Product liability insurance

Installation of a defective product

There is very little English authority on the meaning of product liability policies, and the three most important cases have been decided in the last five years. In each of those cases, Rodan International Ltd v Commercial Union [1999] Lloyd’s Rep IR 495 , A S Screenprint Ltd v British Reserve Insurance Ltd [1999] Lloyd’s Rep IR 430 and James Budgett v Norwich Union [2003] Lloyd’s Rep IR 114 , although the wording was different, the courts ruled that product liability policy did not extend to economic loss inflicted on a third party by reason of defects in goods supplied by the assured, and that there had to be physical injury to persons or to other property before coverage attached. In Rodan, the Court of Appeal denied recovery on the basis that by reason of the defect the goods supplied were worth less than was believed. In A S Screenprint and in Rodan there was held to be no recovery for the customer’s claim for loss of profits from future contracts of sale, and in James Budgett it was held that there could be recovery where the product poisoned the goods into which it was incorporated but not for the customer’s alleged loss of profits in respect of future dealings with its own customers. The common theme running through the cases is that a product liability policy is designed to cover negligence claims, where the product does physical harm to a person or to other property: it is not designed to cover pure breach of contract actions in respect of the diminished value of the product supplied. The question is, therefore, whether the product supplied has damaged some other product. The point has arisen in two recent cases with remarkably similar facts – Horbury Building Systems Ltd v Hampden Insurance NV [2003] EWHC 2110 (Comm) (Deputy High Court Judge Ian Glick QC), affirmed [2004] EWCA Civ 418 and Pilkington United Kingdom Ltd v CGU Insurance plc [2004] EWCA Civ 23. Both Court of Appeal decisions are to be reported in [2004] Lloyd’s Rep IR. The basic question in each was whether a defective product sold to a customer and incorporated into the customer’s building could be said to have caused damage to the building simply because the product had to be replaced