ltd [2010] HCA Trans 232.

70    In the present case, there is no need to resolve this difference between the parties, if indeed there is any. As will become apparent, I have found the relevant international decisions upon which Capral relies to be cogent and consistent with Australian law. Accordingly, the resolution of the separate questions in these proceedings does not turn upon the proper weight to be attributed to foreign decisions. It is sometimes said that to conclude that a precedent is wrong is to pose the question of stare decisis, rather than answer it. The inverse is also true. If a case is plainly correct, the question of its authoritative weight never truly arises.

71    A related aspect of Capral’s approach to construction requiring attention at this stage concerns its reliance on the history of the CGL standard form developed in the United States. Such material may well be relevant in the construction of an insurance policy. For example, Martin Davies in “The Construction of Standard Form Shipping Contracts” [2023] Lloyd’s Maritime & Commercial Law Quarterly 225 argues at 241 that:

Parties choose to use generic standard forms not because they understand and choose to abide by all the words of all the particular provisions, but because they choose, in a general sense, to pattern their rights and obligations according to the prevailing industry standard expressed in the form that they choose to use. That is voluntary submission to regulation suggested by a private lawmaker, and so the process of understanding the parties’ rights and obligations is much more akin, as Prausnitz argued, to one of statutory interpretation than to one of searching for the parties’ intention, or even what a reasonable person would understand their apparent intention to be.

72    Here, the high line of Capral’s reliance on the CGL policy’s history was that a particular amendment “put to rest any doubt that ‘property damage’ occurs when the insured’s product is incorporated into a larger tangible product and the insured’s product causes the larger product to fail”: AS [55]. As I have found in favour of Capral on the proper construction of Property Damage without having recourse to any such amendment, it is unnecessary to decide whether the amendment is relevant in order to resolve the separate questions.

The Separate Questions

73    On 14 December 2023, the parties agreed the following questions for separate hearing and determination:

Question 1:

Whether:

(a)    the amounts paid by the Applicant pursuant to deeds of settlement and release in settlement of claims against the Applicant in connection with 5083 H116 aluminium rolled plate purchased by the Applicant and supplied to its customers (the Customer Claims);

(b)    the costs and expenses incurred by the Applicant defending and settling the Customer Claims; and

(c)    the costs and expenses incurred by the Applicant in seeking damages, compensation and reimbursement from DNV AS in respect of the amounts referred to in (a) and (b) above,

were in respect of a claim for “Property Damage” in respect of an “Occurrence” within the meaning of the contract of insurance dated 6 November 2019 with policy number 10M 4103251 (the Policy) and/or the renewed contract of insurance dated 12 November 2020 (the Renewed Policy).

Question 2:

Whether the “Additional Costs” (as defined at [14] of the Concise Statement and set out in Question 1(b) and (c) above) are covered under clause 1.1, or alternatively clause 1.2, of the Policy and/or Renewed Policy.

Question 3:

Whether the Applicant’s claim under the Policy or the Renewed Policy is excluded by clause 6.11.

Question 4:

Whether the Applicant’s claim under the Policy or the Renewed Policy is excluded by clauses 6.14.2 and/or 6.14.3.

74    At the hearing, Capral accepted that the answer to question 2 should be “no” on the basis that CGU did not provide written consent to the incurring of the “Additional Costs”, although Capral still maintains a claim for contractual damages for an alleged breach in not providing written consent (which is to be dealt with subsequently to these separate questions). In light of that concession, both parties agreed that questions 1(b) and 1(c) were of no utility and should be set aside: T4.22–25; T7.16–19. Accordingly, I have answered question 2 in the negative and set aside questions 1(b) and 1(c).

75    It is convenient to address the remaining questions in turn.

Question 1(a)

76    The crux of question 1(a) is whether the Customer Claims were for Property Damage. Arguing that the answer to this question should be “yes”, Capral relied solely upon the first limb of the definition of “Property Damage” in cl 4.21 of the Policy. Clause 4.21.1 provides that Property Damage includes:

physical injury or damage to or physical loss of or destruction of tangible property including loss of use at any time resulting therefrom.

77    Capral argues that the Customer Claims were for Property Damage because:

(a)    when the Plate was used in the manufacturing and/or construction process, it was affixed or bonded to the Vessels predominantly by welding the Plate to other plate or extrusion material;

(b)    the Plate did not have the necessary corrosion resistance qualities and was not suitable for marine-grade use;

(c)    upon the application or incorporation of the plate to the Vessels, the Vessels were physically injured and rendered unsuitable for marine-grade use;

(d)    cost and effort then became necessary to remove the defective/non-compliant Plate from the Vessels and install compliant plate or, in some instances, the Vessels or parts thereof were discarded completely and built anew; and

(e)    the resulting settlement amounts were amounts that Capral was legally liable to pay in respect of a claim for Property Damage within the meaning of the Policy.

78    Accordingly, Capral’s position is that the Customers suffered Property Damage immediately upon the incorporation of the Plate into the Vessels. Capral submits that the “Occurrence” which resulted in this Property Damage was its supply of non-compliant plate. Clause 4.16 defines Occurrence to include an event which results in Property Damage where such Property Damage is neither expected nor intended from the standpoint of the Insured.

79    CGU says that Capral is attempting to persuade the Court to read a policy responding to “any claim for Property Damage” as one responding to claims that goods sold are not fit for purpose: claims, in substance, that those goods were inferior to that promised. CGU submits that while the remediation of non-compliant plate may have caused damage to the Customers’ property, that went only to the quantification of the Customers’ claims and, more particularly, formed no part of the basis for those claims. In any event, property damage due to remediation would not be damage as a result of an Occurrence, because it would be expected and intended from the standpoint of the insured.

80    CGU compares the Customers to the purchaser of a computer that operates at a slower speed than represented because the wrong computer chip was inserted. The computer may need upgrading sooner than was expected and thus have a shorter lifespan, and may be less valuable than promised. However, even if holes were drilled inside the computer and the chip was screwed into place (rather than being merely slotted into place) such that there was a physical injury to the computer’s interior, the claim would not be for that physical injury. The drilling and insertion of screws had to occur whether the chip was defective or not: T81.10–30. Similarly, CGU says, the fixing of the Plate to the Vessels does not mean that they have been damaged or that any claim would be “for” property damage.

Authorities on the meaning of “for”

81    The requirement that a claim be “for” property damage raises a question of characterisation: see Allianz Australia Finance Ltd v Wentworthville Real Estate Pty Ltd [2004] NSWCA 100; (2004) 13 ANZ Ins Cas 61-598 at [38]–[40] (Mason P) (with whom Sheller JA and Pearlman AJA agreed). It is the facts that determine whether a policy responds to a claim, not how the claim is formally put: Kaboko Mining Limited v Van Heerden (No 3) [2018] FCA 2055 at [49]–[50] (McKerracher J), quoting Quintano v B W Rose Pty Limited [2008] NSWSC 793; (2009) 15 ANZ Ins Cas 61-805 at [9] (Brereton J).

