A Supreme Court of Queensland judge has considered the definition of ‘Products’ in the context of a broadform liability policy, and in particular whether a house constructed by the insured was a Product.

The insured constructed a house with aluminium windows. A few years later a severe storm blew in the windows and wind and water tore through the house. The poor old homeowners made a claim against the builder.

The builder turned to his broadform liability insurer, which refused indemnity on the basis of a typical ‘product defect’ exclusion in the policy, namely: Property Damage to products if the damage is attributed to any defect in them or to their harmful nature or unsuitability.

The insurer’s position was that the house, which suffered damage because of the deficiently installed windows, was the builder’s Product. In that regard, the policy had a typical definition of ‘Products’: Products means anything which is or is deemed to have been manufactured…assembled, erected or constructed by you.

The judge relied on an English Court of Appeal decision in which it was decided that a product is something which (at least originally) is a tangible and moveable item which can be transferred from one person to another, and not something which only came into existence to form part of the land on which it was created. On that basis, the judge decided that the product defect exclusion did not apply.

However, the English decision concerned a policy which had a different definition of ‘Product’ the definition was: any product or goods manufactured, constructed, installed…by the insured.

Contrast that with the definition anything assembled, erected, etc in the broadform policy. The English court focused on the word ‘product’ which was used in the definition. That word was not used in the broadform policy definition. So instead of relying on a case which considered whether a house was a ‘product constructed by the insured’, he should have considered whether the house was ‘any thing constructed by the insured’.

Further, the policy reviewed by the English Court was a ‘building services liability policy’, intended to cover liability for faulty workmanship, materials or design. The English court thought it would be contrary to the essential purpose of the policy to construe the exclusion as removing cover in respect of defects in the insured’s buildings. That was, of course, quite a different kind of policy to the broadform liability policy considered by the Queensland judge.

The judge went on to find support for his conclusion that the house was not a Product from the presence of another exclusion in the broadform policy, which excluded cover in respect of: personal injury or property damage caused by the demolition…removal of support…alteration…construction, erection of and/or addition to any building by or on behalf of the insured. That exclusion had no relevance to the claim because of a write-back in respect of contracts worth less than $500,000. However, the judge thought that the write-back would be ‘rendered completely meaningless’ if cover written back was then taken away by the product defect exclusion.

In that regard, the judge appears to have read the words property damage caused by the…construction…of any building as excluding cover in respect of damage arising from defects in a building. That is a surprising construction of the clause.

Bigby v Kondra and Zurich Australian Insurance Ltd

This is the first Australian superior court decision concerning the question of whether a house constructed by an insured is a ‘Product’ for the purpose of a broadform liability policy. The judge concluded that a house is not a Product. In our view the decision is wrong because it relies on an English decision concerning a different kind of policy with a differently worded exclusion, and because comfort is drawn from another exclusion in the broadform policy which has a different purpose.