Court deems affixing of defective cladding “property damage” under general liability policy

Following the raft of litigation in connection with non-compliant cladding is the finding of the Federal Court in: The Owners – Strata Plan No 91086 v Fairview Architectural Pty Ltd (No 3) – [2023] FCA 814. The decision has considerable implications on general liability insurers’ and opens up an avenue for significant losses they may have to meet.

If the reasoning of the Court is followed “property damage” in the context of a general liability policy happens at the time a “defective” product was incorporated into a building. This remains notwithstanding that the product itself did not undergo physical alteration or change (such as decay or cracking or failure resultant of some inherent defect) causing damage to “something else”. But only because it was later discovered that a product was (or was deemed to be) unsafe and needed to be removed.

On one view, the decision does not accord with what the insurance market would consider to constitute “physical damage” or an “occurrence”, within the meaning of a general liability policy.  Considering this judgment is a preliminary decision – in which the Owners need only satisfy the Court it had “an arguable case” that the policy responded – the final determination of this issue will need to await judgment at trial – and then possible review on appeal.

The facts

The matter was an application to the Federal Court of Australia to join AAI Insurance, trading as Vero Insurance to class action proceedings brought against Fairview Architectural. Fairview was the manufacturer and supplier of aluminium composite building panel materials known as “Vitrabond”.

Vitrabond has been used as cladding on numerous buildings in Australia. The panels are created with a core of highly flammable polyethylene overlaid with aluminium. In the event of fire, Vitrabond can rapidly accelerate and add to the intensity of a building fire. Due to this risk, regulators have directed that cladding be removed and replaced on affected buildings. In turn Owners have sought compensation for the cost of doing so from manufacturers and suppliers of Vitrabond and various building professionals.

In this case the Owners’ Corporation represented two high rise residential buildings in Sydney, clad with many thousand Vitrabond panels. The panels were affixed to the building using a “flat stick” method, which requires the installation of horizontal and vertical metal strips known as “top-hats” onto the building structure. Fixing is completed using thousands of screws and metal anchors that penetrate the sarking on the exterior of the building and which affix the top-hats to the steel studs – making up the building’s structure and exterior walls.

The defendant, Fairview is in Administration and has insufficient funds to complete rectification works, estimated at $200M. The works have not yet been undertaken. Accordingly, Fairview’s insurance policy has been called upon to meet the cost of the works.

To join Fairview’s insurer (Vero) to the proceedings it was necessary for the Court to find that there was an arguable case against Vero. That in turn required the Court to determine at a preliminary stage whether there was an arguable case that Fairview’s policy would respond to the claim if Fairview was to be found liable to the Owners.

Central to policy response is the extent to which fixing the “defective” Vitrabond panels was an “Occurrence” causing “Property Damage” to the Owners’ buildings in circumstances where the panels had to be removed and replaced by different panels.

At this preliminary stage, the Court held that there was an arguable case that the insuring clauses in the policies would be triggered. The final resolution of that issue will need to be determined at trial, but it seems unlikely that the Court will resile from its preliminary decision.

The policies

The policies in question contained reasonably standard property damage insuring clauses that require “Property Damage” and an “Occurrence” happening “during the Period of insurance”.

“Property Damage” was defined in the policy as “physical loss, destruction of or damage to tangible property…”. At law “damage” is understood to mean a physical alteration or change, not necessarily permanent or irreparable, which impairs the value of usefulness of the thing said to have been damaged.”[1]

An “Occurrence” was defined to mean an event, including continuous or repeated exposure to substantially the same general conditions, which results in …. Property Damage …. that is neither expected nor intended … from [the insured’s] standpoint.”

The Owners' arguments
A claim in respect of "property damage"
The Owners contended that the affixation of defective panels caused physical loss or damage to tangible property and advanced their claim on four grounds, namely:
  1. The affixation of the defective panels caused damage to the buildings because the panels created a fire risk and therefore made the buildings unsuitable, or less suitable, for their intended use, being habitation, which fell within the second part of the definition of “Property Damage”.

  2. The process of affixing the defective panels to the buildings with screws caused damage to the structure of the buildings because it was necessary to affix the top hats (frame for the panels) to the concrete and steel stud walls of the building by screws or masonry anchors (and that physical interference with the structure of the buildings amounted to damage).