82    The word “for” is protean and capable of a number of meanings. As stated in the Macquarie Dictionary, one meaning is “in consideration of”, suggesting an immediate relationship between its preceding and succeeding words. Another meaning is “with regard or respect to”, which extends to an indirect relationship between its preceding and succeeding words: Zurich Australian Insurance Ltd v Regal Pearl Pty Ltd [2006] NSWCA 328; (2007) 14 ANZ Ins Cas 61-715 at [63] (Spigelman CJ) (with whom Beazley and Hodgson JJA agreed).

83    In Regal Pearl, the insured sold prawns to a restaurant. After consuming the insured’s prawns, a number of the restaurant’s customers became ill. The insuring clause covered “all amounts that an Insured Person becomes legally liable to pay in compensation for … Personal Injury or Property Damage”.

84    The insurer argued that the expression “liability to pay in compensation for … Personal Injury” did not respond to the liability between the insured and the restaurant, which was a liability in contract rather than negligence. That argument, which echoes aspects of CGU’s submissions in the present case, was rejected by the New South Wales Court of Appeal. The Court held that “for” should, in the context of the relevant policy, be given a broad meaning and understood as “in respect of”, with a breadth sufficient to encompass the restaurant’s claims against the insured for breach of contract. That conclusion was said to depend upon the contractual context. Chief Justice Spigelman placed some emphasis on the presence of an exclusion identical to cl 6.11 of the Policy, stating at [81] that:

It appears clear that, absent such an exclusion in the case of property damage resulting in physical damage or destruction, the policy would respond in such a case when the implied contractual warranties had been breached. There is no reason why the same conclusion should not apply in the case of personal injury.

85    The Full Court of this Court deployed similar reasoning in Siegwerk Australia Pty Ltd v Nuplex Industries (Australia) Pty Ltd [2013] FCAFC 130; (2013) 305 ALR 412. Nuplex, the insured, had supplied resin that was used to seal cans of tuna. The resin was defective, and some of the cans corroded. Millions of cans had to be recalled. The policy provided coverage “in respect of Personal Injury or Property Damage”.

86    One of the insurer’s arguments was that, even assuming the corrosion of cans was property damage, the liability of Nuplex was not “in respect of” that property damage but was really in respect of economic loss. The Full Court rejected that argument. Justice Robertson (with whom Perram and Dodds-Streeton JJ agreed) explained at [161] that:

It seems to me that one flaw in QBE’s submission on the insuring clause is to reason by reference to an unstated exclusion for economic loss. Additionally, in my view a flaw in the submission is to ignore or downplay the significance of the money payments having as their basis the physical damage to tangible property. The relevant question is whether the liability is in respect of Property Damage or whether the claim sought damages on account of Property Damage. In my opinion, the answer is that the liability is in respect of such damage and the claim was on account of such damage.

87    CGU accepts that any distinction between “for” and “in respect of” is not at the heart of the present case: T78.4–5.

Authorities on the meaning of “property damage” generally

88    In Ranicar v Frigmobile Pty Ltd; Ranicar v Royal Insurance Pty Ltd [1983] Tas R 113; (1983) 2 ANZ Ins Cas 60-525, a consignment of frozen scallops sold by the plaintiffs to a foreign buyer was rejected for export because the temperature of the scallops had risen above the limit allowed by the Exports (Fish) Regulations. As a result, the scallops could only be sold within the Commonwealth for less than the contract price. The plaintiff’s insurance contract provided coverage for “all risks of loss or damage to the subject-matter insured”, but did not extend to cover “loss, damage or expense proximately caused by delay or inherent vice or nature of the subject-matter insured”.

89    After reviewing the Oxford English Dictionary and a line of authority dating back to 1821, Green CJ interpreted “damage to” property at 116 as follows:

In my view, the ordinary meaning, and therefore the meaning which I should prima facie give to the phrase “damage to” when used in relation to goods, is a physical alteration or change, not necessarily permanent or irreparable, which impairs the value or usefulness of the thing said to have been damaged. It follows that not every physical change to goods would amount to damage. What amounts to damage will depend upon the nature of the goods.

90    On the facts, his Honour held that the change in temperature amounted to damage to the scallops. The alteration in temperature involved a physical change and had the effect of removing one of the scallops’ primary qualities — their exportability. The usefulness of the scallops was impaired and their value was reduced.

91    This understanding of property damage has been applied or cited with approval by intermediate appellate courts: Switzerland Insurance Australia Ltd v Dundean Distributors Pty Ltd (1998) 10 ANZ Ins Cas 61-388; [1998] 4 VR 692 at 703 (Ormiston JA) (with whom Callaway JA agreed); AXA Global Risks (UK) Ltd v Haskins Contractors Pty Ltd [2004] NSWCA 138 at [41] (Mason P) (with whom Bryson JA and Windeyer J agreed); Prime Infrastructure (DBCT) Management Pty Limited v Vero Insurance Ltd [2005] QCA 369; (2005) 13 ANZ Ins Cas 61-661 at [31] (McMurdo P) (with whom Mullins J agreed).

92    CGU submits that while the approach in Ranicar works when one is dealing with damage to fully formed property, it does not work when one is dealing with the construction of a structure: T89.47–90.12. As a matter of authority, CGU’s submission is contrary to the reasoning of the Queensland Court of Appeal in Prime Infrastructure. In that case, a fault developed in weld as a result of faulty workmanship during the original construction of a reclaimer. Notwithstanding the construction context, McMurdo P at [31] quoted and applied the explication of property damage in Ranicar.

93    The Ranicar approach is also consistent with the general principles that govern the assessment of loss under a policy of insurance against property damage. Those principles were recently summarised as follows by Leggatt LJ in Endurance Corporate Capital Limited v Sartex Quilts & Textiles Limited [2020] EWCA Civ 308 at [35]–[38], cited with approval in Sphere Healthcare Pty Ltd v Allianz Australia Insurance Ltd [2023] NSWSC 1462 at [12]–[13] (Stevenson J):

(a)    Where an insurer agrees to “indemnify” the insured against loss or damage, the nature of the insurer’s promise is that the insured will not suffer the specified loss or damage. The occurrence of such loss or damage is therefore a breach of contract which gives rise to a claim for damages: see, in Australia, Globe Church Inc v Allianz Australia Insurance Ltd [2019] NSWCA 27; (2019) 99 NSWLR 470 at [209]–[210] (Bathurst CJ, Beazley P and Ward JA). The general object of an award of damages for breach of contract is to put the claimant in the same position so far as money can do it as if the breach had not occurred.

(b)    Where the breach of contract arises from loss or destruction of or damage to property, there are two distinct ways of seeking to give effect to this principle. One is to award the cost of replacing or repairing the property. The other is to award the market value of the property in its condition immediately before the damage occurred, less any residual value.

(c)    Which measure is appropriate depends on the use to which the claimant was intending to put the property. Where the insured was intending to continue to use the damaged property, the measure of loss will be the cost of reinstatement. Where at the time of the damage the insured was intending to sell the property, the measure of loss is the amount by which the market value of the property was reduced.

