Constructive Notes ®
The meaning of ‘damage’
In Graham Evans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd1, Dowsett J held that mere unsuitability for purpose of works was not damage. That was however predicted on a policy which did not cover the works, but covered only the contractor’s plant.2
By contrast, the rendering useless of a coat of paint was regarded as damage by Forster J in Graham Evans and Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd.3
The English Court of Appeal case of Promet Engineering v Sturge,4 suggests that the term ‘damage’ should be given its ordinary meaning. In that case, a claim was made on an insurance policy in relation to damage to an offshore accommodation platform. Fatigue cracking was discovered in the platform which had started within welds which were found to be defective.
The Court of Appeal decided that there was damage within the meaning of the extension of the insurance cover (‘any defective part which has caused loss or damage to the [platform]’). Hobhouse LJ said:
‘… on any ordinary use of language they [legs and spud cans] were damaged. They were damaged by being subjected to stresses which they were unable to resist due to the latent defects, that is to say the wrongly profiled welds’.5
In Prime Infrastructure (DBCT) Management Pty Ltd v Vero Insurance Ltd & Ors,6 the appellants contended that the faulty workmanship in the weld was not itself damage to the insured property, so that there could have been no subsequent damage when a reclaimer collapsed. The court rejected that argument, holding that the faulty weld impaired the value or usefulness of the reclaimer because it weakened it and rendered it more prone to collapse and more likely to damage other adjacent machinery in the collapse process.
The Australian case of Ranicar v Frigmobile Pty Ltd,7 also saw the court adopt (per Green CJ) the ‘ordinary meaning of the word damage’. The Chief Justice said that damage required:
‘A physical alteration or change, not necessarily permanent or irreparable, which impairs the value or usefulness of the thing said to have been damaged’.8
That case in fact involved scallops which, due to being stored at a higher temperature than prescribed by export regulations could not be exported notwithstanding the fact that they could still be eaten. The court said that the alteration in temperature had:
‘…undeniably involved a physical change to a substance and that change had the effect of removing one of the primary qualities which the scallops had – their exportability’.9
While the test in Ranicar is widely used in seeking to ascertain whether an occurrence on a construction project constitutes ‘damage’ or ‘physical damage’ for the purpose of the Contract Works insurance, blind adherence to its formulation may not always be terribly enlightening. This seems to have been recognised by the judge in Shamrock Civil Engineering v Honan Insurance Group,10 who, when referencing Ranicar said:
…the assistance provide by that case is limited. That was a case where the issue was whether under an exclusion clause in a policy of insurance there was damage to the scallops. Here the questions is whether the damage to a batter wall and flooding leading to a putrid lake on part of the land qualifies as ‘damage to any property real or personal’; In so far as Ranicar…is a guide, it is at least strongly arguable that the putrid lake on the land constitutes a physical alteration or change to the land, not necessarily permanent or irreparable and that putrid lake impaired the value of usefulness of the land.’11
The requirement that there be a physical alteration or change is illustrated in two subsequent UK decisions.12 The first is in the case of Bacardi–Martini Beverages Ltd v Thomas Hardy Packaging.13 That case concerned the manufacture and bottling of Bacardi Breezers. The Court of Appeal decided that the addition of contaminated carbon dioxide did not constitute damage. The court held that the new product was not damaged, but merely defective at the moment of its creation.14 The distinction was confirmed in a construction context by the English Court of Appeal in Skanska Construction UK Ltd v Egger (Barony) Ltd.15
The second case is Pilkington United Kingdom Ltd v CGU Insurance,16 in which the Court of Appeal held that the incorporation of defective glass into a rail station could not be considered as damage to that other property. Potter LJ said:
‘Damage requires some altered state … It will not extend to a position where a commodity supplied is installed in or juxtaposed with the property of a third party in circumstances where it does no physical harm, and the harmful effect of any later defect or deterioration is contained within it.’17
The case can be contrasted with that in Austral Plywoods v FAI General Insurance Co Ltd.18 In that case, the question was whether there had been ‘property damage’ which was defined as ‘physical injury to tangible property’. The Court of Appeal in Queensland decided that the affixation of defective plywood to a hull by means of screws and glue caused physical injury to the 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.
Austral Plywoods has been adopted in two recent liability cases in relation to a definition of ‘Property Damage’ informed by the meaning of ‘physical damage’ or ‘physical injury to tangible property.’
