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THE SUPREME COURT
No. 41/03 Denham J.
Hardiman J.
Geoghegan J.BETWEEN/
ANALOG DEVICES B.V., ANALOG DEVICES
IRELAND LTD., ANALOG DEVICES
RESEARCH AND DEVELOPMENT LTD.
AND ANALOG DEVICES INC.
Plaintiffs/Respondents
and
ZURICH INSURANCE COMPANY
AND AMERICAN GUARANTEE AND
LIABILITY INSURANCE COMPANY
Defendants/Appellants
JUDGMENT of Mr. Justice Geoghegan delivered the 16th day of March 2005
Introductory
This is an appeal from an order of the High Court (Kelly J.) declaring that the above-named appellants are jointly and severally liable on foot of respective policies of insurance issued by them to indemnify the above-named respondents in respect of the losses sustained by them as a consequence of a certain calamitous incident which will be elaborated upon in this judgment. The two policies were apparently referred to throughout the hearing in the High Court as “the local policy” and “the global policy” and this nomenclature was adopted by the learned trial judge in his reserved judgment. I will similarly adopt it in this judgment. The two policies are not identical but are broadly similar and they are what is known in the insurance business as “all risk policies”.
Factual background to claim
Between them, the respondent companies were at all material times engaged in the manufacture, research and design of high performance linear mix signal and digital integrated circuits that address a wide range of real world signal processing applications and for the purposes of this claim the relevant business was carried on at Raheen Industrial Estate in County Limerick. It is not disputed, and the learned High Court judge found as a fact, that twice a year the plaintiffs’ normal manufacturing operation is closed down so as to enable plant maintenance to take place. This usually occurs at Christmas and in the summer. In 1999, such a close down occurred over the August Bank Holiday weekend and required maintenance was then carried out. The maintenance work was carried out by employees of the respondents. During that August Bank Holiday weekend one such employee while carrying out the maintenance fitted an incorrect filter to a machine. Unfortunately, that had catastrophic effects in the manufacturing process and the losses which resulted have given rise to this insurance claim.
On the 17th August, 1999 the respondents, through their brokers, notified the appellants of the claim. The notice described the loss as follows:“A technician inserted an incorrect filter in the processing unit resulting in the destruction of wafers.”
Because of the error on the part of the maintenance man, hydrochloric acid (“HCL”) contaminated with carbon particles was deposited on raw silicon wafers. As a consequence, a large number of wafers had to be scrapped leading to an interruption of approximately ten days in the manufacturing operation.
It was claimed by the appellants that the losses sought to be recovered under the policies were excluded by the local and/or global policies and accordingly, liability was repudiated. The appellants, in the High Court, relied upon exclusions contained in section III clause F(4), F(5) and F(13) of the local policy and exclusions 10(c), 10(d) and Endorsement No. 1 in the global policy and continue to so rely in the appeal before this court.
The exclusions
The text of the three exclusions in the local policy reads as follows:
“(F) Perils excluded
This policy does not ensure against loss or damage caused by or resulting from:
(4) Errors or defects in design or specification, faulty workmanship or faulty materials, unless a loss by a peril not otherwise excluded ensues, and then only for such ensuing loss;
(5) Errors in processing or manufacturing resulting in damaged property being worked upon, unless a loss by a peril not otherwise excluded ensues, and then only for such ensuing loss. (13) Against loss or damage caused by, resulting from, contributed to or made worse by actual or threatened release, discharge, escape or dispersal of contaminance or pollutants, or whether direct or indirect, proximate or remote or in whole or in part caused by, contributing to or aggravated by any physical damage insured by this policy, unless loss or damage from a peril insured herein ensues and then this policy shall cover such ensuing damage. This exclusion shall not apply where loss or damage is directly caused by a peril insured against under this contract to property covered.
Contaminants or pollutants means any material which after its release can cause or threaten damage to human health, welfare or causes or threatens damage deterioration, loss of value, marketability or loss of use to property insured hereunder, including, but not limited to, bacteria, fungi, virus or hazardous substance.”
