The relevant authorities
75 Primary reliance was placed by the applicants on two Canadian cases that may be seen to have been referred to with approval by the Queensland Court of Appeal.
76 In Canadian Equipment Sales & Service Co Ltd v Continental Insurance Co (1975) 59 DLR (3d) 333, the Ontario Court of Appeal was concerned with a liability policy under which the insurer agreed to pay all sums which the insured was legally liable to pay "because of injury to or destruction of property, including loss of use". A subcontractor of the insured allowed material to fall into a pipe. Money was expended to clear the pipe lest it became blocked and cause damage. The Court of Appeal overturned the trial judge who had distinguished between expenses to protect the pipe and damage to the pipe. The Court said at 336:
…the dropping of the coupon into the pipe … was an injury to the pipeline, and Dow Chemical, from that moment, had an imperfect or impaired pipeline. The attempt to locate the coupon was a direct and natural consequence of the injury to the pipeline. …
77 "Injury" to tangible property included the impairment of its use. That conception of injury is not limited to the physical constitution of the pipe being in some way deleteriously changed. Rather, the injury or harm was to the functionality of the thing. Importantly, however, the word "injury" was not qualified by the word "physical".
78 The second Canadian case upon which significant reliance was placed, Carwald Concrete and Gravel Co Ltd v General Security Insurance Company of Canada and Anor (1985) 24 DLR (4th) 58, did concern a liability policy using the phrase "physical injury", indeed the policy terms were very similar to those here. The facts were that the insured poured a concrete pad that was to have a certain strength to support heavy compressors and other associated equipment at a gas processing plant. The concrete was inadequate. It had to be taken up and repoured. The removal of the concrete affected associated reinforcing steel bars, ducting, grounding wire, plumbing and anchor bolts. The policy was relevantly for liability to pay compensatory damages for property damage defined as:
(1) physical injury to or destruction of tangible property…including the loss of use thereof at any time resulting therefrom; or
(2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period.
79 The first part of this definition is almost identical to paragraph (a) of the definition of property damage here. The second part is similar to paragraph (b), with, however, an important difference in causal qualification: (2) above refers to the loss of use being caused by an occurrence; paragraph (b) of the definition in this Policy refers to it being "caused by physical damage to or destruction of other tangible property".
80 In Carwald, the Court first looked to the Supreme Court decision of Attorney General of Ontario v Fatehi [1984] 2 SCR 536 dealing with the recovery of economic loss (not an insurance case). Due to the respondent's negligence there was a highway accident which caused debris and gasoline to be strewn across the road, making it impassable. The cost of cleaning up the highway was said by the respondent to be pure economic loss and so unrecoverable. The Supreme Court disagreed. The road had ceased to be a road in the sense of a traffic carrying facility. This was, the Supreme Court said, damage to the property of the owner of the road. The Court then referred to two other Canadian cases: one where there was, and another where there was not, found to be property damage. In Poole-Pritchard Canadian Ltd v Underwriting Members of Lloyds (1969) 71 WWR 684, there was damage to pipe and vessel insulation material which failed because of the application of defective asphalt emulsion. In Rivtow Marine Ltd v Washington Iron Works [1974] SCR 1189, the cost of repairing latent defects was purely economic and not property damage.
81 At [20], the Court in Carwald said:
…where, as here, the pouring of defective concrete made the rebars, reinforcing steel, ducting, wiring, plumbing and anchor bolts useless for the purpose for which they were installed as the pad could not be used and this constituted physical injury to tangible property.
82 The applicants here draw a direct parallel with the facts in the present case. They submit that the defective conduit and grouting filling the tunnel made the tunnel useless for the purpose for which it had been installed. Indeed, even if the tangible property was the steel sleeve, it, likewise, had been made useless for the purpose for which it had been installed. This was said to be physical injury; just as the Alberta Court of Appeal said that the making of the rebars, reinforcing steel and other equipment useless for the purpose for which they were installed was physical injury to tangible property.
