IN THIS EDITION
Seeds of doubt swept away
The long-running matter of Selected Seeds (we have discussed the earlier decisions in the case in previous editions) has finally been determined by the High Court. In the process, the court has highlighted an important issue for liability insurers.
To recap the facts briefly, Selected Seeds was a grain and seed merchant. It purchased a consignment of what was said to be Jarra grass seed, a variety grown principally for quality stockfeed and haymaking. However, it was substantially contaminated with seed of another variety (summer grass) which produced inferior grass and was not suitable for the production of commercial grass seed.
By the third generation, crops grown from seed derived from the original consignment yielded only summer grass, which graziers regarded as a weed. It took hold on a property operated by R and J Shrimp. The Shrimps claimed the cost of eradicating the summer grass infestation. The claim was settled by Selected Seeds, which then claimed on its broadform liability policy with QBEMM to indemnify it for the amount paid to settle the claim.
The insurer denied indemnity. It relied on a policy exclusion (known as the “efficacy clause”) which excluded cover for liability arising out of “the failure of any Product to correctly fulfil its intended use or function”.
Selected Seeds was successful at trial in the Queensland Supreme Court; but had the judgment in its favour overturned after QBEMM appealed to the Court of Appeal. Selected Seeds then appealed to the High Court.
The unanimous five-member bench of the High Court found that the trial judge had been correct. The court found that the efficacy clause had to be read in conjunction with, and in light of, the indemnity clause in the policy.
The indemnity provided cover for property damage that was caused by an occurrence (as defined in the policy). The Court of Appeal had fallen into error in reading the efficacy clause independently of the indemnity clause; which had the effect that the Court of Appeal regarded the efficacy clause as covering a wider range of liability than that covered by the indemnity clause. That approach was incorrect.
The property damage in question was the damage to the Shrimps’ land caused by the summer grass infestation. The question in terms of the efficacy clause then was whether Selected Seeds’ liability for that damage arose out of the failure of the seeds to fulfil their use or function.
The court found that the answer to that question must be “no”. The liability was not caused by the failure of the seeds to produce Jarra grass. It arose by reason of the direct effect of the summer grass seeds on the land. The seeds were so contaminated that only summer grass was produced. Accordingly, the efficacy clause did not apply and Selected Seeds was entitled to indemnity.
The result then was that the Court of Appeal’s judgment was overturned and the trial judge’s decision was restored.
Selected Seeds Pty Ltd v QBEMM Pty Ltd [2010] HCA 37
Section 54 cannot “cure” excluded circumstance
This case raises an unusual, and perhaps controversial, application of s.54 of the Insurance Contracts Act.
The plaintiff, Mrs Johnson, was injured when the light aircraft piloted by her husband crashed on take-off. He was the director of, and employed by, Triple C Furniture & Electrical, which also owned the plane. Mr Johnson was killed in the crash. Mrs Johnson then sued Triple C for damages for the injuries she sustained. Triple C in turn joined Rural & General Insurance, the insurer of the aircraft, into the claim.
At trial, liability to Mrs Johnson was not contested and she was awarded substantial damages. Rural & General argued that the claim was excluded because, at the relevant time, the aircraft was being operated in breach of Civil Aviation Authority requirements (an exclusion to the policy). This related to Mr Johnson not having satisfactorily completed a required “aeroplane flight review” within the two years immediately preceding the crash.
The trial judge found that the insurer had not established that Mr Johnson had in fact failed to complete the review. Judgment was therefore given in favour of Triple C against Rural & General. The insurer appealed.
On appeal, Justice Chesterman (delivering the three-member bench’s unanimous judgment) found, having reviewed the evidence, that Rural & General had in fact established to the required standard that Mr Johnson had not completed the review.
Triple C argued that any such failure by Mr Johnson could be excused under s.54 of the Insurance Contracts Act. In brief, that section provides that if an insurer could refuse to pay a claim by reason of some “act” of the insured or some other person after the policy was entered into, then the insurer may not refuse to pay the claim unless the “act” could be regarded as the cause of the loss. Otherwise, the insurer’s only remedy is to reduce its liability by the amount that “fairly represents” the extent of its prejudice resulting from the “act”.
The argument put by Triple C was that the failure to complete the review was an “omission”; and therefore an “act” within the meaning of s.54. Justice Chesterman doubted that was the case; commenting:
“He may have omitted to undergo the review but what was required was that he complete the review to someone else’s satisfaction. Obtaining that satisfaction was something Mr Johnson might achieve, or fail to achieve, but it was not something he could omit.”
In addition, Justice Chesterman found that the case was not one in which the omission gave the insurer a right to refuse the claim by reason of something in the policy. It was an omission which had been relied on to give rise to a claim which the insured could not otherwise make. Because Mr Johnson had not satisfactorily completed the flight review, the claim was excluded. The “omission” could not change that. Accordingly, it was held that the failure to complete the flight review was not an “omission” of the kind contemplated by s.54.
Finally, Justice Chesterman held that, in any event, since the flight review was intended to assess Mr Johnson’s competence to fly, and his alleged lack of competence was the cause of the crash, the failure to satisfactorily complete the flight review could be regarded as the cause of the loss.
Accordingly, the appeal was allowed and judgment was given in favour of Rural & General.
Johnson v Triple C Furniture & Electrical Pty Ltd and Anor [2010] QCA 282
Fire exclusion burns mortgagee’s claim
In 2005, Paul Philp and Alison Parker entered into a mortgage with Secure Funding in relation to a property at North Rothbury. Later that same year, they entered into a household insurance policy with Insurance Australia Ltd (IAL), which also noted Secure Funding’s interest as mortgagee.
