IN THIS EDITION
Seeds of doubt
Regular readers will recall that we discussed the case of Selected Seeds Pty Ltd v QBEMM Pty Ltd in the April issue. That case has now had its sequel in the Queensland Court of Appeal – with a rather different result.
To recap the facts, Selected Seeds had acquired seeds that were represented to it to be Jarra grass. In fact, the seeds were summer grass seeds. While Jarra grass is regarded as a valuable agricultural crop, summer grass is a weed.
Selected Seeds provided the seed to intermediaries and it was eventually acquired by Mr & Mrs Shrimp who planted it on their land. When they discovered it was summer grass and not Jarra grass, they claimed damages from the intermediaries, who in turn joined Selected Seeds into the action. The matter was eventually settled, with Selected Seeds providing $150,000 to the settlement.
Selected Seeds claimed on its liability policy with QBEMM, seeking indemnity for the $150,000 settlement and almost $700,000 in legal costs.
The insurer resisted the claim on two primary bases – firstly, that there had been no “occurrence” within the meaning of the insuring clause in the policy; and secondly, that an exclusion (described as the “Efficacy Clause”) in relation to failure of the product supplied to “correctly fulfil its intended use”. At trial, both those contentions were rejected, with the trial judge giving judgment in favour of Selected Seeds.
QBEMM appealed, albeit on more limited grounds; namely that the trial judge was incorrect in concluding that Selected Seeds’ legal liability to pay the $150,000 fell within the insuring clause in the policy; and that the trial judge should have found that cover was excluded under the “Efficacy Clause”.
The Court of Appeal dismissed the first contention based on the insuring clause.
The “Efficacy Clause” was in an endorsement to the policy and was in the following terms:
“This Policy does not cover any liability arising directly or indirectly from or caused by, contributed to by or arising from:-
1.the failure of any Product to germinate or grow or meet the level of growth or germination warranted or represented by the Insured; or
2.the failure of any Product to correctly fulfil its intended use or function and/or meet the level of performance, quality, fitness or durability warranted or represented by the Insured.”
Delivering the Court’s unanimous judgment, Justice Fraser noted that the damage to the Shrimps’ property occurred only because the seeds they planted were unsuitable for their intended uses.In terms of the “Efficacy Clause”, Selected Seeds’ liability arose only because the seed it supplied did not correctly fulfil its represented quality as Jarra seed or correctly fulfil its intended use or function of producing Jarra grass and seed.On a literal construction of the clause therefore, the liability for which Selected Seeds sought indemnity was plainly excluded.
Selected Seeds argued that a literal construction of the “Efficacy Clause” should not be adopted, because to do so would mean that it essentially had no cover under the policy.
Justice Fraser found that the “conventional approach” of construing each exclusion clause independently was required in this case. Because the “Efficacy Clause” was in a separate endorsement, it was a new agreement for an additional exclusion.It was intended to exclude cover which otherwise fell within the insuring clause but left the other exclusion clauses intact.
Although a literal construction of the “Efficacy Clause” did reduce the extent of cover for products liability, it still provided cover for liabilities arising on various bases. It might have been that the extent of the remaining products liability cover was unclear, but that in itself was no basis for not giving effect to the exclusion clause.
As a result, the appeal was allowed and judgment was entered for QBEMM.
Selected Seeds Pty Ltd v QBEMM Pty Ltd  QCA 286
Profits do not offset losses in business interruption policy
Tropical Reef Shipyard (TRS) operated a shipyard facility in Cairns, Queensland, which included a 3000 tonne slipway.TRS held business interruption insurance with QBE Insurance. The policy covered TRS for “an amount in respect of weekly loss of Turnover suffered… if the Business is interrupted or interfered with due to… property… having sustained… loss or damage”.
Between September 2006 and April 2007, TRS suffered three incidents each of which caused distinct damage to the slipway. TRS claimed that it suffered business interruption losses as a result of those incidents; resulting in alleged losses of turnover totalling some $11 million.
The insuring clause in the policy provided that “for each week we [i.e. QBE] will pay an amount based upon Weekly Calculations not exceeding the Weekly Sum Insured each week in respect of loss of Turnover suffered by you during the Indemnity Period”, such payment to “be made every seven days whenever practicable”.The Weekly Sum Insured is defined to mean “the sum insured for each week which you have selected and which appears in the Schedule. All calculations shall be on a weekly basis”. The relevant Weekly Sum Insured was $201,000.
The policy went on to provide that QBE “will pay [TRS] … for each week … the loss of Average Weekly Turnover based upon Weekly Calculations adjusted and agreed”. The expression Average Weekly Turnover was not defined; but the term Actual Average Weekly Turnover was defined to mean “the Actual Average of the Turnover for the twelve (12) months preceding the commencement date of the interruption [to be expressed as a weekly figure]”. Turnover meant the “money paid or payable by you for goods sold and for services rendered”.
Prior to trial, the parties sought determination of several issues, one of which was the way in which TRS’s losses were to be calculated for two distinct periods of the claim. During those periods, TRS suffered a reduction in turnover during some of the weeks claimed for. However, in other weeks, there was no loss, and in fact TRS’s actual Turnover was greater than the Actual Average Weekly Turnover.
