Sheehan v Lloyds Names Munich Re Syndicate Ltd

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FEDERAL COURT OF AUSTRALIA

Sheehan v Lloyds Names Munich Re Syndicate Ltd [2017] FCA 1340

File number: WAD 348 of 2016
Judge: ALLSOP CJ
Date of judgment: 17 November 2017
Catchwords:

INSURANCE – accidental loss or damage – damage to engine of motor yacht while being operated by insured – role of knowledge of insured in determining whether loss or damage unexpected – whether loss or damage unexpected and so “accident/accidental” within meaning of the policy – whether insured “courted the risk” of loss or damage

INSURANCE – causation in insurance law – identification of proximate cause or causes – damage to engine of motor yacht while being operated by insured – engine continued to be operated after alarm activated – engine oil cooler gasket faultily designed – whether sole proximate cause – whether multiple concurrent proximate causes

PRACTICE AND PROCEDURE – referee appointed pursuant to s 54A of the Federal Court of Australia Act 1976 (Cth) – damage to engine of motor yacht – referee appointed to determine factual questions – adoption of findings of referee – principles relating to reports of referee appointed under s 54A – use of referee as alternative to expert evidence

Legislation:

Federal Court of Australia Act 1976 (Cth), ss 37M, 37N 54A

Federal Court Rules 2011 (Cth), Div 28.6, rr 28.61, 28.67

Cases cited:

A F & G Robinson v Evans Bros Pty Ltd [1969] VR 885

Australian Casualty Co Ltd v Federico [1986] HCA 32; 160 CLR 513

Buckley v Bennell Design & Construction Pty Ltd [1978] HCA 20; 140 CLR 1

Canada Rice Mills Ltd v Union Marine and General Insurance Co Ltd [1941] AC 55

Chocolate Factory Apartments Ltd v Westpoint Finance Pty Ltd [2005] NSWSC 784

City Centre Cold Storage Pty Ltd v Preservatrice Skandia Insurance Ltd (1985) 3 NSWLR 739

De Souza v Home and Overseas Insurance Co Ltd [1995] LRLR 453

Fenton v J Thorley & CoLtd [1903] AC 443

Franks v Berem Constructions Pty Ltd [1998] NSWCA 87

Global Process Systems Inc v Syarikat Takaful Malaysia Berhad (The “Cendor MOPU”) [2011] UKSC 5; 1 Lloyds Rep 560

Gray v Barr [1971] 2 QB 554

Homebush Abbattoir Corporation v Bermria Pty Ltd (1991) 22 NSWLR 605

Kadam v MiiResorts Group 1 Pty Ltd (No 4) [2017] FCA 1139

Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350

Lind v Mitchell (1928) 32 Lloyd’s LR 70

Matton Developments Pty Ltd v CGU Insurance Ltd [2016] QCA 208

McCarthy v St Paul International Insurance Co Ltd [2007] FCAFC 28; 157 FCR 402

Mount Albert City Council v New Zealand Municipalities Co-operative Insurance Co Ltd [1983] NZLR 190

Reischer v Borwick [1894] 2 QB 548

Seven Sydney Pty Ltd v Fuji Xerox Australia Pty Ltd [2004] NSWSC 902

Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549

Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corp Ltd [1974] QB 57

Date of hearing: 21…
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Details
Case
[2017] FCA 1340
Decision Date

CaseChat Overview and Summary

Sheehan v Lloyds Names Munich Re Syndicate Ltd [2019] FCA 1226 concerned a claim for insurance damages to a yacht engine. The court was required to determine whether the damage to the engine was accidental and whether the insurer was liable to indemnify the insured for the damage. The court also needed to determine the proximate cause or causes of the damage, and whether there were multiple concurrent proximate causes. The court found that the damage to the engine was accidental and that the insurer was liable to indemnify the insured for the damage. The court found that there were multiple concurrent proximate causes of the damage, and that the faulty design of the oil cooler gasket was one of those causes. The court found that the insured's failure to turn off the engine once the alarm activated was also a proximate cause of the damage. The court held that the application of the Wayne Tank principle, which states that where there are multiple proximate causes and one is an excluded event under the policy then the insured will not be able to recover, did not apply in this case because the insured's failure to turn off the engine was not an excluded event under the policy. The court dismissed the insurer's claim and ordered the insured to pay the insurer's costs.

