Mobis Parts Australia Pty Ltd v XL Insurance Company SE (No 7)

[2017] NSWSC 1321

Supreme Court

New South Wales

• Summary available
• Amendment notes

Medium Neutral Citation:	Mobis Parts Australia Pty Ltd v XL Insurance Company SE (No 7) [2017] NSWSC 1321
Hearing dates:	29-31 May, 1, 5–8, 13–16, 19, 21-23 and 26-30 June 2017; further submissions 7 and 19 July 2017; further argument 27 July 2017; further submissions 28 July, 2, 3 and 9 August 2017; further argument 16 August 2017; further submissions 21, 23, 24, and 29 August 2017
Decision date:	29 September 2017
Jurisdiction:	Equity - Commercial List
Before:	Stevenson J
Decision:	Mobis entitled to indemnity under the Local Policy
Catchwords:	INSURANCE – property damage and business interruption policy – warehouse collapse in a storm – whether plaintiff insured entitled to indemnity under a Local Policy or alternatively a Master Policy – whether insurer agreed conditionally to accept liability under the Local Policy – whether collapse was caused by hail or storm – whether on its proper construction Local Policy has the hail limit specified in the Master Policy – whether Local Policy should be rectified to include a hail limit – whether faulty design exclusion in Local Policy enlivened – whether plaintiff is an insured under Master Policy – whether plaintiff entitled to bring action under Master Policy – whether faulty construction exclusion in Master Policy enlivened – quantum of plaintiff’s claim – whether plaintiff’s stock was lost in collapse; CONTRACT – insurance policies – whether on its proper construction Local Policy has hail limit specified in Master Policy – whether policy should be rectified to include hail limit – whether on proper construction of Master Policy plaintiff entitled to indemnity under storm limit notwithstanding existence of hail limit
Legislation Cited:	Environmental Planning and Assessment Regulation 2000 (NSW) Insurance Act 1973 (Cth) Insurance Contracts Act 1984 (Cth)
Cases Cited:	ABN AMRO Bank NV v Bathurst Regional Council (2014) 224 FCR 1; FCAFC 65 Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652 Australian Gypsum Ltd v Hume Steel Ltd (1930) 45 CLR 54; HCA 38 Balent v National Insurance Co of New Zealand Ltd (1959) 59 SR (NSW) 275 Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243 British Traders’ Insurance Co Ltd v Monson (1964) 111 CLR 86 Caine v Lumley General Insurance Ltd (2006) 14 ANZ Ins Cas 61-698; NSWSC 337 Caine v Lumley General Insurance Ltd [2008] NSWCA 4 Castellain v Preston (1883) 11 QBD 380 Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (1982) 2 ANZ Ins Cas 60-463 Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (1983) 155 CLR 279; 2 ANZ Ins Cas 60-514 Chapman v Pole (1870) 22 LT 306 Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 City Realties (Holdings) Ltd v National Insurance Co of NZ Ltd (1986) 4 ANZ Ins Cas 60-695 Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 Deaves v CML Fire & General Insurance Co Ltd (1979) 143 CLR 24 East End Real Estate Pty Ltd (t/as City Living) v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400 Federation Insurance Ltd v Wasson (1987) 163 CLR 303; HCA 34 Fowler v Fowler (1859) 4 De G & J 250; 45 ER 97 General Accident Fire & Life Assurance Corporation Ltd v Midland Bank Ltd [1940] 2 KB 388 General Accident Insurance Asia Ltd v Sakr [2001] NSWCA 402 General Newspapers Pty Ltd v Cigna Insurance (1991) 6 ANZ Ins Cas 61-086 Harris Paper Pty Ltd v FAI General Insurance Co Ltd (1995) 8 ANZ Ins Cas 61-276 HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601 Holmes v Payne [1930] 2 KB 301 Jones v Dunkel (1959) 101 CLR 298 Kuwait Airways Corporation v Kuwait Insurance Co SAK (No 1) [1996] 1 Lloyd’s Rep 664 Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd (2005) 13 ANZ Ins Cas 61-643; NSWCA 66 Leppard v Excess Insurance Co Ltd [1979] 2 All ER 668; 1 WLR 512 Manufacturers' Mutual Insurance Ltd v Queensland Government Railways (1968) 118 CLR 314 Metlife Insurance Ltd v Visy Board Pty Ltd [2007] NSWSC 1481 Millman v Rochester Ry Co 3 App Div 109; 39 NYS 274 (1896) Mobis Parts Australia Pty Ltd v XL Insurance Company SE (No 4) (Supreme Court (NSW), Stevenson J, 5 June 2017, unrep) Moore v Evans [1917] 1 KB 458 Moore v The National Mutual Life Association of Australasia Limited [2011] NSWSC 416 National Vulcan Engineering Insurance Group Ltd v Transfield Pty Ltd; National Vulcan Engineering Insurance Group Ltd v Connell Wagner Pty Ltd; National Vulcan Engineering Insurance Group Ltd v Coffey Partners International Pty Ltd (2003) 59 NSWLR 119; NSWCA 327 Newton, Bellamy & Wolfe v State Government Insurance Office (Qld) [1986] 1 Qd R 431 Prime Infrastructure (DBCT) Management Pty Ltd v Vero Insurance Ltd [2005] QCA 369 Re Mining Technologies Australia Pty Ltd [1999] 1 Qd R 60 Scott v Copenhagen Reinsurance Co (UK) Ltd [2002] EWHC 1348 (Comm) Simic v New South Wales Land and Housing Corporation [2016] HCA 47 State of New South Wales v AXA Insurance Australia Ltd (2002) 54 NSWLR 409; NSWCA 63 Synergy Health (UK) Ltd v CGU Insurance Plc (t/as Norwich Union) [2010] EWHC 2583 (Comm) Taylor v Johnson (1983) 151 CLR 422 TEC Desert Pty Ltd v Commissioner of State Revenue (WA) (2010) 241 CLR 576 The Nominal Defendant v Gabriel (2007) 71 NSWLR 150; NSWCA 52 Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338; HCA 37 Thiess Pty Ltd v ERC Frankona Reinsurance Limited [2007] QSC 4 Webster v General Accident, Fire & Life Assurance Corporation Ltd [1953] 1 QB 520
Texts Cited:	Australian Oxford Dictionary (online) Colinvaux’s Law of Insurance (11th UK ed, Sweet & Maxwell) D Kelly and M Ball, Kelly and Ball Principles of Insurance Law, (2nd ed, 2001, LexisNexis) Macquarie Dictionary (online)
Category:	Principal judgment
Parties:	Mobis Parts Australia Pty Ltd (Plaintiff) XL Insurance Company SE (First Defendant) AIG Europe Limited (Second Defendant) UNIQA Versicherungs AG (Third Defendant)
Representation:	Counsel: N J Young QC with T Mehigan and E Ball (Plaintiff) J E Marshall SC with D S Weinberger (First Defendant) S Gray (Second Defendant) P S Braham SC with R Scruby (Third Defendant)   Solicitors: Ashurst Australia (Plaintiff) McCabes Lawyers (First Defendant) Kennedys (Australasia) (Second Defendant) Hicksons Lawyers (Third Defendant)
File Number(s):	SC 2015/281297

TABLE OF CONTENTS

Introduction - paragraph 1

The policy limits - paragraph 13

Issues

Issues under the Local Policy - paragraph 20

Issues under the Master Policy - paragraph 26

Issues specific to UNIQA - paragraph 31

Decision - paragraph 36

Under the Local Policy - paragraph 1

Under the Master Policy - paragraph 1

UNIQA issues - paragraph 1

The Local Policy - paragraph 39

The Master Policy - paragraph 44

The Acceptance of Liability issue - paragraph 51

Was there a contract of settlement? - paragraph 59

If there was a contract of settlement, was there a change of the “known facts and circumstances”? - paragraph 77

Does the 5 June letter constitute a waiver by election? - paragraph 89

Is XL precluded from relying on the Faulty Design Exclusion by reason of s 14 of the Insurance Contracts Act? - paragraph 99

What was the cause of the collapse? - paragraph 101

The proximate cause of the collapse - paragraph 103

The rain and hail leading to the collapse - paragraph 116

Earlier rain events - paragraph 120

Mr Carolan’s hypothesis - paragraph 128

The hail load versus the collapse load - paragraph 137

Temporal proximity of the falling of the hail and the collapse of the warehouse - paragraph 145

Conclusion as to proximate cause - paragraph 148

Does the Local Policy have a hail limit? - paragraph 150

Clause 1.9b - paragraph 154

Rectification

Should the Local Policy be rectified to include the Hail Limit? - paragraph 162

Principles - paragraph 164

Background - paragraph 168

Negotiation of the 2010/2011 Master Policy - paragraph 186

Mobis joins XL’s global insurance program - paragraph 205

Events leading to the 2011 Australian Local Policy wording - paragraph 269

Events thereafter – the “mistake” repeated - paragraph 348

Should the Local Policy be rectified? - paragraph 358

Has XL shown, to the relevant standard, there was a “mistake”? - paragraph 360

Mobis’s intention - paragraph 387

Conclusion as to rectification - paragraph 400

Was there a variation of contract constituted by the issue of the Local Policy wording? - paragraph 402

The Faulty Design Exclusion - paragraph 404

The warehouse - paragraph 407

“Its own” faulty design - paragraph 417

Negligence not necessary - paragraph 431

Faulty design – “res ipsa loquitur”? - paragraph 432

When is a design “faulty”? - paragraph 436

Building Code of Australia - paragraph 453

AS/NZS 1170.0 - paragraph 456

AS/NZS 1170.1 - paragraph 465

The proper construction of Note 1 - paragraph 492

Load shedding to adjacent beams - paragraph 512

Is there a “robustness” requirement in the Standards? - paragraph 533

The Wind Standard

Is it relevant? - paragraph 552

Did the design comply with the Wind Standard?

Ridge vent throat width - paragraph 561

Terrain - paragraph 571

Doors - paragraph 578

Conclusion concerning the Wind Standard - paragraph 592

Conclusion as to compliance with the Standards - paragraph 593

Was the warehouse faulty even if it complied with the Standards? - paragraph 594

Conclusion as to the Faulty Design Exclusion - paragraph 605

Mobis is thus entitled to indemnity under the Local Policy - paragraph 606

Master Policy – the Faulty Construction Exclusion - paragraph 609

The Master Policy – the Overlap Clause - paragraph 618

UNIQA issues - paragraph 648

The Master Policy - paragraph 651

Is Mobis an “insured” under the Master Policy? - paragraph 657

Is Mobis entitled to make a claim under the Master Policy? - paragraph 689

Is the Master Policy a composite policy? - paragraph 705

Section 48 of the Insurance Contracts Act - paragraph 715

Conclusion as to Mobis’s entitlement to sue - paragraph 721

Is UNIQA liable for losses in Australia? - paragraph 725

Illegality? - paragraph 741

Mobis’s notice of motion filed 29 June 2017 - paragraph 750

Quantum - paragraph 753

Building claim - paragraph 756

FDC Construction and Fitout Pty Ltd building cost - paragraph 759

Removal of debris and professional fees - paragraph 762

Separate building costs - paragraph 763

The slab - paragraph 770

Do some components of the building claim represent a claim for contents? - paragraph 774

More robust construction - paragraph 777

Provisional sums and variations - paragraph 798

Provisional sum 6: landscaping $225,202 - paragraph 799

Provisional sum 7: IT requirements $708,912 - paragraph 805

Provisional sum 12: building code upgrades for additional fire services $191,564 - paragraph 808

Provisional sum 15: sub-terrain conditions $670,309.77 - paragraph 812

Variation 6: extra floor strength $37,828 - paragraph 813

Variation 8: glazed doors $152,259 - paragraph 817

Variation 9: additional lighting to warehouse $10,091 - paragraph 820

Variation 11: glazed balustrades $139,217 - paragraph 822

Variation 12: joinery $127,383 - paragraph 825

Variation 15: IT $25,572 - paragraph 829

Stock - paragraph 834

What happened to the stock at the time of and following the collapse? - paragraph 845

How much stock was “salvageable” at the date of the fire? - paragraph 864

How much stock was “lost” by reason of the warehouse collapse?

