A recent decision of the Queensland Court of Appeal has served as a timely reminder to insurers and insureds alike of the importance of clear and unambiguous drafting of exclusion clauses, particularly in circumstances where such exclusions are relied upon by insurers to carve out coverage otherwise available under a broadform liability policy.

The insured, Selected Seeds Pty Ltd (Selected) conducted the business of grain and seed merchants. Selected contracted to supply Jarra grass seed to S & K Gargan, which they agreed to grow, harvest and sell back to Selected. In mid 2003, with the agreement of Selected, S & K Gargan supplied some of their seed crop, representing it to be Jarra grass seed, to M Gargan. In October 2004, M Gargan sold a quantity of his seed, represented to be Jarra grass seed, to Landmark Operations Limited (Landmark). In December 2004 Landmark sold a quantity of the seed to Mr and Mrs Shrimp, representing that it was Jarra grass seed. The Shrimps planted the seed on their property between December 2004 and January 2005, intending to grow a Jarra seed crop and hay crop from the seed.

The Shrimps grew only Summer grass, rather than Jarra grass.

None of the parties were aware that the seed Selected supplied to S & K Gargan was not Jarra grass seed but was actually Summer grass seed. The growth of Summer grass as opposed to Jarra grass caused loss to the Shrimps because Jarra grass has a quality that makes it fit for production of commercial grass seed and good quality palatable stock feed. However, Summer grass is fit only for low quality stock feed and is not fit for production of commercial grass seed.

The Shrimps sued Landmark in the Federal Court for damages for breach of contract, misleading and deceptive conduct and negligence (the Federal Court proceedings). Many parties were then joined to the Federal Court proceedings. Relevantly, Landmark joined M Gargan, claiming indemnity and contribution against Mr and Mrs Shrimp's claim. M Gargan in turn joined Selected, claiming an indemnity and contribution.

Selected contributed $150,000 to the settlement of the Shrimps' claim (the Settlement) which Selected's liability insurer, QBE Insurance (Australia) Limited (QBE) agreed was reasonable in the circumstances.

Selected held a Broadform Liability Insurance Policy with QBE (the Policy) under which it sought indemnity for the Settlement and the costs associated with defending the Federal Court proceedings. QBE denied indemnity and Selected commenced proceedings against QBE seeking a declaration of indemnity which was granted by the trial Judge.

On appeal, QBE argued that the Efficacy Clause should be given its broad and literal meaning, particularly because it was a separate endorsement to the standard printed policy wording (which suggested an intention to adapt the standard wording). Selected argued that QBE's construction of the Efficacy Clause would result in the exclusion having too wide an application and the clause should actually operate only to exclude claims where a product fails to perform up to a claimed standard rather than where a contaminated product damages a customer's property.

Firstly, the Court of Appeal found that no reliance could be placed upon the reasoning in John Wyeth & Bros Ltd v Cigna Insurance Co of Europe SAMD & Ors (the Wyeth Case) (as relied upon by the trial judge) because the terms of the exclusion in the Wyeth Case connoted a much narrower causal relationship than the terms of the Efficacy Clause. The Court of Appeal also found the difference between the nature of the third party claims in the Wyeth Case were significant enough to warrant distinction from Selected's circumstances.

Secondly, the Court of Appeal rejected Selected's argument that QBE's construction of the Efficacy Clause was incorrect because the Policy, by its very nature (broadform liability), was meant to provide broad cover. The Court of Appeal found that this was no justification for moving away from the literal meaning of the Efficacy Clause and the fact that it was expressed in a separate endorsement displayed a clear intention to exclude cover which otherwise fell within the insuring clause and which other exclusions left intact. While the Efficacy Clause did reduce the extent of cover for product liability, it still provided cover for liabilities on various other bases. Therefore, the Policy remained a broadform liability policy.

Finally, the Court of Appeal noted that the principle of contra proferentum did not apply because the language of the Exclusion Clause was clear and unambiguous.

Therefore, the Court of Appeal overturned the finding of the trial judge regarding the construction and applicability of the Efficacy Clause and allowed QBE's appeal. Selected's claim for indemnity was found to be excluded by operation of the Efficacy Clause. This case provides an important lesson that plain and unambiguous drafting of insurance policies, particularly exclusion clauses, is critical to ensuring that courts will uphold the literal meaning/intention of the policy (and exclusion clauses).

This story is available in full at Mondaq.