What is Physical Loss or Damage ? – Non-functioning Batteries do not meet the Policy Definition
Israel
Adv. Peggy Sharon Adv. Aviv Klepner
A company which produces and distributes alarm systems and fire detectors, using batteries manufactured by the Insured (Semicom Lexis Ltd.), filed a claim for damages of app. ILS 11 million arguing that the life span of the batteries was short, which required their replacements after a few weeks instead of after 2 or 3 years.
The damage claimed comprised of alleged costs of replacements at the clients’ sites worldwide and loss of profits due to decrease of sales resulting from the fault.
In view of the Israeli Insurance Contract Law which grants the injured third party a direct right of claim against the Insurer of the alleged wrongdoer, Plaintiff filed the claim against both the Insured which supplied the batteries and its Insurer.
The Insured sent a Third-Party Notice to its Insurer, Migdal Insurance Company Ltd. which had issued to Semicom a Liability insurance policy (Product and General Liability).
As to the merits of the claim regarding the faulty batteries, the District Court dismissed the Plaintiff’s claim while stating that Plaintiff did not discharge the burden of proof regarding the source of the fault. There were two equal possibilities explaining the fault: a defect in the production or improper storage of the batteries by Plaintiff itself in humid conditions in Hong Kong prior to their installation.
The Court stated that where there are two reasonable potential causes for the fault, one relating to the production and the other lies on the Plaintiff, it should be determined that Plaintiff loses due to non-shifting its burden of proof.
As to the insurance coverage. The Product Liability policy defines “Damage” as being either death, bodily injury or loss or damage to tangible property of a third party including consequential loss as a result thereof.
Plaintiff and the Insured argued that the product in which the battery was installed ceased to operate, was destroyed, did not function as it should have, and was not usable due to the fault. They argued that the term “Loss” in the policy encompasses various sorts of damage including non-physical damage and therefore it includes the loss of use caused by the faulty batteries.
Migdal argued in response that the batteries did not work for their expected period of time which caused financial losses, however not a physical damage or loss to the property of a third party.
The judge accepted the argument of the Insurer and stated that a determination according to which non-functioning of the batteries would be considered as a physical damage to the systems in which they were installed, stretches the limits of policy interpretation far too much without justification. Indeed, the fact that the batteries stopped operating caused the fire detectors failure to fulfill their purpose until the replacement of the faulty batteries with proper ones. But no evidence was brought showing that the systems suffered a physical damage and that any of their components were damaged or required any repair.
Therefore, the physical requirement under the policy was not fulfilled.
In addition, the Product Liability Policy has various exclusions, e.g. the cost of replacement or repair of products, and a financial loss which is not a direct result of a physical damage to third party property. These exclusions also exclude coverage to the claimed damage.
As to the Third-Party Liability section, the policy requires an unexpected event which caused bodily injury or property damage which prima facie exist in this case. However, there is an exclusion of the policy regarding products which were manufactured, sold or distributed by the Insured after these products left the direct possession of the Insured.
In addition, the policy does not cover a financial loss.
Plaintiff and the Insured argued that the coverage under the policy includes a Professional Liability Insurance. They based this argument on the fact that the Professional Liability Exclusion which was included in the Third-Party Liability Section, was cancelled by an Extension to the policy.
The Court decided that the cancellation of the exclusion does not grant the Insured an independent coverage of a Professional Liability Insurance. The effect of the cancellation is that where a claim complies with the Third-Party Policy requirements for coverage, the coverage will not be excluded only because the duty which was breached by the Insured is a professional and not a general one.
As there is no coverage under the Third-Party Liability of the policy in the absence of physical damage, the Insurer is not liable towards the Insured and the Third Party even where the Insured’s actions breached its professional duties.
The District Court dismissed both, the claim and the Third-Party Notice with costs imposed on Plaintiff and the Insured.
C.C. 7597-05-15 Electronics Line 3000 Ltd. (Risko Group) v. Semicom Lexis Ltd. & Migdal Insurance Co. (Central District Court 3rd January 2024).