When is insured property “lost”? - paragraph 895

Was any stock “lost”? - paragraph 903

The risk of a fire - paragraph 906

No stock was “lost” - paragraph 914

How much stock was destroyed or damaged? - paragraph 922

Stock that was not destroyed or damaged by the collapse - paragraph 923

Stock destroyed without inspection - paragraph 931

Stock that Mobis cannot replace - paragraph 940

Stock that Mobis has not yet replaced - paragraph 950

Why Mobis has not replaced this stock - paragraph 956

Is Mobis likely to replace this stock? - paragraph 960

Clause 4.2.1(d) of the Local Policy - paragraph 964

Does s 54 of the Insurance Contracts Act prevent XL from relying on cl 4.2.1(d)? - paragraph 974

Is Mobis entitled to indemnity for the “cost of replacement” of stock it has not replaced or cannot replace? - paragraph 981

Kia owned stock - paragraph 1002

Contents - paragraph 1014

The individual items

(a) Skywire $75,754 - paragraph 1018

(b) Shockwatchers $35,485 - paragraph 1021

(c) Other items in Asset Register $49,423 - paragraph 1022

(d) Betterment on third level of racking $66,734 - paragraph 1025

(e) Rack and binning labels $49,798 - paragraph 1026

(f) Binning upgrade for fire compliance $181,486 and additional fire proofing $13,574 - paragraph 1027

(g) Binning dividers $74,676 - paragraph 1031

(h) Totes and tote trolleys $17,400 - paragraph 1033

Average - paragraph 1035

Business interruption - paragraph 1056

Loss of gross profit - paragraph 1060

Rate of gross profit - paragraph 1062

Period of lost sales - paragraph 1065

Rate of trend - paragraph 1069

Allowance for the fire - paragraph 1076

Increased cost of working

Additional labour costs - paragraph 1081

General ledger costs - paragraph 1091

FDC $20,220 - paragraph 1095

Jenmarc $5,268 - paragraph 1097

Blacktown City Council $21,782 - paragraph 1098

Mobis head office $150,681 - paragraph 1099

Security $457,827 - paragraph 1102

PNL and Wrapfix $8,455 - paragraph 1108

Crown $30,701 - paragraph 1109

Assets of third party $80,045 - paragraph 1110

Various invoices for staff amenities $27,245 - paragraph 1111

DY Kim Language Services $7,467 - paragraph 1112

Miscellaneous $8,057 - paragraph 1113

Rent outside indemnity period - paragraph 1114

Relocation costs - paragraph 1122

Savings - paragraph 1123

Depreciation - paragraph 1125

IT expenses - paragraph 1139

Concluding remarks on quantum - paragraph 1144

Judgment

Introduction

1. On 25 April 2015, a severe storm occurred in Sydney. It caused a warehouse owned by the plaintiff, Mobis Parts Australia Pty Ltd, to collapse.

2. Mobis is a wholly owned Australian subsidiary of Hyundai Mobis, a company incorporated in Korea which I will call “Mobis Korea”. Mobis used the warehouse to store and distribute spare parts for Hyundai and Kia motor vehicles.

3. The warehouse was vast; equivalent in size to several city blocks. Fortunately, as the storm occurred on a public holiday, no one was in the warehouse when it collapsed.

4. A little under three months later, on 30 July 2015, the warehouse (and virtually all of its then contents, including a large amount of stock) was destroyed in a fire which broke out during the demolition recovery process.

5. Mobis seeks indemnity in respect of the loss that it claims to have suffered by reason of the collapse (but not the fire) from the first defendant, XL Insurance Company SE, under a Property Damage and Business Interruption Policy issued by XL for the period 23 June 2014 to 23 June 2015. The parties referred to this as the “Local Policy”.

6. The Local Policy was issued by XL as part of an International Property Damage and Business Interruption Program.

7. Under that program, XL (together with the second defendant, AIG Europe Ltd, and the third defendant, UNIQA Versicherungs AG) issued a Property Damage and Business Interruption Policy (covering the period 23 June 2014 to 23 June 2016) in the name of another wholly owned subsidiary of Mobis Korea, Mobis Slovakia s.r.o. The parties referred to this as the “Master Policy”.

8. Under the Master Policy, XL was the lead insurer (with a 50% share of risk); with AIG and UNIQA having a 30% and 20% share of the risk, respectively.

9. Mobis’s primary claim is against XL under the Local Policy. Mobis only seeks indemnity under the 2014 Master Policy if, contrary to its case, the Local Policy does not respond to its claim.

10. Mobis seeks indemnity in the order of $62 million (less some $14.4 million already paid to it by XL, discussed below) in respect of:

1. the cost of rebuilding the warehouse (some $17.25 million);

2. the replacement value of the loss or damage of contents (some $8.5 million) and stock (the full amount of the policy sub limit of some $27.5 million); and

3. business interruption of some $9.1 million.

11. The hearing of this matter proceeded over 21 hearing days between 29 May and 30 June 2017. There was further argument thereafter on a number of points, resulting in further submissions delivered during July and August 2017.

12. I have been greatly assisted by the commendably competent and efficient manner in which the case was prepared by the solicitors for the parties and presented by counsel throughout that period. I have been particularly assisted by the comprehensive written and oral submissions I received following the conclusion of evidence. Much of what follows is taken, with gratitude, from those written submissions, especially as to uncontroversial and background matters.

The policy limits

13. The Local Policy has a limit for “storm” damage of $72,105,000 (equivalent to EUR 50 million).

14. The Master Policy has a corresponding limit for storm damage (EUR 50 million).

15. The Master Policy also has a limit of EUR 10 million for “hail”. The parties referred to this as the “Hail Limit”.

16. XL contends that the agreement of the parties was that there should be a corresponding hail limit in the Local Policy.

17. No such limit appeared in the terms of the Local Policy as originally written with effect from 1 January 2011, or as renewed annually from 23 June each year until, and including, the relevant policy period (23 June 2014 to 23 June 2015).

18. A number of issues arise as a result of this omission.

19. On 5 June 2015, shortly after the warehouse collapsed, XL agreed to make a payment to Mobis in the amount of the asserted Hail Limit (hence the payment of some $14.4 million referred to at [10]; being the equivalent of EUR 10 million).

Issues

Issues under the Local Policy

20. The first issue is whether a letter that XL wrote to Mobis on 5 June 2015, Mobis’s acceptance of the offer said to have been made in that letter and the subsequent payment by XL to Mobis of the $14.4 million referred to at [10] and [19], had the effect of foreclosing debate about XL’s obligations under the Local Policy, other than as to whether the Local Policy has the Hail Limit and as to quantum. The parties referred to this as the “Acceptance of Liability” issue.

21. The second issue (which is relevant assuming that the Local Policy has the Hail Limit) is whether the cause of the collapse was hail or storm. This involves consideration of what meteorological event caused the collapse of the warehouse.

22. The third issue (which is relevant assuming the collapse was caused by hail) is whether, by reason of cl 1.9 of the Local Policy, the Hail Limit in the Master Policy is, in effect, imported into the Local Policy.

23. The fourth issue is whether the Local Policy should be rectified so as to incorporate the Hail Limit.

24. The fifth issue is whether the damage suffered by Mobis was caused by the “faulty” or “defective” design of the warehouse so as to enliven exclusion cl 3.2.1 of the Local Policy (the “Faulty Design Exclusion”).

25. Finally, there are issues as to quantum; particularly concerning Mobis’s claim for the loss of and damage to stock in the warehouse on the date of collapse.

Issues under the Master Policy

26. Assuming Mobis is not able to recover under the Local Policy, and must resort to the Master Policy, the following issues arise under the Master Policy.

27. The first is whether, in the events that have happened, the Hail Limit in the Master Policy is engaged (this is the same issue that arises under the Local Policy, assuming it has a hail limit).

28. The second issue is whether, by reason of Art 3.1.8 of the Master Policy (which the parties called the “Overlap Clause”), and assuming the damage was caused by “storm” as well as by hail, Mobis is entitled to indemnity up to the storm limit of EUR 50 million, even if the Hail Limit was engaged.

29. The third issue is whether the damage suffered by Mobis is the result of “faulty building construction” of the warehouse so as to enliven exclusion Art 6.3 of the Master Policy (the “Faulty Construction Exclusion”). This raises questions similar to, but not quite the same as, those which arise under the Faulty Design Exclusion in the Local Policy.

26. Again, issues of quantum arise.

Issues specific to UNIQA

31. UNIQA (one of the three insurers under the Master Policy) raises the following issues (which are not raised by either XL or AIG).

32. The first is whether Mobis is an “Insured Company” under the Master Policy.

33. The second is whether, assuming Mobis is an Insured Company under the Master Policy, it is entitled to make a claim under that policy (or whether only Mobis Slovakia is entitled to bring a claim).

34. The third is whether, on the proper construction of the Master Policy, UNIQA is liable for risks in Australia.

35. The fourth is whether UNIQA’s participation in the Master Policy would constitute a breach of s 10 of the Insurance Act 1973 (Cth) and thus not be “permitted” for the purpose of Art 5.1 of the Master Policy.

Decision

36. Subject to a number of qualifications concerning the quantum of its claim, Mobis is entitled to indemnity under the Local Policy.

37. Accordingly, the question of whether the Master Policy would respond to a claim by Mobis does not arise.

38. The answers to the particular questions set out above are:

Under the Local Policy

1. The letter written by XL to Mobis on 5 June 2015, Mobis’s reply to that letter and the payment of $14.4 million did not constitute an “acceptance of liability” by XL (see [51] to [100] below);

2. hail was the proximate cause of the collapse of the warehouse (see [101] to [149] below);

3. cl 1.9 of the Local Policy does not have the effect of importing the Hail Limit in the Master Policy into the Local Policy (see [150] to [161] below);

4. the Local Policy should not be rectified so as to incorporate the Hail Limit (see [162] to [403] below);

5. the Faulty Design Exclusion is not enlivened (see [404] to [605] below).

Under the Master Policy

1. Were Mobis to seek indemnity under the Master Policy:

1. the Faulty Construction Exclusion would not have been enlivened (see [609] to [617] below);

2. the Overlap Clause would not have had the effect that Mobis was entitled to indemnity up to the storm limit (see [618] to [647] below).

UNIQA issues

1. Were Mobis to seek indemnity under the Master Policy:

1. Mobis is an “Insured Company” under the Master Policy (see [657] to [688] below);

2. only Mobis Slovakia, and not Mobis, is entitled to make a claim under the Master Policy (see [689] to [724] below);

3. UNIQA is not, in any event, liable for risks in Australia (see [725] to [740] below); and

4. UNIQA would not have been in breach under s 10 of the Insurance Act had it been liable to indemnify Mobis (see [741] to [749] below).

The Local Policy

39. By the insuring clause under the Local Policy, XL agreed to:

“[I]ndemnify [Mobis] by either payment or, at [XL’s] option, by replacement or repair (both based on the cost of reinstatement) up to the Limit of Liability stated in the Schedule in respect of the coverage granted under:

Section 1 – Property Damage

Section 2 – Business Interruption

resulting directly from any Damage during the Period of Insurance stated in the Schedule…”.

40. There is no hail limit in the “Schedule” which is set out in cl 1.10 of the Local Policy as follows:

Limit in respect of any on Occurrence	Limit in the Aggregate during any on Period of Insurance
Damage resulting from:
Earthquake	AUD 72,105,000	AUD 72,105,000
Earthquake – 13-39 Pilbara St, Amcap warehouse, WA 6986 Welshpool Perth	AUD 14,421,000	AUD 28,842,000
Flood	AUD 72,105,000	AUD 72,105,000
Storm	AUD 72,105,000	AUD 72,105,000
Accidental damage	AUD 14,421,000	Not Applicable
Theft	AUD 7,210,500	Not Applicable
Riot, Civil Commotion and Malicious Damage	AUD 7,210,500	Not Applicable
Any other damage	AUD 96,620,700	Not applicable

41. XL did not exercise its option to indemnify Mobis “by replacement or repair”.

42. Thus, the basis of indemnity is the “cost of reinstatement”. “Reinstatement” is defined in cl 4.2, to which I will return (see [843] below).

