Courting the Risk & the Refusal of Indemnity by Roger Walter and Melanie Cox | August 2007 Area of Expertise | General Insurance
In Brescia Furniture Pty Limited v QBE Insurance (Australia) Limited & Mercantile Mutual Insurance (Australia) Limited [2007] NSWSC 598 (unreported decision of Hammerschlag J dated 6 July 2007) the plaintiff, Brescia, having been refused indemnity under an industrial special risk policy providing cover against property damage and consequential loss of profits, successfully sued for damages for breach of the insurance contract. Of particular interest was the reasonable precautions defence raised by the insurers, which alleged that the insured had courted the risk and was therefore not entitled to indemnity. The case illustrates the degree of difficulty insurers will encounter in seeking to rely on such a defence, given that it operates on the subjective knowledge and intentions of the insured, rather than on more objective considerations. Brescia’s furniture showroom and warehouse was destroyed by fire on 11 March 2005. The insurers refused indemnity under an Industrial Special Risk Industry Policy on the following three bases: 1.
Brescia’s failure to take reasonable precautions as required by the Policy;
2.
on the basis of s56(1) of the Insurance Contracts Act 1984 (Cth) for an allegedly fraudulent stock claim; and
3.
on the basis of s56(1) of the Insurance Contracts Act 1984 (Cth) for an allegedly fraudulent business interruption claim.
Each of these defences failed. Issues were also raised in connection with the amount of damages, such as whether damages for consequential loss were payable as a result of the refusal to indemnify, reinstatement value as against indemnity value and accounting issues concerning the amount to be paid in respect of business interruption. Ultimately a verdict of $17,305,275.66 was entered in favour of Brescia in respect of its claim for damages. The damages awarded for business interruption extended beyond the 12-month Policy indemnity period because of the finding that damages for consequential loss were payable. The loss of trading profits suffered by Brescia as a result of the delay in reopening the building was held to have been caused by the insurers’ breach. This fact was held not to have been altered by the fact that Brescia could have rebuilt from its own resources but elected not to. Had Brescia unreasonably chosen not to, that fact may have grounded a contention of failure to mitigate, but no such contention was put and the Brescia decision not to rebuild was held not to be unreasonable anyway. In the remainder of this article we deal with the reasonable precautions defence and the facts relevant to it.
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Facts The building was acquired by Brescia in 1988. It had three levels: a basement level used for bulk storage and furniture assembly; a “ground floor” showroom; and a “first floor”, which was also used for storage of furniture, as was an additional loft cavity on this level, which was located under a sloping roof that was first erected in 1997. Use of this new roof cavity for storage required Council consent but this was not obtained. French polishing was done in a spray booth in the basement and for about sixteen years there was no filtration system to trap flammable materials emitted. Unfiltered flammable residues accumulated in the booth’s exhaust ducting, which initially consisted of a steel exhaust duct leading from a grill installed in an external wall of the booth. The duct passed through the wall of the building and ran vertically up its side. In October 2003 Brescia arranged to relocate the ducting to make it run under the roof and inside the first floor level. Council officers were aware of this work, but no development consent was obtained for it, nor was Brescia informed that such consent was required. Then in about September 2004 Brescia built a new spray booth near the old one, with ducting running completely inside the building up to the roof and connecting to the existing outlet and exhaust fan. The old ducting was being removed at the time of the fire. Council permission was required but not obtained in respect of the re-routing of the old ducting, the installation of the new booth, the installation of ducting for the new booth and the installation of the ducting that ultimately joined the two installations. On 11 March 2005 a Brescia employee was asked to brick up the redundant exhaust hole in the old spray booth in order to stop fumes passing into the decommissioned ducting and to prevent access to the building through the hole in the wall. The employee, who found that the grill over the hole had been attached to the wall by way of metal hinges that had been welded so that the grill could not be readily removed, decided with a Brescia company officer to use an angle grinder to cut the hinges. In applying the grinder to the grill, the employee generated sparks that ignited the fire.
