Mcmahons Tavern Pty Ltd v Suncorp Metway Insurance Limited No. DCCIV-01-1104

McMAHONS TAVERN PTY LTD (formerly trading as EUREKA TAVERN) v SUNCORP METWAY INSURANCE LIMITED
[2003] SADC 139
Judge Vanstone
Civil

The plaintiff’s claim is pursuant to a contract of insurance.
In the early hours of Monday, 21 February 1999, a group of perhaps 30 people, many of them armed, stormed the Eureka Tavern (“the Eureka”) at 10 Park Terrace, Salisbury, apparently vengeful on account of the earlier rejection of two of their number by Eureka staff. The Eureka was open and operating at that time. There were at least 50 customers within the hotel, many of them using gaming machines. Staff, and some patrons, successfully barricaded the doors, preventing the group from entering. However, the Eureka building sustained at least several thousand dollars worth of damage, which included destruction of a number of plate glass windows. When the group failed to gain entry, some of them damaged motor vehicles in the hotel carpark, most being the property of the patrons within. The incident, referred to during the trial as “the riot”, was plainly terrifying to those inside the hotel. There was quite extensive publicity about it.
Repairs to the hotel required that it be closed for a period, and that occurred prior to the usual closing time of 5 o’clock in the morning. The Eureka re-opened later that day. The plaintiff’s case is that even after re-opening and for many months henceforth, there was a marked negative impact on turnover, and that in addition, certain steps entailing expenditure had to be taken to re-enliven custom.
The plaintiff’s claim is for indemnity for these losses pursuant to its contract of insurance with the defendant.
At the relevant time the Eureka was owned and operated by the plaintiff, McMahons Tavern Pty Ltd. There were other hotels operated within what was referred to as “the Eureka group” including the Stockade Tavern (“the Stockade”) situated at 2 Gawler Street, Salisbury, South Australia. One of the proprietors of the Eureka group was Mr Graham Hobbs, a witness for the plaintiff.
Hotels within the Eureka group were at that time insured with the defendant. The relevant policy went into evidence as P1. The policy made provision for coverage of both “material loss or damage” and “business interruption”. The dispute before the court was concerned only with the latter of those heads of loss, and then only with the indemnity sought for losses said to have been incurred after the time when the Eureka re-opened. The defendant’s position in respect of the claim was that any loss in the nature of business interruption suffered by the plaintiff as a result of the event did not fall within the scope of the policy. In the alternative the defendant argued that if such a loss had been sustained, its quantum was of a much lesser amount than the $260,000 odd claimed by the plaintiff.
Set out hereunder is that part of the policy concerned with the first matter at issue: whether the policy operated to provide cover for any business interruption or interference occurring after re-opening and as a result of the incident.
“SECTION 2
BUSINESS INTERRUPTION
THE INDEMNITY
In the event of any building or any other property or any part thereof used by the Insured at the Premises for the purpose of the Business being physically lost, destroyed or damaged by any cause or event not hereinafter excluded (loss, destruction or damage so caused being hereinafter termed “Damage”) and the Business carried on by the Insured being in consequence thereof interrupted or interfered with, the Insurer(s) will, subject to the provisions of this Policy including the limitation on the Insurer(s) liability, pay to the Insured the amount of loss resulting from such interruption or interference in accordance with the applicable Basis of Settlement.”
It was not suggested that the riot was an excluded event.
A proviso then followed but it is not disputed that it did not come into play.
The composite question which arises under the first part of Section 2 of the policy is: was there an interruption or interference to the plaintiff’s business, after the plaintiff re-opened the business, which was in consequence of the Eureka building being physically lost, destroyed or damaged by any cause or event?
The defendant submitted that in order to attract the indemnity the business interruption must be in consequence of the physical damage itself and that once that damage was repaired – in this case within a matter of hours – any subsequent loss was referable not to the damage, but to its cause, being the riot. The plaintiff contended that the wording of the provision indicates that it is the building being “damaged by an event” which triggers the indemnity, and that it is artificial to isolate the physical damage from the event which caused it, and then to confine indemnity to interruption or interference resulting from the physical damage. The plaintiff submitted that the use of the words “damage so caused” in the clause within parenthesis tends to give some support to that interpretation, even though the shorthand “Damage” is not employed until the following clause.
It is clear even on the undisputed evidence of the two customers of the Eureka who were called by the plaintiff and who were present during the incident, that the business suffered in the wake of the riot. Formerly regular customers, both men removed their patronage subsequent to the incident and by reason of it. On the plaintiff’s case those witnesses could be treated as being representative of other persons who were present at the incident.
Counsel spent some time putting submissions as to the mechanism by which the incident was asserted to have caused a drop in patronage; for instance, that it did so additionally via the media attention the event attracted and by raising an apprehension of a recurrence in the minds of prospective patrons, such as to deter them. Mr Stanley, who appeared for the plaintiff, submitted that at worst, on his case, this sequence of reactive events amounted to causes operating equally and simultaneously with the event causing damage and did not therefore detract from the incident itself as being the “…efficient and, in that sense, proximate cause …” of the loss: HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc & Anor (1998) 43 NSWLR 601, 612 per Sheller JA, Beazley JA and Stein JA agreeing. I am not sure that it is necessary to descend to such an analysis. In my view the matter comes down to interpretation of the clause set out above. The key words are “in consequence thereof”. These words could be read as referring to the “building … being physically lost, destroyed or damaged …”, or alternatively could refer to the “cause or event” giving rise to the damage. I consider that the first reading is the correct one. I do not think that (after the hotel re-opened) there could be said to have been an interruption to or interference with the business, caused by the damage. I accept that there was a diminution in business because some customers were initially unwilling to maintain their patronage of the hotel. But that is to be contrasted with an interruption to or interference with the ability of the operator to carry on its business at the premises. This limb of the policy responds to loss or impairment of that ability, rather than to changes in attitude or perception in the customers of the operator arising from the relevant event.
