Phillip Edward Gray and Pauline Margaret Gray v Mercantile Mutual Insurance (Australia) Ltd No. SCGRG 94/95 Judgment No. 4841 Number of Pages 22 Insurance Standard Contracts

[1994] SASC 4841

COURT IN THE FULL COURT OF THE SUPREME COURT OF SOUTH AUSTRALIA MOHR(1), OLSSON(2) and DEBELLE(3) JJ

CWDS
Insurance - standard contracts - Claim by appellants for water damage - insurance policy excluded liability for damage caused by flood - policy a prescribed contract of insurance pursuant to the Insurance Contracts Act 1984 (Cth) - whether the appellants' building was principally and primarily used as a place of residence - relevant factors - trial judge erred in failing to give sufficient weight to the nature and extent of the use as a residence - appeal allowed. Insurance Contracts Act 1984 (Cth) s 35 and Insurance Contracts Regulations reg4, reg9-12. Sunter v Commissioner of Land Tax (NSW) (1976) 7 ATR 30; Brown v Commissioner of Land Tax (NSW) (1977) 7 ATR 642; Greenville Pty Ltd v Commissioner of Land Tax (1977) 7 ATR 278; Longford Investments Pty Ltd v Commissioner of Land Tax (NSW) (1978) 8 ATR 656 and Abbott v Commissioner of Land Tax (1979) VR 297, applied. Speedo Knitting Mills Ptv Ltd v Cth (1981) 37 ALR 417 and Parker Pen (Austr) Pty Ltd v Export Development Grants Board (1983) 46 ALR 612, distinguished. Federal Commissioner Of TaxatiOn v FH Faulding and Co Ltd (1950) 03 CLR 594; Hahnefeld v Chiropractor's Borad (1983) 31 5A8R 285; Dixon v Bridge (1966) 84 wrv (Pc 2) (NSW) .248; Readymix Concrete (Victoria) Pty Ltd v Federal Commissioner of Taxation (1969) 118 CLR 177 and Universal Press Pty Ltd v Federal Commissioner of Taxation (1989) 90 ALR 332, discussed.

HRNG ADELAIDE, 12 October 1994 #DATE 22:11:1994

Counsel for appellants:     Mr G Harley

Solicitors for appellants:    Harley and Co

Counsel for respondent:     Mr T.F. Forrest

Solicitors for respondent:    Stratford and Co

ORDER
Appeal allowed.

JUDGE1 MOHR J I agree.

JUDGE2 OLSSON J This is an appeal from the decision of a District Court Judge in relation to a preliminary issue which arose in the course of an action in the District Court.

2. The relevant narrative facts are not in contention and may simply be stated.

3. In October 1992 the plaintiffs purchased and entered into possession of a property at Kanmantoo, which is a very small country town on what is now a secondary road in the Adelaide Hills.

4. The property in question extended over an area of about 2 acres and abuts the secondary road on one frontage. On it was erected an old building of about 180.5 square metres in size.

5. By reference to the photographs tendered before the learned trial judge the front of the building was on the actual footpath alignment. Access was gained to the premises through a door in that frontage, through which there was entry, via a passage, to the various rooms within the building.

6. All but approximately 50 square metres of the building comprised residential accommodation, consisting of three bedrooms, a lounge, kitchen, family room and toilet and bathroom facilities.

7. On the left of the passage, on entry, was a large room of about 50 square metres ("the shop") in which was conducted what was loosely described as the business of a general store. This abutted the kitchen, which was partly utilised to prepare certain food items for sale in the shop, but also used for normal domestic purposes.

8. At the time of purchase of the property the shop was known as the "Kanmantoo General Store". It included a post office agency. Petrol was sold from two bowsers in front of the shop.

9. As I understand the evidence, the plaintiffs and their three children had, prior to the purchase, resided at Nairne. Their motivation for moving to Kanmantoo was that they desired a change in lifestyle and more room for the children. The land with the premises enabled the children to have a horse. The business conducted on the site had a potential to provide a modest living, in addition to the income received from the male plaintiff's continuing part time employment in Nairne. It was intended that the business would be attended to by the female plaintiff, with such assistance as the male plaintiff had time to render.

10. I infer from the material before the Court that, on obtaining possession, the plaintiffs continued to conduct the business in much the same fashion as had previously been the case.

11. It was open quite extensive hours seven days per week. The plaintiffs sold a variety of lines of goods, including groceries, fruit and vegetables, delicatessen items (including sandwiches and hot dogs), newspapers and magazines, as well as petrol. The agency provided the usual range of post office services.

12. The plaintiffs paid a total consideration of $160,000 for the property, of which $40,000 was said to have been attributed to the business component.

13. I take the learned trial judge to have accepted that the main motive for the purchase was to acquire the premises as a private residence for the plaintiffs; and that the presence of the business was regarded by them as something of a bonus. The evidence did not suggest that they had specifically been looking for a new residence with a business attached, when they decided to move from Nairne.

14. On or about 5 November 1992 the plaintiffs entered into contracts of insurance with the defendant. One contract related to contents and the other to the building. The latter was a re-instatement policy in relation to damage by storm, tempest or rainwater.

15. It was in contention between the parties as to whether the contract related to the building ("the building insurance") was a "prescribed contract" for the purposes of regulations 9 and 10 of the Insurance Contracts Regulations ("the Regulations") made pursuant to the provisions of the Insurance Contracts Act, 1984 ("the Act").

16. On or about 18 December 1992 the building and its contents were damaged by the entry of water. It is clear that such water entry was the result of a nearby water course overflowing, following heavy rain in the region. However, an issue arose between the parties as to whether what occurred was properly characterised as damage resulting from a flood, or damage resulting from storm or tempest. In terms, the building insurance did not cover damage by flood. Indeed the policy purported to exclude damage so caused.

17. Against the foregoing background a question was debated as to whether the defendant was, in any event, entitled to rely on the exclusion, having regard to the provisions of section 35 of the Act and the Regulations.

18. Insofar as they are material the provisions of section 35 read as under:-
"35. (1) Where:
    (a) a claim is made under a prescribed contract; and
    (b) the event the happening of which gave rise to the claim
    is a prescribed event in relation to the contract;
    the insurer may not refuse to pay an amount equal to the
    minimum amount in relation to the claim by reason only that
    the effect of the contract, but for this subsection, would be
    that the event the happening of which gave rise to the claim
    was an event in respect of which:
    (c) the amount of the insurance cover provided by the
    contract was less than the minimum amount; or
    (d) insurance cover was not provided by the contract."

