Selected Seeds Pty Ltd v QBEMM Pty Ltd
[2009] QSC 70
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- Unreported Judgment
- Appeal Determined (QCA) - Appeal Determined (HCA)
- Selected Seeds Pty Ltd v QBEMM Pty Ltd[2009] QSC 70
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Selected Seeds Pty Ltd v QBEMM Pty Ltd[2009] QSC 70
Selected Seeds Pty Ltd v QBEMM Pty Ltd[2009] QSC 70
SUPREME COURT OF QUEENSLAND
PARTIES: | |
FILE NO/S: | |
Trial Division | |
PROCEEDING: | Hearing |
ORIGINATING COURT: | |
DELIVERED ON: | 8 April 2009 |
DELIVERED AT: | Brisbane |
HEARING DATE: | 30 March 2009 |
JUDGE: | McMurdo J |
ORDER: | Declare that under the insurance policy referred to in the pleadings the plaintiff is entitled to:
|
CATCHWORDS: | INSURANCE – GENERAL – POLICIES OF INSURANCE – CONSTRUCTION – where insured supplied wrong seed – where insured was sued in respect of damage suffered from wrongful supply and settled out of court – where insurer will indemnify ‘in respect of … Property Damage … caused by an Occurrence’ – where the policy ‘does not cover any liability arising from or caused by ‘the failure of any Product to correctly fulfil its intended use or function’ – whether the Occurrence was the supply of the seed or the planting of the seed – whether an Occurrence can cause instantaneous Property Damage – whether the liability arose from the failure of the Product to fulfil its intended use or function – whether there was a claim from which the insured could become legally liable in respect of Property Damage so that the insurer is obliged to reimburse the insured for expenses incurred in connection with the defence of a legal claim GIO General Ltd v Newcastle City Council (1996) 38 NSWLR 558 |
COUNSEL: | R S Ashton for the plaintiff |
SOLICITORS: | Carne Reidy Herd for the plaintiff |
[1] This case involves three questions as to the proper construction of an insurance policy. It is convenient to first discuss the relevant facts, which are now agreed, before going to the relevant terms.
The facts
[2] The plaintiff carries on business as a grain and seed merchant. In late 2002, it purchased a quantity of seed from a supplier in the Northern Territory, which represented that it was Jarra grass seed.
[3] In truth this seed was, for the most part, Summer grass seed. Jarra seed and Summer seed are quite different things. Jarra seed is used to grow what is described as an extremely palatable forage grass, and it is also grown to produce more Jarra seed. Summer grass is an annual grass fit only for low quality stock feed and not fit for the production of commercial grass seed. Jarra grass, in its establishment year, has seedlings which are smaller, slower and weaker than Summer grass at the same age.
[4] Accordingly, the Summer grass seed was no substitute for Jarra seed. The consequences for the primary producer who planted this Summer grass, thinking that it was Jarra grass, were of two kinds. The first was that the expected commercial benefits of Jarra grass would not be enjoyed. The second was that the Summer grass would have to be eradicated if the land in which it had been planted was to be used as intended or for some similar purpose which was incompatible with the presence of Summer grass. It is common ground that this second consequence would constitute “Property Damage” as that term is used in the insurance policy, because it was “physical damage to … tangible property including any resulting loss of use of that property”.[1]
[5] In February 2003, the plaintiff supplied a quantity of this seed to a partnership called S & K Gargan. It was sold as Jarra grass seed as the plaintiff, fortified by an independent laboratory analysis, believed it to be. The buyers agreed to sow the seed on their property, grow and harvest a crop and sell the crop back to the plaintiff. The buyers did just that, save that some of it was supplied to Mr Michael Gargan. This seed produced by the Gargans was substantially Summer grass seed.
[6] Mr Michael Gargan planted and grew from his purchase a further grass seed crop, which, unknown to him and the plaintiff, was almost exclusively Summer grass. In October 2004, Mr Gargan sold some of his crop to a company called Landmark Operations Limited, which carried on business as a farming merchandise supplier in the Northern Territory. In December 2004, this company sold some of it to people called Shrimp. It was sold as Jarra grass seed. They planted it on their property, intending that it produce Jarra seed and a hay crop. They grew only Summer grass from it.
