Abstract

"Physical Damage to Property" may include major functionl impairment - Exclusion: Property in Physical or Legal Control applies to contractor's control of property while working on it - Exclusion: Faulty Workmanship -  Exclusion: Contractual Liability does not apply to mere productionof defective work - Interest - Construction, Foreign Authorities

Article

“Physical Damage to Property”

Typically, an insuring promise of a General Commercial Liability policy covers the insured all against sums that it becomes legally liable to pay for compensation in respect of physical injury to or loss of or destruction of tangible property, including loss of its use at any time resulting from the physical injury or loss or destruction of it, happening during the period of insurance as a result of an occurrence in connection with its business. An extension may provide cover for loss of use of tangible property which has not been physically injured or destroyed if it is caused by physical damage to or destruction of other tangible property. This would seem to indicate that loss of use of tangible property, itself, is not damage, but it is property damage when it has been caused by that property’s being physically injured or destroyed or when the loss of use of tangible property has been caused not by its being physically injured or destroyed, but by that harm to other tangible property. Loss of use is not injury. This makes it more difficult to say that physical injury is the lack of functional utility of the work.

To engage the insuring promise, incorporating  the definition of “Property Damage”, it is necessary that there be a sum that the insured is legally liable to pay the claimant for compensation in respect of physical injury to tangible property, including loss of its use at any time, resulting from the physical injury to it. If the insured’ contract work consists of creating a tunnel from one pit to another and as part of it a metal sleeve is forced into the earth, the sleeve and the tunnel are a fixture in the land, owned by the landowner. The tunnel, including the void, is the relevant tangible property, its tangibility being present in the nature of the pipe. As a structure it has a specific utility consisting of its specific purpose, which is defeated if it were filled with concrete so that it is not fit for the reception of other material.

The meaning of property may depend on its legal and factual context and if that refers to tangible property, it must be a thing that can be touched or felt, physically, and physical injury to or destruction of tangible property is a reference to physical injury to or destruction of a thing. The word is the most comprehensive of all the terms which can be used, and can be applied to many different kinds of relationship with a subject matter. It comprehends a wide variety of different forms of interests. Its use, without more, in a particular context does not signify what form of interest is created. It is often used to refer to something that belongs to another. The sleeve is a thing, but a tunnel is also a thing: the sleeve and the void work as a structure. In other contexts, “property” is not a thing, but a bundle of rights, a legal relationship with a thing, a degree of legally enforceable power permissibly exercised over it. But even this description may have its limits,for example, whether or to what extent there can be property in knowledge or information or human tissue. The concept is elusive because of the extensive frame of reference of control and access. However, it consists primarily in control over access: Yanner v Eaton [1999] HCA 53; 201 CLR 351.

In the phrase, “tangible property”, “property” cannot mean something broad and intangible: it can only mean a physical thing. But the character of the property includes control over access.

In R & B Directional Drilling Pty Ltd (in liq) v CGU Insurance Limited (No 2) [2019] FCA 458, an insured had contracted to construct a tunnel through an embankment, to line it with a sleeve, grouted externally with concrete, and to run conduits for cables through the void, but had performed the work defectively so that the cement leaked through the sleeve into the cables and set but without damaging any of the physical parts. The sleeve had concrete fixed to it, but was not damaged in its fabric. The void was filled, but not injured. Although the whole work could not function in its intended way it required removal and replacement with time penalties to the principal, it was held that cover for liability for damage to physical property did not apply.

The claim related to direct and wasted costs, and compensation for delay. The direct costs of restoration were all the costs to remove the concrete and conduits placed into the sleeve by the principal and to restore the tunnel to its prior state. It was not pleaded for breach of contract but for liability consequent on damage to property under the Liability policy.

It was held that property damage is one of degree, meaning and characterisation, something more than affectation of its value is required, and mere material impairment of functionality or purpose of physical property is not enough.  But a serious or complete destruction of its utility by the introduction of the defective work may be. The defective work injured or impaired the tangible property, the tunnel, by rendering it totally inadequate for its physical purpose, but only temporarily. If it could not have been remedied, or remedied without damage to the integrity of the sleeve, it may reasonably be found to have physically injured or destroyed the tunnel as a tunnel for its purpose. But as it did not suffer any direct physical harm, temporary impairment of use which was remedied without physical harm to it was not property damage within the purpose of Liability insurance.