19. Having regard to regulation 10, damage by flood was a prescribed event. It followed that, if the building insurance was properly characterised as a prescribed contract as envisaged by regulation 9, then, on the facts of this case, the defendant was not entitled to rely on the exclusion in the policy document.

20. Regulation 9 is expressed in these terms:-
    "9. The following class of contracts of insurance is declared
    to be a class of contracts in relation to which Division 1 of
    Part V of the Act applies, namely, contracts that provide
    insurance cover (whether or not the cover is limited or
    restricted in any way) in respect of destruction of or damage
    to a home building, where the insured or one of the insureds
    is a natural person."

21. The phrase "home building" is the subject of a lengthy definition contained in regulation 2. So far as is material for present purposes, that definition stipulates that:-
    "'home building' means -
    (a) a building used principally and primarily as a place of
    residence; and
    (b) out-buildings, fixtures and structural improvements used
    for domestic purposes, being purposes related to the use of
    the principal residence, on the site ...".

22. It follows that the initial issue which arose between the parties was as to whether the plaintiff's building could properly be described as "a building used principally and primarily as a place of residence".

23. In the foregoing circumstances the learned trial judge was requested to determine an initial preliminary issue couched in these terms:-
    "Is the insurer prevented, by virtue of the operation of
    Section 35 of the Insurance Contracts Act, from relying on
    the exclusion of flood contained in the Business Pak Policy
    being Policy No 60 A075299BPK and being referred to in
    paragraph 6 of the amended statement of claim?"

24. Having reviewed the evidence, as I have summarised it above, the learned trial judge answered that question in the negative. It is against that conclusion that the plaintiffs now appeal.

25. In the course of reasons for decision published by him, the learned trial judge discussed a series of authorities bearing on the meaning of the expressions "principally", "primarily" and "primarily and principally". There do not appear to be any authorities which specifically discuss the phrase "principally and primarily".

26. Having conducted that review he expressed the opinion that it is not sufficient to find that, because the portions of a building which are used as a residence exceed, in physical area, those which are used for other purposes, the definition is necessarily satisfied. It was his conclusion that the use of the composite expression was intended to be emphatic; and implied that the degree of use of the overall premises had predominantly to be as a place of residence. It was his ultimate opinion that, on the evidence, the use of the shop segment of the premises "was not so subordinate, incidental or ancillary in the plaintiffs' use of the whole building so as to make its use as a residence the predominant use of the building". He said that the question was one of degree. The plaintiffs had not satisfied him that, at the time of the taking out of the insurance, the whole of the building was to be used principally and primarily as a place of residence.

27. Given that such an issue will always involve questions of fact and degree, the first aspect to be addressed is the very nature of the proper approach to the evidence.

28. It seems to me to be beyond question that issues such as this do not fall to be resolved merely upon the application of a quantitative test. The reasoning adopted in Parker Pen (Aust) Pty Ltd v Export Grants Development Board (1983) 46 ALR 612 (which focused on the phrase "primarily and principally") necessarily proceeded upon a qualitative test, which certainly excluded the proposition that the sole use of the premises had to be that which was stipulated.

29. Despite his contrary assertions, the reasoning of Lockhart J in that case is not, prima facie, entirely easy to reconcile with some of the dicta of Woodward J in Speedo Knitting Mills Pty Ltd v Commonwealth of Australia (1981) 37 ALR 417, who also considered the same statutory provision. In the latter case Woodward J remarked, in passing, that, where the test is to be applied to land, it is objective, whereas, in other cases, a subjective element enters into the consideration.

30. Whilst, in a sense, that may be so, it seems to me that, also in relation to land, the proper area of consideration cannot be entirely devoid of a subjective element. As Lockhart J said in the Parker Pen Case at 621:-
"... In the context of s4(1) the inquiry must be to ascertain
    whether the expenditure was incurred by the person primarily
    and principally for the purpose of creating or seeking
    opportunities or creating or increasing demand for the
    stipulated objects, including the sale by that person for
    export of eligible goods manufactured in Australia. This
    involves a subjective element. The purpose must be someone's
    purpose. It is the purpose of the person mentioned in the
    sub-section. To ignore subjective elements is wrong. There
    is, of course, a difference between the essential elements in
    the notion of purpose and the means whereby purpose is
    ascertained. Purpose may be gleaned either from subjective
    or objective elements or, more usually, both. A person may
    say what his purpose is, but the objective facts may cast
    doubt upon the credibility or reliability of his statement.
    It is for the Tribunal of fact to consider all the
    circumstances and conclude whether the requisite purpose has
    been established. Objective facts are usually more reliable
    than mere protestations of purpose, intent or state of mind,
    which, although susceptible of testing in cross-examination,
    are intrinsically impenetrable and inscrutable."

31. It is, of course, true that the section there in contemplation expressly used the word "purpose", whereas the definition now under consideration does not. However, it seems to me that, as a matter of logic, the above reasoning is no less apposite to it.

32. One difficulty which arises is that the two words "principally" and "primarily" do not, according to their normal English usage, necessarily mean the same thing - although they can. In the Parker Pen Case, which was concerned with a phrase "expenditure ... that ... has been incurred by a person primarily and principally for the purpose of creating (opportunities for export sales)" Lockhart J discussed the situation in these terms (at 619-620):-
    "Section 4(1) uses the adverbs 'primarily' and 'principally'.
    It is a curious use of language. The words have different
    derivations and sometimes different connotations. For
    example, one meaning of 'primarily' is at first or
    originally. 'Principally' does not bear this meaning. I
    have looked at various dictionaries. They all define the
    adjectives 'primary' and 'principal' and some define the
    adverbs 'primarily' and 'principally'. The modern meanings
    given in the dictionaries to these words is much the same.
    For example, Collins Dictionary of the English Language,
    Australian edition edited by G A Wilkes, defines 'primarily'
    so far as relevant, as 'principally; chiefly; mainly'. The
    Macquarie Dictionary defines the adverb 'principally' as
    'chiefly; mainly'. It is in this sense that the words are to
be understood in s4(1). Notwithstanding the tractability of
    the English language I do not think that the two adverbs have
    separate work to perform in the sub-section. In my view the
    draftsman used both words to emphasize that it is only where
    the Board is satisfied that expenditure has been incurred
    mainly or chiefly (to use neutral adverbs) for the required
    purpose that the expenditure answers the description of
    'eligible expenditure'. ... I do not think it matters,
    however, whether the two adverbs are treated as synonymous or
    have some subtle difference in meaning. The essential
    intention of the draftsman is clear enough."

