C. The reasons of the primary judge
14 After identifying the background to and terms of the application, and the salient parts of the policy and the Third Party Claims Act, the primary judge expressed the following views as to s 5 of the Third Party Claims Act (J[37] to [41]):
37 The general effect of s 5 of the Third Party Claims Act is that the relevant court has a discretion to grant or refuse leave to bring or continue proceedings against an insurer in the court, but must refuse leave if the insurer can establish that it is entitled to disclaim liability under the policy.
38 To enliven the discretion, a claimant must generally establish: first, that there is an arguable case against the insured; second, that there is an arguable case that the relevant insurance policy responds to the arguable case against the insured; and third, that there is a real possibility that the insured would not be able to meet any judgment against it: Murphy, McCarthy & Associates Pty Ltd v Zurich Australian Insurance Limited [2018] NSWSC 627 at [17] and the cases there cited. There remains a residual discretion to refuse leave even if those three requirements are met: DSHE Holdings Ltd (receivers and managers appointed) (in liq) v Abboud [2017] NSWSC 579 at [20]-[21].
39 The requirement in s 5(4) that leave be refused if the insurer can establish that it is entitled to disclaim liability is "one imposed to insulate insurers from exposure to untenable claims": Murphy at [16]. The onus of establishing an entitlement to disclaim is obviously on the insurer: Ritchie v Advanced Plumbing and Drains Pty Ltd [2019] NSWSC 1028 at [28]. It has been said that the onus imposed on the insurer by s 5(4) of the Act requires it to demonstrate "beyond argument" an entitlement to disclaim indemnity: Ritchie at [28]; Giabal Pty Ltd v Gunns Planations Ltd (in liq) [2020] NSWSC 1070 at [14]; Chubb Insurance Australia Ltd v Giabal Pty Ltd; Caitlin Australia Pty Ltd v Giabal Pty Ltd [2020] NSWCA 309 at [3] and [7]. That proposition would appear to flow from the interlocutory nature of an application for leave and the fact that the entitlement to disclaim may depend on unresolved and contestable questions of fact. It may be, however, that questions of construction arising under the policy of insurance may be determined on a final basis in advance of the trial: Chubb at [12].
40 [The insurer] took issue with the suggestion that it was required to satisfy the Court that its entitlement to disclaim liability was "beyond argument". It submitted that the emphatic language of s 5(4) of the Third Party Claims Act pointed against such a conclusion, that the reasoning in Ritchie to the contrary was wrong, and that, because the parties in Giabal and Chubb were not in dispute as to the applicable legal threshold, they provide no real support for the proposition that the entitlement to disclaim must be beyond argument. [The insurer] also submitted that there was nothing in the text of s 5 to suggest either that the court considering an application for leave was confined to determining whether the claimant had an arguable case, or that the court was precluded from determining on a final basis whether the insurance policy responded to the claimant's claim.
41 [The insurer] submitted that the circumstances of this case were such that the Court should determine whether the policies respond to [the insured's] claim on a final, not interlocutory, basis. [The insurer] noted, in that regard, that the parties had each filed detailed and comprehensive expert evidence which addressed whether [the insured's] claim under the policies arose from or related to property damage which happened during the period of insurance. The parties also advanced comprehensive submissions in respect of that issue. In [the insurer's] submission, it was in all parties' best interests for the coverage issue to be determined on a final basis at this stage of the proceeding.
15 The primary judge then identified the following principal issues for resolution (J[43] to [50]):
(1) the Court's jurisdiction to make orders referable to the Third Party Claims Act;
(2) whether the respondent had an arguable case against the insured;
(3) whether there was an arguable case that the policies respond to the insured's claim or potential liability to the respondent, and as part of that question, whether the insurer was entitled to disclaim liability, including whether:
(a) the insured's potential liability arises from "Property Damage" (i.e. physical loss, destruction or damage to tangible property);
(b) such damage was caused by an "Occurrence" (i.e. an event which results in "Property Damage" that was neither expected nor intended from the insured's standpoint);
(4) whether the insurer was entitled to disclaim liability on the basis of one or more of the exclusion clauses in the policies;
(5) whether there was a real possibility that the insured would not be able to meet any judgment against it (which the primary judge noted (at J[48]) was a matter beyond doubt); and
(6) whether - assuming the respondent established that: (a) it had an arguable case against the insured; (b) there was an arguable case that the policies respond to the insured's claim; and (c) there was a real possibility that the insured would not be able to meet any judgment - there were any reasons why the discretion would not be exercised in favour of the respondent.
