Kazlauskas & Kermode v Sun Alliance & Royal Insurance Australia Limited and Ors

[1998] QSC 15

IN THE SUPREME COURT

OF QUEENSLAND  O.S. 1136 of 1998

Brisbane

[Kazlauskas & Kermode v Sun Alliance & Royal Insurance Australia Limited and Ors]

BETWEEN:
  KAROLIS KAZLAUSKAS and ELAINE KERMODE

Applicants

AND:
  SUN ALLIANCE & ROYAL INSURANCE
  AUSTRALIA LIMITED AND ORS
  Respondents

CATCHWORDS:                 CONSTRUCTION OF INSURANCE POLICY - application of contra proferentem rule - whether declaratory relief should be given.

Counsel:P.A. Keane Q.C., S.G. for the applicants.

S.C. Doyle S.C. for the respondents.

Solicitors:  Clayton Utz for the applicants.

Minter Ellison for the respondents.

Hearing Date:  16 February 1998

REASONS FOR JUDGMENT - MUIR J.

Judgment delivered 3 March 1998

Introductory Matters

The applicants, Dr Kazlauskas and Dr Kermode (“the insured”) were the owners of a dwelling house which was destroyed by fire on 27 August 1997.  The building and its contents, which were also destroyed, were the subject of a policy of insurance (“the policy”) issued by the respondents to this application, Sun Alliance & Royal Insurance Australia Limited and Others (“the insurers”).

The insured have a right under the policy to have the insurers pay the cost of rebuilding.  In correspondence between the parties, the insured have contended that the insurers’ obligation in relation to replacement benefit is not limited to the value of the building recorded in the coverage summary of $275,000.00.  The insurers contended to the contrary.

The insured seek a declaration that:-

“...Upon the proper construction of the clause styled How We Pay a Claim for Your Building - Optional Replacement Benefit contained in the policy for the period 10 April 1997 to 10 April 1998, the entitlement of [the insured] in the events which have happened is not limited to the value as recorded in the coverage summary of the policy.”

The Policy of Insurance

The expression “coverage summary” is defined as follows:-

“Coverage Summary

this is the document we give you which sets out the details of your insurance cover.  You receive a coverage summary when you first take out your insurance and again when the policy is renewed or changed.”

The policy relevantly provides, in Section 1, Part A:-

“What is Insured
The property set out in the coverage summary is insured if it is destroyed, lost or damaged.  It is insured only if you own, or are liable for, the property.

When we will pay

We will cover your buildings and contents for accident damage or loss . . .

Additional things we will pay for when you have insured your buildings

We will pay the following in addition to the sum insured:

(1)We will pay the amount that your buildings could be rented out for each week if you had not had a loss: we will pay up to 10% of your buildings sum insured for up to 12 months . . .

. . . .

(2)We will pay the reasonable costs of demolishing and removing any building debris when damage occurs or anything which causes damage.  We will pay up to 10% of your buildings sum insured.

(3)We will pay the reasonable costs of architects, surveyors and legal fees when damage occurs.  We will pay up to 10% of your buildings sum insured.

. . . .

(4)If you have a loss, we will increase the sum insured on your building by the amount the Consumer Price Index (all groups) has increased since you took out your policy or last renewed it.

(5)You are fully insured again for the amount shown in your coverage summary following a claim.  This does not apply when your claim is for a total loss as your policy will end then.

Additional things we will pay for when you have insured your contents

We will pay the following in addition to the sum insured

. . . .

(6)If you have a loss, we will increase the sum insured on your contents by the amount the Consumer Price Index (all groups) has increased since you took out your policy or last renewed it.  This increase does not apply to any special contents you have insured.

(7)You are fully insured again for the amount shown in your coverage summary following a claim.  This does not apply when your claim is for a total loss as your policy will end then.

(The numbers (1) to (7) above do not appear in the policy.  They have been inserted by me for ease of reference).