33. The learned Judge went on to make the point that the Board, from which the appeal emanated, had used the word 'predominant' as the touchstone indicated by the juxtaposition of the two separate words "primarily and principally". He stressed, however, that, although that word is capable of meaning that the stipulated purpose must have a controlling or ascending influence so as, virtually, to be the sole purpose, it was not so employed in the section. He considered that "predominant" may be understood in the sense of mainly, chiefly, primarily or principally; and that it was in such sense that the Board had used the word.

34. I recognise that this is not, prima facie, the precise approach adopted by Woodward J in the Speedo Knitting Mills Case at 428, although Lockhart J was of the view that it was not substantially different, in substance, from the view which he adopted.

35. Lockhart J argued that it was not sufficient to enquire whether some difference can be discerned between the uses, to justify classifying one as the main or predominant use. The predominance must, he opined, be of such a degree as to impart a character to the parcel as a whole - that was the true significance of the two words "primarily and principally" (Greenville Pty Ltd v Commissioner of Land Tax (NSW) (1977) 7 ATR 278). However, at the end of the day, Woodward J, in the Speedo Knitting Mills Case was of opinion that, to adopt the words of Rath J in Sonter v Commissioner of Land Tax (NSW) (1976) 7 ATR 30 at 35, albeit with particular reference to the use of the word "primarily":-
    "The word primarily, as applied to the case, means that
    those uses are to be weighed and evaluated. There is no
    particular touchstone that can be used, all circumstances
    bearing on the degree, extent and intensity of the uses, as
    land uses are to be considered. The question is one of fact
    and degree, and one to be approached on a broad common sense
    basis."

36. That reasoning is, I think, equally pertinent to the situation now before the court.

37. In summary then, it is my view that the correct test to be applied in this case, bearing in mind the points made by Lockhart J, is whether, on the evidence, the appellants demonstrated that the degree or intensity of use of the subject building as a place of residence was such that it could fairly be said that the building, as a totality, was mainly or chiefly so used.

38. Applying that criterion it is necessary, as Lockhart J demonstrated, to consider not only the objective but also the subjective features of the situation.

39. I find myself, with respect, quite unable to accept the reasoning of the learned trial judge, when he commented:-
    "Here the building had two substantial uses as both a
    residence and a shop. It was equally correct to describe it
    as a shop with a residence or a residence with a shop. The
    fact that the shop occupied less area in the building than
    the residence is far from decisive. There was no suggestion
    that any greater area was needed for the building to be used
    properly either as a shop or as a residence. It is
    impossible meaningfully to compare the intensity of use as a
    shop on the one hand and as a residence on the other or the
    amount of the purchase price which was attributable to each
    use of the property. The use as a shop was not so
    subordinate, incidental or ancillary in the plaintiffs' use
    of the whole building so as to make its use as a residence
    the predominant use of the building. To paraphrase Lush J in
    Abbott v Commissioner of Land Tax (above at 303) there were
    two substantial activities being carried on in the building,
    each appropriately conducted. It could equally be argued
    that the shop was the predominant use of the building and the
    residence was ancillary to it because of the convenience of
    having the operators of the shop living so close to the
    business. Only the part of the building adjacent to the
    main road could conveniently be used as a shop. There was no
    suggestion that if the rest of the building had not been
    used as a residence the shop would have occupied any greater
    part of the building. Thus the balance of the building was
    used as a residence, at least partly, because it was not
    required for the shop. On this view it would not be
    correct to categorise the predominant use of the whole
    building as a place of residence. It is ultimately a
    question of degree. On the evidence the plaintiffs have not
    satisfied me that when they took out the insurance the
    whole of the building was to be used principally and

    primarily as a place of residence."

40. To my mind that summation ignores both the physical reality of the situation and also the undisputed factual history and intention of the appellants. Indeed it does not really take into account at all, as it should have done, those subjective elements which demand consideration.

41. Be that as it may, these factors loom as being of particular importance:-
    - the shop component of the premises was in existence when
    the premises were purchased. It was not developed as an
    initiative of the appellants.
    - that component, physically, comprises but a modest
    proportion of the total building and comprehends only one
    room of it - given some joint usage of the kitchen.
    - the business is wholly conducted by the family resident in
    the residential portion of the premises and does not employ
    outsiders. Moreover, the available evidence suggests that
    the income derived from it is not a living for the family
    entity. The male appellant had to continue in or resort to
    another form of paid employment.
    - the predominant aim of the appellants in purchasing the
    property was to acquire a new residence and develop a new
    lifestyle in a country setting. The existence of the
    business was very much ancillary to that purpose and not the
    salient reason for the purchase of the property.

