MOLYNEUX HOLDINGS LIMITED V IAG NEW ZEALAND LIMITED HC DUN CIV-2006-412-000248

MOLYNEUX HOLDINGS LIMITED V IAG NEW ZEALAND LIMITED HC DUN CIV-2006-412-000248 7 September 2006IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY CIV-2006-412-000248BETWEEN MOLYNEUX HOLDINGS LIMITED Plaintiff AND IAG NEW ZEALAND LIMITED Defendant Hearing: 30 August 2006 Appearances: S P Rennie for Plaintiff C Hlavac for Defendant Judgment: 7 September 2006JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN Upon Application for Summary Judgment The Dispute[1] Molyneux has made a claim upon its public liability policy with IAG. Cherries it received and processed for export suffered contamination damage. Settlements have been reached with some growers. [2] Molyneux considers its insurance covers it for this and other losses. It has applied for summary judgment. The primary issue involves a question of interpretation and it is suitable as such for determination by summary judgment application.Background[3] Molyneux operates a fruit packhouse in Cromwell. It receives cherries from growers for packaging, and for export sale. Its services include receiving andgrading the fruit, splitting bunches into individual fruit pieces, sorting, sizing and packaging. [4] When the fruit arrives at Molyneux's packhouse it is warm and requires chilling to prevent deterioration. The initial process involves receiving the fruit in bins of pails which are placed in a "field hydrocooler" in which the fruit is washed and chilled to about 0°C -1°C. The fruit is then moved to the packing line where the pails of cherries are emptied into a "water dump" to allow leaf and debris to float away. [5] At the top of the elevator, fruit passes through a cluster cutter which splits the cherries into single fruit before it is sized and sorted. The fruit is then passed through an "in-line hydrocooler" after which it is inspected prior to being packed into export cartons before being palletised in a coolstore pending shipment. [6] Molyneux's contract with its growers required it to hydrocool, grade and coolstore the grower's fruit to Summer Fruit NZ's cool chain specifications. Those specifications require packers to maintain a high standard of quality throughout and to ensure that all fruit leaving the packhouse for export is in premium condition and likely to arrive in the marketplace in such condition. [7] The use of hydrocoolers is designed to remove heat from the cherries and to ensure quality. By keeping the fruit as near to 0°C -1°C as possible premature ageing is reduced and the shelf life of the fruit is extended. This is important when fruit is shipped by sea to overseas markets. [8] Throughout the process, cherries pass through a number of water baths. The importance of maintaining water quality is well recognised in the industry. Cherries entering the packhouse are always loaded with a level of decay organisms that will cause decay of fruit after harvest should the conditions be suitable for growth. Once decay organisms start growing on the internal surfaces of the fruit, the situation is irreversible. Water provides a mechanism for the removal of the decay organisms, including the pathogen mucor piriformis.[9] Molyneux had a water treatment programme in place to combat decay organisms within the processing water. This included treating the water with chlorine – the most common antimicrobial pesticide used in sanitation systems. [10] There were early indications the 2003/2004 season would provide a bumper crop. To handle the anticipated extra demand, Molyneux hired an in-line cooler that had apparently been used previously for other products, including probably carrots. When it arrived it was in need of cleaning from previous use and was cleaned by Molyneux. Apparently it was not cleaned as thoroughly as it should have been. [11] It has been established that a substantial proportion of the processed cherries rotted as a result of contamination by the pathogen mucor piriformis which occurred somewhere within Molyneux's cherry packing process. Either Molyneux failed to properly clean the in-line hydrocooler before use, or it failed to properly chlorinate or otherwise treat the processing water so as to prevent the spread of pathogens.Molyneux's Claim[12] Significant losses were incurred by growers whose fruit was processed by Molyneux. Molyneux has settled a majority of these by payments totalling $466,363.10. It has other growers with whom it has not yet settled. It says it is insured for this loss by its insurance cover with IAG. [13] The issue is whether IAG's insurance cover indemnifies Molyneux for its loss. IAG claims cover is denied because of a policy exclusion that applies in this case.The Policy[14] It provides for public liability insurance to cover Molyneux's liability for property damage to a third party, arising out of Molyneux's business activities. Indemnity is available for damage arising from the insured's business or its completed products. [15] The policy also provides an indemnity to cover the damage of property belonging to others within premises occupied by the insured.