16 After determining that the Court had jurisdiction to make orders under the Third Party Claims Act (J[51] to [54]), the primary judge considered whether the question of leave should be determined on an interlocutory or final basis and decided to do so on an interlocutory basis. At J[55] to [66], the primary judge reasoned as follows:
55 The question whether leave can and should be granted to bring or continue proceedings directly against an insurer pursuant to the Third Party Claims Act is ordinarily determined on an interlocutory basis. That is essentially why it is generally only necessary for a claimant to demonstrate that there is an arguable case that the policy in question responds to the claim. It is also presumably why it has been said that an insurer who opposes leave on the basis that it is entitled to disclaim liability under the policy must demonstrate "beyond argument" that it is entitled to disclaim.
56 [The insurer] submitted that the Court should determine whether the policy responds to [the insured's] claim on a final, not interlocutory basis. In [the insurer's] submission, it was in the best interests of all parties for that issue to be determined separately and on a final basis. It was also said to be appropriate to consider that question on a final basis given that both it and [the respondent] had adduced detailed expert evidence in respect of that issue. In those circumstances, it would not be appropriate to permit the parties to essentially re-agitate the issue at the final hearing. While [the insurer] did not file an application for the separate determination of that issue pursuant to r 30.01 of the Federal Court Rules 2011, it indicated that it would do so if required or if the Court considered that to be necessary.
57 [The respondent's] position in respect of whether the coverage issue should be determined on a final basis was somewhat ambiguous and equivocal. It appeared to accept that it would be in its best interests for the issue to be determined on a final basis. There would plainly be little point in it pursuing the proceeding if it was unable to recover from [the insurer] under the policies. [The respondent] nevertheless did not consent to the issue being determined on a final basis and many of its submissions appeared to be premised on the proposition that it need only demonstrate that there was an arguable case that the policies responded. Perhaps more significantly, [the respondent] submitted that some of the factual issues that appeared to have some potential relevance to the coverage issue were matters for determination at the final hearing. For example, the precise extent and nature of the damage allegedly caused to the buildings was a matter for determination at the final hearing.
58 The Court undoubtedly has the power to order that a question arising in a proceeding be heard separately and in advance of the trial: see r 30.01 of the Rules. In the ordinary course, however all issues of fact and law should be determined simultaneously: Tallglen Pty Ltd v Pay TV Holdings Pty Ltd (1996) 22 ACSR 130 at 141-142. Ordering that a particular question be determined separately and in advance of the trial has also been said to be a "procedure that should be adopted with caution and can be fraught with difficulties": Save the Ridge Inc v Commonwealth (2005) 147 FCR 97; [2005] FCAFC 203 at [15].
59 I am not inclined in all the circumstances of this case to make an order for the separate determination of the issue as to whether the AAI policies respond to [the insured's] claim. Nor do I consider that it is appropriate in all the circumstances to make a final determination in respect of that issue at this early stage of the proceeding. While I accept that it may be in the parties' best interests for that issue to be determined as soon as possible, there are a number of factors which militate against determining that issue separately and in advance of the trial.
60 First, [the insurer] did not identify with any precision the question that was capable of being determined separately, or identify the final order or declaration that should be made if the question was to be determined on a final basis. [The insurer] formulated the question as simply being whether [the insurer's] policies are responsive to [the insured's] claim. It is at best doubtful that that is a sufficiently precise formulation of a separate question. It may be noted, in this context, that the declaration that [the respondent] will seek against [the insurer], if granted leave to amend, is that [the insurer] is "liable to indemnify [the insured] for the Covered Loss and Damage pursuant to the AAI Liability Policies up to any applicable limits of indemnity". The expression "Covered Loss and Damage" is defined in expansive terms in the proposed amended pleading. It includes loss and damage claimed not only by [the respondent], but also by some group members. [The insurer] did not suggest that it would be appropriate to separately determine whether that declaration should be made.
61 Second, the factual and legal basis upon which any question concerning insurance coverage could be determined separately was not fully explored and remained somewhat unclear. Any separate determination of a question concerning coverage would have to be answered on the premise that [the respondent's] claim against [the insured] was or would be made out. While [the insured] agreed, "for the sake of expedience", not to contest that the Vitrabond cladding affixed to [the respondent's] buildings had the properties alleged by [the respondent], it nevertheless reserved the right to contest that issue if it was joined and the matter proceeded to trial. Moreover, save for that concession, [the insurer] did not agree or concede any other facts. [The respondent's] claim against [the insured] is factually and legally complex and has many limbs. [The insurer's] concession addressed only one aspect of [the respondent's] claim.
