ALLIANZ INSURANCE CO LTD v KEMCON PTY LTD SUPREME COURT OF NEW SOUTH WALES COMMERCIAL LAW DIVISION MEAGHER, HANDLEY and Cripps JJA 18 August 1992, 8 February 1993 [1993] NSWCA 5 FACTS: The respondent is a manufacturer of chemicals, one of which is the insecticide heliothon EC. In 1987 a batch of the insecticide was contaminated through the negligent act of an employee of the respondent. The negligence went undetected and the insecticide was supplied to Bayer Australia Ltd who retailed the contaminated insecticide principally to tomato growers whose crops failed as a direct result of use of the contaminated insecticide. The growers claimed against Bayer Australia Limited who claimed against the respondent. The respondent (insured) sought indemnity from the appellant (insurer) and was successful. The appellant now claims the losses were incurred outside the period of the insurance policy. HELD:(per curiam) (1) Contamination is a direct damage to goods and may cause consequential damage to property which cannot result in the loss of cover after the policy has expired. (2) The application of the facts to the plain language of the policy results in the availability of indemnity for a claim arising out of or in connection with any property treated or altered by the respondent during the period of insurance. ORDERS: (1) Appeal dismissed with costs. South Coast Basalt Pty Ltd v R W Miller and Co Pty Ltd (1981) 1 NSWLR 356 Meagher JA This is an appeal from a decision of Giles i in a dispute between a manufacturer (the respondent Kemcon Pty Ltd) and its insurer (the appellant Allianz Insurance Co Ltd) on the meaning of a products liability policy. Amongst other products, KemCon Pty Ltd manufactured a product called heliothon EC for its clients, one of which was Bayer Australia Ltd. The ingredients of this product were heliothon Al, emulsifier 1061 and xylol. The client supplied the first two ingredients and Kemcon Pty Ltd provided the third. The end product, heliothon EC, was an insecticide. In May 1987 Bayer Australia Limited ordered some heliothon EC from Kemcon Pty Ltd, which substantially supplied the product to Bayer Australia Ltd by the end of June 1987. Unhappily, some employee of Kemcon Pty Ltd negligently mixed with the heliothon EC a substance called Velpar, which was a herbicide. Between June and November that year, Bayer Australia Limited sold to tomato growers quantities of heliothon EC thus contaminated with predictably disastrous results. Bayer Australia Limited compensated the tomato growers for their lost crops, recalled all unused supplies of the product, and incurred legal and investigative expenses in connection with the incident. Bayer Australia Limited sought to recover these damages from Kemcon Pty Ltd (as to which there seems little if any, dispute) and Kemcon Pty Ltd sought indemnity from its insurer, the present appellant. Giles J found against the insurer. The relevant provisions of the policy should be set out. They are parts of CL1, CL6, CL7, CL8 and CL9. CL1, which was headed "Operative Clause" was in the following terms: 2 UNREPORTED JUDGMENTS "The Allianz Insurance Co Ltd (hereinafter called the Company) will indemnify the Insured against their liability to pay compensation (including claimant's costs, fees and expenses) in accordance with the law of any country... "This indemnity applies only to such liability as defined by each Section of this Policy arising out of the Business outlined in the Schedule, subject always to the Terms, Conditions and Exclusions of such Section and of the Policy as a whole. "For the purpose of determining the indemnity granted: 1.1... 1.2 "Damage" means loss of or damage to property; 1.3 "Product" means any property after it has left the custody or control of the Insured which has been designed, specified, formulated, manufactured, constructed, installed, sold, supplied, distributed, treated, serviced, altered or repaired by or on behalf of the insured [sic].""" CL6 and CL7, which are within the "General Liability" Section, read as follows: "6. INDEMNITY The insured is indemnified by this Section in accordance with the Operative Clause for and/or arising out of... Damage occurring during the Period of Insurance but not against claims: 6.1... 