  3. The process of removing the panels will inevitably result in damage to the top hat subframes which were affixed to the buildings for the purpose of attaching the panels and were suitable for that purpose at the time of affixation. That constitutes damage to tangible property (i.e to the top-hat subframes).

  4. There was damage to the buildings or the top hat subframes because of the risk that the structural integrity of the buildings or the subframes would be damaged when the panels came to be removed (despite the fact they were designed to last the lifetime of the building). Such risk was said to exist from the point in time when the panels were affixed to the buildings via the subframes.

The Owners relied on evidence from a structural and façade engineer who opined that removal of the panels “would almost inevitably result in some damage to the top hat subframe, as well as some damage to the screws and fittings that affixed the subframe to the steel studs or concrete which comprised the wall structure of the building.”

The expert further observed that significant force was required to remove the panels (based on observation) whereby the panels were prised from the top hat causing the top hats to bend, dent or distort and damage screw connections between the top hats and steel studs or concrete.

Finally, the expert considered that even if panels could be removed without top hats and screw connections being damaged, it would not be possible to reuse the existing top hat structures.

Ultimately this reasoning was accepted by the Judge who determined as a fact that there would be “Property Damage” within the meaning of the relevant policy to trigger the insuring clause.

Vero’s case in response
Vero response to the four grounds of the Owners’ claim was as follows:
  1. The fact there is a risk that buildings may be damaged by fire at some point in the future did not constitute physical damage.

  2. Any damage to the buildings caused by the insertion of screws or nails, and the resulting holes was not unintended or unexpected damage as Fairview knew that the top hats were to be affixed by way of nails or screws. On this basis the damage was therefore not caused by an occurrence as defined in the policies. In the alternative, Vero submitted any damage was not caused by an event which was unintended or unexpected because the affixation of the panels was clearly intended.

  3. Any damage to the top hats that may result from the removal of the panels would not be damage that occurred during the periods of insurance. Rather, it is damage that may occur in the future, or amounts to no more than a risk that damage may occur in the future.

  4. The mere risk that some damage to the buildings or top hats may occur at some time in the future is not physical damage that occurred during the periods of insurance.

In substance, Vero submitted that physical damage cannot have occurred at the time of affixation due to the risk of future damage (i.e removal of the panel) or fire, and the screws and nails used for the top hats was clearly not unintended or unexpected such that there was no “Occurrence”.

In addition, Vero asserted that some of the authorities relied on were wrongly decided and that for loss of use to constitute physical damage, the loss of use must result from damage to the property, not the mere risk of future damage.

While we consider Vero’s submissions to be sound, it appears on balance that inadequate expert evidence was adduced to support its defence. Vero served expert evidence from a façade engineer but the Court placed little weight on that opinion. The Court was critical of the expert’s views as they were “largely unsupported by any reasoning”. In this regard, the Court noted that “somewhat curiously”, Vero’s façade expert was not asked to comment on or respond to the Owners façade experts’ opinions nor was he specifically asked to opine on whether the panels could be removed from Owners’ buildings without damaging the top hats or steel and concrete substrate” (being a key issue in dispute).

Indeed, as the Court found, it is difficult to see how removal of thousands of panels affixed to the “top-hats” could not result in some damage to elements of the building, irrespective of what removal method was employed.

Vero also adduced evidence from a general building consultant. That expert was not a façade engineer and has little or no experience in facades. That evidence was rejected.

Commentary on the decision

Insurers on risk at the time that cladding was installed would be required to meet the cost of repairing or recladding a building, possibly many years later, notwithstanding that no physical damage has actually occurred to the building or cladding.

The position taken that the affixation itself caused damage because the building structure was intended to have top hats installed seems at odds with the wording in the policy as if that is “damage” then it was clearly intentional or “expected and intended” as the means of installation itself. Clearly the building was designed to have the panels affixed to it using top hats exactly in the manner that was done. The ‘unexpected’ part was only that it was later determined that such cladding should not be used. Further argument about these matters is likely to be aired at trial.

What is clear is that the resolution of the issue presented by the facts of this case are less than clear. Grab your Top Hat and watch this space!

[1] Ranicar v Frigmobile Pty Ltd [1983] Tas R 113

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