62 Third, the lack of precision with which the separate question was framed, and the uncertainty and lack of clarity concerning the factual and legal basis upon which the question was supposed to be determined, is rendered more problematic and acute given that this is a representative proceeding. While it is perhaps conceivable that the question of coverage could be determined separately in respect of any claim arising from alleged damage to [the respondent's] buildings, the question plainly could not be answered with respect to any claims relating to buildings owned or leased by other group members. There was no evidence before the Court as to how Vitrabond panels were affixed to the buildings of other group members, or whether they could be removed without causing any damage to the buildings.
63 Fourth, while the parties each adduced detailed and comprehensive expert evidence concerning the question whether [the respondent's] buildings were damaged as a result of the affixation of the Vitrabond panels in circumstances where they will need to be removed, I am not satisfied that other evidence that may in due course be adduced at the trial may not also bear on that issue. [The respondent] will, for example, no doubt adduce evidence at trial which seeks to quantify the loss or damage it has suffered by reason of the need to remove the Vitrabond panels and remediate the buildings before replacement panels are affixed. It is difficult to imagine that that evidence will not bear on the question whether the affixation of the panels damaged [the respondent's] property.
64 Fifth, the question whether AAI's policies respond to [the insured's] claim in respect of any compensation it may be found liable to pay [the respondent] arising from the affixation of the defective panels is a complex and difficult mixed question of fact and law. It involves questions of meaning, characterisation and degree. It is not a question ideally suited to separate determination. It would, of course, be different if the coverage issue simply turned on a question of construction of the AAI polices: cf Chubb at [12]. That, however, is not this case.
65 In all the circumstances, I consider that the separate and final determination of the coverage issue at this point in the proceedings would be inappropriate and fraught with difficulties. I do, however, propose to make clear and definitive findings in respect of the coverage issue, based on the detailed evidence before the Court, rather than resorting to findings based on what the evidence arguably established. That is likely to assist the parties in considering the approach they may take to the proceeding going forward.
66 I should also note that, given the way that the hearing of this interlocutory application has proceeded, I would be inclined to permit the parties to tender the evidence which has been adduced in respect of the interlocutory application (the expert reports and transcript) at the trial without the need to recall the experts. It may also be appropriate to impose limits on any further evidence that the parties may adduce in respect of the issues dealt with by the experts. I am inclined to the view that the parties should be permitted to re-agiate (sic) those issues without regard to what has transpired in the course of the hearing of this interlocutory application. Those, however, are issues that can be addressed in due course during the further case management of the proceeding.
17 The primary judge's decision to proceed on an interlocutory basis is the subject of the first ground of appeal in the draft notice of appeal.
18 The primary judge then addressed, in turn, the remaining issues and determined, in summary, that:
(1) the respondent has an arguable case against the insured (J[44], [67] to [69]);
(2) there is an arguable case that the policies respond to the insured's claim or potential liability to the respondent and the insurer had not established an entitlement to disclaim liability under the policies (J[45], [46], [70] to [171] and [178] to [179]);
(3) the insurer is not entitled to disclaim liability on the basis of any exclusion clauses (J[47], [172] to [177]); and
(4) there was no reason not to exercise the discretion favourably to the respondent (J[49], [180]).
19 The primary judge identified the second of these issues as the central issue for determination and it is that issue to which most of the primary judgment was, and the proposed grounds of appeal are, addressed. The primary judge's analysis of that issue is considered below.
20 The primary judge considered first whether there was "Property Damage" (i.e. physical loss, destruction or damage to tangible property). At J[70] to [79] the primary judge noted the four different species of "Property Damage" for which the respondent contended and the insurer's contentions in response.
21 First, the respondent contended that the affixation of the 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 as habitation. In response, the insurer contended that there was no physical damage to the buildings merely by reason of a risk that the buildings may be damaged by fire at some point in the future.
