Court of Appeal considers meaning of a Product under a Contractors' Combined Liability Policy

In Aspen Insurance UK Limited v Adana Construction Limited [2015] EWCA Civ 176, the Court of Appeal considered the meaning of a "Product" under the terms of a Building Services Combined Liability Policy. The Court of Appeal adopted a purposive interpretation in the context of a policy which was intended by the parties to cover a wide range of circumstances in which liability would arise.

Background

The Respondent ("Adana") was a sub-contractor of construction works at King's Dock Mill in Liverpool. Adana carried out construction works including the casting and fixing in place of a reinforced concrete pile cap which was to form a crane base. Adana also supplied dowels (iron rods) which it installed into four reinforced piles to connect the piles to the crane base. Following completion of the works and erection of a tower crane on the crane base, the crane collapsed and fell backwards. The crane driver was very gravely injured, a number of neighbouring properties were significantly damaged and the crane itself was seriously damaged. Experts concluded that the collapse was due to a failure of the connection between the crane base and the piles. The load being applied to the connection was greater than the ability of the connection to resist the load either because the design was faulty or because Adana failed to follow the design or specification.

Adana was insured by Aspen under a Miles Smith Building Combined Contractors' Liability Policy (the "Policy") which included cover for Public Liability and Product Liability.

Public Liability cover was provided against legal liability for personal injury and damage to property including where "resulting from faulty or inefficient workmanship, materials or design" (save for "making good") but liability arising from any Product was excluded (the "Product Exclusion").

Product Liability cover was provided against legal liability for personal injury and damage to property caused by any Product but liability "arising in connection with the failure of any Product to fulfil its intended function" was excluded (the "Functionality Exclusion").

"Product" was defined as meaning "any product or goods manufactured, constructed, installed, altered, repaired, serviced, processed, treated, sold, leased, supplied or distributed by or on behalf of [Adana] from or within Great Britain … but only after such item has left [Adana's] care, custody or control."

The Policy also contained a foundation clause under which it was agreed that the insurance did not indemnify Adana in respect of "loss of or damage to any superstructure arising from the failure of [Adana's] foundation works to perform their intended function." (The "Foundation Clause").

Aspen sought a declaration of non-liability under the Policy on the basis that (1) the concrete base was a Product; (2) any liability was caused by the Product failing to fulfil its intended function; (3) Aspen was not therefore liable under the Public Liability or Product Liability sections; and (4) even if there was any liability, it was excluded by the Foundation Clause.

First instance decision

HH Judge Mackie QC declined to make the declaration sought by Aspen. He held that the concrete base was not a Product within the definition under the Policy. Adana had created the base by pouring concrete in situ after which it came into existence as a lump of concrete. The concrete base was not a product with a small "p". It was not one of Adana's range of products; it could not be bought. Rather it was created as part of the work on site. He also found that the dowels were "perhaps" component parts of the piles once placed and secured within them but were not part of a wider product and as products on their own they were not Adana's.

In considering the Foundation Clause the judge held that "superstructure" in its construction sense denoted a building above the ground, foundations being permanent features which supported the building. The expressions "foundations" and "superstructure" did not apply to a temporary crane.

Court of Appeal Decision

The Court of Appeal allowed Aspen's appeal to the extent that any liability may be established against Adana in respect of damage to the crane itself on the basis that this was excluded under the Foundation Clause. However, the Court of Appeal rejected Aspen's submissions that the concrete base was a Product. Although the Court of Appeal was of the view that the dowels were Products, the expert evidence was that the dowels did not fail such that if Adana was liable, its liability would not have been caused by the dowels but by its faulty workmanship in not installing them properly.

Public and Product Liability Cover

The Court of Appeal considered what constituted a Product under the Policy for the purpose of determining whether any assumed liability of Adana was excluded under (1) the Product Exclusion under the Public Liability section and (2) the Functionality Exclusion under the Product Liability section.

The concrete base

The Court of Appeal held that the judge had been correct in finding that the concrete base as a whole (including the dowels within it) was not a Product within the definition of the Policy.

The Court of Appeal first considered the structure of the definition of "Product" which was defined as meaning "any product or goods" (undefined) followed by past participles relating to the manner in which the insured came to provide it. In order to be a Product the item in question had to have been provided by, and have left the insured's control in, one or other of the wide range of means specified.