TRS did not seek indemnity for those weeks; but claimed its alleged losses in the weeks when its turnover was less than the Actual Average Weekly Turnover.TRS also contented that in calculating any payment due under the policy, any increase in turnover in one week was not to be offset against a decrease in turnover in another week.
For its part, QBE contended that a “running account” should be used to calculate losses claimed over the two periods. This would have the effect of offsetting increases in turnover in what might be termed “good weeks” against the losses sustained in the “bad weeks”.
In the Federal Court, Justice Finkelstein found that QBE’s argument should be rejected. The cover provided by the policy made it clear that the indemnity was “for each week” that TRS suffered a loss. That meant that the calculations were to be made on a weekly basis.This position was reinforced by the introduction to the policy, which spoke about indemnity “in respect of weekly loss of Turnover”. In addition where a loss arises, it was to be paid within “seven days whenever practicable”.
In other words, the policy provided indemnity for losses incurred on a week-to-week basis. Those losses must be calculated by reference to weekly figures only.There was nothing in the policy to support QBE’s proposal of using a “running account” for various periods of claim.
While that could result in what might be seen as a windfall gain, that was only the case if TRS’s position was considered on an annual basis.On a weekly basis however (and bearing in mind that was the basis that the policy provided for), it could not be seen as a windfall.
Accordingly, that issue was resolved in favour of TRS.
Tropical Reef Shipyard Pty Ltd v QBE Insurance (Australia) Ltd  FCA 1088
Common director does not make companies “related”
Many insurance policies refer, in one way or another, to “related entities”. While the term is common in other contexts, its application in an insurance context remains somewhat unclear, as a recent case from the NSW Court of Appeal demonstrates.
The case centred on a retirement village in Yowie Bay, NSW. The retirement village had been constructed by a builder under a contract with a developer, Yowie Pty Ltd (Yowie).That company then sold the development to Waterbrook at Yowie Bay Pty Ltd (Waterbrook).
After Waterbrook acquired the retirement village, certain building defects were identified. Waterbrook made a claim under a builders home warranty policy issued to the builder for the cost of rectifying the defects.Allianz repudiated liability.Waterbrook then commenced proceedings in the NSW Supreme Court against Allianz, claiming an entitlement to indemnity under the policy in relation to its claim.
In the course of those proceedings, several preliminary questions were determined; including the issue of:
“Whether [Waterbrook] falls within the exclusion, from the definition of ‘Building Owner’ of companies (or persons or companies) related within the meaning of the Corporations Law, to [Yowie]”.
Under the policy, Allianz agreed to indemnify the “Building Owner”. That term was defined in the policy as:
“[T]he person for whom residential building work is being or is about to be carried out under a contract as defined in this policy, and any person who is a successor in title for the time being of the land or building in respect of which the work was carried out under the contract, but excludes:
(a) a developer who does residential building work;
(b) a person who does residential building work other than under a contract;
(c) the holder of a licence who or which carried out residential building work;
(d) persons or companies related, within the meaning of the Corporations Law, in [sic] any corporate person referred to in subclauses (a), (b) or (c) of this definition.”
Justice McDougall in the Supreme Court answered the preliminary question, “no”; meaning that Waterbrook was not excluded from the definition. Allianz appealed on that, and other issues.
In the Court of Appeal, all three judges upheld Justice McDougall’s finding on that issue (although there were differences between Justice Giles, in the minority, and Justices Ipp and Hodgson on other issues in Allianz’s appeal).
Delivering the court’s reasons on this issue, Justice Ipp noted that Allianz’s argument that Waterbrook and Yowie were “related” hinged on the fact that, at the time Yowie entered into the building contract for the retirement village, one of its directors was also a director of Waterbrook.
Allianz submitted that companies could be “related” in two ways: because shares in the companies were commonly owned; or because one company was able to influence or control the affairs of another.As the two companies had a common director, they were therefore “related”, it was argued.
Justice Ipp however found that the relevant provision in the Corporations Law was s.50, which stated:
“(1) Where a body corporate is:
(a) a holding company of another body corporate; or
(b) a subsidiary of another body corporate; or
(c) a subsidiary of a holding company of another body corporate;
the first mentioned body and the other body are related to each other.”
He agreed with Justice McDougall that nowhere in the Corporations Law did any definition of “related entity” actually use the word “related”. The expression appeared only in the defined term itself. It followed that s.50 was the provision that defined when one company was “related” to another.
As the exclusion did not use the terms “related entity” or “related party”, but rather required that the companies be “related” to each other, it was consistent with the statutory provisions establishing the Building Insurance Scheme that reference should be made only to s.50.
Since none of the relevant relationships covered by s.50 were present, the court found that Justice McDougall was correct and that Waterbrook was not excluded from the definition of “Building Owner”.
Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd  NSWCA 224
A valuable contribution
Questions of contribution between insurers can sometimes be fraught with complexity, particularly in relation to building work, where multiple sub-contractors may be involved. The situation has however been clarified somewhat by a decision of the Victorian Court of Appeal.