22 Secondly, the respondent contended that the process of affixing the panels to the buildings caused damage to the structure of the buildings, because the panels were affixed to the subframes, and the subframes were in turn affixed to the concrete and steel stud walls of the building by screws or masonry anchors. In response, the insurer contended that any damage to the buildings caused in this way was not "unintended or unexpected" damage because the insured knew that the subframe was to be affixed in this way. Thus, the insurer contended, the damage was not caused by an "Occurrence" as defined in the policies. The insurer also submitted, in the alternative, that the damage was not caused by an "event" which was unintended or unexpected because the affixation of the panels was clearly intended.
23 Thirdly, the respondent contended that the process of removing the panels will inevitably result in damage to the subframes. In response, the insurer contended that any damage to the subframes that may result from the removal of the panels would not be damage that occurred during the periods of insurance, and instead is damage that may occur in the future (or amounts to no more than a risk that damage may occur in the future).
24 Fourthly, the respondent contended there was damage to the buildings or the subframes because of the risk, which existed from the point in time when the panels were affixed to the buildings via the subframes, that the structural integrity of the buildings or the subframes would be damaged when the panels came to be removed. In response, the insurer contended that the mere risk that some damage to the buildings or the subframes may occur at some time in the future is not physical damage that occurred during the periods of insurance.
25 At J[81] to [103], the primary judge considered the evidence, including expert evidence, concerning the contended "Property Damage". That evidence was directed primarily at the question whether the affixation of the panels caused any relevant damage to the buildings, on the premise - conceded by the insurer for the purposes only of the application - that the panels are defective and will at some point have to be removed. At J[104] to [118] the primary judge made a series of factual findings. It is sufficient for present purposes to reproduce J[115] to [118]:
115 In summary, having regard to the whole of the evidence, I make the following factual findings concerning the removal of the existing Vitrabond panels from [the respondent's] buildings.
116 First, the panels will not be able to be removed without causing some damage to the existing top hat subframe that is affixed to the concrete wall and steel stud walls of the buildings. The removal of the panels is also likely to damage some of the screws fixing the vertical and horizontal top hats together and some of the screws or anchors fixing the top hats to the cement and steel stud walls and compromise the connections achieved by those fittings or fixings.
117 Second, the inevitable result of the removal of the panels is that the existing top hat structure will also have to be removed from the buildings and disposed of. That is so for at least two reasons. The first reason is that the top hat subframe and associated screws and fittings will be damaged in the course of the removal of the panels. It would not be feasible to remove the panels in such a way as to preserve the top hat subframe for reuse. The second reason is that, even if it was possible to remove the panels without damaging the top hat subframe, that subframe could not, in any event, be utilised for the purpose of affixing any replacement panels, either by means of some type of adhesive system or via a cassette system. A new bespoke affixation system will have to be designed for the purpose of affixing the replacement panels. In short, the existing top hat structure, which was fit for purpose at the time of the original affixation of the Vitrabond panels, would effectively have to be destroyed or otherwise disposed of.
118 Third, once the panels and existing top hat subframe are removed from the building, there will almost inevitably be a need to remediate parts of the building before any new subframe or affixation system and replacement panels are affixed to the building. That remediation is likely to involve, at the very least, the filling of holes in the concrete and steel stud wall frames and the repair or replacement of the existing sarking.
26 At J[119] the primary judge noted the following:
The parties each relied on authorities concerning the scope and application of property damage clauses in insurance contracts. It is, however, unnecessary to address the authorities in painstaking detail. That is because both parties acknowledged that it is not possible to distill from the authorities "a simple coherent definition or universally applicable rules capable of being applied to varied factual circumstances to reach deduced logical results": cf R & B Directional Drilling Pty Ltd (ACN 163 164 234) (in liq) v CGU Insurance Ltd (No 2) (2019) 369 ALR 137; [2019] FCA 458 at [101]. Ultimately the question whether a property damage clause of the sort in issue in this case responds to the claim against [the insured] is a question of fact and degree. Many of the authorities referred to by the parties turned on their own unique and distinguishable facts. The more contentious cases are those where the physical damage is alleged to be a loss of functionality. It is, nevertheless, useful to provide a brief summary of some of the relevant authorities.