94    These general principles are consistent with the understanding of property damage set out in Ranicar. As extracted above, Green CJ defined property damage as “a physical alteration or change” that “impairs the value or usefulness of the thing said to have been damaged”. Full compensation for an impairment to the “value” or “usefulness” of a thing said to have been damaged is provided by the general principles summarised in Sartex Quilts.

Authorities on the meaning of “for property damage” where a defective product is incorporated into larger tangible property

95    I turn now to authorities that have applied the concept of property damage to facts similar to the circumstances of the present case. Whereas the authorities in Australia and Canada support Capral’s position, there are cases in the United States and the United Kingdom that support CGU.

Australia

96    Capral submits that question 1(a) is squarely covered by the decision of the Court of Appeal of the Supreme Court of Queensland in Austral Plywoods Pty Ltd v FAI General Insurance Company Limited [1992] QCA 4; (1992) 7 ANZ Ins Cas 61-110. In that case, the insured had supplied plywood to a boat builder. The builder affixed the plywood to the hull of a boat by fixing it with screws and glue, but the plywood turned out to be defective. In order to restore the hull to its original condition, the plywood had to be removed, the glue chiselled or scraped off, and the screw holes filled. The insured supplied replacement plywood at no cost. The policy provided indemnity “for all amounts which the Insured becomes legally liable to pay as compensation for … property damage”. The term “property damage” was relevantly defined as “physical injury to … tangible property”. The similarities to the present case are obvious, although I note that the definition of Property Damage in Capral’s policy also expressly includes resulting loss of use.

97    The Court of Appeal held that the insured had suffered property damage. As the Court explained at 77,524 (emphasis added):

The tangible property to which the appellant had to prove physical injury was the hull of the boat in the condition in which it was immediately prior to the affixation of the defective plywood. The question is whether the affixation of that plywood caused physical injury to the hull. If that question is answered in the affirmative it is then necessary to identify that physical injury for it is only that physical injury which is compensable. The measure of that compensation would ordinarily be, and we think here is, the cost of remedying that physical injury.

In one sense any affixation of plywood to a hull by means of screws and glue causes physical injury to the hull. It causes holes to be drilled in the hull for the screws and the glue may also damage the surface of the hull. In order to restore the hull to its original condition, the plywood would have to be removed, the glue chiselled or scraped off and the screw holes filled … But, of course, if the plywood is not defective there is no physical injury which would give rise to a legal liability in the supplier to pay compensation for it.

Upon the permanent affixation of the defective plywood to the hull, the hull was not only physically injured by the screw holes and glue but was rendered unsuitable, or less suitable, for the purpose for which it was constructed. Compare Carwald Concrete and Gravel Co. Ltd. v General Security Insurance Co. of Canada 24 D.L.R. (4th) 58 at 63; Canadian Equipment Sales and Service Co. Ltd. v Continental Insurance Co. 59 D.L.R.(3d) 333 at 336.

To remedy that injury the plywood had to be removed and the hull restored to a state in which new plywood could be affixed.

98    Austral Plywoods has been cited by this Court with apparent approval, or at least without apparent disapproval: R & B Directional Drilling Pty Ltd (in liq) v CGU Insurance Ltd (No 2) [2019] FCA 458; (2019) 369 ALR 137 at [90]–[91] (Allsop CJ); The Owners — Strata Plan No 91086 v Fairview Architectural Pty Ltd (No 3) [2023] FCA 814 at [121]–[123] (Wigney J). In R & B Directional Drilling at [91], Allsop CJ concluded that the proper reading of Austral Plywoods was that “the physical injury to the hull was the fixing of the defective plywood by physical means of screws and glue making the hull unsuitable or less suitable for its purposes and requiring the restoration of the physical state of the hull upon removal of the plywood”. After undertaking an extensive review of authorities in Canada, the United States, New Zealand, the United Kingdom and Australia, the Chief Justice said at [101] that:

the distinctions that are capable of being drawn in each case do not easily translate into a simple coherent definition or universally applicable rules capable of being applied to varied factual circumstances to reach deduced logical results. To say that there must be physical interference with property is to require facts or circumstances that can be so characterised … [I]n Austral Plywoods, the affixing of the defective plywood physically affected the hull, not just because of screw holes, but also because with such physical change it was unsuitable to use as a hull.

99    In R & B Directional Drilling itself, the insured was contracted to construct and install a tunnel for the purpose of carrying cables. The insured was near the completion of its works and pumping concrete into the tunnel void. Concrete entered a hole in one of the conduit pipes, rendering it unable to carry a cable. A claim was brought against the insured for the cost of removing grout and conduit pipes from the steel sleeve so that the work could be repeated.

100    The insurance contract was relevantly identical to the Policy at issue in these proceedings. The insured argued that the tunnel was the relevant tangible property, not the sleeve alone or the conduit pipes. Thus, the dispute between the parties turned upon whether the insured’s actions had caused physical injury to the tunnel.

101    Chief Justice Allsop concluded that there had been no physical injury, explaining at [135]–[136] that:

the tunnel is not injured; it is and remains sound once the defective work is removed. The tunnel has not been damaged because it can be used again. The cost and consequences of getting to that point again are not meaningfully characterised as the consequences of physical injury to the tunnel, but as the cost and consequences of defective work: the removal of defective work from inside the undamaged sleeve, from inside an otherwise uninjured tunnel. On this view, it can be said that there has been a (temporary) loss of use of tangible property (the tunnel) but that loss of use has not been caused by physical injury to the tunnel, but by the placement of defective work in the tunnel. On this view, there has been no physical injury to the tunnel. It has been filled with concrete and conduit pipes (as it was intended to be), but one of the pipes was defective (as it was not intended to be). The defective work can be, and was, removed, leaving the tunnel in the same physical state that it was in before the placement of the defective work. The position may well have been different had the concrete not been able to be removed, or not been able to be removed without damaging the integrity of the sleeve.

… I would characterise what occurred … as the placement of materials within the tunnel that were defective, requiring their removal from the tunnel. The tunnel itself was not physically injured; its temporary loss of use was not caused by physical injury, but by defective works.

102    The other decision of this Court to cite Austral Plywoods is Fairview Architectural. In that case, the insured had manufactured and supplied Vitrabond panels for incorporation into the façades of buildings. The panels were defective, and this created a fire risk. The owners of the buildings brought a claim for loss or damage arising from the supply of the Vitrabond panels, including the costs of removing the panels and remediating the buildings. The applicable insurance policy provided indemnity for liability to pay compensation in respect of “property damage”, relevantly defined as “physical loss, destruction of or damage to tangible property, including the loss of use thereof at any time resulting therefrom”.

103    Relying upon Austral Plywoods and R & B Directional Drilling, Wigney J concluded at [150] that “the affixation of the defective Vitrabond panels to Owners’ buildings caused ‘physical damage … to tangible property’, that property being the buildings”. That conclusion was said to follow because:

(a)    the means by which the panels were affixed to the buildings caused physical damage to the buildings themselves in the form of nail or screw holes;

(b)    the affixation of the panels to the buildings made the buildings less suitable, in a substantial and material way, for their intended purpose of residential housing;

(c)    the panels had to be removed; and

(d)    the removal of the panels would result in further damage to part of the buildings.