43. I will set out below other clauses in the Local Policy as necessary to understand the issues which arise.

The Master Policy

44. The Master Policy had an insuring clause which, although expressed somewhat differently to that in the Local Policy, was to the same effect.

45. The Master Policy had limits for “storm”, “wind storm” and for “natural peril events” (including a hail limit).

46. The table setting out the various liability limits was in the following form and headed “Insured Perils/Limits of Liability”:

Limit each loss (e.e.i.) PD/BI combined	Limit in annual aggregate (a.a.g.)
Peril
Fire, Lightning, Explosion, Aircraft Impact (Flexa)	260,000,000	520,000,000
Fire, Lightning, Explosion, Aircraft Impact (Flexa) for Italian branch office only	2,500,000	2,500,000
Storm, Windstorm	50,000,000	50,000,000
Windstorm US – Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Texas, Puerto Rico (USA), Hawaii (USA), Caribbean Islands, Japan, Taiwan	Not insured	--
Flood	50,000,000	50,000,000
Flood in the US – Flood zone A	Not insured	--
Earthquake	50,000,000	50,000,000
- Earthquake (SAIC Greece only)	Not insured	--
- Earthquake in California (USA) and Japan	Not insured	--
- Earthquake Italy, Mexico, Chile, Alaska, Hawaii, Puerto Rico	Not insured	--
Earthquake Australia (named area Perth)	10,000,000	20,000,000
Natural peril events, hail, avalanche, weight of snow and ice, rockslide, falling stones, landslide	10,000,000	10,000,000
Contract Works and/or Property under construction	5,000,000	5,000,000
Machinery Breakdown	5,000,000	10,000,000
Electronic Equipment Breakdown	1,000,000	1,000,000
Theft following forcible or violent entry and damages to the insured property	5,000,000	5,000,000
Civil Commotion, Riot, Lock-out, Strike	5,000,000	5,000,000
Unnamed perils	10,000,000	20,000,000

47. The Hail Limit formed part of the limit:

“Natural peril events, hail, avalanche, weight of snow and ice, rockslide, falling stones, landslide.”

48. Somewhat repetitively, Art 13.2 of the Master Policy defined “Natural Peril Events (natural peril cover)” as follows:

“a.   High water/inundation (including tsunami);

Inundation is deemed to have occurred when a water body overflows its natural or man-made boundaries, e.g. river banks, embankments or dykes, causing the surrounding land to be submerged in water.

b.   Windstorm (= winds with a minimum velocity of 75 km/h that uproots trees or take the roofs off buildings in the vicinity of the insured property);

c.   Hail;

d.   Avalanche;

e.   Weight of snow or ice;

f.   Rockslide;

g.   Falling stones;

h.   Landslide.”

49. Thus, the limits of liability under the Master Policy were significantly different in nature to those in the Local Policy.

50. Again, I will set out below the other relevant terms of the Master Policy as necessary to understand the issues that arise.

The Acceptance of Liability issue

51. The Acceptance of Liability issue is centred around a letter XL sent to Mobis’s solicitors on 5 June 2015.

52. On 26 May 2015, Mobis’s solicitor wrote to XL:

“As you will be aware, our client’s warehouse, located at 77 Peter Brock Drive, Eastern Creek, NSW, suffered extensive damage in the storm on 25 April 2015 with the loss of stock and other items located within the building. It has been over three weeks since the incident was reported and the initial meeting with your company’s loss adjusters, Crawford, took place and, despite repeated requests by our client’s broker, Marsh, there has been no formal response on whether or not your company accepts liability under the policy.

… As the maximum indemnity period for business interruption cover under the policy is 12 months, our client needs to progress the reconstruction of its warehouse urgently. Your company is well aware of this and yet has delayed granting indemnity. This delay is causing (and will continue to cause) prejudice to our client.

There is no reason for the delay. The loss was clearly caused by an insured occurrence. Our client has been cooperating fully with loss adjusters appointed by your company. Therefore, please let us have confirmation of the grant of indemnity by return.”

53. On 5 June 2015, XL replied:

“Investigations into and the adjustment of the loss by XL has [sic] been ongoing since the date of the loss.

…

XL accepts liability under the policy in respect of the loss on the basis of known facts and circumstances, and subject to the applicable terms and conditions.

The maximum limit of liability applicable to the loss is EUR 10 million (the limit). XL is satisfied that the loss will exceed the limit and XL is therefore prepared to pay Mobis the amount of the limit forthwith.

Please submit your bank details for electronic funds transfer.

XL understands that Mobis does not agree that the limit applies to the loss. Accordingly, XL accepts that if Mobis takes payment of [EUR 10 million] at this time Mobis’s rights remain reserved.

XL otherwise reserves its position.”

54. The investigations referred to in the 5 June 2015 letter included whether the warehouse complied with the Australian Standards for buildings of its type. Those investigations culminated in a report produced on 2 June 2015 by a firm of consulting engineers, Costin Roe Consulting. The Costin Roe report concluded that the warehouse's structural design complied with the requirements of the relevant Australian Standards.

55. On 12 June 2015, Mobis’s solicitors replied:

“Thank you for your letter dated 5 June 2015 (which we received on 9 June 2015).

Please arrange for the EUR 10 million to be paid into the following account…

…

Mobis reserves its rights to contend that the limit of liability applying to the loss exceeds EUR 10 million.”

56. On 23 June 2015, XL paid Mobis the Australian dollar equivalent of EUR 10 million (being the $14.4 million referred to at [10] and [19] above).

57. Mobis put its case on the Acceptance of Liability issue in three ways:

1. first, that the 5 June 2015 letter evidenced a settlement contract, the effect of which is that XL may not rely on the Faulty Design Exclusion and, subject to the question of whether the Local Policy has the Hail Limit, and to the questions which arise concerning quantum, XL is bound to indemnify Mobis for the loss it suffered as a result of the storm;

2. second, and to the same effect, that the 5 June 2015 letter constituted a waiver by election;

3. third, that by reason of the 5 June 2015 letter, XL may not rely on the Faulty Design Exclusion, as to do so would constitute conduct otherwise than with utmost good faith for the purposes of s 14 of the InsuranceContracts Act 1984 (Cth).

58. Mobis also submitted that the 5 June 2015 letter contained an admission by XL of its liability under the Local Policy. It clearly does and XL made no submission to the contrary. However, in closing submissions, Mobis did not submit that this fact alone was decisive of any question in the case; in particular, the question of whether the Faulty Design Exclusion was enlivened. This was no doubt because Mobis recognised that as the admission was made otherwise than in the course of a formal court process, it was merely an item of evidence to be weighed up against all other relevant evidence: see for example The Nominal Defendant v Gabriel (2007) 71 NSWLR 150; NSWCA 52 at [113] (Campbell JA).

Was there a contract of settlement?

59. Mobis submitted that “the 5 June letter constitutes a settlement (subject to the applicable limit of liability) of Mobis’s claim under the Local Policy, in relation to the issue of the warehouse’s compliance with the applicable Australian Standards and the application of [the Faulty Design Exclusion]”.

60. Mobis submitted:

“In partially settling the potential dispute with Mobis on the terms set out in the 5 June Letter, Mobis and XL exchanged mutually binding promises that XL’s payment and Mobis’s acceptance of that payment would resolve all coverage and indemnity issues under the policy [except for the Hail Limit issue and ‘on the basis of known facts and circumstances’].”

61. Mobis contended that this case is relevantly indistinguishable from that considered by the Court of Appeal in Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243.

62. In that case, Allsop P (as his Honour then was) with whom Beazley JA (as her Honour then was) and Campbell JA agreed, considered a letter sent by an insurer to the insured stating that “we…confirm that indemnity is granted” pursuant to the policy and stating that:

“The grant of indemnity is subject to the policy terms, conditions and exclusions and is based on the facts presently known to [the insurer].”

63. However, the only conclusion to which Allsop P came was that the letter constituted an admission by the insurer of its liability. Thus, his Honour said (at [290]):

“The expression ‘grant indemnity’ in these circumstances at least contains the recognition or admission, in perhaps customary language, of liability under the policy.”

64. His Honour did not conclude that the letter constituted a settlement contract.

65. Indeed his Honour continued (at [291]):

“The ‘grant of indemnity’ or admission of liability may also be seen, in certain circumstances, to give rise to another agreement. For instance, if after some dispute as to coverage, an insurer stated that the parties should now proceed ‘on the basis of an admission of liability’, a fresh agreement, supported by fresh consideration may come into existence”.

66. Allsop P referred to the observations of Chesterman J in Thiess Pty Ltd v ERC Frankona Reinsurance Limited [2007] QSC 4.

67. In that case, Chesterman J said (at [40] and [41]):

“…an insurer’s acceptance of its insured’s claim does away with the potential uncertainties and their capacity to generate costs which the insurer may have to bear; if the claim is litigated, and replaces them with the insurer’s intimation (or promise) that it will pay the claim. There is, in accepting a claim, an element of compromise, or of admission that the insured is entitled as a matter of contractual right to the indemnity contained in the policy. The consideration is the benefit to the insurer that it will not be liable to pay the insured’s, and its own, costs of an action, and the detriment to the insured of forbearing to sue for the proceeds of the policy.

The acceptance of the claim is in form and substance an agreement. Moreover it will normally amount to a contract, legally binding on the parties.”

68. In reaching the conclusion that acceptance of a claim will “normally” amount to a legally binding contract, Chesterman J referred to Newton, Bellamy & Wolfe v State Government Insurance Office (Qld) [1986] 1 Qd R 431.

69. In that case, Andrews ACJ and Derrington J said (at 437):

“Acceptance of liability is more than a bare admission of liability.

In any event the arrangement here is supported by consideration. The insurer by accepting liability offers the other party an inducement and impliedly requests him to forebear from taking action with avoidance of costs of formal proceedings at the expense of the insured.”

70. McPherson J said (at 444):

“Here it is not at all difficult to discern in the correspondence at least an implied request by the S.G.I.O. that the plaintiffs refrain from suing pending an investigation by the former of the circumstances of the accident. It was in consideration of this forbearance, which was both a detriment to the promisee and a benefit to the promisor, that in the end the S.G.I.O. agreed to accept liability.”

71. These authorities establish that a legally binding contract of settlement may be created between an insurer and an insured where the insurer states that it accepts liability to indemnify the insured under the policy in question, and where the insured can be shown to have given consideration for that acceptance, constituted, for example, by a forbearance to sue the insurer, following from the insurer’s request (to be implied from its acceptance of liability) that it not do so.

72. But each case must depend on its own facts.

73. Here, it is plain from the terms of the 5 June 2015 letter, and the reply by Mobis’s solicitor of 12 June 2015, that both parties accepted that Mobis reserved its right to contend that, contrary to XL’s assertion, the limit of XL’s liability under the Local Policy exceeded EUR 10 million. If any implication is to be drawn from the correspondence, it is that XL expected, or at least contemplated the possibility that Mobis would bring proceedings to establish the correctness of that proposition; hardly surprising, bearing in mind that the Local Policy did not, in terms, contain any limit of liability of the kind asserted by XL.

74. I see no basis to conclude that, by the 5 June 2015 letter, XL was impliedly requesting Mobis to forbear from bringing action against it. XL was simply stating its position, and accepting that Mobis reserved its rights about the correctness of that position.

75. Nor do I see any other consideration given by Mobis for the qualified acceptance of liability given by XL in the 5 June 2015 letter.

76. The letter contains an admission. But it does not evidence a contract.

If there was a contract of settlement, was there a change of the “known facts and circumstances”?

77. If, contrary to my finding, there was a contract of settlement, it was a term of that contract that XL’s acceptance of liability under the Local Policy was “on the basis of known facts and circumstances”.

78. Mobis submitted that, assuming the 5 June 2015 letter bespoke a settlement contract, there was no relevant change in the facts and circumstances known to XL such as would, notwithstanding its acceptance of liability, justify it now relying on the Faulty Design Exclusion.

