Four years after the Pilkington1 case about the failed glazing at the former Eurostar terminal, Seele Austria GmbH & Co v Tokio Marine Europe Insurance Limited2 continues the theme of when a defect causes damage, and when there may be cover for mere defects.
Seele was subcontracted to design and install ‘punched’ windows in a development at Paternoster Square next to St Paul’s Cathedral. Tokio Marine provided combined Contract Works and Third Party Liability cover for the building project.
Following installation, the windows were tested for water penetration. This revealed defects in the seals that allowed water to enter the building. To allow access to the defective windows for remedial works, external cladding and internal finishes, including ceilings, floors and plasterboard, had to be opened up and replaced.
Seele had the benefit of cover under the policy for loss of or damage to insured property unless a policy exclusion applied. Memorandum 18 stated this included damage arising out of a defect in design, workmanship or materials other than in respect of
(1) the cost necessary to replace, repair or rectify insured property which was defective in design, materials or workmanship, and what could be described as “access damage”, namely loss or damage caused to insured property to enable replacement, repair or rectification of defective property. If the defect had caused damage to insured property other than access damage, the exclusion was limited to the cost of any additional work needed to improve the original design.
(2) the cost necessary to replace, repair or rectify insured property which was in a defective condition due to a defect in design, materials or workmanship and insured property lost or damaged to enable replacement, repair or rectification of such defective insured property. This was not to apply to other insured property which was not defective but was unintentionally damaged as a consequence of the defect in design, materials or workmanship.
(3) “The Insurers will additionally indemnify the insured in respect of intentional damage necessarily caused to the Insured Property … to enable the replacement, repair or rectification of Insured Property …which was in a defective condition…”
Memorandum 18(3) was the odd man out, since it appeared to be providing cover even though it was in a list of exclusionary provisions.
Court of Appeal decision
The central issue for the Court of Appeal was whether memorandum 18(3) operated as a standalone indemnity for intentional damage caused by remedial works or whether it was conditional on the operation of memorandum 18(2) and provided cover only if the defective insured property caused accidental physical damage either to the defective insured property itself or some other part of the works as a whole.
The Court of Appeal decided by a majority – so it was far from a clear cut point – that memorandum 18(3) provided a standalone indemnity. Accordingly, even without physical damage to the defective insured property or the rest of the works, the damage deliberately caused to gain access for remedial works would be covered.
The damage to the external cladding and internal finishes to carry out remedial works constituted damage to insured property other than the defective windows. The cost of remedying the defects in the windows and making good the access damage was not covered under memorandum 18(1) or memorandum 18(2) as the defects were not damage and did not cause damage to other parts of the works save for intentional access damage.
As a standalone provision, memorandum 18(3) nonetheless indemnified Seele for making good the intentional access damage.
Whilst the Court of Appeal was essentially undertaking a policy interpretation exercise in relation to memorandum 18(3), the decision is useful in highlighting the distinction between damaged and defective property. The similarities between Seele and Pilkington v CGU Insurance Plc are striking.
Pilkington involved toughened glass panels incorporated into the roof of the Eurostar terminal at Waterloo. A small number of panels were fractured and costs were incurred in installing safety nets under the remaining panels to prevent risk of injury to the public using the terminal. Pilkington sought indemnity from their global liability insurers, CGU. The product liability section of the CGU policy covered “loss of or physical damage to physical property not belonging to the insured” caused by an article supplied. Pilkington argued that the terminal structure was physically damaged by the installation of the defective glass panels and, accordingly, that the cost of the installation of safety precautions was covered under the CGU policy.
The Court of Appeal held that to trigger cover the insured had to demonstrate some form of damage to property caused by the product, for which purpose a defect in the product itself was not sufficient, and that the loss claimed resulted from the damage to property. As there was no property damage other than to the glass panels themselves, an indemnity would only be available if the incorporation of a defective product into a building constituted damage to property. This was not the case where the defective product had caused no physical harm to the building and functioned effectively with the other components of the building, subject only to the possibility of some future harm.
In Seele the Court of Appeal recognised that it may be difficult to identify the dividing line between defective property and other property in determining whether there has been damage to other property. Where defective products which are easily identifiable are incorporated into buildings or structures, such as those in the Pilkington and Seele, identifying whether or not there has been damage to property is likely to be straightforward. However, in other cases, the distinction can be less obvious and determining whether the defective product has caused damage to other property, rather than pure financial loss, may be significantly more complex.
Quite where the law will go after Waterloo and St Paul’s remains to be seen, but at least the general principles to apply in cases of this type seem fairly predictable.