JSM Management Pty Ltd v QBE Insurance (Australia) Ltd
[2011] VSC 339
•25 July 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMON LAW DIVISION
No. 4882 of 2010
| JSM MANAGEMENT PTY LTD | Appellant |
| v | |
| QBE INSURANCE (AUSTRALIA) LTD | Respondent |
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JUDGE: | OSBORN J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 24 June 2011 | |
DATE OF JUDGMENT: | 25 July 2011 | |
CASE MAY BE CITED AS: | JSM Management Pty Ltd v QBE Insurance (Australia) Ltd | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 339 | |
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INSURANCE – Appeal from Victorian Civil and Administrative Tribunal – Construction of policy of industrial special risks insurance – Where overweight container forklift operated on hardstand not rated to support it – Where hardstand suffered extensive cracking – Exclusion for “wear and tear” – Wear and tear means ordinary wear and tear – Condition requiring insured to take reasonable precautions to prevent loss – Whether Fraser v BN Furman (Productions) Limited [1967] 1 WLR 898 applicable to a policy of loss insurance – Commercial purpose of policy – Failure to apply condition to facts of case – Potential partial defence only – Case remitted for further hearing – Legal and General Insurance Australia Limited v Eather (1986) 6 NSWLR 390 – s 54 Insurance Contracts Act 1984 (Cth)
WORDS AND PHRASES – wear and tear
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P Riordan SC with Mr T Wodak | Davis Zucco |
| For the Defendant | Mr W Thompson SC with Mr T Messer | Hall & Wilcox |
TABLE OF CONTENTS
Introduction......................................................................................................................................... 2
Background......................................................................................................................................... 2
The Policy............................................................................................................................................ 4
Wear and Tear..................................................................................................................................... 5
Ordinary usage................................................................................................................................. 12
Reasonable Precautions.................................................................................................................. 13
HIS HONOUR:
Introduction
This is an appeal pursuant to s 148 of the Victorian Civil and Administrative Tribunal Act 1998 on questions of law, from a decision made by the Victorian Civil and Administrative Tribunal (‘the Tribunal’) with respect to an industrial special risks insurance policy (‘the policy’).
The appeal raises significant questions as to the proper interpretation of two provisions of the policy. The first is an exclusion clause with respect to liability for damage constituting wear and tear to the insured premises and the second provision is a condition which requires the insured to take reasonable precautions in respect of damage to the insured property.
For the reasons set out below, I am satisfied that the Tribunal erred in its characterisation of the content of the notion of wear and tear.
I am also satisfied that the Tribunal failed to properly apply the requirements of the reasonable precautions condition to the facts as the Tribunal found them.
Background
The appellant (‘the owner’) leased a trucking depot/warehouse distribution centre at Derrimut to a company known as Gaffney Logistics Pty Ltd (‘Gaffneys’) for a term of five years commencing on 27 October 2007.[1]
[1]The lease provided that the permitted use would be a ‘transport depot / yard and associated uses’.
The annual rental was $1 million.
The premises included a substantial hardstand area adjacent to a warehouse.
The lease was in a Law Institute of Victoria standard form and included a provision that the tenant must keep the premises in the same condition as at the start of the lease, except for fair wear and tear.
The evidence before the Tribunal established that before going into possession Gaffneys was advised by the owner’s representative Mr Marro that the hardstand had a load bearing rating of 40 tonnes. The owner’s agent, Mr Mirabella, further advised Gaffneys on 24 September 2007 that it could not use its container forklift (with a potential weight in the order of 100 tonnes under load) on the hardstand because that would cause it to fail.
Gaffneys went into occupation prior to the commencement of the lease and brought onto the site the container forklift which had been the subject of discussion. Gaffneys were again warned by the owner’s agent that the forklift should not be used on the hardstand, following the agent’s observation of the forklift on the premises. The forklift was however utilised for unloading containers over the subsequent months.
The Tribunal found:
26I accept the Owner’s witnesses evidence that the hardstand was damaged through the weight of the container forklift which continued to be operated upon the hardstand over a period of approximately eight months while the tenant was in occupation of the property.
27I accept Mr Marro’s evidence that the hardstand was built to withstand 10 tonne axle loads.
28I reject the Owner’s contention that there was (sic) ongoing repeated requests to Gaffneys not to use the container forklift on site. There was an initial warning by the agent with a follow up by Mr Marro subsequently and then further follow up by the Owner’s business associate (but, only after damage was present and obvious). The Owner was clearly attempting to negotiate with Gaffneys to reinforce the hardstand as part of a business opportunity. It is not known how serious Gaffneys were in their negotiations.[2]
[2]Reasons, [26]-[28].
The negotiations which are referred to by the Tribunal took place in the context of the substantial rental which the owner was receiving pursuant to the lease.
