Insurance & Reinsurance
The recent case of Entyce Food Ingredients Pty Ltd v CGU Insurance Limited  VSC 757 provides a helpful reminder of the limitations of product liability insurance and a reminder to manufacturers of the potential risks and costs of being involved in a massive scale product recall without appropriate insurance. The decision examines the wording of two critical exclusions regularly contained in product liability policies, a recall exclusion and a defects exclusion.
The business of Entyce Food Ingredients Pty Ltd (Entyce) is to import and sell frozen berries. In 2015 one of Entyce's customers was Patties Foods Ltd (Patties). In February 2015 Patties was notified by the Department of Health that frozen berries sold to it by Entyce were at risk of being contaminated with Hepatitis A. On 13 February 2015 Patties began a voluntary recall. As a result of the recall, Patties suffered loss and damages of more than AUD7,500,000. Subsequently, AIG Australia Limited, Patties' insurer, brought a subrogated claim against Entyce seeking to recover the costs associate with the recall. The dispute ultimately settled for AUD4,000,000.
Entyce sought indemnity for the settlement under a general liability policy with CGU Insurance Limited (CGU). CGU refused cover on the basis that the policy expressly excluded:
Entyce then joined CGU to the proceedings as a third party.
The relevant part of the exclusion clause provided:
The liability of the insurer to indemnify the Insured pursuant to Clause 1.1 [Liability for Personal injury, Property Damage and Advertising Injury] and to pay other costs and expenses pursuant to Clause 1.2 [Defence Costs] shall not extend to any of the following:
6.14.3 the cost of or damages claimed in relation to the withdrawal, recall, inspection, repair, replacement or loss of use of the Products or any property of which such Products form a part, if such Products or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein;
6.14.4 Property Damage to the Products if such damage is attributable to any defect in them or to their harmful nature or unsuitability, other than those Products repaired, serviced or treated by the Insured after such Products were originally sold, supplied or distributed, however this Exclusion 6.14.4 shall be restricted to the defective or harmful or unsuitable part of the Product and shall not apply to Property Damage to the remainder of such Product or Products.
Entyce submitted that Clause 6.14.3 (the recall exclusion) was not triggered, as the settlement deed established liability and the exclusion only excluded the direct costs of a recall. It submitted that the reference to ‘damages claimed’ in the exclusion should be closely related to the use of the ‘Products’ and should not extend to claims for general losses incurred by Patties, such as for business interruption. It claimed that CGU's interpretation provided a disincentive to issue a voluntary recall and this rendered the policy uncommercial and worthless.
CGU focused on the expression "in relation to" in the clause, submitting this gave the exclusion a broad connective effect to include the type of losses that Patties' claimed in their proceedings. CGU argued that Entyce's interpretation focused too narrowly on the words "recall" and "costs" and ignored the use of the additional terms "withdrawal" and "loss of use" which gave the exclusion a more expansive scope. CGU denied that the exclusion was uncommercial or lacked utility, as the purpose of the product liability policy was not to provide a warranty or guarantee of the products themselves.
In respect of Clause 6.14.4 (defects exclusion), Entyce stated that the exclusion would only be engaged if there was an inherent defect in the product and not if any external force damaged the product. In this case, the contamination by the Hepatitis A virus was not an inherent defect but damage caused by an external force.
CGU submitted that requiring an "inherent" defect placed an unsustainable restriction on the plain language of the clause. The clause was concerned with whether property damage was attributable to any defect, the harmful nature or unsuitability of the product. Under the policy, the definition of property damage was not merely restricted to physical damage but included the "loss of use". The berries had suffered a loss of use. They were defective, harmful or unsuitable because of the unacceptable health risk associated with them, ie the potential to be infected with the Hepatitis A virus.
Connock J accepted that both the recall and the defects exclusion applied and dismissed Entyce's claim to an indemnity.
His Honour accepted CGU's broad interpretation of the recall exclusion. He confirmed that "recall" was not the operative word in the clause but one of a series of specified event in which costs and damages were excluded. The judge rejected the submission that there needed to be a direct claim for recall expenses, finding it was sufficient that there was a clear and logical connection between the damages claims and a recall, withdrawal or loss of use of the product. In respect of the defects exclusion, His Honour determined that the berries were defective, harmful and unsuitable for human consumption because of the contamination by the virus. The definition of property damage covered the loss of use of tangible property not physically damaged but where the Occurrence caused the loss of use which meant that berries not contaminated by the virus were also excluded. His Honour rejected the requirement that the clause was qualified to require that the damage be 'inherent'.
The case provides a clear illustration of the limits of a General Liability Policy. Product liability insurance protects companies against claims for personal injury or property damage caused by products sold by the business. The policy does not act as a warranty or a performance bond for the manufacturer's contractual obligations or to cover the costs of a product recall. If the Insured had taken out the appropriate insurance cover, such as a product recall policy or a manufacturers E&O policy, it is likely they would have been indemnified under the alternative policy.
For underwriters, the case illustrates the importance of ensuring that the exclusions are drafted with broad language that aligns with the commercial intention of the policy.