TRANSFIELD CONSTRUCTIONS PTY LTD v GIO AUSTRALIA HOLDINGS PTY LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CLARKE, MEAGHER and SHELLER JJA 12 July 1996, 12 July 1996 [1996] NSWCA 538 INSURANCE — POLICY — MEANING OF PHYSICAL LOSS OR DAMAGE FACTS Appellant policy of insurance with defendant contained risk cover in the event of physical loss or damage including destruction. The design of the insured object, thirty grain silos, was inherently defective insofar as the fumigation system filled with grain and was rendered useless, necessitating the removal of the grain to rectify the defect. HELD Meagher JA; Clarke, Sheller JJA agreeing: Although the defect rendered the fumigation system useless, on a superficial reading of the contract of insurance useless does not amount to physical loss or damage, including destruction. However, in another context, useless may amount to damage. ORDER Appeal dismissed with costs. Meagher JA This is an appeal by Transfield Constructions Pty Ltd who is in dispute with its insurer, the respondent GIO Australia Holdings Pty Ltd. Mr Justice Rolfe found in favour of the insurer, hence this appeal. The plaintiff/appellant contracted with the Minister for Public Works to construct certain grain silos and the respondent/insurer issued policies for insurance in respect to those works. The appellant/plaintiff is an insured within the meaning of the policy. The appellant was responsible for the erection of thirty grain silos on the terminal. Each silo was fitted with fumigation pipes, diffuser grids and channels which were each employed for the purpose of dissipating fumigant throughout each silo and to control the spread of insects. Each of the diffuser grids was manufactured under a sub-contract. Each grid consisted of a side bar on either side of flat, stainless steel. The side bars were designed to fit flush with the side bars of the grids on either side, in that way, the weight of the grain was transferred and spread from one side bar to the others in the screen. But a single wire in the mesh used to form each grid protruded beyond the end of the side bar on each grid by a distance of between one and two millimetres. Every grid in every silo was affected by this defect. A gap developed, therefore, which was sufficient to admit the infiltration of grain into the fumigation pipes which were exposed beneath each diffuser screen, eventually the whole of the six hundred millimetre fumigation pipe beneath each silo became full of grain as did the area beneath each screen. The small parts feeding from the fumigation pipes to diffuser screens also became blocked by grain. In consequence of the blocking of the fumigation pipes, each silo could not be fumigated. The plaintiff/appellant was required to remove the grain and repair the screens. The case was conducted on a statement of agreed facts which I have endeavoured to summarise. 2 UNREPORTED JUDGMENTS The risks against which the appellant was insured was physical loss or damage, which includes destruction. The question for Mr Justice Rolfe, therefore, was whether the blockage from the fumigation pipes by grain, so that the fumigants could not escape from the pipes into the silos, constituted physical loss or damage. The question really is one of first impression on the construction of the words Ihave quoted. I think His Honour was correct. No pipes were lost, no pipes were destroyed, no pipes were damaged. It is not contested that to remove the pipes and re-install them would have caused a financial loss to the plaintiff/appellant. That again is beside the point. Mr Maconachie, learned senior counsel for the appellant said "The fact that the pipes were rendered useless constituted physical damage within the meaning of the policy." I do not think so. Loss of usefulness might in some context amount to damage, though even that is not beyond dispute, but in my view it cannot amount to physical damage. Functional in utility is different from physical damage. For these reasons which were substantially the reasons given by His Honour below, I think the appeal should be dismissed with costs. Clarke JA I agree with Mr Justice Meagher and also like his Honour, the reasons of the trial judge. Sheller JA I also agree with the reasons given by Mr Justice Meagher and the reasons of Mr Justice Rolfe. In my opinion the appeal should be dismissed with costs. Clarke JA: The order of the Court is that the appeal be dismissed with costs. Counsel for the appellant: J Maconachie QC Solicitors for the appellant: GIO Counsel for the respondent: J Simpkins Solicitors for the respondent: Carroll and O'Dea