In the circumstance posited, though the tangible property is the tunnel formed by the steel sleeve in the ground; its proprietary characteristics were framed by what it was and what relationships parties had with it. Its purpose, nature and character, the relationships of persons to it in respect of control and access, and how it could be physically injured or impaired were controlled by the contractual engagements.

Although it was totally, albeit temporarily, unfit for its intended purpose, it was not injured since it remained sound and was fit to be used again when the defective work was removed, leaving it in the same physical state as it enjoyed before the defective work. The loss through the cost of remediation for which the insured was liable was not the consequence of physical injury to the tunnel but of the cost of the remedy of defective work inside an otherwise undamaged one. The temporary loss of its use as tangible property was not caused by physical injury to it, but by the presence of of defective work in it. It may be characterised as the placement within the tunnel of materials that were defective, requiring their removal. The position may well have been different had the defective work  not been able to be removed, or removed without damaging the integrity of the sleeve.

The judgment reviews the Australian, English and North American authorities, which have conflicting views, though the conflict sometimes arises from a difference in the nature and extent of the harm to physical property by the work or a difference in the policy’s language.

Of significance is the principle that Liability insurance cover is not designed to apply to the insured’s liability for the mere failure to perform a business contract in its tender of defective work or materials: Tesco Stores Ltd v Constable [2008] EWCA Civ 362 at [24]. It is a commercial risk which is not passed on to the Liability insurer. Its coverage is engaged only when they cause injury to other property: Maryland and Casualty Co v Reeder 270 Cal Rptr 719 (1990) at 722; F & H Construction v ITT Hartford Insurance Company of the Midwest 12 Cal Rptr 3d 896 (2004). Otherwise, it would also function as a performance bond or warranty of a product: Diamond State (supra) at 482; Qualls v. Country Mutual Insurance Co 123 Ill.App.3d 831, 462 N.E.2d 1288 (1984). It does not cover a claim which asserts defective work, or products incorporated into other property, which has continued to function and is not yet physically affected, though its value had been diminished. This principle is distinct from the issue as to the meaning of “physical damage”, but it is part of the legal context in which the expression is to be read,and as such could influence its construction, especially by its provision of consistency with its literal meaning.

That Liability insurance does not cover a mere failure to perform a contract for work or a product does not entirely solve the problem. If permanent or a sufficiently high degree of interference to the functionality of the property does come within the policy’s definition of it, there seems to be no reason, logical or practical, why liability for that head of damage, as distinct from the cost of repairing the defect, should not escape the performance bond disqualification since, ex hypothesi, it relates to the exception to that class as property damage to the principal’s property. If this is correct, the question then remains why the same classification should not also apply to temporary harm to its function. This issue differs from whether there is property damage.

A short review of the authorities, many not binding but informative, is useful to indicate the contrroversy and the fine distinctions which control the results.

In Canadian Equipment Sales & Service Co Ltd v Continental Insurance Co (1975) 59 DLR (3d) 333, in respect of the insured’s liability for the cost of removing material allowed to fall into a pipe lest it became blocked and cause damage, it was held that the dropping of the material into the pipe was an injury to the pipeline as its owner then had an imperfect or impaired one because injury to tangible property included the impairment of its use. The injury extended to its functionality. Importantly, however, the word “injury” was not qualified by the word “physical”. However, the position was only that the pipeline was not damaged, but it would not function property until removal of the material: R & B Directional Drilling Pty Ltd (in liq) v CGU Insurance Limited (No 2) [2019] FCA 458.

In Attorney General of Ontario v Fatehi [1984] 2 SCR 536, which was not an insurance case, the respondent’s negligence in a highway accident caused debris and gasoline were strewn across the road, making it impassable. The cost of cleaning up the highway was found to be the result of property damage since it had ceased to be a road in the sense of a traffic-carrying facility.