79. In view of the conclusion to which I have come concerning the contract of settlement issue, there is no need for me to express any opinion about this matter.

80. However, had it been relevant for me to do so, I would have accepted Mobis’s submission.

81. In my opinion, a reasonable business person in the position of the parties would have understood that XL’s reference to “known facts and circumstances” was a reference to facts and circumstances relating to what actually caused the warehouse to collapse.

82. The facts and circumstances known to XL, as at 5 June 2015, were that it had:

1. engaged Costin Roe to review the engineering aspects of the warehouse’s design and to assess whether the design of the warehouse complied with the relevant Australian Standards; and

2. received from Costin Roe what was described as a “preliminary report” in which Costin Roe expressed the opinion that the warehouse complied with the relevant Australian Standards and that its collapse was caused by superimposed loading due to hail stones, water and ice that “greatly exceeded the design loads required in accordance with” those Standards.

83. XL does not contend that Costin Roe’s opinion was expressed upon the basis of incorrect information about the design of the warehouse, or that any new material facts about that design have come to light since the Costin Roe report.

84. XL seeks to justify its change of position solely on the basis that it received a second opinion from a structural engineer, Mr Paul Summers, to the effect that the warehouse did not comply with the relevant Australian Standards and was, in fact, defectively designed.

85. I do not accept that the receipt of that second opinion is a further “fact and circumstances” that would, assuming there was a contract of settlement, have justified XL from departing from its terms.

86. I accept Mobis’s submission that an opinion expressed by an expert after the loss is not a “fact or circumstance” relating to the loss but is rather, a means chosen by XL to evaluate the significance of the “known facts and circumstances”.

87. XL’s case seeks to read the words “on the basis of known facts and circumstances” as if they meant “as presently advised”, or something to that effect.

83. Had it been relevant for me to consider this question, I would not have accepted XL’s submission.

Does the 5 June letter constitute a waiver by election?

89. Mobis submitted that the 5 June 2015 letter constituted an election by XL to accept liability under the Local Policy and not to rely on the Faulty Design Exclusion.

90. Mobis submitted that by accepting liability under the Local Policy, and making the payment of $14.4 million referred to at [10] and [19] above, XL acted inconsistently with the maintenance of a defence based on the Faulty Design Exclusion and has thus made an unequivocal election between inconsistent rights.

91. I do not accept this submission.

92. In final submissions, Mobis accepted that the election by an insurer to accept or deny liability under a policy does not, without more, constitute an irrevocable election.

93. So much is established, for example, in the decision of the Court of Appeal in National Vulcan Engineering Insurance Group Ltd v Transfield Pty Ltd; National Vulcan Engineering Insurance Group Ltd v Connell Wagner Pty Ltd; National Vulcan Engineering Insurance Group Ltd v Coffey Partners InternationalPty Ltd (2003) 59 NSWLR 119; NSWCA 327 in which Santow JA (with whom Ipp JA and Young CJ in Eq agreed) said (at [64]):

“…acceptance by the insurer of a claim by an insured to which the policy does not extend cover cannot amount to an election.”

94. I do not think the fact that XL’s acceptance of liability was limited to EUR 10 million affects this conclusion.

95. In any event, in order for there to be a waiver by election, the election must be made with knowledge of the relevant facts (for example, see Moore v The National Mutual Life Association of Australasia Limited [2011] NSWSC 416 at [73] (Ball J)).

96. The knowledge that XL would have had to have had in order to make an election in this case is the (alleged) fact that the warehouse was defectively designed.

97. If that is the true position (and I deal with this below) there is no suggestion that XL knew this to be so when it wrote the 5 June 2015 letter.

98. On the contrary, at that time it had the advice of Costin Roe that the design of the building complied with the relevant Australian Standards.

Is XL precluded from relying on the Faulty Design Exclusion by reason of s 14 of the Insurance Contracts Act?

99. As I have concluded that the 5 June 2015 letter neither bespeaks a settlement contract nor a waiver by election, I see no basis upon which I could conclude that XL’s reliance on the Faulty Design Exclusion amounts to conduct otherwise than in accordance with its obligation to act with utmost good faith.

100. Whether XL is in fact entitled to rely upon the Faulty Design Exclusion is a matter which I consider later in these reasons.

What was the cause of the collapse?

101. A vital question in this case is what, as a matter of fact, caused the collapse of the warehouse; in particular, whether it was caused by the hail that fell on the day.

102. As the answer to many of the legal questions which arise depends on the answer to that question, I shall deal with it before addressing those legal questions.

The proximate cause of the collapse

103. The matter for consideration is the proximate cause, or causes, of the warehouse collapse.

104. Was that proximate cause hail alone, as XL contends, or storm (comprising a combination of rain and hail), as Mobis contends?

105. If the correct conclusion is that the proximate cause of the collapse was hail, and if the cover available to Mobis (whether under the Local Policy or the Master Policy) is confined by a hail limit, then Mobis’s case fails, as XL has already paid it the amount of that limit.

106. “Storm” is defined (somewhat unhelpfully) in the Local Policy as “storm, tempest, windstorm, hurricane, tornado, cyclone and typhoon”.

107. There is no suggestion is this case that what occurred on 25 April 2015 was anything other than a “storm” for the purpose of that definition (rather than a “tempest” and so on). I see no reason not to give the word “storm” its ordinary and natural meaning.

108. “Storm” is defined in the Australian Oxford Dictionary (online) as:

“A violent disturbance of the atmosphere with strong winds and usually rain, thunder, lightning, or snow.”

109. The definition in the Macquarie Dictionary (online) is:

“1. a disturbance of the normal condition of the atmosphere, manifesting itself by winds of unusual force or direction, often accompanied by rain, snow, hail, thunder and lightning, or flying sand or dust.

2. a heavy fall of rain, snow, or hail, or a violent outbreak of thunder and lightning, unaccompanied by strong wind.”

110. As those definitions and common experience suggest, hail is usually accompanied by rain. As Einstein J said in Caine v Lumley General Insurance Ltd (2006) 14 ANZ Ins Cas 61-698; NSWSC 337 (at [99]):

“Hailstorms almost always involve rain and wind.”

111. In Caine v Lumley caravans were damaged in a storm that included hail and torrential rain. The relevant insurance policy contained a provision which capped liability under the policy for damage to caravans caused by hail to $100,000.

112. Einstein J held:

“[93]   It is true to say that damage was caused to the caravans by storm including hail and torrential rain, as per paragraph 12 of the Agreed Facts. That is precisely what happened. But it is not inconsistent with hail being the proximate cause of the damage. Proximate cause is a concept which requires an assessment of the qualities of reality, predominance and efficiency in circumstances in which a number of factors contribute to the happening of the damage in question: HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601 at 608.

…

[95]   It is not correct to say that two concurrent causes, properly so-called, were involved. …

[96]   In the present case, it is true that high winds were driving the hail but that is not a concurrent cause of the damage by hail.

…

[98]   In the present case, there is an abundance of evidence that the effective, or dominant or operative cause of damage to the caravans, including the annexes and tropical roofs, was hail.

[99]   It is no answer that the hail fell during a storm which also involved torrential rain and high winds. Hailstorms almost always involve rain and wind. The policy singles out hail and specifically excludes cover for that risk, except in the circumstance in which the hail penetrates the entire thickness of the damaged matter, whereupon the $100,000 limit applies.”

113. Einstein J’s decision was upheld in the Court of Appeal in Caine v Lumley General Insurance Ltd [2008] NSWCA 4.

114. McColl JA (with whom Mason P and McClellan CJ at CL agreed) said (at [76]):

“In considering the proximate cause of loss in the insurance context, the Court has regard to the reality, predominance and efficiency of a cause, rather than proximity in time: HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc (at 608) per Sheller JA (Beazley and Stein JJA agreeing); see generally Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd [(2005) 13 ANZ Ins Cas 61-643] [2005] NSWCA 66 (at [39]ff) per McColl JA (Ipp and Tobias JJA agreeing). The Court applies common sense standards in determining what is the proximate cause, approaching the question by reference to the understanding of ‘the man in the street, and not as either the scientist or the metaphysician, would understand it’: Lasermax (at [109] – [110]).”

115. Her Honour then set out, with approval, the passages from the judgment of Einstein J to which I have referred and concluded (at [82]):

“This analysis of the evidence compellingly demonstrates, in my view, that it was the penetration of the hail into, or through, the various fabrics of which the caravans (including the tropical roofs and annexes) were constructed which was the proximate cause of the damage to the caravans. Indeed [the insured] did not really challenge the proposition that hail was a proximate cause of the damage. Rather, he argued that it was but one of several proximate causes, the others being the wind and the rain. In my view [the insured] did not establish error in the primary judge’s analysis of the evidence and his conclusion on proximate cause.”

The rain and hail leading to the collapse

116. A video shot by an independent witness, Ms Susan Bree, on her smart phone showed that the warehouse collapsed at, or more likely very slightly before, 3:49 pm.

117. Ms Bree was standing in or near a building immediately adjacent to the warehouse. At the start of the video one can hear what Mobis described in its submissions as a “rumbling sound” together with someone (presumably Ms Bree) exclaiming that “the whole Mobis building’s gone down”; suggesting the collapse was either then underway, or had concluded. The collapse itself occurred over a very short time; some 15 seconds.

118. Each of Mobis and XL called meteorological experts: Mr Barry Cook for Mobis and Prof Michael Manton for XL.

119. The evidence of those experts established the following sequence of meteorological events:

1. there was continuous precipitation over the warehouse from at least 3:27 pm to the time of collapse;

2. rain was falling at 3:27 pm;

3. heavier rain was falling at 3:29 pm;

4. hail began falling at 3:31 pm;

5. steady or heavy hail fell between 3:31 pm until at least 3:46 pm or 3:47 pm or, possibly, 3:48 pm (in the view of Prof Manton);

6. the core of the storm passed over the warehouse by 3:46:27 pm;

7. a mixture of rain and hail was falling by no later than 3:47:55 pm;

8. the precipitation transitioned into rain at some point before the collapse (Mr Cook thought it would have been about 3:46 pm whereas Prof Manton thought that there was “potential for a mixture [of hail and rain] for the few minutes after [3:46 pm] before the roof collapsed; and

9. rain continued to fall after the collapse until at least 4:30 pm.

Earlier rain events

120. The evidence pointed very strongly to the conclusion that the warehouse would not have collapsed from rain alone on 25 April 2015.

121. I did not understand Mobis to make a submission to the contrary.

122. Each party adduced evidence from an expert hydrologist: Dr Ian Joliffe for Mobis and Mr Drew Bewsher for XL.

123. In their joint report, Dr Joliffe and Mr Bewsher agreed that from their perspective, without the presence of hail, the roof would not have collapsed from rain alone had it been properly designed and constructed.

124. Further, the evidence established that since the warehouse was constructed in 2008, there had been a number of days when heavier rain fell than occurred on 25 April 2015, without causing the warehouse to collapse.

125. As recently as 21 March 2015 (only a month before the date of collapse) a rain storm of considerably greater severity than that of 25 April 2015 occurred over the warehouse without causing any damage to it.

126. It must follow that, on those occasions, notwithstanding the considerable amount of rain that fell, the roof of the warehouse, and its related drainage systems, were adequate to cope with the downfall.

127. Those facts point, strongly in my opinion, to the probability that on 25 April 2015, the hail was the proximate cause of the collapse.

Mr Carolan’s hypothesis

128. In their joint report, Dr Joliffe and Mr Bewsher also agreed that:

1. assuming there was no significant debris or other material on the roof (and there is no suggestion of this), the collapse must have been caused by either:

1. hail alone; or

2. hail and water;

2. in the absence of hail, and as a direct result of inferred rainfall intensity, it is likely that the maximum depth of rainwater on the roof would have only been about 5 mm;

3. assuming that a depth of 38 mm of rain would have been required to collapse the roof (in the absence of hail), hail must have been present to create the additional load required to collapse the roof;

4. this additional load would have, in the absence of any external debris loading (and there is no suggestion of that) been created by the mass of hail itself together with:

1. hail forming local ponding of water on the roof; and/or

2. hail otherwise impeding drainage of water off the roof.