The Tribunal further found:
29I accept the Insurer’s contention that Clause 7.1.2 of the lease between the Owner and Gaffneys would have given the Owner instantaneous rights had the Owner wished to exercise them by either re-entry or termination of the lease. This did not occur. On the evidence, I find that the Owner had both full knowledge of what was occurring at the rented premises and the ability to address that issue had there been that inclination.[3]
[3]Reasons, [29]. Emphasis added.
The Policy
On 26 October 2007, the owner[4] had taken out an industrial special risks insurance policy[5] with the respondent, QBE Insurance Australia Limited (‘the insurer’) for a 12 month period. Section 1 of the policy provided indemnity in the event of any physical loss, destruction or damage not otherwise excluded happening at the property. The schedule to the policy provided a general combined limit of liability and then a series of sub-limits of liability. The policy provided initial exclusions by reference to the definition of the property covered.[6] The policy further provided exclusions in respect of a series of ‘perils’ (‘perils exclusions’). These included the following:
[4](through its insurance broker)
[5]A QBE Commercial Industrial Special Risks Mark IV Insurance Policy, comprising pursuant to the preamble ‘the Schedule, Sections, Definitions, Conditions, Exclusions, Endorsements, Memoranda and Warranties (if any) and any other terms herein contained’.
[6]These exclusions included:
8.land, provided that this exclusion shall not apply to structural improvements on or in the land if such structural improvements are not otherwise excluded in this Policy.
9.bridges, canals, roadways and tunnels, railway tracks (other than on the premises occupied or used by the Insured), dams and reservoirs (other than tanks) and their contents.
4.physical loss, destruction or damage occasioned by or happening through:-
(a)moths, termites or other insects, vermin, rust or oxidation, mildew, mould, contamination or pollution, wet or dry rot, corrosion, change of colour, dampness of atmosphere or other variations in temperature, evaporation, disease, inherent vice or latent defect, loss of weight, change in flavour texture or finish, smut or smoke from industrial operations (other than sudden and unforeseen damage resulting therefrom)
(b)wear and tear, fading, scratching or marring, gradual deterioration or developing flaws, normal upkeep or making good
(c)error or omission in design, plan or specification or failure of design
(d)normal settling, seepage, shrinkage or expansion in buildings or foundations, walls, pavements, roads and other structural improvements, creeping, heaving and vibration
(e)faulty materials or faulty workmanship
Provided that this Exclusion 4(a) to (e) shall not apply to subsequent loss, destruction of or damage to the Property Insured occasioned by a peril (not otherwise excluded) resulting from any event or peril referred to in this exclusion
The Tribunal concluded that the owner could not claim with respect to loss arising from the damage to the hardstand caused by the container forklift by reason of the exclusion contained in clause 4(b) above relating to wear and tear. The owner appeals this finding on two bases:
(a) The Tribunal erred in law by interpreting the phrase ‘wear and tear’ in the policy as including damage caused by other than ordinary or normal use.
(b) The Tribunal erred in finding that the damage, which was the subject of the claim, was caused by the weight rather than the operation of the forklift.
The second of these grounds of appeal must fail. It does not fairly reflect the Tribunal’s reasons. Paragraphs [25] to [27] of those reasons, which I have quoted above, make clear that the Tribunal concluded that it was the combination of excessive weight and continued operation over a period of approximately eight months which caused the damage to the hardstand.
Wear and Tear
I turn then to the wear and tear exclusion clause which I have set out at 4(b) above. The Tribunal’s reasons relating to the construction of this clause were as follows:
31The term ‘wear’ I accept relates to usage while the word ‘tear’ refers to the operation of natural forces/the elements. See both (sic) Scott L.J. in Taylor v Webb (1937) 2 KB 283 at p.302-304.
I accept that there is a difference between the expression ‘fair wear and tear’ and ‘wear and tear’. The important distinction is that ‘fair wear and tear’ denotes the situation of either ordinary use or reasonable use whereas ‘wear and tear’ just indicates use.
32There is no argument or issue on the ‘tear’ aspect in this case – here the container forklift was used by Gaffneys on the hardstand between late October 2007 until early June 2008. While the Owner’s representative Mr Marro told Gaffneys that it was not to use the forklift [on] the hardstand and was aware that the hardstand was not rated to carry the weight of the forklift the forklift was still using the hardstand to operate.
33I reject the Owner’s contention that if the words ‘wear and tear’ are read in context with surrounding words that the words describe a process of slow damage. The words describe a progressive situation rather than a ‘one off’ incident. The important aspect is use.
34Importantly the question of whether the container forklift was appropriate or sanctioned by the Owner for the tenant Gaffneys is not the issue for the Insurer. As between the Owner and the Insurer use is the key question.
35The Respondent is entitled to rely upon Perils Exclusion 4(b) to avoid liability to cover the Owner in respect to repairs and damage sought in respect to the hardstand and for damages sought in respect to loss of rent. The use of the property has created the wear.[7]
[7]Reasons, [31]-[35].
The owner submits:
(a) that the term ‘wear’ should be equated with ‘ordinary wear’; and
(b) that damage caused by the container forklift was not ‘ordinary wear’.