6.2 arising out of or in connection with any Product. "7, EXCLUSIONS This section does not cover liability for claims arising out of: TA... 7.4 damage to property owned, leased or hired by or under hire purchase or on loan to the Insured or otherwise in the Insured's care, custody or control other than: 7.4.1 premises (or the contents thereof) temporarily occupied by the insured for work therein, or other property temporarily in the Insured's possession for work thereon (but no indemnity is granted for damage to that part of the property on which the Insured is working and which arises out of such work) CL8 and CL9, which fell within the "Products Liability" Section, read as follows: "8. INDEMNITY The insured is indemnified by this Section in accordance with the Operative Clause for and/or arising out of... Damage occurring during the Period of Insurance but only against claims arising out of or in connection with any Products and not against claims for which indemnity is afforded by the General Liability Section whether or not such section is insured by this Policy "9, EXCLUSIONS This Section does not cover liability for claims: 9.1 for costs incurred in the repair, reconditioning or replacement of any part of any Product which is or is allowed to be defective; 9.2 arising out of the recall of any Product or part thereof; It will be observed that CL6 and CL8 complement each other. It is difficult, if not impossible, to see how they could both apply to any one event. CL6 is of application where the product remains in the insured's custody; CL8 applies once the product has left the insured's custody. URJ ALLIANZ INSURANCE CO LTD v KEMCON PTY LTD (Meagher JA) 3 It was common ground that the "Period of Insurance" referred to in both CL6 and CL8 was the two-year period expiring on 30 June 1987. Reading the definitions contained in clause I into CL8, and spelling out the meaning of the term "Period of Insurance" so that it is applicable in the circumstances of the case, CL8 would read: "The insured is indemnified by this Section against their liability to pay compensation (including claimant's costs, fees and expenses) for and/or arising out of injury and/or loss of or damage to property occurring before 30 June 1987 but only against claims arising out of or in connection with any property after it has left the custody or control of the Insured which has been treated or altered by or on behalf of the insured." It will be remembered that the contamination of the product occurred before 30 June 1987, the damage to the tomato crops after that date. The principal but not the only question which was debated before his Honour, and again before us, was whether CL8 applied to all three heads of damage claimed. His Honour held it did. Mr Rofe QC, submitted that his Honour was wrong and CL8 was inapplicable. On his submission, it was clear that each head of damages (payment to the tomato growers#, recall of the product,investigative and legal expenses) only arose after 30 June 1987 [and in this respect he is, of course, clearly correct] and that therefore all claims to recover those damages must fall outside CL8. Mr Sullivan QC, leading counsel for the respondent insured, submitted that the conclusion does not flow from the premise. I think that Mr Sullivan is correct. What has to fall within the "Period of Insurance" (ie before 30 June 1987, in the present case) is "damage to property". The contamination of the stock of heliothon EC was, as Mr Rofe QC conceded "damage to property". The damages relating to the tomato crops are claims "in connection with" or "arising out of" the damaged property. The damage referred to in CL8 is wide enough to encompass both damage to the tins of heliothon EC and damage to the tomato crops; but only one kind of damage must occur before 30 June 1987, and it is sufficient if the other kind of damage is consequential or connected with, or arises out of the first kind of damage. CL8 does not say that all damage claimed must occur before 30 June 1987. CL8 therefore applies to the present case. This is the construction at which Giles J arrived, and I think he was correct; particularly if one applies the contra preferentem rule to this singularly inelegantly drafted clause. Mr Rofe referred us to a number of Californian authorities, which I must say I find less than wholly helpful. They deal with a variety of differently worded policies. They also deal with situations when both the damage to products (analogous to the damage to the heliothon EC in the present case) and the consequential damage (analogous to the damage to the tomato crops in the present case) both occurred outside the period of insurance. Before Giles J argument also proceeded on the question whether, in the event that CL6 applied, the exemption provisions in CL7 would apply. In the view I take of CL8, these questions do not arise. I might add that Mr Rofe sought to mitigate the consequences of an adverse decision on the question of the applicability of CL8 to his client by relying on the exempting provisions of CL9; we would not permit argument on this point as in the Court below counsel for Allianz Insurance Co Ltd conceded that CL9 was of no applicability. The result is that the appeal must be dismissed with costs. 