83 The Court in Carwald referred to three American cases. Importantly in the American jurisprudence, two of which concerned the form of liability insurance which rested on property damage being defined as "injury" to property, not "physical injury"; the third dealing with "physical injury". The first was Bundy Tubing Company v Royal Indemnity Company 298 F 2d 151 (6th Cir, 1962), a decision of the Sixth Circuit Court of Appeals. There the insured manufacturer's defective heating system was installed in concrete floors. Hot water was carried through tubing which was defective. There was damage to household furnishings from leakage for which the insurer accepted liability. The contest was over the cost of the removal of the defective system which required digging up the concrete. The concrete, said the insurer, had not been injured or damaged by the leakage or the defective system. The clause provided indemnity for "all sums which the insured shall become legally obligated to pay as damages because of injury to or destruction of property, including loss of use thereof, caused by accident." The Court of Appeals said that the home with a heating system which did not function would not be "suitable for living quarters in the winter time." The market for its sale would be affected. This is an example of "injury to property" represented by the affectation of the value of property into which a defective component had been installed. I will return to a body of United States cases to that effect, under this form of definition. Bundy Tubing can perhaps be put more persuasively than a case merely about affectation of value. The home could be seen to be physically injured by being made unsuitable for winter habitation.
84 The other two cases to which the Alberta Appeal Court referred were St Paul Fire and Marine Insurance Co v Coss 145 Cal Rptr 836 (1978), a decision of the Second District Court of Appeal of California, and Hamilton Die Cast Inc v United States Fidelity and Guaranty Co 508 F 2d 417 (7th Cir, 1975). It will be necessary to see where these cases fit with other authoritative American appellate decisions. For the present, they are to be examined to illuminate the conclusion (and its limits) of the Alberta Court of Appeal.
85 The earlier case, Hamilton Die Cast, concerned an insured who had supplied tennis rackets with defective frames. The incorporation of a defective part, the frame, was said to be property damage, being "injury to … tangible property" (the definition present in this Policy without the word "physical" before "injury"). The Seventh Circuit Court of Appeals rejected the claim:
We do not think that the mere inclusion of a defective component, where no physical harm to the other parts results therefrom, constitutes "property damage" within the meaning of the policy.
86 Hamilton Die Cast was cited by the Californian Second District Court of Appeal in St Paul Fire and Marine v Coss, which concerned a general liability policy in the form introduced in the early 1970s where "property damage" was defined as meaning: "(1) physical injury to or destruction of tangible property which occurs during the policy period, including loss of use thereof at any time resulting therefrom; or (2) loss of use of tangible property which has not been physically injured or destroyed or provided such loss of use is caused by an occurrence during the policy period." (These were the same policy terms as were being dealt with by the Alberta Court of Appeal in Carwald with the same similarity to the Policy here that I have already mentioned.)
87 Coss was contracted to build a home. Disputes arose about workmanship at a point when completion was near. He left the site, and was sued by the owner for damages for the remedying of defective work and for the supply of defective materials. Whilst the defective workmanship and materials produced an inferior home (as the defectively designed racket frame produced an imperfect tennis racket in Hamilton Die Cast), this was said not to be property damage.
88 The Alberta Court of Appeal distinguished these two cases (Hamilton Die Cast and St Paul Fire and Marine v Coss) on the basis that in the case before it, the pouring of the defective concrete did damage other property: that is physically injured other property by making the other property, being the rebars, reinforcing steel and other equipment, useless for their purpose.
89 From the above the following can be stated: first, on the authority of the Ontario Court of Appeal in Canadian Equipment, impairment of functional use of physical property (there dropping a coupon into a pipe) is injury to that property; secondly, on the authority of the Alberta Court of Appeal in Carwald, the making (by covering with defective concrete) of equipment being tangible property useless for the purpose for which it or they were installed (if it or they had been covered by non-defective concrete) constitutes physical damage to that equipment; thirdly, on the authority of the Sixth Circuit Court of Appeals in Bundy Tubing, the making of a home unsuitable for occupation for a significant part of the year by the installation of a defective heating system was injury to the home; and fourthly, such injury to property is to be distinguished from the consequences of the mere inclusion of a defective component into a whole where there is no physical harm to the other parts.