In adopting the Ranicar approach and posing the questions:
‘1) has there been a physical alternation of the tangible property; and
2) has that physical alteration impaired the usefulness or value of that tangible property’,
Jackman J in Capral Limited v Insurance Limited t/as CGU Insurance, answered ‘yes’ to both and applied the principles in Austral Plywoods, saying that the case was correctly decided. 19
On 3 April 2025, the Full Federal Court of Australia delivered their appeal judgement in that case.20
The Appeal judgement upheld the first instance judgement, and in doing so made the following observations:
‘CGU’s argument that the installation of the defective Plate did not damage the property at all, and in fact “improved” the Vessels, must be rejected’.21
‘….On no practical commercial view could it be said that incomplete Vessels were “improved” by the affixing of non-compliant product. …. in a practical and commercial sense, adding defective product to an incomplete product does not progress it towards completion at all, because it does not progress it towards a finished product having the required characteristics. That is especially so where the defective product will be required to be removed before the product can be sold, in which case on one view it takes it further from completion.’22
‘CGU submitted to the primary judge, as it did on this application, that the Ranicar approach works when one is dealing with damage to fully formed property, but not when one is dealing with the construction of a structure: ….The primary judge observed that this was contrary to the reasoning in Prime Infrastructure, where a fault developed in a weld as a result of faulty workmanship during the original construction of a reclaimer used to lift coal from stockpiles onto conveyer belts. McMurdo P at [31] quoted and applied the explication of property damage in Ranicar.’23
‘…her Honour’s reasoning that faulty workmanship in the weld caused damage to property because it impaired the value or usefulness of the reclaimer is sound. The damage to property was caused by faulty workmanship. The property was not better off for having been constructed with a serious fault.’24
Austral Plywoods was also applied by Wigney J at first instance,25 and upheld on Appeal in AAI Limited v The Owners – Strata Plan No 91086,26 in which the Full Federal Court thought the position analogous with that case and found the circumstances before the court to be distinguishable from R&B Directional Drilling and Pilkington.27
In declining insurers leave to appeal, the Full Federal Court said:
‘[59] The insurer’s submissions take an overly narrow view of the primary judge’s conclusion as to property damage caused by the installation of the panels by focussing upon particular passages of the primary judgement, at the expense of a fair understanding of the whole of that judgement. Read as a whole, it is plain that the primary judge considered it to be at least arguable that the policies responded because, inter alia, there had been an immediate physical alteration or change to the buildings by dint of the affixation of the panels which affixation caused a physical alteration to the buildings and had rendered the buildings less suitable for their use as residential buildings…’
‘[60] The proposition that the primary judge considered the relevant property damage to include the buildings having been rendered less suitable for use as residential buildings is underscored by his Honour’s detailed analysis of the authorities considered …. which addressed various scenarios in which property damage had (or had not) been suffered when an object was rendered unsuitable or less suitable for its intended use’.
‘[62] Consistent with the authorities considered by the primary judge, it is at least arguable that damage to property occurs when there is “a physical alteration or change, not necessarily permanent or irreparable, which impairs the value or usefulness of the thing said to have been damaged”: see Ranicar v Frigmobile Pty Ltd; Ranicar v Royal Insurance Pty Ltd [1983] TAS R 113 at 116. … As Jackman J noted in Capral Limited v Insurance Australia Limited t/as CGU Insurance [2024] FCA 775 at [91], this conception of property damage has been applied or cited with approval by intermediate appellate courts. It is at least arguable that the affixation of panels effected an immediate physical alteration or change to the buildings which impaired their usefulness as residential buildings and as such caused property damage to those buildings in the sense described in Ranicar’.28
These two recent Full Federal Court decisions concerned the meaning of physical injury or damage under liability policies. It should be noted that there is arguably a significant difference between the commercial setting and purpose of a policy providing liability cover and a policy providing first party cover for damage to contract works.
In the case of the latter, the excision from the scope of the risk assumed by the insurers of loss in the nature of expenses associated with rectifying defective work is of central importance. Further Contact Works policies commonly contain a clarifying rider to their defects exclusion(s) that property is not to be regarded as damaged solely by reason of a defect in workmanship or design. Treating a structure as damaged as a whole by the mere presences of defective work is difficult to reconcile with that express agreement.29
In terms of the requirement that the physical alteration must impair the value or use of the property, reference is made to two United Kingdom decisions.