104    I note that the issue before Wigney J was merely whether the insurer’s liability was arguable, the judgment being ultimately concerned with whether leave to proceed against the insurer should be granted: see [178].

Canada

105    Austral Plywoods cited two Canadian decisions: Carwald Concrete and Gravel Co Ltd v General Security Insurance Company of Canada (1985) 24 DLR (4th) 58 and Canadian Equipment Sales & Service Co Ltd v Continental Insurance Co (1975) 59 DLR (3d) 333.

106    In Carwald, the insured was contracted to supply and pour a concrete pad as part of the construction of a gas processing plant. Electrical ducting, grounding wire and plumbing was also to be embedded in the concrete, as well as anchor bolts for positioning equipment on the pad. Subsequent testing revealed that the concrete that was poured did not possess the required strength, meaning that it had to be removed. The insured’s policy provided coverage for “all sums which the Insured shall become legally obligated to pay as compensatory damages because of … property damage”, relevantly defined as “physical injury to or destruction of tangible property”.

107    The Alberta Court of Appeal held that the insured’s liability arising from the need to remove and repour the concrete pad was based on damage to property. This was because, as the court emphasised at [20], the “pouring of defective concrete made the rebars, reinforcing steel, ducting, wiring, plumbing and anchor bolts useless for the purpose for which they were installed as the pad could not be used”.

108    In Canadian Equipment, the Ontario Court of Appeal was concerned with a liability policy under which the insurer agreed to pay all sums which the insured became legally liable to pay “because of injury to or destruction of property, including loss of use”. A subcontractor of the insured allowed material to fall into a pipe. Money was expended to clear the pipe lest it become blocked and cause damage. The Court of Appeal overturned the trial judge, who had distinguished between expenses to protect the pipe and damage to the pipe. The Court said at 336 that the dropping of the coupon into the pipe was an injury to the pipeline.

109    Capral’s reliance upon Canadian Equipment was misplaced. The policy in that case provided coverage for mere “injury” (cf “physical injury”), and the result is otherwise contrary to R & B Directional Drilling.

United States of America

110    I turn now to the position in the United States. It suffices for present purposes to discuss appellate decisions in the influential commercial centre of Illinois, where the highest federal and state courts have reached conflicting conclusions on substantially the same facts. In doing so, I have borne in mind that there is not one common law of the United States of America: Erie Railroad Co v Tompkins 30 US 64 (1938), reversing Swift v Tyson 41 US 1 (1842).

111    The divergence in Illinois arises out of two decisions: Eljer Manufacturing Inc v Liberty Mutual Insurance Co 972 F 2d 805 (1992) (United States Court of Appeals, Seventh Circuit) and Traveler’s Insurance Co v Eljer Manufacturing Inc 197 Ill 2d 278; 757 NE 2d 481 (2001) (Supreme Court of Illinois). Both cases concerned suits brought against the United States Brass Corporation in respect of plumbing systems. Contractors installed the systems in construction sites, usually behind walls or between floors and ceilings. Defects in the systems caused them to leak. 95% had not failed, but were viewed as defective from their alleged tendency to fail. The insurance claims included liability for removing systems from their locations in constructed buildings and for diminution of value of the buildings from the presence of allegedly defective plumbing, even if not yet leaking. Many of the policies provided coverage for “damages because of property damage”, with “property damage” defined as “physical injury to tangible property”. The contracts were governed by the law of Illinois.

112    In Eljer Manufacturing Inc v Liberty Mutual Insurance Co, a majority of the Seventh Circuit Court of Appeals found in favour of the insureds. The owners of the construction sites had suffered property damage from the moment that the defective plumbing systems were installed, even before the systems had failed.

113    Circuit Judge Posner began by considering the interaction between the ordinary meaning of “physical injury” and the objectives of insurance contracts. The judge explained at 808–10 that:

The central issue in this case – when if ever the incorporation of one product into another can be said to cause physical injury – pivots on a conflict between the connotations of the term “physical injury” and the objective of insurance. The central meaning of the term as it is used in everyday English – the image it will conjure up in the mind of a person unschooled in the subtleties of insurance law – is of a harmful change in appearance, shape, composition, or some other physical dimension of the ‘injured’ person or thing. If water leaks from a pipe and discolours a carpet or rots a beam, that is physical injury, perhaps beginning with the very earliest sign of rot – the initial contamination (an important question in asbestos cases as we shall see). The ticking time bomb, in contrast, does not injure the structure in which it is placed, in the sense of altering the structure in a harmful, or for that matter in any way – until it explodes. But these nice, physicalist, ‘realistic’ (in the philosophical sense) distinctions have little to do with the objectives of parties to insurance contracts. The purpose of insurance is to spread risks and by spreading cancel them. …

Nor are literal interpretations, which assume that words or phrases are always used in their ordinary-language sense, regardless of context, the only plausible interpretation of contractual language, especially when the contract is between sophisticated business entities. We should at least ask what function “physical injury” might have been intended to perform in a comprehensive general liability policy beyond just drawing a commonsensical, lay person’s, ordinary-language distinction between physical injury and physical non-injury.

Apparently the term was intended to distinguish between physical and non-physical injuries rather than to distinguish between injuries and non-injuries.

114    The last proposition in this passage was substantiated with reference to the drafting history of the CGL policy. The judge then said at 810 that:

We can now see more clearly that two senses of “physical injury” are competing for our support. One, which the insurers want us to adopt, is an injury that causes a harmful physical alteration in the thing injured. The other, which is what the draftsmen of the Comprehensive General Liability policy apparently intended and what rational parties to such a policy would intend in order to make the policy’s coverage real and not illusory, is a loss that results from physical contact, physical linkage, as when a potentially dangerous product is incorporated into another and, because it is incorporated and not merely contained (as a piece of furniture is contained in a house but can be removed without damage to the house), must be removed, at some cost, in order to prevent the danger from materializing. There is an analogy to fixtures in the law of real and personal property – improvements to property that cannot be removed without damaging it. In effect we are being asked to choose between “physical injury” and “physical injury”.

115    Judge Posner preferred the latter sense, justifying the distinction at 810–11 as follows (omitting citations):

Human beings give structure to their experience – cut the world of perception up into usable slices – through language, in accordance with the needs and interests of the moment. For many purposes the distinction between touching and altering is important; if two automobiles collide, it makes a big difference whether they merely touch each other or dent each other. For other purposes, other distinctions are more important, such as that between harms from touching, whether or not some harmful physical change ensues, and harms from other interferences with valued interests.

Within the class of unintentional torts, too, the distinction between touching and not touching is often made. Under traditional tort law, if you hit a bridge and put it out of commission, you are liable to the owner of the bridge but not to merchants who lose business because customers cannot reach them with the bridge down. You have not touched the merchants or their property. The doctrine of “economic loss,” illustrated by the Rickards case, makes touching a prerequisite to tort liability for damage to property and thus rules out loss-of-use claims by persons with whose property the tortfeasor had made no physical contact.

