December 2010 - Insurer cannot rely on exclusion clause
The High Court has found insurer QBE could not rely on an exclusion clause to deny liability to its insured, seed merchant Selected Seeds Pty Ltd.
Selected Seeds had sold jarra seed to a couple who intended to grow a jarra and hay crop as quality stock feed. Instead, the product failed to produce jarra grass and instead grew a weed crop, summer grass.
Chief Justice Robert French and Justices Ken Hayne, Susan Crennan, Susan Kiefel and Virginia Bell overturned a 2009 Queensland Court of Appeal decision for QBE, in which the insurer had challenged the interpretation of its broadform liability policy.
Selected Seeds was granted special leave to appeal against that decision to the High Court.
Selected Seeds’ policy provided indemnity against public and product liability.
The policy schedule contained endorsements which formed part of the policy. Endorsement 3 was an “efficacy clause”, which excluded liability arising from a product failing to meet its “intended use or function”. The appeal focused on that aspect of the clause.
The issue was whether Selected Seeds’ liability to the buyer arose because of damage caused by planting the wrong seed or from what the supplied jarra grass failed to do.
In the initial Queensland Supreme Court proceedings, QBE argued Selected Seeds’ supply of the seed was “too remote” from the damage suffered and did not come within the insuring clause.
But Justice Margaret McMurdo drew a distinction between what the clause excluded and how Selected Seeds’ liability arose and ruled the efficacy clause did not apply.
“Liability for damages from what was done to the land arose not from what the product failed to do, grow jarra grass, but what it did do to the claimants’ property,” she said.
The Court of Appeal overturned her ruling, but the High Court said QBE’s argument attempted to address the relevant liability as the damage to the land, but did so in a way which “inverted the true question posed by the efficacy clause”.
QBE said if the seeds had functioned as intended and fulfilled their intended use, there would have been no damage to the land.
“The liability of Selected Seeds for damage to the land was not caused by failure of the seeds to produce jarra grass. It arose because of the direct effect of the seeds on the land.
The seeds were so contaminated that only summer grass was produced. The efficacy clause does not apply,” Chief Justice French said.
The case has important ramifications for the insurance industry.
By now all members should have received the conference issue of AILA News.
The Adelaide conference was a huge success and I congratulate the SA chapter and the conference committee for all the hard work they put in to ensure the event was first class.
Hard act to follow
I remind members that Perth is the venue for next year’s annual conference.
Diarise the dates now – October 19-21, at the Hyatt Regency Hotel. While the Adelaide conference is a hard act to follow, the WA committee is working hard to ensure Perth hosts another excellent conference.
I welcome Northern Territory broker Lance Schmidt, from AFA Insurance Brokers, to the AILA board. I thank all the board members, who have worked tirelessly during 2010 for the organisation, despite the heavy workloads from their day jobs.
I would also like to thank Brisbane barrister Ron Ashton for agreeing to present the annual Geoff Masel memorial lecture.
He has been criss-crossing around the nation to present the lecture to all chapters and we appreciate the time and effort he has devoted to the task.
With the festive season approaching, I wish all AILA members season’s greetings. I trust you all have a chance for a holiday. Stay safe.