Background
Major held products liability insurance with CGU providing cover for an occurrence caused by an unknown defect in Major's products, pursuant to which CGU was obliged to pay Major's legal costs in respect of such claims.
Major supplied two hydraulic cylinders for a yacht owned by Timelink. The piston rods on the canting keel buckled, broke and caused the keel to detach from the hull during a race resulting in damage to the yacht and consequential loss. Timelink sued Major for damages essentially on the ground that the cylinders were not fit for purpose, that they had relied on Major's skill as a specialist hydraulic engineering company, and that Major had supplied the cylinders which were not appropriate for their intended use. In essence, Major contended that it merely provided a component which it did not design, and which was specified by Timelink's own engineer.
Major sought indemnity for Timelink's claim from CGU under the public liability policy. CGU denied liability pursuant to an express exclusion in the policy excluding liability arising from the rendering of professional advice or service.
Major successfully defended the Timelink proceeding at first instance and on appeal, and then sought its defence costs from CGU under its public liability policy.
Decision
The Victorian Supreme Court held the policy did not respond. Pagone J, started with the proposition that CGU's obligation to pay Major's defence costs depended upon the character of Timelink's claim against Major and whether, if Timelink's claim were successful, CGU would have been obliged to indemnify Major for any liability.
This required the Court to consider the true nature of the claim, as well as the intention of the parties in relation to the purpose of the insurance contract.
His Honour stated that the obligation to provide legal costs for a defence must be judged in this policy upon the assumption that Timelink's claim would succeed.
It was clear that the policy was intended to expressly include cover for unknown product defect, and to expressly exclude liability for design and professional risks resulting from the rendering of professional advice or service.
As Timelink did not contend that the cylinders were inherently defective, but contended that Major should not have supplied the cylinders for the purpose which Timelink had sought, the claim was properly characterised as one where the wrong cylinders were allegedly supplied in the context of allegations about the rendering of professional advice of service. Such a claim would be expressly excluded under the CGU policy.
In the alternative, Timelink also alleged that Major had caused loss from its performance or failure to perform the making or formulating of a design. This claim would also have come within another exclusion relating to the formulation of design or specification. In circumstances where CGU would not be obligated to indemnify Major for such a claim, CGU was also not obligated to pay Major's defence costs.
Conclusion
This case highlights that the paramount consideration in determining whether a claim falls within the terms of a policy is the nature and not the form of the claim.
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