42. In the course of cross examination it was pressed upon the male appellant that the existence of the business was a significant factor in the decision to acquire the property and that the appellants would not have bought it had it not been for the business component. As to this, relevant extracts of the male appellant's evidence (which seems to have been accepted by the learned trial judge) were:-
    "Q. Perhaps I'll put it a slightly different way. Prior to
    your purchase of the premises, the time when you were
    thinking of purchasing the premises, I assume somehow or
    other you got to hear of the fact that the premises were for
    sale; is that right.
    A. Yes.
    Q. And you and your wife went along to have a look at the
    premises; is that right.
    A. That's correct.
    Q. And what did you have in mind insofar as what you might do
    with the premises if you purchased the premises.
    A. I thought it was a lovely old building and a nice
    atmosphere town there and room for my children to do what
    they wished, I guess.
    Q. But did you have in mind that if you purchased the
    premises you would resign from the employment you had at the
    tyre business.
    A. No.
    Q. What was your intention at that time.
    A. The intention was my wife would work in the shop and I
    would continue my employment.
    Q. And at that time you were thinking of buying the premises,
    was your wife in employment.
    A. No.
    Q. So can we take it that at the time you went to see the
    premises, whether the first occasion or the second occasion
    or whatever, as you were thinking about buying the premises,
    that the premises were being used as a general store.
    A. Yes, they were.
    Q. So far as you could tell.
    A. Yes.
    Q. It was being used partly for sale of petrol.
    A. Yes.
    Q. And as a post office.
    A. Yes.
    Q. The same use as you continued to use after you bought the
    premises.
    A. That's correct.
    Q. Did we take it then that what was for sale at the time you
    were looking at the premises, it was the land and the
    buildings and the business that was conducted within the
    building.
    A. We were looked mainly at the land and the home when we
    initially looked at it.
    Q. But do you agree that also for sale as part of the deal
    was the business, the general store, fuel sales and post
    office business.
    A. Yes.
    Q. And you purchased all of these things. You purchased the
    land which includes the building and you purchased the
    business.
    A. Yes.
    Q. And can we take it that you paid some additional money or
    some money specifically for the business.
    A. That's correct.
    ...
    Q. Perhaps I can ask you again, is it the case that you did
    not buy the land and premises only for the purpose of living
    there.
    A. I don't understand.
    Q. Do you agree that when you bought the land and the
    premises, one of the reasons you bought it was so that you
    could live there.
    A. That's correct.
    Q. And that's what you did, you moved yourself and your
    family to the premises and lived in the building.
    A. That's right.
    Q. But do you agree that another reason why you bought the
    premises was so that you and your wife could operate a
    business from within the premises and earn some money from
    doing is that.
    A. Yes.
    Q. And do you agree that at that time if you'd just been
    looking for a place to live you wouldn't have purchased these
    premises.
    A. I can't answer that.
    Q. Well, do you agree that it's unlikely that you would have
    purchased these premises and used them just as a place to
    live, given that you had to pay some money to the previous
    proprietors of the business to buy the business.
    A. Officially we weren't looking for a business.
    Q. That may be the case, but after, initially do you agree
    that you wouldn't have bought the premises if your only
    intention for the use of the premises was to use them as a
    place of residence, to live there.
    A. I don't agree with that.
    Q. Are you saying that you would or might have bought the
    premises and paid money for the business but stopped
    operating the business and just used the premises to live in.
    A. It's a difficult thing to say. I mean, the house and the
    land suited my purposes. If it hadn't have been the business
    and the price would have been right I probably would have
    bought it anyway, but the fact that it had a modest income
    with it was just sweet."

43. The female appellant's evidence on the same topic was to the following effect:-
    "Q. How did you come to purchase that particular property at
    Kanmantoo; what led you there to that purchase.
    A. Nairne was getting too big. The street we were in started
    from being a lonely street, then it got too busy, houses,
    units. We wanted a country feel for the kids and for
    ourselves, and we looked at Kanmantoo, looked at Callington.
    Kanmantoo suited us best.
    Q. When you were looking at Kanmantoo and Callington, were
    you looking for a business or a residence.
    A. Residence.
    Q. You eventually purchased the property on the main road at
    Kanmantoo.
    A. Yes.
    Q. At the time that you purchased that property, what did you
    intend to do with the property.
    A. We were thinking of the children. They had a dramatic
    couple of years, the trail bike, and a pony for Sarah.
    Q. There is in fact a business in that building, the
    Kanmantoo General Store.
    A. Yes.
    Q. When you purchased that building, what did you intend to
    do with the business, if anything.
    A. The contract, when you read it, was a small business that
    would be operated perhaps by one person and Phillip could
    stay working at the tyre centre. We thought would give me
    something to do.
    Q. After you purchased the business, did you - and the
    property - did you in fact live in the property.
    A. Yes.
    Q. Did you continue to run the business.
    A. Yes.
    Q. Did your husband continue to work at the tyre place.
    A. Yes."

44. That evidence renders it patent that the principal reason for the move to Kanmantoo was to effect a change of residence; and that the existence of the shop was merely peripheral to that motive. It was an added "bonus" in that it would give the female appellant "something to do".

45. I am driven to the conclusion, in light of the whole of the evidence, that the ultimate analysis expressed by the learned trial judge did not accurately reflect the actual situation. At the end of the day the plain inference which arises is that the subject building was, at the relevant time, used "principally and primarily as a place of residence", in the sense contemplated by the definition contained in regulation 2. Globally the building was the family home; and that was its main function. The incidental modest business carried on within it does not gainsay that fundamental proposition. I am reinforced in this conclusion by the fact that not only does it accord with the reality and common sense of the situation, but it also recognises the remedial nature of the Act and a need to apply a fair and liberal interpretation to it.

46. Accordingly, I would allow the appeal and set aside the answer given to the first question arising on the preliminary issue. I would substitute for it an answer in the affirmative. The second question raised in relation to the preliminary issue (as adverted to in his reasons for decision) should, consequentially, be referred back to the learned trial judge for further hearing and determination.

JUDGE3 DEBELLE J This appeal concerns an important question relating to standard cover in insurance contracts for house owners insurance.

2. The appellants entered into a contract of insurance with the respondent in respect of premises owned by them at Kanmantoo. The premises were used both as a shop and as a dwelling. I will later deal in more detail with the nature and disposition of the premises. The appellants made a claim under the contract of insurance for water damage to the premises on 18 December 1992. The contract of insurance contained an exclusion for damage caused directly or indirectly by flood. The respondent insurer has, in reliance on that exclusion and on other grounds, denied liability to indemnify the appellants. The appellants commenced an action in the District Court in which they alleged, inter alia, that the insurance contract is a prescribed contract of insurance pursuant to the Insurance Contracts Act 1984 (Cth) ("the Act") and that the respondent could not, therefore, rely on the exclusion as to flood damage. It was ordered that the following question be determined as a preliminary question. "Is the insurer prevented, by virtue of the operation of Section 35 of the Insurance Contracts Act, from relying on the exclusion of flood contained in the Business Pak Policy being Policy No 60 A075299BPK and being referred to in paragraph 6 of the amended statement of claim?"

