Pilkington United Kingdom Ltd v CGU Insurance Plc

A products-liability policy covering liability for physical damage to another’s property does not insure against a defective component merely because it has been incorporated into a structure and may fail in future. The insured must show an actual harmful physical alteration to other property, such as contamination or intermixture. The policy does not cover economic loss, precautionary measures, or a guarantee of the supplied product’s quality or fitness.

A clear general condition making compliance with notice obligations a condition precedent permits the insurer to deny liability for breach without proving prejudice. Contra proferentem applies only where genuine ambiguity remains after ordinary contractual construction.

Pilkington supplied heat-soaked toughened-glass panels for the Eurostar Terminal at Waterloo. Some panels fractured because of a manufacturing defect. No injury or damage to the terminal, apart from the failed panels, was alleged. Eurostar adopted safety measures to prevent future harm rather than replacing the panels.

After Pilkington contributed to a settlement of claims brought through the construction chain, it sought an indemnity from CGU under a global liability policy. CGU denied cover. HHJ Michael Dean QC held that the claim did not concern physical damage to third-party property and that Pilkington had also breached conditions precedent requiring notice.

The appeal concerned whether incorporation of the defective panels itself constituted physical damage and whether the notice provisions were conditions precedent to liability.

1. Appeal dismissed unanimously. Potter LJ gave the judgment, with which Jonathan Parker LJ and Charles J agreed. The judge’s construction of the policy and his conclusion on notice were upheld.

2. The insuring clause covered liability for physical consequences caused by the supplied commodity, not contractual liability for its defective quality. A defect, or a risk that the commodity may fail later, does not by itself establish physical damage to another’s property. Physical damage ordinarily requires a harmful change in physical state. Contamination or intermixture may satisfy that requirement, but a component which remains physically harmless to the surrounding structure does not.

3. The terminal was not physically damaged when the panels were installed. The panels and the other parts of the building functioned, subject only to the risk of later fracture. The cost of measures taken to avert that risk was economic and precautionary expenditure. It was not liability in respect of an occurrence causing physical damage. Construing the policy otherwise would turn products-liability insurance into a guarantee of the quality and fitness of the product. The reasoning in Rodan International Ltd v Commercial Union [1999] Lloyds Rep 495 supported that distinction.

4. Particular Clause 16 reinforced the conclusion that damage or deterioration confined to the supplied product was outside the intended cover. The court did not decide the precise standalone scope of that exclusion. It observed that applying it directly to safety works designed to avoid removal or repair could raise construction difficulties.

5. The notice clause required prompt written notice of a potentially relevant occurrence and immediate notice of impending civil proceedings. General Condition 7 made those requirements conditions precedent. Pilkington’s unexplained delays were manifest breaches. Following Pioneer Concrete (UK) Ltd v National Employers Mutual General Insurance Association Ltd [1985] 1 Lloyds Rep 274, CGU did not need to prove prejudice.

• Court of Appeal (Civil Division) — dismissed Pilkington’s appeal in [2004] EWCA Civ 23, affirming that the claim was outside the products-liability cover and that the relevant notice obligations were conditions precedent.
• High Court, Queen’s Bench Division (Commercial Court) — on 25 June 2003, HHJ Michael Dean QC held that incorporation of the defective panels did not cause physical damage to the terminal and that Pilkington had failed to comply with the notice provisions.