In Hunter v Canary Wharf,30 the Court of Appeal considered whether the deposit of dust could constitute damage for the purpose of a nuisance claim. Pill LJ, with whom the two other judges agreed, said:
‘Damage is in the physical change which renders the article less useful or less valuable.’31
In the decision of The Orjula,32 the English Court of Appeal considered that the fact that the property in question required the expenditure of money to restore it to its former useable condition was a relevant consideration in determining whether or not the property had been ‘damaged’.
In the Queensland Supreme Court decision of Dalton J in Delta Pty Ltd v Team Rock Anchors Pty Ltd & Anor,33 her Honour stated:
‘Movement of a wall cannot be loss or damage to tangible property in my view. A wall might move so much that it itself is damaged. Moreover a retaining wall might cause damage to property it fails to support. But I cannot see that movement is damage independent of those things.’34
This decision was upheld on Appeal in which is was said
‘….It was not pleaded or found that SW1 or any wall did not itself remain wholly intact and capable of fulfilling its designed purpose. The trial judge’s findings to the contrary are not susceptible of challenge: after the unacceptable movement was detected in SW1, the retaining walls were buttressed and supported by the backfilling of soil and then with properly installed rock anchors, after which the walls fulfilled their function, although at some point the walls “may have been imperilled or stressed”, the walls were saved by timely steps being taken and they were not lost, and there was no evidence that the walls were damaged in the process of backfilling and re-excavation. As the trial judge concluded, movement of any retaining wall was not damage independently of damage to the wall or some other tangible property, and the “significant lateral movement” caused by TRA’s breaches of the subcontract was not itself capability of amounting to Property Loss within (a) of the definition in the policy’.35
The meaning of ‘physical damage’
There also may be a distinction between the requirement for there to be ‘damage’ as opposed to ‘physical damage’.
In the case of Lewis Emanuel & Son Ltd & Anor v Hepburn,36 the court considered the interpretation of the phrase ‘physical loss or damage or deterioration’. The court concluded that it was necessary to apply the natural and ordinary meaning to those words but of most interest, the judge, Mr Justice Pearson, concluded that the word ‘physical’ qualified, not only ‘loss’ but also ‘damage’ and ‘deterioration’.
In British Celanese Ltd v AH Hunt (Capacitors) Ltd,37 the court once again underlined the importance of the ordinary use of words. This case involved a claim in which machinery became clogged with solidified material that had to be cleaned before the machinery could again be used. The judge in that case found that the clogging did constitute physical injury.
The case of SCM (United Kingdom) Limited v WJ Whittall & Son Ltd affirmed that decision and held in that case that the blockage of pipes with material that had solidified in them as a result of a power failure, constituted physical damage.38
The case of Hunter & Ors v Canary Wharf & London Docklands Development Corporation suggested that the deposit of dust was capable of constituting physical damage. However, LJ Pill went on to say:39
‘… the fact it costs money or labour to remove a deposit of material on property does not necessarily involve a finding that the property has been damaged.’40
Reference should also be made to the Canadian case of Canadian Equipment Sales & Service Co Ltd v Continental Insurance Co in which expense was incurred in removing from a pipe a piece of equipment and coverage was triggered by ‘injury’ to property (‘injury’ often being equated with ‘damage’).41 It was held that the presence of a piece of pipe in a pipeline constituted an ‘injury’ to the pipeline because the material in the pipeline made it an ‘imperfect or impaired’ pipeline.42
The issue of what constitutes ‘physical damage’ was considered by the New South Wales Court of Appeal in Transfield Constructions Pty Ltd v GIO Australia Holdings Pty Ltd.43 In that case, the appellant (insured) had contracted to construct certain grain silos. The respondent (insurer) had insured the works against physical loss or damage, which included destruction.
Owing to a defect, the fumigation pipes in each silo became blocked by grain. The insured was required to remove the grain to carry out repairs. The question was whether the blockage of the fumigation pipes by grain constituted physical loss or damage.
At first instance, Rolfe J held that it did not. The insured appealed to the New South Wales Court of Appeal and contended that the fact that the pipes were rendered useless constituted physical damage within the meaning of the policy.
