BARRY.NILSSON. Lawyers

Zürich Australian Insurance Limited v Regal Pearl Pty Ltd - New South Wales Court of Appeal

THE FACTS

Regal Pearl Pty Ltd ran the China Bowl Restaurant in Coogee, Sydney. In May 1997, a number of customers of the restaurant contracted the Hepatitis A virus after eating contaminated prawns imported from Burma. Regal Pearl purchased the prawns from Tai Kwan Seafood Pty Ltd (Tai Kwan) which had purchased them from Great Ocean Products Pty Ltd (GOP), the importer. On 31 May 2001, judgment was entered for the various customers against Regal Pearl. The court accepted evidence that the reason they contracted the Hepatitis A virus was because the prawns had not been properly cooked. Regal Pearl succeeded in its cross claim against Tai Kwan for breach of terms implied into the contract by the Sale of Goods Act i.e. that the prawns would be of merchantable quality and fit for their purpose. Tai Kwan held an insurance policy with Zurich. Zurich denied liability under the policy. Tai Kwan was not able to meet the judgment directly. Regal Pearl then commenced these proceedings seeking access to Tai Kwan's insurance policy for payment of the judgment debt.

The Zürich policy contained the following relevant clauses:-

• Insuring clause:

'When a Limit of Liability is shown in the Schedule for Products Liability, We will pay for all amounts up to this Limit of Liability that an Insured Person becomes legally liable to pay in compensation for:-

1. Personal Injury; or

2. Property Damage

that results during the Period of Insurance from an Occurrence within the Territorial Limits that happens in connection with Your Products.'

• Exclusion clause:

'This section does not cover:-

12. Contractual liability;

Liability for Personal Injury or Property Damage that is accepted by any Insured Person under any contract, warranty or agreement requiring:-

(a) '

(b) the acceptance of any liability, except liability that would have existed even if the contract accepting the liability did not exist; or

(c) the waiving or limitation of the Insured Persons rights of recovery against another party.'

    * Definition of 'Products Liability':-


'Products Liability means any liability for an Occurrence that is caused by or arises out of any of Your Products.'

The contract between Tai Kwan (the customer) and GOP (the company) contained the following relevant clause:-

' . . . the customer assumes all risks and liabilities whatsoever for any consequences arising from the use of the goods, whether singularly or in combination with any other products. The customer shall indemnify and hold the company harmless from and against any and all claims, demands, obligations, causes of action, liabilities, expenses and damages arising out of or relating to any alleged defects whether latent or patent in the goods purchased.'

THE LITIGATION

Zurich argued that the judgment entered against Tai Kwan was not covered by the policy which, through the insuring clause, only covered amounts that Tai Kwan became legally liable to pay in compensation 'for personal injury or property damage'. Zurich submitted that Tai Kwan's liability to Regal Pearl was a liability to pay compensation 'for economic loss'. Zurich argued in the alternative that the implied terms in the contract between Tai Kwan and Regal Pearl constituted an acceptance of a liability of a kind contemplated by subparagraph (b) of the exclusion clause, and further that Tai Kwan indemnifying and releasing GOP constituted a waiver or limitation of Tai Kwan's right of recovery against GOP so to trigger subparagraph (c) of the exclusion clause.

Counsel for Regal Pearl submitted that an interpretation of the insuring clause that restricted its application to direct claims made by consumers, so that it did not apply to indirect claims, would severely restrict the operation of the policy given that Tai Kwan, as a wholesaler, would in most cases be sued by a retailer rather than a consumer. Counsel for Regal Pearl also argued that the exclusion clause did not apply as there had been no 'acceptance of any liability' by Tai Kwan.

The trial judge held Zurich liable to cover Tai Kwan's judgment debt on the basis that the liability of Tai Kwan to Regal Pearl was of a character which fell within the insuring clause, and the exclusion clause did not apply. His Honour said:-

'The words in the definition of 'Products Liability' ' 'that is caused by or arises out of any of Your products' plus the words in the insuring clause 'that happens in connection with Your Products' satisfies me that this insuring clause has a much wider application than merely limiting the liability of the insurer to indemnify the insured only against personal injury or property damage which the insured is found liable to pay to an injured person.'

Zurich appealed.

THE APPEAL

The appeal was dismissed. The New South Wales Court of Appeal held that the expression 'for personal injury' could also mean 'in respect of personal injury'. Whether it does or not was to be determined by the context. The Court held that the insuring clause covered the judgment entered against Tai Kwan for breach of implied contractual terms. The court said that the commercial purpose of a products liability policy should encompass the range of obligations normally associated with product liability in Australian Law, which includes terms implied into contracts by State and Commonwealth legislation. Chief Justice Spigelman said:-

'If the scope of cover were restricted to the degree for which the Appellant contends, the insured will not receive any cover in the most likely circumstances in which it was exposed to risk.'

With regard to the operation of the exclusion clause, the court focused upon the reference to the liability for personal injury or property damage being 'accepted by any insured person under any contract'.

'The use of the words 'accepted by', where twice appearing, together with the reference to any such contract 'requiring acceptance', indicates that something distinctive and out of the ordinary, by way of additional liability, must arise before the exclusion clause takes effect. The implied terms of merchantable quality and fitness for purpose with respect to product liability are so common that only clear words will be found to exclude them in a policy purporting to give cover for product liability.'

The court also thought that the waiver or limitation of rights by Tai Kwan in its contract with GOP was not something which triggered the exclusion clause.

'There has been no claim for 'cover' under the contract with Great Ocean. There is no relevant claim to which the policy is called upon to respond and to which exclusion clause 12 could attach.

'Exclusion clause 12 is not a provision which denies cover whenever an insured enters into an arrangement which adversely affects the subrogation rights of an insurer. In its terms it cannot apply to the present case.'

COMMENT

There is a fine line here between a Court rewriting a contract between 2 commercial parties, which ought to be avoided, and interpreting a policy giving weight to the context in which it was issued. Here the Court held that the word 'for' in the insuring clause was capable of meaning 'in respect of'.

A significant outcome for insurers was the finding that the contractual liability exclusion was not able to protect Zurich in circumstances where its insured had, by way of contract, cut off any subrogated recovery action that Zurich might have made against GOP.

For further information on this topic, please contact:

• Robert Samut