The Reasonable Precautions Defence The defendant insurers alleged that the insured failed to take reasonable precautions to prevent the damage to the insured property and that under the Policy this was in breach of a condition precedent to the insurers’ liability to indemnify, with the result that the insured was not entitled to indemnity. In determining this issue the following three fundamental principles were applied by the Court: 1.
That determining whether the onus of proof lies with the insurer or the insured depends on the proper construction of the Policy. The Court held that this question of onus did not impact on this case but recognised that where a breach of a policy clause must be established the onus of proof, on ordinary principles, falls on the person asserting breach (here the insurers).
2.
That because the commercial purpose of this type of policy is to protect against negligence, the test of existence of risk is determined by the perception of the insured. His Honour held that the test is whether the insured perceived and deliberately courted the risk. The enquiry is in relation to the insured’s perception of risk whether foolishly held or not: Legal & General Insurance Australia Limited v Eather (1986) 6 NSWLR 390. His Honour held that the exercise required examination of the evidence of the insured’s
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knowledge and conduct, and the consideration of any inferences to be drawn from that evidence so as to determine whether the insured recognised a danger and deliberately courted it by intentional and considered action or inaction: Caff v McHenland Nominees Pty Limited (t/a Confoil Containers) (1984) 3 ANZ Ins Cas 60-575; Albion Insurance Company Limited v Body Corporate Strata Plan No. 4303 [1983] 2 VR. 3.
That in order to attribute a state of mind to a company the collective states of mind of officers of the company relevantly connected with it are treated as being the state of mind of the company.
The matters raised by the defendant insurers against the insured in relation to the courting of risk were as follows (these are referred to below as “the risks”): a)
using the roof level for storage having failed to obtain Council consent and knowing that Council would not have permitted it without significant and expensive modification;
b)
using such of the spray booth system as was constructed without Council consent knowing that Council would not have permitted it without significant and expensive modification;
c)
using the old booth until 2004 without filters and with no adequate system of cleaning or maintaining the booths and ducts so as to reduce the risk of fire;
d)
using the building (particularly the roof void, but also the spray booths) without adequate fire protection;
e)
using the booths and ducts connected internally after January 2005;
f)
failing to disconnect and/or cap the old duct; and
g)
using the angle grinder that caused the fire.
The following issues were held to be the matters requiring determination: 1.
The insured’s perception of fire risk generally in relation to the risks and whether the risks as a whole reflect a systemic disregard for fire safety.
2.
Whether the insured knew the risks and recognised or perceived the risk posed by each of them.
3.
Whether the insured deliberately courted that risk by intentional considered action or inaction.
As to the alleged systematic disregard for safety, the Court accepted that the insured was unaware of the need to obtain Council consent to use the roof level or for various works undertaken in connection with the spray booths and ducting. The Court also accepted that the insured did not consider there was any factor contributing to the risk of fire to the building that had not reasonably and sufficiently been addressed by precautions taken, and that the creation and use of the roof cavity had not increased the risk of fire to the building. In drawing these and the other conclusions as to the insured’s perception, his Honour noted the statement of Cole J in Plasteel Windows Australia Pty Limited v Sun Alliance Insurance Limited (1989) 5 ANZ Ins Cas 60-918 that a court may find that an asserted position of an insured that subjectively it did not perceive a risk should be rejected and that the court may be influenced in such rejection by a circumstance that a reasonable person could not have held such a view.