129. Dr Joliffe and Mr Bewsher also agreed that:

1. there would have been very little movement, or mobilisation of hail on the roof of the warehouse prior to its collapse; and

2. hail on the roof would have impeded the movement of water off the roof both over and through the hail.

130. The structural engineer who gave evidence on behalf of Mobis, Mr David Carolan, expressed the opinion that the combination of hail and rain on the roof would have contributed to the imposed load on the roof structure. Mr Carolan opined that the combined weight of hail and rain caused the beams supporting the roof to deflect, creating reservoirs in which falling rain could pond, and that the combined weight of the ponded rain and hail led to the collapse.

131. Mobis submitted:

“Mr Carolan explained that the deformation of the roof was non-linear and that the changes in slope and load ‘represents a complex phenomenon’ which gave rise to a feedback loop that eventually reached a ‘point of no return’.”

132. Mr Carolan prepared a computer model which sought to simulate this hypothesis. That model assumed a somewhat simplified sequence of weather events compared to those that actually occurred on the day. Nonetheless, it correctly predicted the timing of the roof collapse.

133. Mr Carolan explained that, on his hypothesis, it was a combination of the rain and hail that, in these circumstances, caused the roof to deflect. Mr Carolan hypothesised that the hail on the roof would have impeded the flow of water off the roof and caused water to leak through the “laps” in the roof sheeting and enter the building. This was consistent with images from CCTV footage within the warehouse which appeared to show water accumulating on the floor (evidently having leaked through the roof) some minutes before collapse.

134. The structural engineer retained by XL, Mr Summers, made some criticisms of Mr Carolan’s hypothesis.

135. However, assuming Mr Carolan’s hypothesis should be accepted, it suggests that it was the accumulation of hail, not rain, that was the real cause of the build-up of the load on the roof and the cause of rain water build up in reservoirs that Mr Carolan opined had been caused by such deflection. It seems probable that it was because of the hail on the roof that the rain water falling on the roof could not drain away. After all, the warehouse had successfully withstood heavier rain storms without the beams suffering deflection and without the warehouse collapsing.

136. That further suggests that it was the hail that caused the collapse.

The hail load versus the collapse load

137. Mr Cook and Prof Manton agreed that:

1. between 6 and 10 cm of hail accumulated at the warehouse during the accumulation phase of the storm (that is, the period of building up hail stones falling to the ground);

2. the hail stone density was likely to be between 800 and 900 kg/m3; and

3. the packing density of the hail stones was likely to be between 63% and 70%.

138. Based on these figures, Mr Carolan and Mr Summers performed calculations to assess whether the hail load thereby caused exceeded the collapse load (that is, the load needed to cause the warehouse to collapse) of the building.

139. If the hail load (that is, leaving aside the effect of rain) exceeded the collapse load, that would suggest that the hail, alone, caused the collapse.

140. Mr Summers calculated a collapse load of 0.33 kPa. Mr Carolan calculated a collapse load of 0.37 kPa. I was not invited to make any assessment of which of these calculations was correct.

141. Assuming that the hail stone density and the packing density were at the midpoint of the figures agreed by Mr Cook and Prof Manton (that is, 850 kg/m3 and 66% respectively), the evidence showed that the hail load would exceed Mr Summers’s collapse load if there was 6 cm of hail and would exceed Mr Carolan’s collapse load if there was 7 cm of hail.

142. Further, if there was 7 cm of hail, the hail load would have exceeded Mr Summers’s collapse load no matter what (within the range agreed by Mr Cook and Prof Manton) the hail stone density and packing density.

143. Even assuming the correctness of Mr Carolan’s (higher) collapse load calculation, very little rain (over and above the hail) would have been needed to cause the combined rain/hail load to exceed the collapse load.

144. Again, those matters point to the conclusion that it was the hail that caused the collapse.

Temporal proximity of the falling of the hail and the collapse of the warehouse

145. Finally, hail was falling onto and accumulating on the roof of the warehouse until a very short time before the collapse.

146. As I have described, the warehouse collapsed at, or probably very slightly before, 3:49 pm. Heavy hail had been falling onto the roof of the warehouse until very shortly before then; at most, 3 minutes, but perhaps only 1 minute: see [119] above).

147. There was thus only a brief period prior to the collapse when rain alone was falling onto the roof of the warehouse. During that brief period it seems very likely that most, if not all, of the hail that had fallen over the previous 5, 6 or 7 minutes remained on the roof, impeding the runoff of the rain and, on Mr Carolan’s hypothesis, causing deflection of the beams, and creation of reservoirs for the rain.

Conclusion as to proximate cause

148. When these factors are considered together, they persuade me that it was the hail that fell on 25 April 2015 that was the proximate cause of the warehouse collapse.

149. To adopt the language of McColl JA in Caine, my opinion is that when considering these matters, and applying a common sense standard, the man or woman in the street would reach the conclusion that the “reality, predominance and efficiency” of the impact of the hail in the storm that occurred shows that it was the proximate cause of the collapse.

Does the Local Policy have a hail limit?

150. A critical issue in the proceedings is whether the Local Policy has a hail limit, notwithstanding the fact that the policy document issued by XL on 1 March 2011, and renewed annually thereafter, specifies no such limit.

151. XL contends that the Local Policy has such a limit for two reasons.

152. The first is the asserted effect of cl 1.9b of the Local Policy (although this argument was not maintained with great enthusiasm in final submissions).

153. The second is XL’s contention that the Local Policy should be rectified to include the Hail Limit.

Clause 1.9b

154. Clause 1.9 of the Local Policy provided:

“This Policy, while an independent contract, forms an integral part of the International Property Damage and Business Interruption Programme for Mobis Slovakia… [Mobis] agrees that, where permissible under applicable law:

…

b. programme aggregate limits of indemnity may operate to reduce the limit of indemnity available under this Policy in respect of any covered loss, irrespective of whether any limit of indemnity of this policy has not been or would not be exceeded by such loss.”

155. It is common ground that the reference to “programme limits of indemnity” in the clause is a reference to the aggregate limits of indemnity in the Master Policy.

156. In my opinion, the effect of cl 1.9b is that if payment of an earlier claim under the Master Policy eroded the aggregate limit available under the Master Policy for, say, a storm claim, then the amount available to Mobis under the Local Policy for a storm claim would be reduced accordingly; even if the amount of that claim did not exceed the storm limit in the Local Policy.

157. I accept Mobis’s submission that cl 1.9b requires no more than a matching of limits of liability by reference to specific perils appearing in the Local Policy to determine whether the aggregate limits of liability under the Master Policy have been exceeded.

158. This is consistent with the third paragraph of cl 3.1.8 of the Master Policy which provides:

“The limits of liability agreed in this Policy (in particular the annual aggregate limits) under Art 2 apply combined for all companies insured under this Master Policy and any local policies”.

159. There is no suggestion that, so construed, cl 1.9b has been enlivened.

160. Contrary to XL’s submission, I do not accept that the effect of this clause is to import the Hail Limit in the Master Policy into the Local Policy.

161. If the parties to the Local Policy had intended such a result, they would have used language more clearly directed to that result.

Rectification

Should the Local Policy be rectified to include the Hail Limit?

162. XL contends that the Local Policy should be rectified so as to include the Hail Limit.

163. In opening submissions, XL put its case succinctly:

“The Local Policy was to be issued by XL’s Australian office in relation to Mobis Australia. It should have contained the hail limit but did not due to a mistake”.

Principles

164. The relevant principles were recently restated by the High Court in Simicv New South Wales Land and Housing Corporation [2016] HCA 47; as follows:

“[103]    Rectification is an equitable remedy, the purpose of which is to make a written instrument ‘conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately’. For relief by rectification, it must be demonstrated that, at the time of the execution of the written instrument sought to be rectified, there was an ‘agreement’ between the parties in the sense that the parties had a ‘common intention’, and that the written instrument was to conform to that agreement. Critically, it must also be demonstrated that the written instrument does not reflect the ‘agreement’ because of a common mistake. Unless those elements are established, the ‘hypothesis arising from execution of the written instrument, namely, that it is the true agreement of the parties’ cannot be displaced.

[104]   The issue may be approached by asking — what was the actual or true common intention of the parties? There is no requirement for communication of that common intention by express statement, but it must at least be the parties’ actual intentions, viewed objectively from their words or actions, and must be correspondingly held by each party.” [Gageler, Nettle and Gordon JJ] [Citations omitted]

165. Further, each of these matters must be established by clear and convincing evidence. As Kiefel J (as the Chief Justice then was) stated in Simic at [41]:

“[The] intention must be proved by admissible evidence and proved to a high standard. In a passage from Fowler v Fowler [(1859) 4 De G & J 250 at 265; 45 ER 97 at 103], which has been cited with approval by this Court, Lord Chelmsford said that:

‘a person who seeks to rectify a deed upon the ground of mistake must be required to establish, in the clearest and most satisfactory manner, that the alleged intention to which he desires it to be made conformable continued concurrently in the minds of all parties down to the time of its execution’.”

166. Rectification is concerned with the subjective and actual state of mind of the parties, objectively ascertained.

167. As Kiefel J explained in Simic (at [42]):

“What is necessary to be shown is the actual intention of each of the parties. This has often been referred to by intermediate appellate courts as the subjective intention of the parties. A court, in determining whether the burden of proof is discharged, may be said to view the evidence of intention objectively, in the sense that it does not merely accept what a party says was in his or her mind, but instead considers and weighs admissible evidence probative of intention.”

Background

168. The Local Policy was incepted on 1 January 2011, part way through the 23 June 2010 to 23 June 2011 period of the then current (and first) Master Policy.

169. The Local Policy wording was not provided by XL to Mobis’s Australian broker, Marsh Australia, until 1 March 2011. It contained no hail limit.

170. Thus, the issue to be determined on XL’s rectification case is whether, as at 1 January 2011, it was the agreement of XL and Mobis, or their common intention, that the Local Policy have the Hail Limit and that, by reason of common mistake, it did not.

171. The only witness called by XL to give evidence of having made a mistake of any kind was Mr Timothy Jones. Mr Jones was XL’s Underwriting Manager in Australia and the person responsible for signing the Local Policy on behalf of XL.

172. In his affidavit, Mr Jones said:

“After I reviewed the 2014/15 Master Policy I realised that the hail, weight of snow and ice limit was not included in the 2014/15 local policy as issued. I should not have signed the 2014/15 local policy as issued without the hail, weight of snow and ice limit.

I also reviewed other documents in XL’s electronic document management system, Documentum, at that time. It became apparent to me that none of the local policies relating to Mobis issued in Australia prior to the loss contained the hail, weight of snow and ice limit. It is clear to me from my review of each Master Policy since inception of the Mobis global program and the other documents available in Documentum that the hail, weight of snow and ice limit should have been included in each local policy for Mobis submitted to me in my role as the person responsible for authorising local policies.

As a result of a breakdown in the system at XL none of the local policies which had been prepared and reviewed prior to being provided to me for signing (or the authorisation for someone else to sign) contained the hail, weight of snow and ice limit.

As it is my responsibility before authorising the issue of a local policy it is ultimately my mistake that the local policies in Australia prior to the loss were issued without the hail, weight of snow and ice limit. I was not the person at XL to do the actual writing up of the local policy. The people who do that are junior to me. As I have explained above I rely upon others to prepare the documents for submission to me but it is still my ultimate responsibility.”

173. The XL officer responsible for drafting the Local Policy wording issued on 1 March 2011 was Ms Denise Stanley. XL did not call Ms Stanley. Mr Jones said that Ms Stanley left XL “several years ago”. XL offered no evidence as to any steps taken to locate and take a statement from Ms Stanley. Mr Jones did not suggest that Ms Stanley left XL’s employ on bad terms. Although Mobis did not suggest that a Jones v Dunkel (1959) 101 CLR 298 inference should be drawn by reason of her absence from the witness box, the fact remains that there is no explanation from her as to how the Local Policy came to be worded as it is.

