When is that which occurred not an “Occurrence”?

Key Point

• “Occurrence” must be distinguished from “damage” when construing insurance policies

In the recent case of Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2018] NSWCA 100, the NSW Court of Appeal considered what “Occurrence” meant in a liability policy and highlighted the distinction that must be made between an occurrence and the damage that flows from that occurrence.
 
The brief facts were that the plaintiff insured, Weir Services Australia Pty Ltd (“Weir”), was retained to refurbish a grinding mill in a mineral processing facility in the Philippines. This facility had a centrally rotating drum and conical endplates on either side. The drum consisted of four separate shell sections bolted together and was welded to two end cones by circumferential welds. Two years after the refurbishment was completed one of the circumferential welds failed, as a result of which the drum failed and the mill was substantially damaged. The owner of the mill brought an action against Weir which was settled. Weir made a claim on its broadform liability policy with AXA with respect to the amount of the settlement and also its costs.
 
The policy provided cover for Property Damage “which happens during the period of insurance; and is caused by an occurrence…”. “Occurrence” was defined in the policy to mean “an event, including continuous or repeated exposure to substantially the same general conditions, which results in …Property Damage neither expected nor intended by You”.
 
At first instance, the Court found that Weir had not established that there was an occurrence within the meaning of the policy. Weir had originally pleaded that the failure of the circumferential weld was the relevant occurrence that triggered the policy. It later amended its claim to plead three alternative events which might also be occurrences. Those were (a) “cyclic loading”, which was the type of force operating on the drum over time; (b) cyclic loading coupled with Weir’s allegedly defective work to the circumferential weld; and (c) the performance by Weir of the repair work to the allegedly defective circumferential weld.
 
The Court below found that the failure of the circumferential weld was not an occurrence, but rather the damage which was complained of. The “cyclic loading” was a description of the physical force to which components of the mill were subjected during normal operation, and coupling the “cyclic loading” with the allegedly defective repair work took the matter no further. In relation to the performance by Weir of the repair work which was allegedly defective, the Court found that this was not an occurrence as it lacked the “essential quality of an Occurrence, which is that it is unexpected”.
 
The Court of Appeal overturned this finding (although this was not determinative of the outcome of the case, which ultimately turned on the application of an exclusion). The Court found that the primary judge was correct in finding that the failure of the weld or the separation and failure of the drum was not an occurrence. The Court said that even though these were “events”, they were also “damage” and “…the strict dichotomy between “occurrence” (in the sense of an “event” or state of affairs causative of damage) and the damage itself precluded recognition of those readily observable changes in physical circumstance as an “occurrence”. The Court also agreed that the “cyclic loading” is merely a physical force, which could not, of itself, have led to damage which was not expected nor intended by Weir or anyone else.
 
However, with respect to Weir’s allegedly faulty workmanship, the Court found that the work carried out on the mill was expected and intended by Weir to restore the mill to full working order, and it was expected and intended that it would not cause the damage which happened. That damage was therefore neither expected nor intended by Weir. The Court below was wrong in finding that the “occurrence” itself must be unexpected. The unexpected criterion applies to the damage, not the event, and therefore Weir’s faulty workmanship was an occurrence within the meaning of the policy.
 
This case is also illuminating in its analysis of a “product defect” exclusion, which will be the subject of a future blog.

Post by Dr Tim Channon