District court judgment
Supreme Court judgment
In June 2011 the Court of Appeals handed down its decision in Molram Hoist & Lifting Equipment v Bituach Haklai Ltd (CA 1228/08), which considered the cover afforded by the product liability policy.
Molram had entered into a sell agreement with a customer to provide it with a casting machine. After one part of the machine broke, Molram extended its product liability policy to include faulty design.
After several months, additional parts of the equipment broke and the customer filed a claim against the manufacturer for the faulty product and the loss of profit caused due to failure of the product. The manufacturer in turn sued the insurer, which issued a product liability policy.
The insurer, Bituach Haklai, stated that the policy did not cover loss of profit and did not cover the damage to the product itself.
The operative clause specified in the policy stated that "the insurer will indemnify the insured against any compensation the insured will be obliged to pay for damages arising out of the product".
In this context, 'damages' refers to bodily injury or damage to property, as a result of an accidental event.
Section 3 in the Product Liability Chapter includes an exclusion: "This chapter does not cover the insured for… any loss to the product itself and/or repair costs."
The Tel Aviv District Court accepted part of the plaintiff's claim and ruled that the defects in the machine occurred due to the manufacturer's negligence in the design process, which was covered in the policy. The court determined that the customer suffered loss of profits as a result of the event.
However, as the policy covers only the specific damages mentioned therein, not including consequential loss, the loss of profit is not covered.
Molram appealed to the Supreme Court.
Loss of profit
The court distinguished between actual tangible damage to the property and financial loss (eg, loss of profit). It stated that loss of profit is a consequential loss that is not included under property damage.
According to the judgment, even where the loss of profit results from the malfunction of a machine, it should be considered as consequential damage and not as property damage. Therefore, in the absence of an explicit coverage clause that states otherwise, such loss is not covered under a property or product liability policy.
Damages to the product
The court distinguished between the fracture that occurred before the policy was extended and those that occurred after the extension. The restriction of a standard product liability policy specifically excludes any loss relating to the product itself and thus relates to the situation before the policy was extended. The first fracture was therefore not covered.
However, before the additional fractures occurred, the manufacturer extended the policy to cover its liability for any damages as a result of faulty design.
The Supreme Court therefore stated that the specific extension meant that the policy would also cover the damages caused to the product itself, provided that such damages were as a result of a defect in the design.
The court explained that according to the rules of interpretation of an insurance contract, the contract should be construed most strictly against the drafter and according to the insured's expectations. The reasonable expectations of Molram were that once it extended the policy and paid additional premiums, the policy would include risks that were not covered under the basic policy.
For further information on this topic please contact Rachel Levitan or Idit Speiser at Levitan, Sharon & Co by telephone (+972 3 688 6768), fax (+972 3 688 6769) or email ([email protected] or [email protected]). The Levitan, Sharon & Co website may be accessed at www.levitansharon.co.il.