Analog Devices B.v v Zurich Insurance Company

• Jurisdiction: Ireland
• Court: Supreme Court
• Judge: Mr. Justice Geoghegan
• Judgment Date: 16 March 2005
• Neutral Citation: [2005] IESC 12
• Date: 16 March 2005
• Docket Number: [S.C.

ANALOG DEVICES BV & ORS v ZURICH INSURANCE CO & ANOR

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

[2005] IESC 12

Denham J.

Hardiman J.

Geoghegan J.

No. 41/03

THE SUPREME COURT

INSURANCE

Contract

Exclusion clause - Interpretation - Factual matrix - All risks policy - Contra proferentum rule "Faulty workmanship" - "Error" - Contamination and pollution - Whether liability excluded in respect of losses arising from negligent maintenance - Whether policies covered ensuing losses - Plaintiff granted relief - (41/2003 - Supreme Court - 16/3/2005) - [2005] 1 IR 274; [2005] IESC 12 - [2005] 2 ILRM 131 - Analog Devices BV v Zurich Insurance Co.

WORDS AND PHRASES

Error"Error" - "Faulty workmanship" - Insurance - Exclusion clauses - (41/2003 - Supreme Court - 16/3/2005) [2005] IESC 12- Analog Devices BV v Zurich Insurance Co.

The plaintiffs suffered financial losses caused by contamination of silicon wafers as a result of a wrong filter being replaced during maintenance works in their production plant. They sought to be indemnified by the defendants for that loss. The defendants claimed that, by virtue of exclusion clauses in the relevant policies, they were not obliged to indemnify the plaintiffs for such losses as they had been caused by faulty workmanship and/or an error in processing or manufacturing and/or release of contaminants. The plaintiffs contended that the losses arose from a maintenance error and were thus covered by the policies in place. In the High Court, Mr. Justice Kelly held that the essential purpose of construing the policies was to ascertain the parties intention at the time they were negotiated. The policies in suit contained no exclusion clauses in respect of maintenance and, as the risks involved in processing were different from those which occur during maintenance it followed that liability had not been excluded under the heading of faulty workmanship. The defendants were liable pursuant to the policies to indemnify the plaintiffs. The defendants appealed to the Supreme Court.

Held by the Supreme Court (Geoghegan J delivering judgment, Denham J and Hardiman J agreeing ) in dismissing the appeal. All risk policies covered all perils unless they have been unambiguously and clearly excluded. The fault in manufacture and processing was the consequence of the maintenance error. The maintenance error could not be regarded as part of the manufacturing/processing and even if this was not so there was at the very least an ambiguity which would have to be resolved against the appellants. The trial judge was entitled to have regard to the absence of an exclusion clause in relation to maintenance. The trial judge had been correct in his interpretation of all the relevant exclusion clauses.

Reporter: R.F.

ROHAN CONSTRUCTION v ICI 1988 ILRM 373

REARDON SMITH LYON v YNGVAR HANSEL-TANGEN 1976 3 AER 570

INVESTORS COMPENSATION SCHEME LTD v WEST BROMWICH BUILDING SOCIETY 1998 1 WLR 896 1998 1 AER 98

MANNAI INVESTMENTS CO LTD v EAGLE STAR LIFE ASSURANCE CO LTD 1997 AC 749

ANNTAOIS COMPANIA NAVIERA SA v SALEN REDERIERNA AV 1985 AC 191

CLARK CONTRACT LAW IN IRELAND 4ED 149

ROHAN CONSTRUCTION LTD v INSURANCE CORPORATION OF IRELAND LTD 1986 ILRM 419

CHESHIRE & FIFOOT LAW OF CONTRACT 13ED

SWEENEY v KENNEDY (ARBITRATION) 1950 IR 85

GENERAL OMNIBUS CO LTD v LONDON GENERAL INSURANCE CO LTD 1936 IR 596

IVAMY GENERAL PRINCIPLES OF INSURANCE LAW 6ED

KIER CONSTRUCTION LTD v ROYAL INSURANCE (UK) LTD & ORS 1992 30 CON LR 45

QUEENSLAND RAILWAYS v MANUFACTURERS MUTUAL INSURANCE 1969 1 LR 214

ALL STATE INSURANCE v SMITH 1999 F 2D 447

SCHULTZ v ERIE INSURANCE GROUP 2001 754 NE 2D 971

WESTERN ALLIANCE INSURANCE COMPANY v GILL 426 MASS 115

MERIDIAN MUTUAL INSURANCE COMPANY v KELMAN 197 F 3D 1178

PALMER v PAWTUCKET MUTUAL INSURANCE COMPANY 352 MASS 304 306 225 NE 2D 331 1967

1 JUDGMENT of Mr. Justice Geoghegan delivered the 16th day of March 2005

Introductory

2 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

3 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.

4 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."

5 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.

6 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

7 The text of the three exclusions in the local policy reads as follows:

"(F) Perils excluded"

8 This policy does not ensure against loss or damage caused by or resulting from:

9 (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;

10 (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.

11 (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.

12 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."

13 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."

14 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."

15 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 exclusion

Notwithstanding any provisions of the policy to which this...