Two of the three exclusions under the global policy are contained in section 10 of the policy and they are in clause (c) and clause (d) respectively. Clause (c) reads as follows:
“This policy does not insure against the cost of making good defective design or specifications, faulty material or faulty workmanship; however, this exclusion shall not apply to loss or damage resulting from such defects, design or specification, faulty material or faulty workmanship.”
Clause 10(d) reads as follows:
“This policy does not insure against errors in processing or manufacture of the insured’s product unless loss or damage not otherwise excluded ensues and then this policy shall cover for such ensuing loss or damage.”
The third exclusion in the global policy is contained in “Endorsement No. 1” and that reads as follows:
“The following provisions are hereby attached to and made part of this policy:
Seepage And/Or Pollution And/Or Contamination Exclusion; Debris, Removal and Cost of Cleanup Extension; Authorities Exclusion.
1. Seepage and/or pollution and/or contamination exclusionNotwithstanding any provisions of the policy to which this endorsement is attached, this policy does not ensure against loss, damage, costs or expenses in connection with any kind or description of seepage and/or pollution and/or contamination, direct or indirect, arising from any cause whatsoever.
Nevertheless if a peril not excluded from this policy arises directly or indirectly from seepage and/or pollution and/or contamination, any loss or damage insured under this policy arising directly from that peril, shall (subject to the terms, conditions and limitations of the policy) be covered.
However, if the insured’s property the subject of direct physical loss or damage for which this company has paid or agreed to pay, then this policy (subject to its terms and conditions and limitations) insures against direct physical loss or damage to the property insured hereunder caused by or resulting in seepage and/or pollution and/or contamination.”
The learned trial judge held that none of the above exclusion clauses applied and went on to hold that even if any of those exclusion clauses did apply the ensuing damage provisions in the “faulty workmanship” and “error in processing” exclusions, meant that the losses claimed or most of them were in fact covered under the policies.
Principles of interpretation
The interpretation of the local policy is governed by Irish law. The interpretation of the global policy is governed by the law of the Commonwealth of Massachusetts. I propose first to deal with the general principles of interpretation applicable under Irish law and I will comment later on whether and to what extent those principles apply equally in the law of Massachusetts.
In general “all risks” policies of insurance cover all perils unless they have been unambiguously and clearly excluded. In Rohan Construction Limited v. Insurance Corporation of Ireland Limited [1988] ILMR 373 at 377 Griffin J. in a judgment with which Finlay C.J. and Hederman J. concurred said the following:
“It is well settled that in construing the terms of a policy the cardinal rule is that the intention of the parties must prevail, but the intention is to be looked for on the face of the policy, including any documents incorporated therewith, in the words in which the parties have themselves chosen to express their meaning. The Court must not speculate as to their intention, apart from their words, but may, if necessary, interpret the words by reference to the surrounding circumstances. The whole of the policy must be looked at, and not merely a particular clause.”
As is pointed out in the written submissions of the respondent, Griffin J. goes on to expand on the meaning of “surrounding circumstances” and he refers with approval to a passage from the speech of Lord Wilberforce in Reardon Smith Line Ltd v. Yngvar Hansen-Tongen, [1976] 3 All ER 570 at 574/5:
“…When one speaks of the intention of the parties to the contract, one is speaking objectively – the parties cannot themselves give direct evidence of what their intention was – and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly, when one is speaking of the aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have had in mind in the situation of the parties … what the Court must do must be to place itself in thought in the same factual matrix as that in which the parties were”.
In modern times these principles have received further expansion from the House of Lords. Lord Hoffman in Investors Compensation Scheme v. West Bromwich Building Society [1998] 1 WLR 896 considered that quite a radical change had come about the result of which “subject to one important exception” was to assimilate the way in which such documents are interpreted by judges to the commonsense principles by which any serious utterance would be interpreted in ordinary life. He then set out the modern principles as he saw them and which I would accept.
