Another look at the meaning 'property damage': Capral Ltd v Insurance Australia

In the Australian case, Capral Limited (Capral) v CGU, Capral faced a situation where the aluminium plates it supplied were found to be defective after being used by customers to construct marine vessels.

This defect led to claims from 10 customers for the defective product and their consequential losses, amounting to AUS$2,197,000, which Capral settled.

Subsequently, Capral, a manufacturer and supplier of aluminium products, sought to recover these costs through its insurance policy with CGU, claiming the damages fell under 'property damage' as covered by the policy, a point which is contested by CGU.

In this article, we examine the importance for both businesses and insurers to carefully review and understand policy wording - especially around coverage scope, exclusions, and procedural requirements- to ensure clarity on what is and isn’t covered in the event of a claim.

Defining 'property damage'

The Court's task was to interpret the policy terms, in particular, what constituted 'property damage', whether Capral's additional legal costs were recoverable and if any exclusion clauses applied that would negate the claim.

The policy defined 'property damage' as physical injury, damage, loss, or destruction of tangible property, including loss of use resulting therefrom.

The Court's analysis

The Court, referencing both Australian and international case law, concluded that the damage to the customers' vessels due to the defective plates did indeed constitute 'property damage'. This was because the defective plates "physically altered" the vessels, “impairing their usefulness and value” (a test which originates from Ranicar v Frigmobile [1983]).

However, the Court found that the additional costs incurred by Capral in defending the claims were not recoverable under the policy. This decision was reached because Capral had not obtained prior written consent from CGU before incurring these costs, as required by the policy terms.

Regarding the applicability of exclusion clauses, the Court examined one specific clause related to products withdrawn from the market due to suspected defects. The Court determined that this exclusion did not apply because the property damage had occurred before the plates were recalled. The damage was already done when the plates were incorporated into the vessels, and thus the exclusion concerning preventative actions for suspected defects was irrelevant in this case.

Key takeaway for businesses and insurers

This decision highlights the complexities involved when a defective product is integrated into property (in this case the vessels), and how that can constitute property damage if there is ‘physical alteration’ which ‘impairs usefulness or value’.

For businesses and insurers alike, this case serves as a crucial reminder of the need for precise and careful consideration of policy terms to ensure all parties are clear on both the coverage scope and the conditions under which claims can be made or contested.

Comparison with the Sky UK case: Importance of clear policy wording

This judgment was handed down at a similar time to the well reported Court of Appeal judgment in Sky UK Limited & Another v Riverstone Managing Agency Limited & Others [2024] EWCA Civ 1567, which also considered the meaning of “damage”, albeit under a CAR policy.

The Sky case related to water damage to wooden roof cassettes due to the absence of a temporary roof during the construction phase of Sky Central. The water ingress caused swelling, decay and other damage to the timber roof cassettes, which continued to worsen even after the building's completion and the expiration of the insurance policy.

Sky claimed under the CAR policy, which insurers contested on several grounds including the meaning of “damage”.

The Court of Appeal found against insurers on the basis that the presence of moisture and the resultant wetting of the timber constituted “damage” under the policy, because the wetting constituted “physical alteration”, clarifying the scope of coverage under CAR policies, particularly the recoverability of post-policy damage.