January 13 2011
The High Court has allowed an appeal from the Queensland Court of Appeal's decision in Selected Seeds Pty Ltd v QBEMM Pty Ltd ( QCA 286).(1) The decision gives key and influential guidance on the construction of exclusions and endorsements, providing that they should be construed literally and given their natural and ordinary meaning, but within the context of the loss or damage covered by the policy as a whole.
Selected Seeds sold what it thought to be Jarra grass seeds, but which were in fact substantially or substantially contaminated with Summer grass seeds. In time the seeds grew only Summer grass, which is a crop of lower value than Jarra grass. Eradication measures were required before the land could be used as planned by its owners. Selected Seeds settled with the landowners and then commenced proceedings against its insurer.
The policy insured for "all sums which You become legally liable to pay by way of compensation… in respect of… Property Damage… caused by an Occurrence". However, an efficacy clause excluded cover for:
"any liability arising directly or indirectly from or caused by, contributed to by or arising from… the failure of any product to correctly fulfil its intended use or function and/or meet the level of performance, quality, fitness or durability warranted or represented by the Insured."
The insurer relied on this clause to refuse indemnity to Selected Seeds.
The court of appeal decided that cover was excluded because the liability was connected with the seeds being unsuitable for their intended use.
The High Court gave the efficacy clause a narrower operation by construing it in light of the policy as a whole - in particular, the type of damage covered by the policy.
The efficacy clause on its face excluded cover where liability was connected (in a wide and inclusive rather than narrowly causative way) with the failure of a product "to correctly fulfil its intended use or function". However, the court held that the efficacy clause excluded cover only where the property damage was connected with that failure. This was because the policy as a whole covered liability in respect of property damage. This was the context in which the efficacy clause appeared.
Accordingly, it was irrelevant whether Selected Seeds' liability was connected with the seed failing to fulfil its use or function. The relevant question was whether the damage was so connected.
The court gave the efficacy clause a "literal construction" and its "natural and ordinary meaning" - namely, that cover was excluded only in connection with a failure of a product to fulfil its intended use or function, and nothing more. Its concern was to "exclude warranties and representations made by the insured about what their product might do or achieve" - which is clear from its use of the language of sale of goods and consumer protection legislation.
The damage was connected with "what the seed did; not what it failed to achieve". The seed introduced the weed, Summer grass, resulting in damage. But that damage was not connected with the seed failing to fulfil its intended use or function, which was only to produce Jarra grass and seed.
The High Court has clearly confirmed that exclusion clauses must be read in light of the contract of insurance as a whole. This is consistent with the legal principle that due weight must be given to the context of a clause. If more support were required for this proposition, it could be found in the provision common to many insurance policies that an endorsement is both to attach to and form part of the policy.
One result of this is that many exclusion clauses in general will operate more narrowly. Exclusions in product liability policies are commonly expressed to be for liability connected in some way with a list of specific matters. Despite the word 'liability' being used, those exclusions will operate only when those matters are connected with the loss that gives rise to the insured liability, such as personal injury or property damage.
The court's decision also confirms that clauses excluding liability for failure of a product to fulfil its intended use or function will exclude liability only for that failure, and not liability for other damage that the product may cause.
For further information on this topic please contact Moira Saville or Duncan Campbell at Mallesons Stephen Jaques by telephone (+61 2 9296 2000), fax (+61 2 9296 3999) or email (email@example.com or firstname.lastname@example.org).
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