“(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’ but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammar; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meaning of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must for whatever reason, have used the wrong words or syntax; see Mannai Investments Co. Ltd. V. Eagle Star Life Assurance Co. Ltd. [1997] AC 749.
(5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Anntaios Compania Naviera S.A. v. Salen Rederierna A.V. [1985] A.C. 191, 201:
‘If details semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense’.”
I am inclined to the view that applying those ordinary principles, the learned trial judge’s findings can be supported. But even if I was wrong about that, I have absolutely no doubt that those findings are correct having regard to the further principles which I am about to explain.
A fundamental principle which appears to be particularly relevant to this case is the principle of contra proferentem. Clark in the 4th edition of Contract Law in Ireland at p. 149 sets out the general principle as follows:
“If the exempting provision is ambiguous and capable of more than one interpretation then the courts will read the clause against the party seeking to rely on it.”
The application of the principle to insurance contracts is treated in the same work at p. 273. The author points out that two Irish cases provide clear guidance on the position to be adopted in the interpretation and construction of insurance contracts. The following passage from Rohan Construction Limited v. Insurance Corporation of Ireland Limited [1986] I.L.R.M. 419 from a High Court judgment of Keane J. (as he then was). The passage reads as follows:
“It is clear that policies of insurance, such as those under consideration in the present case, are to be construed like other written instruments. In the present case, the primary task of the court is to ascertain their meaning by adopting the ordinary rules of construction. It is also clear that, if there is any ambiguity in the language used, it is to be construed more strongly against the party who prepared it, i.e. in most cases against the insurer. It is also clear that the words used must not be construed with extreme literalism, but with reasonable latitude, keeping always in view the principal object of the contract of insurance.”
In Cheshire Fifoot and Furmston’s Law of Contract 13th edition the rule is defined as meaning that if there is any doubt as to the meaning and scope of the excluding or limiting term, the ambiguity should be resolved against the party who inserted it and seeks to rely on it.
The second Irish case referred to by Clark is In re Sweeney and Kennedy’s Arbitration [1950] I.R. 85 where Kingsmill Moore J. in his judgment in the High Court on a special case stated on a question of law arising from the award of an arbitrator said at pp 98-99 of the report the following:
“But, even if I am wrong in my conclusion that the interpretation is reasonably free from doubt, the case must be decided against the underwriters if the words are ambiguous. The wording of the proposal form and the policy was chosen by the underwriters who knew, or must be deemed to have known, what matters were material to the risk and what information they desire to obtain. They were at liberty to adopt any phraseology which they desired. They could have provided clearly and expressly that no driver should be employed who was under twenty one years of age or had less than twelve months experience, and they could have done this by means of a special condition or by an addition to the final proviso under the heading ‘description of drivers’ in the policy. Indeed they could have secured their object (if it was their object) with perfect clarity in half a dozen ways. If, then, they choose to adopt ambiguous words it seems to be good sense, as well as established law, that those words should be interpreted in the sense which is adverse to the persons who chose and introduced them: Anderson v. Fitzgerald (1), per Lord St. Leonards, at p. 507; Fowkes v. Manchester and London Life Assurance and Loan Association (2), per Cockburn CJ at p. 925 and per Blackburn J., at p. 929; Fitton v. Accidental Death Insurance Co. (3), per Willes J., at p. 135.
Assuming, then, that the interpretation is not so clear as I think it is, and that Mr. Doyle’s interpretation of the words may be as feasible as Mr. Kenny’s, I must still decide against the underwriters who chose words raising such ambiguity. I would like to associate myself with the opinion of Lord Greene M.R. in Woolfall & Rimmer, Ltd. v. Moyle (4), at p. 73, where he said:- ‘…if underwriters wish to limit by some qualification a risk which, prima facie, they are undertaking in plain terms, they should make it perfectly clear what that qualification is. They should, with the aid of competent advice, make up their minds as to the qualifications they wish to impose and should express their intention in language appropriate for achieving the result desired. There is no justification for underwriters, who are carrying on a widespread business and making use of printed forms either failing to make up their minds what they mean, or, if they have made up their minds what they mean, failing to express it in suitable language. Any competent draughtsman could carry out the intention which [counsel] imputes to this document, and, if that was really intended, it ought to have been done’.”
