In Selected Seeds Pty Ltd v QBEMM Pty Ltd and Ors [2010] HCA 37 the High Court considered whether QBEMM Pty Ltd (the Insurer) was entitled to rely upon an efficacy clause in an insurance policy to deny liability to its insured, Selected Seeds Pty Ltd (Selected Seeds), who were 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.

Facts

Selected Seeds, a seed merchant, sold a batch of Jarra Grass seed, a type of livestock fodder, to a Mr and Mrs Shrimp (the Shrimps). The Shrimps planted the seed for fodder.

As the Jarra Grass seed was contaminated with Summer Grass seeds, by the time the seeds grew, only Summer Grass, which is a crop of lower value than Jarra Grass, was reaped by the Shrimps.

Eradication measures relevant to the Summer Grass was required to be taken by the Shrimps before the land could be used to grow fodder as originally intended. The Shrimps subsequently brought proceedings against Selected Seeds to recover damages in relation to the damage sustained to their land by reason of the Summer Grass. The Shrimps’ claim was settled and Selected Seeds sought indemnity from its insurer in relation to the settlement reached with the Shrimps, and Selected Seeds’ costs under a policy of insurance (the 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.

Selected Seeds subsequently brought proceedings against the Insurer in the Supreme Court of Queensland. 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 it caused to the Shrimps’ property.

The Insurer subsequently appealed the decision of the Supreme Court to the Queensland Court of Appeal. the Queensland Court of Appeal reversed the Supreme Court decision 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 and seed, and as such finding that the efficacy clause was triggered to exclude Selected Seeds’ claim.

By special leave, Selected Seeds appealed to the 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 Seed and grass, but 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 the summer grass to the land.

Implications

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 contract of insurance as a whole, and be given its natural and ordinary meaning.

The High decision is also important to both Insurers and Insured’s alike as it confirmed that clauses contained a policy of insurance excluding cover for the failure of an Insured’s product to fulfil its use or function will only exclude cover for that failure, as opposed to any other loss or damage caused by the defective product.