COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (HHJ MICHAEL DEAN QC)
London, WC2A 2LL
B e f o r e :
LORD JUSTICE JONATHAN PARKER
MR JUSTICE CHARLES
| PILKINGTON UNITED KINGDOM LIMITED
|- and -
|CGU INSURANCE PLC
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Andrew Phillips (instructed by Messrs Greenwoods) for the respondent
Crown Copyright ©
Lord Justice Potter:
The Terms of the Policy
"a. all sums which the Insured shall become legally liable to pay for compensation and claimants' and costs and expenses in respect of any Occurrence to which this Policy applies as stated in the Specification and in connection with the Business.
b. all costs and expenses of litigation incurred with the written consent of the Company in respect of a claim against the Insured to which the indemnity expressed in this Policy applies."
"3. Products Liability
a. Bodily injury to or illness or disease of any person except that arising out of and in the course of his employment by the Insured under a contract of service or apprenticeship
b. Loss of or physical damage to physical property not belonging to the Insured or in the charge or under the control of the Insured or any servant of the Insured
caused by any commodity article or thing supplied installed erected repaired altered or treated by the Insured and happening during the Period of Indemnity elsewhere than at the Insured's premises."
This cover was subject to a limit of £10 million for any one period of indemnity.
"This Policy shall not apply to liability assumed by the Insured by agreement in respect of injury illness disease loss or damage caused by any commodity article or thing supplied installed or erected by the Insured unless such liability would have attached in the absence of such agreement except as may otherwise be overridden in any other Particular Clause herein."
"This Policy shall not apply to liability in respect of recalling removing repairing replacing reinstating or the cost of or reduction in value of any commodity article or thing supplied installed or erected by the Insured if such liability arises from any defect therein or the harmful nature or unsuitability thereof.
Provided always that this clause shall not apply to liability for damage as defined in this Policy to any component supplied by a third party and incorporated in a product supplied by the Insured."
"Notice of Claims
1. Any one occurrence which might give rise to a claim under the Policy shall be reported in writing to the company as soon as possible and as far as practicable no alteration or repair shall be carried out until the company has had an opportunity of investigating. The Insured shall give immediate notice of any impending prosecution inquest fatal injury or civil proceedings in connection with the occurrence and shall send to the Company immediately every relevant document"
"The due observance and fulfilment of the terms and provisions and conditions insofar as they relate to anything to be done or complied with by the Insured and the truth of the statements in the proposal made by him which shall be the basis of this contract and held to be incorporated herein shall be conditions precedent to any liability of the Company"
i) Was the claim one in respect of "loss of or physical damage to physical property not belonging to" Pilkington and not falling within the exception in Particular Clause 16?
ii) Had Pilkington complied with their obligation to give notice of the occurrence or of impending civil proceedings and, if not, did such failure relieve CGU from liability?
The proceedings below
The decision of the judge
"The panels at the time of installation were in precisely the same physical state as upon manufacture. They may or may not fail. Very few of them have failed so far. Undoubtedly the glass does carry some risk of future failure which is not acceptable to Eurostar. If any do fail they may or may not cause personal injury to people in the terminal or damage to its fabric. It would appear the risk of personal injury is the more serious and the one that concerns Eurostar. It is less likely that fragments of glass would cause significant damage to the physical fabric of the terminal. Only if that were to happen could it be said that the terminal had suffered physical damage. There is no suggestion that the defective panels could not be removed or replaced at a cost. Neither Eurostar or Tarmac have elected to do so, no doubt for good financial reasons. Expenditure incurred to avoid the risk of physical damage to the terminal or, more realistically, personal injury to people in the terminal, is not expenditure incurred as a result of an occurrence involving physical damage to the physical fabric of the terminal. This policy contains no sue and labour clause of a type commonly found in marine insurance policies."
