The Federal Court gets “physical”: R&B Directional Drilling Pty Ltd (In Liquidation) v CGU Insurance Limited [2019] FCA458

SRB Legal acted for CGU Insurance in this matter which was heard by Chief Justice Allsop.

 

Facts

The First Applicant, R & B Directional Drilling Pty Ltd (In Liquidation) (R & B) entered into a contract with the Second Applicant, Longfield Services Pty Ltd (Longfield) to carry out the construction of a tunnel beneath a railway line which was owned by and situated on land of BHP.

The tunnel, comprised of a 650mm diameter steel pipe was to accommodate several PVC conduits that were to carry electrical and communication cables beneath the railway line. The conduits were to be held in place by the space around them in the tunnel being filled with concrete.

The tunnel was duly constructed and the several conduits placed inside of it. However, when the concrete was pumped into the tunnel it found its way into one of the conduits which must have been cracked or holed during part of the insertion process. Notwithstanding various attempts to remove the concrete from the conduit, this was unsuccessful with the result that all of the concrete and the conduits had to be high pressure water blasted to remove them from the tunnel for that part of the works to be performed again.

No damage was sustained to the steel tunnel itself as a result of the removal of the damaged conduits and concrete.

R & B were unable to redo the works and Longfield claimed that it had incurred substantial costs of approximately $850,000.00 in relation to the removal of the concrete and conduits, redoing those works and various delay costs in completion of the contract.

Longfield made a claim on R & B for the costs that it had incurred and in turn, R & B sought indemnity under a liability policy that they held with CGU (the Policy).

Policy coverage

The Policy provided cover for, relevantly, property damage with that defined to be:

(a) Physical injury to or loss of or destruction of tangible property including loss of used of that property at any time resulting therefrom.

(b) Loss of the use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by physical damage or destruction of other tangible property.

R & B claimed that there had been damage to the tunnel being the steel sleeve and the internal void and that the tunnel was tangible property to which there had been injury or harm that impaired its value or usefulness until it was rectified.

In response, CGU maintained that whilst the steel sleeve was tangible property, the tunnel itself was not or if it was, then it had not suffered any physical injury.

Allsop CJ considered numerous authorities including a number of English and American decisions as to what constitutes physical injury to determine the issue of whether the damage to unusable conduits within the tunnel had caused physical injury to the tunnel being the void rather than the steel pipe which was undamaged.

His Honour considered that both of the words used in the definition being physical and injury, must be applied and concluded that there had not been physical injury to the tunnel nor had there been any loss of tangible property caused by physical injury.

His Honour stated that the preferred view of physical injury to tangible property required more than just a diminution of value of the tangible property resulting from an impairment of functionality or purpose. It appears that His Honour’s view in this respect would have been different if the word physical had not been used in the definition.

The placement of defective work in the tunnel did not amount to physical injury to the tunnel as the defective work was removed leaving the tunnel in its same physical state as it was before the placement of the defective work.

Accordingly His Honour found that the claim by R & B did not come within the cover afforded by the insuring clause as there was not any physical injury to tangible property.

Exclusions

CGU raised, in the alternative, that if there had been property damage then various exclusions contained in the policy would apply:

Property in Physical or Legal Control

His Honour determined that the work being performed by R & B was the filling of the tunnel and that the tunnel was not the site or premises being occupied to carry out such work and accordingly it was tangible property in the physical control of R & B with the result that this exclusion applied to the extent that CGU was not liable for the claim in the event there had been property damage.

Faulty Workmanship

His Honour’s conclusions in this regard were that the direct costs of rectifying the defective works being the removal and redoing of the conduits and cement would be excluded by this clause but as there was no express provision excluding consequential losses, part of the costs being claimed against R & B would have been covered under the policy.

Contractual Liability

Notwithstanding that the only claim against R & B by Longfield was pursuant to their contract and there were no claims being made in negligence against R & B, His Honour concluded that any liability in contract of R & B was not outside of the usual liabilities that would have been imposed by law and accordingly this exclusion had no application to the claim.

Significance for insurers

The decision provides a detailed analysis of what is required to constitute property damage for a liability policy and highlights the importance of giving proper weight to all of the words used in definitions contained in policies.

In addition, the decision restates the important principle to be taken into account when considering the coverage of a general liability policy being they are not usually intended to pay the costs associated with repairing or replacing an insured’s defective works or products as to do so would transform the policy into something akin to a performance bond.

This case law update is intended for general information only and you should not act upon it or omit to act on the basis of anything contained herein without first obtaining legal advice in relation to any particular matter or issue.