174. In his affidavit, Mr Jones said:

“In or about 2011 XL India started to perform administrative functions for and on behalf of XL Australia which included the creation of policy documents, such as the production of local policies.”

175. The implications of that evidence were not developed by Mr Jones in his affidavit, or by XL in its submissions.

176. However, as is revealed below, there is no suggestion in the written communications between the parties in January and February 2011 that Ms Stanley utilised the services of XL India to prepare the wording of the Local Policy.

177. As I explain below, the event which led to the issue of the Local Policy without the Hail Limit was an email that Ms Ladislava Hurtajova sent on 22 December 2010 to a colleague, Mr Patrick Hofmann.

178. Ms Hurtajova was, at the relevant time, XL’s Upper Middle Markets Property Underwriter for the Austrian and Central and Eastern European markets. Ms Hurtajova held this position from 2009 until mid 2013; she was XL’s program underwriter for the policy years 2010/11, 2011/12 and 2012/13. Ms Hurtajova was responsible for the writing of the original Master Policy and its renewal in those years.

179. In the circumstances I discuss below, it was Ms Hurtajova who determined that the Hail Limit should be included in the Master Policy. Ms Hurtajova gave evidence that she was not involved in the drafting of the Local Policy (although that assertion requires some qualification), and that, so far as she knew, at no time did anyone on behalf of Mobis Korea or Mobis request that a policy be issued without the Hail Limit.

180. Ms Hurtajova said she assumed and intended that the Local Policy would have the same limits as the Master Policy.

181. Ms Hurtajova said that the only exception to this was “that a local policy might have a lower limit if the declared values in that country were lower than the relevant limit in the Master Policy, or if a different coverage was specifically requested”. The latter circumstance did occur in relation to the Local Policy in the 2012/2013 policy year after Mobis sought to have its newly acquired Perth premises covered. That led to a lower limit for earthquake loss specified in the case of Perth than for Eastern Creek (see [40] above).

182. Although in her affidavit Ms Hurtajova said the Local Policy “contained a mistake” in that it did not include the Hail Limit, she did not say that she made a mistake in her 22 December 2010 email. Indeed she did not mention that email at all in her affidavit.

183. XL also called evidence from Mr Stefan Rossa. Mr Rossa assumed the responsibilities formerly undertaken by Ms Hurtajova for the 2014/15 policy period.

184. Mr Rossa played no role in the issue and renewal of the Local Policy. However, like Ms Hurtajova, Mr Rossa gave evidence that he assumed, expected and intended that the Local Policy would have the same sub limits as the Master Policy.

185. The officer at Mobis most directly involved in the circumstances leading to the issue of the Local Policy was Mr Sam Papa, who was then Mobis’s General Manager, Finance and Administration. Mobis did not call Mr Papa. Mr Papa has left Mobis’s employ, evidently in less than happy circumstances. XL made no Jones v Dunkel submission concerning his absence. The result is that assessment of his state of mind at the critical time depends on his email communications (particularly with Mr Roman Kalocai, a Senior Client Executive from Mobis Korea’s insurance broker, Marsh Europe).

Negotiation of the 2010/2011 Master Policy

186. In December 2009, Mobis Korea appointed Marsh Europe as its worldwide insurance broker for property damage and business interruption insurance.

187. Thus, on 15 December 2009, Mobis Korea wrote a letter addressed “[t]o whom it may concern” stating:

“This letter is to confirm that we, Hyundai Mobis appoints ‘Marsh Inc’, as our exclusive insurance broker in respect of Package Insurance, globally.”

188. A few days earlier, on 8 December 2009, Mr Kalocai wrote to a colleague:

“We are glad to advise that MOBIS has appointed MARSH as their world-wide insurance broker for [Property Damage/Business Interruption insurance]…

MARSH was appointed to service their subsidiaries in Slovakia, Czech Republic, Germany, Belgium, UK, Sweden, Russia, UAE, Egypt and Australia…

As MOBIS in Australia has its renewal date on 1st of January [2011], we will need assistance of MARSH in Australia…

Please get in touch with local client… your Contacts in Australia [at Mobis] are [Mr Sam Papa and Ms Tammy Seow].”

189. On 1 April 2010, Marsh Europe sent XL (for the attention of Ms Hurtajova and others) a proposal for property damage and business interruption insurance for “Mobis subsidiaries” in the countries referred to in Mr Kalocai’s email of 8 December 2009 above (including Australia).

190. The proposal specified an inception date of 1 January 2011 in the case of the “Mobis subsidiary” in Australia.

191. One of the sub limits that Marsh Europe proposed was EUR 50 million for “flood, windstorm, hail, earthquake”.

192. At around the time Marsh Europe made this proposal, Ms Hurtajova told Mr Kalocai that:

1. once a Master Policy was finalised, XL’s local offices (or fronting partners if applicable) would issue a Local Policy; and

2. those Local Policies would be based on the cover in the Master Policy, but would be drafted to meet local regulatory and legal requirements, and had wording known within XL as “good local standard” wording.

193. So far as concerns Marsh Europe’s proposal that cover be granted with a EUR 50 million sub limit for hail, Ms Hurtajova said in her affidavit:

“I was unwilling to offer such a high limit for hail on the Mobis global program. I was not prepared to offer a limit of EUR 50 million for hail”.

194. Ms Hurtajova was not challenged about this evidence.

195. Ms Hurtajova prepared draft wording for the proposed cover. In her affidavit she said:

“In the 2010/11 draft wording I proposed a lower limit for certain ‘natural peril events’ being ‘hail, avalanche, weight of snow and ice, rockslide, falling stones, and landslide’. The limit I was prepared to offer was EUR 10 million for those ‘natural peril events’”.

196. Ms Hurtajova and Mr Kalocai met on 18 June 2010 at XL’s Vienna office. Ms Hurtajova had sent her draft wording to Mr Kalocai the day before. It contained, and highlighted, the EUR 10 million limit for:

“Natural peril events, hail, avalanche, weight of snow and ice, rockslide, falling stones, landslide”.

197. Evidently, during the 18 June 2010 meeting, Ms Hurtajova and Mr Kalocai discussed the lower limits on which Ms Hurtajova was insisting. Thus, following the meeting, Mr Kalocai wrote to Ms Hurtajova:

“I got back home safely. I’m still thinking about the deductible for [machinery breakdown] – please let me know if you have any space for lowering the deductible to EUR 25,000. Otherwise I may really have a problem because of this with the Koreans. As I mentioned, maybe you can lower the deductible and in return for this you can have the lower limits for the other perils we were talking about. I can imagine that next year you will be on the deductible you propose for [machinery breakdown]”.

198. Ultimately, XL agreed to a lower deductible for machinery breakdown, evidently in exchange for Mr Kalocai’s agreement that “you can have the lower limits for the other perils we were talking about”.

199. After the 18 June 2010 meeting, neither Mr Kalocai nor anyone else from Marsh Europe or Mobis requested insurance for natural peril events (in particular, for hail) in an amount greater than EUR 10 million.

200. On 27 July 2010, the first Master Policy was issued with effect for the period 23 June 2010 to 23 June 2011.

201. It had a limit of EUR 10 million for:

“Natural peril events, hail, avalanche, weight of snow and ice, rockslide, falling stones, landslide”.

and included the extended definition of “natural peril events” to which I have referred (see [48] above).

202. The Master Policy recorded that the inception date for Australia would be 1 January 2011.

203. On 26 July 2010, Ms Hurtajova made a file note in which she described the “Program Structure” as follows:

“There are two main production sites in [Slovakia] and [Czech Republic] and warehouses/offices in all other countries. Master country Slovakia, [Freedom of Services] policies/coverages for Czech Republic; Germany, Belgium, UK, Sweden and local policies for Australia, Russia and UAE”.

204. In her affidavit, Ms Hurtajova explained that “Freedom of Services” policies could be issued for all Mobis subsidiaries in the European Union but that for non-European countries “it would be necessary for XL to issue separate ‘local policies’ as different regulatory and legal requirements apply”.

Mobis joins XL’s global insurance program

205. Evidently, no steps were taken to effect a Local Policy for Australia until September 2010.

206. On 28 September 2010, Mr Kalocai sent an email to a colleague at Marsh Australia (Ms Carmel Adelson):

“I would like to come back to this client.

As you remember, last year Mobis Korea did not send proper instructions to Mobis Australia, so they renewed insurance with existing broker. In the meantime, we Marsh Slovakia set an international program for all Mobis operations.

It is necessary for Mobis Australia to join that program as from 1st of January 2011.

Please contact them again and make sure that existing [Property Damage/Business Interruption] policy is cancelled. Marsh is globally appointed only as [Property Damage/Business Interruption] broker for Mobis, but in other countries we agreed with client to handle local policies as well. So if you are able to agree that with client, it would be perfect”.

207. Mr Kalocai attached to that email a “Summary of Global Property Insurance” for Mobis for the period 23 June 2010 to 23 June 2011 (that is, the terms of the then current Master Policy).

208. That summary specified the “Main Sub-limits” as follows:

Per Occurrence and in the aggregate:
Earthquake, volcanic eruptions	50,000,000	EUR
Flood, high water/inundation	50,000,000	EUR
Windstorm = winds with a minimum velocity of 75 km/h	50,000,000	EUR
Hail, avalanche, weight of snow and ice, rockslide, falling stones, landslide (each)	10,000,000
Erection and Construction	5,000,000	EUR
Electronic Equipment Breakdown	1,000,000	EUR
Machinery breakdown	5,000,000 e.e.l	EUR
10,000,000 a.a.l
Theft following forcible or violent entry and damages to the insured property	5,000,000	EUR

209. The summary thus included the Hail Limit of EUR 10 million.

210. It also stated:

“The Master Policy issued in Austria will be Excess and Difference in Conditions/Difference in Limits for Worldwide”

and, beside the words “Other Extentions [sic]”:

“Difference in Limits (DIL)/Difference in Conditions (DIC)”.

211. This was a reference to Art 5.2 of the Master Policy. That article is headed “Difference in Limits (DIL)/Difference in Conditions (DIC)”. The parties referred to the article as the “DIL/DIC clause”. It provides:

“If the insurance cover granted by this Master Policy exceeds that provided by the local policies, and this is permissible by law, this Master Policy shall provide additional cover over and above the indemnities under the local policies. The indemnifiable amount for the applicable local policies and the Master Policy together shall not exceed the aggregate limits or sub-limits set out in this Master Policy”.

212. I will return to this article when discussing a later email exchange between Mr Kalocai and Mr Papa.

213. The summary stated that for Australia (that is, for Mobis) there was to be a Local Policy with an inception date of 1 January 2011.

214. On 27 October 2010, Ms Adelson sent an email to Mr Papa. This appears to be the first communication to Mobis following the issue of the Master Policy about the possibility of it becoming a party to a Local Policy with XL.

215. Ms Adelson’s email stated:

“I hope that you remember our communications late last year.

I have been advised by my colleague that Mobis Korea have been in contact with you to discuss the change in broker to be implemented 1 January 2011.

I hope that this is in fact the case.

Attached please find the summary of the program for you[r] information.

Would you please advise me of the following:

1. Have you had contact re this situation?

2. Would you please review the values set out on page 6 and confirm to me whether they are correct?

3. Provide me with confirmation that your current Property Policy will be cancelled effective 1 January 2011.

I look forward to hearing from you.”

216. Ms Adelson attached to that email the Summary of Global Property Insurance that she had received from Mr Kalocai.

217. On 29 October 2010, Mr Papa sent an internal email to Mr Chung at Mobis as follows:

“This is the email I received from the Marsh broker...

It looks like only some of the insurance (i.e. property) is going to them.

It makes no sense for [Mobis] to have 2 brokers covering our total insurances requirements.

I am happy to tell her to go away again and that I haven’t heard anything.”

218. On 4 November 2010 Mr Papa replied to Ms Adelson’s 27 October 2010 email:

1. stating Mobis had not been contacted about a possible change in broker (and that it was working with its existing broker on renewals);

2. enquiring as to “what your brief is”;

3. enquiring “are you supposed to be quoting or implementing”; and

4. stating that “current policy is not being cancelled”.

