Austral Plywoods Pty Ltd v FAI General Insurance Co Ltd [1992] QCA 4 (1992)7 A.N.Z. 2 Ins. Cas. 61-110

BETWEEN: [1992] QCA 004 AUSTRAL PLYWOODS PTY. LTD. (Plaintiff) Appellant AND: FAI GENERAL INSURANCE COMPANY LIMITED (Defendant) Respondent JUDGMENT OF THE COURT Delivered the 3rd day of March 1992 The appellant, who was the plaintiff in the action, is a plywood manufacturer. In April 1987, it supplied plywood to a company called DMK Building Supplies which in turn supplied it to Quilkey Brothers, a boat builder who, in placing his order for the plywood, was acting as agent for the boat owner, a Dr. Ruscoe. The supply was to fulfil a specific order by Mr. Quilkey for marine ply with a surface veneer of sapele, a wood with a mahogany-type finish. The plywood was of varying thicknesses and used for a variety of purposes in the construction of the boat. It was affixed to the hull of the boat by Mr. Quilkey by means of glue and screws. The plywood was defective in that the bonding of the veneered surface was inadequate. In early August 1987, when he was well advanced with the construction of the boat, Mr. Quilkey noticed that the bonding was failing in some places. He decided to remove all of the plywood from the boat and there is no dispute that this was a necessary consequence of the defect. -- 1 of 7 -- 2 The appellant supplied new plywood at no cost. Furthermore, it accepted its liability to Dr. Ruscoe for the cost of removal of the defective plywood, consequential repair to the hull of the boat, and the installation of the new plywood. The respondent did not dispute that liability and it is not now in issue. In the action, the appellant sought to recover from the respondent that cost, together with some legal expenses, a total of $43,457.25, pursuant to a policy of insurance called a Broadform Liability Policy. That policy insured the appellant "for all amounts which the Insured becomes legally liable to pay as compensation for ... property damage caused by an occurrence in connection with the insured's business". In view of what has been said there can be no dispute between the parties that the liability of the appellant to Dr. Ruscoe in the amount claimed was caused by an occurrence in connection with appellant's business, namely the fabrication and supply of the plywood. The first question in issue between the parties was and is whether the amount which the appellant became liable to pay as compensation to Dr. Ruscoe was for property damage. See para. 12A of the Statement of Claim and ground 1 of the Notice of Appeal. The term "property damage" is defined in the policy to mean, relevantly, "physical injury to ... tangible property". The question whether the amount which the appellant became -- 2 of 7 -- 3 legally liable to pay Dr. Ruscoe was for physical injury to tangible property was not decided by the Trial Judge. He assumed that to be the case but determined the action against the appellant by concluding that one of the exclusions to the policy applied. He might well have been influenced by the way in which the case was presented before him, but it seems likely that determining the question whether the amount paid was for physical injury to tangible property before considering whether any exclusion in the policy applied helped to lead him into error. The tangible property to which the appellant had to prove physical injury was the hull of the boat in the condition in which it was immediately prior to the affixation of the defective plywood. The question is whether the affixation of that plywood to the hull caused physical injury to the hull. If that question is answered in the affirmative it is then necessary to identify that physical injury for it is only that physical injury which is compensible. The measure of that compensation would ordinarily be, and we think here is, the cost of remedying that physical injury. In one sense any affixation of plywood to a hull by means of screws and glue causes physical injury to the hull. It causes holes to be drilled in the hull for the screws and the glue may also damage the surface of the hull. In order to restore the hull to its original condition, the plywood would have to be removed, the glue chiselled or scraped off -- 3 of 7 -- 4 and the screw holes filled. Compare Wyoming Sawmills Inc. v. Transportation Insurance Company Or.578 P.2d 1253 at 1257. But, of course, if the plywood is not defective there is no physical injury which would give rise to a legal liability in the supplier to pay compensation for it. Upon the permanent affixation of the defective plywood to the hull, the hull was not only physically injured by the screw holes and glue but was rendered unsuitable, or less suitable, for the purpose for which it was constructed. Compare Carwald Concrete & Gravel Co. Ltd. v. General Security Insurance Co. of Canada 24 D.L.R. (4th) 58 at 63; Canadian Equipment Sales & Service Co. Ltd. v. Continental Insurance Co. 59 D.L.R.(3d) 333 at 336. To remedy that injury the plywood had to be removed and the hull restored to a state in which new plywood could be affixed. His Honour decided the case against the appellant because he thought that exclusion 4 in the policy applied. It provides:- "This insurance does not apply to: ... 4. property damage to the insured's products arising out of such products or any part of such products." He reached this conclusion because of his view that "the property damage that occurred to Dr. Ruscoe's boat was -- 4 of 7 -- 5 damage to the plywood which was the insured's product". However, if the plywood was physically injured that was not the only physical injury as shown above. The appellant was entitled to be indemnified in respect of the physical injury to the hull. That is not what the appellant claimed. It claimed to be indemnified in respect of the whole of the sum which it paid to Dr. Ruscoe which was the cost of replacement of the defective plywood; that is, it included not only the cost of removal of the defective plywood and the restoration of the hull to a state in which new plywood could be affixed, but also the cost of affixing that new plywood. The particulars of the claim did not enable a calculation to be made of the cost of removal of the plywood and restoration of the hull to a state in which new plywood could be affixed. Before the Trial Judge and initially in this Court the question which was argued was whether or not the appellant was entitled to recover the whole sum. Mr. Gibson Q.C. for the respondent quite properly pointed out to us that there was some evidence from Mr. Quilkey that the work of cutting out and getting rid of the defective plywood and cleaning up what was left took two weeks. From that it may be inferred from the figures in the particulars of Dr. Ruscoe's claim that the labour cost of this was $4,800.00 and the shed rent for this was $261.00, making a total of $5,061.00. No other part of the claim is capable -- 5 of 7 -- 6 of apportionment in this way. Both parties before us expressed the view that, if we came to the conclusion which we have, we should give judgment accordingly, rather than, for example, granting a re-trial limited to the question of amount. Accordingly, there should be judgment for the appellant for the sum of $5,061.00. As the point on which the appellant succeeds was not advanced below or in this Court until a very late stage, we would make no order as to costs of the action or the appeal. -- 6 of 7 -- IN THE COURT OF APPEAL SUPREME COURT OF QUEENSLAND Appeal No. 33 of 1991 Before the Court of Appeal Mr Justice Fitzgerald Mr Justice Davies Mr Justice Thomas BETWEEN: AUSTRAL PLYWOODS PTY. LTD. (Plaintiff) Appellant AND: FAI GENERAL INSURANCE COMPANY LIMITED (Defendant) Respondent JUDGMENT OF THE COURT Delivered the third day of March 1992 CATCHWORDS: INSURANCE - LIABILITY - Appellant claims from respondent pursuant to liability policy in relation to supply of defective plywood - whether amount appellant was liable to pay was for "property damage" - whether "physical injury to tangible property" - whether exclusion clause precludes recovery of entire sum Counsel: Mr. L.D. Bowden of Counsel for the Appellant Mr. G.J. Gibson Q.C. and with him Mr. L.A. Stephens of Counsel for the Respondent Solicitors: Morris Fletcher & Cross for the Appellant Bradley & Co. for the Respondent Hearing date(s): 18 February 1992 -- 7 of 7 --