Kingsmill Moore J. went on to observe that what Lord Greene had to say was “but the latest expression of a sentiment which judge after judge has uttered for nearly a century” and he goes on to cite other passages which indicate that an insurance policy ought to be framed in such a way that it can be clearly understood. The principle of contra proferentem need only be resorted to of course if there is an ambiguity. I will be considering that question in due course. The second important general principle in relation to exclusions is that the onus is on the insurer to establish the application of the exclusion or exemption. Counsel for the respondents cite in their written submissions to this court a passage from the judgment of Hanna J. in General Omnibus Company Limited v. London General Insurance Company Limited [1936] I.R. 596 which is in the following terms.
“The first defence depends upon the interpretation and construction of the exclusions or exceptions as stated in exemption (e). The policy starts by giving an indemnity in general terms and then imposing exceptions. The law is that the insurance company must bring their case clearly and unambiguously within the exception under which they claim benefit, and, if there is any ambiguity, it must be given against them on the principle of contra proferentes.”
On appeal the Supreme Court took a different view on the interpretation of the policy but it was not suggested that the general principle stated by Hanna J. was incorrect. In the same written submissions there is a passage from the standard work Ivamy General Principles of Insurance Law 6th ed. 1993 which is worth quoting and it reads as follows:
“Since exceptions are inserted in the policy mainly for the purpose of exempting the insurers from liability for a loss which, but for the exception, would be covered by the policy, they are construed against the insurers with the utmost strictness. It is the duty of the insurers to except their liability in clear and unambiguous terms.”
Errors in Processing or Manufacturing
I turn now to the actual exclusion clauses in these policies. Starting with the local policy, the appellants rely in the first instance on the exclusion in relation to errors in processing or manufacturing resulting in damaged property being worked upon. They argue, indeed they suggest that it is indisputable, that when the contaminated acid was used to clean the silicon wafers this constituted an error in process or manufacture. In this regard they relied particularly on the evidence of a Mr. Zuck called on behalf of the appellants who, when asked what the effect of the particles from the filter membrane would have had on the HCL replied:
“The HCL itself had the corrosive for the chemical attack on the membrane material. The effect then would be that we would have carbon debris of different sizes flowing to the wafer. It probably had very little effect as to changing its Ph or changing its HCL nature. Where it had the effect was when it was called upon to clean off a wafer, it did the opposite and made the wafer more dirty. In other words the HCL which was designed to clean the wafers in fact damaged them and made them unusable.”
This, of course, begs the questions of what is an error and when was it made. I find myself in complete agreement with the learned trial judge that there was one single error which caused the problems and that was the error referred to above at the time of the maintenance work. The fault in manufacture and processing was then automatic and was not in itself an “error” rather, it was the consequence of the one and only error. I would also agree with the trial judge that there was no manufacturing or processing being carried on at the time of the maintenance error. In my opinion, the position becomes quite clear if one asks oneself a few simple questions. Was there manufacturing going on in the August Bank Holiday of 1999? Answer: No, the machines were closed down for maintenance. Did something go wrong during the maintenance operation? Answer: Yes. Was that the sole cause of everything that went wrong afterwards? Answer: Yes. I cannot see that the evidence of Mr. Zuck makes the slightest difference to that obvious interpretation.
