Product liability – where do you stand if things go wrong?
26th November 2015
Elaine Chan, Partner in the Commercial Litigation team at Ward Hadaway, looks at what manufacturers can do if products turn out to be faulty.
Many manufacturers, particularly those operating in consumer-facing sectors, take out product liability insurance.
This covers an insured’s legal liability for death or bodily injury and loss/damage to material property.
However, the indemnity does not extend to the insured’s legal liability for pure economic losses, such as loss of business, without there being physical damage.
This leads to the question as to what constitutes “damage” of products, particularly with ingredient-type exposures.
“Damage” is defined as damage to material property. “Property” is damaged when there has been some alteration in the physical characteristics of the property which renders it less useful or valuable. The property damage must also constitute damage to third party property and not to the product itself.
What do the courts say?
There have been contrasting cases in this field, two of which are discussed below:
Bacardi-Martini Beverages Limited v Thomas Hardy Packaging (2002) EWCA CIV 549
In this case, Thomas Hardy Packaging supplied CO2 to Bacardi-Martini Beverages who then mixed the CO2 with an alcohol/water concentrate to produce a drink known as a Bacardi Breezer.
A batch of CO2 was contaminated with benzene which necessitated a product recall. The alcohol/water concentrate was never intended to be sold as a product in its own right and the Court concluded that the finished product (the Bacardi Breezer) did not exist until the CO2 and alcohol/water concentrate were mixed.
The Bacardi Breezer was defective because of the contamination with benzene. The Court found that there was no damage to property because until the moment the concentrate is mixed with CO2, the Bacardi Breezer did not exist.
Therefore, there was no direct physical damage for the purposes of a contractual limitation of liability clause. The result of the mixing of the concentrate and CO2 was not damaged concentrate but an entirely new defective product (i.e. damage to the product itself rather than to third party property).
This may seem a rather harsh decision on Bacardi-Martini Beverages. However, in relation to other cases, if third party property is contaminated through mixing with another defective product then that property will usually be regarded as having suffered damage, provided that it can be shown that an altered physical state has been caused. This is demonstrated in the case of:
Tioxide Europe v CGU International Insurance (2004) EWHC 2116
Tioxide manufactured and supplied a white titanium dioxide pigment for use in the manufacture of UPVC compounds for doors and window frames. Whilst the pigment was intended to give a white colour to the end product, in many cases the pigment caused a pinking discolouration under certain conditions, which gave rise to claims by consumers for the cost of repair and replacement, and loss of goodwill, business and profits suffered as a result of pinking.
Tioxide sought an indemnity under its global liability policy with its insurers. It had to show that the claims had been made against it for “damages on account of physical injury to tangible property not owned by Tioxide resulting from an accident, including continuous or repeated exposure to the same general harmful conditions”.
The judge in this case mentioned that the damage was to products manufactured using compounds containing Tioxide’s pigment and considered that an unwanted change in colour which impairs the value of the product is a physical injury.
Although the claims against Tioxide by its customers were for pure economic loss and not for damage to property, the policy wording in this case was sufficiently wide to encompass claims for the cost of repair or replacement of paint products. However, claims such as loss of profits and business resulting from the pinking problem were not a sufficiently direct connection between the loss and physical injury.
The Bacardi case was not argued but here the case involved damage to products manufactured using compounds containing Tioxide’s pigment, and not the compounds themselves, and the damage manifested itself when the products were installed in environmental conditions where pinking was liable to occur.
What does this mean for manufacturers?
These cases are a useful reminder to manufacturers about the risks in ingredient defect cases and how that impacts on insurance policy coverage.
In the Bacardi case, the “Bacardi Breezer” did not exist as a product before the mixing process. This rendered the damage to be classed as damage to the product itself and therefore a quality issue rather than damage to third party property.
It is important in the defence of any case, or where there may be a coverage issue, that expert evidence is obtained to understand the manufacturing process, to discover exactly which ingredient was defective in any ingredient type exposures and when the finished product is said to come into existence and when damage occurred.
Coverage provided under each product liability policy will depend on the wording relating to physical damage and the individual facts of each case. Contractual exclusion and limitation of liability clauses within the contracts between all interested parties will need to be carefully examined to determine the responsibility for any liabilities.
How can I find out more about this?
For further information on product liability or other issues raised by this article, please contact Elaine Chan at firstname.lastname@example.org or on 0161 837 3885.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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