What is "Damage" in Contract Works Claims?

Ordinary Rules of Construction

There is no doubt that the insurance industry has developed its only body of law and as a result there are aspects of insurance law which are particular to it. The best known example is the concept of utmost good faith. However it should be remembered that an insurance contract is just that, a contract, and it is generally subject to the normal rules of construction.¹

The Ordinary Meaning of Damage - Promet Engineering v Sturge

It seems settled law that when construing an insurance policy, the term 'damage' should be given its ordinary meaning. This approach was adopted in the English Court of Appeal in Promet Engineering v Sturge.² That case concerned a claim on an insurance policy relating to damage to an off-shore accommodation platform, which was built in Singapore.

The platform had three legs which were designed to extend and retract, so that the platform could be floated and towed into position. At their base, the legs passed through a steel box, which was designed to sit on the sea floor when the platform was in position. The steel box was called the 'spud can', which was strengthened by internal bulkheads and brackets and was designed to be watertight. The spud can was attached to the legs by welds. Fatigue cracking was discovered. The cracks were caused by the normal action of the waves. The cracks had started within the welds but had spread to the top plate and internal structure of the spud can. The cracks were such that the platform was in danger of collapsing. The cracks were repaired and the owners claimed on the insurance policy. It was found that the welds were not properly profiled and were therefore defective.

The Owners of the platform claimed on their insurance policy. The policy provided for an indemnity for damage to the platform. It also provided for an extension of the insurance cover for:

"any defective part which has caused loss or damage to the [platform]."

Insurers rejected the claim on the basis that there was no damage to the platform and succeeded at first instance. Tuckey J decided that the manifestation of the cracks was the result of a latent defect becoming patent and no damage had been suffered.

The Owners appealed and the Court of Appeal decided that there was damage within the meaning of the extension of the insurance cover. Hobhouse LJ said:

"It would be an abuse of language to describe the legs and spud cans as merely defective; on any ordinary use of language they 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."³

In most cases, whether there has been damage will be sufficiently obvious and therefore a general test of adopting an ordinary meaning of the word is appropriate. However this test does not assist in understanding what is meant by damage. We need to delve deeper into the concept.

The starting point for the ordinary meaning of any word is of course its dictionary definition. The Oxford English Dictionary definition of damage is as follows:

Harm or injury impairing the value or usefulness of something, or the health or normal function of a person

This Oxford dictionary definition was applied to define damage in two cases unrelated to insurance, which are the criminal case of R v Henderson & Batley⁴ and by Mance J in The Orjula.⁵

Ranicar v Frigmobile⁶

A very similar definition, from a different edition of the Oxford dictionary, was also considered in the Australian case of Ranicar v Frigmobile. The court though in that case thought that this definition was not helpful on the basis that the use of the word 'injury' begs the question (that needs to be determined). In other words, by defining damage as an injury, the debate is not being taken much further.

Although not a construction case, the Ranicar decision does provide a useful analysis of the elements that constitute the definition of damage. The case concerns the transportation of scallops. The scallops were being shipped to a wharf in Melbourne and were destined for overseas export. However during a routine inspection in Melbourne, the scallops were found to have been stored at a higher temperature than prescribed by the relevant export regulations. In fact, the scallops could still be eaten, but under Australian regulations, they could not be exported. The owners of the scallops argued that they were damaged by the fact they could not be exported and claimed on their insurance.

The court agreed with the owners. In doing so, Green CJ adopted what he described as 'ordinary meaning of the word damage'. He 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."⁷

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'.⁸ A change in temperature in itself was 'a physical change'⁹ and the scallops were less valuable in the sense that they could not be exported.¹⁰