Plain language exclusions – a berry good idea
A recent application of policy exclusions in a damages claim arising from contaminated food products.
The Supreme Court considered the application of various exclusion clauses in a policy of insurance that an insurer sought to rely on to deny indemnity in response to a third party claim from its insured.
Entyce Food Ingredients Pty Ltd (Entyce) supplied, among other things, frozen berries to Patties Food Ltd (Patties).
Entyce imported frozen berries into Australia from a supplier based in China. In 2017, a batch of frozen berries was contaminated with the Hepatitis A virus while the berries were being packaged in China, which led to an outbreak in Australia. In response, Patties was required to recall products containing the frozen berries that were either contaminated or at risk of being contaminated.
Patties commenced Supreme Court proceedings against Entyce for breach of contract, which resulted in a settlement of $4 Million in Patties’ favour.
Entyce was an insured party under a General and Products Liability Insurance Policy (Policy) held with CGU. The Policy afforded Entyce liability cover for personal injury, property damage and advertising injury liability. Entyce sought indemnity from CGU in respect of the settlement with Patties. CGU, declined the claim under the Policy and was subsequently joined to the proceeding by Entyce as a third party.
CGU resisted the third party claim and, in its defence submitted, among other things, that its liability to insure Entyce was excluded through the operation of clauses 6.14.3, and 6.14.4 of the Policy.
- clause 6.14.3 of the Policy excluded CGU’s liability to indemnify for the cost of or damages claimed in relation to the withdrawal, recall, inspection, repair, replacement or loss of use of products or any property of which such products form a part, if such products or property were withdrawn from the market or from use because of any known or suspected defect or deficiency (recall exclusion);
- clause 6.14.4 of the Policy excluded CGU’s liability to indemnify for property damage to products if such damage was attributable to any defect in them or to their harmful nature or unsuitability, other than products repaired, serviced or treated by the insured after they were originally sold, supplied or distributed (defect exclusion).
The decision at trial
The third party claim failed on the basis that the Supreme Court accepted the exclusions relied on by CGU were indeed applicable to the claim. Connock J accepted the recall and the defect exclusions contained in the Policy applied and subsequently dismissed the third party claim.
In dismissing the third party claim, his Honour rejected Entyce’s submission that the recall exclusion should be read down to exclude only costs related to the recall itself, instead preferring CGU’s broad interpretation of loss in the exclusion. His Honour opined that the clause in its plain reading includes all loses resulting from the recall of the goods. Relevantly, His Honour noted that "recall" was not the operative word in the exclusion clause but rather one of a series of words which had to be considered in conjunction.
As for the defect exclusion, his Honour determined that the berries were defective, harmful and unsuitable for human consumption because of their contamination with the virus.
His Honour opined that the effect of the contamination fell within the definition of “property damage” as it constituted a physical alteration or change which impaired the value or usefulness of the thing said to have been damaged.
His Honour noted the frozen berries were meant for human consumption and could not be after they were contaminated with the virus. He therefore concluded that when having regard to the natural and ordinary meaning of “defect” and “deficient”, it was logical to conclude the frozen berries were defective.
Implications for you
This case reiterates that plain and ordinary meaning is still paramount in matters involving interpretation of contractual terms. Courts are loathe to read ambiguity into contractual terms unless absolutely necessary. This case was no exception. While Entyce’s arguments were creative, the wording of the Policy was far too clear in its plain language to make anything else from it.
This case also illustrates the importance of ensuring exclusion clauses in policies are drafted broadly with language that accords with the overall intentions of the insurer.
Entyce Food Ingredients Pty Ltd v CGU Insurance Limited  VSC 757 (17 November 2020)