The word ‘wear’ has as one of its meanings:
The process or condition of being worn or gradually reduced in bulk or impaired in quality by continued use, friction, attrition, exposure to atmospheric or other natural destructive agencies; loss or diminution of substance or deterioration of quality due to these causes.[8]
[8]Oxford English Dictionary vol XX page 46.
The Macquarie Dictionary expresses its meaning as being:
To impair, deteriorate or consume gradually by use or any continued process
In turn the Oxford English Dictionary describes the meaning of the phrase ‘wear and tear’ as
wearing or damage due to ordinary usage; deterioration in the condition of a thing through constant use or service.[9]
[9]Oxford English Dictionary vol XX page 46.
The Macquarie Dictionary describes the meaning of the phrase as ‘diminution, decay, damage, or injury sustained by ordinary use’.
Black’s Law Dictionary[10] also gives the primary meaning of the phrase as ‘deterioration caused by ordinary use’.
[10]Bryan A Garner (ed in chief) 8th Edition, 2006.
In my opinion, the ordinary meaning of the phrase ‘wear and tear’ is that given as its primary meaning by both the Oxford English Dictionary and the Macquarie Dictionary, namely damage due to or sustained during ordinary usage.
This is because the word ‘wear’ is coupled with the word ‘tear’. The concept unifying both words is damage caused by ordinary, as against extraordinary, events. ‘Wear’ is concerned with the result of usage taking place in respect of a thing. ‘Tear’ is concerned with the impact of ordinary natural causes such as weather upon a thing.
The phrase wear and tear is often used to confine the obligation of a tenant to keep premises in good repair.
A Dictionary of Modern Legal Usage[11] states:
Wear and tear. In the context of leases, the phrase wear and tear – a ‘reduplicative phrase’, as linguists call it – includes not only the action of weather but also the normal use of property. A tenant is not liable to replace a carpet that becomes dingy from normal use during the tenancy – but a spilled bottle of black ink is another matter. The phrase is usually preceded by a synonym, for good measure: normal wear and tear, reasonable wear and tear, and fair wear and tear are generally synonymous.
[11]Bryan A Garner (ed) 2nd Edition, 1995. Emphasis in original.
The understanding of the phrase in the context of leases was elucidated by Scott LJ in Taylor v Webb:[12]
The phrase ‘wear and tear’ is a very old English idiom and the clause ‘fair’ (or ‘reasonable’) ‘wear and tear excepted,’ has been common in leases and tenancy agreements for two or three centuries. It is, like many idiomatic expressions, complex in meaning; it implicitly refers to both cause and effect, and in each aspect it covers two classes of disrepair, (a) that brought about by the normal or ordinary operation of natural causes, such as wind and weather, in contradistinction to abnormal or extraordinary events in nature such as lightning, hurricane, flood or earthquake; and (b) that brought about by the tenant, and other persons present in or on the premises with the consent of the tenant, either unintentionally or as a normal incident of a tenant’s occupation, in the course of the ‘fair’ (or ‘reasonable’) use of the premises for any of the purposes for which they were let. Sense (a), the first of the two senses covered by the phrase ‘wear and tear’ when used in repairing covenants, is somewhat analogous to the sense of the words when used in marine insurance. There the perils of the sea against which the policy protects are exceptional or abnormal marine events, at least in point of degree, and sufficiently so to constitute them ‘accidents’: and a line was drawn in old sailing-ship days between the normal damage and cutting away of sails, spars and ropes incidental to ordinary heavy weather on the one hand, which does not constitute a peril insured against, and an abnormal casualty which does; and the old law and even the old idiomatic phrase reappear in statutory guise in s 55, sub-s 2(c), of the Marine Insurance Act 1906. So in the law of landlord and tenant legal interpretation of the phrase as applied to the elements has produced a similar demarcation of degree between the normal and abnormal, the ordinary and the extraordinary; leaving a penumbral zone where a jury may wander and lawfully come to its own conclusion, a zone of ‘give and take’ decisions, as Willes J said in Scales v Lawrence. That the phrase ‘wear and tear’ includes in its scope my sense (b), namely, the tenant’s user and its effect, is too plain to need argument, and is well recognized in the decided cases.[13]
[12][1937] 2 KB 283, 302.
[13]Ibid, 302-3. Citation omitted.
The judgment goes on to further discuss the meaning of ‘fair’ in the phrase ‘fair wear and tear’ when used in the context of a lease. The view of the legal consequences of a conventional fair wear and tear clause in a lease articulated in Taylor v Webb was subsequently overruled in Regis Property Company Ltd and Dudley.[14] Nevertheless, the passage I have quoted expresses the fundamental notions of wear and tear. It also directs the reader to the context of marine insurance as illustrating the relevant concept of ‘tear’.
[14][1959] AC 370, 393-394.