How we pay a claim for your building

When damage occurs to the buildings we will do one of the following:

·Reinstate or repair the buildings to the condition they were in just before the damage occurred, or

·Pay you the cost of reinstating or repairing the buildings to the condition they were in just before the damage occurred, or

·Pay you the value of the land and buildings just before the damage occurred.  We will reduce this payment by the value of your land and buildings after the damage occurred.

We decide which one we will do.

PLEASE NOTE:

Optional Replacement Benefit

If you selected the optional replacement benefit, this will be shown on your coverage summary as ‘Basis of Settlement - Replacement’.  With this benefit we will pay the cost of rebuilding your buildings or repairing the damaged portions either at your situation or, at our option and with your approval, at another site, to the same condition as when they were new.  We will also pay any additional costs required for your buildings to comply with government or local authority by-laws.  We will not pay these additional costs if you were required to comply with these by-laws before the damage occurred.  (emphasis supplied)

Rebuilding or repairing your buildings must commence within six months of the damage occurring.  If it does not commence within six months, we will settle your claim on the basis that your cover does not include the replacement benefit.

. . . .

How we pay a claim for your contents

When damage occurs to carpet which is 15 years old or more, or any other items which consists solely of fabric, we will do one of the following:

. . . .

When damage occurs to any other contents item, we will do one of the following:

·Replace the property with the nearest equivalent new property; or

·Repair the property to the condition it was in when new; or

·Pay you the cost of replacement or repair.

We decide which one we will do.

. . . .”

The “Coverage Summary” which is referred to in the body of the policy and issued with the policy relevantly provides:-

“Part A and B: Buildings and Contents

Situation

16 Gresham Street, East Brisbane, Qld.  P/Code 4169

Values  -          Buildings          Basis of Settlement      Contents

275,000.00     Replacement                100,000.00"

The Insured’s Submissions

The principal points relied on by the insured in support of their construction are as follows:-

(a)The insured’s obligation stated in the clause headed “Optional Replacement Benefit” is not qualified by or defined by reference to any values stated in the coverage summary;

(b)The reference in the coverage summary to values for buildings is given operation  by the provisions of the policy relating to payments “in addition to the sum insured”.  It is thus not necessary to treat any value stated in the coverage summary as limiting the insurer’s obligations of the optional replacement benefit clause in order to give some effect to the stipulation of values in the summary;

(c)The optional replacement benefit clause selects a particular basis of payment as is plain from the introductory words:-

“If you selected the optional replacement benefit this will be shown on your coverage summary as ‘BASIS OF SETTLEMENT - REPLACEMENT’.” 

The optional replacement benefit clause thus expressly obliges the insurers to pay the cost of rebuilding to the replacement standard without any reference to any value stated in the coverage summary as the sum insured;

(d)The optional replacement benefit clause should not be read down so as to deprive it of the operation it was intended to have, namely, to permit the insured to reinstate the building to its condition as new and to be reimbursed for that cost by the insurers.

The Contractual Scheme

The coverage summary plays an important role in the policy.  It “sets out the details of (the insured’s) insurance cover”.  There is an element of obscurity in the policy through its failure to define the expression “sum insured” or to clearly show the linkage between expressions such as “the sum insured”, “the coverage summary” and “the insurer’s obligations”.  The latter, insofar as damage to buildings is concerned, are referrable to matters stated under the heading “How We Pay a Claim for Your Building”.  Under the optional replacement benefit clause (“the Replacement Clause”), the insurers are obliged to pay the cost of rebuilding or repairing the damaged portions of the building at the location of the insured’s premises or, at the insured’s option, at another site.  Where the optional replacement benefit (“the Benefit”) has not been selected by the insured, the insurers have a choice between (stating the matter broadly):-

·Reinstatement or repair;

·Paying to the insured the cost of reinstatement or repair;

·Paying the insured the difference between land and buildings pre-damage and post-damage.

Similar options are provided to the insurers in respect of claims for damage to contents.  The policy contains no equivalent of the Replacement Clause in relation to contents.