However, I must now deal with a different argument put forward by the appellants. They say that the actual maintenance is part of the processing or manufacturing. In making this argument they particularly rely on the evidence of Mr. Tony O’Keeffe, consulting engineer. Mr. O’Keeffe made it clear in his evidence that the maintenance work was essential and that the manufacturing process could not be done without it. Running right through the submissions both in writing and orally of the appellants is their insistence on the necessity of the maintenance arrangements but in my view, and clearly in the view of the trial judge that does not have the effect of rendering the maintenance part of the processing or manufacturing. They are two different activities (or three different activities if one accepts the submission by the appellants that processing is somewhat wider than manufacturing). The man who made the unfortunate error when replacing the filters was a Mr. Gaffrey who was a “facilities technician” with the appellants. He was part of a group of five employees. He had nothing to do with and no role to play in the day to day processing and manufacturing. There was nothing particularly unique about the necessity for the maintenance twice a year in relation to this manufacture and process but maintenance it remained. It would seem to me that as a matter of plain English it cannot be regarded as part of the actual manufacturing or processing. Even if I were wrong about this, at the very least, there is an ambiguity and for the reasons which I have already given, that ambiguity would have to be resolved against the appellants.
Faulty workmanship
I turn now to the “faulty workmanship” exclusion. The trial judge held that in the context of the policies the expression “faulty workmanship” applied only to the manufacturing process and not to a fault in maintenance work and that, accordingly, the loss resulting from Mr. Gaffrey’s error was not excluded. On the meaning of the expression “faulty workmanship” the learned trial judge referred to cases decided in the courts of England, Australia, British Colombia and the United States of America and went on to observe that the term does not appear to have been considered by an Irish court. The trial judge then said the following at p. 40 of his unreported judgment:
“Having touched upon a number of the authorities which were relied upon I must not lose sight of the essential purpose of my attempting to construe these policies and their exclusion clauses namely to try and ascertain what the mind of the parties was when they were negotiated. In that regard I am entitled to take into account the general background which existed.
I have come to the conclusion that in the context in which these policies were negotiated and given the state of knowledge in particular of the defendants both as to the operations which were in place at the plaintiffs’ premises with its biannual close down for maintenance and the existence of a species of exclusion clause which dealt with precisely that situation the defendants did not exclude liability for the undoubtedly negligent act of Mr. Gaffrey in the course of carrying out the maintenance work.”
The trial judge was entitled to arrive at that view, but I think it appropriate to comment upon the arguments to the contrary put forward by the appellants. It is argued on behalf of the appellants that neither the clause in the local policy or its equivalent in the global policy suggest that only faulty workmanship during the course of manufacturing is excluded. This would seem to me to beg the question of what is really meant by “faulty workmanship”. It is clearly the opposite to good workmanship. If a furniture maker makes a chest of drawers and the drawers subsequently work well and handles do not fall off it would be perfectly normal English to observe that he applied “good workmanship”. If, on the other hand, a house owner has a regular contract for maintenance of his central heating system and that is done with efficiency in the sense that it does not break down, I do not think that one would ever use the expression “good workmanship”. Essentially, that expression relates to the making of something or the building of something rather than the maintaining or repairing of something. But that is simply a layman’s approach though not an irrelevant approach. The learned trial judge quite rightly sought assistance from case law.
The second complaint of the appellants is that the learned trial judge had regard to evidence that insurance companies had available to them standard exclusion clauses relating to maintenance work and the trial judge felt entitled to draw inferences from the absence of such a clause. In my opinion, the learned trial judge was correct on both counts.
In relation to the meaning of “faulty workmanship”, the learned High Court judge first referred to the English High Court case of Kier Construction Limited v. Royal Insurance (U.K.) Limited [1992] 30 Con LR 45 where Judge Bowsher QC sitting as an official referee said the following.
“Workmanship is the skill required to convert a designed plan and specification into an object: in modern engineering projects it is usually the skill of a team rather than the skill solely of an individual.”
The trial judge next referred to the Australian case of Queensland Railways v. Manufacturers Mutual Insurance [1969] 1 Lloyds Rep. 214 where Windeyer J. in the High Court of Australia said the following:
“Faulty workmanship I take to be a reference to the manner in which something was done, to fault on the part of the workman or workmen”.
But Kelly J. points out that in making that observation the learned judge was drawing a distinction between faulty workmanship and faulty design.