Meagher JA (with whom Clarke and Sheller JA agreed) put the position as follows:
‘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 … 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 (sic) utility is different from physical damage. For these reasons … I think the appeal should be dismissed.’44
In R&B Directional Drilling Pty Ltd (in liq) v CGU Insurance Ltd (No 2)45 the insured was contracted to construct and install a tunnel for the purpose of carrying cables. The insured was near the completion of its works and pumping concrete into the tunnel void. Concrete entered a hole in one of the conduit pipes, rendering it unable to carry a cable. A claim was brought against the insured for the cost of removing grout and conduit pipes from the steel sleeve so that the work could be repeated.
Chief Justice Allsop concluded that there had been no physical injury, explaining that:
‘…the tunnel is not injured; it is and remains sound once the defective work is removed. The tunnel has not been damaged because it can be used again. The cost and consequences of getting to that point again are not meaningfully characterised as the consequences of physical injury to the tunnel, but as the cost of consequences of defective work: the removal of defective work from inside the undamaged sleeve, from inside an otherwise uninjured tunnel. On this view, it can be said that there has been a (temporary) loss of us of tangible property (the tunnel) but that loss of use has not been caused by physical injury to the tunnel, but by the placement of defective work in the tunnel. On this view, there has been no physical injury to the tunnel. It has been filled with concrete and conduit pipes (as it was intended to be), but one of the pipes was defective (as it was not intended to be). The defective work can be, and was, removed, leaving the tunnel in the same physical state that it was in before the placement of the defective work. The position may well have been different had the concrete not been able to be removed, or not been able to be removed without damaging the integrity of the sleeve.
… I would characterise what occurred…as the placement of materials within the tunnel that were defective, requiring their removal from the tunnel. The tunnel itself was not physically injured; its temporary loss of use was not caused by physical injury, but by defective work.’46
In the New Zealand High Court Case of Technology Holdings Limited v IAG New Zealand Limited & Anor,47 the court concluded that ‘damage’ had a meaning other than ‘physical damage’. Specifically, the court found:
‘Where the word “damage” is not qualified by the word “physical”, it is normally sufficient if the damage is in the form of diminution in value or functionality.’48
Importantly, the judge noted that a diminution in value of functionality was not, on its own, physical damage in terms of the policy, and that if it was, any loss by an insured party in respect of property no matter what the cause would be potentially covered. For there to be ‘physical damage’, something must happen to the property itself.49
An earlier case that might be thought to sit somewhat incongruously is the decision of Mr Justice Langley in the High Court of Justice Queen’s Bench Division in the decision of Tioxide Europe Limited v CGU International Plc.50
That case, which considered response under a liability policy (rather than material damage cover) involved the discolouration or ‘pinking’ of outdoor products in certain environmental conditions. ‘Property Damage’ was defined in that case to mean ‘physical injury to or a destruction of tangible property …’
It was Tioxide’s case against the insurer that ‘Property Damage’ or ‘physical injury to tangible property’ consisted of the discolouration in the UPVC products containing the offending pigments.
In finding that the words of the indemnity clause were sufficiently wide to encompass claims for the cost of repair or replacement of the products which have ‘pinked’ the judge said:
‘the precise mechanism of pinking is I think of less importance and an unwanted change of colour is in ordinary language a “physical” change and, if it impairs the value of the product, in my judgement it is a “physical injury”.’51
In Newcastle Resources Pty Ltd v Certain Underwriters at Lloyd’s syndicate CVS1919 (No 2),52 it was said:
‘Where the road has an excessive hump that affects its utility or usefulness then is it fair to say the road is damage.’53
And then:
‘Property is not damaged simply because it is defective… indemnity is provided for liability arising from “physical damage”. That requires a physical alteration or change which impairs the value of usefulness of the thing that is said to be damaged… Roads that are to be replaced because of the inevitability of future damage are defective, but they have not been damaged.’54
More recently in the UK (and possibly signalling a differing approach to that of the Australia Courts) in Sky UK v Riverstone managing Agency,55 the Court of Appeal found ‘untenable’ insurers argument that timbers need to have reached a condition by which they required immediate replacement or repair because anything short of that would not be damage.