In that context there is a well recognised distinction between perils of the sea and the consequences of the inevitable action of wind and waves. In The Xantho[15] Lord Herschell stated:
I think it clear that the term ‘perils of the sea’ does not cover every accident or casualty which may happen to the subject-matter of the insurance on the sea. It must be a peril ‘of’ the sea. Again, it is well settled that it is not every loss or damage of which the sea is the immediate cause that is covered by these words. They do not protect, for example, against that natural and inevitable action of the winds and waves, which results in what may be described as wear and tear. There must be some casualty, something which could not be foreseen as one of the necessary incidents of the adventure. The purpose of the policy is to secure an indemnity against accidents which may happen, not against events which must happen. It was contended that those losses only were losses by perils of the sea, which were occasioned by extraordinary violence of the winds or waves. I think this is too narrow a construction of the words, and it is certainly not supported by the authorities, or by common understanding. It is beyond question, that if a vessel strikes upon a sunken rock in fair weather and sinks, this is a loss by perils of the sea. And a loss by foundering, owing to a vessel coming into collision with another vessel, even when the collision results from negligence of that other vessel, falls within the same category.[16]
[15]Thomas Wilson Sons & Company v Xantho (Cargo Owners) [1887] 12 AC 503.
[16]Cited in Great China Metal Industries Co Ltd v Malaysian International Shipping Corporation Berhad (1996) 39 NSWLR 683, 694-5. Emphasis added.
There is also authority in the context of all risks insurance which demonstrates that the concept of wear and tear is conventionally regarded as one concerned with the consequences of ordinary usage and weather events. In London and Provincial Leather Processes Ltd v Hudson[17] Goddard LJ stated:
I think we get considerable assistance as to what the true interpretation of the words ‘accident or casualty’ or the meaning of what is a risk in an all-risks policy by referring to Lord Sumner’s speech in British and Foreign Marine Insurance Co v Gaunt. The case is an exceedingly well known one in insurance law and one from which I think great assistance can be obtained. In that case some wool covered by an all-risk policy arrived in this country, having suffered damage on the way. Rowlatt J had held that the circumstances were just as consistent with natural forces acting on the wool, which would not have been a risk within the policy, because there would be nothing there accidental or fortuitous – no extraordinary force of nature, but the ordinary force of nature acting on the goods, atmospheric conditions causing some deterioration, or weather. It was necessary for the shipper to negative that and to prove some definite cause within the policy. What was meant by a casualty, I think, is to be found in Lord Sumner’s speech where he says: ‘There are, of course, limits to “all risks”. They are risks and risks insured against. Accordingly the expression does not cover inherent vice or mere wear and tear or British capture. It covers a risk, not a certainty; it is something, which happens to the subject-matter from without, not the natural behaviour of that subject-matter, being what it is, in the circumstances under which it is carried. Nor is it a loss which the assured brings about by his own act, for then he has not merely exposed the goods to the chance of injury, he has injured them himself.’ The underwriter is not insuring against the shipper destroying his own goods. I need not read the next passage, but I go on to the next page, where he says: ‘When he’ – that is the assured who is seeking to recover – ‘avers loss by some risk coming within “all risks”, as used in this policy, he need only give evidence reasonably showing that the loss was due to casualty, not to a certainty or to inherent vice or to wear and tear.’[18]
[17][1939] KB 724.
[18]Ibid, 730-1. Emphasis added.
It can be seen that the concept of risk is articulated in contradistinction to inherent vice and wear and tear. Wear and tear is regarded as a consequence of ordinary usage and ordinary weather.
Counsel did not in submission cases in which exclusion clauses relating to wear and tear contained in insurance policies have been the subject of judicial authority. My own researches have however revealed the following decision of the District Court for the Western District of Pennsylvania which does, in my view, correctly interpret the phrase in the context of a boiler and machinery policy:
The defendant argues that certain judicial definitions of the phrase ‘wear and tear’ are inapplicable here because, in the instant policy, ‘wear and tear’ is not modified by any adjective … However, construing the words ‘wear and tear’ in their everyday common usage, we are convinced that the words ‘wear and tear’ mean simply and solely that ordinary and natural deterioration or abrasion which an object experiences by its expected contacts between its component parts and outside objects during the period of its natural life expectancy. We do not find that the modifiers ‘ordinary’ or ‘natural’ add anything to the commonly understood meaning of ‘wear and tear’.
As a legal term ‘wear and tear’ is almost always used in connection with leases of real or personal property providing that the property be returned to the lessor at the end of the lease term in as good condition as when it was delivered excepting for ‘wear and tear’, or ‘natural wear and tear’ or ‘ordinary wear and tear’. We find the use of the modifiers ‘natural’ or ‘ordinary’ to be a typical lawyer's redundancy.[19]
[19]Cyclops Corporation v Home Insurance Company 352 F.Supp. 931 (1973). Emphasis added. The decision has since been cited with approval in, amongst others, Sentinel Management Co v New Hampshire Insurance 563 N.W.2d 296 (Min.App 1997); see also Northwestern National Casualty Company v Khosa Inc 520 N.W.2d 771 (Minn.App. 1994).