"33.The real complaint is not that the terminal sustained physical damage upon installation of the glass, but that the glass was not suitable for the terminal operators' purpose under their contracts with Tarmac. This may well have produced an economic loss in terms of the expense of remedial measures and loss of use but such loss was not as a result of physical damage to physical property in terms of the distinction recognised in the three English cases which I have considered. In truth, the claimants are seeking an indemnity by way of a guarantee of the quality and fitness of their product for a particular purpose rather than liability to a third party as a result of an occurrence causing physical damage to the physical property of a third party. Apart from the fact that, in my judgment, such a liability does not fall within the ordinary meaning of the basic cover, such a liability is expressly excluded by condition 16 of the policy "
The extent of the cover
" there was on any view an Occurrence but it is still necessary to identify what the extent of that Occurrence was. In my judgment on the facts found by the Official Referee, Judge Kershaw was right to include as a consequence of that Occurrence the damage that was caused to the commodity itself, that is to say the caking of the powder which was caused by the hydroscopic effect of the staining of the cartons which had been caused by a defect in the commodity. But I do not consider that Judge Kershaw was right to construe the clause as if an Occurrence could include mere damage caused by the commodity to itself. Such a construction fails to give effect to the natural meaning of the language which clearly contemplates that the commodity will cause physical damage to something else. Further, that view would contemplate that, without more, the products liability policy would cover deterioration in the commodity supplied. In my judgment the correct analysis is that there was an Occurrence the staining of the cartons of which a consequence was the damage to the commodity the caking of the powder. " (emphasis added)
"The phrase 'in respect of' carries with it a requirement that the liability relate to the identified Occurrence. The effect of the decision of the judge to treat the words 'in respect of the Occurrence' as meaning no more than "in connection with the same causes of action as gave rise to the liability for the Occurrence" transforms this cover from a products liability cover to a policy covering general contractual liabilities. A products liability policy in which the cover provided is defined in words such as those used in the present policy is confined to liability for physical consequences caused by the commodity or article supplied. The liability of the assured in damages will have to be expressed in terms of money but that liability must be in respect of the consequences of the physical loss or damage to physical property (or some personal bodily injury)." (emphasis added)
"The general intention of special clause H is apparent from its wording and is supported by the heading used "Damage to Goods Supplied". It makes it clear that the cover in the policy relates to physical consequences, not mere financial consequences and relates to the liability for physical consequences of the supply of defective goods but not to breaches of contract as such."
" the relevant head of loss is not caused by any defects in the packaging but is caused by Mars choosing not to place further orders with LMG. The same point can be demonstrated by appreciating that causation is, in the context of this cover, a physical concept: the loss or damage has to happen physically during the period of the insurance. It is not possible to treat a liability to pay compensation in respect of an economic loss which arises from a loss of goodwill as being in respect of physical loss or damage physically caused."
"It is clear that death, bodily injury, illness, loss or damage are all physical consequences. The type of loss claimed against the insured for which the indemnity is sought, that is to say, the loss of profit on repeat orders, is not loss or damage of the physical kind usually understood by those words."
"The central issue in this case when if ever the incorporation of one product into another can be said to cause physical injury pivots on a conflict between the connotations of the term "physical injury" and the objective of insurance. The central meaning of the term as it is used in everyday English the image it will conjure up in the mind of a person unschooled in the subtleties of insurance law is of a harmful change in appearance, shape, composition, or some other physical dimension of the 'injured' person or thing. If water leaks from a pipe and discolours a carpet or rots a beam, that is physical injury, perhaps beginning with the very earliest sign of rot the initial contamination (an important question in asbestos cases as we shall see). The ticking time bomb, in contrast, does not injure the structure in which it is placed, in the sense of altering the structure in a harmful, or for that matter in any way until it explodes. But these nice, physicalist, 'realistic' (in the philosophical sense) distinctions have little to do with the objectives of parties to insurance contracts. The purpose of insurance is to spread risks and by spreading cancel them
Nor are literal interpretations, which assume that words or phrases are always used in their ordinary-language sense, regardless of context, the only plausible interpretation of contractual language, especially when the contract is between sophisticated business entities. We should at least ask what function 'physical injury' might have been intended to perform in a comprehensive general liability policy beyond just drawing a commonsensical, lay person's, ordinary-language distinction between physical injury and physical non-injury.
Apparently the term was intended to distinguish between physical and non-physical injuries rather than to distinguish between injuries and non-injuries."
"We can now see more clearly that two senses of "physical injury" are competing for our support. One, which the insurers want to adopt, is an injury that causes a harmful physical alteration in the thing injured. The other, which is what the draftsmen of the Comprehensive General Liability Insurance policy apparently intended and what rational parties to such a policy would intend in order to make the policy's coverage real and not illusory, is a loss that results from physical contact, physical linkage, as when a potentially dangerous product is incorporated into another and, because it is incorporated and not merely contained (as a piece of furniture is contained in a house but can be removed without damage to the house), must be removed, at some cost, in order to prevent the danger from materializing."
" the drafting history of the property damage clause, and the probable understanding of the parties to liability insurance contracts, persuade us that the incorporation of a defective product into another product inflicts physical injury in the relevant sense on the latter at the moment of incorporation here, the moment when the defective Quest systems were installed in homes."
"There is immediately something counter-intuitive about saying that physical injury has been done to a house in which a functioning plumbing system has been installed. Of course when we determine later (years later) that a good number of the systems will fail 5% in this case then perhaps there is a sense in which the 'injury' was present from the moment of installation: this is the majority's 'ticking time bomb' metaphor. But is there physical injury? The majority believes that interpreting the phrase is all a matter of emphasis 'physical injury' versus 'physical injury'. In my view, the phrase must be interpreted as 'physical injury', with both words given effect. The majority's account cannot give both words meaning at the same time. Something physical occurs when the plumbing is installed but it is not injury; and we might say that there is injury (of a sort) when the plumbing is installed but it is not physical.
