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 Owners' 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 Owners' 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 Owners 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 AAI'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. AAI'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 AAI'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.
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. 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 Owners have 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 AAI'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.