Consequential Losses: Are they covered by Standard Product Liability Policy? What is the Scope of Product Liability Policy?
By Adv. Rachel Levitan and Adv. Idit Spieser
In a recent judgement (June 2011) the Court of Appeals handed down its decision in C.A. 1228/08 Molram Hoist & Lifting Equipment & others v. Bituach Haklai Ltd. & others which dealt with the question relating to the cover afforded by the product liability policy.
Background:
The Insured (Molram) had contracted with a certain food manufacturer (hereinafter: the customer) to build a certain lifting equipment for the customer. After one part of the lifting equipment broke, the Insured extended its product liability policy to include also faulty design.
After several months, additional parts of the equipment broke and the customer filed a claim against the manufacturer for the faulty product and the loss of profit caused due to the failure of the product.
The manufacturer in turn, sued the Insurer who issued a product liability policy.
The Insurer (Bituach Haklai) stated that the policy does not cover loss of profit and does not cover the damage to the product itself.
The Policy:
The operative clause specified in the policy states as follows:
"The insurer will indemnify the insured against any compensation the insured will be obliged to pay for damages arising out of the product…
"Damages" means:
1. Bodily Injury
2. Property Damage: Damage to property as result of an accidental event.
Section 3 in the Product liability Chapter includes an exclusion:
"This chapter does not cover the insured for… any loss to the product itself and/or repair costs". (hereinafter: "The Exclusion")
The District Court Judgment:
The Tel-Aviv District court accepted part of the Plaintiff's claim and ruled that the defects in the machine occurred due to the manufacturer's negligence in the designing process which is covered in the policy.
The court determined that the customer suffered loss of profits as a result of the event.
However as the policy covers only specific damages mentioned therein which does not include consequential loss, the loss of profit is not covered.
The Insured appealed to the Supreme Court.
Supreme Court Judgment
Loss of profits
The court distinguished between actual tangible damages to the property and financial loss such as loss of profit, and stated that loss of profit is a consequential loss which is not part of the term "property damage".
According to the judgement even if the loss of profit results from the malfunction of a machine it should be considered as consequential damage and not as part of the term property damage. Therefore, in the absence of an explicit coverage clause which states otherwise, is not covered under property or product liability policy.
Damages to the Product
The court distinguished between the fracture that occurred before the policy was extended to the fractures that occurred after the policy was extended. The restriction of a standard product liability policy specifically excludes any loss relating to the product itself relates to the situation before the policy was extended and therefore the first fracture was not covered.
However, before the additional fractures occurred, the manufacturer extended the policy to cover its liability for any damages as a result of faulty design.
The Supreme Court stated that the specific extension meant that the policy will cover also the damages caused to the product itself, provided that such damages are as a result of a defect in the design.
The court explained that according to the rules of interpretation of an insurance contract, the contract should be construed most strictly against the drafter and according to the insured’s expectations. The reasonable expectations of the insured were that once he extended the policy and paid additional premiums, the policy would include risks that were not covered under the basic policy.
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