In Poole-Pritchard Canadian Ltd v Underwriting Members of Lloyds (1969) 71 WWR 684, damage to pipe and vessel insulation material which failed because of the application of defective asphalt emulsion had been found to be property damage. In Rivtow Marine Ltd v Washington Iron Works [1974] SCR 1189, the presence of latent defects was not.

In Carwald Concrete and Gravel Co Ltd v General Security Insurance Company of Canada (1985) 24 DLR (4^th) 58, where the policy used “physical injury”, the insured poured a concrete pad that was to have a certain strength, but the concrete was inadequate and had to be taken up and repoured. This affected associated reinforcing steel bars, ducting, grounding wire, plumbing and anchor bolts by rendering them useless for the purpose for which they were installed as the pad could not be used, and this constituted physical injury to tangible property. The policy covered liability for property damage defined as physical injury to or destruction of tangible property including the loss of use thereof at any time resulting therefrom; or loss of use of tangible property which has not been physically injured or destroyed caused by an occurrence, as distinct from physical damage to or destruction of other tangible property according to the policy in R & B Directional Drilling.

In Bundy Tubing Company v Royal Indemnity Company [1962] USCA6 42; 298 F 2d 151 (6^th Cir, 1962), where property damage was defined as “injury” to property, not “physical injury”, the insured manufacturer’s defective heating system was installed in concrete floors. Hot water which was carried through defective tubing caused damage to household furnishings from leakage which was accepted to be within the cover. Cover for the cost of the removal of the defective system which required digging up the concrete was found. It was held to be “injury to property” because the home would be physically harmed by being without a functional heating system would not be suitable for living quarters in winter. The market value for its sale would be affected but this may not be the best indication of physical damage.

In Hamilton Die Cast Inc v United States Fidelity and Guaranty Co [1975] USCA7 3; 508 F 2d 417 (7^th Cir, 1975), an insured supplied tennis rackets with defective frames where there was no physical harm to the other parts. The incorporation of a defective part, the frame, was not “injury to tangible property”, even without the word “physical” before “injury”. Similarly, in St Paul Fire and Marine Insurance Co v Coss 145 Cal Rptr 836 (1978) where “property damage” was defined in the same policy terms as in Carwald, the insured was contracted to build a home, but after disputes arose about workmanship when completion was near, he left the site, and was sued by the owner for the cost of remedying defective work and for the supply of defective materials. Whilst the defective workmanship and materials produced an inferior home this was not property damage. The Court in Carwald distinguished these two cases on the basis that in the case before it, the pouring of the defective concrete physically injured other property by making it useless for its purpose.

The above cases rech the following reasoning. Impairment of the functional use of physical property is injury to it: Canadian Equipment. The wrongful making of tangible property useless for its purpose constitutes physical damage to it: Carwald. The making of a home unsuitable for occupation for a significant part of the year by the installation of a defective heating system was injury to the home: Bundy Tubing. But it is to be distinguished from the mere inclusion of a defective component without physical harm to the rest.

In Austral Plywoods Pty Ltd v FAI General Insurance Company Ltd [1992] QCA 4 , the insured supplied defective plywood to a boat builder who affixed it to the hull of a boat. It had to be removed. It was held that the physical injury to the hull was the permanent physical fixing of the defective plywood, making the hull unsuitable, or less suitable, for its purposes and requiring restoration of its physical state. This constituted physical damage to property because it was rendered unsuitable or less suitable for the purpose for which it was constructed by having affixed to it material which is intended to alter it permanently. Cf Carwald Concrete & Gravel Co. Ltd. v. General Security Insurance Co. of Canada 24 D.L.R. (4th) 58 at 63; Canadian Equipment Sales & Service Co. Ltd. v. Continental Insurance Co. 59 D.L.R. (3d) 333.  It was said that this is different from its being covered by or buried in such as earth or water which is not affixed to it and on removal of which it is left in its original condition. And the question directly in issue was not whether to bury an object is to damage it, but rather whether to extract a buried object is to repair it.