The underlying principles of interpretation which are relevant must be that the words contained in the owner’s insurance policy are to be given a businesslike interpretation and that their ordinary meaning should prevail unless the context requires otherwise. In Robertson v French[20] Lord Ellenborough CJ stated of a written policy of insurance:
It is to be construed according to its sense and meaning as collected in the first place from the terms used in it, which terms are themselves to be understood in their plain, ordinary and popular sense, unless they have generally in respect to the subject matter, as by the known usage of a trade, or the like, acquired a peculiar sense of the same words; or unless the context evidently points out that they must in the particular instance, and in order to effectuate the intention of the parties to that contract, be understood in some other special and peculiar sense.
[20]1803 4 East. 130, 135.
When one party to an insurance policy of the type here in issue is an ordinary businessman or businesswoman, the objective onlooker would expect the words used in exclusion clauses within the policy to have their ordinary and natural meaning, unless the context within the policy otherwise demonstrates that the true intention of the parties required a different meaning.
As I have said, the ordinary meaning of the phrase wear and tear treats both components as concerned with the consequences of ordinary not extraordinary damage.
The authorities I have cited, which articulate well accepted notions of insurance law, also take the same approach.
I turn then to the terms of the policy in issue. First, it should be noted that the policy contemplates that the premises insured are, or may be, leased. The endorsements to the policy delete certain clauses relating to computing damage with respect to business losses and replace them with a clause which contains express provisions with respect to the loss of gross rentals. This context also supports the view that the phrase wear and tear should be given its ordinary meaning. That meaning is consistent with the meaning customarily applied in the context of leases. Its use in the exclusion clause contained in the policy leaves the owner potentially insured with respect to damage caused by a tenant in breach of the lease.
Secondly, sub-cls 4(a), (b) and (d) of the perils exclusions are all concerned with damage occurring either necessarily, or potentially, by ordinary processes. The concept of wear as something generated by ordinary use sits comfortably in this context.
Thirdly, the specific context of cl 4(b) includes other words which are directed to other forms of gradual damage commonly generated by ordinary use and natural processes, particularly ‘fading’ and ‘gradual deterioration or developing flaws’.
Fourthly, the phrase ‘normal upkeep’ contained in cl 4(b) expressly qualifies the notion of upkeep by use of the word ‘normal’ in a way in which ‘wear and tear’ is not, as does the use of the word ‘normal’ at the commencement of the class of circumstances listed in exclusion 4(d). Nevertheless, the use in other contexts of the word ‘normal’ does not demonstrate that the phrase ‘wear and tear’ should be given other than its ordinary meaning.
In summary, when the policy is read as a whole there is no contextual reason for giving the phrase wear and tear other than its usual meaning.
It follows that the construction of the exclusion clause advanced by the owner should be preferred to that advanced by the insurer.
Ordinary usage
The insurer submitted however that if the owner’s construction was preferred, the evidence demonstrated in any event that the use of the container forklift constituted ‘ordinary usage’. It was submitted that the relevant use continued throughout Gaffneys’ occupation of the premises and was not prevented by the insured when it had the capacity to do so.
I do not accept that the use in issue, namely the continued operation of a massively overweight container forklift on the hardstand over a period of approximately eight months, could be described objectively as ‘ordinary use’.
It was submitted by the insurer that the objective onlooker would be amazed if the consequences of the use in issue were not caught by the exclusion relating to wear and tear. I do not accept this submission either. The policy read as a whole contains a web of provisions which might potentially bear on the facts in issue. Most obviously, the obligation to make disclosure of objectively material facts relating to the risk might be relevant where before the issue of the policy the use had commenced which ultimately caused the damage (despite the fact that the owner did not subjectively know this use would continue). In addition, the objective onlooker might consider that the exclusion with respect to a failure to take reasonable precautions was intended to govern facts such as those in the present case.
The insurer relied before the Tribunal upon the latter but not the former provisions. For present purposes, it is sufficient to say that the arguments advanced for the insurer by generalised observations with respect to the perspective of the hypothetical objective onlooker do not persuade me that the damage in issue in this case could be described as damage caused by ordinary use.
Accordingly, the first ground of appeal must succeed.
Reasonable Precautions
This is not, however, the end of the matter. The insurer has filed a motion of contention in the following terms:
The appellant was in breach of condition 11 of the insurance policy in that it failed to take all reasonable precautions to prevent loss, destruction, or damage to the property insured by the policy.
Condition 11 of the policy provides:
The insured shall take all reasonable precautions to prevent loss, destruction, or damage to the property insured by this Policy
Condition 14 provides:
The due observance and fulfilment of these Conditions … are conditions precedent to any liability of the Insurer(s) to make any payment under this Policy.