But I am not one to get too bogged down in assertedly 'plain' or 'objective' language. The majority properly relies on the purpose of insurance: spreading risks. That purpose, however, does not extend to risks which were not bargained for ex ante. (When courts impose risks on insurers that were not paid for by the insured, other insureds will ultimately pay in the form of higher premiums.) The question, then, is what the parties contemplated when they contracted for insurance to cover 'physical injury'.
I am not at all convinced that these parties intended to refer to the installation of plumbing systems that would fail years later. As counsel for Travelers explained at oral argument, Eljer could have purchased other kinds of insurance that would have covered risks from installation although we can safely assume that the costs of such insurance would have been higher
Another difficulty with the majority's approach is its reliance on the indeterminate notion of a 'defective' product to perform the function of the word 'physical'. In this case the Quest systems failure rate was 5%, so perhaps we could say that each system installed was 'defective'. But all products have some failure rate. If a product has a failure rate of 1%, or 1/10th of 1%, is it 'defective' such that it caused 'physical injury' when installed?"
" In sum, this court now finds that, under its plain and ordinary meaning, the term "physical injury" unambiguously connotes damage to tangible property causing an alteration in appearance, shape, color or in other material dimension. We reject the policyholders' assertions that under the post-1981 excess CGL policies, the very installation of a functional Quest system into a structure constitutes 'property damage'. The plain language of the policies unambiguously states that the insurable event that gives rise to the insurers' obligation to provide coverage is the physical damage to tangible property. The term "physical" limits the word "injury" in the policies' definition of "property damage".
[19-21] We also conclude that under its plain and ordinary meaning, the phrase "physical injury" does not include intangible damage to property such as economic loss "
"The policy would not only provide insurance against tort liability, but would function as a performance bond as well."
"the unique nature of asbestos products, which disseminate toxic fibres upon installation and continuously contaminate a structure and its contents subsequent to installation. It follows, therefore, that this contamination, which Wilkin held constituted the 'physical' injury to the property, occurs upon installation of these toxic products. Wilkin was premised upon the specific facts before the court in that case and not upon a general proposition that incorporation of a defective component into another structure constitutes 'physical injury'."
" the American Courts adopt a much more benign attitude towards the insured; this seems to be based variously on the "folly" argument in Leebov or "general principles of law and equity" (Slay at p.1368) or that insurance contracts are: "contracts of adhesion between parties who are not equally situated" giving rise to the principle:
that doubts as to the existence or extent of coverage must generally be resolved in favour of insured
or because the Courts have
adopted the principle of giving effect to the objectively reasonable expectations of the insured for the purpose of rendering a "fair interpretation" of the boundaries of insurance cover. [Broadwell at p.80]."
"For the most part these notions which reflect a substantial element of public policy are not part of the principles of construction of contracts under English law. These are well known and can be summarised as follows:
1. The words of the policy must be given their ordinary meaning and reflect the intention of the parties and the commercial sense of the agreement. Thus they must be construed in their context or, as Lord Mustill put it in Charter Reinsurance Co Ltd v Fagan & others  2 Lloyds Rep 113 at p.117 col.1 "the words must be set in the landscape of the instrument as a whole".
2. A literal construction that leads to an absurd result or one otherwise manifestly contrary to the real intention of the parties should be rejected, if an alternative more reasonable construction can be adopted without doing violence to the language used.
3. In the case of ambiguity the construction which is more favourable to the insured should be adopted; this is the contra proferentem rule."
Notice of claim
" is one and entire, and it is to my mind unreasonable to hold that one sentence in its middle is a condition precedent while the rest of the condition cannot be so considered. A policy of this nature, in case of ambiguity or doubt, ought to be construed against the office and in favour of the policy-holder, and it seems to me unreasonable to hold that the office can escape from all liability by reason only of the omission to duly record in a proper wages book the name of every employee and the amount of his wages. This is only required for the purpose of the statement which, by the proposal, the insured agreed to render at the end of each period of insurance. In my opinion, it ought not to be regarded as in any sense a condition precedent, and it follows that, in my opinion, the appeal fails and must be dismissed with costs."
"It is especially incumbent on insurance companies to make clear, both in their proposal forms and in their policies, the conditions which are precedent to their liability to pay, for such conditions have the same effect as forfeiture clauses, and may inflict loss and injury to the assured and those claiming under him out of all proportion to any damage that could possibly accrue to the company from non-observance or non-performance of the conditions. Accordingly, it has been established that the doctrine that policies are to be construed "contra proferentes" applies strongly against the company: In Re Etherington."
Lord Justice Jonathan Parker:
Mr Justice Charles:
LORD JUSTICE POTTER: This appeal is dismissed for the reasons set out in the judgment, a copy of which is now handed down and available. Other copies of which are available in the well of the court for any member of the public who wishes to read it.