I find, therefore, that the plaintiff’s claim fails. In case I am found to be in error in my interpretation of the policy, I propose to proceed to an assessment of damages on the basis that the defendant is liable to indemnify for the downturn in custom following the riot. Most of the evidence called in the case was directed to this issue.
I have mentioned already three of the witnesses. The plaintiff also called the then managers of the Eureka and the Stockade being Mr Amadio and Ms Garrod, respectively. Finally the plaintiff called Mr Matthew Fox, a certified practising accountant and director of the firm Messrs Hood Sweeney. The defendant called no oral evidence. I found all the witnesses to be conscientious and generally reliable. There were some difficulties for the patrons and hotel managers in speaking of the precise sequelae of events occurring over four years ago. I found the evidence of Mr Fox, who analysed the turnover of both the Eureka and the Stockade and who formed opinions as to the appropriate settlement amounts, to be impressive.
I now set out the section of the policy headed “Basis of Settlement” (which immediately follows the passage earlier referred to) together with the relevant definitions.
“BASIS OF SETTLEMENT
Item No 1
The insurance under this item is limited to loss of Gross Profit due to: (a) Reduction in Turnover and (b) Increase in Cost of Working and the amount payable as indemnity thereunder shall be:
(a)In respect of Reduction in Turnover:
The sum produced by applying the Rate of Gross Profit to the amount by which the Turnover during the Indemnity Period shall, in consequence of the Damage, fall short of the Standard Turnover.
(b)In respect of Increase in Cost of Working:
the additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the reduction in Turnover which, but for that expenditure, would have taken place during the Indemnity Period in consequence of the Damage, but not exceeding the sum produced by applying the Rate of Gross Profit to the amount of the reduction thereby avoided;
less any sum saved during the Indemnity Period in respect of such of the charges and expenses of the Business payable out of Gross profit as may cease or be reduced in consequence of the Damage.
Provided that if the Declared Value of Gross Profit at the commencement of each Period of Insurance be less than the sum produced by applying the Rate of Gross Profit to the Annual Turnover, (or its proportionately increased multiple thereof, where the Indemnity Period exceeds 12 months) the amount payable hereunder shall be proportionately reduced.
Item No 2
The insurance under this item is to cover such reasonable professional fees as may be payable by the Insured, and such other reasonable expenses necessarily incurred by the Insured and not otherwise recoverable, for preparation of claims under the Insured’s Material damage and Consequential Loss insurance policies and the Insurer(s) shall indemnify the Insured for such reasonable fees and expenses.
Item No 3
The insurance under this item is limited to loss in respect of Pay-Roll and amount payable as indemnity hereunder shall be:
(a)In respect of Reduction of Turnover
(i)during the portion of the Indemnity Period beginning with the occurrence of the Damage and ending not later than the number of weeks thereafter specified in the Schedule: the sum produced by applying the Rate of Pay-Roll to the Shortage in Turnover during the said portion of the Indemnity Period less any saving during the said portion of the Indemnity Period, through reduction in consequence of the Damage, in the amount of Pay-Roll paid.
(ii)during the remaining portion of the Indemnity Period: the sum produced by applying the Rate of Pay-Roll to the Shortage in Turnover during the said remaining portion of the Indemnity Period less any saving during the said remaining portion of the Indemnity Period, through reduction in consequence of the Damage, in the amount of Pay-Roll paid; but not exceeding the sum produced by applying the percentage of the Rate of Pay-Roll specified in the Schedule to the Shortage in Turnover during the said remaining portion of the Indemnity Period, increased by such amount as is deducted for savings under the terms of Clause (a)(i).
NOTE:
At the option of the Insured the number of weeks referred to in Clause (a)(i) above may be increased to the number of weeks specified in the Schedule under the heading “Consolidated period” provided that the amount arrived at under the provisions of Clause (a)(ii) shall not exceed such amount as is deducted under Clause
(a)(i) for savings effected during the said increased number of weeks.
(b)In respect of Increase in Cost of Working
So much of the additional expenditure described in Clause (b) of Item 1 as exceeds the amount payable thereunder, but not more than the additional amount which would have been payable in respect of Reduction in Turnover under the provision of Clauses (a)(i) and (ii) of this item had such expenditure not been incurred.
Provided that if the Declared value of Insured Pay-Roll at the commencement of each Period of Insurance be less than the sum produced by applying the Pay-Roll Limits to the sum produced by applying the Rate of Pay-Roll to the Annual Turnover (or its proportionately increased multiple thereof, where the Indemnity period exceeds 12 months) the amount payable shall be proportionately reduced.
Item No 4
The insurance under this item is limited to increase in cost of working (not otherwise recoverable hereunder) necessarily and reasonably incurred during the Indemnity Period in consequence of the Damage for the purpose of avoiding or diminishing reduction in Turnover and/or resuming and/or maintaining normal business operations and/or services.
Definitions:
GROSS PROFIT: the amount by which:
(a)the sum of the Turnover and the amount of the Closing Stock and work in Progress shall exceed
(b)the sum of the amount of the Opening Stock and Work in Progress and the amount of the Uninsured Working Expenses as set out in the Schedule