The coverage summary “sets out details of (the) insurance cover”.  The sum stated in the coverage summary is the sum referred to as “the sum insured” in the policy.  The obligations to pay specified monies “in addition to the sum insured”, to “increase the sum insured” and to ensure that the insured “are fully insured again for the amount shown in your coverage summary following a claim” all point towards the role of the “values - buildings” in the coverage summary as providing a limit to the insurers’ obligations.  It is tolerably clear that where the Benefit is not selected, the insurers’ liability is limited by reference to the sum insured or, to use the words of the coverage summary, the sum stated in the coverage summary as “values - buildings”.

It is then necessary to determine whether the Replacement Clause, read in conjunction with other parts of the policy, has the consequence that where the insured selects the Benefit, the limitation on the insurer’s obligations specified in the coverage summary does not apply.

Support for the applicants’ argument is given by:-

·the stipulation in the Replacement Clause that where the Benefit is selected, the coverage summary will show - “Basis of Settlement - Replacement”;

·the Replacement Clause imposes an unqualified obligation to repair or rebuild;

·the fact that the coverage summary contains the words “Basis of Settlement - Replacement”.

The above considerations suggest that the part of the coverage summary which states “Values - Buildings” may not apply, at least so as to set a limit to the insurers’ obligations to repair or rebuild where the Benefit is selected.

What are the indications, if any, to the contrary?

The Insurers’ Submissions

The respondent insurers submit:-

“(c)A number of clauses in the policy assume the existence of an upper limit on the extent of the insurers’ liability under it.  These clauses can only be given effect if the values stated in the Coverage Summary are given the meaning contended for by the Respondents:

(i)On p.6 under the heading `Additional things we will pay for when you have insured your buildings’, the policy expressly provides for amounts which `We shall pay.. in addition to the sum insured’.  This assumes that there is a sum insured which limits or is relevant in some way to the sum which the insurer is to pay.  This strongly supports the construction contended for by the Respondents.

Specific provision is made in the case of an investment property for the payment of market value rent up to 10% of the `sum insured’ for up to 12 months.  Similarly in relation to demolition fees, architects, surveyors and legal fees.

(ii)The same provisions refer to `the building sum insured’.  That must, it is submitted, be a reference to the value figure identified in the coverage summary.  It cannot be given any meaning otherwise.

(iii)On p.7 under the same heading the `sum insured on your building’ is to be automatically increased by the amount of the CPI since the policy was effected.  Again, it is submitted, that is a reference to the value figure identified in the coverage summary.

(iv)Also on p.7 under the same heading it is stated that following a claim:  `You are fully insured again for the amount shown in your coverage summary’.

This is unambiguous statement the amount shown in the Coverage Summary operates to limit the Respondents’ obligation to indemnify the Applicants.  The amount shown in the Coverage Summary is the `full’ amount of indemnity.  That `full’ cover is expressly to apply `again’ (meaning, of course, `once more’ and implying a previous application) following a claim.

(v)Near identical provisions are contained in the policy under the heading `Additional things we will pay for when you have insured your contents’ in relation to contents component of the policy:  pp.7-8.

21.Moreover the structure of the policy indicates that these clauses deal particularly with the extent of cover provided under the policy.  The clause mentioned in sub-paragraph (i) above is identified in the index to the policy under the heading `Buildings - Extent of Cover’: p.17.  The clauses mentioned in sub-paragraphs (i) and (ii) above are identified in the index under the headings `Sum Insured’: p.18.  They should be given an effect consistent with this evident intention.

22.By way of contrast, the Applicants seek to give dominant effect to several clauses within the policy which deal with a different topic, namely those contained under the heading `Paying Claims’ on p.10 of the policy document.

23.Those clauses are indexed under the heading `Claims’: p.17.  The sub-heading under which they appear is `How we pay a claim ...’: pp.10-11.  They deal with the basis of satisfaction of claims, and have nothing to say about applicable limits.  There is, accordingly, no inconsistency between them and the view contended for by the Respondents.”