116    The majority’s conclusion was provided at 814:

[T]he drafting history of the property-damage clause, and the probable understanding of the parties to liability insurance contracts, persuade us that the incorporation of a defective product into another product inflicts physical injury in the relevant sense on the latter at the moment of incorporation — here, the moment when the defective Qest systems were installed in homes.

117    That conclusion should be read in light of what was said earlier at 812, where Judge Posner clarified that:

We do not think that every time a component part fails, the resulting injury can be backdated to the date of installation or incorporation. The expected failure rate must be sufficiently high to mark the product as defective – sufficiently high, as is alleged to be the case regarding the Qest plumbing system, to induce a rational owner to replace it before it fails, so likely is it to fail. That condition was satisfied.

118    Circuit Judge Cudahy dissented. He explained at 814 that:

There is immediately something counter-intuitive about saying that physical injury has been done to a house in which a functioning plumbing system has been installed. Of course, when we determine later (years later) that a good number of the systems will fail – five percent in this case – then perhaps there is a sense in which the “injury” was present from the moment of installation: this is the majority’s “ticking time bomb” metaphor. But is there physical injury? The majority believes that interpreting the phrase is all a matter of emphasis – “physical injury” versus “physical injury.” In my view, the phrase must be interpreted as “physical injury” with both words given effect. The majority’s account cannot give both words meaning at the same time. Something physical occurs when the plumbing is installed – but it is not injury; and we might say that there is injury (of a sort) when the plumbing is installed – but it is not physical.

119    Judge Cudahy’s dissenting position was preferred by the Supreme Court of Illinois in Traveler’s Insurance Co v Eljer Manufacturing Inc (2001). On substantially the same facts as those considered by the Seventh Circuit, the Supreme Court concluded at 502 that:

under its plain and ordinary meaning, the term “physical injury” unambiguously connotes damage to tangible property causing an alteration in appearance, shape, color or in other material dimension. We reject the policyholders’ assertion that, under the post-1981 excess CGL policies, the very installation of a functional Qest system into a structure constitutes “property damage.” Insurance coverage is not triggered where the Qest system does not cause any physical injury to tangible property during the policy period and performs as intended. The plain language of the policies unambiguously states that the insurable event which gives rise to the insurers’ obligation to provide coverage is the physical damage to tangible property. The term “physical” limits the word “injury” in the policies’ definition of “property damage.”

We also conclude that under its plain and ordinary meaning, the phrase “physical injury” does not include intangible damage to property, such as economic loss. We agree … that the diminution in value of a whole, resulting from the failure of a component to perform as promised, does not constitute a physical injury.

120    The Supreme Court of Illinois went on to endorse the thrust of CGU’s argument in the present case, pointing out at 503 that:

if we were to interpret the post-1981 excess CGL policies as urged by the policyholders, “the policy would not only provide insurance against tort liability, but would function as a performance bond as well.” As explained more fully in Qualls:

“[C]omprehensive general liability policies … are intended to protect the insured from liability for injury or damage to the persons or property of others; they are not intended to pay the costs associated with repairing or replacing the insured’s defective work and products, which are purely economic loss. Finding coverage for the cost of replacing or repairing defective work would transform the policy into something akin to a performance bond.”

121    Somewhat ironically in light of the federal-state divide just identified, the only American authority which CGU specifically drew to my attention in the context of question 1(a) was a decision of the Seventh Circuit Court of Appeals: Hamilton Die Cast Inc v United States Fidelity and Guaranty Co 508 F 2 d 417 (1975). That case concerned an insured who had supplied tennis rackets with defective frames. The incorporation of a defective part (the frame) was said to be property damage (relevantly defined as “injury to … tangible property”). The Seventh Circuit Court of Appeals rejected the claim, stating at 419 that (emphasis added):

We do not think that the mere inclusion of a defective component, where no physical harm to the other parts results therefrom, constitutes “property damage” within the meaning of the policy.

122    Hamilton Die Cast was discussed in Carwald at 65, but ultimately distinguished. On the facts of Carwald, the pouring of the defective concrete did damage other property. As explained above, the pouring of the concrete physically injured the rebars, reinforcing steel and other equipment.

United Kingdom

123    The two decisions of this Court that discussed Austral Plywoods also considered Pilkington United Kingdom Limited v CGU Insurance Plc [2004] EWCA Civ 23. Pilkington manufactured heat-soaked toughened glass panels that were installed in the roof and vertical panelling of the Eurostar Terminal at Waterloo. A small number of the panels (at most 13 out of 3000) proved defective in that they fractured in situ. It was not alleged that there was damage to the fabric of the terminal other than the fractures in the panels themselves, but Eurostar was concerned that passengers might be injured. Rather than remove and replace the panels, Eurostar installed safety features designed to prevent any fractured glass from falling into areas of the terminal frequented by the public or staff. Pilkington contributed to a settlement of Eurostar’s claims and sought indemnity from its insurer.

124    Pilkington’s insurance contract covered “physical damage to physical property not belonging to the Insured … caused by any commodity article or thing supplied installed erected repaired altered or treated by the Insured”. Particular Clause 16 provided that the policy “shall not apply to liability in respect of recalling removing repairing replacing reinstating or the cost of or reduction in value of any commodity article or thing supplied installed or erected by the Insured if such liability arises from any defect therein or the harmful nature or unsuitability thereof”.

125    Because it could not be shown that physical damage or deterioration had occurred within any part of the terminal other than a small number of the individual panels themselves, Pilkington accepted that it could only succeed on the appeal if it could demonstrate that the incorporation of a potentially dangerous and defective product into the physical structure of a building owned by another in itself constitutes a “loss of or physical damage to physical property not belonging to the insured”.

126    The Court of Appeal unanimously rejected the insured’s argument. As Potter LJ explained at [50]–[53]:

The relevant words expressly require physical damage and further that it must be to the physical property of another. At the same time, the policy makes clear by Particular Clause 16 that damages sustained, insofar as it relates to a defect in or the harmful nature of the product itself, is excluded i.e. the policy only answers in respect of the physical damage shown to have been suffered by property in relation to which it has been introduced or juxtaposed.

As already observed, generally speaking, damage requires some altered state, the relevant alteration being harmful in the commercial context. This 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, it will not extend to a position where the commodity supplied is installed in or juxtaposed with the property of the third party in circumstances where it does no physical harm and the harmful effect of any later defect or deterioration is contained within it.

…

In the context of insurance law it makes commercial sense of an agreement which is designed to protect the insured against liability for physical damage to physical property and not to afford an indemnity by way of guarantee for the quality and fitness of the commodity supplied.

127    Lord Justice Potter also discussed the reasoning in Eljer Manufacturing Inc v Liberty Mutual Insurance Co (1992) (Seventh Circuit), concluding at [40] that the dissenting judgment of Judge Cudahy “better reflects the approach of an English court”.