 

In Re Mining Technologies Australia Pty Ltd [1999] 1 Qd R 60, where the claim concerned recovery of expenses of retrieving equipment that had become buried, it was held to be covered because it was related to property damage. Pincus JA, dissenting accepted that there may be injury to property if it was made imperfect or impaired so that it could not be used for its purpose, but held that a pipeline merely obstructed by loose material is not actually damaged, though until the material is removed it will not function properly. He would not accept that property is damaged by every circumstance which makes it temporarily unusable, for example, an object dropped into deep water or an object hidden away.

 

The foregoing suggests that whether something is physically injured by being rendered unsuitable for its purpose is a matter of degree in characterisation and ascription of meaning, depending on whether it has things affixed to it which so render it, or whether it is simply covered.

 

In Transfield Construction Pty Ltd v GIO Australia Holdings Pty Ltd (1997) 9 ANZ Insurance Cases 61-336 it was held that impairment of functionality only, caused by the blockage by grain of fumigation pipes in silos defectively constructed under contract, but remediable, was not physical damage or injury to them. It was said that loss of usefulness might in some context amount to damage, though even that is not beyond dispute, but it cannot amount to physical damage. Functional inutility is different from physical damage. The Court did not consider the issue whether Liability insurance covered loss due to  defective work when no harm was done to other property.

 

In Allstate Exploration NL v QBE Insurance (Australia) Ltd 15 ANZ Insurance Cases 61-773 a seismic disturbance caused a rock fall which did not physically damage the insured mine but resulted in its enforced closure did not meet the description of “loss, destruction or damage”. It was limited to physical loss or damage, and not to loss by deprivation of use. The same reasoning was used in Kraal v Earthquake Commission [2015] NZCA 13; 2 NZLR 589, as to whether there had been “physical loss or damage” to a property made uninhabitable because of its proximity to the danger of falling rock but otherwise undamaged by earthquakes.

 

In Moore v Evans [1917] 1 KB 458 a claim under a policy for “loss of or damage or misfortune to” property in circumstances where goods were irretrievable because of the outbreak of war and the occupation of their location was rejected. There was no evidence that they had been interfered with or taken.

 

Pilkington United Kingdom Ltd v CGU Insurance Plc [2004] EWCA Civ 23; [2005] 1 All ER (Comm) 283 and Promet Engineering (Singapore) Pte Ltd v Sturge (The “Nukila”) [1997] EWCA Civ 1358; 2 Lloyd’s Rep 146 also follow the reasoning that a phrase such as “physical damage to physical property” requires a changed physical state to the property affected; and, depending on the terms of the clause, were confined to the physical consequences, not financial consequences. In Pilkington, a small number of many glass panels manufactured and installed by the insured proved defective, requiring remedial measures not involving removal, and there was no physical damage amounting to loss of or physical damage to physical property.

Sturges Manufacturing Co v Utica Mutual Insurance Co 37 NY 2d 69; 332 NE 2d 319 (1975), which involved defective straps on ski bindings, was based on a policy that referred to “injury” not “physical injury”. In Maryland Casualty Company v WR Grace & Company [1994] USCA2 557; 23 F 3d 617 (2^nd Cir, 1993) and United States Fidelity & Guaranty Co v Wilkin Insulation Co 144 Ill 2d 64; 578 NE 2d 926 (1991), there was physical injury to tangible property because the property into which asbestos was incorporated had been physically injured by actually being contaminated. In Marathon Plastics 514 NE 2d 479 (1987) it was held that PVC pipes with leaking seals constituted property damage though there was no physical injury to the water system, but it was later held that it was wrongly decided: Bituminous Casualty Corp v Gust K Newberg Construction Co 218 Ill App 3d 956; 578 NE 2d 1003 (1991); and Diamond State Insurance Co v Chester-Jensen Co 243 Ill App 3d 471; 611 NE 2d 1083 (1993) on the basis that policies must be interpreted by the standard of construction of contracts, and as the policy explicitly required “physical injury”, it could not be construed to provide coverage for loss or diminished use simply resulting from the failure of a component to perform as promised.