The classic statement regarding the interpretation of a reasonable precautions clause in a contract of insurance is that of Diplock LJ in Fraser v BN Furman (Productions) Limited:[21]
What, in my judgment is reasonable as between the insured and the insurer, without being repugnant to the commercial purpose of the contract, is that the insured, where he does recognise a danger should not deliberately court it by taking measures which he himself knows are inadequate to avert it. In other words, it is not enough that the employer’s omission to take any particular precautions to avoid accidents should be negligent; it must be at least reckless, that is to say, made with actual recognition by the insured himself that a danger exists, and not caring whether or not it is averted.[22]
[21][1967] 1 WLR 898 (‘Fraser’).
[22]At 906.
This test was approved and expanded in Albion Insurance Company Limited v Body Corporate Strata Plan No. 4303,[23] where McGarvie J stated:
The insured is in breach of the condition if, through a lack of concern and desire to prevent bodily injury, he deliberately adopts a course of action or inaction which he realises exposes him to the risk of someone being injured by the recognised danger.
The test which Diplock LJ propounded is not whether the insured who recognises a danger, takes no measures or takes measures which he knows to be inadequate to avert it. The test is whether the insured deliberately courts the danger by refraining from taking any measures or by taking measures which he knows to be inadequate to avert it. The word ‘deliberately’ indicates intentional, considered action or inaction. The verb ‘court’ suggests action or inaction which invites the danger of accident. The test requires more than a recognition of the danger and failure to take any measures or any measures known to be adequate to avert it. It requires that this be due to a deliberate decision to court the danger.[24]
[23][1983] 2 VR 339 (‘Albion’).
[24]Ibid, 344-5.
More recently, in CGU v Lawless,[25] Redlich JA stated:
The test is wholly subjective. A failure to take reasonable precautions will occur only where there is a deliberate course of action or inaction which the insured realises exposes him to the risk of someone being injured by the danger which has been recognised. Hence the phrase ‘a deliberate decision to court the danger’. The insured might establish compliance with the condition by showing one or more of the following things:
(1)There was no recognition of the danger or the extent of the danger of bodily injury;
(2)Particular precautions would not have been reasonable in the circumstances;
(3)No particular precaution was considered or it was not regarded as reasonable or practicable in the circumstances;
(4)The failure to take the precautions was not due to a lack of desire and concern to prevent bodily injury.
[25][2008] VSCA 38, [17] (‘Lawless’).
Counsel for the insurer conceded that in policies of liability insurance at least, it is now clearly established that a reasonable precautions condition must be construed extremely narrowly. It was submitted, however, that a different approach was warranted in respect of construing a reasonable precautions condition in a policy of property insurance. He urged the Court not to follow the decision of the New South Wales Court of Appeal in Legal and General Insurance Australia Limited v Eather.[26]
[26](1986) 6 NSWLR 390 (‘Eather’).
In Eather, the insured claimed indemnity for the loss of certain jewellery that had been stolen from the back seat of his locked car. The insurer argued that the Fraser test was inapplicable to the construction of the reasonable precautions condition in the policy, as different considerations applied in the case of a first party policy providing indemnity against loss when compared to a policy providing indemnity as against third parties. It was submitted that a requirement that the insured not act negligently was not inconsistent with the commercial purpose of a policy indemnifying for loss.
Kirby P and Glass and McHugh JJA, in separate concurring judgments, rejected the distinction. First, the particular policy in question was a multi-risks or composite policy which, in addition to providing indemnity for damage to the insured’s own property, also provided indemnity for liability to third parties. As Kirby P noted:
It would be curious indeed, having regard to the structure of the composite policy and the application of the general conditions to all of the policies in the insurer's ‘Home Protection Plan’, if the condition were to have a variable meaning: one meaning in respect of some terms of the policies and another, more stringent meaning, in respect of others, including Policy 4. Such an ambulatory construction of the policy should not be adopted.
Secondly, the Court adopted the reasoning of Mahon J in the Supreme Court of New Zealand in Mason v Century Insurance Co Limited,[27] where his Honour had held that the Fraser principle was applicable to the construction of a contract for motor vehicle insurance, irrespective of the fact that the policy was one for loss and not indemnity. His Honour accepted that such a policy was one in which the insurer had agreed to indemnify the insured against the consequences of the insured’s own negligence. As such, it was necessary for the insured to be reckless with actual recognition of the existence of a danger and a lack of care as to the consequences before the reasonable precautions condition would be breached. Glass JA stated of the reasonable precautions condition:
Such an obligation is clearly repugnant to the commercial purpose of a contract to indemnify a person against liability which he may incur for negligent conduct. It is also in my view repugnant, although to a lesser extent, to a contract to indemnify a person against accidental loss of damage to his property. The ordinary meaning of that phrase would be significantly curtailed if it did not include loss which the hypothetical reasonable man would have foreseen as a possibility and avoided by appropriate action. The possibility that jewellery may be lost is constant so long as it is worn in public and retention of it in the home does not eliminate the possibility of loss in drains or cavities or by theft. An insurance cover against the loss of property by misadventure will be considerably less valuable if loss foreseeable as a possibility and preventable by reasonable care is excepted from it.
[27][1973] 2 NZLR 216.