90 The applicants relied on the Queensland Court of Appeal in Austral Plywoods Pty Ltd v FAI General Insurance Company Ltd [1992] QCA 4; 7 ANZ Insurance Cases 61-110. There the insured had supplied plywood to a boat builder who had affixed it to the hull of a boat by fixing it with screws and glue. The plywood was defective and had to be removed from the hull, the glue chiselled or scraped off the hull, and the screw holes on the hull filled. The policy liability for "property damage" was defined as, relevantly, "physical injury to … tangible property". The Court of Appeal said:
… 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.
91 The proper reading of this is that the physical injury to the hull was the fixing of the defective plywood by physical means of screws and glue making the hull unsuitable or less suitable for its purposes and requiring the restoration of the physical state of the hull upon removal of the plywood.
92 Whilst Austral Plywoods does not take the matter any further than Carwald, and while there was actual interference with the integrity of the hull (the screw holes and glue), the case in its reference to Carwald and Canadian Equipment can be seen as support for the proposition that making, by defective work, tangible property useless or unsuitable for its purpose is physical injury to that tangible property.
93 Austral Plywoods and Canadian Equipment were the subject of some remarks by Pincus JA in Re Mining Technologies Australia Pty Ltd [1999] 1 Qd R 60. The case concerned recovery of expenses incurred in retrieving equipment that had become buried. It could be seen as expenditure to avoid an imminent and insured loss or event. The argument was that there was an implied suing and labouring clause or that what was done was a form of "repair", which was expressly covered. In dissent, Pincus JA said the following at 64-65:
… In Austral Plywoods…the question was whether there was "property damage" defined as "physical injury to…tangible property" caused by the affixation of defective plywood to a hull. It was held that the hull was damaged by this affixation, because it 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. To say that an object can be said to be "damaged" by having affixed to it material which is intended permanently to alter it is one thing; it is another to say that an object is "damaged" if it is covered by or buried in a substance such as earth or water which is not affixed to it and on removal of which the object is left in its original condition. And of course the question directly in issue here is not whether to bury an object is to damage it, but rather whether to extract a buried object is to repair it. In Canadian Equipment Sales…it was held that expenses incurred in removing from a pipe a piece of material which had fallen into it were within an insurer's agreement to pay sums which the insurer was liable to pay if there was injury to property. It was held that there was an injury to the pipeline because the material in the pipeline made it an "imperfect or impaired pipeline". I can see the force of that, but on the other hand it would make sense to say, in answer to an inquiry whether a pipeline obstructed by some loose material was damaged: "No, there is no actual damage, but until this material is removed the pipeline will not function properly." I would not accept that machinery is, in the ordinary sense, damaged by every circumstance which makes it, for the time being, unusable; an object dropped into deep water is an example, and an object hidden away is another.
[Citations omitted.]
94 These comments perhaps do not take the matter much further except to say that it can be seen to be a matter of degree in the process of characterisation and ascription of meaning as to whether something is physically injured by being rendered unsuitable for its purpose, depending on whether it has things affixed to it which so render it, or whether it is simply covered by a substance that can be removed. Here, it is more than being covered by dirt - the tunnel was filled with concrete that fixed itself to the steel pipe upon setting; but it is less than the interference with the surface of the hull. The internal surface of the steel sleeve was not impugned, but the job of removal of all the concrete required the force of high pressure water blasting.
95 The decision of the New South Wales Court of Appeal in Transfield Construction Pty Ltd v GIO Australia Holdings Pty Ltd (1997) 9 ANZ Insurance Cases 61-336 stands as contrary to the cases that see impairment of functionality as physical injury. The insured contracted to construct grain silos. The policy insured the works against physical loss or damage. A defect in construction caused the fumigation pipes in each silo to become blocked by grain. The insured removed the grain and carried out repairs. Meagher JA (with whom Clarke and Sheller JJA agreed) said the following at 76-616:
The risks again for which the appellant was insured were physical loss or damage, which includes destruction. The question for Mr Justice Rolfe, therefore, was whether the blockage from the fumigation pipes by grain, so that the fumigants could not escape from the pipes into the silos, constituted physical loss or damage.