The matter arose out of damage to the premises of law firm Mallesons in Melbourne’s CBD, which were being fitted out by Commercial Interiors Australia Pty Ltd. Commercial Interiors was a sub-contractor to Probuild Constructions, which had a construction contract with Mallesons. The firm had moved into the premises prior to 31 March 2005; but fit-out works were still continuing.
On that date, an employee of Commercial Interiors accidentally caused a flush sprinkler head to activate, causing significant water damage to the fit-out works and to Mallesons’ contents.It was common ground that the incident was the result of negligence by Commercial Interiors.
Commercial Interiors had a liability policy with QBE. Probuild had a similar policy with Lumley. The Lumley policy covered both Probuild and its sub-contractors, which included Commercial Interiors. Each company notified its respective insurer of a possible claim against it.
The damage was eventually rectified by Probuild at a cost of around $565,000. That amount was reimbursed by Lumley; except for a deductible of $20,000. Probuild then deducted around $19,750 from the money it owed Commercial Interiors under the sub-contract as reimbursement for the deductible. QBE paid Commercial Interiors that amount.
Lumley requested contribution from QBE for the amount it had paid to Probuild.QBE refused to make contribution. Lumley then commenced proceedings seeking contribution for half the total amount it had paid Probuild for rectification costs.
The trial judge found in favour of Lumley and ordered that QBE make contribution in an agreed amount. QBE appealed.
The appeal was based on three essential contentions: that Commercial Interiors was not an “insured” under the Lumley policy because it had not actually authorised or ratified its inclusion in that policy; Commercial Interiors had not made a claim on the Lumley policy; and Lumley had only indemnified Probuild, and not Commercial Interiors.
In a unanimous decision, the Victorian Court of Appeal helpfully summarised the principles applicable to contribution between insurers as follows:
“(a)An insurer (first insurer) is entitled to contribution from another insurer (second insurer) if the following requirements are met:
(i) Both insurers insure a common insured. It does not matter if one or both policies insure other persons or if, where they do so, not all insureds are covered by both policies. Nor does it matter if the common insured is a party to the insurance contract under one policy and a person referred to in s 48 of the Insurance Contracts Act in respect of the other policy.
(ii) The common insured has suffered a loss or incurred a liability that is covered by both policies in whole or in part. It does not matter if one or both policies cover other risks or if, where they do so, not all risks are covered by both policies.
(iii) The first insurer has indemnified the common insured in respect of the loss or liability in whole or in part in accordance with its obligations under its policy.
(iv) The second insurer has not indemnified the common insured in respect of the loss or liability in whole or in part in accordance with its obligations under its policy.
(b)Ordinarily, the question whether the loss or liability is covered by both policies is to be determined at the time of the insuring clause event. The fact that, subsequently, the second insurer ceases to be liable under its policy because the common insured has been indemnified by the first insurer under its policy does not extinguish the first insurer’s right to contribution.
(c)Other examples of events occurring after the insuring clause event which will usually not affect the first insurer’s right of contribution include:
(i) a decision by a plaintiff to sue a person who is a joint tortfeasor with the common insured by virtue of the latter being vicariously liable for the former’s negligence, and to enforce judgment against the joint tortfeasor in circumstances where the joint tortfeasor is an insured under the first policy but not the second policy;
(ii) an agreement by the common insured and the second insurer under which the common insured waives his or her rights under the second policy or releases the second insurer from liability under the second policy;
(iii) in the case of an occurrence policy, failure by the common insured to make a claim under the second policy; and
(iv) cancellation of the second policy by the common insured. Where the second insurer refunds part of the premium as a result of the cancellation, the refunded amount may need to be taken into account in quantifying the second insurer’s liability to contribute.
(d)Where the loss or liability falls within an exclusion in the second policy, thefirst insurer is not entitled to contribution from the second insurer.”
Applying those principles, the Court found:
- Although Commercial Interiors had not “actively” authorised Probuild to include it as an insured under the Lumley policy or to ratify that status, it did not alter the legal effect of Commercial Interiors’ inclusion as an insured under the Lumley policy; which was that Commercial Interiors had a right under s 48 of the Insurance Contract Act to recover under that policy.
- It was not necessary for Commercial Interiors to make a claim under the Lumley policy; as QBE had acquiesced in Lumley treating Commercial Interiors’ liability as having been notified under and covered by the Lumley policy. In any event, s.54 of the Insurance Contracts Act would have “cured” any lack of notice.
- The trial judge had correctly concluded that Lumley’s payment of the rectification costs was made on behalf of Commercial Interiors to discharge its liability in tort. As a result, Lumley had in fact indemnified Commercial Interiors.
- If Lumley had not paid the rectification costs under its policy, QBEwould have been obliged to do so.
It followed then that Lumley had satisfied the requirements for obtaining contribution from QBE; and it would be unjust for Lumley not to obtain contribution. As a result, the trial judge’s findings were upheld and QBE’s appeal was dismissed.
QBE Insurance (Australia) Ltd v Lumley General Insurance Ltd  VSCA 124