Liability insurance: definition of “product”

This recent Commercial Court decision is of interest to anyone involved in combined liability insurance. Although largely restricted to its facts, the court considered the definition of “Product”, the operation of efficacy exclusions in product liability cover and the inter-relationship of product liability and public liability sections in a contractor’s combined wording. More generally, the case provides a salutary reminder to insurers that the Market’s understanding of how a type of insurance operates will count for little if the policy wording provides otherwise.

Facts

The defendant was a groundworks contractor which undertook various works at a building site in Liverpool, including casting and fixing in place a reinforced concrete crane base on top of four piles. The crane base was designed by the project’s structural engineer and the piles had been installed by another contractor. The defendant’s job involved drilling four holes into the top of each pile and inserting into those holes steel dowel rods, which were fixed with epoxy resin and designed to protrude from the piles and to form a connection with the crane base. The crane base itself was then formed in situ by pouring concrete into a shuttered area immediately above the piles.

The defendant’s work was completed by mid-December 2008 and handed over to the main contractor. A crane erected atop the crane base collapsed on 6 July 2009, severely injuring the crane driver and causing extensive property damage. Expert evidence indicated that the failure of the crane base was due to design error by the engineer: as designed, it was simply unable to resist the forces imposed on it by the crane. The crane base had been uprooted intact together with the steel dowels, which had neither broken nor fractured, but had simply pulled out of their drilled holes. However, the structural engineer alleged that poor workmanship by the defendant (specifically drilling the holes in the piles to an inadequate depth) was a contributing factor.

The Policy

The policy in issue was a contractor’s combined liability policy which included separate sections covering public liability and product liability. Cover was provided by the public liability section unless “caused by any Product”, in which case the product liability section responded. “Product” was defined in the Policy as “any product or goods manufactured, constructed, installed, altered, repaired, serviced, processed, treated, sold, leased, supplied or distributed by or behalf of the Insured…but only after such item has left the Insured’s care, custody or control”. The product liability section (and product liability section only) contained what is often referred to as an efficacy exclusion, excluding liability “arising in connection with the failure of any Product to fulfil its intended function”. The claimant insurer sought declarations that it was not liable to the defendant on the basis that:

(a) The crane base and/or its component parts was a “Product”, such that the product liability section responded;

(b) Any liability which might arise, would arise in connection with the product’s failure to fulfil its intended function and was therefore excluded by the efficacy exclusion;

(c) In the alternative, liability was at least partly excluded by a so-called “Foundation Clause” excluding liability “in respect of loss of or damage to any superstructure arising from the failure of the Assured’s foundation works to perform their intended function”.

Decision

Judge Mackie QC considered that the crane base, the piles and the connection between the two were different items, none of which were the defendant’s “Products” within the policy definition. Of relevance was the fact that the policy definition imported the conventional meaning of the word (““Product” means any product or goods”) and the crane base could not be considered one of the defendant’s product range, capable of order or purchase. The dowel rods were, if anything, component parts of the piles, not the crane base, once secured within the piles. Similarly, neither the piles nor the resin bond could be part of the crane base or considered the defendant’s product.

Even if any of the above items were products, the judge considered they had not failed to fulfil their intended functions: the crane base had transmitted the forces it was designed to transmit and had remained intact; and the dowel rods had not fractured or broken. To the extent that the holes in the piles were of an inadequate depth, this was a workmanship issue (and hence a public liability issue) and not a product liability matter.

The claimant called expert evidence on the Lloyd’s insurance market’s understanding of contractors’ combined liability wordings, asserting that there was a generally held view that once a project had been handed over, public liability cover ended and any claim was then either covered by the product liability section or not at all. Since the crane base had been handed over, it followed that this was properly a product liability claim. The judge disregarded that evidence, however, as inadmissible and contrary to the cover expressly provided by the policy.

The Foundation Clause did not apply because “superstructure” in its construction sense connoted a building above the ground (rather than a temporary structure) and foundations were similarly permanent features which support a building. The crane base had no such permanent load-bearing function.

CMS Cameron McKenna LLP acted for the defendant contractor.

Further reading: Aspen Insurance UK Limited v Adana Construction Limited [2013] EWHC 1568 (Comm)