A product (with a small "p") can be given a very wide meaning. It could mean anything which is the result of any process of manufacture or construction. Whilst a meaning which had the result that a building was a Product was a possible one, the Court of Appeal did not consider that the parties to an insurance of this kind should be taken to have intended this result. Without attempting a precise definition, the Court of Appeal regarded the hallmark of a product in this context as being that it was something which, at least originally, was a tangible and moveable item which can be transferred from one person to another and not something which only came into existence to form part of the land on which it was created.

In reaching this conclusion the Court of Appeal had in mind that the Product Exclusion was an exceptions clause which supports a narrow rather than a broad interpretation. Looking at the matter in the round Adana was not reasonably to be regarded as having constructed a product but as having carried out concreting works for the purpose of securing a foundation for the crane on and in the site. The fact that the works created something did not mean that everything that was created was to be regarded as a Product for the purpose of the Product Exclusion.

The constituents of the base

The Court of Appeal was of the view contrary to that of the judge, that the dowels were Products. The fact that they were incorporated into another object which itself was not a Product (i.e. the concrete base) did not matter. The difficulty for Aspen, however, was that the dowels did not break or fracture but were pulled out intact. What went wrong was that the holes drilled into the piles were either too short or not wide enough. If Adana was liable, its liability would not have been caused by the dowels but by its faulty workmanship in not installing them properly. While the definition of Product includes a product installed by Adana, the Court of Appeal said that that does not mean that Product Liability cover extends to defective installation. If there is something wrong with the Product, it is covered by the Product Liability section. If a Product is fine but installed in the piles in the wrong way, there is no cover for Product Liability but there is cover for bad workmanship under the Public Liability section.

Failure to fulfil intended function

It was not necessary in the circumstances for the Court of Appeal to determine whether any assumed liability of Adana arose in connection with the failure of Product to fulfil its intended purpose within the meaning of the Functionality Exclusion. The observations of the Court of Appeal here are, therefore, obiter.

As to the dowels, it was not apparent to the Court of Appeal that they failed to fulfil their own intended function. What appeared to have happened was that the holes in which they were placed were too shallow and too narrow. If (contrary to the Court of Appeal's view) the relevant Product was the concrete base together with the dowels, again it did not seem to the Court of Appeal that it was the Product that failed to fulfil its function. What failed was the arrangement as a whole. The Court of Appeal observed that in order for the Functionality Exclusion to be potentially applicable, the insured's liability has to have been caused by the Product in question. The Court of Appeal found it difficult to envisage a liability which has been caused by the Product and which "arises in connection with" the failure of the Product to fulfil its intended purpose, which was not caused by that failure.

The Foundation Clause

The Court of Appeal found that the Foundation Clause was applicable. The term "superstructure" was not limited to buildings above the ground. First, applying a purposive approach, it was perfectly reasonable to suppose that a general building contractors' liability policy such as this would be designed to embrace work such as the erection of a crane as well as the construction of any building. Second, the Foundation Clause was expressed in general terms to apply to loss of "any" superstructure. If it was intended to have connoted only a building above the ground then it would have been very easy for it say so. Further, the nature of the foundation work was not limited or confined in any way. In constructing the crane base Adana was carrying out the foundation works in relation to the crane – the "structure" which was to rest on the top of ("super") the base. Fourth the Court of Appeal saw no good reason why the fact that the crane base was only intended to be on site temporarily meant that it could not be a superstructure.

Notwithstanding its decision, the Court of Appeal shared the scepticism of the judge as to the appropriateness of making any negative declaration in advance of any trial of liability or statement of assumed facts. Lady Justice Gloster expressed her grave reservations as to whether it was appropriate to determine the coverage issues on the basis that, necessarily, many of the facts were assumed or uncertain.

In a subsequent judgment as to costs, the Court of Appeal ordered that Adana should have 85% of its costs of the appeal on the basis that Aspen had failed to establish its primary contention, namely that there was no public liability cover. Although Aspen succeeded on the question of whether the crane was a superstructure and whether the foundation works failed to fulfil their intended function, this was probably academic in light of the fact that Aspen's liability for other matters under the Policy would exhaust the limit of indemnity.

Comment

Although the Court of Appeal was considering the definition of a Product in the context of a building services liability policy, the decision gives some helpful guidance on the meaning of "a product" in the context of public/product liability insurance and the application of the functionality exclusion which commonly appears in such product liability policies.

The decision also highlights the risks for insurers in seeking declarations of non-liability on coverage issues where the underlying liability proceedings are on-going and the facts are uncertain.