In Eljer Manufacturing Inc v Liberty Mutual Insurance Co [1992] USCA7 885; 972 F 2d 805 (7^th Cir, 1992) the insured sold a defective plumbing system to contractors who installed it in construction sites. In about 5% of cases, its defect caused it to leak. The policy’s definition of property damage was “physical injury to tangible property”. The claims included cover for liability for removing functioning systems from their locations and for diminution of value of the buildings from the presence of operative but potentially defective plumbing. The Court, applying New York law and relying on Sturges Manufacturing, held that when a product is integrated into a larger entity, and the component product proves defective, there is injury to the entity to the extent that its market value is reduced in excess of the value of the defective component. Because of the policy’s drafting history the words in their context were wider than their literal sense, as the draftsmen apparently intended, and were what rational parties to it would intend for the coverage to be real rather than illusory. The terms described a loss that results from physical contact, physical linkage, as when a potentially dangerous product is incorporated into another and must be removed at some cost in order to prevent the danger from materializing. But before such sound but potentially defective work or product can be found to be injured, the expected failure rate must be sufficiently high that the product would be regarded as so likely to fail as to induce a rational owner to replace it before it does so.

Arising from the same circumstances but in respect of a policy with the same definition and to which Illinois law applied, it was held in Traveler’s Insurance Co v Eljer Manufacturing Inc 197 Ill 2d 278; 757 NE 2d 481 (2001) that the cover did not apply since to answer the trigger, the injury must be physical in nature. The clear and unambiguous words hould prevail over extrinsic considerations. The Court rejected the reasoning in Eljer Manufacturing Inc v Liberty Mutual Insurance Co (supra). In its plain and ordinary meaning, “physical injury” unambiguously connotes damage to tangible property causing an alteration in appearance, shape, color or in other material dimension. Coverage is not triggered if the system does not cause any physical injury to tangible property and performs as intended. The plain language unambiguously requires physical damage to tangible property. It does not include intangible damage to property, such as economic loss by way of diminution in value of a whole, resulting from the failure of a component to perform as promised.

 

In California, before 1973 property damage was defined as “injury to or destruction of tangible property.”, but after that, the standard policy defined it as “i) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or ii) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period”, which was more restrictive. In Armstrong World Industries Inc v Aetna Casualty and Surety Co 52 Cal Rptr 2d 690 (1996), all claims, whether for release of asbestos fibres or for mere installation of asbestos, were held to be covered as “property damage” under all policies. It is an act of contamination that amounts to physical injury and, even without a release of fibres, the diminished value resulting from the incorporation of asbestos in a building constitutes property damage.

 

In Shade Foods Inc v Innovative Products Sales and Marketing 93 Cal Rptr 2d 364 (2000), the insured supplied contaminated material to a cereal maker which incorporated it into its product. The Court found physical injury.

 

In F & H Construction v ITT Hartford Insurance Company of the Midwest 12 Cal Rptr 3d 896 (2004), where property damage was defined as “physical injury to tangible property”, the insured supplied cap extensions to be welded to steel piles in a construction. The caps were inadequate and the piles were unfit for use without reinforcing the piles. It was found that there was no physical injury to tangible property, that the incorporation of a defective component into a larger structure does not constitute property damage unless and until it causes physical injury to tangible property in at least some other part of the system, and that it was not established by the mere failure of a defective product to perform as intended nor by economic loss such as the diminution in value of the structure, the lost bonus for early completion of the project, or the modification cost. Thes were not property damage because they were intangible economic damages rather than damages “to tangible property.” Some courts had even rejected such claims under policies which defined it to mean “injury to tangible property.” (This authority was followed in Regional Steel Corporation v Liberty Surplus Insurance Corporation 225 Cal App 4^th 1377; 173 Cal Rptr 3d 91 (2014).) As a matter of degree, the harm differed from physically affectation to the property by rendering it useless for its purpose totally or to a significant degree, as in Bundy Tubing (supra).