3. The trial judge ruled that the question be answered "No". The appellants appeal from that decision.

4. Section 35 of the Act provides:
    "(1) Where:
    (a) a claim is made under a prescribed contract; and
    (b) the event the happening of which gave rise to the claim
    is a prescribed event in relation to the contract;
    the insurer may not refuse to pay an amount equal to the
    minimum amount in relation to the claim by reason only that
    the effect of the contract, but for this subsection, would be
    that the event the happening of which gave rise to the claim
    was an event in respect of which:
    (c) the amount of the insurance cover provided by the
    contract was less than the minimum amount; or
    (d) insurance cover was not provided by the contract.
    (2) Subsection (1) does not have effect where the insurer
    proves that, before the contract was entered into, he clearly
    informed the insured in writing (whether by providing the
    insured with a document containing the provisions, or the
    relevant provisions, of the proposed contract or otherwise)
    or the insured knew, or a reasonable person in the
    circumstances could be expected to have known:
    (a) where the effect of the contract, but for subsection (1),
    would be that the liability of the insurer in respect of a
    claim arising upon the happening of the event would be less
    than the minimum amount - what the extent of the insurer's
    liability under the contract in respect of such a claim would
    be; or
    (b) where the effect of the contract, but for subsection (1),
    would be that the insurer would be under no liability in
    respect of such a claim - that the contract would not provide
    insurance cover in respect of the happening of that event."

5. It is common ground that the Parliamentary intention, which is almost concealed by those provisions, is that, if s35(1) applies to the appellants' contract of insurance, the exclusion for flood damage has no operation. In other words, the exclusion will not apply if the contract of insurance is a prescribed contract as defined by the Act. The only issue is whether the appellants' claim is made under a prescribed contract.

6. A prescribed contract is defined in s34 of the Act to mean a contract of insurance that is included in a class prescribed by Regulations to be a contract to which s35 applies. Division 2 of the Insurance Contracts Regulations (Regulations 9 to 12) deals with insurance for what the Regulations call "home buildings". Regulation 9 defines prescribed contracts in relation to this class of insurance contracts as "contracts that provide insurance cover (whether or not the cover is limited or restricted in any way) in respect of destruction of or damage to a home building, where the insured or one of the insureds is a natural person". Regulation 10 defines prescribed events for the purpose of s35(1)(b). Flood is a prescribed event. Thus, the exclusion in the appellants' contract of insurance concerning flood will not apply if the appellants' building at Kanmantoo is a home building as defined.

7. The Regulations also define a home building. Regulation 4 provides:
    "`home building' means -
    (a) a building used principally and primarily as a place of
    residence; and
    (b) out-buildings, fixtures and structural improvements used
    for domestic purposes, being purposes related to the use of
    the principal residence,
    on the site and, without limiting the generality of the
    expression, includes -
    (c) fixed wall coverings, fixed ceiling coverings and fixed
    floor coverings (other than carpets);
    (d) services (whether underground or not) that are the
    property of the insured or that the insured is liable to
    repair or replace or pay the cost of repairing and replacing;
    and
    (e) fences and gates wholly or partly on the site,
    but does not include -
    (f) a hotel;
    (g) a motel;
    (h) a boarding house;
    (j) a building that is in the course of construction;
    (k) a temporary building or structure or a demountable or
    moveable structure;
    (m) a caravan (whether fixed to the site or not); or
    (n) a building that is let or rented by the insured, as
    lessor, as a business and is not the principal residence of
    the insured"

8. As the trial judge observed, the central issue is whether the appellants' building was, at the relevant time, a building used principally and primarily as a place of residence. It was common ground that that question should be determined as at the date of the formation of the contract of insurance, namely, 5 November 1992.

9. It will be noticed that the fact that the building is the principal place of residence of the insured does not necessarily result in the building being a home building. The definition focuses on the use of the building and, where there is more than one use, is concerned with the principal and primary use.

10. The appellants gave evidence which the trial judge accepted. There was no other evidence. The appellants' evidence was that in October 1992 they had purchased a property at Kanmantoo, a small country town in the Adelaide Hills. The appellants had been looking for a residence in the country for themselves and their children. The property contained some two acres. An old building containing about 180.5 square metres was erected on the land. The building was adjacent to the main road which passed through the town of Kanmantoo. On the northern side of the building and adjacent to the road was a room of some 50 square metres which was used as a shop. In that area the business of the "Kanmantoo General Store" was conducted. The business included a post office agency. Petrol was sold from two bowsers at the roadside immediately in front of the shop. The shop was open from 6.00 am to 7.00 pm on weekdays and from 8.00 am to 6.00 pm at weekends. The appellants formed a partnership to run the shop business. Although they each had another job, they also worked in the business.

11. The rest of the building was disposed as a dwelling. A plan was tendered showing the layout and disposition of the rooms. Immediately behind the shop was a kitchen of some 35 square metres. The kitchen was used both for preparing small quantities of food sold in the shop and as the appellants' domestic kitchen. Access to the kitchen could be gained only through the shop. The public had access to the shop but to no other part of the building. The rest of the building consisted of five main rooms used as a lounge room, three bedrooms, a family room, a bathroom and lavatory. The area of those rooms totalled some 96 square metres. These rooms were occupied by the appellants and their three children and were used only by the family. The building was their only residence. Land at the rear of the building was used for recreational purposes and, among other things, to keep a horse for the appellants' children. The appellants' son also rode a motor bike on the land. The appellants paid $120,000 for the property plus $40,000 for the business of the shop. Although they had not been looking for a business, when the opportunity presented itself, the appellants believed that they could make some income by continuing to operate the general store.

12. The trial judge noted that there does not appear to be any judicial consideration or exposition of the phrase "used principally and primarily as a place of residence" under the Act or Regulations. He referred to other contexts in which either the word "primarily" or the word "principally" or the combination of the two words had been used. He held that, in the context of the Insurance Contracts Regulations, it is necessary that the evidence should show that the whole of the building which is the subject of the insurance is properly categorised as being used principally and primarily as a place of residence. He rejected a quantitative approach and said that it is not sufficient to find that the definition of a "home building" was satisfied because the area of the parts which were used as a residence exceeded those which were used for other purposes. He concluded that the expression "principally and primarily" should be treated as a single concept and in effect as a synonym for the word "predominantly". He held that the predominant use of the building was as a shop and not as a dwelling. He expressed his reasons in these terms:
    "Here the building had two substantial uses as both a
    residence and a shop. It was equally correct to describe it
    as a shop with a residence or a residence with a shop. The
    fact that the shop occupied less area in the building than
    the residence is far from decisive. There was no suggestion
    that any greater area was needed for the building to be used
    properly either as a shop or as a residence. It is
    impossible meaningfully to compare the intensity of use as a
    shop on the one hand and as a residence on the other or the
    amount of the purchase price which was attributable to each
    use of the property. The use as a shop was not so
    subordinate, incidental or ancillary in the plaintiffs' use
    of the whole building so as to make its use as a residence
    the predominant use of the building. To paraphrase Lush J in
    Abbott v Commissioner of Land Tax (above at 303) there were
    two substantial activities being carried on in the building,
    each appropriately conducted. It could equally be argued
    that the shop was the predominant use of the building and the
    residence was ancillary to it because of the convenience of
    having the operators of the shop living so close to the