219. Ms Adelson replied stating:

“What can I say…

I would only be insuring the Property and it would be implementation not quoting.

1012. I am not satisfied that Mobis is entitled to indemnity in respect of any property belonging to Kia which was damaged or destroyed in the collapse.

1013. Indeed, the matter was barely pressed in final submissions.

Contents

1014. Mobis claims an amount of $8,545,089 for contents lost when the warehouse collapsed.

1015. Two issues arise. The first is in respect of a number of individual items.

1016. The second is whether the contents claim should be subject to average.

1017. I will first deal with the individual items that are still in contention.

The individual items

(a) Skywire $75,754

1018. This item concerns “finger scanners” (devices used to record stock) lost in the collapse.

1019. Ms Daley opined that this claim may have been duplicated. However, Mr Stoddart gave evidence that there was no duplication and that these items were lost as a result of the collapse.

1020. I allow this claim.

(b) Shockwatchers $35,485

1021. The claim for this item was withdrawn in final submissions.

(c) Other items in Asset Register $49,423

1022. Ms Daley was only able to identify $15,877 of the amount claimed in Mobis’s Asset Register.

1023. However, Mr Guangxiang Liang, an accountant employed by Mobis, gave evidence that the items were not in the Asset Register as they were consumable items. He provided a photograph which showed the existence of the racking and binning labels at the time of collapse.

1024. I allow those items.

(d) Betterment on third level of racking $66,734

1025. The claim for this item was withdrawn in final submissions.

(e) Rack and binning labels $49,798

1026. XL accepted this claim in final submissions.

(f) Binning upgrade for fire compliance $181,486 and additional fire proofing $13,574

1027. This is the cost of the supply and installation of intumescent coating to steel columns and the supply and installation of fire rated materials within the warehouse following the collapse.

1028. XL submitted that the claimed expense duplicated a claim already made.

1029. But that suggestion was not put to Mr Stoddart and is inconsistent with his evidence.

1030. I allow this amount.

(g) Binning dividers $74,676

1031. Although Ms Daley pointed out that these items are not included in Mobis’s Asset Register, Mr Stoddart gave evidence that these dividers were installed during the original construction of the warehouse and were present at the time of the collapse.

1032. I allow these items.

(h) Totes and tote trolleys $17,400

1033. Mr Stoddart gave evidence that these items were purchased in 2005 and were still in the warehouse and in use at the time of collapse.

1034. I allow this item.

Average

1035. The sum insured under the Local Policy for contents was $9,683,269 (as set out in the Asset Schedule to the policy).

1036. Clause 4.2.1(e) of the Local Policy provided for average in respect of contents (and also, but not relevantly, for buildings) and was in the following terms:

“e.   Average

Each Sum Insured stated in the Asset Schedule in respect of Buildings and Contents is declared to be separately subject to the following condition of Average, namely;

If, at the time of Reinstatement of any Property Insured, the sum insured in respect of such Property at the commencement of the covered peril causing Damage represents less than eighty-five per cent of the cost which would have been incurred in Reinstatement if the whole of the item of Property insured had been destroyed or damaged, then the Insured shall be considered as being his own insurer for the difference between the sum insured and the cost of Reinstatement of the whole of the Property Insured, and shall bear a rateable proportion of the loss accordingly.”

1037. The effect of cl 4.2.1(e) was that if the sum insured for contents was less than 85% of the cost that would have been incurred for reinstatement of all the contents insured, Mobis’s entitlement to indemnity was rateably reduced in that proportion.

1038. The question of whether average applies depends upon whether certain items that are part of Mobis’s claim for damage to the building (see [774] above) should be characterised as “contents”.

1039. Those items comprise air-conditioning units, dock levellers, lifts, switchboards, carpets, signage, exhaust fans, security systems, switchboard generators, roller doors and smoke alarms.

1040. If those items should be characterised as “contents”, the result is that Mobis was underinsured for contents such as to enliven the average provision. The parties are in agreement as to the amount that should be deducted from Mobis’s claim if this is the correct conclusion.

1041. Clause 2.23.1 of the Local Policy defined “Buildings” as, relevantly:

“The word ‘Buildings’ shall mean buildings that are the property of the Insured or for which the Insured is responsible, including

a. Landlord’s [sic] fixtures and fittings

b. Tenants’ [sic] improvements and betterments…”.

1042. On the other hand, cl 2.23.2 defined “Contents” to mean, relevantly:

“The word ‘Contents’ shall mean machinery, plant and other contents belonging to the Insured…(other than landlord’s [sic] fixtures and fittings, tenants’ [sic] improvements and betterments, Stock and other property more specifically insured by this Policy whilst in or on the Buildings…”.

1043. At all relevant times it was a mutually known fact that Mobis owned the warehouse. It was not a “tenant”. There was no “landlord”. Hence, the use of those words in the Local Policy was inapt. The reference “[l]andlord’s fixtures and fittings” and “[t]enants’ improvements and betterments” should be read as any fixtures, fittings, improvements or betterments in the warehouse.

1044. On the face of it, the items in question are fixtures, fittings and improvements, and thus part of the building. As Mobis submits, they are all attached to the building and form an intrinsic part of its function as a warehouse. They are “annexed” to the property in the sense described by the High Court in TEC Desert Pty Ltd v Commissioner of State Revenue (WA) (2010) 241 CLR 576 at 585 (French CJ, Gummow, Heydon, Crennan and Kiefel JJ).

1045. However, XL pointed to the fact that the items are listed in Mobis’s “Asset Register” as items of machinery or hardware, as thus as contents, rather than components of the building.

1046. In that regard, XL relied on cl 4.16 of the Local Policy which provided:

“For the purpose of determining the heading under which any property is insured, [XL] agrees to accept the reasonable designation under which such property has been entered in [Mobis’s] records.”

1047. By this clause, XL agreed, for the purposes of determining whether to insure Mobis’s property as “contents” rather than “buildings”, to accept the manner in which Mobis described the property in its own records (provided such description was reasonable).

1048. The question may well have been relevant to the level of premium; although there is no evidence about whether XL would have charged a different premium if Mobis had included the value of these items as part of the building.

1049. The amount Mobis nominated to XL as the value of its contents for the purposes of the Local Policy was $9,683,269. This is the figure specified as “General Contents” in the Asset Schedule of the Local Policy. That figure is recorded in Mobis’s Asset Schedule as the value of its contents, and included the items in question.

1050. Although XL did not see Mobis’s Asset Register when it wrote the Local Policy, by cl 4.16 it agreed to accept Mobis’s designation that these items should be included in the Asset Schedule to the Local Policy, and thus be insured as contents. I would infer that XL assumed (correctly) that this was how Mobis characterised the items in its own records.

1051. In my opinion, it is implicit in cl 4.16 that the parties agreed that if XL insured Mobis’s property on this basis, Mobis could not later contend that the property be differently characterised.

1052. As XL submitted, Mobis has taken the benefit of the clause by designating these items as contents and cannot be now heard to say that they are not. I accept the submission that the designation clause should not be treated as being ambulatory and thus permitting Mobis to alter the heading under which its property is claimed.

1053. In my opinion, on the proper construction of cl 4.16, it represents an agreement between Mobis and XL by which:

1. XL agreed to accept the designation given by Mobis in its records to its property for the purpose of determining how that property was to be insured; and

2. Mobis agreed that, if XL insured the property on that basis, when making a claim under the policy it could not seek to advance an inconsistent position.

1054. Accordingly, the parties should be taken to have agreed that the items in question were “contents”.

1055. The average provision is thus enlivened.

Business interruption

1056. Mobis claims various amounts on account of business interruption. The Local Policy provides cover for Mobis’s loss of gross profit and increased cost of working resulting from the interruption to and interference with its business caused by the warehouse collapse.

1057. Thus, cl 7 of the Local Policy provides, relevantly:

“If during the Period of Insurance Property [Mobis] shall sustain Damage, and in consequence of the Damage:

(a) Business of [Mobis] at the [warehouse] is interrupted or interfered with; …

[XL] will…indemnify the Insured in respect of loss of:

- Gross Profit

- Additional Increase in Cost of Working

…

sustained during the Indemnity Period and directly resulting from such interruption or interference of the Insured’s Business”.

1058. Clause 7.1.1(a) provides for the calculation of the loss of gross profit by reference to cll 8.1 and 8.7.

1059. Clause 7.1.1(b), when read in conjunction with the last two lines of cl 7.1.1, defines “Increase in Cost of Working” as follows:

“[T]he additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the reduction in Turnover which, but for the expenditure, would have taken place during the Indemnity Period in consequence of the Damage…

less any sum saved during the Indemnity Period in consequence of the Damage in respect of such of the charges and expenses of the Business payable out of Gross Profit ”.

Loss of gross profit

1060. Mr Johnson has assessed Mobis’s loss of gross profit at $318,557; Ms Daley at $34,735.

1061. The matters that divide the parties on this question are:

1. the appropriate rate of gross profit that should be adopted in respect of lost sales;

2. the period of over which lost sales should be considered;

3. the rate of growth for sales (the “trend”) that should be applied to lost sales; and

4. what, if any, allowance should be made for the impact of the fire.

Rate of gross profit

1062. Mr Johnson, on behalf of Mobis, applied a rate of 28.95% to lost sales. Ms Daley, on behalf of XL, applied a rate of 27.99%.

1063. Neither Mobis nor XL offered any submission as to which of these rates was to be preferred.

1064. In the absence of such submission, I find that the halfway point: 28.47% should be adopted.

Period of lost sales

1065. Mr Johnson calculated loss over a period of eight months; Ms Daley over three months.

1066. The only direct evidence on this issue was from Mobis’s sales and marketing manager, Mr Harrington. His evidence was that there was (unsurprisingly) a drop in revenue from the date of collapse (25 April 2015) to the end of May 2015, followed by a surge in sales from June to late September 2015 and a dip in sales after September 2015 (compared to budget).

1067. That evidence suggests that the period over which to assess loss of sales lies somewhere between the figures adopted by Mr Johnson and Ms Daley.

1068. I propose to adopt the period from the date of collapse to the end of September 2015 (a little over five months); being the period the subject of Mr Harrington’s evidence.

Rate of trend

1069. The question here is what rate of sales growth should be assumed to have occurred but for the warehouse collapse.

1070. Mr Johnson calculated a trend for sales growth of 11.49%; Ms Daley 5.62%.

1071. Ms Daley opined that the best indicator of expected trend was the six month period prior to the collapse: 5.62%.

1072. But the sales growth actually experienced by Mobis between April and September 2014 (which corresponds, approximately, to the period I have adopted for present purposes) was 13.65%. The growth during the period April to September 2015 was 8.26%, and during the period April to September 2016 it was 20.7%. These figures suggest that Ms Daley’s figure is somewhat pessimistic.

1073. Mr Harrington’s evidence of a drop followed by a surge in sales following the warehouse collapse must be considered in the context of his evidence that most of Mobis’s customers are Hyundai and Kia dealers who, typically, hold an average of 45 days’ worth of spare parts in their own inventories and Mr Stoddart’s evidence that temporary warehouses were fully operational by 30 June 2015. Further, there is no evidence to suggest that the demand for Hyundai and Kia spare parts would have changed during the five month period following the collapse (compared to the corresponding period before the collapse).

1074. That evidence suggests that, despite the warehouse collapse, the sales growth actually achieved in the five month period following the collapse was in the same order it would have been but for the collapse.

1075. In those circumstances, I propose to adopt the figure of 9%; being slightly more than that actually experienced from April to September 2015.

Allowance for the fire

1076. Both Mr Johnson and Ms Daley assumed that the fire on 30 July 2015 had no effect on Mobis’s gross profit.

1077. But it must have; some part of Mobis’s loss of profit must be attributable to the extra disruption caused by the fire.

1078. In the absence of evidence on the subject, I can only guess as to what that effect was.

1079. Just as in the case of the extra pilings issue in the building claim (see [795] to [796] above) and the saleable stock destroyed without inspection (see [931] to [939] above) one possible course, is that I simply disallow this aspect of Mobis’s claim for business interruption because of this hiatus in the evidence.