 

There are no simple coherent rules for varied factual circumstances. Physical damage requires facts or circumstances that can be so characterised, for example, that the physical object could no longer function as its proper use, or that with such physical change it was unsuitable to use as it should because its physical integrity had been so compromised that it is not functional. Functionality and physical affectation are interwoven, for example, if there are defective water systems that had not failed but by the mere presence of the defect had damaged the value of the property affected, there is no physical harm. But it would be present if the release of asbestos fibres and the integration of exposed asbestos with property so intermingled with it that it is contaminated and so physically affected as to be harmful. Physical affectation, danger and functionality together my be characterised as physical injury. The distinctions may be fine. The purpose of Liability policies is another dimension. Further, the focus of the present issue is the coverage clause which is subject to qualification by exclusions designed to reflect the true nature of the cover: R & B Directional Drilling Pty Ltd (in liq) v CGU Insurance Limited (No 2) [2019] FCA 458, where the interference in use was temporary until the defect was rectified, though the delay attracted penalties upon the claimant under its contract. R & B Directional Drilling Pty Ltd (in liq) v CGU Insurance Limited (No 2) [2019] FCA 458

 

That said, it is difficult to identify the criteria of the degree of dysfunction necessary to amount to property damage. As the cover does not apply to the business cost of removal and/or replacement of the impediment, and as any harm done to other property in the process comes within the cover, then the feature of cover in issue is confined to the insured’s liability harm done through the loss of use of the property due to the dysfunction. Theoretically, apart from quantum, it is difficult to discern a logical distinction by nature between temporary loss of use and its permanent state for the purpose of its inclusion within the rubric of property damage. Apart from the length of harm caused, they are identical. If a construction of physical damage to property excludes a physical loss through prevention of its operation though it is otherwise undamaged, there seems to be no reason why it should not so apply equally to permanently loss of use. This reasoning has the disadvantage that the weight of the cases is against it.

 

The suggested distinction has the advantage of pragmatism over logic in that while it might be reasonable to  withhold the description of physical damage to property if the property remains physically sound but is rendered briefly dysfunctional, it is more difficult to do so if it is rendered totally and permanently so.  But even if the degree of dysfunction is a distinction, it will still be necessary to have some indication of the criteria by which the bar is to be set between those extremities. The above discussion seems to indicate that if it is not total, it needs to be of a high order.

If, hypothetically and contrary to he above finding, the interference to the tunnel’s function was properrty damage within the policy’s definition, the direct costs of removal of the concrete and conduits was directly related to it since the physical injury was the placement of the concrete with the defective conduit which had to be removed. This would have been covered.

The second loss claimed was consequential loss said to have been suffered by the head contractor as a result of the delay. The Policy referred to “all sums that the insured person  shall become legally liable to pay in respect of property damage.” The width of “in respect of” dependens on context: Technical Products Pty Limited v State Government Insurance Office (Queensland) [1989] 167 CLR 45 at 47. There is a powerful argument that policies of this kind cover the physical consequences of the damage, not economic loss that may in some causal sense flow from the damage: Rodan International Ltd v Commercial Union Assurance Company PLC [1997] Lloyds Rep IR 495 at 500; Pilkington at [28], and James Budgett Sugars Ltd v Norwich Union Insurance [2002] EWHC (Comm) 968. However, such costs from delay were sufficiently closely connected with the physical injury as to be “in respect of” it. Though consequential in a sense, they related immediately to the consequences of the defective work, and were not purely economic loss in the sense of loss of further business or reputation: R & B Directional Drilling Pty Ltd (in liq) (supra).

Exclusion: Property in physical or legal control

If at the relevant time the insured’s work on the land of another reaches the stage that the property in materials used become part of the land and the property of its owner, the insured would not have owned it but itwould have been in its physical control. Although another party may have had the ability to give directions about the site, the physical control of the work may be in the insured and its employees doing it. In an exception as to “premises (and their contents) where the premises are temporarily occupied by an insured person to carry out work”, the notion of premises or site from the definition of a schedule is a the place occupied to carry out the work, as the words “premises (and their contents)” imply. It is. The work being done is not the site: R & B Directional Drilling Pty Ltd (in liq) v CGU Insurance Limited (No 2) [2019] FCA 458.