    business. Only the part of the building adjacent to the main
    road could conveniently be used as a shop. There was no
    suggestion that if the rest of the building had not been
    used as a residence the shop would have occupied any greater
    part of the building. Thus the balance of the building was
    used as a residence, at least partly, because it was not
    required for the shop. On this view it would not be correct
    to categorise the predominant use of the whole building as a
    place of residence. It is ultimately a question of degree.
    On the evidence the plaintiffs have not satisfied me that
    when they took out the insurance the whole of the building
    was to be used principally and primarily as a place of
    residence."

13. From that decision, the appellants appeal to this Court.

14. The words "principally" and "primarily" have been judicially considered on many occasions, either singly or in composite expressions, such as "wholly or principally", or together in the phrase "principally and primarily". I do not think that much is to be gained by reviewing the authorities in extensive detail since the precise meaning of the phrase in which either of these adverbs is used and the effect to be given to it will vary according to the statutory context.

15. In some cases "principally" and "primarily" have been used in a quantitative sense. Thus, in Federal Commissioner of Taxation v F.H. Faulding and Co Ltd (1950) 83 CLR 594 the High Court held that "principally" was so used in the First Schedule to the Sales Tax (Exemptions and Classifications)Act 1935 which provided an exemption from sales tax for "Essences, concentrates and cordials, consisting wholly or principally of juices of Australian fruits, for the making of non-alcoholic beverages". Thus a cordial containing less than 50 per cent by volume or by weight did not fall within the exemption. Similarly, in Hahnefeld v Chiropractors Board (1982) 31 SASR
285, this Court interpreted the word "principally" in a quantitative sense in holding that a requirement in s19 of the Chiropractors Act 1979 for registration as a chiropractor that the applicant must derive "his income principally from the business of chiropractic" meant that the applicant had to demonstrate that more than half his income was so derived from chiropractic.

16. In other cases, it has been held that a quantitative test, of itself, is not sufficient. That is exemplified by a number of decisions where land owners have sought to come within an exemption from land tax on the ground that the land was being used for primary production, decisions concerning the Land Tax Management Act 1936 (NSW). That Act provided an exemption if land was used for primary production. One part of the definition of primary production required the land to be used "primarily for... the maintenance of animals or poultry thereon for the purpose of selling them or their natural increase or bodily produce". That provision was considered in Sonter v Commissioner of Land Tax (NSW) (1976) 7 ATR 30 where the taxpayer used the subject land for a number of concurrent purposes, namely, breeding and selling cattle, horses and hounds and also for conducting a riding school. The riding school was the most remunerative source of income but, while that was a relevant factor, it was not held to be conclusive. Rath J observed at 34:
    "In these circumstances the financial gain from the various
    activities is some indication of the comparative intensity of
    the activities. The economics of various aspects of the
    business conducted on land do not necessarily reflect the
    comparative extent of the use of the land. It is readily
    conceivable that where there are a number of users of the
    same land it may be the least profitable use that is the most
    intense one, either in its demands on the land, or upon the
    labour to maintain it, or both. But where, as here, animals
    have been maintained on land for two business purposes, the
    problem as to whether the use of the land is primarily for
    the one purpose or the other will receive some clarification
    from the financial considerations involved. But I do not
    regard the financial considerations as necessarily decisive,
    at all events in this case."

17. Later, he concluded that the question was one of fact and degree. He said at p35:
    "The word `primarily' as applied to the case, means that
    those uses are to be weighed and evaluated. There is no
    particular touchstone that can be used; all circumstances
    bearing on the degree, extent and intensity of the uses as
    land uses are to be considered. The question is one of fact
    and degree, and one to be approached on a broad, commonsense
    basis."

18. He held that, as he could not determine as between the riding school activities and the other activities conducted on the land which was the primary use of the land, the exemption was not available.

19. The same exemption was again considered by Rath J in Brown v Commissioner of Land Tax (NSW) (1977) 7 ATR 642. In that case the total area of the subject land was 41 acres, of which some 17 acres were used for primary production. The balance of the property was unused except so far it was part of a water catchment area for a substantial dam with a capacity of 2.5 million gallons. Rath J rejected a quantitative approach urged upon him by the Commissioner and held that the land qualified for the exemption. The intensity of the use of that portion of the land used for primary production coloured the use of the whole parcel.

20. In Greenville Pty Ltd v Commissioner of Land Tax (NSW) (1977) 7 ATR 278 the relevant part of the definition of primary production required the land to be used "primarily for... the cultivation thereof for the purpose of selling the produce of such cultivation". An area of 160 acres which had been used as a golf course, went out of use as a golf course on 22 December and on 23 December 1.5 acres were ploughed and sown with pumpkin seed. Helsham CJ held that, as the enquiry was into actual land use, the test to be applied was objective. The land use was not to be determined by the intention of the owner. He continued (at 280): "In applying that test one must adopt a broad approach and a commonsense one... It would probably not be sufficient to look merely at the financial return from the cultivation; the fact that there was none would not of itself warrant a finding that the land was not used primarily for cultivation, nor would the existence of a more rewarding cottage industry carried on by the owner on the land at the same time. Likewise the quantity of produce of the cultivation taker of the land would not of itself be a determinant of its primary use. The matter will be one of degree in each case. To claim an exemption under the Act the owner must be able to point to an activity being conducted on the land that will give the land the character of being mainly used for that activity, or that will enable a person having to decide the matter to say that the land is, in substance and looked at as a whole, being used for an activity that gives rise to an exemption."

21. Thus both Rath J and Helsham CJ applied a like test.

22. In Longford Investments Pty Ltd v The Commissioner of Land Tax (NSW)
(1978) 8 ATR 656 an exemption was refused to a landowner who held 69 acres of which 2.5 acres was used for fruit production and packing sheds, the fruit producing a negligible return. About one-third of the property could not be directly used for primary production. There was evidence of investigations and plans for primary production on the useable area. Sheppard J followed the decision in Greenville and held that the fact that part of the land was used for primary production and the rest unused did not necessarily mean that the land was primarily used for that purpose.