128    In Fairview Architectural, Wigney J distinguished Pilkington at [166] on the basis that “the defective glass panels were not removed and the safety measures that were taken so as to avoid the risk of shattering glass caused no damage to the terminal building”. That line of analysis derives some support from [52] of Pilkington, where Potter LJ clarified that:

It has to be accepted that difficulties of application of such a test may arise in cases where a product or commodity supplied is installed by attachment to other objects in a situation in which it remains separately identifiable but, by reason of physical changes or deterioration within it, it requires to be renewed and replaced. In such a case, resort is necessary to the usual canons of construction in order to resolve the difficulty. In this policy, as it seems to me, Particular Clause 16 makes clear that such cover is not intended.

129    It is thus unclear whether the reasoning in Pilkington would cover the present case, where the Plate had to be removed and there is no equivalent to Particular Clause 16.

Consideration

130    Were the Customer Claims for property damage? At first blush, CGU’s position has intuitive appeal. The Customers only suffered loss because the Plate was defective, and the Policy is not a guarantee of the quality and fitness of the Plate. Unfortunately for CGU, that intuitive appeal rapidly deteriorates once the issue is properly approached as a question of construction.

Construction

131    Capral was entitled to be indemnified in respect of any claim for “Property Damage”, relevantly defined as “physical injury or damage to or physical loss of or destruction of tangible property including loss of use at any time resulting therefrom”.

132    The critical phrase is “physical injury to tangible property”. In my view, what this requires is a physical alteration of tangible property that impairs its usefulness or value. One must therefore ask two questions: (1) has there been a physical alteration of the tangible property; and (2) has that physical alteration impaired the usefulness or value of the tangible property. Both questions involve comparing the state of the tangible property immediately before the alleged incident of damage with its state immediately thereafter.

133    This construction accords with the natural meaning of property damage. Compare two hypotheticals. In the first, a clumsy driver leaves a dent in my car. In the second, vandals cover my car with spray paint. Both are obvious instances of property damage. But why is that so? In my view, the answer is that both involve a physical alteration that impairs usefulness or value. The dent and graffiti have physically altered the car, and any willing but not anxious buyer would pay less as a result of those physical alterations. This analysis reflects the approach in Ranicar, which is in turn supported by an unbroken phalanx of intermediate appellate authority.

134    If Property Damage is identified, the question then becomes whether the relevant claim is “for” such damage. Consistent with the reasoning in Segal Pearl and Siegwerk, in my view “for” should here be construed as “in respect of” or “on account of”. It suffices that a payment has Property Damage as its basis.

135    How does the above construction apply where a defective product is incorporated into larger tangible property? The first step is to ask whether there was a physical alteration of tangible property. This is a question of fact. In Austral Plywoods, the requirement of physical alteration was satisfied by the affixation of plywood to the hull by means of screw and glue. In R & B Directional Drilling, by contrast, there was no physical alteration because concrete had merely been placed into the tunnel.

136    If a physical alteration is identified, the second step is to ask whether that alteration caused an impairment in the usefulness or value of the tangible property. This involves comparing the usefulness and value of the tangible property immediately before and after the defective product is incorporated. Like the first step, the answer to this second question will depend upon the particular circumstances.

137    In order to resolve the present dispute, it suffices to say that that a claim will be “for Property Damage” in a case like Austral Plywoods, where:

(1)    the incorporation of a defective product into larger tangible property physically alters that property;

(2)    the nature of the defect is such that the incorporated product must be removed from the property;

(3)    the nature of the physical alteration is that removing the product will come at a substantial cost;

(4)    as a result, the usefulness or value of the property immediately after the incorporation of the defective product is less than its value immediately beforehand; and

(5)    the customer claims for that difference in usefulness or value.

138    Even in a case like this, CGU argues that the customer’s claim is “for” the relevant non-conformity, rather than for property damage. I reject that submission, which draws an untenable a priori distinction between non-conformity and property damage. If I purchase a non-conforming oven that burns down my house, only a legally-trained pedant would say that my claim is not for property damage. As in Siegwerk, CGU’s submission reasons by reference to an unstated exclusion and ignores or downplays the significance of money payments having physical damage to tangible property as their basis. This reasoning is fortified in the present case by the presence of cl 6.11, which excludes liability for loss of use of tangible property which has not been physically injured where such loss results from “the failure of the Products to meet the level of performance, quality, fitness or durability expressly or impliedly warranted or represented by the Insured”. The natural inference is that, absent such exclusion, the Policy responds to Property Damage even in a case involving breach of contractual warranties: see Regal Pearl at [81]. The question then becomes whether the exclusion in cl 6.11 applies, which is a matter that I will address in question 3.

139    CGU argues that Austral Plywoods was wrongly decided because there was no meaningful distinction between affixing the plywood by drilling holes and merely slotting the plywood into place. The fundamental problem with that submission is that it overlooks the two essential elements of Property Damage. First, if the plywood had merely been slotted into place, the rest of the hull would have undergone no physical alteration. Second, in the absence of such an alteration, there would have been nothing to relevantly render the hull less useful or valuable. The reasoning in Austral Plywoods is, with respect, perfectly sound.

140    Much of CGU’s computer chip hypothetical falls on the same sword. However, I should also observe that CGU’s characterisation of the hypothetical, as carefully constructed as it was, lacked the necessary degree of nuance. To illustrate, consider two scenarios. In the first, I am a retailer who sells two different computers: one for office use and one for use in e-sports. The only difference between the two is that the office computer requires a standard chip, while the e-sports computer requires a more expensive gaming chip. I purchase a gaming chip from a manufacturer, and physically alter the computer by inserting the chip. I later find out that I purchased a mere standard chip. I can only sell the computer at the office price, which is naturally less than the e-sports price. Have I suffered property damage? The answer is no. The usefulness and value of my computer may be lower than promised, but they are still better than without any chip at all. So far so good for CGU.

141    Now consider a variation which is closer to the present case with its particular product standards for marine-grade applications. Suppose that I am a retailer who only sells e-sports computers. In fact, I am contractually bound to supply only e-sports computers to a particular customer. These computers are personally designed, and it is very expensive to remove the chip. As in the earlier scenario, I purchase a gaming chip from a manufacturer. I again physically alter the computer by installing the chip, and again I find out after installation that it was only a standard chip. I now have to incur substantial costs to remove the chip, damaging other parts of the computer in the process. The computer was more useful and more valuable to me before I installed the chip, and I have now suffered property damage. The non-conformity is identical, but the physical injury is not.

142    I reject the argument, advanced by CGU and supported by aspects of the reasoning of the Supreme Court of Illinois in Eljer and the Court of Appeal in Pilkington, that Austral Plywoods turns an indemnity for property damage into a guarantee of contractual performance. This is for two reasons. First, the supply of a defective product is not property damage in and of itself. It is only once the defective product is physically incorporated into larger tangible property that the possibility of property damage arises.

