The claimants sold bulk soap powder. The packager packed it in defective cardboard which caused it to cake. The buyer sought damages.for breach of contract against Rodan (i) for the difference between the sound value of the powder and its reduced value in its damaged state; (ii) expenses incurred in extra handling; (iii) the cost of the cartons which had been ordered in anticipation of further deliveries of powder from Rodan which Newbrite did not then order; (iv) loss of future sales by reason of damage to Newbrite’s brand name. Rodan were insured with the respodent.
Held: The claimants claimed an indemnity against, ‘all sums which the Insured shall become legally liable to pay for compensation . . in respect of any Occurrence to which this cover applies . . in connection with the Business.’ ‘Occurrences’ were defined as, amongst other things, ‘Loss of or physical damage to physical property not belonging to the Insured…’. The soap powder was defective in that it caused the cartons to stain and absorb moisture so that, in turn, the powder itself became caked. The claimants had to pay Newbrite compensation for (1) Newbrite’s losses incurred in selling off the balance of the powder at reduced prices; (2) Newbrite’s additional costs incurred in the handling rejected and unsold powder; (3) the cost of unused cartons into which Newbrite had intended to pack further soap powder from the claimants; and (4) Newbrite’s loss of anticipated profits for eighteen months.
Held: (Majority) Items (1) and (2) to be within the scope of the insuring clause, but outside cover by reason of one of the exclusions; and the whole court found items (3) and (4) to be outside the scope of the insuring clause. (Hobhouse LJ) ‘In my judgment on the facts found by the Official Referee, Judge Kershaw was right to include as a consequence of that Occurrence the damage that was caused to the commodity itself, that is to say the caking of the powder which was caused by the hygroscopic effect of the staining of the cartons which had been caused by a defect in the commodity. But I do not consider that Judge Kershaw was right to construe the clause as if an Occurrence could include mere damage caused by the commodity to itself. Such a construction fails to give effect to the natural meaning of the language which clearly contemplates that the commodity will cause physical damage to something else. Further, that view would contemplate that, without more, the products liability policy could cover deterioration in the commodity supplied. In my judgment the correct analysis is that that there was an Occurrence – the staining of the cartons – of which a consequence was the damage to the commodity – the caking of the powder. Thus in considering what liability on the part of Rodan has arisen from the Occurrence one also has to take account of that physical consequence of the Occurrence.
The next step in the analysis is to consider which, if any, of the Items of damage are referable to a legal liability of Rodan to pay compensation ‘in respect of’ the Occurrence. It is hard to see what effect Judge Kershaw was giving to the words ‘in respect of’. He seems to have treated them as equivalent to ‘arising out of the same cause of action as gave rise to the assured’s liability for the Occurrence’. He does not seem to have asked himself whether the relevant Item represented a liability to pay compensation in respect of the Occurrence. This is most clearly illustrated by his conclusion that Rodan were entitled to an indemnity in respect of their liability for future loss of profits and expenditure thrown away on the purchase of cartons to be used for further powder that it was intended should be supplied by Rodan to Newbrite but never was. These future losses of Newbrite related not to the supply of the 80 tons but to the non-supply or the non-acceptance of further powder. They certainly do not relate to any physical consequence of the damage to the cartons in which the 80 tons were packed by Newbrite’s packers. The phrase ‘in respect of’ carries with it a requirement that the liability relate to the identified Occurrence. It is not sufficient that it should simply have had some connection with the Occurrence.
The effect of the decision of the judge to treat the words ‘in respect of the Occurrence’ as meaning no more than ‘in connection with the same causes of action as gave rise to the liability for the Occurrence’ transforms this cover from a products liability cover to a policy covering general contractual liabilities. A products liability policy in which the cover provided is defined in words such as those used in the present policy is confined to liability for physical consequences caused by the commodity or article supplied. The liability of the assured in damages will have to be expressed in terms of money but that liability must be in respect of the consequences of the physical loss or damage to physical property (or some personal – ‘bodily’ – injury).
Provided that the commodity or article supplied has caused the physical consequence, the compensation payable by the assured to the third party will include, and the liability of the insurer to indemnify the assured, will extend to the totality of the loss which the third party is entitled to recover from the assured by way of damages in respect of that physical consequence. Thus, if a defective article supplied by the assured causes bodily injury to the third party disabling him or, for example, causes his premises to be destroyed by fire, the third party will be entitled to recover from the assured the full value of what he has lost which will, in the two examples I have given, include compensation for future loss of earnings. They are part of what the third party has lost as a consequence of the physical loss or injury and they are accordingly part of the liability of the assured in respect of that physical consequence.
Items 3 and 4 in the claim of Newbrite were not of such a character. They relate to the future non-performance of obligations of Rodan towards Newbrite. They do not relate to any quantification of the loss which Newbrite suffered as a result of the relevant physical Occurrence, the staining of the cartons in which Newbrite packed the first 80 tons delivered. In my judgment the judge’s decision in favour of Rodan on Items 3 and 4 was clearly wrong and cannot stand.’
Judges:
Hobhouse LJ
Citations:
[1999] Lloyd’s Rep IR 495
Jurisdiction:
England and Wales
Cited by:
Cited – Horbury Building Systems Ltd v Hampden Insurance Nv ComC 9-Sep-2003
The claimant had installed suspended ceilings in a new cinema complex. They took out insurance with the respondents, and now pursued a declaration as to the liability of the defendants under the policy. They had used the wrong washers, leading to a . .
Cited – Pilkington United Kingdom Limited v CGU Insurance Plc QBD 28-Jan-2004
The claimants had installed glass tiles in a roof. They fractured, and facing a claim for damages, they sought payment from their insurers. The claimants argued that the risk of fracture meant that the damage occurred upon installation, the insurers . .
Lists of cited by and citing cases may be incomplete.
Insurance
Updated: 11 June 2022; Ref: scu.186287