The question really is one of first impression on the construction of the words I have quoted. I think His Honour was correct. No pipes were lost, no pipes were destroyed, no pipes were damaged. It is not contested that to remove the pipes and re-install them would have caused a financial loss to the plaintiff/appellant. That again is beside the point. Mr Maconachie, learned senior counsel for the appellant said "The fact that the pipes were rendered useless constituted physical damage within the meaning of the policy." I do not think so. Loss of usefulness might in some context amount to damage, though even that is not beyond dispute, but in my view it cannot amount to physical damage. Functional in utility is different from physical damage. For these reasons which were substantially the reasons given by His Honour below, I think the appeal should be dismissed with costs.
96 The decision was based on first impression in an ex tempore judgment. Nevertheless, it stands as authority that functional utility was not physical damage, at least in the circumstances before the Court.
97 Transfield is, however, supported by a decision of the New Zealand Court of Appeal, and the approach taken under English law. In Kraal v Earthquake Commission [2015] NZCA 13; 2 NZLR 589, the Court of Appeal dealt with the claim that there had been "physical loss or damage" to a property otherwise relevantly undamaged by the 2010 and 2011 Christchurch earthquakes, but made uninhabitable by order of the Council because of its proximity to the danger of rock and boulders falling nearby. The words construed were not "physical injury", but a cognate phrase. The Court referred to Moore v Evans [1917] 1 KB 458 where the Court of Appeal had rejected a claim under a policy for "loss of or damage or misfortune to" property in circumstances where goods were in Brussels and irretrievable because of the outbreak of war and the occupation of Brussels. There was no evidence that the goods had been interfered with or taken. There was required to be actual loss of or damage to the property. The Court also relied on Pilkington United Kingdom Ltd v CGU Insurance Plc [2004] EWCA Civ 23; [2005] 1 All ER (Comm) 283, Promet Engineering (Singapore) Pte Ltd v Sturge (The "Nukila") [1997] EWCA Civ 1358; 2 Lloyd's Rep 146; Allstate Exploration NL v QBE Insurance (Australia) Ltd [2008] VSCA 148; 15 ANZ Insurance Cases 61-773 (to which cases I will presently come); and Transfield, for the construction of physical damage as involving a necessary change of physical state.
98 Allstate concerned a composite physical damage and business interruption policy taken out by the owner of the Beaconsfield mine. A seismic disturbance caused a rock fall which did not physically damage the mine, but there was a closure by order of a governmental authority. In construing a clause dealing with consequences of actions of civil authorities, the Victorian Court of Appeal construed the phrase "risk of loss, destruction or damage" as limited to physical loss or damage, and not extending to other loss by deprivation of use.
99 The English cases referred to in Kraal reflect the clear view that a phrase such as "physical damage to physical property" requires a changed physical state to the property affected; and, depending on the terms of the clause, were confined to the physical consequences, not financial consequences. In Pilkington, heat-soaked toughened glass panels manufactured by the insured, Pilkington, were installed in the roof and vertical panelling at the Eurostar Terminal at Waterloo. A small number proved defective (13 out of 3,000). Remedial measures not involving removal of any panels were undertaken. The cause of any defect was said to be the presence of nickel sulphide in the glass, not removed by the heat-soaking. There was no physical damage. The claims of the insured was under a CGU liability policy which had a products liability section covering loss of or physical damage to physical property. The insured relied on certain American authorities and in particular Eljer Manufacturing Inc v Liberty Mutual Insurance Co 972 F 2d 805 (7th Cir, 1992) (Eljer 1992). The majority opinion of Circuit Judge Posner was rejected in favour of the dissent of Circuit Judge Cudahy. The insured also relied on Sturges Manufacturing Co v Utica Mutual Insurance Co 37 NY 2d 69; 332 NE 2d 319 (1975) and Maryland Casualty Company v WR Grace & Company 23 F 3d 617 (2nd Cir, 1993). Sturges was distinguished as based on a policy that referred to "injury" not "physical injury". Maryland Casualty was explained by reference to its treatment by the Illinois Supreme Court in Traveler's Insurance Co v Eljer Manufacturing Inc 197 Ill 2d 278; 757 NE 2d 481 (2001) as an asbestos case in which there was contamination and physical damage to the relevant property into which asbestos was incorporated.