143    I note that there is good commercial sense in this distinction. Before a defective product is incorporated into other tangible property, an insured’s liability is relatively stable. The insured can remedy the breach by supplying a replacement. Once a defective product is so incorporated, however, liability depends upon the nature of the property with which the product has come into contact. As Clifford J observed in Weedo v Stone-E-Brick 405 A 2d 788 (1979) (Supreme Court of New Jersey) at 791:

The consequence of not performing well is part of every business venture; the replacement or repair of faulty goods and works is a business expense, to be born by the insured-contractor in order to satisfy customers.

There exists another form of risk in the insured-contractor’s line of work, that is, injury to people and damage to property caused by faulty workmanship. Unlike business risks of the sort described above, where the tradesman commonly absorbs the cost attendant upon the repair of his faulty work, the accidental injury to property or persons substantially caused by his unworkmanlike performance exposes the contractor to almost limitless liabilities. While it may be true that the same neglectful craftsmanship can be the cause of both a business expense of repair and a loss represented by damage to persons and property, the two consequences are vastly different in relation to sharing the cost of such risks as a matter of insurance underwriting.

144    The discussion of CGU’s computer chip hypothetical above also illustrates the point: the non-conformity was identical in both scenarios, and yet the liability of the manufacturer (being the insured) was substantially higher in the variation. It is not unreasonable to expect that an insurer might provide coverage for such liability in return for an appropriate premium, because the requirement of physical injury, and thus physical contact, ensures that its liability does not become indeterminate.

145    Second, compensation for property damage is not equivalent to compensation for a breach of contract. Whereas contractual damages will put the insured in the position that it would have been in if the product was conforming, property damage will merely put the insured in the position it would have been in if the product was never incorporated. That difference was specifically emphasised in Austral Plywoods, where the insured was only covered for the cost of removing the defective plywood and restoring the hull to a state in which new plywood could be affixed. This was a lesser amount than the customer’s contractual claim, which would also have included the cost of re-installing the plywood.

146    In sum, “Property Damage” as defined in the Policy means a physical alteration of tangible property that impairs its usefulness or value. Whether that requirement is satisfied by the incorporation of a defective product into larger tangible property will depend upon the circumstances of the case. For present purposes, it suffices to say that Austral Plywoods was correctly decided.

Application

147    I will deal first with the Customers that used the Plate in the construction of marine vessels (hereinafter the Marine Customers, being each Customer other than Rocklea, which used the Plate in the construction of a water tank).

148    Did the Marine Customers suffer Property Damage? The first step is to ask whether there was a physical alteration of tangible property. The answer is “yes”. Mr Hawkins gave unchallenged evidence that Plate is generally used in construction by a process of welding, and CGU accepted that “putting on this defective plate to the ship hulls involves welding them to the hulls”: T84.37–38.

149    The second step is to ask whether the physical alteration identified caused an impairment in the usefulness or value of the tangible property. The answer is again “yes”. Each of the Marine Customers concluded that their property could not proceed to market without the Plate being removed, and the cost of such removal was substantial. Accordingly, I have inferred on the evidence before me that the relevant property was less useful and less valuable to the Customers immediately after affixing the Plate than immediately beforehand. If the Customers had been offered the opportunity to swap their Vessels that had Plate incorporated with the Vessels they had immediately prior to such incorporation, they would have taken the offer. As in Austral Plywoods, the Vessels were rendered unsuitable, or less suitable, for the purpose for which they were constructed.

150    The upshot is that each of the Marine Customers suffered Property Damage. Consistently with the principles set out in Sartex Quilts and the decision in Austral Plywoods, the measure of such damage was the cost of reinstating the Vessels to their state immediately prior to the incorporation of the Plate, either by repair or replacement.

151    The question then becomes whether the Marine Customers’ claims were “for” the Property Damage just identified. For present purposes, the answer is “yes”. The cost of reinstating the Vessels was substantial, and each deed of settlement referred to the customer having made claims for “property damage”.

152    It is possible that the settlement amounts provided compensation for other heads of loss. The Customers were also entitled to be compensated for the cost of installing the replacement plate after the property damage to the Vessels had been remediated, and Austral Plywoods specifically deducted such cost from the insured’s claim. Further, many of the deeds of settlement do not on their face exclude compensation for heads of loss other than property damage. For example, the deed of settlement with Austal refers to “claims for loss and damage in respect of the supply of the Rolled Plate and property damage to the End Products” (emphasis added). It also appears that CGU may wish to contend that some of the settlement amounts were not reasonable: T4.41–5.3.

153    But as both parties confirmed at the hearing, the question whether or not some parts of the settlement amount may need to be deducted does not arise at this stage of the proceedings: T5.5–6.24, T18.1–18. Accordingly, it suffices for present purposes to say that at least part of the Customer claims were for Property Damage.

154    I turn then to Rocklea’s claim concerning the water tank. I am satisfied, on the balance of probabilities, that there was a physical alteration of Rocklea’s tangible property when the Plate was used in the construction of the water tank. The evidence was somewhat thin in this respect, but the letter attached to the email from Rocklea to Capral dated 12 March 2021 indicates that the Plate was attached to other material. The rest of the analysis then proceeds as for the Marine Customer claims. The relevant deed of settlement cited Rocklea’s claim “for the property damage to the End Product”, End Product being defined as the “water tank”.

Conclusion

155    Subject to the caveat that I am not being asked to decide whether parts of the settlement amounts may need to be deducted, the answer to question 1(a) is “yes”.

Question 3

156    Question 3 asks whether Capral’s claim is excluded by cl 6.11 of the Policy. That clause excludes liability for (italics added):

The loss of use of tangible property which has not been physically injured, damaged or destroyed which results from:

6.11.1    delay in or lack of performance by or on behalf of the Insured of any contract or agreement;

6.11.2    the failure of the Products to meet the level of performance, quality, fitness or durability expressly or impliedly warranted or represented by the Insured.

157    As I have concluded that the Vessels were physically injured, the chapeau to cl 6.11 is not satisfied. CGU did not contend otherwise. The answer to question 3 is “no”.

Question 4

158    Question 4 asks whether Capral’s claim is excluded by cll 6.14.2 and/or 6.14.3 of the Policy.

159    CGU no longer presses for an exclusion under cl 6.14.3, which concerns Property Damage to the Products (here the Plate) rather than Property Damage to other tangible property (here the Vessels). Accordingly, it is only necessary for me to address cl 6.14.2.

160    Clause 6.14.2 of the Policy excludes liability for:

the cost of or damages claimed in relation to the withdrawal, recall, inspection, repair, replacement or loss of use of the Products or any property of which such Products form a part, if such Products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein.

161    CGU submits that cl 6.14.2 applies because the Vessels are property of which the Plate formed a part and the Vessels were withdrawn from the market. CGU says that Capral’s reliance on authorities from the United States of America and Canada is of little to no assistance and, more particularly, cannot change the fact that the exclusion squarely applies. According to CGU, the timing of the withdrawal relative to the Property Damage is irrelevant: T111.28–30.

