Indemnity was granted to an insured who provided aluminum plate panels that were used by its customers to build marine craft that were later deemed defective.
The insuring property damage clause was triggered as customers had suffered property damage as a result of applying and removing the aluminum plate. The defective product exclusion did not apply.
In issue
- Whether a property damage insuring clause extended to customers of the insured
- Whether an exclusion clause for defective or deficient products applied when the defect or deficiency was not known when the insuring clause was triggered, and whether a market recall exclusion clause applied.
The background
The applicant, Capral Limited (Capral), manufactures and supplies aluminum products. Capral supplied 10 customers (Customers) with its aluminum plate (Plate). The Customers used the Plate to construct marine vessels. The Plate was subsequently discovered to be defective, and the Customers made claims relating to the defective product and their consequential losses (the Customers’ Claims).
Capral paid $2,197,000 in settlement of the Customers’ Claims. It subsequently sought indemnity for the Customers’ Claims from its insurer, CGU, on the basis that the claims made by the Customers were for property damage and were otherwise not excluded under its policy. The insurer disputed Capral’s claim.
The decision at trial
The court was required to determine whether the amounts paid by Capral to Customers was for ‘property damage” within the meaning of the policy; whether the additional costs incurred by Capral were recoverable; and whether a certain exclusion clause applied.
Whether the amounts paid by Capral to the customers were a claim for property damage under the policy
The policy defined Property damage as ‘physical injury or damage to or physical loss of or destruction of tangible property including loss of use at any time resulting therefrom’.
The court considered that the Customers had suffered property damage by reason of applying, and then subsequently removing, the Plate to/from their vessels. After considering Australian and international authorities, the court determined that '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 depends upon the circumstances of the case.
It therefore determined the amounts paid by Capral to the customers were considered a claim for property damage under the policy.
Whether the additional costs incurred by Capral in defending the Claims were recoverable under the policy
The court determined that the additional costs incurred by Capral in defending the Claims were not recoverable under the policy as Capral did not obtain the written consent of CGU prior to incurring the costs.
Whether the claim is excluded under the policy
The only policy exclusion requiring consideration at trial related to a product that had been withdrawn from the market, or from use, because of a suspected defect or deficiency therein.
The court determined that the property damage had occurred prior to the recall of the Plate, and as the Customers had suffered property damage upon the incorporation of the Plate into their respective marine craft, the property damage preceded the discovery that the Plate was defective. The particular exclusion clause only excludes the cost of preventative action by withdrawal of a product when a danger is apprehended.
It therefore determined that Capral’s claim was not excluded under the policy.
Implications for you
The decision highlights the need for careful and close consideration of policy wordings, particularly insuring clauses and exclusion clauses. It also assists in understanding property damage in the context of a defective product being applied to another product, and the circumstances in which a market recall exclusion clause will apply.
Capral Limited v Insurance Australia Limited t/as CGU Insurance [2024] FCA 775