[16] The policy expressly excludes liability for property damage to any product where liability is connected with any fault or defect in work done to the product by the insured. [17] The dispute before me concerns how those underlined words should be interpreted. [18] Molyneux's position is that a failure to treat the water is not a fault in work done to the cherries. Rather, it is an omission relating to the environment in which the cherries were handled. The failure to treat the water is not work on the product itself, because the products were cherries at the start and were still cherries at the end. [19] IAG contends that in carrying out the work Molyneux was contracted to perform, from the time the cherries first arrived at the packhouse until they left in a packaged export state they were "worked on". [20] My task is to determine the proper meaning of the exclusion clause. [21] Aids to determining meaning focus upon the policy itself, but also include reference to other factors. [22] Words may have natural and ordinary meaning, but within the provisions of a policy will also have a purpose. An inquiry would involve checking to see whether some other or modified meaning was intended. [23] Other factors include consideration of principles or rules applied in particular circumstances. An interpretation of insurance policies is commonly subject to consideration of these other factors. It is often expressed that where there is ambiguity then insurance contracts are construed contra-proferentem against the insurer. That is, where there are two permissible meanings then the meaning most favourable to the insured is to be adopted. Also in insurance contracts exclusion clauses are usually construed narrowly.Molyneux's Case[24] The Shorter Oxford includes among the meanings of 'work': to make, to form or fashion, to mix, to shape and convert into something else. Hence, a permissible meaning is that the word suggests some form of modification to the product. [25] If the cherries were converted into jam, then clearly the product had been modified and a reasonable commercial person standing in the position of the parties would accept there had been a change to the nature of the peril, or the risk, and therefore the exclusion was intended to apply. [26] Mr Rennie submits Molyneux plainly did not modify the product: it stored and handled the product in an environment which it had worked on, but it did not modify the product in any way. [27] Mr Rennie draws support from the policy itself for the conclusion that "work on the environment" was not intended to be covered by the exclusion clause. He refers me to a clause relating to Bailee liability which notes that the exclusion relating to "work done to the product" does not apply to "faulty or defective storing of any product. [28] Molyneux says that storing is precisely what it was doing when the cherries were placed in the coolers, which cool the environment. Therefore, the Bailee liability exclusion clause indicates an intention to exclude work done relating to the environment in which the cherries were kept. [29] Mr Rennie submits that what occurred in this instance can be distinguished from what occurs when a baker puts a cake into a heated oven. In that instance a baker who burnt the cake would be doing work on the cake, because in the oven the batter undergoes physical change with chemical reactions to ultimately form a cake. Clearly work was done on the batter to create an entirely different product. In this case the cherries do not undergo any physical change, nor is there any chemical reaction.[30] Mr Rennie submits that IAG's own expert accepts that the chlorine in the water neither cleans nor sterilises the cherries, and has "virtually no penetrating action". Chlorine only affects the bacteria and microbes in the environment; it does not affect the cherries. [31] Molyneux says the generic word for what it was doing is probably "handling", but nothing else by which it should be considered it was working on the product.Considerations[32] I consider the commercial purpose of the insurance policy is to indemnify an insured for third party property damage arising from the insured's work or from its completed products. It does not indemnify the insured for damage to the very products which it has manufactured, repaired, handled or the like, caused by the insured's faulty workmanship. [33] It follows that to adopt the view that "work on" requires there to be some modification to the cherries, through shaping, forming or converting into something else, would require an unnatural, narrow and constrained interpretation of the words used. [34] The fact is the pathogen got into the fruit because there was a defect in the process, that is in the work done on the cherries. [35] If there is an ambiguity in respect of any term in a policy then such is construed against the party for whose benefit it is claimed. However, the Court should be wary of looking for an ambiguity when on the plain meaning of those words none is to be found. It follows the Court should try to determine