Some of the foregoing points are more persuasive than others.  I accept the submission that a number of clauses in the policy assume the existence of an upper limit on the insureds’ liability and can be given effect only if the “Values - Buildings” in the coverage summary is treated  as providing the general upper limit of the insureds’ cover.  The insurers’ argument is also assisted by the conclusion, earlier expressed that, at least where the Benefit is not selected, the insurers’ liability is limited by reference to the sum insured.  Analysis however of the paragraphs numbered (1) to (7) above under the heading “Additional things we will pay for when you have insured your buildings” provides only limited support to the insurers’ argument.  Those paragraphs are introduced by the words “We will pay the following in addition to the sum insured”.  Where the Benefit is selected, there is no obligation to pay “the sum insured”.  On a literal reading of the introductory words, there is no scope for the application of the additional payment provisions, in respect of building loss or damage, where the Benefit is selected.  I acknowledge that, even if the Benefit is not selected, the insurers may select an option which does not require payment of moneys.  But in that case, one of the options is the payment of the amount of the sum insured.

There is doubt as to how the obligations to pay or do “additional things” apply where the Benefit has been selected.  The obligation to pay reasonable costs of demolition limited to 10% of “your buildings sum insured” in (2) is inconsistent with the unqualified obligation to rebuild or repair in the Replacement Clause.  The obligation to pay the costs of debris removal is not necessarily inconsistent with the obligations under the Replacement Clause.  A 10% limitation on architects, surveyors and legal costs in paragraph (3) and even the requirement that those costs be “reasonable” is not consistent with the replacement clause.  The obligation there is simply to meet the costs of rebuilding or repairing.  In so far as those costs include the costs of architects, surveyors and other appropriate professional persons, the insurers are liable for them unless their obligations are further qualified by the paragraphs under consideration.  Paragraph (4) is neutral.  If the applicants’ arguments are accepted, the provision has no scope for operation where the Benefit has been selected. 

The respondents argued that a construction should be favoured which avoids giving absurd or unreasonable meanings to the terms of the policy;  Australian Casualty Co Ltd v. Frederico (1986) 60 ALJR 460 at 462. It was contended that it was absurd to conclude that an insurer would expose itself to an unknown liability in consideration of a premium which might have no relation to it and equally absurd to conclude that an insured would think that the respondents had done so. There is no evidence before me as to whether the insured turned their minds to what the insurers may or may not have thought about the replacement cost of the building or even whether they addressed that question. I note that the sum insured figure in respect of both building and contents was the same as “the sum insured” under a previous policy with one of the insurers which expired on 10 April 1997. I can see nothing irrational in an expectation on the part of an insured that an insurer would evaluate the question of risk by reference to matters such as possible rebuilding or repair costs and the statistical and other possibilities of a building of the nature in question being lost or destroyed before assuming risk under a policy.

The insurers produced evidence to the effect that it was the virtually universal practice of insurers in Australia to set premiums by reference to reinstatement/replacement costs and that the premium would have been much higher in this case if the insurers had thought that the policy might be construed in accordance with the applicants’ contentions.

Not surprisingly, there was no evidence of the language used by other insurers in their respective policies in order to bring about the allegedly uniform practice.  There was no evidence that the applicants knew or ought to have been expected to have been aware of any such insurance industry practice.  I therefore find the evidence of the insurers to which I have referred of no assistance in determining the construction point.

Conclusion on the Construction Question

The sophistication of the insurers’ arguments counts against their adoption.  These arguments, although very persuasive, require a careful and detailed analysis of the wording of the document with a view to reading down or qualifying the plain words, boldly stated, of the Replacement Clause.  There appears to me to be some difficulty in construing a house and contents insurance policy in this way.  The approach to construction of the Replacement Clause favoured by the insured has the merit, in this context, of simplicity and gains support from the fact that where the Benefit is selected, the Replacement Clause expressly states that the fact of selection will be shown “on your coverage summary as `basis of settlement - replacement’.” That suggests that the basis of settlement, in the event of damage to the building, will be referrable to that heading rather than the heading “Values - Buildings”.