Thirdly, the learned High Court judge referred to All State Insurance v. Smith [1999] fdd 447 a decision of the United States Court of Appeals (Ninth Circuit). The court in that case was concerned with the exclusion for faulty workmanship in an all risk policy. The learned High Court judge, however, accepted the expert evidence of a Massachusetts lawyer that that case having been decided in California did not represent good law and certainly, did not represent the law of the Commonwealth of Massachusetts for the purpose of the global policy.
Fourthly, the judge referred to a decision of the Court of Appeals of Indiana in Schultz v. Erie Insurance Group 754 NE 2 d 971. The court in considering what was meant by “faulty workmanship” in an insurance policy reiterated the well known doctrine that courts construe ambiguous terms in an insurance policy in favour of the insured where there is an exclusion clause involved.
The learned trial judge’s analysis of these cases has been criticised in the written submissions of the appellants. However, it does not seem to me that on any interpretation of them they particularly assist on the key question of whether “faulty workmanship” in the policies the subject of this appeal included errors in maintenance. For the reasons which I have already indicated, I believe that they did not and that was clearly the view of the learned High Court judge independently of any of the case law which he cited.
As I have already indicated I accept the entitlement of the learned trial judge to have regard to the evidence that in the area of the insurance market in which these policies would have issued, the companies had available to them standard exclusion clauses relating to maintenance work. In particular, the judge was entitled to draw inferences from the absence of such a clause. The appellants criticise him for doing this on the basis that the judge was required by law to ascertain the parties’ intention by reference to the words used by the parties. In this context and in the written submissions the appellants referred to Igote v. Badsey [2001] I.R. 511 in the following passage from the judgment of Murphy J.
“At the end of the day the rule as to construction and the context in which it is to be achieved is most succinctly expressed in the judgment of Keane J. (as he then was) in Kramer v. Arnold [1997] 3 I.R. 43 at p. 55 when he said:-
‘In this case, as in any case where the parties are in disagreement as to what a particular provision of a contract means, the task of the court is to decide what the intention of the parties was, having regard to the language used in the contract itself and the surrounding circumstances’.”
The learned trial judge in having regard to the existence of certain standard clauses which were not in these policies was fully complying with the principles there laid down by Keane J. He was merely carrying out the task of interpretation in the light of “the surrounding circumstances”. To put it another way he regarded those matters as “the relevant factual matrix”. It is worthwhile at this point citing the trial judge’s own explanation of what he did:
“Having touched upon a number of the authorities which were relied upon I must not lose sight of the essential purpose of my attempting to construe these policies and their exclusion clauses namely to try and ascertain what the mind of the parties was when they were negotiated. In that regard I am entitled to take into account the general background which existed.
I have come to the conclusion that the context in which these policies were negotiated and given the state of knowledge in particular of the defendants both as to the operations which were in place at the plaintiffs’ premises with its biannual close down for maintenance and the existence of a species of exclusion clause which dealt with precisely that situation, the defendants did not exclude liability for the undoubtedly negligent act of Mr. Gaffrey in the course of carrying out the maintenance work.
Had they wished to exclude liability for maintenance it was, on the state of knowledge available to them, perfectly open to them to do so. In my view in the context of these policies of insurance the term ‘faulty workmanship’ did not exclude liability for defective work which was not done in the manufacturing process…”.
Contamination/pollution exclusion
Even though in this instance the wordings of the two exclusions coming broadly under this heading in the local and global policies respectively is rather different, the same fundamental question of interpretation must first be asked. Were these clauses intended to exclude liability for environmental contamination or pollution external to the actual manufacturing process. It is of limited assistance only to have recourse to case law on this question because every policy considered by the courts has had different wording and has not necessarily the same purpose. The case law, however, can be helpful and the learned trial judge made good use of some American authorities. His own overall view is summed up in the following passage at p. 50 of his unreported judgment:
“Even apart from these American authorities it seems to me on a fair view of the exclusion, it was directed towards a situation where a toxic substance would escape from its place of containment into the environment giving rise to damage as a result. I do not think that on a fair reading of it it can be said to have any application to the present situation where there was no escape or release or discharge of the hydrochloric acid. Neither did the hydrochloric acid go anywhere where it ought not to have been and it certainly did not pollute or contaminate the environment.”