Policy Exclusions
In the case of Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd,5654 a clause in the policy of insurance excluded from cover:
‘…loss or damage directly caused by defective workmanship, material or design or wear and tear, or mechanical breakdown or normal upkeep or normal making good but so that this exclusion shall be limited to the part immediately affected and shall not apply to any other part or parts lost or damaged in consequence thereof.’
A claim was made under the policy in respect of damage caused to flood mitigation works through the breaching by flood waters of a coffer dam that had been impacted by vehicles passing over its top. No claim was made for damage to the dam itself. The construction of the limiting words of the exclusion clause was raised, for the first time, in the High Court.
It was held:
‘…that this exclusion referred to a single overall exclusion of loss or damage of the type described in the clause and not to one or other of the possible causes of exclusion. Accordingly, the limitation applied only to the coffer dam as “the part immediately affected”. The consequentially damaged works were covered by the policy.’57
The Coffer Dam and Bank
In that case,58 no claim was made in respect of the coffer dam or bank for its rectification. However, in the case of Walker Civil Engineering v Sun Alliance & London Insurance PLC,59 Rolfe J considered that there were strong indications in the judgments in Chalmers Leask that had a claim been made for its rectification it would have been rejected. His Honour in that case, noting that there was no binding authority directly on the point, considered that the decision provided persuasive support for the proposition that reinstatement work of the defective work was not recoverable under the policy before him for consideration. The basis for his Honour so concluding was that the loss or damage resulting from the necessity to carry out such rectification work was directly caused by defective workmanship, material or design.
Three Coats of Paint
Another case of interest in this regard is Graham Evans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd.60 In that case, a building required three coats of paint and, after a substantial part of its exterior had been painted with three coats, the paintwork began to flake from it.
The plaintiff, as the responsible building company, had to strip a considerable amount of the paintwork with a view to large areas being repainted. The evidence establishes that the primary cause of the problem was that the primer coat had been applied in to dilute a form and it had, therefore, failed to achieve adequate adhesion to the concrete surface of the walls and adequate cohesion within itself.
In consequence, the other two coats were prevented from adhering to the walls of the building. The plaintiff claimed under the policy, which was in essentially the same terms and having essentially the same exclusion as the one considered in Chalmers Leask.
In this case, noting that the impugned workmanship could relate only to the preparation and/or application of the primer coat, Foster J held that the exclusion clause did not apply to the loss or damage claim in respect of loss or damage occurring to the second or third coats of paint.
By contrast, in the UK case of Skanska Construction UK Ltd v Egger (Barony) Ltd,61 Mance LJ dismissed out of hand any attempt to claim that a defective sub-base to the flooring could be considered to have caused damage to the floor above. Mance L J said:
‘That argument attempts to divide the indivisible. I see no prospect of any court accepting that the sub-base damaged the rest of the slab above it’.62
In Walker Civil Engineering v Sun Alliance & London Insurance PLC,63 Rolfe J interpreted Foster J’s decision in the Graham Evans case to be based upon his Honour’s findings that whilst the three coats of paint were necessary to establish a finished painted surface, only the first coat was defective and that lack of quality in it caused damage to the second and third coats. Rolfe J thought his Honour’s reasoning to be that each of the second and third coats had a function to perform which was independent of that to be performed by the first coat, notwithstanding that all coats were necessary to bring about the finished result.
This enabled Rolfe J to distinguish the facts of that case from those in Walker, where the concrete (the subject of the claim) had no other function to perform other than to stabilise fibreglass tanks which were found to be defective.
In Walker, Rolfe J also disagreed with Foster J’s finding that the causal connection was indirect rather than direct, finding it impossible to conclude that the damage to the second and third coats did not arise directly from the failure of the first coat.64
Sewerage Tanks
In Walker’s case, the contract works policy excluded cover for loss or damage directly caused by defective workmanship, construction or design. A proviso to the exclusion, however, stated that the exclusion applied only to the defective part, and any other part or parts lost or damaged in consequence of the direct loss or damage did not fall within the exclusion and were covered by the policy.
As part of the contract works, the plaintiff had installed in-ground fibreglass sewerage tanks on the site. One of the problems which had arisen with the fibreglass tanks was that, when empty, the tanks would be ‘popped’ out of the ground by hydrostatic ground water pressure. To counter this, concrete had been poured over each tank in order to stabilise it in position. The tanks were then found to be defective and had to be replaced. In order to remove them from their position, the plaintiff had needed to break and remove the concrete.