[7] In April 2006, Mr and Mrs Shrimp brought proceedings against Landmark Operations Limited in the Federal Court of Australia. They claimed damages for breach of contract, misleading and deceptive conduct and negligence. Ultimately they claimed that they had suffered loss and damage in four respects:
(a)the costs of eradicating the Summer grass from 340 hectares of their property;
(b)the loss of use of that land during the eradication program, which was expected to take at least two years;
(c)the loss of profits which would have been derived from the sale of Jarra fodder and Jarra seed;
(d)a diminution in the value of their land, resulting in their contracting to sell that land in December 2007 for less than what would have been the price had the seed been Jarra grass.
In essence the claims at least within (a) and (b) were in the nature of losses from physical damage to their property, whereas the claims within (c) and perhaps (d) were in the nature of expectation losses. The former were losses from the fact that they had what was effectively a weed, the Summer grass, upon their land. The losses within (c) and (d) were not so much from the damage to their land, but from their not having the benefit of that which they intended to be planted on their land. That difference is significant for the second of the points in this case, which concerns the so called “efficacy” exclusion.
[8] Ultimately the present plaintiff and many other parties were joined in the proceedings in the Federal Court. The plaintiff here was joined in September 2006 by Mr Gargan, who had been joined by Landmark Operations Limited. The claim against this plaintiff was for indemnity or contribution on the basis that it was liable to Mr and Mrs Shrimp in negligence and for a contravention of the TradePractices Act 1974 (Cth). It sought and was granted leave to defend the claim by Mr and Mrs Shrimp.
[9] Those proceedings were settled between all parties by a written agreement in March 2008. The plaintiff contributed $150,000 to the settlement of the Shrimps’ claim. It is agreed that the settlement was a reasonable one in the interests of the plaintiff and the insurers in all of the circumstances.
[10] In the present proceedings the plaintiff seeks indemnity for that amount, together with its legal fees and expenses in those proceedings which totalled $685,806.32. It had conducted its own defence because the insurers declined to do so. In October 2006, the insurers wrote to the plaintiff saying that their solicitors could not act because their investigations were continuing, and that the plaintiff should engage its own lawyers to conduct the defence “as a prudent uninsured”.
[11] The first question is whether the circumstances were within the insuring clause. The second is whether the plaintiff’s liability was within the efficacy exclusion. If those points are resolved in favour of the plaintiff, there is a third question, which is whether the plaintiff is entitled to all of its Federal Court costs. The issue there is whether the Shrimps’ claim, prior to an amendment to their pleadings in March 2008, was such as to engage the insuring clause of this policy.
The first question
[12] The insuring clause was as follows:
“2.1Liability
We will pay
(a)all sums which You become legally liable to pay by way of compensation;
(b)all costs awarded against You;
in respect of Personal Injury or Property Damage happening during the Period of Insurance and caused by an Occurrence within the Territorial Limits in connection with Your Business.”
[13] The plaintiff says that the $150,000 which it paid under the settlement was an amount which it became legally liable to pay in respect of “Property Damage happening during the Period of Insurance and caused by an Occurrence within the Territorial Limits”. As to its legal costs and expenses, it is common ground that, subject to the third question, the plaintiff is entitled to them under another provision of the policy if it is entitled to indemnity for the $150,000.
[14] It is common ground that the $150,000 was a sum which the plaintiff was legally liable to pay by way of compensation in respect of the Property Damage, that being the damage to the Shrimps’ land, and that the damage happened during the Period of Insurance. In the way the case was ultimately argued for the insurers, the issue about the insuring clause is whether it is demonstrated that there was an “Occurrence” which had the required causative effect.
[15] The policy defined “Occurrence” as follows:
“1.6‘Occurrence’ means
An event which results in Personal Injury or Property Damage, neither expected nor intended from Your standpoint. All Personal Injury or Property Damage arising out of continuous or repeated exposure to substantially the same general conditions shall be construed as arising out of one Occurrence.”
