By Adrian Papaianni, Partner and Hilda Shlemon, Lawyer

Insurers have traditionally interpreted “Property Damage” within the meaning of a public and products liability policy to occur when there has been consequential damage arising from defective work and/or defective products. Most liability policies will exclude the cost to rectify defective work or replace defective products. Two recent authorities threaten to displace the traditional approach and should be treated by all insurers with caution.

Recent History

On 4 February 2025, the Federal Court of Appeal handed down its decision in AAI Limited v The Owners – Strata Plan No 91086 and Fairview Architectural Pty Limited [2025] FCAFC 6 (‘Fairview’) where the Owners – Strata Plan 91086 sought to join AAI as the liability insurer for Fairview Architectural to a cladding class action.  The Court considered the meaning of “Property Damage” in liability policies and as to whether the existence and installation of defective combustible cladding, and the subsequent rectification required to the building.

It was ultimately found by the Court that it was reasonably arguable that Property Damage occurred at the time that the defective product was affixed to the building (even if there was no physical damage at that point in time) as the defective product may create a risk (such as a fire safety risk) to the Property and/or would require damage being caused damage to other areas of the building to rectify it. The Court’s findings are best encapsulated when it stated”

…it is at least arguable that damage to property occurs when there is a physical alteration or change, not necessarily permanent or irreparable, which impairs the value or usefulness of the thing said to have been damaged.^[1]

The full Court in Fairview did not make a final determination on this point as its focus was in determining whether there was a reasonably arguable case to join AAI as the liability insurer for the building to the cladding class action.

This then leads us to the decision made by the Federal Court of Appeal in Insurance Australia Limited t/as CGU Insurance v Capral Limited and Fairview Architectural Pty Limited [2025] FCAFC 46 (‘Capral’) on 3 April 2025 which provides further guidance.

Background

Capral Limited (Capral) supplied sub-standard aluminum plates (the Plate) to ten of its customers and were the subject of a product recall. The Plate had already been used by those customers in the construction ships, boats, barges and a water tank (Vessels).

Capral sought indemnity from CGU under its general products and liability policy. CGU denied the claims on the basis that the damage claimed related to rectification of the defective Plate and no consequential. Accordingly, it was CGU’s position that there was no “Property Damage” within the meaning of the CGU Policy (and otherwise a Product Recall Exclusion would apply).

First Instance

At first instance, the Federal Court considered the meaning of “Property Damage” in the Liability Policy underwritten by CGU (which was similar to that the sub the Fairview proceedings).  In considering what constituted “Property Damage” within the meaning of the CGU Policy, the Court cited the case of Fairview and found that the damage occurred at the time that the defective product was affixed even if there was no consequential damage.

Submissions by CGU on Appeal

CGU appealed the decision and contended that the primary judge erred in concluding that the claims made against Capral for the defective aluminum Plates and installed onto third party marine vessel properties constituted “Property Damage” within the meaning of the relevant liability policy. There was also a contention that a Product Recall exclusion would apply to exclude cover. In respect of the Property Damage point CGU contended that:

• the nature of the claim, as set out in the original letter of demand is for defective goods and the damages claimed are the rectification costs to replace the Plates, not property damage.
• the use of the product per se did not damage any property in which it was installed and the primary judge’s articulation that “Property Damage” was to be derived from the Ranicar authority as “physical alteration to tangible property that impairs its usefulness or value…”^[2] is an oversimplification (second and third arguments together).
• none of the authorities considered by the primary judge compelled the conclusion that the CGU Policy must respond, and that United Kingdom and Canada authorities relied upon did little to assist (fourth and fifth issues together).

Decision on Appeal

The Federal Court full bench upheld the first instance decision. In arriving at this decision, the Court found:

1. The Policy’s Insuring Clause expressly responds to any “claim for Property Damage…”. The third-party customers were claiming for the damage to their property and stated that the primary judge correctly concluded that the claims made by the customers have physical damage to tangible property as their basis. The work and materials required to rectify the property damage that had occurred formed the basis of the claim for “Compensation for … Property Damage” and how it was quantified.
2. In affixing the subject aluminum plate, the real question is whether the alteration to property must involve some negative consequence to the property sufficient to be characterised as “damage”. The Court further concluded that “Whether changes in physical characteristics of property affect usefulness or value is relevant to determining whether there has been property damage..”^[3] is the relevant question. In this case, it is inferred, it arose as there was a requirement to rectify as soon as the defective product was affixed. So, despite the fact there was no “consequential damage” resulting from the installation of the defective Plates, it is enough that the Vessel has to be damaged to allow for the product to be removed.
3. The argument that the primary judge relied on irrelevant cases is incorrect, cases such as Ranicar (where the Court found that salmon transported high temperatures making it not exportable) and Infrastructure (where welding was alleged to cause subsequent damage). The full Court asserted that this was not correct, there was damage at the time of the welding of each aluminum Plate to the third-party marine vessels. The Court stated that the present case was based on the resupply of a non-conforming product such and if the product had not been welded to third party vessels (so there was no physical alteration) then any claim would have been for a defective product not property damage. It follows that the “damage” is when the product is affixed because of physical alteration.
4. The Court then noted that the Canadian and UK authorities referred to were relevant and assisted in interpreting CGU’s Policy
5. CGU’s argument that the claim for preventative measures was analogous to this case is incorrect because this case is one where the incorporation of a defective product into another is alleged to have caused substantial damage to the property into which it was incorporated.

The Court also held that the CGU Policy’s Product Recall exclusion would not apply because the act of installing the defective product and the costs to rectify it were incurred at installation not as a result of a Product Recall.

Implications

The Fairview case is not yet determined, and the Court’s findings have been limited to what is reasonably arguable.

The Capral decision shows that the Federal Court is sympathetic to claims that Property Damage triggers a Liability Policy’s Insuring Clause and occurs at the time a defective product is affixed irrespective of whether it causes consequential damage. The argument is that the third-party property (such as a building) is affected as soon as a defective product has been installed because its characteristics inherently change (i.e. a loss in value or increased fire safety risk) but each case will turn on a case-by-case basis and all Policy terms and conditions should be considered.

This approach if adopted threatens to trigger legal liability Policy Insuring Clauses when a defective product has been installed even if it is not causing consequential damage. By implication this means a Policy’s Insuring Clause could be triggered well after the expiration of a Policy period if it can be shown that a product was defective at installation.

It is only a short step for Courts adopting this approach to find that it should not be limited to defective product installation but extended to defective installation works or workmanship and will raise a real risk of insurers being prevented from relying on the exclusions that are regularly applied such as defective Design or Workmanship exclusions.

There is also the risk that the principles in Capral will be extended to Material Damage Policies in addition to third party legal liability Policies given common definitions for Property Damage.

These issues are still being litigated and is an area that we will closely assess in the coming months.

 

^[1] AAI Limited v The Owners – Strata Plan No 91086 and Fairview Architectural Pty Limited [2025] FCAFC 6 at [62].

^[2] Insurance Australia Limited t/as CGU Insurance v Capral Limited and Fairview Architectural Pty Limited [2025] FCAFC 46, [24].

^[3] Ibid [69].