The High Court has found insurer QBE could not rely on an exclusion clause to deny liability to its insured, seed merchant Selected Seeds Pty Ltd.

Selected Seeds had sold jarra seed to a couple who intended to grow a jarra and hay crop as quality stock feed. Instead, the product failed to produce jarra grass and instead grew a weed crop, summer grass.

Policy schedule

Chief Justice Robert French and Justices Ken Hayne, Susan Crennan, Susan Kiefel and Virginia Bell overturned a 2009 Queensland Court of Appeal decision for QBE, in which the insurer had challenged the interpretation of its broadform liability policy.

Selected Seeds was granted special leave to appeal against that decision to the High Court.

Selected Seeds’ policy provided indemnity against public and product liability.

The policy schedule contained endorsements which formed part of the policy. Endorsement 3 was an “efficacy clause”, which excluded liability arising from a product failing to meet its “intended use or function”. The appeal focused on that aspect of the clause.

The issue was whether Selected Seeds’ liability to the buyer arose because of damage caused by planting the wrong seed or from what the supplied jarra grass failed to do.

In the initial Queensland Supreme Court proceedings, QBE argued Selected Seeds’ supply of the seed was “too remote” from the damage suffered and did not come within the insuring clause.

But Justice Margaret McMurdo drew a distinction between what the clause excluded and how Selected Seeds’ liability arose and ruled the efficacy clause did not apply.

“Liability for damages from what was done to the land arose not from what the product failed to do, grow jarra grass, but what it did do to the claimants’ property,” she said.

The Court of Appeal overturned her ruling, but the High Court said QBE’s argument attempted to address the relevant liability as the damage to the land, but did so in a way which “inverted the true question posed by the efficacy clause”.

QBE said if the seeds had functioned as intended and fulfilled their intended use, there would have been no damage to the land.

“The liability of Selected Seeds for damage to the land was not caused by failure of the seeds to produce jarra grass. It arose because of the direct effect of the seeds on the land.

The seeds were so contaminated that only summer grass was produced. The efficacy clause does not apply,” Chief Justice French said.

The case has important ramifications for the insurance industry.