what the parties intended by the policy words to be bound by. Resort to the contra- proferentem rule should be had as a last resort. [36] An insurer seeking to rely on an exclusion clause to deny cover has the onus of proving that the exclusion applies. It does not follow that there is a presumption for or against either insured or insurer when interpreting the terms of an insurancecontract. Insurance contracts are subject to the same general principles of construction as any other contract: QBE Insurance Limited v Attorney-General(CA174/04, 3 August 2005, O'Regan, Baragwanath and Panckhurst JJ) at para 41. [37] Mr Rennie's reference to the Shorter Oxford definition concerns the use of the word 'work' as a substantive verb, ie "to work" an object. In my view, the word 'work' as used in the policy is used as a transitive verb. As such it means to do something, to perform a function, or to produce an effect. It would include doing something involving effort for a definite purpose, ie in order to produce something or effect some result. [38] In this sense the natural and ordinary meaning of the phrases "work on" and "work done to" involve some wider meaning than the narrow definition contended for by Molyneux. The meaning would also include the handling, cleaning, cooling and packing of fruit. [39] I accept Mr Hlavac's submission that this view of matters is also supported by an analysis of related policy provisions. [40] Mr Rennie referred to the fact that the policy exclusions did not include "work on the environment" in relation to damage done to product. An alternative view to Mr Rennie's proposition is also available. It is that, but for the exception created to allow indemnity in respect of faulty or defective storing of any product, the storing of a product would otherwise come within the ambit of "work done to the product" and therefore be excluded. It would follow that "work done to the product" would ordinarily include storage of the product. [41] In my view, the work carried out by Molyneux went beyond the mere storage of the cherries. It involved processing them from a raw state, straight from the orchard, to a cleaned, cooled and packaged state ready for export. Therefore the processing of the cherries by use of coolers involved more than mere storage and did include some modification or alteration by the cooling of the fruit.[42] In this case the fruit that was damaged was product which the insured had been contracted to process. If, on the other hand, within the insured's premises the damage had occurred to the product for reasons not involved with the work of processing the fruit, then clearly there would have been cover. But cover does not extend to indemnify the insured for damage to those products which the insured has worked upon, and which by its own negligence it has damaged. [43] I did not detect by this analysis any ambiguity regarding the circumstances in which liability is to apply, nor how damage occurred. Molyneux was contracted to perform work in relation to customer's fruit. Damage occurred to that property due to Molyneux's failure to perform the work or to complete the contract to a particular standard. Otherwise, and to accept the position Molyneux contends, the policy of insurance would amount to an underwriting of goods supplied by Molyneux or a guarantee of the workmanship it contracted to perform. That is not the purpose of the policy in this instance. [44] The intent of the policy was to focus the element of insurable risk upon third party property which Molyneux had no relationship with. The policy was not designed to insure property which Molyneux "worked on". At the time of damage the cherries were Molyneux's product because it was the property that Molyneux then worked on. The work involved effort to achieve a particular purpose, an intended result. The work involved the whole process of dealing with the cherries from beginning to end. It certainly included the cleaning and cooling of the cherries using the in-line hydrocooler. The work included omissions as well as positive action because it was all encompassed within Molyneux's contractual obligations which were to ensure that the cherries left the packhouse for export in a premium condition and were likely to arrive in the marketplace in such a condition.Judgment[45] The application for summary judgment is dismissed. Costs are payable to the defendant on a 2B basis. [46] Had I interpreted the insurance policy in favour of Molyneux I would have entered judgment as to liability only. In the normal course, the insurance policyplaces the insurer in charge when dealing with the claims of third parties. Although Molyneux has settled with a number of growers because IAG refused to indemnify it, there ought to be a means to review those settlements. There is too little evidence of this before the Court in the affidavits which have been filed. A more detailed inquiry is appropriate than is available in this instance upon the summary judgment application.Solicitors: Rhodes & Co, Christchurch for Plaintiff Young, Hunter, Christchurch for Defendant