[16] The plaintiff argues that the Occurrence was the supply of the seed by it to Michael Gargan. Alternatively, it says that it was the planting of the seed by the Shrimps. The insurers accept that under this policy, the Occurrence need not have happened within the Period of Insurance.
[17] As to that first argument, the insurers say that the plaintiff’s supply of the seed was too remote from the damage to the Shrimps’ property for that damage to have been a result of it. Of course the plaintiff’s supply to Mr Gargan is a link in the chain of events leading to the damage. But the insurer says that some closer connection is required, and that the “event” must be the “proximate or immediate incident” leading to the damage, in reliance upon what was said by the Chief Justice in Windsurf Pty Ltd v HIH Casualty and General Insurance Ltd.[2]In that case the insured was a developer of an apartment building, for which it held a constructions risk insurance policy entitling it to indemnity for sums payable “in respect of or arising out of or by reason of … personal injury … happening as the result of an occurrence”. The period of cover operated until the end of the defects liability period. It was held that the occurrence in that case had to happen within the period of insurance. After the expiry of that period, a person suffered personal injury when she fell on negligently laid carpet. She recovered damages against Windsurf which sought indemnity from HIH. Windsurf argued that the occurrence was the negligent laying of the carpet. The court accepted HIH’s argument that this was not the occurrence but that instead, the relevant event was the injured person’s fall. The Chief Justice, with whom White and Muir JJ agreed, said:
“What, in ordinary parlance, was the ‘event’, the happening or incident, from which [the] injury flowed? Surely the shifting of the carpet and her fall. That conclusion itself answers an additional contention for the appellant, that the injury could be seen to have resulted from more than one occurrence.”[3]
His Honour cited Distillers Company Bio-Chemicals (Australia) Pty Limited v Ajax Insurance Company Limited,[4] where a public risk insurance policy limited to a certain sum the total liability of the insurer:
“for all compensation payable to any claimant or number of claimants in respect of or arising out of any one occurrence or in respect of or arising out of all occurrences of a series consequent on or attributable to one source or original cause.”
A number of actions for damages for negligence were brought by or on behalf of children born with deformities alleged to have been brought about by a drug distributed by the insured. Stephen J, with whom Gibbs J relevantly agreed, held that “there was no one occurrence in respect of which or arising out of which compensation may become payable to all these infant claimants” and that:
“only if the links in the chain of causes be traced as far back as the act on the part of the insured in distributing [the drug] can one event common to each claimant be found and the proviso should not … be construed as including such a remote cause within the meaning of ‘occurrence’.”[5]
[18] Of course care must be taken in considering judgments dealing with different policies. But these two cases provide substantial support for the insurer’s argument here that the causal connection between the Occurrence and the Property Damage is not necessarily supplied by the simple application of a “but for” test. As the plaintiff’s argument accepts, there must be some commonsense evaluation of the causal connection. The matter is largely one of impression but in my conclusion, it is somewhat artificial to say that the event which resulted in the damage to the Shrimps’ property was the supply of seed by the plaintiff to Mr Gargan. Much happened between that event and the damage: in particular, the seed supplied by the plaintiff was planted, resulting in another crop of grass seed, and in turn Mr Gargan planted that crop to produce yet a further crop from which there was derived the seed which found its way to the Shrimps’ land. Accordingly, the insurer’s argument that the event constituted by the plaintiff’s supply of the seed was not the Occurrence should be accepted.
