The "efficacy exclusion" on UK Product Liability policies
Generally UK product liability policies exclude cover arising from the insured’s product failing to perform its intended function. Back in 2008 the Commercial Court ruled how one such efficacy exclusion should be applied in the case of John Reilly v National Insurance & Guarantee Corporation Limited.
John Reilly was an engineer who fitted a fire extinguishing system to a customer’s printing factory. When a fire broke out, part of the equipment failed to operate, allowing the fire to spread and damage the premises.
John Reilly was duly sued by his customer. The customer ended up in Commercial Court, dealing with Reilly’s insurer, National Insurance & Guarantee Corporation Limited. But whilst Reilly’s policy had included product liability cover, there was an exclusion for claims arising out of “...the failure of any fire or intruder alarm switch gear control panel or machinery to perform its intended function.”
Presiding over the case, Mr Justice Barton found that the policy covered only the malfunctioning of the system which caused the damage. That is to say, the policy would provide cover if the fire system itself caused a fire or malfunctioned in some way that caused personal injury. However, Justice Barton decided the policy did not provide cover where the system failed to perform its intended function (i.e. failing to extinguish a fire). Consequently the claim was denied.
The Commercial Court’s decision is a reminder of the scope of product liability cover. Product liability policies are intended to cover liabilities to third parties for personal injury or property damage, but not contractual matters such as warranties or promises that a product will perform as intended. The lesson to be learnt is that where a firm’s biggest risk is product non performance, it is always advisable to check that a policy includes efficacy cover.