Exclusion: Faulty workmanship

If under a chapeau, “We will not pay anything in respect of performing, correcting or improving any work undertaken”, the exclusion refers to “performing, correcting or improving any work undertaken”, to “correct” is to set right. In the context of correcting work done by faulty workmanship, setting right is the elimination of the fault and its replacement, depending on how much needs to be done to correct it in the circumstances. It would apply to the removal of defective and its replacement with suitable work. Wasted costs in correcting the work, and are excluded. Under this formula of the exclusion, consequential costs may be outside the expression “in respect of the cost of correcting”. If it simply referred to any payment “in respect of faulty workmanship” the would be broader: cf Tokio Marine and Fire Insurance Co Ltd v Costain Aust Ltd (1989) 5 ANZ Insurance Cases 60-891; Walker Civil Engineering Pty Ltd v Sun Alliance & London Insurance Plc (1998) 10 ANZ Insurance Cases 61-418. Graham Evans & Co v Vanguard Insurance Co Ltd (1981) 4 ANZ Insurance Cases 60-689 or Murphy, McCarthy & Associates Pty Ltd v Zurich Australia Insurance Ltd [2018] NSWSC 627 are not to the contrary.

 

Exclusion: Contractual liability

The relevant part of this exclusion refers to liability assumed by agreement. The use of “assume”, mening “to take to or upon oneself”, confirms that it excludes liabilities created by the explicit and voluntary acts of the parties rather than those liabilities imposed upon them by law. It is intended to apply where an insured agrees to extend the limits of the ordinary liability, such as to liability for injury without proof of fault, or to liability beyond what is usually incidental to the occurrence, for example, the degree of skill ordinarily expected of an expert: Karenlee Nominees Pty Ltd v ACN 004 312 234 Ltd (1994) 8 ANZ Insurance Cases 61-236; Zurich Australian Insurance Ltd v Regal Pearl Pty Ltd 14 ANZ Insurance Cases 61-715 at [84]–[123]; QBE Underwriting Ltd v Southern Colliery Maintenance Pty Ltd [2018] NSWCA 55. The contractual nature of a claim of a contract to perform work efficiently and the obligation to pay damages for breach is not a liability assumed within the meaning of the exclusion: R & B Directional Drilling Pty Ltd (in liq) v CGU Insurance Limited (No 2) [2019] FCA 458.

There is a suggestion of distinction between “accepted” and “assumed”: Canadian Indemnity Insurance Co v Andrews & George Co [1952] 4 DLR 690; Dominion Bridge Company Ltd v Toronto General Insurance Company [1964] 1 Lloyd’s Rep 194. Contra: Larson Construction Co v Oregon Automobile Insurance Co [1972] 2 Lloyd’s Rep 87 at 89; Zurich (supra) at [105].

 

Interest

Under s 57(2) of the of the Insurance Contracts Act 1984 (Cth), the period in respect of which the insurer is required to pay interest in accordance with the Act commences on the day when it became unreasonable for it to refuse to pay the claim. It is given an objectively reasonable period to investigate it and determine its position. If its position amounts to a refusal to pay and a court has held that a liability does exist, the refusal cannot extend this period to the adjudication, even if its position was formed and held bona fide: Fitzgerald v CBL Insurance Ltd [2014] VSC 493 at [415 - 416]; O’Neill v FSS Trustee Corporation [2015] NSWSC 1248 at [27]–[35]. If there has been no adjudication of th insured’s liability there can be no liability to indemnify because the words “shall become legally liable to pay” connote adjudication: Orica Ltd v CGU Insurance Ltd [2003] NSWCA 331; 59 NSWLR 14 at [15]–[17]; Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2018] NSWCA 100; 259 ALR 314 at [2].

 

Construction – Foreign Authorities

Authorities from the United States, Canada, England and Australia are relevant to consider in order, to the extent possible, to help provide a consistent and stable meaning to a clause in a standard business insurance policy: cf the comments of Lord Diplock in The ‘Maratha Envoy’ [1978] AC 1 at 8 D-H. This does not require other than rendering the meaning of the words of the Policy in accordance with the proper approach under Australian law. However, the views expressed in considered decisions of appellate courts of other countries in respect of clauses in like policies, in similar or identical terms, are invaluable to the process of consideration: R & B Directional Drilling Pty Ltd (in liq) v CGU Insurance Limited (No 2) [2019] FCA 458.