4 UNREPORTED JUDGMENTS Handley JA This is an appeal by leave from a decision of Giles J answering questions in respect of an insurance policy issued by the appellant which he had ordered to be decided before trial under RSC Pt31 R2. Proceedings were brought by Bayer Australia Ltd against Kemcon to recover damages for negligence and breach of contract arising out of the preparation and packaging by Kemcon for Bayer of a quantity of heliothon EC during May 1987. This is an insecticide used by commercial tomato growers to protect their crops from insect attack. Unfortunately one or more batches of this insecticide became contaminated with Velpar, a herbicide, at Kemcon's factory. This product was delivered to Bayer and distributed by it. Thereafter certain tomato growers in Queensland complained to Bayer that their crops had been damaged by application of the insecticide. Bayer paid out considerable sums of money in satisfaction of these claims, recalled and destroyed the remaining insecticide and incurred costs in the investigation and settlement of the growers' claims. Bayer sued Kemcon to recover these direct and consequential losses and Kemcon sought indemnity from Allianz under its Combined General and Products Liability policy which was in force until 30 June 1987. Allianz declined indemnity and Kemcon joined it as first cross-defendant. Giles J determined the questions relating to the construction and effect of the Allianz policy adversely to it and they became the subject of the present appeal. CL8 of the policy provided, so far as relevant: "8. INDEMNITY The Insured is indemnified by this Section in accordance with the Operative Clause for and/or arising out of... Damage occurring during the Period of Insurance but only against claims arising out of or in connection with any Products..." This must be read with the operative clause, CL1, which relevantly provided: "The Allianz Insurance Co Ltd... will indemnify the Insured against their liability to pay compensation (including claimants' costs, fees and expenses) in accordance with the law of any country... This indemnity applies only to such liability as defined by each Section of this Policy... For the purpose of determining the indemnify granted: 1.1... 1.2 'Damage' means loss of or damage to property; 1.3 'Product' means any property after it has left the custody or control of the Insured which has been... formulated, manufactured... sold, supplied... by or on behalf of the Insured". Bayer claimed that the contamination occurred in Kemcon's factory during May 1987. However the insecticide was not sprayed on the crops until after 30 June 1987. Allianz claimed that the only relevant damage to property for the purposes of the policy was the damage to the crops and that this occurred after the policy had expired. Kemcon's case was that the relevant damage was the contamination of the heliothon EC which occurred in May 1987, that Bayer's claim arose out of that damage, and it was entitled to indemnity. The Judge said that "in the ordinary use of language... the contamination of the heliothon EC by the mixture of Velpar was damage to the heliothon EC". He found that the claim by Bayer arose out of or in connection with a Product within the meaning of the second limb of CL8. He then considered whether the indemnity sought by Kemcon fell within the first limb of the clause as being "for URJ ALLIANZ INSURANCE CO LTD v KEMCON PTY LTD (Handley JA) 5 or arising out of Damage". He said that the entitlement in this limb to be indemnified against liability "arising out of Damage" was to be contrasted with an entitlement to indemnity against liability "for Damage. While Bayer's claim on Kemcon, particularly to recover amounts paid to the growers was not a claim "for Damage" ie damage to the heliothon EC, it was a claim "arising out of... Damage." Bayer's claim for compensation against Kemcon could be said to arise out of the contamination because if Bayer succeeded it would have established a causal link between the contamination and its liability to the growers and between such liability and Kemcon's acts and omissions in the course of preparing and packing the insecticide. Finally the Judge held that the contaminated heliothon EC was a "Product" because it was property, ie goods, which had left the custody or control of Kemcon and had been formulated or manufactured by it. The appellant relied upon what it submitted was the clear language of the policy but also upon more general considerations. It was said that the policy was for liability insurance, practically the whole of the Bayer claim was for compensation paid to the growers and the liability of Kemcon