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As to the particular risks raised, these were dealt with by his Honour as follows: Using furniture chemical spray booths without filters and with no adequate system of cleaning or maintaining the booths and ducts. The evidence established that there was no filter for a spray booth until the Council required its installation and that the insured was aware of this. However, the Court held that the evidence neither established that the booths were not adequately cleaned or maintained, nor that the insured perceived any fire risk connected with the use of the old booth while it was without filters. Hence it was held that the insured did not consciously court any fire risk with respect to the use of the spray booth generally. Using the building (particularly the roof level, but also the spray booths) without adequate fire protection. The evidence established that the insured’s fire control steps did not comply, as at the date of the fire, with the requirements of the Building Code of Australia in that the building required and did not have sprinklers and that the fire protection measures in the roof were inadequate. However, the Court held that the insured’s behaviour was not that of a person/entity deliberately courting a perceived risk, but rather, consistent with a lack of perception of any such risk. Using the spray booths and ducts connected internally without Council consent. The additional ductwork done by the insured required further Council consent and none was obtained. However, the Court found that the new booth with new ducting, filters and extraction machinery represented a decrease in fire risk rather than an increase. Thus the evidence did not establish any perception of any fire risk on the part of the insured. Failing to disconnect and/or cap the duct to the spray booths. The Court accepted the evidence of the insured that it did not perceive that the risk of fire to the premises was increased in any way by its various works in connection with the ducting (including the decommissioning of the old ducting) or by the creation of the roof level cavity. The Court found that the insured was unaware of the state of the old duct in the roof level void and did not perceive any fire risk with respect to it. The insured accordingly could not deliberately have courted, and accordingly did not court, any such risk. Using an angle grinder in the vicinity of the spray booths. The defendants’ submissions concerning the use of the angle grinder were that the insured knew that work conducted on the morning of the fire generated flammable residues and that a grinder would emit sparks when it struck metal and that it deliberately courted danger when it gave instructions in relation to the work. The Court accepted that it did not occur to the insured that there was any risk of a fire occurring as a result of the work to remove the grill. While the insured knew that potentially dangerous residues were generated by use of the spray booth, it denied that it knew that the use of the angle grinder was likely to ignite the residues. Hence the Court held that the insured did not appreciate the risk associated with the use of the angle grinder and that at no time did the insured deliberately court any risk.
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Implications In order to establish that an insured has failed to take reasonable precautions to prevent damage or injury the subject of a claim, an insurer has the rather difficult task of proving that the insured not only perceived the risk but that they also deliberately adopted a course of action or inaction which they realised exposed them to the risk of someone being injured or of damage occurring – this is the law as applied in this case and first enunciated in Australia by the Victorian Court of Appeal in Albion Insurance Company Limited v Body Corporate Strata Plan No. 4303 [1983] 2 VR. In New Zealand there have been statements expressing preference for an objective test (of recklessness or gross irresponsibility), a test that has found favour in Canada and the USA. Such a test removes the emphasis from the subjective factors of knowledge and intention but the law in New South Wales as laid down by the Court of Appeal in 1986 in Legal & General Insurance Australia Limited v Eather requires determination of the issue with regard to these subjective factors. It was held in that case: The insured person will not be in breach if he shows either that he did not recognise that a danger existed or that perceiving its existence he took some action to avoid it and was not indifferent to whether the danger was averted or not: Fraser v B N Furman (Productions) Ltd; Miller Smith & Partners (A Firm) Third Party [1967] 1 WLR 898 at 906; [1967] 3 All ER 57 at 61. This principle was applied in the present case in which his Honour also held in accordance with longstanding Victorian authorities that breach of the second limb of the principle requires a deliberate decision by the insured to court the danger by refraining from taking any measures or by taking measures which he knows to be inadequate to avert it.
For more information, please contact: Roger Walter Partner T: 02 8257 5736 roger.walter@turkslegal.com.au
Melanie Cox Lawyer T: 02 8257 5770 melanie.cox@turkslegal.com.au
Sydney | Level 29, Angel Place, 123 Pitt Street, Sydney, NSW 2000 | T: 02 8257 5700 | F: 02 9239 0922 Melbourne | Level 10 (North Tower) 459 Collins Street , Melbourne, VIC 3000 | T: 03 8600 5000 | F: 03 8600 5099
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