Does the affixation of combustible cladding cause “property damage”?
The Owners – Strata Plan No 91086 v Fairview Architectural Pty Ltd (No 3)  FCA 814
The plaintiff is the owners corporation of two high-rise residential buildings. The façades of the buildings incorporate aluminium composite panels manufactured and supplied by the defendant. The plaintiff has commenced representative proceedings alleging that the panels were not of merchantable or acceptable quality, effectively on the basis that they are banned combustible cladding, which the plaintiff has been ordered to remove.
The defendant is unlikely to be able to meet any monetary judgment awarded against it.
In this interlocutory application, the plaintiff sought to join the defendant’s insurer, AAI Limited, and leave to bring proceedings against AAI pursuant to s 5 of the Civil Liability (Liability (Third Party Claims Against Insurers) Act 2017 (NSW), which enables a claimant to recover directly from an insurer. The plaintiff was required to establish an arguable case against the defendant, an arguable case that the insurance policy responded and a real possibility that the insured would not be able to meet any judgment against it.
The central issue was whether affixing the panels was an “occurrence” which cased “property damage” to the plaintiff’s buildings, in circumstances where the panels must be removed and replaced, and so fell within the cover provided by AAI. The panels were affixed to the buildings using industrial strength double-sided tape stuck to metal strips, called “top hats”, which were nailed or screwed into the concrete and steel structure of the buildings.
The Court rejected AAI’s submission that the Court should determine whether the policy responded to the defendant’s claim on a final, rather than interlocutory basis, finding that to do so would be inappropriate and fraught with difficulties.
AAI effectively conceded that the panels were defective and not of merchantable or acceptable quality and thus that there was an arguable case against the defendant.
In respect of the question of whether affixing the panels caused property damage the plaintiff put its case in a number of ways. First, that damage was caused by making the buildings unsuitable or less suitable for their intended purpose, inhabitation. Second, that the thousands of screws used to affix the panels caused damage. Third, that removing the panels would inevitably cause damage to the top hats, being tangible property. Fourth, the risk, which existed from the time the panels were affixed, that the buildings would be damaged when the panels were removed, constituted damage.
AAI submitted that the risk of fire did not constitute physical damage, that any damage because of the insertion of screws or nails was not unintended or unexpected damage, and therefore not an occurrence, nor was such damage caused by an unintended or unexpected event because the affixation of the panels was intended. Further, AAI submitted that any damage caused by removal did not occur during the periods of insurance.
The Court preferred the evidence of the plaintiff’s experts, which was that removal of the panels would inevitably result in some damage to the top hats and the wall structure, irrespective of what method of removal was employed, and that new top hats would be required to install replacement panels.
The Court found that affixing the defective panels caused property damage, both to the walls of the buildings and the top hats, for the following reasons. First, the affixation of combustible panels made the buildings less suitable for use as a residential building. Second, there was no dispute that the plaintiff had been ordered to remove the panels. Third, the means of affixing the panels caused physical damage to the buildings themselves – the nail or screw holes in the concrete walls of the buildings – and the removal of the panels would result in damage to the top hats to which the panels were affixed.
After considering a number of authorities, the Court held that the circumstances of the case were relevantly indistinguishable from Austral Plywoods Pty Ltd v FAI General Insurance Company Ltd (1992) 7 ANZ Insurance Cases 61-110;  QCA 4, in which defective plywood panels affixed to a boat’s hull by screws and glue were found to have caused physical injury to the hull.
On the question of whether the AAI policy responded to the defendant’s claim, if found liable to the plaintiff, the Court found that at the very least it was arguable it did. The AAI policy required that the property damage be damage by “an event … which results in … property damage … that is neither expected nor intended… from [the defendant’s] standpoint”. The Court found that it was the damage that must be neither expected nor intended, not the event, and that it was not expected or intended that the affixation of the panels would cause damage to the buildings because it was not expected that the panels would be combustible and defective and therefore need to be removed. Further, there was no relevant exclusion in the AAI policy.
The Court held that there was no discretionary reason for refusing leave and leave to proceed against AAI was granted.