The policy included cover against fire damage to the property. That was however subject to an exclusion which excluded cover if the fire was started with the intention of causing damage by someone who lived in the property, or who entered with the consent of someone who lived at the property.
While the policy was current, Philp entered the property with Parker’s consent and set a fire which caused damage. When Secure Funding became aware of the damage, it claimed on the IAL policy. IAL denied liability, relying on the exclusion clause.
In the Federal Court, Justice Middleton confirmed that firstly, it was necessary to look at the terms of the bargain constituted by the policy. That specifically excluded cover where the fire was deliberately set by someone who lived at the property, or had entered it with the consent of such a person.
Secure Funding however argued that regard should be had to the “commercial purpose” of the policy. That purpose was, it argued, that the cover was to provide protection for the financier, and not to exclude it where arson was undertaken by the “insured” as defined.
Justice Middleton however rejected that argument, stating:
“I do not accept that the interpretation I have adopted is commercially unsound or does not conform with the purpose of the Policy. One can readily understand an insurer (otherwise accepting liability for deliberate conduct) seeking to exclude indemnity in the case of the deliberate and wrongful acts of specific individuals such as residents, tenants or their families. It should also be noted that it is possible for a person with a limited interest (such as a mortgagee) to take out their own policy to avoid difficulty with insurance should the mortgagor (or someone with temporary carriage of an asset) be tempted to destroy the property.”
As a result, IAL’s interpretation was upheld and the policy did not respond to Secure Funding’s claim.
Secure Funding Pty Ltd v Insurance Australia Limited [2010] FCA 1094
Election "result" needs to be clear
Many commercial insurance policies provide alternative bases for settlement of claims made on those policies. Which of those is adopted is usually at the insurer’s election. However, in such a case, insurers need to carefully consider what they are electing to do, and how that is communicated to the insured, as a recent case from Queensland illustrates.
In February 2004, the plaintiff’s Cessna 208 aircraft owned by Cape York Airlines suffered engine failure and ditched in the sea about 120 metres off Green Island, near Cairns. The aircraft was recovered from the sea some 42 hours later. It had suffered damage both from the impact of the ditching and from immersion by seawater.
Cape York notified its insurer, QBE, about the crash. It was not disputed that the accident and the damage it caused to the aircraft were within the scope of the policy. The aircraft was insured for a total of $1.8 million. Under the terms of the policy, QBE could “at its option pay for, repair, or pay for the repair of, accidental loss of or damage to” the aircraft.
QBE, through its loss adjuster, engaged an American company, Aircraft Structures International Corp (ASIC) to advise on the possible repair of the aircraft. ASIC provided a “repair estimate” for the aircraft which came to a little under $700,000.
QBE wrote to Cape York stating that it believed that restoration was possible (as opposed to treating the aircraft as a constructive total loss), and requested that it (i.e. Cape York) “instruct [ASIC] proceed with the repairs”. The letter included the “repair estimate”.
Cape York however objected, taking the position that repair was not feasible. It was concerned that while the repairs noted in the ASIC “repair estimate” might be possible, those repairs would not render it airworthy under CASA guidelines, and therefore could not be considered to have “restored” the aircraft to its pre-accident condition. Cape York contended that the aircraft should be considered a total loss.
QBE wrote to Cape York again, this time noting the option available under the policy, but once more asking Cape York to “instruct” ASIC to proceed with the repairs. It included a revised “repair estimate” of a little over $1 million.
Following further objection, QBE wrote to Cape York stating that it was satisfied that ASIC’s processes were sufficient not only to repair the damage but to maintain the aircraft’s airworthy status and allow an Australian airworthiness certificate to be issued. It sought to assure Cape York that the aircraft would be returned “in the same or in this case a better condition”.
With the impasse unresolved, Cape York commenced proceedings. QBE defended the proceedings on the basis that it had made an election to repair the aircraft and, as such, it was bound to carry out those repairs. That election, it argued, constituted an agreement to repair the aircraft; but that as Cape York had “repudiated” that agreement by refusing to send the aircraft to ASIC, its liability was at an end.
In the Queensland Supreme Court, Justice Daubney identified the key issue as being whether QBE had made and communicated an unequivocal election to repair the aircraft. QBE contended that its letters to Cape York constituted that election.
Justice Daubney noted that where a contract provided a “suite” of options (as the policy in question did), the party entitled to make the election had to choose one option from that “suite”. If it chose to do something not included as one of those options, then it had not made any election at all.
After “carefully considering” QBE’s letters, Justice Daubney found they did not constitute an election under the policy, because they did not elect to “repair” the aircraft. Rather, they sought to have Cape York “instruct” ASIC to proceed with the repairs. That was not one of the options available under the policy.
In addition, other evidence demonstrated that QBE’s preferred option was not to repair the aircraft, but rather to either fix its liability, or negotiate a cash settlement with Cape York, set at the amount of ASIC’s “repair estimate”. While there was nothing objectionable about QBE seeking to compromise its liability for a cash sum, it could only do so once it had unequivocally elected to repair. Since it had never done that, the option of a cash settlement never arose. Further, the fixing of its liability in the amount of the quote was again not an option available to QBE under the policy.
The end result was that Cape York was entitled to be paid the amount insured under the policy of 1.8 million. With recovery costs, indemnity for loss of use and interest, the total judgment came to more than $3 million.
Cape York Airlines Pty Ltd v QBE Insurance (Australia) Ltd [2010] QSC 313
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