Part 1 and Part 2 discuss the insured’s claim for property damage indemnity resulting from incorporation of defective aluminium plate in customer’s products. 

The insurers CGU also unsuccessfully argued the application of the products recall exclusion in the policy. The policy excludes insurer’s liability for:

“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or loss of use of the Products or any property of which such Products form a part, if such Products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein;”

The insurers argued that the exclusion applied because the vessels were “property”  as defined of which the plate formed a part and the vessels were withdrawn from the market.

The appeal court held that the relevant exclusion requires a causal relationship between the damages claimed and the relevant withdrawal from the market and that the causal relationship is not satisfied where the relevant damage occurs before the withdrawal from the market.

The court said:

“211     …The ambiguity lies, or the different available interpretations arise, from the causative or temporal sense in which the word “if” is used and the way in which the two parts of cl 6.14.2 operate with respect to each other. The first part of the clause, when it applies, 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

212       The second part of the clause requires the existence of a condition, introduced by the word “if”, before that exclusion can apply, namely:

if such Products or property [being those referred to in the first (exclusionary) part of the clause] are withdrawn from the market or from use because of any known or suspected defect or deficiency therein.

213       CGU would read the word “if” as carrying the meaning “if at any time”. That is not to say that CGU reads words into the exclusion, it is simply to point out that CGU denies any causal quality or temporal function or implication to the word “if” when that word has various meanings. It is for this reason that it is not uncommon for people to use the phrase “if at any time” rather than simply saying “if”. They do so to better convey the intended consequences of the condition being satisfied.”

The court said that context and purpose favoured a different construction to that advanced by the insurer:

“216     …The insuring clause is intended to provide cover for Property Damage and cl 6.14.2 is intended to make an inroad into that cover. A part of the obvious commercial context is that property damage will often be sustained before (and lead to) a withdrawal of products from the market. The exclusion was not intended to deny indemnity in relation to property damage caused by faulty product before withdrawal on the basis that such a withdrawal occurs later.

217       Reading the clause as excluding a property damage claim to which the policy was responding, purely because a withdrawal from the market has later occurred, gives rise to a construction which is commercially unlikely. It would give rise to potentially absurd results in relation to withdrawals which occur years after damage is sustained. It would give rise to the uncommercial result that the insurer should delay paying a claim if a recall or withdrawal was on the cards or to the situation in which a paid claim later becomes one which was excluded.”

The court said that the insurer put too great an emphasis on what it contended was a literal meaning of the words used at the expense of ascertaining the objectively intended meaning of the words having regard to context and purpose.

The appeal court said that the exclusion clause did not apply to exclude an indemnity for a liability of the insured for property damage which was caused by defective product before the defective product was withdrawn from the market. 

A similar finding would be made by a South African court.

Insurance Australia Limited t/as CGU Insurance V Capral Limited