The plaintiff accepted that the fibreglass tanks were not covered by the policy because of the exclusion. It, however, made a claim under the proviso for indemnity in respect of the costs of removing the concrete as being loss or damage flowing from the necessity to carry out rectification work.
Rolfe J, in finding for the insurer which had denied indemnity under the policy, considered that re-instatement of the defective work was not recoverable under the policy, the reason being that the loss or damage resulting from the necessity to carry out such rectification work was directly caused by defective workmanship, material or design.
His Honour considered that if fibreglass tanks had not been used, then there would be no need to use the concrete or, put another way, the concrete played no part other than to stabilise the tanks. Thus the concrete was an integral part of the tank construction.
His Honour considered the secondary submission of the insurer, whereby it was contended that to the extent that the loss was not excluded, it was not an ‘occurrence’ under the policy because the policy defined occurrence as an act which was not intended or expected by the plaintiff, whereas the removal of the concrete was intended by the plaintiff.
The court, in rejecting this submission, held that the word ‘intended’ was to be limited to exclude from the policy an intended act giving rise to the initial loss or damage and ‘expected’ should be construed in the same way. Accordingly, if the court’s view on the primary submission was not correct, the plaintiff was entitled to recover the costs of removing the concrete under the policy.
The case went to appeal before the New South Wales Court of Appeal (Mason P, Sheller JA and Sheppard AJA).65 The court unanimously held that the appeal should be dismissed. Sheller JA (with whom Mason P agreed) said:
‘In my opinion, the appellant’s claim is properly characterised as a claim to be indemnified under the policy for the cost of reinstating the defective part, namely the fibreglass tanks. So characterised, it was not a claim in respect of any other part or parts lost or damaged in consequence of defective workmanship, construction or design, any more than would be a claim for the cost of stripping off of the second and third coats of paint in Graham Evans if they had remained in tact and undamaged but had to be removed in order to reinstate the primer coat.’66
Sheppard AJA, who delivered the leading judgment said as follows:
‘Here the parts which were defective were the fibreglass tanks. No other part was defective. Their defectiveness, for which it is acknowledged no claim can be made, led to the need, not only to replace the tanks, but also to remove the complex of equipment installed within them and to break up much of the concrete placed around the tanks in order to keep them stable … It is important, I think, to reach a conclusion on the meaning of the words “part” and “any other part or parts” where used in the limitation to the exclusion clause. In my opinion “part” is not a reference to a part such as a tank or a gasket; it is a reference to a part of the work being carried out by the appellant … The natural meaning of the word “part” in those circumstances is that it refers to the part of the works which, being defective, have been productive of loss or damage … The words “loss or damage” in the exclusion should receive the same wide interpretation that should be accorded to the same words in the insuring clause subject only to the requirement that it be “directly caused” by defective workmanship … In my opinion the loss or damage suffered by the appellant as a result of having to remove the tanks because of their defectiveness was all “directly caused” by the need to replace them.’67
Sheppard AJA went on to say:
‘On that view the loss and damage suffered by the appellant in the present case would all be within the exclusion. The critical question is whether the words of the limitation to the exclusion make any difference. It operates to limit the exclusion to the part of the works (on the construction which I have given to the word “part”) which is defective. It does not apply to any other part or parts … lost or damaged in consequence of the defective workmanship, construction or design. The question then arises as to what the part of the work which was defective involves. In my opinion it was the part of the works which involved the construction of the three sewerage pumping stations. It is perfectly true that the complex of equipment installed within the tanks was not defective, but the entirety of that part of the work was of no use once it was found that the tanks were admitting water. That made the whole of that part of the work defective.’68
Sheppard AJA concluded thus:
‘Here the part of the works which was defective was the tanks and all that was installed within them, the latter not because there was any defect in the equipment which was housed in the tanks but because the equipment was of no use unless it was housed in tanks which were free from defects. It is not appropriate, in my opinion, to look separately at the tanks, so as to consider them alone and treat the need to remove the equipment inside them as a separate and distinct item of loss. One has to look at the tanks, really the sewerage pumping stations, as a whole. When this is done it becomes clear that the exclusion clause, notwithstanding the limitation to it, operates to exclude the claim which is here made, the relevant part of the works being defective.’69
The case can be contrasted with that of Promet Engineering in which the court was requested to consider whether a defective part, in that case the weld, had caused damage.70 Hobhouse LJ said:
‘The submission based upon the use of the word “part” is in my judgment open to … objections. It leads to absurd results. It provides no criterion for distinguishing between what is and what is not damaged …’71
Compacted Earth Mounds
A similar argument to that advanced in Walker’s case was raised and rejected by the Full Court of the Supreme Court of Victoria in Prentice Builders Ltd v Carlingford Australia General Insurance Ltd.72
In that case, the appellant had subcontracted the work of building compacted earth mounds and sheds. The mounds had originally been completed to the satisfaction of that subcontractor’s foreman, however, a new foreman was brought to the site and he instructed the subcontractor’s workmen to begin removing the top of the mounds for the purposes of reshaping them.
