RODAN INTERNATIONAL LTD v COMMERCIAL UNION ASSURANCE COMPANY PLC

A products liability policy covering compensation in respect of an occurrence of physical property damage does not cover contractual losses merely because they arise from the same defective supply. The liability must relate to the identified physical occurrence, although it may include all consequential loss flowing from that physical damage.

Loss arising from future non-performance, such as lost future profits and wasted expenditure on intended future supplies, falls outside such cover. An exclusion for recall, removal or reduction in value of defective goods supplied excludes the assured's liability for the corresponding expenditure incurred by a third party.

Rexodan supplied detergent powder to Newbrite. The powder was unmerchantable. It stained Newbrite's cartons and the powder subsequently caked. Newbrite recovered agreed damages from Rexodan, including reduced value of the supplied powder, costs of dealing with returned powder, wasted expenditure on further cartons, and future lost profits.

Under its products liability policy, Rexodan sought an indemnity from Commercial Union. Judge Kershaw QC held that the policy covered the wasted expenditure and lost profits, but that a special clause excluded the first two items. The insurer appealed for judgment in its favour. Rexodan cross-appealed. The central issue was the scope of compensation payable in respect of an occurrence and the effect of the exclusion for damage to goods supplied.

1. Appeal allowed and cross-appeal dismissed unanimously. Judgment was entered for the insurer. Hobhouse LJ gave the principal judgment, with which Mummery LJ agreed. Pill LJ agreed in the result and with the material construction of the insuring clause.

2. The products liability cover was confined to liability for the physical consequences caused by the supplied commodity. The words in respect of required the assured's liability to relate to the identified occurrence. They did not extend cover to every liability arising from the same contractual cause of action. Where supplied goods cause physical injury or property damage, the indemnity may extend to the full damages attributable to that physical consequence, including consequential financial loss.

3. The relevant occurrence was the staining of Newbrite's cartons. Hobhouse LJ held that deterioration of the product itself could not alone constitute the occurrence, although the caking of the powder was a physical consequence of the carton damage. Items 3 and 4, however, concerned prospective supplies that were not made or accepted. They were losses from future non-performance, not damages in respect of the occurrence, and were outside the primary cover.

4. Items 1 and 2 were in any event excluded by special clause H. They represented, respectively, reduction in value of the supplied commodity and the costs of recalling or removing it. The clause excluded liability for such expenditure incurred by the third party; it was not confined to acts performed by the assured. Pill LJ considered Items 1 and 2 outside the primary cover as well, because the powder's deterioration remained a consequence of its own unmerchantability. He nevertheless agreed that clause H excluded them.

5. As no compensation claim fell within the policy, the insurer had no liability for either party's costs of the earlier proceedings. The proper form of the first-instance costs declaration was therefore academic.

• Court of Appeal (Civil Division) — allowed the insurer's appeal, dismissed Rexodan's cross-appeal, and entered judgment for the insurer.
• Manchester Mercantile List — Judge Kershaw QC held that the insurer was liable to indemnify Rexodan for items 3 and 4, but not items 1 and 2, and made declarations concerning costs.