The learned trial judge found particularly helpful the decision of the Supreme Judicial Court of Massachusetts in Western Alliance Insurance Company v. Gill 426 Mass. 115. Delivering the judgment of that court, Greaney J. held that a somewhat similar exclusion was intended to deal with “environmental pollution” and not to exclude for “ordinary business activities”. The judge went on to say the following:
“… the terms used in the pollution exclusion, such as ‘discharge’, ‘dispersal’, ‘release’, and ‘escape’, are terms of art in environmental law which generally are used with reference to damage or injury caused by improper disposal or contaminant of hazardous waste … The exclusion should not reflexedly be applied to accidents arising during the course of normal business activities simply because they involve a ‘discharge, dispersal, release or escape’ of an ‘irritant or contaminant’… the history of the pollution exclusion indicates that the provision was drafted to avoid enormous expense of environmental litigation.”
The learned trial judge goes on to point out that this view of the Supreme Judicial Court of Massachusetts was subsequently approved by the United States Court of Appeals for the Sixth Circuit in Meridian Mutual Insurance Company v. Kelman 197F 3d 1178. The relevant passage in the judgment of that court reads as follows:
“State and Federal Courts are split on the issue of whether an insurance policy’s total pollution exclusion bars coverage for all injuries caused by contaminants, or whether the exclusion applies only to injuries caused by traditional environmental pollution. Many courts including the Sixth Circuit, have held that a pollution exclusion clause in a CGL insurance policy applies only to injuries caused by traditional environmental pollution…
The Seventh Circuit has explained the reasoning behind limiting the application of pollution exclusion clauses only to injuries caused by traditional environmental pollution as follows:
‘Without some limiting principle, the pollution exclusion clause would extend far beyond its intended scope, and lead to absurd results. To take but two simple examples, reading the clause broadly would bar coverage for bodily injuries suffered by one who slips and falls on the split contents of a bottle of Drano, and for bodily injury caused by an allergic reaction to chlorine in the public pool. Although Drano and chlorine are both irritants or contaminants that cause, under certain conditions, bodily injury or property damage, one would not ordinarily characterise these events as pollution. To redress this problem courts have taken a common sense approach when determining the scope of pollution exclusion clauses … A reasonable policy holder, these courts apparently believed, would not characterise such routine instance as pollution’.”
I would repeat that without the assistance of any of this case law (and it is very helpful) I would take the view that on a natural interpretation of the respective clauses in the local policy and the global policy only environmental damage was intended to be excluded. However, in relation to the global policy, I would particularly have regard to the cases cited given that the law of the Commonwealth of Massachusetts applies.
Massachusetts Law
The views which I have expressed in relation to the exclusions in the local policy would seem to apply equally to the global policy. The learned trial judge seems to have found and, in my view, on the evidence of the legal experts was entitled to find that there was no material difference between the general principles of insurance law in Massachusetts and the general principles applicable in this jurisdiction. In the written submissions of the appellants before this court there is an attempt to rubbish the qualifications of the legal expert in relation to Massachusetts law called on behalf of the respondents and there is also a criticism that the learned trial judge, to some extent at least, interpreted the American case law himself and decided the issues arising on the global policy based on his own opinion rather than the opinion of Massachusetts legal experts. Both of these criticisms are ill-founded.
The legal expert called on behalf of the respondent was a Mr. Dolan, a former District Court judge. There is nothing in the tenor of his evidence to support the view that he was not competent to give it. Nor is that suggestion in any way made by Professor Baker, the expert called on behalf of the appellant. Reading Mr. Baker’s evidence, one is left with the impression that although he did not agree with Mr. Dolan on everything he regarded him with equal respect. The main if not the only area of disagreement of any importance between Mr. Baker and Mr. Dolan was that Mr. Baker took the view that policies are differently interpreted depending on whether it is what he called “the consumer mass market type of insurance” or whether it was, as it were, a custom made insurance policy with a big undertaking. Mr. Dolan did not, in the main, accept the validity of this distinction. Even in the evidence of Mr. Baker the distinction was not firmly established. To a large extent Mr. Baker was speculating on how the Supreme Court in Massachusetts would react in given situations. The learned trial judge was perfectly entitled to prefer the view of Mr. Dolan on this matter to the view of Mr. Baker.
