The primary policy dispute in the appeal judgment in Insurance Australia Limited t/as CGU Insurance V Capral Limited is discussed in our previous blog here.
The insurers also argued that the installation of the defective plate did not damage the property at all and it in fact “improved” the vessel, so the claim must be rejected.
The insurers further argued that the trial judge impermissibly had put a “gloss” on the meaning of “Property Damage” by importing notions of value.
The appeal court rejected both arguments :
“66. The Plate was progressively welded into the Vessels, causing physical changes to the Vessels which were detrimental. As soon as the Plate was welded to the hulls, and although it would not be known for a short period, it would be necessary for the Plate to be removed to construct the Vessels according to Capral’s customers’ specifications. The welding of the Plate caused damage because the incomplete hulls were physically altered in a detrimental way, whether one examines the issue at the time the Plate is being welded in, after each piece of Plate is welded in, or once all the relevant Plates have been welded into place. The hulls were being progressively damaged through the process of welding, culminating in a need to repair the damage. The primary judge held, and CGU did not challenge, that Capral’s customers could not proceed to market or sell the Vessels without the Plate being removed and the Vessels being rectified.
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68. …The real point is that the alteration to property must involve some negative consequence to the property sufficient for the consequence to be properly characterised as “damage”. Whether there was damage is a question of fact and degree: R & B Directional Drilling at [101]; Fairview Architectural at [132].
69 Whether changes in physical characteristics of property affect usefulness or value is relevant to determining whether there has been property damage. In Ranicar, changes caused by enzymic activity and chemical oxidation of the fats in the scallops (caused by being transported by Frigmobile at too warm a temperature) did not result “in any significant difference in the edibility, taste, smell, texture or appearance of the scallops”; but the physical “change had the effect of removing one of the primary qualities which the scallops had – their exportability” and it was “plain that their usefulness was impaired and their value reduced”.”
The court went on to conclude:
“91. The claims in the present case were not, for example, for a resupply of conforming product. No doubt, if the defective product had not been welded into the Vessels such that no damage was caused and no rectification works were needed (and so no physical alteration to the surrounding Vessel occurred), then any claim may have been for defective product and not for property damage. The primary judge was correct in observing that “the supply of a defective product is not property damage in and of itself” and that it is “only once the defective product is physically incorporated into larger tangible property that the possibility of property damage arises”. As his Honour observed, 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 tradesperson commonly absorbs the cost attendant upon the repair of their faulty work, the accidental injury to property or persons substantially caused by their 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.”
South African decisions on property damage are consistent with these findings.