It is said in paragraph 401 of 25 Halsbury’s Laws of England 4th Ed (Reissue), in relation to the application of the contra proferentem rule to polices of insurance:-

“Where there is ambiguity in the policy the court will apply the contra proferentem rule.  Since the printed parts of a non-marine insurance policy, and usually the written parts, are produced by the insurers, it is their business to see that precision and clarity are attained and, if they fail to do so, the ambiguity will be resolved by adopting the construction favourable to the insured . . . This rule, however, only becomes operative where the words are truly ambiguous; it is a rule for resolving ambiguity and it cannot be invoked with a view to creating a doubt.  Therefore, where the words used are free from ambiguity in the sense that, fairly and reasonably construed, they admit of only one meaning, the rule has no application.”

The above passage correctly states the law in this country; Wilson v. Harvey Trinder (NSW) Pty Ltd (1973) 2 NSWLR 870 at 874-875; Manufacturers Mutual Insurance Limited v. Stargift (1985) 3 ANZ Ins. Cas. 60-615 at 78-763;  Minucoe v. London and Liverpool and Globe Insurance Co Ltd (1925) 36 CLR 513 at 523 and Maxwell v. Price (1960) 2 LL. Rep. 156 at 157 per Dixon C.J. with whom Menzies J. agreed.

I am unable to conclude that the Replacement Clause and coverage summary “fairly and reasonably construed” in the context of the policy as a whole admit only of the meaning advanced by the insurers.  There are substantial arguments in favour of the insureds’ construction and I apply the contra proferentem rule in their favour.

Other Allegations Raised by the Insurers

The insurers oppose the application on the basis that a determination of the construction point would not resolve the “dispute” between the parties.  In my view, in determination of that point, even if declaratory relief were to be confined to the narrow point of construction would be likely to greatly facilitate the trial of any action which might be commenced and also the settlement of the action or any dispute between the parties.  It was also submitted that:-

“There is a real question whether the Applicants made a material non-disclosure (or misrepresented) the value of their house and contents to the Respondents. Given that the claim exceeds the limits of Aon’s authority to have written the policy it may be, upon full factual investigation, that the Respondents have a right under s.28(3) of the Insurance Contracts Act 1984 (Cth) to avoid liability altogether on the basis that had they known the full extent of the risk involved they would not, in the circumstances, have insured at all: Orb Holdings Pty Ltd v. Lombard Insurance Co (Australia) Ltd [1995] 2 QdR 51.”

It was submitted that, on these grounds, it was inappropriate for any declarations to be made.

The only matters pointed to in support of the alleged non-disclosure or misrepresentation was an opinion of a third party that the costs of rebuilding could amount to $376,000 and evidence that the applicants, in discussion with the broker when negotiating the policy, said nothing about possible costs of rebuilding.

It is proper that great caution be taken lest a litigant be deprived of a proper opportunity of raising and arguing a defence fairly open to it.  The following expression of principle by the Court in Fancourt v. Mercantile Credits Ltd (1980-1982) 154 CLR 87 at 99 is applicable:-

“The power to order summary or final judgment is one that should be exercised with great care and should never be exercised unless it is clear that there is no real question to be tried.”

In my view the matters raised by the insurers amount to no more than speculation or conjecture.  The facts pointed to by them, do not provide the basis of even a weak inference that there may have been relevant non-disclosure or misrepresentation.  There is no real question to be tried.  I declare that, upon the proper construction of the clause styled “How we pay a claim for your building - Optional Replacement Benefit” contained in the policy issued by the respondents in favour of the applicants for the period 10 April 1997 to 10 April 1998, the entitlement of the applicants in respect of repair or replacement of the building insured in the events which have happened is not limited to the sum of $275,000 in the coverage summary of the policy.  I order that the respondents pay the costs of and incidental to this summons to be taxed.