23. These decisions were approved and applied by Lush J in Abbott v Commissioner of Land Tax (1979) VR 297, another case where an exemption of land tax was claimed on the basis that the land was used primarily for primary production. The Land Tax Act 1958 (Vic) defined land use for primary production as "land or lands used primarily for... the maintenance of animals or poultry thereon". The land was divided into two parts of which the smaller but better parcel of 83 acres was leased to a golf club at a substantial rental and the larger parcel of the land was used for grazing and raising animals for sale, an activity which was run at a loss. Lush J concluded that the word "primarily" required the main use of the land to impart a character to the land as a whole. He said at 302-303:
    "In construing the word `primarily' in its application to a
    case where a parcel of land is divided into two parts, one of
    which is devoted to an exempt use and one not, it must be
    remembered that the question is whether the whole of the land
    is primarily used for the exempt purpose. In my opinion, it
    is not sufficient to inquire whether some difference can be
    discerned between the uses to justify classifying one as the
    main use or predominant use. The predominance must be of
    such a degree as to impart a character to the parcel as a
    whole... Further, it is the uses of the land which have to
    be considered, not the reasons in the mind of the owner for
    adopting or permitting those uses."

24. His Honour denied the exemption. It will be noticed that he followed decisions in New South Wales in rejecting a subjective test. The decision was affirmed on appeal in Abbott v Commissioner of Land Tax (1985) VR 164. Crockett J expressed the same reasoning as Lush J in these terms (at 166):
    "This means that when the land with respect to which
    exemptions are claimed is employed for dual uses those uses
    are to be compared, weighed and evaluated. But is it
    sufficient, when each of two uses is substantial, to
    determine the matter by saying that one of those uses is, as
    between the two of them, the main or principal use? I think
    not. The character of the parcel of land as a whole is that
    which has to be judged. It is not enough to say of two
    genuine and substantial uses that one is - perhaps only
    marginally - when compared with the other, the `chief use'.
    It must be a sufficiently `chief' use as to give its
    character to the whole of the land. To achieve this it must
    be sufficiently such a use as to give rise to that degree of
    predominance of use as will fairly allow the character of the
    whole parcel to be so described - in this case - as one used
    for primary production - or a particular form of it, namely
`the maintenance of animals', etc: cf Dixon v Bridge (1966)
    84 WN (Pt 2) (NSW) 248."

25. In Dixon v Bridge, the question was whether a football club fell within the definition of a club "primarily devoted to some athletic purpose". The club had more than one purpose. The Court of Appeal in New South Wales held that it was necessary to examine all relevant facts and, having done so, to determine the central and dominant activity of the club. Asprey JA, with whom the other members of the Court agreed, said (at 254): "To be `primarily devoted' to some purpose, where, as in this case, more than one objective has been pursued at the same time, is to be chiefly engaged in a form of activity which pursues the objective relevant to that purpose so that such activity becomes... the central and dominant activity of the club. That is a question to be determined by considering all the material elements related to each form of activity being pursued." Thus, the task was in effect to determine the activity which determined the essential character of the club. In Readymix Concrete (Victoria) Pty Ltd v Federal Commissioner of Taxation (1969) 118 CLR
177, Kitto J had to determine whether transit mixers used by the appellant qualified as manufacturing plant and thus eligible for a special deduction from income tax. In order to qualify for the deduction the plant had to be used by the taxpayer "primarily and principally, and directly in any part of the operations by means of which" readymix concrete in its final state was to be manufactured. In allowing the appeal, Kitto J looked to the essential purpose of the transit mixers.

26. One instance of the use of the words "principally" and "primarily" as a composite expression is to be found in the definition of "eligible expenditure" in s4(1) of the Export Market Development Grants Act 1974 (Cth). Under the Act grants may be made to persons incurring eligible expenditure which is defined to mean expenditure that has been incurred by a person "primarily and principally for the purpose of creating or seeking opportunities, or creating or increasing demand for specified exported goods, services or know-how". In Speedo Knitting Mills Pty Ltd v The Commonwealth
(1981) 37 ALR 417, the sales revenue of the plaintiff, which manufactured swimwear, consisted almost entirely of royalties paid by overseas manufacturers under licence agreements. With the intention of increasing worldwide sales and attracting new licence agreements, the plaintiff incurred expenditure by advertising at overseas sporting events and by sending employees on overseas promotional trips. Woodward J held that the plaintiff had not discharged the onus of establishing the expenditure was eligible expenditure as defined. His Honour distinguished the land tax cases in determining that the purpose of which the expenditure might be incurred could not always be determined by an objective test. It would be relevant to have regard to the intention of the person making the expenditure but the genuineness of the intention would be judged by objective facts.

27. The same provision was later considered by Lockhart J in Parker Pen (Aust) Pty Ltd v Export Development Grants Board (1983) 46 ALR 612. His Honour adopted a like approach to that of Woodward J. While, he said, the determination of an individual's purpose involved subjective elements, the averment of the subjective intention had to be tested by reference to objective facts. He said (at 621):
    "The purpose must be someone's purpose. It is the purpose of
    the person mentioned in the subsection. To ignore subjective
    elements is wrong. There is, of course, a difference between
    the essential elements in the notion of purpose and the means
    whereby purpose is ascertained. Purpose may be gleaned
    either from subjective or objective elements or, more
    usually, both. A person may say what his purpose is, but the
    objective facts may cast doubt upon the credibility or
    reliability of his statement. It is for the Tribunal of fact
    to consider all the circumstances and conclude whether a
    requisite purpose has been established. Objective facts are
    usually more reliable than mere protestations of purpose,
    intent or state of mind, which, although susceptible of
    testing in cross-examination, are intrinsically impenetrable
    and inscrutable."

28. On occasions a qualitative standard is applied in relation to the words "principally and primarily" either used singly or conjunctively: see Universal Press Pty Ltd v Federal Commissioner of Taxation (1989) 90 ALR 332, where Gummow J in determining whether street directories were "books consisting wholly or principally of maps" inquired as to what was "that characteristic which provides the goods with their essential properties or gives them their distinctive quality" (at 338). As His Honour noted in that case, a quantitative test would have led to the same result.