NOTE:

The amounts of the Opening and Closing Stocks and Work in Progress shall be arrived at in accordance with the Insured’s normal accountancy methods, due provision being made for depreciation.

TURNOVER: the money (less discounts, if any allowed) paid or payable to the Insured for goods sold and delivered and for services rendered in course of the Business at the premises

INDEMNITY PERIOD: the period beginning with the occurrence of the damage and ending not later than the number of months specified in the schedule thereafter during which the results of the business shall be affected in consequence of the Damage.

PAY-ROLL: the remuneration (including but not limited to pay-roll tax, bonuses, holiday pay, workers’ compensation insurance premiums and/or accident compensation levies, superannuation and pension fund contributions and the like) of all employees.

SHORTAGE IN TURNOVER: the amount by which the Turnover during a period shall in consequence of the Damage, fall short of the part of the Standard Turnover which relates to that period.

RATE OF GROSS PROFIT: The rate of Gross Profit earned on the Turnover during the financial year immediately before the date of the Damage.

ANNUAL TURNOVER: The Turnover during the 12 months immediately before the date of the Damage

STANDARD TURNOVER: The Turnover during that period in the 12 months immediately before the date of the Damage which corresponds with the Indemnity Period.

RATE OF PAY-ROLL: The rate of Pay-Roll to Turnover during the financial year immediately before the date of the Damage.

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To which such adjustments shall be made as may be necessary to provide for the trend of Business and for variations in or other circumstances affecting the Business either before or after the Damage or which would have affected the Business had the Damage not occurred, so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which but for the Damage would have been obtained during the relative period after the Damage.”