In relation to the criticism of the trial judge for applying his own mind to Massachusetts law there is an interesting and relevant piece of dialogue between Mr. Gallagher, S.C., counsel for the appellant and Mr. Baker. It reads as follows:
“Q. Mr. Gallagher: Are there any other matters, apart from those cases and the principles you have decided that would inform the Massachusetts courts approach to the error in processing clause?
A. Let me look at my report here and see if I
noted anything else. Other than what I
have mentioned given that they are the
paucity of authority it is really going to
be up to Your Lordship to look at what
the words say and decide how they apply
to the facts in the case.”
The learned trial judge can hardly be criticised if he did just that.
It seems clear from the evidence of Professor Baker that before coming to Ireland to give evidence he had not applied his mind at all to the important issue of there being a standard type of exclusion in respect of maintenance and to the fact that that exclusion was not included in the global policy. In cross-examination of Professor Baker, Mr. Denis McDonald, S.C., counsel for the respondent, referred the professor to a leading case known as the Palmer case decided in the Supreme Court of Massachusetts. Professor Baker conceded that that that case which was quite an old authority laid down the principle that ambiguities are to be construed against the insurer and exclusions from coverage are to be strictly construed. Through the same witness, Mr. McDonald established that the reason for the principle was that it promoted the policy’s basic purpose of indemnity and, indeed, that that had been stated in the case of Schultz v. Erie Insurance Group the case decided by the Court of Appeal of Indiana. The purpose of this line of cross-examination was to destroy the credibility of Professor Baker’s claim to distinction between general consumer policies and custom made policies.
Mr. Dolan, in his evidence, expressly referred to the Western Alliance case and described it as “the controlling case here”. He said that Greaney J. had there interpreted the pollution provision as applying to environmental issues matters that would pollute or contaminate damage soil or water supply. He said that that continued to be “the binding law in Massachusetts but the reference in that policy in Western Alliance to pollution referred only to environmental catastrophe, hazardous waste”. He referred to some other case law also in support of the same proposition. On foot of the evidence of Mr. Dolan and Professor Baker, the learned trial judge was entitled to take the view which he did in relation to the interpretation of the global policy on both the error in processing and the faulty workmanship exclusion. Even if there was an ambiguity, that ambiguity under the law of the Commonwealth of Massachusetts would have had to be resolved in favour of the insured.
Since I take the view that the learned High Court judge was correct in his interpretation of all six exclusion clauses between the two policies, it is not necessary for me to consider the rather more difficult questions relating to the meaning of “ensuing loss”. If an exclusion does not apply then the question of whether something is an exception to the exclusion does not arise.
At this point, I want to make it clear that I am not in any way disregarding the evidence of Mr. Bergin and others as to the broad factual matrix that all risks policies are not intended to guarantee a manufacturer’s product or to cover what he and other witnesses called the “efficacy risks”. It would be extraordinary if a manufacturer who used say, the wrong men or the wrong machines to make his product with the result that the product was defective could turn to his insurance company on foot of an all risk policy. No doubt conceptually there could be such a policy but it would be highly improbable and, as I understand the evidence, neither appellant nor respondent were at any stage suggesting that these policies would have that effect. But as found by the learned High Court judge (and in my view correctly found) this was not an error in processing or manufacturing nor could it be described as faulty workmanship. Rather it was an error in a quite independent activity, that is to say, maintenance. I would regard as wholly fallacious the submission that because maintenance was essential for the processing and manufacturing it somehow or other became part of the processing or manufacturing. That seems to me to be a complete non-sequitur and obviously this was also the view of the learned High Court judge.
For all these reasons, I would dismiss the appeal.
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