29. The decisions in the Speedo Case and in the Parker Pen Case do not, I think, assist in the resolution of the issues in this appeal. The task of determining how a building is used is a different task from the determination of a person's purpose. Purpose necessarily involves subjective elements. By contrast, the actual use of land or buildings will not, generally speaking, turn on intention but on the evidence of how the land or building is being used, matters of fact which are capable of objective evaluation. Even if a building is the principal place of residence and intended to be used as such, the question remains whether the principal and primary use is residential, a question which can only be determined by an examination of the uses made of the building. It is possible even to contemplate circumstances where the building is not the principal place of residence, yet the principal and primary use of the subject building is residential. The fact that the building was the only place of residence of the appellants does not assist in the resolution of the issues, except to the extent that it establishes that the rooms available for residential use were extensively used for that purpose.

30. There may, nevertheless, be instances where the intention of the parties will be of assistance in determining the principal and primary use of a building. For example, it will be relevant where the insured has recently purchased a building disposed as a shop and dwelling but intends to carry out alterations and convert the shop to residential use. However, in the instant case, the appellants intended to use both the dwelling and the shop. Their intentions, therefore, are of no assistance in determining the principal and primary use of the building. The enquiry must, therefore, have regard only to the objective facts concerning the manner in which the building was used.

31. I have derived more assistance from the observations made in the land tax decisions. As a general rule, the test to be applied will be an objective one and, when applying that test, a broad and commonsense approach should be adopted. However, I do not think it always appropriate, when determining whether the principal and primary use of a building is residential, to decide whether one use predominates over another to a sufficient degree to impart its character to the building. A building might retain the character and appearance of a dwelling notwithstanding that the non-residential use predominates. In other cases, the building might appear to be used for non-residential purposes but is in fact wholly devoted to residential use. Nor does the test assist in a case such as the present when the character and style of the building is residential but a portion is plainly a shop.

32. The definition of "home building" assumes that a building might be put to more than one use. A comparison of the extent of usage is, therefore, required. Thus, as a general rule the most useful starting point will, therefore, be to examine the nature and extent to which the building is used for residential and non-residential purposes. Once the respective areas used for each purpose have been ascertained, it will be necessary to examine the extent to which each is used. When determining the extent of use, it is unlikely that assistance will often be gained from an examination of the hours in each day for which the residential part of the building is used. For example, a bedroom is rarely used for as long a time as other rooms used in common by a family. If little or no use is made of the residential area, it is unlikely that the building will be a home building as defined. Similarly, if the residential area is a very small part of the total area of the building it will also be unlikely that the building would qualify as a home building. It will be relevant to examine also the use made of the curtilage of the building. For example, the fact that there is a garden which is used for recreation by those residing in the building may be further evidence that the principal and primary use of the building is for residential purposes.

33. Depending on the nature of the building and the uses made of it, other matters might have to be considered. But it is difficult to discern a more suitable criterion for determining the principal and primary use of the building than a quantitative assessment of the nature and extent of the uses made of the building and in a large number of cases it is likely that the issue will be resolved by such a test. It is unlikely that examination of the level of income earned will assist. In the ordinary case, no income will be earned in the residential part of the building. It is unlikely also that the intensity of the use of the non-residential part of the building will be of great assistance. In other words, the fact that a building is principally and primarily used as a residence will be unaffected by whether the non-residential use is on a part-time or full-time basis. A medical practitioner or barrister may conduct his whole practice from a room in the house he occupies with the rest of his family. Another medical practitioner or barrister might use the same room on a part-time basis or simply as a study in which he works out of normal business hours. In each case the same room is used for a non-residential purpose but the character of the building may remain unaffected by the extent of that non-residential use and the principal and primary use of the building will continue to be residential. While the issue whether a building is principally and primarily used as a residence will be a question of fact and degree in every case and it will be necessary to consider all circumstances bearing on the degree, extent and intensity of the respective land uses, a quantitative assessment of the nature and extent of the respective uses is likely in most cases to be of considerable weight.

34. There are a number of facts which point to the conclusion that the principal and primary use of this building was as a residence. The building was designed as a dwelling and was still disposed as a dwelling in 1992. It had the scale, appearance and character of a dwelling, albeit with a shop at the front. By far the greater part of the building was available for and was used as a residence. Those rooms were used only by the appellants and their family. The public did not have access to them. Land to the rear of the building was used for recreational purposes by the appellants and their family, a fact which reinforces the extent of the use of the building as a residence. The shop was but a small part of the whole building. The business of the shop is an incidental, albeit substantial, activity in the overall use of the building. The area used solely as a shop is some 28 per cent of the total area of the building. Even if the kitchen is included in the shop area - and it must not be overlooked that the primary use of the kitchen is for residential purposes - no more than 47 per cent of the building is used for non-residential purposes. Both the appellants had other employment and arranged their working hours so that one was available to work in the shop. No other staff were employed. The position of the appellants is to be contrasted with that where a small residential unit forms part of a larger non-residential building, for example, a shop or office with a small residential flat at the rear. In short, the nature and extent of the use of the building as a residence predominated over the use of the building as a shop. This is not a case where a caretaker resided at the rear. Nor is it a case where a building originally used as a dwelling has undergone a change of use so that by far the greater part is used as a shop.

35. At the end of the day, what is being compared are two kinds of uses and it is necessary to determine whether one predominates over the other. While the shop was extensively used, it was less than one-third of the area of the building, the rest of which was wholly and continuously used as a residence. In other words, the greater part of the building was disposed as a residence and was extensively used by the appellants and their family as a residence and for no other purpose. Had the residential part of the building not been used as a dwelling or the residential use had been infrequent, it might not have been possible to conclude that the building was principally and primarily used as a residence.

36. I think the trial judge erred in failing to give sufficient weight to the nature and extent of the use as a residence. He erred also in holding that the appellants had to show that the whole of the building had to be properly categorised as being principally and primarily used as a residence, a test which seeks to enquire whether one of the uses of the building imparts its character to the whole. In this case substantial weight must, I think, be given to the extent of the use as a residence. Applying a broad and commonsense approach, I conclude that the principal and primary use of this building was as a residence. It was, therefore, a home building as defined in the Insurance Contract Regulations.

37. For these reasons, I would allow the appeal and answer the preliminary question "Yes".