In respect of the indemnity period, the number of months specified in the Schedule (P2) was twelve.
Evidence as to the loss of business after the incident went further than that of the two customers earlier mentioned. The Eureka’s manager, Mr Amadio, perceived a loss of confidence in patrons and a tendency to abandon the Eureka in favour of the Stockade. He noticed a downturn particularly in the gaming area of the hotel and the restaurant. The front bar and bottle department were, he said, less affected. He considered that the downturn lasted for “some months, without a doubt” (t/s 41). Steps were taken to address the downturn.
The co-owner, Mr Hobbs, also spoke of a fall in trade. He said that he had an office at the Eureka, attended there once or twice a week and, both before and after the incident, constantly monitored the hotel’s performance. Mr Hobbs said he expected a significant impact on the patronage by reason of the incident and he instructed the manager to review security and entertainment in an effort to forestall it. He observed the expected impact and thought it lasted about six months, although he expected, as well, a longer term impact.
The manager of the Stockade, Ms Garrod, also gave evidence on this topic. She said the incident was a talking point in her hotel among Eureka patrons, some of whom Ms Garrod noticed were now at the Stockade on Friday and Saturday nights. There was also an increase in the food trade. She thought this increase lasted about a month. She said “as with everything else I guess it dies down after that time” (t/s 64). Mr Fox’s analysis of turnover supported an event having occurred towards the end of February which had a negative impact on the Eureka’s business.
I accept the thrust of all this evidence. Furthermore it stands to reason that there would be a marked impact after an incident such as this, an incident which received attention in both the electronic media (see P13) and print media (see P12).
The more difficult question is during what period (being not longer than 12 months) the results of the business were affected in consequence of the damage.
The method adopted by Mr Fox, based on the policy, was to calculate the expected turnover of the Eureka for the period after 21 February 1999 by reference to the levels of turnover in the period leading up to the riot compared with the levels in the same period of the previous year. The expected turnover was thus calculated to be 17.7% higher than for the earlier period (P4 and t/s 213). However, that was not the figure Mr Fox used. He also plotted and compared the turnover of the Stockade in 1998 as against that of the Eureka. (The Stockade was seen to be a useful comparator because of its near location, similar quality and size and because of its similar emphasis on gaming machines.) Mr Fox observed that the trends were “very much aligned” (t/s 213). He then compared the turnover of the Stockade from 20 February to 31 August 1998 against the same period in 1999 and found an increase of 14.2%. Using this trend Mr Fox plotted what should have been the turnover of the Eureka from 20 February 1999 to 31 August 1999 against the actual turnover. He found that at a point “around August 1999” (t/s 219) the actual turnover reached the expected level. On that basis he determined that the indemnity period should be 6 months.
Based on the evidence of Mr Hobbs, Mr Amadio and Ms Garrod, I accept that the Stockade figures provided an appropriate basis for determining the expected trend at the Eureka. Mr Fox’s comparison of the turnover of the two establishments in 1998 was additional support for that conclusion. The only qualification is that the Stockade benefited to some degree after the riot from the custom of some disaffected Eureka patrons.
I consider that Mr Fox’s methodology was sound, at least as a matter of theory. Whether the full extent of the gap between expected and actual turnover in the 6 months after the riot can be attributed to that event remains a question which Mr Fox could not wholly answer. As Mr Stanley conceded, over a period, a number of factors will necessarily have an impact on the business of an hotel and the more time that elapses after an event such as the riot, the less effect will that event have, and the harder it will be to attribute any particular level of trade to that event.