27 The primary judge then considered those authorities and in particular Bundy Tubing Company v Royal Indemnity Company 298 F2d 151 (6th Cir, 1962); Canadian Equipment Sales & Service Co Ltd v Continental Insurance Co (1975) 59 DLR (3d) 333; Carwald Concrete & Gravel Co. Ltd v General Security Insurance Co. of Canada (1985) 24 DLR (4th) 58; Austral Plywoods Pty Ltd v FAI General Insurance Co Ltd [1992] QCA 4; (1992) 7 ANZ Insurance Cases 61-110; Armstrong World Industries Inc v Aetna Casualty and Surety Co 45 Cal App 4th 1 (Cal Ct App 1996); 52 Cal Rptr 2d 690 (1996); Pilkington United Kingdom Ltd v CGU Insurance plc [2004] EWCA Civ 23; [2005] 1 All ER (Comm) 283; and R & B Directional Drilling Pty Ltd (in liq) v CGU Insurance Ltd (No 2) [2019] FCA 458; (2019) 369 ALR 137 (at J[120] to [148]).
28 Having done so, the primary judge reasoned (at J[149] to [157]):
Analysis and finding - there has been physical damage to tangible property
149 As was the case in R & B Directional Drilling (see [134]), the resolution of the question concerning the engagement of the coverage clause in the AAI policy or policies is not easy. The question involves matters of degree and characterisation and the answer is by no means straightforward. The authorities are not entirely consistent and certainly do not supply any coherent rule or rules that can simply be applied to the present circumstances.
150 I have nevertheless concluded that the facts and circumstances of this case are such that the better view is that the affixation of the defective Vitrabond panels to [the respondent's] buildings caused "physical damage … to tangible property", that property being the buildings (specifically the concrete walls, steel struts and sarking that together comprise the walls of the buildings), as well as the top hat subframe that was affixed by nails and screws to the walls of the buildings and upon which the panels were themselves affixed in a manner that was intended to be permanent. The affixation of the defective panels therefore caused or resulted in "property damage" for the purposes of cl 2.1 of AAI's insurance policies.
151 There is no dispute, at least for the purposes of the current application, that the Vitrabond panels that were affixed to [the respondent's] buildings had qualities or characteristics that made them defective and unsuitable for affixation to residential buildings. The panels were and are, in summary, combustible. As a result, they fail to comply with relevant building codes and increase the risk of loss of life and damage to the building in the event of a building fire. Two considerations flow from the fact that the panels are defective and unsuitable for those reasons.
152 First, the affixation of the panels to the buildings made the buildings less suitable, in a substantial and material way, for the purpose for which the buildings were intended, being for use as residential housing. That is not to say that the buildings are uninhabitable. People are still residing in them. They are, however, undoubtedly less suitable for ongoing habitation because, while the panels remain affixed to the buildings, the buildings are essentially unsafe because there is a risk that if there is a building fire, the fire will spread more rapidly and will be more severe than would otherwise be the case. It could not seriously be suggested that the affixation of combustible panels to a residential building in such circumstances does not make the building less suitable for use as a residential building.
153 Second, the panels will have to be removed. There is no dispute that [the respondent] has been ordered to remove the panels.
154 The fact that the affixation of the panels made the buildings substantially and materially less suitable for their intended use does not alone establish that the affixation caused property damage. It is necessary to have regard to two further important facts.
155 First, the means by which the panels were affixed to the buildings caused physical damage to the buildings themselves. The panels were affixed by first affixing a top hat subframe to the buildings. That top hats were affixed by means of nails or screws to both the concrete walls and steel stud walls of the buildings. That resulted in nail or screw holes in the concrete and steel walls of the buildings, as well as holes in the sarking that covered the walls. If and when the top hat structure is removed, as a result of the need to remove the panels from the buildings, the nails and screws will also inevitably have to be removed, leaving possibly thousands of holes throughout the buildings' structural walls.
156 [The insurer's] assertion that the damage to the building structures caused by the insertion of nails and screws was trivial or superficial and does not constitute any change to the physical state of the buildings, or involve any interference with the integrity of the building, is unsupported by any cogent evidence. It is also unsupported by authority. The insertion of nails and screws into the concrete and steel walls of the buildings could fairly be said to have changed or altered the physical state of the buildings in a harmful or deleterious way. Even if the authorities supported the application of a de minimis rule or principle, there is no sound basis upon which to find that the creation of possibly thousands of redundant holes in the walls of a building was de minimis.