Thirdly, the desirability of a common interpretation of reasonable precautions clauses throughout the common law world was such that Fraser ought be followed for reasons of comity. The Court held that the recklessness standard reflected community expectations concerning respective obligations in contracts of insurance.
Counsel for the insurer argued first that the reasoning in Eather was not applicable to the present case as the policy in Eather was composite, in that it contained clauses relating to both loss indemnity and liability indemnity, whereas the policy in question relates only to loss indemnity. In turn, he submitted that the commercial purpose of a contract of insurance for damage to property would not be frustrated by adopting as a condition precedent to recovery, the requirement that the insured not have negligently caused the loss. In the alternative, Mr Thompson submitted that even if the parties’ intentions objectively considered would not have been to make absence of negligence a condition precedent to recovery, the clause in question should nevertheless be construed as requiring no more than a lack of ‘ordinary recklessness’. He submitted that there was no reason to ‘virtually obliterate’ the term as occurred in Fraser and subsequently in Albion.
I am not satisfied that I should depart from the reasoning expressed by their Honours in Eather. In particular, I agree that the desirability of a common interpretation of this particular term across contracts of insurance of a commercially common form weighs heavily in favour of adopting the Fraser test. It would be odd if the meaning of the phrase depended upon whether a policy combined both liability and/or risks insurance or whether, alternatively, the insured had obtained two policies with respect to these classes of cover.
Furthermore, if the reasonable precautions condition was interpreted as imposing a duty upon the insured to avoid damage to the property by perceiving such risks as would be foreseeable by reasonable care, and taking such care as would be preventable by reasonable action, such a requirement would be repugnant to the commercial purpose of a special risks policy. Although, as Glass JA observed of the multi-risk accidental loss and damage policy in Eather, the repugnancy would be of a ‘lesser extent’ than that in respect of the cover contemplated by a liability policy.
The owner was entitled to take out insurance to protect itself against damage to property stemming from its own acts or defaults even if they involved a want of reasonable care when analysed with hindsight. An industrial special risks policy provides indemnity for any loss, damage or destruction of the insured property unless caused by an event specifically excluded. The question of what are ‘reasonable precautions’ must be construed in light of this commercial purpose.
In my view the observations by McHugh JA in Eather are appropriate to the present case because the policy with which I am concerned is sufficiently analogous to that which was there in issue.
In the present case the multi-risks policy indemnified against accidental loss or damage. Thus the indemnity covered any unexpected or unintended loss of or damage to the jewellery: Robinson v Evans Bros Pty Ltd.[28] It, therefore, covers any loss or damage which is the result of negligent conduct on the part of the insured. It would defeat the commercial purpose of the contract of indemnity if the wording of the condition operated so as to take away an important part of the basis of the indemnity itself. The approach to the words ‘all reasonable precautions’ in liability policies is in my opinion equally applicable to the present policy.
[28][1969] VR 885
A like approach to that of Eather has been taken in England since the decision of the Court of Appeal of England and Wales in Sofi v Prudential Assurance Co Ltd.[29] There, Lloyd LJ with whom Glidewell and Woolf LJJ concurred, rejected an argument that the recklessness test laid down in Fraser was confined only to contracts of liability insurance, holding that it applied equally to contracts of property insurance.[30]
[29][1993] 2 Lloyd’s L.R. 559, 565. Albeit a case of a composite policy.
[30]See also Gunns v Par Insurance Brokers [1997] 1 Lloyd’s L.R. 173, 177 in which the view was expressed that the meaning of a condition of this type propounded in Fraser has application ‘to all types of insurance’.
I turn then to the Tribunal’s findings with respect to the owner’s state of mind in the present case. As I have previously stated the Tribunal made the following initial findings of fact:
28I reject the Owner’s contention that there was ongoing repeated requests to Gaffneys not to use the container forklift on site. There was an initial warning by the agent with a follow up by Mr Marro subsequently and then further follow up by the Owner’s business associate (but, only after damage was present and obvious). The Owner was clearly attempting to negotiate with Gaffneys to reinforce the hardstand as part of a business opportunity. It is not known how serious Gaffneys were in their negotiations.
29I accept the Insurer’s contention that Clause 7.1.2 of the lease between the Owner and Gaffneys would have given the Owner instantaneous rights had the Owner wished to exercise them by either re-entry or termination of the lease. This did not occur. On the evidence, I find that the Owner had both full knowledge of what was occurring at the rented premises and the ability to address that issue had there been that inclination.[31]
[31]Reasons, [28]-[29].
I take the reference to ‘full knowledge of what was happening at the premises’ to refer back to the matters which the Tribunal found to be causal of damage, namely the continued operation of the overweight container forklift over a period of approximately eight months.
The Tribunal further states:
… While the Owner’s representative Mr Marro told Gaffneys that it was not to use the forklift [on] the hardstand and was aware that the hardstand was not rated to carry the weight of the forklift the forklift was still using the hardstand to operate.[32]
[32]Reasons, [32].