A great many documents detailing the performance of the Eureka both before and after the riot were put into evidence. In their addresses counsel provided further analysis of some aspects of these.
In forming his opinion as to the loss of gross profit (Item No 1) Mr Fox used the total of all departments of the hotel, as opposed to undertaking a department by department analysis. In my view that approach was appropriate. There was some evidence that there was an inverse relationship between results in the gaming area as against the gaming bar (where entertainment was presented) and in any event, there seems to me to be, on the evidence, no warrant to do other than view the hotel as a whole.
An examination of the Eureka’s weekly turnover figures in P14, comparison of 1998 and 1999 weekly turnover figures (P16), and comparison of turnover figures with year to date average figures for 1999 (P16) all highlight a marked impact on turnover in the several months following the riot, but a steady regaining of ground from mid May onwards and particularly from June onwards. The week following the riot produced the worst turnover figure for the first ten months of the year, and perhaps more; although the week following showed a temporary recovery, perhaps due partly to a curiosity factor. In those circumstances it is hard to discern after mid May that the riot still had a significant impact on trading. This is particularly so bearing in mind the myriad factors influencing the trading figures of any hotel, and the fact that this was not the only instance of negative publicity for the hotel, although it was undoubtedly the worst. There was another incident attracting poor publicity on 19 April 1999.
In all the circumstances I am persuaded that the results of the business were adversely affected as a result of the riot for at least three months after the incident. However, I am not satisfied that the indemnity period could extend beyond that; although, as I have observed, I find no fault with Mr Fox’s methodology. I am satisfied that in the fourth to sixth month after the incident the riot continued to have some limited but unquantifiable impact on turnover. If the failure to extend the indemnity period beyond three months could constitute some unfairness to the plaintiff then against that could be set off allowance for the fact that, as noted, the Stockade gained some Eureka customers after the riot and that made the Stockade’s 1999 trend, as calculated and used by Mr Fox, some degree stronger than it would otherwise have been. In addition, in Mr Fox’s calculations, there were some areas where alternative approaches might have resulted in a slightly more conservative loss of gross profit. For example, provision for annual and long service leave of employees, and contract labour expenses were not taken into account in determining the rate of gross profit (t/s 222-225 and 277-278).
The task then is to calculate the loss using an indemnity period of three months. In fact, as Mr Stanley suggested (t/s 348), it is convenient to use a period of 14 weeks. Annexed to these reasons is that calculation. It employs the same methodology used by Mr Fox, the source for which is, of course, the policy. I find if the defendant were found to be liable that the quantum of that liability pursuant to the policy would be in the sum of $147,000.
Since the question of interest raises the application of s.57 Insurance Contracts Act 1984 (Cth) and I have not heard submissions as to it, I do not propose to determine that matter.
As noted, there will be judgment for the defendant.
CALCULATION FOR INDEMNITY
PERIOD ENDING 31.5.99
ITEM 1:    Loss of Gross Profit
Eureka standard turnover       21.02.98 – 31.05.98 (14 weeks)   $2,042,232
                  Eureka actual turnover           21.02.99 – 31.05.99 (14 weeks)     1,981,675
Trend Analysis
Stockade turnover                  21.02.98 – 31.05.98  1,724,771
                  Stockade turnover                  21.02.99 – 31.05.99  1,909,919
\ Turnover increased by 10.73%
Eureka standard turnover       2,042,232 x 110.73% =                  2,261,363
                  Less: Actual turnover  -1,981,675
Reduction in turnover =  297,688
Reduction in turnover x rate of gross profit[1] :
  279,688 x 33.17% =  97,772
[1]        See definition and calculation by Mr Fox: P4, page 1.
Then apply proviso[2] being 87.3% :  ______
[2]        See P1, page 13, and t/s 361 line 22.
92,772 x 87.3% =  80,990
ITEM 2:    Reasonable Professional Fees
Hood Sweeney’s fees[3]  4,750
[3]        See P4, page 3.
ITEM 3:    Loss in Respect of Payroll
Rate of payroll is 16.29%[4]
                  Payroll limits:           100% for 8 weeks
  50% for balance[5]
[4]        See definition and calculation by Mr Fox: P4, page 3.
[5]        See P2, page 3.
_{8 x 16.29% x reduction in turnover}_:
^{14 weeks}
                  8 x 16.29% x 279,688 x ¹/₁₄ =  26,035
                  Plus: 6 x 16.29% x 279,688 x ¹/₁₄x¹/₂9,763
35,798
ITEM 4:    Increase in Cost of Working
Increase in security costs and entertainment costs
38,258[6] + 9,209[7] x ¹⁴/₂₆=   25,559
[6]        See calculation by Mr Fox for 6 months: P4, page 4.
[7]        See calculation by Mr Fox for 6 months: P4, page 4.
Add Items 1, 2, 3 and 4 =  $147,097

[2003] SADC 139

19 September 2003