157 Second, for the reasons given in detail earlier, the evidence before the Court establishes, on the balance of probabilities, that the removal of panels will result in damage to, if not the destruction of, at least some of the top hat subframe. [The insurer's] contention that the panels can be removed from the top hats without damaging the top hats has no merit and must be rejected. The same can be said concerning [the insurer's] contention that the existing top hat structure could be retained and reused to support replacement panels. Even if, contrary to that finding, it was possible to remove the panels without damaging the top hats, the top hats would not in any event be able to be used as a means by which replacement panels could be affixed to the buildings. The result is that the existing top hat structure will have to be removed and disposed of and a new bespoke system will have to be designed to affix the replacement panels.
29 The primary judge then reasoned as follows:
158 Having regard to those factual findings, the circumstances of this case are relevantly indistinguishable from the circumstances considered in Austral Plywoods. The defective plywood panels in Austral Plywoods were affixed to the boat's hull by screws and glue. That means of affixation interfered with the integrity of the hall (sic). Likewise, the defective Vitrabond panels were affixed to the buildings by means of top hats which were nailed or screwed into the structural walls of the buildings and the panels were glued, in a manner that was intended to be permanent, to the top hats. The affixation of the defective plywood panels in Austral Plywoods made the hull unsuitable, or less suitable, for its purposes and required the restoration of the physical state of the hull upon the removal of the defective plywood. Likewise, the affixation of the defective Vitrabond panels made the buildings less suitable for their intended use as residential premises. Removal of the Vitrabond panels will require restoration of the damage caused by the affixation and removal of the existing top hats and panels.
159 There are also significant parallels between the circumstances of this case and both Carwald and Bundy Tubing. In Carwald, the pouring of defective concrete over equipment which rendered the equipment useless for its purpose was held to have constituted physical injury to that tangible property. In Bundy Tubing, the installation of defective tubing in a heating system in a house was held to have caused damage to the house, because a house with a heating system which did not work was not suitable for habitation. In this case, the installation of defective (combustible) panels damaged the top hat subframe because, once the panels were removed, that structure was useless for its purpose and could not be reused. The installation of combustible and therefore dangerous panels also had a serious impact on the suitability of the buildings for ongoing habitation. It made long term occupation of the buildings dangerous.
160 While it is true that the policy in Bundy did not state that the injury had to be "physical" injury, as Allsop CJ noted in R & B Directional Drilling, "the home [in Bundy Tubing] could be seen to be physically injured by being made unsuitable for winter habitation" (at [83]). It is also true that the buildings in this case are still occupied. That, however, does not alter the fact that the affixation of the panels makes the buildings less suitable for occupation because of the danger that they pose. That is why [the respondent has] been ordered to have the panels removed from the building.
161 The affixation of combustible panels to a residential building can also, broadly speaking, be compared with the integration of a dangerous or toxic substance, such as asbestos, into a building. Just as the integration into a building of a potentially hazardous material such as asbestos results in physical injury to the building at the time of installation (even if at that time the dangers were not realised, or the toxic substances had not been released: cf Armstrong at [32] and [43]), so the affixation to a building of potentially hazardous combustible panels can be seen to result in physical damage to the building at the point of installation. It is immaterial that the dangers posed by the combustible panels were not appreciated at the time of affixation. The panels posed an immediate danger to the occupants of the buildings and made the buildings substantially less suitable for their intended use at the point of affixation. It is equally immaterial that the panels may have served their architectural and waterproofing purposes or functions. They were nonetheless unsuitable because they were combustible and created an immediate danger to the occupants of the building.
162 While I consider that this case is somewhat analogous to the cases involving the incorporation of asbestos into buildings, my conclusion does not rely heavily on those cases. The asbestos cases concern a rather unique circumstance, and the various courts' findings in the asbestos cases are not always consistent. In Pilkington, the critical feature of the asbestos cases was said to be that the properties of asbestos was such that its incorporation into a building had an "instant and damaging effect on the property" as opposed to a propensity to cause damage in the future. In Armstrong World Industries, however, the California Court of Appeal held that the incorporation of asbestos in a building resulted in a physical injury to the building, even if asbestos fibres were not immediately released. There would appear to be at least some analogy between the danger posed by the incorporation of asbestos in a building in those circumstances, and the affixation to a building of combustible panels which heightened the risk of a serious fire. The affixation of the panels had an instant and damaging effect on the building because the panels posed an immediate and unacceptable danger to the residents of the building.
163 It should also be emphasised that, insofar as the physical damage to property comprised or included the damage to the top hat substructure, that damage, contrary to [the insurer's] submission, occurred at the time of the affixation of the defective panels. While the top hat substructure remains in place and will not be actually damaged until the panels are removed, the damage may nevertheless relevantly be taken to have been caused when the defective panels were affixed to the top hats by means of high strength double-sided tape that was intended to provide a permanent bond.