1080. However, I will invite submissions as to whether an alternative course is available and preferable.

Increased cost of working

Additional labour costs

1081. Mobis claims an amount of $768,569 for additional labour costs.

1082. XL accepts all but $39,104 of this claim.

1083. The difference between the parties is principally a product of the differing methodology adopted by Mr Johnson and Ms Daley.

1084. Mr Johnson used average wage costs for the period before and after the collapse, whereas Ms Daley adopted the actual hours worked and hourly rates to ascertain the incremental increase in labour costs.

1085. Ms Daley’s methodology appears to me to be more reliable, as it is based on actuality. I propose to adopt it.

1086. However, once again, neither expert made any allowance on account of labour costs caused by the fire.

1087. It seems likely that Mobis incurred some additional labour costs because of the fire.

1088. But, again, I could only guess what those costs were.

1089. And, again, one course I could follow is simply to dismiss this aspect of Mobis’s claim.

1090. However, I will invite submissions as to whether there is any other course I should follow.

General ledger costs

1091. These are costs recorded in a ledger created by Mobis to record expenses incurred by reason of the collapse and the fire.

1092. Mobis claims $5,346,507 under this head, whereas XL contends the correct figure is $4,495,010: a difference of $851,497.

1093. Clause 7.1.1(b) of the Local Policy requires that Mobis demonstrate, in each case, that the additional expenditure was:

1. incurred in consequence of the damage caused by the collapse of the warehouse;

2. “necessarily and reasonably incurred”; and

3. incurred “for the sole purpose of avoiding or diminishing the reduction in turnover”.

1094. I will deal with each of the items in dispute in turn.

FDC $20,220

1095. The bulk of this amount ($18,000) relates to charges from the local council for road blocks around the damaged warehouse. Mr Stoddart gave evidence that Mobis was required by NSW Fire & Rescue to set up road closures and safe access to the damaged warehouse.

1096. I am not satisfied this expenditure was for the sole purpose of avoiding or diminishing reduction in turnover. It thus does not satisfy the “sole purpose” test.

Jenmarc $5,268

1097. This cost was incurred to re-establish power to the damaged warehouse. Turnover could not be generated without power. I am satisfied the sole purpose test is satisfied.

Blacktown City Council $21,782

1098. This is a cost levied by the local council for road closures. It does not satisfy the sole purpose test.

Mobis head office $150,681

1099. Mr Stoddart and Mr Harrington gave evidence that these costs related to travel and accommodation expenses of key decision makers from Mobis Korea who travelled to Australia immediately following the collapse to facilitate the making of urgent decisions concerning significant items of expenditure, such as leases, fitout, equipment and staffing.

1100. Mr Stoddart said that the presence in Australia of these key decision makers assisted in getting Mobis’s business up and running and thereby diminished any reduction in Mobis’s turnover.

1101. Although there was no evidence before me of any breakdown or itemisation of these figures, I am satisfied that they are incurred and that they satisfy the sole purpose test.

Security $457,827

1102. This expense was for security guards for the warehouse.

1103. Mr Stoddart gave evidence that this cost was incurred to protect potentially salvageable items of stock and other assets, and to also protect Mobis from the risk of people entering the premises and sustaining injury.

1104. However, over half of these costs ($295,000) were incurred after the fire.

1105. Mr Stoddart gave evidence that the security was required “to prevent people going inside and doing whatever those sort of people do”.

1106. That evidence makes clear, in my opinion, that the purpose of the security guards was not to avoid or diminish the reduction of turnover. In any event, much of the expenditure was related to the consequences of the fire, and not the collapse.

1107. The sole purpose test is not satisfied.

PNL and Wrapfix $8,455

1108. These costs were incurred for packing and wrapping stock that Mobis consumes in the course of its business. The items were ordered prior to the date of the collapse as spare stock. Because existing stock was lost when the warehouse collapsed, these items were used to replace it. I do not see how this cost satisfies the sole purpose test.

Crown $30,701

1109. Mr Johnson agreed (in the Joint Report with Ms Daley) that this item is included in Mobis’s contents claim. I reject it as part of this claim.

Assets of third party $80,045

1110. This represents the cost of replacement of printers and photocopiers destroyed in the collapse. The amount was paid to the supplier of this equipment (which was leased to Mobis). It does not satisfy the sole purpose test.

Various invoices for staff amenities $27,245

1111. This is a claim for the cost of catering which, according to Mobis’s submissions, was “incurred to keep staff motivated as they worked very long hours in the weeks following the storm” and was part of Mobis’s “effort to ensure the temporary warehouse was set up as quickly as possible”. It does not satisfy the sole purpose test.

DY Kim Language Services $7,467

1112. This is an amount incurred to translate the Local Policy from English to Korean. It does not satisfy the sole purpose test.

Miscellaneous $8,057

1113. This amount is said to relate to various items such as a Bureau of Meteorology Report and Work Health Safety costs and accommodation costs (evidently for a Korean lawyer). I am not satisfied these satisfy the sole purpose test.

Rent outside indemnity period

1114. Following the collapse of the warehouse, Mobis leased two temporary premises nearby. Mobis was not able to negotiate a lease term of less than 15 months from 6 May 2015 for one of those premises, and 18 months from 1 June 2015 for the other.

1115. The issue which arises is whether the rental payments made by Mobis under the leases beyond the expiry of the Indemnity Period (on 25 April 2016: see cl 8.3 and item 1.14 in the Schedule) are covered.

1114. The amount claimed by Mobis totals $1,562,547.

1115. The cover under the Local Policy for increased cost of working was for additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing reduction in turnover which turnover would, but for that expenditure, have taken place “during the Indemnity Period”: cl 7.1.1(b).

1116. The clause thus directs attention to expenditure made for the purpose of avoiding reduction of turnover that would otherwise have taken place “during the Indemnity Period”; that is, from the date of the collapse on 25 April 2015 to the end of the Indemnity Period 12 months later on 26 April 2016.

1117. Whether or not Mobis, by executing the leases during the indemnity period, can be said to have “incurred” an obligation to pay rent beyond that period, I cannot see how the incurring of that obligation can be said to have been made for the purpose (let alone “sole purpose”) of avoiding a reduction in turnover within the period of indemnity. It may have been a necessary consequence (because a shorter lease term could not be negotiated) of the incurring of expense which was for that purpose; but it was not itself incurred for that purpose.

1118. In closing submissions, I was informed that Mobis’s reduction in turnover all occurred within the period of indemnity. That may be how things turned out, but there is no evidence to which my attention has been directed that this was known or expected when these leases were entered into.

1119. For that reason, my conclusion is that Mobis is not entitled to indemnity for this amount.

Relocation costs

1122. For the same reason, Mobis is not entitled to costs paid by it after 25 April 2016 to move back to its replacement warehouse.

Savings

1123. Clause 7.1.1 of the Local Policy provides that there is to be deducted from the amount payable under the policy for loss of gross profit and increased cost of working, any “sum saved” during the period of indemnity:

“…in consequence of the Damage in respect of such of the charges and expenses of the Business payable out of Gross Profit”.

1124. XL contends that there are sums “saved” for the purpose of this provision in respect of depreciation ($1,449,509) and IT expenses ($287,642).

Depreciation

1125. The issue is whether a depreciation expense in Mobis’s financial records which is no longer booked because the assets in question were destroyed is an “expense…payable out of gross profit” which has been “saved” for the purpose of cl 7.1.1 and should thus be deducted from the quantum of Mobis’s claim.

1126. The amount in question is $1,449,509.

1127. The depreciation expenses that Ms Daley identified in Mobis’s financial records relate to plant and equipment.

1128. Mobis devoted a number of pages of its submissions to authorities dealing with the meaning of “gross profit”.

1129. However, those authorities are of little assistance as the expression “gross profit” is defined in the Local Policy in cl 8.1 as follows:

“The amount by which

a.   the sum of the amount of the Turnover and the amounts of the closing stock and work in progress

shall exceed

b.   the sum of the amounts of the opening stock and work in progress and the amount of the Uninsured Working Expenses.

Notes

-   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.

-   The words and expressions used in this definition shall have the meaning usually and reasonably attached to them in the books and account of the Insured.”

1130. The definition thus contemplates that, for the purpose of calculating gross profit, provision will be made for depreciation in opening and closing stock and work in progress. It seems to me to be beside the point that the depreciation in question here is in respect of plant and equipment, rather than stock. The point is that for the purposes of the definition of “gross profit” in the Local Policy, depreciation is taken into account.

1131. The question is whether depreciation can be said to be an expense “payable out of” gross profit.

1132. As Mobis has acknowledged, there is authority for the proposition that it is. In Synergy Health (UK) Ltd v CGU Insurance Plc (t/as Norwich Union) [2010] EWHC 2583 (Comm) Flaux J considered a policy which had terms indistinguishable from those under consideration here and concluded that depreciation was a sum “payable out of gross profit” that had been “saved”.

1133. His Lordship stated:

“[256] More formidable is the second ground upon which [the insured] submits that any saving in respect of depreciation does not have to be brought into account upon the true construction of the policy. This is that depreciation is simply not a charge or expense ‘payable’ out of gross profit within the meaning of the provision. [The insured] submits that the word ‘payable’ connotes something that would be ‘paid’ to somebody, whereas depreciation is never paid in that sense. Rather it is an accounting exercise that spreads the cost of assets over a number of years …

[258] Although the [insurers’] construction stretches the word ‘payable’ somewhat, it seems to me that it is to be preferred to [the insured’s] construction, which leaves the saving in respect of depreciation out of account. My principal reason for that conclusion is that it seems to me that, as a matter of principle, a policy should be interpreted as providing an indemnity for the loss suffered not for more than such an indemnity.

…

[260] Furthermore, in my judgment the word ‘payable’ does not have as inflexible and narrow a meaning as that for which [the insured] contends. I agree with [counsel for the insurers] that, whilst accountants might not ordinarily refer to depreciation being payable, in accounting terms depreciation is a charge or expense deducted from gross profit to arrive at net profit and to that extent, as [an expert account] said, something payable out of gross profit. Thus an accountant would understand why a saving in depreciation was a saving in respect of charges and expenses of the business payable out of gross profit.”

1134. Mobis submitted that Synergy Health should not be followed because:

“…it seems that no argument was addressed to the Court on the fundamental proposition that gross profit (the subject of the indemnity) is the profit of a business before depreciation (and certain other) expenses are taken into account. Flaux J, with respect, appears not to have taken into account this basal proposition”.

1135. But here, because of the definition in the Local Policy, gross profit is not profit before depreciation. It is profit which takes into account depreciation in respect of stock.

1136. In any event, I find Flaux J’s decision to be directly on point and I am persuaded that I should follow it.

1137. It follows that there has been a saving which must be taken into account.

1138. If, as Mobis appears to submit, there is some controversy about the manner in which Ms Daley has assessed the amount of the depreciation expense, that matter can be referred out for separate determination.

IT expenses

1139. The issue here is what savings Mobis made concerning IT by reason of the collapse.

1140. An assistant accountant at Mobis, Mr Liang, gave unchallenged evidence that Mobis had five IT accounts, and that only one, the “network account” was directly connected to the warehouse collapse and that only the IT expenses recorded in Mobis’s “network account” were saved.

1141. Ms Daley’s assessment of the amount of IT expenses saved ($287,642) was calculated on the basis that all five IT accounts were affected by the collapse of the warehouse. Mr Liang’s evidence is that this was not so, that the other IT expenses were not affected by the collapse and should not be treated as a saving.

1142. Mr Johnson’s calculation is based upon that evidence. Mr Johnson assessed the savings at $52,185.

1143. I propose to adopt that figure.

Concluding remarks on quantum

1144. The parties raised numerous issues concerning the quantum of Mobis’s claim. I have endeavoured to address and decide all of the issues raised by the parties.

1145. I now invite the parties to confer and agree as to whether any further issues remain for consideration and as to the monetary consequence of the decisions I have made.

1146. I also invite submissions as to how the issues that I have not been able to deal with should be progressed.

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Amendments

03 October 2017 - corrected formatting

Decision last updated: 03 October 2017