Subsequently, the head contractor’s representative stated that the work in question was unnecessary and demanded that the subcontractor rectify the mounds. When it failed to do so, and left the site, the mounds were rectified at considerable expense. It was contended by the subcontractor’s counsel, that as the costs and expenses incurred by the appellant necessarily included the cost of demolishing the non-defective parts of the mounds, and expenses to which the appellant was put by reason of having to carry out additional work on the mounds, the case, or part of it, fell within the exception to the exclusion in the policy. In that case, the proviso limited the exclusion to ‘the part which is defective and shall not apply to any other part or parts lost or damaged in consequence thereof’.
In rejecting this submission the court said:
‘In my opinion, the sort of thing covered by what might be called the proviso to the exception is exemplified by the water damage suffered in the valley in the case of Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd, as distinct from the cost there of rectifying the defective design of the dam plus roadway. If, for example, the mound in the present case had been a brick wall made with poor workmanship and as a result part of it fell and damaged some machinery, the proviso to the exclusion would apply to leave recoverable under the policy the loss suffered by reason of the fall and the damage to the machinery. But, in my opinion, in the present case there is no difference in character between … rectification of non-defective parts and … rectification of defective parts because both parts merely are constituents of a defective whole, or a whole that embodies, as a whole, defective workmanship.’73
1 (1987) 4 ANZ Ins Cas 60-772.
2 This case was cited by the insured in AXA Global Risks (UK) Ltd v Haskins Contractors Pty Ltd (2004) 13 ANZ Ins Cas 61-611 in which it accepted that the instant policy responded when there was some injury to property. In that case, the insured did not dispute that the eastern wall was defective when built. Its submission however (which was accepted by Mason P) was that unless and until the defects manifested themselves in injury to the structure such as buckling, splitting or crushing there was no ‘physical damage to the property insured’ within the meaning of the policy.
3(1986) 4 ANZ Ins Cas 60-689, 74.
4 [1997] 2 Lloyd’s Rep 146.
5 Ibid 156, per Hobhouse LJ.
6 (2005) 13 ANZ Ins Cas 61-661.
7 [1983] Tas R113 (‘Ranicar’).
8Ibid 78, per Green CJ.
9Ibid. For a frankly, odd, with respect, application of the Ranicar test in relation to a tripped fuse under business interruption insurance triggered by ‘loss or damage’ see Mainstream Aquaculture Pty Ltd v Calliden Insurance Ltd [2011] VSC 286. See also Entyce Food Ingredients Pty Ltd v CGU Insurance Ltd [2020] VSC 757.
10[2021] QSC 313.
11Ibid [265].
12As identified in a presentation by Nicholas Longley: ‘What is ‘Damage in Contract Work Claims’; Society of Construction Law Seminar, Hong Kong, 28 September 2005.
13[2002] 2 Lloyd’s Rep 379; Bacardi-Martini Beverages Ltd v Thomas Hardy Packaging Ltd & Ors [2002] All ER (D) (Apr) 304.
14Ibid 386 per Manse LJ : But see Bayer Australia Ltd v Kemcom Pty Ltd (1996) 6 ANZ Ins Cas 61-026 in which cans of insecticide helothian EC prepared and packaged by the insured became contaminated with a herbicide known as velpar. The contamination which occurred during the preparation and packing was found to have ‘damaged’ the product because it had been physically altered due to velpar.
15[2002] All ER (D) 185 (Mar).
16[2004] BLR 97 (‘Pilkington’).