164 By way of analogy, the affixation of the defective plywood to the hull in Austral Plywoods would not have been considered to have caused damage to the hull until it was realised that the plywood was defective and had to be removed. The damage was nonetheless considered to have been caused at the point of affixation. Similarly, in Carwald the equipment was taken to have been damaged when the defective concrete was poured, and in Bundy Tubing the damage to the house was taken to have occurred when the defective tubes were installed in the hearing system. So too here. The damage to the buildings and the top hats caused by the affixation of the panels may only materialise at the point when the panels are removed, yet the damage may be considered to have occurred at the point of the affixation.
165 It follows that the physical damage to the top hat substructure may effectively be taken to have occurred during the period of insurance. Even if that were not the case, for the reasons already given, there could be no doubt that the damage to the buildings, including the damage to their concrete and steel stud walls, plainly occurred at the time the panels were affixed and therefore during the period of insurance.
166 The circumstances of this case are distinguishable from the circumstances in both R & B Directional Drilling and Pilkington. In R & B Directional Drilling, the insertion and subsequent removal of the defective conduit pipes and concrete grouting did not cause any physical damage to the tangible property in question, being the steel sleeve. In Pilkington, the defective glass panels were not removed and the safety measures that were taken so as to avoid the risk of shattering glass caused no damage to the terminal building. In this case, the affixation of the panels resulted in damage to the buildings (because it involved the affixation of a top hat structure, which involved the need to drive nails or screws into the concrete and steel stud walls of the buildings) and the panels are not able to be removed without causing injury to the property. Removal of the panels and the top hats will ultimately result in buildings which are impacted by potentially thousands of redundant nail or screw holes, as well as damaged and redundant top hats.
30 The primary judge next turned to the question of whether there had been an "Occurrence" (i.e. an event which results in "Property Damage" that was neither expected nor intended from the insured's standpoint). His Honour identified that the words "neither expected nor intended" refer to the "Property Damage", not the "event", citing Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2018] NSWCA 100; (2018) 359 ALR 314 at 336 to 337 [103] (Barrett AJA, Meagher and White JJA agreeing). At J[170] to [171] his Honour reasoned:
170 ... there could be no doubt that [the insured] did not expect or intend that the affixation of the panels would cause any relevant damage to the buildings. That is because it did not expect or intend that the panels would be combustible and defective and therefore did not expect or intend that they would have to be removed from the buildings. The court in Bundy Tubing disposed of an argument akin to the one advanced by [the insurer] in this case as follows (at 153):
The failure of the tubing in the heating system in a relatively short time was unforeseen, unexpected and unintended. Damage to the property was therefore caused by accident.
171 [The insurer's] contention that the relevant property damage was not caused by an occurrence must similarly be rejected. [The insured] plainly did not expect or intend that the panels which were affixed to the buildings were combustible and therefore defective, or that they would need to be removed, or that the removal of the panels would expose and cause damage to the buildings and top hat subframe, or that the affixation of the defective panels would render the buildings substantially less suitable for occupation.
31 After considering some exclusion clauses in the policies and deciding that none were applicable, the primary judge expressed the following conclusions as to whether the policies respond (at J[178] to [179]):
178 For the detailed reasons that have been given, it is at the very least arguable that [the insurer's] policies respond to [the insured's] claim in respect of the compensation it may be found liable to pay [the respondent] arising from the affixation of defective Vitrabond panels to its buildings. On the basis of the evidence currently before the Court, I am satisfied that [the insured's] claim could properly be characterised as a claim in respect of amounts which it might become liable to pay as compensation in respect of "property damage" happening during the period of insurance and caused by an "occurrence". The property damage comprised physical loss, destruction or damage to [the respondent's] tangible property, that property being its buildings, as well as the top hat subframe which had been affixed to the buildings. The occurrence was the affixation of the panels. The loss, destruction or damage was not expected or intended from [the insured's] standpoint.
179 I am not satisfied, on the basis of the evidence currently before the Court, that [the insurer] has established that it is entitled to disclaim liability under its policies.
32 The primary judge then noted that there were no discretionary reasons for refusing leave and concluded that the respondent had established that leave should be granted under s 5 of the Third Party Claims Act (J[180] to [181]).