First instance ruling
High Court decision
In a recent decision the High Court reaffirmed that the construction of an exclusion clause must be determined in light of the policy as a whole.
In Selected Seeds Pty Ltd v QBEMM Pty Ltd(1) the High Court considered whether QBEMM Pty Ltd (the insurer) was entitled to rely on an efficacy clause in an insurance policy to deny liability to its insured, Selected Seeds Pty Ltd, which was sued by a grower in connection with the supply of contaminated seed. This case is relevant to the construction and interpretation of exclusion clauses in insurance policies.
Selected Seeds, a seed merchant, sold a batch of Jarra Grass seed (a type of livestock fodder) to Mr and Mrs Shrimp. The Shrimps planted the seed for fodder.
As the Jarra Grass seed was contaminated with Summer Grass seed, by the time the seeds grew, the Shrimps could reap only Summer Grass - a crop of lower value than Jarra Grass.
The Shrimps had to take measures to eradicate Summer Grass before they could use the land to grow fodder as originally intended. The Shrimps subsequently brought proceedings against Selected Seeds to recover compensation in relation to the damage sustained to their land by the Summer Grass seeds. The Shrimps' claim was settled and Selected Seeds sought indemnity and costs from its insurer under their insurance policy.
The policy insured Selected Seeds for "all sums which You [Selected Seeds] become legally liable to pay by way of compensation…in respect of... property damage... caused by an occurrence".
However, an efficacy clause contained in the policy excluded cover for:
"any liability arising directly or indirectly from or caused by, contributed to by or arising from... 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 [Selected Seeds]."
The insurer relied on the efficacy clause to refuse indemnity to Selected Seeds under the policy.
First instance ruling
Selected Seeds subsequently brought proceedings against the insurer in the Queensland Supreme Court. The trial judge found for Selected Seeds, concluding that liability for damages arose not from what the product failed to do, but from the damage that it caused to the Shrimps' property.
The insurer subsequently appealed the decision of the Queensland Supreme Court to the Queensland Court of Appeal. The court of appeal reversed, finding that Selected Seeds' liability to the Shrimps arose because the seed did not correctly fulfil its represented or warranted quality as Jarra Grass seed, or correctly fulfil its intended function of producing Jarra Grass. As such, it found that the efficacy clause was triggered to exclude Selected Seeds' claim.
By special leave, Selected Seeds appealed to the High Court.
High Court decision
Chief Justice French, with Justices Hayne, Crennan, Kiefel and Bell, confirmed that the liability excluded by the efficacy clause was for property damage caused by, or arising from, the failure of a product to fulfil its use or function, and that the damage to the Shrimps' land did not arise out of the failure of the seeds that were sown to fulfil their intended use or function to produce Jarra Grass; rather, the damage was caused by the introduction of Summer Grass.
The High Court applied a narrow interpretation of the efficacy clause by construing it in terms of the policy as a whole, in particular the type of damage covered by the policy, and found that the policy covered Selected Seeds' liability to the Shrimps.
Accordingly, the High Court found that it was irrelevant whether Selected Seeds' liability was connected with the seed failing to fulfil its use or function. The relevant question was whether the damage complained of was caused by the introduction of Summer Grass to the land.
The High Court decision in Selected Seeds confirmed that while regard must be had to the language used in an exclusion clause, such a clause must be read in the context of the insurance contract as a whole and be given its natural and ordinary meaning.
The High Court decision is also important to both insurers and insureds alike, as it confirmed that clauses contained in an insurance policy excluding cover for the failure of an insured's product to fulfil its use or function will exclude cover only for that failure, as opposed to any other loss or damage caused by the defective product.
For further information on this topic please contact Jason Buttigieg at Piper Alderman by telephone (+61 2 9253 9999), fax (+61 2 9253 9900) or email ([email protected]).