JUNE 2013

Court rules policy covered costs

by Nicole Sosnowski, KT Journalism

The Federal Court has found an insurance policy covered a plastic resin supplier’s costs incurred while proving its product did not cause tuna tins to corrode.

Nuplex Industries (Australia) Pty Ltd’s action against its insurer, QBE, was a cross-claim within a complex courtroom stoush.

Court proceedings began in May 2009, when Visy Packaging Pty Ltd sued Siegwerk Australia Pty Ltd. Visy manufactures, among other products, metal cans with "easy open ends" that open via a ring-pull device attached to the end. Visy supplies the cans to tuna canners.

Siegwerk Australia supplied Visy with a lacquer to seal the inside of the can lids. A component of the lacquer was an epoxy-phenolic resin supplied by Nuplex.

Visy received reports in July 2004 of some easy open ends corroding four to six weeks after the cans were filled with fish. Visy subsequently paid a tuna processor and a supermarket supplier more than $7 million in losses.

Visy claimed Siegwerk Australia’s lacquer failed to properly seal the cans, causing the corrosion, and it sought reimbursement of its losses.

In September 2009, Siegwerk Australia filed a cross-claim against Nuplex, arguing the lacquer failed because Nuplex substituted one epoxy resin component for another in manufacturing the final resin supplied to Siegwerk Australia.

Visy and Siegwerk Australia settled in August 2010, eight months after they began court-ordered mediation, with Siegwerk Australia paying Visy $2.25 million, including interest and costs.

Siegwerk Australia later went into liquidation, so its cross-claim against Nuplex was prosecuted by Zurich Australian Insurance, which had provided a $750,000 costs security to enable the case to proceed.

In May 2011, Nuplex filed a cross-claim against QBE, seeking indemnity under its broadform liability policy for any liability it may have to Siegwerk, and indemnity for costs and other defence expenses incurred.

The Federal Court had to determine two issues. First, whether Nuplex's resin substitution caused the lacquer to fail. To do that, Siegwerk Australia had to prove a causal link between Nuplex’s substitution and the corrosion.
           
Justice Peter Gray found Siegwerk Australia had insufficient evidence, so its theory was plausible, but "amounts to nothing more". He dismissed its claim and ordered Zurich to pay $750,000 of Nuplex's costs.

The second issue was whether Nuplex’s insurance policy would respond. QBE argued it did not, because there was no "property damage" in Siegwerk's claim against Nuplex, only pure economic loss from the recall and withdrawal from sale of large numbers of cans. "Clearly, this argument cannot be accepted. The property damage unquestionably first occurred during the period of insurance," Justice Gray said.  

QBE also argued a product recall exclusion excluded the entire claim because most of the tuna cans were withdrawn from the market for a suspected defect. "This argument is based on a false assumption," Justice Gray said. 

He said the exclusion was directed to the cost and expenses associated with withdrawing products from the market or from use, like the cost of acquiring a temporary substitute for a product. The clause did not target loss of use of the property itself. "To regard [a clause] as excluding any claim for loss of use of products withdrawn from the market because of a suspected defect ... would amount to a substantial negation of the intention of the policy."

Justice Gray found Siegwerk’s claim against Nuplex fell within the coverage clause of Nuplex’s policy and was not excluded by any of the exclusions on which QBE relied. Although Siegwerk’s claim failed, the policy required QBE to defend the proceeding in Nuplex’s name. "QBE is obliged to bear the costs of that defence."

He ordered QBE to pay all remaining legal defence costs, apart from a $500,000 deductible.

(Visy Packaging Pty Ltd v Siegwerk Australia Pty Ltd [2013], FCA 231, 19/03/2013)