Article by Alan FitzGerald in relation to Supreme Court decision of Analog Devices -v- Zurich Insurance Company – an important decision on the interpretation of “All Risks” exclusions.
ALL RISKS WORDINGS – recent decisions and interpretations (02 May 2005)
The following are two very important recent cases dealing with the interpretation of “All Risks” exclusions. For guidance on this or any other type of Policy wording, please contact Alan FitzGerald.
Irish Supreme Court decision of Analog Device etc. –v- Zurich Insurance Company & American Guarantee & Liability Insurance Company
This judgement was delivered on the 16th March 05 and is extremely important in the context of interpretation of “All Risks” exclusions.
A copy of the full judgement is available from this office, but briefly the background and circumstances surrounding the case can be outlined as follows:
Analog manufacture digital integrated circuits at their Raheen premises in Limerick.
Twice a year, manufacturing is closed down to enable plant maintenance to take place. This occurs at Christmas and in the Summer.
In 1999, during the August bank holiday weekend, regular maintenance we carried out.
An employee of Analog fitted an incorrect filter to a machine during this routine maintenance. This had a catastrophic effect on the manufacturing process and significant losses arose. As a result, hydrochloric acid was deposited on silicon wafers and a large number had to be scrapped leading to an interruption of approximately ten days in the manufacturing operation.
Insurers argued that the losses were excluded under the local and global Policies. Precedent both from the U.S. (global Policy) and U.K. and Ireland, was quoted as well as the contra proferentum ruling in terms of any ambiguity in a Policy wording being construed against the insurance company as the persons who drafted the Policy.
One of the exclusions dealt with errors in processing or manufacturing. The Operative had used contaminated acid to clean the silicone wafers which was argued by Insurers, constituted an error in process or manufacture. The Judge stated, inter alia that the Technician had nothing to do with the day to day processing and manufacturing. What he was doing could not be regarded as part of the manufacturing or processing. The Judge stated that even if he was wrong in this respect, there was an ambiguity and that ambiguity would have to be interpreted in favour of Analog.
Another exclusion was faulty workmanship. It was held that the term “faulty workmanship” did not exclude liability for defective work which was not done in the manufacturing process.
A third exclusion related to contamination/pollution. The Court suggested that this exclusion applied to environmental type pollution and not to “ordinary business activities”. It was held that the exclusion did not apply in this instance and again reference was made to any ambiguity in the Policy wording being construed in favour of the Policyholder.
It is worth paraphrasing the concluding comments of the Court of Appeal Judge.
“I want to make it clear that I am not in any way disregarding the evidence of Insurers as to the broad factual matrix that “All Risks” Policies are not intended to guarantee a manufacturers product or to cover what he and other witnesses called the “efficacy risks”. It would be extraordinary if a manufacturer who used say the wrong men or the wrong machines to make his product with the result that the product was defective could turn to his insurance company on foot of an “All Risks” Policy. No doubt, conceptually there could be such a Policy but it would be highly improbable and as I understand the evidence, neither appellant or respondent were at any stage suggesting that these Policies would have that effect. But as found by the learned High Court Judge, this was not an error in processing or manufacturing, nor could it be described as faulty workmanship. Rather it was an error in a quite independent activity, that is to say, maintenance. I would regard as wholly fallacious the submission that because maintenance was essentially for the processing and manufacturing, it somehow or other became part of the processing or manufacturing. That seems to me to be a complete non-sequitor and obviously this was also the view of the learned High Court Judge. For these reasons, I would dismiss the appeal”.
The overriding message here is that “All Risks” wording need to be water tight in terms of specific exclusions and the Courts will find against Insurers where there is any ambiguity.
Tektrol Ltd.-v- International Insurance Company of Hanover Ltd. & Great Lakes Reinsurance (UK)
This is a U.K. case heard in the Commercial Court underlining the need for businesses to keep their business interruption cover under constant review. The Court held that where two separate events which occurred two weeks apart, caused a loss in relation to which an insured sought to be indemnified, Insurers only had to show that one of the events was excluded from coverage for the Insureds claim to fail. However, the Appeal Court overturned that decision on 21st July 05.
Tektrol sought indemnity under its “All Risks” Policy for business interruption relating to the loss of a computer code critical to its main product. The code was stored in five places for security reasons.
On 19th December 01, Tektrol received an e-mail with an attachment purporting to be a Christmas card. The M.D. opened it, inadvertently introducing a virus which erased the code. Two weeks later, the premises were burgled and computers containing the remaining codes were stolen.
The Policy contained a number of critical exclusions, one referring to loss, distortion or corruption of information on computer systems etc., caused by rioters, malicious persons etc. Furthermore, distortion, corruption etc. was excluded unless resulting from a defined peril, (in so far as it was not otherwise excluded). A further exclusion referred to loss in respect of computers or data processing equipment other than damage or consequential loss caused by a defined peril, theft or attempted theft involving forcible and violent means etc., robbery etc., in so far as it is not otherwise excluded. The defined perils were outlined and were standard.
The Lower Court (Commercial Court) concluded that the virus and the burglary were “causes of the consequential loss”.
Insurers argued that the loss arising from the burglary was excluded because it was “caused deliberately by malicious persons”. Tektrol argued because they were not targeted specifically, the loss of the code had not been caused deliberately. The Judge stated that deliberately meant done on purpose rather than accidentally or incidentally. Hence, the exclusion applied. The Judge held that this alone meant that Tektrol’s claim failed as one of the two causes was excluded.
Furthermore, Insurers argued that the loss did not result from a defined peril as the burglars were not “malicious persons”. Tektrol argued that the loss was an electronic loss as opposed to theft of physical items. The Judge rejected this argument suggesting that the burglars were not “malicious persons” and that the loss was not confined to “electronic loss” but covered the theft of physical items.
The Court of Appeal allowed Tektrol’s appeal on 21st July 05. The Judges accepted that the damage caused by the virus was deliberate. However, in the context of “malicious persons”, Tektrol argued that the person who drafted the Policy was only concerned with interferences directed specifically at Tektrol’s computers or committed on or near Tektrol’s premises. The Court agreed that although the virus’ author was a malicious person, the Policy did not intend to exclude interferences by such people that are not directed directly at the computer systems etc., used at the premises. Therefore the virus damage was not excluded. If the Insurers had intended to exclude damage caused indirectly by a computer hacker, they needed to place a specific exclusion in the Policy dealing with this. However, Tektrol still had to succeed on the burglary point. The Court held that every case where information on the computer systems or on the records programmes of software was interfered with by electronic means was included i.e., the loss of the codes as a consequence of the burglary was covered.
As in the Analog case, this case emphasises that Insurers must be specific in terms of Policy wordings if they want to exclude specific events or contingencies. The Appeal Court criticised specifically the Policy wording and expressed disquiet over “All Risks” Policies generally. One of the Appeal Court Judges suggested that although described as an “All Risks “ Policy, the wording was confusing and one had to search through a long list of exclusions to discover the extent of which cover actually applied and suggesting that in the future when interpreting an “All Risks” Policy, “one should start from the presumption that the parties intended an “All Risks” Policy to cover all risks except when they are clearly and unambiguously excluded”. The implication therefore is that exclusions will be interpreted in favour of the Policyholder where any ambiguity exists which is clearly the intention of the contra proferentum ruling. (For further details on this case, contact Alan FitzGerald).