[19] Alternatively, the plaintiff argues that the Occurrence was the planting of the seed by the Shrimps. For the defendants, Mr Holyoak makes two arguments against this alternative. The first is that the Occurrence must be an event which results in the Property Damage, so that it cannot be the same thing as the Property Damage. In that submission, he relies upon what Kirby P held in GIO General Ltd v Newcastle City Council,[6] where the Council claimed to be entitled to indemnity from its insurers for any liability of the Council arising from a collapsed building. The collapse had occurred in the Newcastle earthquake of 1989 and proceedings for personal injuries were brought against the Council on the basis that the building collapsed from a defect in its construction for which the Council was responsible. The relevant insuring clause required the insurer to indemnify the Council in respect of damage to property “happening during the period of Insurance caused by an occurrence in connection with the Business of the insured”. One question was whether whatever constituted the “Occurrence” was “in connection with the Business of the insured”. The primary judge had found that the relevant occurrence was the “earthquake and the contemporaneous collapse of the building”. Kirby P said that:
“The difficulty with the finding is that the ‘collapse of the building’ was, in fact, the relevant ‘damage to property’. Hence if Bainton J is correct, the property damage was, in part, caused by itself. With respect, this construction would not make sense. Therefore, the relevant ‘occurrence’ must be limited to the earthquake itself. This characterisation conforms with commonsense. The most direct and most obvious cause of the damage to the Club was the Newcastle earthquake.”[7]
[20] I accept that in this policy, the Occurrence and the Property Damage could not be the same thing because, just as in the apparently equivalent clause considered by Kirby P, one must be the result of the other. But the present question is whether this means that the event constituted by the planting of the seed cannot be said to have resulted in the damage to the Shrimps’ property.
[21] This submission for the insurers blurs the distinction, common to many contexts of legal liability, between actions and consequences. That distinction is real although in some cases the consequences are instantaneous. The relevant event is the action of planting the seed. The consequence of that action was that the land came to be in a damaged condition. The submission cannot be accepted.
[22] Alternatively, it is argued for the insurers that “such an occurrence did not cause or create the legal liability of the plaintiff in respect of the property damage”. It is contended that the liability to pay compensation, rather than simply the damage to the land, must have been caused by the Occurrence. This argument derives from the dissenting judgment of Sheller JA in GIO General v Newcastle City Council, where his Honour said:
“Undoubtedly the earthquake … was within the definition of an occurrence. But when the phrase speaks of ‘caused by an occurrence’, in my opinion, it speaks in the context of the insured’s legal liability for injury or damage from an occurrence which is ‘causally relevant’ … In that context the occurrence is not the earthquake but the insured’s act which rendered it legally liable to pay. Thus if a structure is unsound because the insured designed it negligently, the fact that its collapse was caused by an earthquake does not mean that it was not caused by an occurrence or event of negligence.”[8]
That is not how I would interpret clause 2.1 of this policy. In this case the words “and caused by an Occurrence within the Territorial Limits in connection with Your Business” provided a further criterion which the Property Damage had to satisfy. But there is nothing within the definition of “Occurrence”, or within the policy as a whole, which suggests that the word “Occurrence” refers to an act of the insured which rendered it legally liable to pay compensation. And again mindful of the risk of applying other decisions which involve different policies, this particular argument seems difficult to reconcile with the conclusions in Distillers Company Bio-Chemicals v Ajax Insurance Company and Windsurf v HIH which I discussed above.
[23] In my conclusion the case was within clause 2.1 because the Property Damage, which happened during the period of insurance, was caused by an Occurrence constituted by the planting of the seed on the Shrimps’ land.
The second question
[24] The second point involves the exclusion which is headed “Efficacy Clause”. It is in these terms:
“The following additional EXCLUSION is added to this Policy:–
This Policy does not cover any liability arising directly or indirectly from or caused by, contributed to by or arising from:-
1.the failure of any Product to germinate or grow or meet the level of growth or germination warranted or represented by the Insured; or
2.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 case is not within the first limb of that clause, at least because the liability did not arise from the failure of this seed to germinate or grow. The question is whether it is within the second limb.
[25] The insurers contend that the second limb was engaged because the liability arose from the failure of this seed to correctly fulfil its intended use or function, which was that it should produce Jarra grass and Jarra seed. It may be accepted that this was its intended use. But the issue is whether the liability arose from the failure of the product to fulfil that use or function, or whether it arose from the fact that Summer grass seed was planted on the Shrimps’ land.
[26] This argument requires particular attention to be paid to the content of the legal liability of the insured. The relevant liability here was for Property Damage, being the damage to the Shrimps’ land. It was not a liability to compensate the Shrimps for a loss of expected profits, except in so far as such profits could not be derived because of what had happened to their land.