17Ibid 107. See also James Langley & Co Ltd v Forest Giles Ltd [2001] EWCA CIV 1242, in which the English Court of Appeal (when considering the availability of public liability cover dependent upon the insured’s defective work causing ‘damage to a property’ of a third party) found that there had been no such damage, Potter LJ deciding [at 16 and 18] that the damage was within the product supplied and the works performed and that it was simply the position that the works performed were defective and had to be redone and that there was therefore no damage to property.
18(1992) 7 ANZ Ins Cas 61-110 (‘Austral Plywoods’).
19[2024] FCA 775.
20Insurance Australia Limited t/as CGU Insurance v Capral Limited (2025) 142 FCR 105.
21Ibid [65].
22Ibid [67]. It is with respect not clear why the court did not view this as analogous with the scenario considered in Bacardi-Martini Beverages Ltd v Thomas Hardy Packaging [2002] 2 Lloyds Rep 379.
23Ibid [75].
24Ibid [81].
25The Owners Strata Plan 91086 v Fairview Architectural Pty Ltd (No3) [2023] FCA 814.
26[2025] FCAFC 6.
27In R&B Directional Drilling Pty Ltd (in liq) v CGU Insurance Limited (No 2) [2019] FAC 458 (‘R&B Directional Drilling’), Allop CJ considered that the question of whether something was physically damaged was a ‘mater of degree, of meaning and of characterisation.’
28AAI Limited v The Owners – Strata Plan No 91086 [2025] FCAFC 6 [416].
29With due attribution to Senior Counsel.
30[1996] 1 All ER 482.
31Ibid 499.
32[1995] 2 Lloyd’s Rep 395.
33[2018] 1 Qd R 564.
34Ibid [93].
35Delta Pty ltd v Mechanical and Construction Insurance Pty Ltd [2019] QCA 62 AT [88].
36[1960] 1 Lloyd’s Rep 304.
37[1969] 2 All ER 1252.
38[1971] 1 QB 337.
39[1997] AC 655.
40Ibid 676.
41(1976) 9 O.R. (2d) 7 n.
42This case and the four preceding are referred to in a paper delivered by Michael D Harvey ‘A tale of blocked pipes, fly tipping, acid, Degas and an alcoholic beverage’, delivered on Thursday 11 May 2005 at the general meeting of the Association of Average Adjusters.
43(1997) 9 ANZ Ins Cas 61-336.
44Ibid 76,716.
45[2019] FCA 458.
46Ibid [135]-[136].
47(2009) 15 ANZ Ins Cas 61-786.
48Ibid [61].
49See also in New Zealand O’Loughlin v Tower Insurance Ltd [2013] NZLR 275; Kraal v The Earthquake Commission [2014] NZHC 919: Corbett v Vero Insurance New Zealand Limited [2019] NZHC1823.
50[2004] EWHC 216 (Comm) (‘Tioxide’).
51Ibid [49].
52[2022] NSWSC 1485.
53Ibid [52].
54Ibid [55].
55[2024] EWCA Civ 1567. The fact of a possible divergence between the English and Australian courts was evident in Swiss Re International Se v LCA Marrickville Pty Ltd [2021] FCA 1206 in which the court discerned that the approach taken in English cases such as Jan de Nul (UK) Ltd v AXA Royale Belge [2002] EWCA Civ 209 does “…not reflect the weight of authority in Australia.”
56(1983) 155 CLR 279 (‘Chalmers Leask’).
57Ibid.
58Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (1983) 155 CLR 279.
59(1996) 9 ANZ Ins Cas 61-311 (‘Walker’).
60(1986) 4 ANZ Ins Cas 60-869 (‘Graham Evans’).
61[2002] All ER (D)185 (Mar).
62Ibid 143.
63(1996) 9 ANZ Ins Cas 61-311.
64Ibid 22.
65Walker Civil Engineering Pty Ltd v Sun Alliance & London Insurance PLC (1999) 10 ANZ Ins Cas 61-418.
66Ibid 74, 684.
67Ibid 74, 693.68Ibid 74, 693.
69Ibid 74, 694.
70Promet Engineering v Sturge [1997] 2 Lloyd’s Rep 146.
71Ibid 156.
72(1990) 6 ANZ Ins Cas 60-951.
73Ibid 76, 288.
This article may provide CPD/CLE/CIP points through your relevant industry organisation.
The material contained in this publication is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.
