A crop of low-quality grass and a battle over product liability insurance has given the High Court an opportunity to emphasise the need to read exclusion clauses properly and in context (Selected Seeds Pty Ltd v QBEMM Pty Limited [2010] HCA 37).

The wrong seed, the crop of weeds, and the battle over insurance

Selected Seeds acquired seeds which it believed would produce Jarra grass, which is used as stock feed for all types of stock. Unbeknownst to Selected Seeds, the certificate of analysis was wrong and there was a substantial amount of Summer grass seeds in the product. Summer grass is low-quality and is regarded as a weed when present in commercial hay and seed crops.

The seed went through various hands until it ended up with the consumers, the Shrimps. They planted the seed, got a crop of Summer grass, and sued the seller and Selected Seeds for the costs of eradicating it from their land and the loss of use of the land during that period.

Selected Seeds settled the claim for $150,000 and turned to its insurer, which refused to pay out on the claim.

What the insurance policy said

The policy indemnified Selected Seeds for "property damage" which included "physical damage to or loss or destruction of tangible property including any resulting loss of use of that property".

An Efficacy Clause excluded "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."

The insurer argued the seed's function was to produce Jarra grass, it didn't, and therefore the liability arose from a failure to correctly fulfil its intended use or function. As a result, the settlement cost was excluded.

The Queensland Court of Appeal agreed with QBEMM. The Efficacy Clause had to be read broadly, excluding any liability which has any connection with the failure of the product to fulfil its use.

Why the insurer couldn't rely upon the Efficacy Clause

The High Court disagreed.

The first problem for the insurer was that the seed didn't just fail to produce Jarra grass. It actually produced a weed that had to be removed. It was this property damage and loss of use of the land that was the basis of the Shrimps' claim, and thus of Selected Seeds' liability.

The High Court considered that the question posed by the Efficacy Clause was whether the liability of Selected Seeds for the damage to the Shrimps' land arose out of the failure of the seeds to fulfil their use or function. The Court concluded that the answer must be "no". That liability was not caused by the failure of the seeds to produce Jarra grass. It arose by reason of the direct effect of the seeds upon the land.

This distinction (between failure to achieve your purpose, and causing actual harm) has been made before in product liability cases, most notably in the English case John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV [2001] EWCA Civ 175.

What this means for other efficacy or exclusion clauses

The High Court's decision in Selected Seeds is a sensible one for insureds, and a clear reminder of one of the basic issues in insurance: policies are to be read as a whole, and exclusions are to be read in context.