[27] The damage to the property was the result of what was done to that land. The land was contaminated by the planting of Summer grass seed and by the subsequent growth of the grass. The losses to Mr and Mrs Shrimp from that property damage, according to their pleading, were those within (a) and (b) as I have summarised their case above at paragraph [7]. They also had a contract with their supplier under which they were entitled to receive Jarra grass seed. They lost the benefit of that contract and thereby lost the profits which they would have derived from planting seed of that description. Undoubtedly this was the principal basis for their claims for the expectation loss within (c) above. It may have been the case that some of those losses were recoverable also upon alternative causes of action pleaded by Mr and Mrs Shrimp. Nevertheless, these different parts of the claimants’ case illustrate the distinction which is presently relevant. In essence, it is the distinction between, on the one hand, the detrimental consequences of what was done to the land and, on the other, the consequences of the land not being improved (by planting Jarra seed) as it should have been.
[28] The present plaintiff’s liability for damages for the losses from what was done to the land arose not from what the product failed to do (grow Jarra grass) but what it did do to the claimants’ property. If the plaintiff was also legally liable for the loss of the profits which would have been made from the intended use of the seed, the insurance for that liability might have been excluded by the second limb of this clause. But the clause does not exclude the liability for the Shrimps’ losses from the detrimental impact upon the condition of their land.
[29] Mr Holyoak properly drew attention to an unreported judgment which well illustrates the present point. It is John Wyeth & Bros Ltd v Cigna Insurance Company of Europe SA/NV & Ors.[9] The insured, Wyeth, claimed to be entitled from its insurers to its legal costs in defending claims brought by third parties for damages for alleged negligence in its manufacture and sale of certain drugs. One issue involved the relevance of what was there described as “the Efficacy Exclusion”, which was in relevantly the same terms as that in the present case. Langley J held that the purpose of the exclusion was to exclude from cover claims which, as counsel for Wyeth had put it, “were for failing to make the claimant better or failing to prevent some condition arising (eg contraception or vaccines)” and that the claims in that case were outside the exclusion, because they were “claims for injuries because the drugs caused dependency and injury which either did not pre-exist or did not do so to the same degree”. In essence, the insured’s liability was for the personal injury which its product did inflict, rather than for its failing to achieve the benefit which was its intended purpose. On appeal, this reasoning was held to be “clearly right”.[10]
[30] Mr Holyoak argued that I should not employ the same distinction here, because Langley J was persuaded to do so by an argument that any other interpretation of that policy would have emasculated much of the cover, which Mr Holyoak said was not the case here. That factor was certainly material in the judgment of Langley J.[11] Nevertheless the distinction is a real one. And to favour the construction argued by the insurers would substantially affect the extent of the cover although it would not clearly deny all benefit from the policy. If the exclusion were to apply whenever the insured’s product had some impact upon a person or property which it would not have had if the product had fulfilled its intended use, then the extent of the operation of this exclusion would be far reaching indeed.
[31] Mr Holyoak also relied upon Nittan (UK) Ltd v Solent Steel Fabrication Ltd,[12] where a similar exclusion was held to operate. The claimant (Nittan) manufactured smoke detector units, and acquired an electronic timer from the defendant, which was the insured. That equipment malfunctioned, resulting in damage to the smoke detectors. But in that case, the failure of the electronic device to perform its intended function, which was to keep a proper control over the temperature in the cabinet in which the claimant’s goods were being tested, caused the cabinet to overheat and damage to be done to the claimant’s goods. So in that case, an intended purpose of the insured’s product was to prevent damage to property of the nature which occurred.
[32] In my conclusion, upon the ordinary meaning of the words used, the efficacy exclusion does not operate to exclude the insurers’ liability in this case.
The third question
[33] Accordingly, the third point arises. Clause 2.2 of the policy provides in part as follows:
“2.2Defence of claims
With respect to the indemnity provided by this Policy We will:
(a)defend in Your name and on Your behalf any claim or legal action against You seeking damages on account of Personal Injury or Property Damage even if the action is groundless, false or fraudulent, and We will investigate, negotiate and settle any claim or legal action as We see fit;
(b)pay all legal costs and expenses incurred by Us and all interest accruing after entry of judgment until We have paid, tendered or deposited in court such part of the judgment as does not exceed the Limit of Liability;
(c)reimburse You for all reasonable expenses, other than loss of earnings, incurred in connection with the defence of a claim or legal action with Our consent.”
