|
By Adv. Peggy Sharon, Senior Partner and Adv. Yossi Givoni, Partner
The Tel Aviv District Court accepted the position of Clal Insurance Co. (represented by our firm) that a product liability policy only covers physical damage caused to third party property and not financial damages allegedly sustained thereby. In addition, such damages were specifically excluded from coverage under the Recall Exclusion.
Background
Fuel Pipeline Co. Ltd. and the Infrastructure and Energy Co. Ltd. (hereinafter: Plaintiffs), two companies engaged in the transportation of fuel, purchased from Middle East Tube Co. (hereinafter: the Insured ) steel pipelines for transportation of fuel within Israel.
Following installation of the underground pipeline, pressure tests were carried out along the entire length (26 kilometers) which revealed leakage. In order to trace the exact locations of the leakage, Plaintiffs conducted several examinations, after which it became necessary for Plaintiffs to excavate the entire pipeline and check for leaks section by section. At the conclusion of the examination, five tiny leakage points were discovered, being the result of defects in the pipes, which probably occurred during the production process.
Plaintiffs claimed NIS 3,500,000 (approximately $900,000) for their expenses for tracing the leakage and replacing the defective pipes.
The Claim
Plaintiffs sued the Insured and Clal Insurance Co. Ltd. (hereinafter: Clal) which issued a Product liability Policy to the Insured, according to the direct privity afforded by the Insurance Contract Law - 1981 for a direct claim against the liability insurer.
The Insured filed a Third Party Notice against Clal alleging that if the Court would impose liability on the Insured for defects in the product, Plaintiffs' damages should be covered by Clal's policy.
Clal's Contentions
Clal declined coverage based on the following:
(a) Plaintiffs' damages are not within the scope of the definition of "Damages" in the policy and therefore, are not covered.
The policy covers only physical damages caused to third party property as a result of defects in the insured's product. The policy was not intended to cover failure of the product to perform and Plaintiffs' damages were financial rather than physical, hence they are not covered.
(b) Plaintiffs' damages are excluded from coverage.
The policy specifically excludes any loss relating to damage to the product itself such as repair, reconditioning, modification or replacement. As Plaintiffs' expenses related to damage to the products (the pipes) and the costs necessary to replace them, these costs are excluded from coverage.
(c) The Insured had no expectation for coverage of this claim as it knew prior to policy inception that the policy only covers physical damage to third party property.
During the negotiations prior to issuing the insurance policy, the Insured was specifically advised by Clal that losses relating to damage to the product itself are not covered and therefore, it had no reasonable expectation that these damages would be covered under the policy.
Court Judgement
After hearings of evidence and legal summations, the Tel Aviv District Court handed down its judgement in which it accepted Plaintiffs' allegation and ruled that the defects in the pipes occurred in the Insured's plant and therefore, the Insured bears full liability to compensate Plaintiffs for their damages (the amount of NIS 1,000,000 which was proven).
As to policy coverage, the Court dismissed the claim and Third Party Notice against Clal and determined that the claimed damages are not covered under the policy.
The Court analyzed the terms of the operative clause as well as the definitions of "Product" and "Damage" as included in the policy.
The operative clause specified in the policy:
"The Insurers will indemnify and/or pay on behalf of the Insured against their liability to pay compensation for and/or arising out of Injury, Damage and/or Advertising Liability (including claimants' costs, fees and expenses in accordance with the law of any country).
The indemnity only applies to:
claims made against the Insured during the period of Insurance specified in the Schedule and arising out of the Business specified therein in respect of Product Liability (including Completed Operations). . .
"Damage" means
damage to, or loss or destruction of tangible property, including the loss of use thereof at any time resulting therefrom. . .
The dispute between Clal and the Insured focused on the interpretation of the term "tangible property", as included in the definition of "Damage".
The Court rejected the Insured's interpretation according to which "tangible" means "clear and definite" or "real" quoted from the Oxford Advanced Learner's Dictionary and accepted Clal's position supported by previous US judgements which related to these terms.
Citing Douglas R. Giddings et al. v. Industrial Indemnity Company et al., 112 Cal. App. 3d 213, the Court interpreted the term tangible property as physical property:
"Understood in its plain and ordinary sense, 'tangible property' means "property (as real estate) having physical substance apparent to the senses ".
To construe the explicit words "tangible property" to include intangible economic interests and property rights requires a strained and farfetched interpretation, doing violence to the plain language of the policies. Such an interpretation would rewrite the policies to fasten on the insurers a liability they have not assumed".
Therefore Plaintiffs' costs and expenses for tracing the defect in the pipes are not covered under the policy, being pure financial loss.
Also, the Court accepted Clal's argument that Plaintiffs' damages are excluded from coverage due to the following exclusions specified in the policy:
"This Section does not cover liability for claims:
(a) for damage to the Product or part thereof (such as repair, reconditioning,
modification or replacement) .
(b) arising out of recall of any Product (or part thereof) or of any property of which such Product forms a part.
The Court ruled that by the above, the policy excludes any claim for damages to the product itself including costs and expenses sustained for its repair and/or replacement. All Plaintiffs' damages related to the failure of the product to meet its standards and to its replacement, hence these damages are excluded from coverage.
Finally, the Court was convinced that prior to the policy inception, the Insured was aware of the fact that the policy did not cover non-physical damages to a third party. The Insured attempted to purchase a special extension to cover such damage but this attempt failed due to Clal's refusal to issue such extension. Therefore the Court denied the Insured's allegation that it had a reasonable expectation that the relevant damages would be covered under the policy.
Summary
A Product Liability policy intends to cover only physical damage to third party property as a result of defects in the insured product. Therefore, damages to the product itself and/or costs and expenses relating to its replacement (including costs incurred to trace the defects in the product) are not covered.
|
Home