The Tribunal went on to make the following specific findings under the heading ‘Relevant facts in this case in respect to reasonable precautions’:
39There is no evidence before me that the Owner leased the premises to Gaffneys knowing that Gaffneys intended to use the container forklift at the premises.
40That Mr Marro was aware that Gaffneys were using the container forklift on the hardstand as at 25 October 2007.
41That the history of the Owner’s positive actions in respect to the container forklift are as follows:
o(a) At the time the lease was signed Gaffneys were told not to use the container forklift. The Owner was advised it was simply to use it to move in.
o(b) Late October 2007 Gaffneys were told not to use the forklift. Gaffneys stated that the forklift was a temporary measure.
o(c) January 2008 Gaffneys were told not to use the forklift. A letter was given to Gaffneys about the agent saying to Gaffneys not to use the forklift at the lease commencement.
42I do not accept that discussions in February and March 2008 were positive actions.
43The actions taken by the solicitors in respect to removal of Gaffneys was for non payment of rent.
44(a) That it was evident that the Owner was aware that Gaffneys were using the forklift on a continual basis.
(b)That the Owner knew that the forklift was significantly greater in axle weight than that allowed by the design of the hardstand and that the Owner was sufficiently concerned by 26 October 2007 to obtain information from PTL Engineering confirming that 12 tonnes was the axle load for the hardstand.
(c)That Mr Marro stated by February 2008 that the hardstand was cracking.
(d)That there was a right contained within the lease to bring the lease to an end but the Owner did not take this step preferring to negotiation (sic) on a business basis with the tenant to improve the Owner’s commercial situation.[33]
[33]Reasons, [39]-[44].
Having made these findings, the Tribunal then considered and rejected the argument in respect of Eather that I have also rejected above. It then simply concluded that ‘in the circumstances the Insurer cannot rely upon the reasonable precautions ground to avoid indemnity’.
This is inherently unsatisfactory. The terms of the Tribunal’s primary finding that the owner had full knowledge of what was happening at the premises and the power to terminate it, if it had wished to do so, necessarily raise the question of whether the reasonable precautions clause was satisfied.
The more detailed findings of the Tribunal do not adequately resolve this question, but on their face raise a seriously arguable issue as to whether it was or was not satisfied. First, it follows from the Tribunal’s findings that this is a case concerned with damage which was in fact foreseen as distinct from foreseeable by the owner. It was foreseen from the commencement of the lease that if the forklift was used upon the premises the hardstand would in all probability be seriously damaged. Further the Tribunal found that the owner knew that the forklift was significantly greater in axle weight than that allowed for by the design of the hardstand and the owner was sufficiently concerned by 26 October 2007 to obtain information from PTL Engineering confirming that 12 tonnes was the maximum axle load for the hardstand.
Secondly, the Tribunal found that the owner knew that the forklift was in fact being used on a continued basis throughout the lease.
Thirdly, by February 2008 the owner knew that serious damage was in fact eventuating, and that the tenant was continuing to fail and refuse to stop using the forklift.
Fourthly, the owner elected not to stop the damage as it could have done by terminating the lease, but to negotiate with a view to reconstructing the hardstand by agreement on commercial terms. It did this knowing that the damage was continuing.
On the face of the Tribunal’s findings there was at least from February 2008 deliberate course of inaction which the insured realised would result in continuing damage to the property, while negotiations were directed not to the cessation of that damage but to the potential commercial redevelopment of the hardstand.
In effect, the owner elected to keep receiving the rent, knowing that damage was occurring, but hoping to reach a new commercial agreement as to the construction of further improvements to the premises.
The Tribunal did not analyse the facts as it found them by reference to the requirements of the reasonable precautions condition. It did not purport to make findings in terms of the potential ways articulated by Redlich JA in Lawless by reference to which it could be said the relevant test was met.[34] It did not identify the factual basis on which it found that the test was met.
[34]Lawless, [17].
I am satisfied that the Tribunal failed to properly apply the relevant test to the facts. Mr Thompson submitted that the court should examine the transcript of cross-examination and draw its own conclusions. Mr Riordan also made submissions by reference to the evidence and invited the Court to draw its own conclusions. I am not satisfied that this course is satisfactory.
It is the Tribunal, not the Court, which is vested with jurisdiction to decide the facts. The facts are to a degree contentious and the Tribunal itself rejected in part the factual case put forward on behalf of the owner.
An additional complication is that the proper application of the reasonable precautions condition may result in only a partial defence to the claim. First, it is open to conclude that the insured’s conduct was not reckless in the relevant sense until February 2008 or some other point during Gaffneys eight month occupation. If it were proven by the insured that at least some part of the loss was incurred prior to any reckless omission by it, s 54 of the Insurance Contracts Act 1984 (Cth) may operate to prevent the insurer from refusing to pay that part of the claim. Secondly, if only part of the claim succeeds not only will the extent of the insured’s liability involve questions of fact and degree, but difficult issues of quantum may also arise.
In the circumstances, it is appropriate to remit the matter to the Tribunal for reconsideration in accordance with law.
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