162    Capral says that cl 6.14.2 is commonly known as the “sistership exclusion”, a term derived from an occurrence in the aircraft industry in which one plane crashed and its “sisterships” were thereafter grounded and recalled by the manufacturer in order to correct the common defect that had caused the crash. Relying on an extensive line of North American authorities, Capral says that the purpose of the exclusion is to exclude the cost of preventative action by withdrawal of a product when a danger is apprehended. It is not, Capral submits, intended to exclude from coverage damages caused by the very product whose failure to perform properly aroused apprehension about the quality of “sister” products. In the alternative, Capral also argues that the Vessels were never withdrawn from the market.

Authorities

163    It is convenient to begin with a discussion of the authorities in North America before returning to those in Australia.

United States

164    Capral’s submissions as summarised above were drawn directly from the judgment of the Fifth Circuit Court of Appeals in Todd Shipyards Corp v Turbine Services Inc 674 F 2d 401 (1982) at 419. The Fifth Circuit cited a number of decisions, one of which was Elco Industries, Inc v Liberty Mutual Insurance Co 90 III App 3d 1106; 414 NE 2d 41 (1980) (Appellate Court of Illinois).

165    In Elco, Kohler had sued the insured for damages sustained as a result of an alleged failure to properly heat treat and case harden governor regulating pins that were installed in Kohler’s engines. The insured sought indemnity for property damage under a policy that included an exclusion clause relevantly identical to cl 6.14.2. The Appellate Court of Illinois held that the exclusion did not apply. As the pins were inserted prior to discovery of the defect, the property damage to Kohler occurred prior to any recall.

Canada

166    In the Carwald case discussed earlier, the insurer also argued that its liability was excluded by a clause substantially similar to cl 6.14.2 of the Policy. The Court of Appeal of Alberta rejected that argument, reasoning as follows. If only the insured’s concrete had suffered damage, the exclusion clause would have eliminated any recovery. However, the failure of the concrete produced physical damage to other tangible property, namely the rebars, structural steel, ducting, wiring, plumbing and anchor bolts. Although the concrete had to be removed and replaced in order to repair the damage, this did not engage the exclusion. As the Court explained at 67, the clause “has no application … where the use of the defective product has caused damage to other property.” That proposition was endorsed by the Ontario High Court of Justice in Foodpro National Inc v General Accident Assurance Co of Canada (1986) 33 DLR (4th) 427 at 433.

Australia

167    Todd Shipyards, Carwald and Foodpro were cited with approval in Michael Ball and David St L Kelly, Halsbury’s Laws of Australia at [235-1905] (as at 1 November 2017) and Desmond Derrington and Ronald Ashton, The Law of Liability Insurance (1st ed, 1990) at 549. After extracting an exclusion clause substantially identical to cl 6.14.2, Derrington and Ashton went on to say that:

The exclusion does not apply to the product that fails and induces liability but only to “sister” products. It is not an exclusion of destruction of property or property damage. So when the insured’s product which proves to be defective is incorporated by another party into his own product, and the result of the defect is that the latter party’s (claimant’s) products must be withdrawn and destroyed, then the insured’s liability to the claimant, including that for the withdrawal of the claimant’s products, is outside the exclusion. It has no application where the use of the defective product has caused damage to other property.

168    In Siegwerk, another issue before the Full Court was the scope of an exclusion clause relevantly identical to cl 6.14.2. It will be recalled that the insured had supplied resin for use in cans of tuna. The resin was defective, and some of the cans corroded. Millions of cans had to be recalled. When considering the application of the insuring clause, the Full Court explained that there was physical damage to the cans that had actually corroded. As to the much greater number of cans which were not themselves physically damaged, such loss was covered by the insuring clause because the relevant definition of property damage included the loss of use of tangible property not physically damaged provided such loss of use was caused by physical damage to other tangible property. There was loss of use of the cans which had not corroded at the time of the recalls because the cans of tuna could not be used in commerce.

169    The Full Court held that the exclusion clause was applicable. Justice Robertson (with whom Perram and Dodds-Streeton JJ agreed) explained at [179]–[180] that:

It seems to me that the correct analysis is to ask: first, what is the property, if any, of which Nuplex’s products formed a part; second, whether such property had been withdrawn from use, or the market, because of any suspected defect or deficiency in them; third, whether there was any loss incurred by Nuplex for loss of use or withdrawal or disposal of the property of which Nuplex’s products form a part; and, fourth, were there claims arising out of or resulting from such loss?

In my opinion, the answers to these questions are as follows. First, there was property of which Nuplex’s products formed a part and that property was the cans of tuna. Second, the cans of tuna were withdrawn from use or from the market because of a suspected defect or deficiency in them. Third, on the present hypothesis, there was loss incurred by Nuplex for the loss of use or withdrawal from use or disposal of the cans of tuna. Fourth, there were claims (by Nuplex) arising out of or resulting from such loss.

170    In my view, what distinguishes Siegwerk from Elco and Carwald is the timing of the property damage. In Elco and Carwald, the relevant property damage occurred prior to any recall. The customers suffered property damage upon the incorporation of the concrete and pins, which naturally preceded their discovery that those products were defective. In Siegwerk, by contrast, the insured only suffered property damage with respect to the cans that had not corroded once those cans were recalled.

Consideration

171    As in Elco and Carwald, and unlike Siegwerk, the claims in the present case concern property damage that occurred prior to any recall. The Customers suffered Property Damage upon the incorporation of the Plate, which naturally preceded the discovery that the Plate was defective. In my view, it follows that cl 6.14.2 does not exclude Capral’s claim. This is for two cumulative reasons.

172    First, CGU’s construction of cl 6.14.2 would render nugatory the Policy’s indemnity for Property Damage. It would be a most strange result if Capral was entitled to be indemnified for the Property Damage suffered upon the incorporation of the Plate in the Vessels, but somehow lost that indemnity when the Customers recalled the Vessels to address that very damage.

173    Second, in that context, the word “if” in cl 6.14.2 should be read as requiring a causal relationship between the damages claimed and the relevant withdrawal from the market. There is no such causal relationship where, as in the present case, the relevant damage occurs prior to the alleged withdrawal.

174    This construction still leaves cl 6.14.2 with considerable work to do. As the authorities confirm, the clause excludes the cost of preventative action by withdrawal of a product when a danger is apprehended. In the present case, however, the risk of Property Damage had already materialised.

Conclusion

175    Accordingly, I answer the separate questions as follows:

(1)(a)    Yes, but noting that the quantification of the amount for which the respondent is liable is reserved for subsequent determination.

(2)    No.

(3)    No.

(4)    No.

176    Capral has been successful on both separate questions that remained in dispute at the hearing (namely questions 1 and 4). As such, Capral is entitled to an order for costs in its favour in relation to the separate questions.

177    It is appropriate to give the parties an opportunity to seek to resolve the remaining issues in the proceedings and, if they are unable to do so, to give consideration to the steps that should be taken for the resolution of those issues. Accordingly, I will conduct a case management hearing in this matter at 9.30 am on 6 September 2024 for the purpose of either disposing of the proceedings or setting a regime for the conduct of the balance of the proceedings.

Associate:

Dated:    17 July 2024