So what constitutes a product?
The Court of Appeal has provided further guidance to the combined liability insurance market, in particular upon the definition of “Product”, elaborating on the Commercial Court’s first instance decision in Aspen Insurance UK Limited v Adana Construction Limited.
The defendant groundworks contractor constructed a concrete crane base on top of four piles. The crane base was designed by the project’s structural engineer and the piles had been installed by another contractor. The groundworks contractor’s role involved drilling holes into each of the piles and inserting steel dowel rods, which protruded and formed a connection with the crane base. The crane base itself was formed in situ by pouring concrete into a shuttered area immediately above the piles.
Following the completion of the groundworks contractor’s work, a crane was erected on top of the crane base. The crane collapsed severely injuring the crane driver and causing extensive property damage. Expert evidence indicated that the failure of the crane base was due to design error by the structural engineer; as designed, the crane base was simply unable to resist the forces imposed on it by the crane. The crane base had been uprooted intact, the steel dowels simply pulled out unbroken of the holes drilled by the groundworks contractor. The structural engineer alleged that poor workmanship by the groundworks contractor was a contributing factor.
The liability proceedings arising from the crane collapse are ongoing and accordingly, the groundworks contractor’s alleged liability for injury or damage caused has yet to be determined.
The groundworks contractor was insured under a contractor’s combined liability policy which included separate sections for public and product liability. The public liability section provided cover unless the loss was “caused by any Product” in which case the product liability section would respond. “Product” was defined in the policy as:
“any product or goods manufactured, constructed, installed, altered, repaired, serviced, processed, treated, sold, leased, supplied or distributed by or on behalf of the Insured…but only after such item has left the Insured’s care, custody or control.”
The product liability section contained what is often referred to as an efficacy exclusion, excluding liability “arising in connection with the failure of any product to fulfil its intended function”.
The insurers sought a declaration of non-liability under the policy on the grounds that the crane base was a Product (thereby falling within the Product Liability section). Any liability of the groundworks contractor which might ultimately arise would have to be in connection with the failure of the crane base to fulfil its intended function and would therefore be excluded from cover.
The Court of Appeal’s decision
The Court refused to grant the insurers a declaration of non-liability based on these two exclusions, finding they did not apply for two principal reasons:
- The crane base was not a “Product”. Even if it had been, it did not fail to fulfil its intended function.
- Whilst the dowels were a “Product”, they did not cause the loss, nor did they fail to fulfil their intended function.
Meaning of ‘Product’
In reaching the above conclusions, the Court of Appeal provided useful guidance on the meaning of “Product”, finding that it should be interpreted in the “conventional or natural sense of the word”. Clarke LJ, giving the leading judgment, did not attempt to define “Product” precisely (because he thought this depended on the item in question) but considered that:
- the characteristics ‘part of a range/ buyable separately/ created offsite’ were indicia of a product; and
- a hallmark of a “Product”, in this context, was something that “at least originally, was a tangible and moveable item which can be transferred from one person to another; and not something which only came into existence to form part of the land on which it was created”.
Clarke LJ also commented that, although the definition of “Product” includes the word ‘installed’, the product liability section does not necessarily apply to all installed objects; if the installation was defective, but the Product was fine, the public liability section is relevant instead.
Critically, the Court of Appeal found that the dowels did not cause the loss or fail to fulfil their intended function because they neither broke nor fractured. Any ultimate liability of the groundwork contractor would therefore not have been caused by the dowels, but by its faulty workmanship in not installing the dowels properly.
The Court of Appeal was troubled by the insurers’ interpretation of the exclusions which, if correct, might serve effectively to emasculate cover:
- The interpretation of “Product” should not be too broad because the combination of workmanship, materials and design in the construction trade usually results in the production of something.
- On the insurers’ construction of “Product”, there would be very few instances where there would be cover under the public liability section.
- It was difficult to envisage a situation where, if a liability has been caused by the “Product”, the liability will not also have arisen in connection with the failure of the Product to fulfil its intended function.
Finally, the Court concluded that for policy purposes, the term “superstructure” could include a temporary structure such as a crane.
This litigation has sounded both important guidance and warning for the combined liability insurance market:
- The courts are prepared to construe “Product” so as to give it commercial sense, even if it is broadly defined in the policy.
- Similarly, the courts will be reluctant to construe exclusions in a way that would lead to a commercial nonsense and not reflect the parties’ intentions.
- The first instance decision on the inter-relationship of product and public liability sections of a combined liability wording remains unaffected. Specifically, there is no “market understanding” that once contracts works are handed over, public liability cover ends and any claim is either covered under the product liability section or not at all. The coverage will depend on the wording itself.
- Finally, the litigation highlights the risks involved to insurers in seeking a negative declaration where meaningful facts as to the cause of the loss and liability of the insured have not yet emerged. The Court of Appeal echoed the scepticism expressed by the Commercial Court as to whether it was appropriate to make any negative declaration in such circumstances. The groundworks contractor had protested throughout that the proceedings were dangerously premature (citing the decision of the Court of Appeal in Horbury Building Systems Ltd v Hampden Insurance NV ) and the Court of Appeal agreed that “there is something artificial in making a declaration on the basis of an assumption of liability which may well be wrong”.
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