[34] Mr Holyoak submits that it was not until amendments were made in the Federal Court proceedings in March 2008, by which time a significant amount of the costs had been incurred, that there had been any claim formulated against the insured “seeking damages on account of property damage”. He submits that the plaintiff had to be within clause 2.1 (the insuring clause) to have been entitled to legal costs, and that the plaintiff was only within clause 2.1 “when there was a claim from which the insured could become legally liable in respect of property damage”.
[35] That submission cannot be accepted for two reasons. First, the liability did not derive from an amendment to the claimants’ pleadings: it arose when the cause or causes of action against the present plaintiff arose, not when they were pleaded. Secondly, the claim by Mr and Mrs Shrimp, as originally pleaded, did complain of damage to their land. At paragraph 84 of that pleading,[13] they alleged that as a consequence of the seed being Summer grass rather than Jarra, their land would have to be treated heavily with chemicals for at least five years, would be unsuitable for growing Jarra grass or any other grass for the production of weed-free fodder over that period and would need to be used to grow some crop which would compete with and choke out the Summer grass over that time. They then pleaded that they would suffer losses from not being able to use the land more profitably over that period. Now this pleading did not include the specific claim for eradication costs which was added in March 2008. But it did include that claim for loss of use of the property during an eradication program, which was a loss consequent upon the land being damaged. Accordingly, it is not the case that it was only in 2008 that the proceedings incorporated a claim for property damage.
[36] The plaintiff alleges that the insurer’s letter of 9 October 2006, in which it advised the plaintiff to “engage its own advisor to conduct its defence as a prudent uninsured pending a determination to the indemnity question”, was a consent to the incurring of costs, in reliance upon Wesfarmers Federation Insurance Ltd v Stephen Wells trading as Wells Plumbing.[14] The insurers do not seem to contend otherwise, if, contrary to their argument, the plaintiff was within the insuring clause prior to March 2008 and at least by October 2006. It follows that the third point is also resolved in favour of the plaintiff.
[37] There is a non-admission of the amount of the costs spent by the plaintiff in the Federal Court proceedings. The parties agree that if the plaintiff is successful, the appropriate order would be to have these costs referred to an assessor or referee. Accordingly, I am not asked to decide what amount should be paid to the plaintiff but only to declare the extent of the plaintiff’s entitlement.
[38] According to the agreed facts, the defendants (rather than one of them) issued the policy. Some question might arise later in these proceedings if and when the court is asked to give a money judgment. For present purposes it is sufficient to declare the plaintiff’s entitlement under the subject policy which will bind both defendants.
[39] It will be declared that the plaintiff is entitled to indemnity under the policy referred to in the further amended statement of claim for the sum of $150,000 and is further entitled under that policy to payment of such costs and expenses as were reasonably incurred in its defence of the Federal Court proceedings referred to in the further amended statement of claim.
[40] I will hear the parties as to the appropriate orders for the appointment of a referee or for some other means of having the amount of those costs assessed.
Footnotes
[1] Clause 1.11(a) of the insurance policy.
[2] (1999) 10 ANZ Insurance Cases 61-447 at [9].
[3] (1999) 10 ANZ Insurance Cases 61-447 at [9].
[4] (1973-1974) 130 CLR 1.
[5] (1973-1974) 130 CLR 1, 20.
[6] (1996) 38 NSWLR 558.
[7] (1996) 38 NSWLR 558, 567.
[8] (1996) 38 NSWLR 558, 572.
[9] [2000] EWHC 192 (Comm).
[10] John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV & Ors [2001] EWCA Civ 175 at [14] (Waller LJ, with whom Dyson LJ and Sir Murray Stuart-Smith agreed).
[11] John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV & Ors [2000] EWHC 192 (Comm) at page 44.
[12] [1981] 1 Lloyd’s Rep 633.
[13] Statement of Claim filed 3 April 2006.
[14] [2008] NSWCA 186.