100 It will be necessary to come to the American jurisprudence shortly but it is helpful to note two things. First, in Pilkington and many of the American cases the claims relate to assertions of defective work or products, incorporated into other property which is working and which is not (at least as yet) physically affected by the defect, though there may be a diminution in value. At least in degree, this can be distinguished from the product or work having a physical effect on the state of the property into which it is physically incorporated such that the property is useless for its purpose, at least to a significant degree. An example of the latter is Bundy Tubing ([83] above, an "injury" not "physical injury" case) where the house with a defective heating system was rendered unliveable in winter; another is perhaps Austral Plywoods ([90] above).
101 Secondly, the distinctions that are capable of being drawn in each case do not easily translate into a simple coherent definition or universally applicable rules capable of being applied to varied factual circumstances to reach deduced logical results. To say that there must be physical interference with property is to require facts or circumstances that can be so characterised. In Bundy Tubing it could be said, as a matter of meaning and characterisation, that a house that had installed in concrete flooring a defective and inoperable heating system had been injured by being physically affected because it could no longer function as a house in winter. Likewise in Austral Plywoods, the affixing of the defective plywood physically affected the hull, not just because of screw holes, but also because with such physical change it was unsuitable to use as a hull. The physical integrity of the property (the house and the hull) has been so compromised as not to be functional. In some circumstances, functionality and physical affectation may be seen as interwoven. This can be seen as different in degree from the circumstances in Eljer 1992 (to which I will come) where there were claims against the insurer for defective water systems that had not failed but were said to have damaged the value of the property into which they were installed. As the dissentient Circuit Judge Cudahy said (972 F 2d at 814):
There is immediately something counterintuitive about saying that physical injury has been done to a house in which a functioning plumbing system has been installed.
102 Perhaps illustration of the potential for the inter-relationship between physical effect and functionality can be seen in the asbestos cases to which I will come. There, the release of asbestos fibres and the integration of exposed asbestos so intermingled itself with the host property that that property can be seen to be contaminated and so affected physically as to now be harmful. Physical affectation, danger and functionality are all interwoven to permit the characterisation of physical injury to tangible property.
103 The fineness of the distinctions in this process of meaning and characterisation is perhaps well illustrated by what Pincus JA said in Re Mining Technologies about Canadian Equipment. For myself, I would agree with Pincus JA's implicit view that the pipeline was not damaged, but it would not function property until removal of the material. Likewise, I respectfully agree with Meagher JA's characterisation of the facts in Transfield. This was not physical damage or injury to the silos. There was a defect that prevented operation until remedied.
104 I turn to the American cases. Some were relied upon by each party. Unfortunately, it is not possible to dip into them and deal with only a few cases. There is not one common law in America: Erie Railroad Co v Tompkins 304 US 64 (1938) reversing Swift v Tyson 41 US 1 (1842). Thus, it is necessary to examine individual State law. I will restrict myself to appellate decisions of the three influential commercial centres: Illinois, California and New York. Some of the insight from these cases is as to the history of the wordings of commercial liability policies. I do not use this as if it were evidence; but it is helpful to understand and contextualise the decisions.
105 The debate has been concerned with the width and nature of the notion of "physical injury" and, in particular, whether it is satisfied by functional impairment to a larger physical entity by the defective work or product incorporated somehow into that larger physical entity.