in respect of such payments did not accrue until the crops were sprayed after the policy had expired. Mr Rofe QC for the appellant referred the Court to general statements in text books that liability policies in general, and product liability policies in particular operate on an "occurrence" basis, so that the occurrence causing third party loss or damage must take place while the policy is in force. The Court was also referred to certain United States decisions in which it was said that this principle had been applied. In my view these general statements and decisions are of very limited relevance in this case. The first task of the Court is to construe the language of the policy in accordance with the ordinary principles governing the interpretation of written instruments and contracts of insurance in particular. The text book statements and case law relied upon by the appellant cannot override clear language in the policy. If the draftsman has ignored such general statements when framing the policy the Court must do the same. In any event the policy as construed by the Judge covered this claim on an "occurrence" basis, the contamination being the relevant occurrence which occurred within the policy period. The appellant's submissions at times seemed to treat Bayer as if it were the insured. If Bayer had itself prepared and packed the insecticide it would have incurred no liability to a third party until the defective product was actually used on a tomato crop. Accordingly Bayer could only have recovered under a policy in this form if it was in force when the crops were damaged. However Kemcon was the insured and it dealt with Bayer, and not directly with the public. Kemcon prepared and packed the product, using active ingredient and emulsifier supplied by Bayer which remained its property. Kemcon added the necessary quantities of xylol, a solvent. The Judge held that property in the xylol passed to Bayer when it was blended with the other ingredients. In these circumstances it is clear that property of Bayer was damaged by Kemcon when it became contaminated with the Velpar. The correctness of this conclusion was not challenged by the appellant nor could it have been. Contamination is a form of direct damage to goods. See South Coast Basalt Pty 6 UNREPORTED JUDGMENTS Ltd v R W Miller and Co Pty, Ltd (1981) 1 NSWLR 356 at 364 (PC). It may later cause consequential damage to other property if it is not discovered in the meantime. In the present case Kemcon caused direct damage to Bayer's goods by contamination during the policy period. The sale and later use of the product outside the policy period before the contamination was discovered resulted in consequential losses to Bayer which greatly increased its overall loss. However the fact that consequential losses accrue or continue to accrue after the policy has expired cannot result in the loss of cover. If a farmer sustained personal injuries within the policy period as the result of using the contaminated product the whole of his claim would be covered by the policy even if the great bulk of his economic loss and pain and suffering were to occur after the policy had expired. Once the general considerations relied upon by the appellant are put aside,it becomes clear, as Giles J held, that Bayer's claim on Kemcon falls literally within the plain language of this policy. When CL8 is extended by writing in the various definitions from the operative clause it reads: "The Insured is indemnified by this Section against their liability to pay compensation... for and/or arising out of injury and/or loss of or damage to property occurring during the period of insurance but only against claims arising out of or in connection with any property after it has left the custody or control of the Insured which has been treated or altered by or on behalf of the Insured." This language applies in terms to the present case. Kemcon is entitled to be indemnified against its liability (if any) to pay compensation (to Bayer) "arising out of... damage to property (ie Bayer's heliothon EC) occurring during the period of insurance (in May 1987)." This indemnify is available "against a claim" arising out of or in connection with any property (the heliothon EC) after it had left the custody or control of Kemcon which had been treated or altered by Kemcon. In my opinion the appeal fails and must be dismissed with costs. Cripps JA I agree with the reasons of Handley JA and Meagher JA and the ordersproposed. Appeal dismissed with costs. REPRESENTATION Counsel for the appellant: DF Rofe QC/BC Lynch Solicitors for the appellant: Malcolm Johns and Co Counsel for the respondent: A Sullivan QC/P Dodson Solicitors for the respondent: Henry Davis York