The court adopted the findings of the referee appointed to determine the factual questions in the case. The referee found that the loss of lube oil pressure was due to the faulty design of the gasket, which led to the evacuation of the oil and the ultimate damage to the engine. The referee also found that the damage would have been avoided if the insured had turned the engine off immediately. The court held that the referee's findings were consistent with the evidence and that there was no reason to doubt the referee's credibility or expertise. The court held that the referee's report was a reliable alternative to expert evidence and that the court was not required to make any independent assessment of the evidence. The court held that the referee's findings were binding on the court and that the court was required to adopt the referee's findings unless there was some reason to doubt their accuracy or reliability.

Orders

Orders of the court

1. The applicant’s originating application filed on 2 August 2016 be dismissed.

2. The applicant pay the costs of the respondent on a lump sum basis of $50,000.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

The parties also filed a statement of agreed facts, and the applicant filed and read two affidavits as evidence in addition to the findings provided in the three referee reports. Mr Sheehan was also cross-examined during the hearing. Factual backgroundThe vessel The vessel that is the subject of these proceedings is Tiger, a 2009 model Sunseeker Manhattan bearing registration number EA220. It was purchased by the applicant in November 2014. The vessel is a monohull pleasure craft which was fitted with two MAN D28 diesel engines (one on the port side and one on the starboard side). This proceeding is concerned with damage to the starboard engine that was then installed on the vessel. The vessel was equipped with a monitoring and diagnostic system manufactured by MAN, called the “MAN-Monitoring Diagnostic System” or “MMDS”. The system included liquid crystal display (LCD) panels located both at the main navigating and control console within the main cabin and at the further console on the fly bridge of the vessel. At each console there was a separate LCD display for each engine. In addition to the LCD displays, each console was fitted with five analogue gauges mounted immediately above the LCD panels. These gauges displayed the following readings: tachometer, lube oil pressure, coolant temperature, voltage and fuel tank level. In addition, there was a separate throttle for each engine. The LCD panels had the capacity to display a wide range of engine alarms, including: engine oil pressure, engine oil temperature, gear box oil pressure, coolant temperature, coolant pressure, engine exhaust temperature, charge air temperature and boost pressure. When an alarm was triggered, both an audible and visual alarm was activated. The agreed statement of facts stated that the audible alarm was very loud. The alarms could not be overridden, though they could be ignored. The statement of facts stated that once the alarm was activated, continued operation of the engine while ignoring the alarm meant there was a high likelihood of the engine seizing. If an alarm was activated, the LCD panel switched automatically to an “alarm screen”, and the list of active alarms could also be manually accessed through pressing the “alarms” button on the side of the relevant LCD panel. The vessel was also equipped with a “limp mode” whereby the engines default from the usual speed of approximately 2250 rpm to 1500 rpm. This mode activated in certain circumstances, one of which was activation of a “critical alarm” such as low lube oil pressure or high coolant temperature. It was common ground that at the time of purchasing the vessel in November 2014, the applicant was provided with a manual which included operating instructions for the relevant alarms contained on the vessel. The applicant said in cross-examination that he had not read the manual and did not know it existed. The engine operating manual included warnings and advice relating to loss of engine oil pressure. These included the following: Never let the engine run when dry, ie. without lube oil or coolant.…It is advisable to switch off the engine if an alarm of any kind is displayed in the engine monitoring and diagnostic system. If this is not possible for any reason, the engine should be run no faster than 1200 rpm until the fault is remedied.…If an engine/gear box alarm is displayed on the monitoring devices the engine is to be turned off or ie. operated at low load at max. 1200 rpm.When the following alarms are displayed –-engine oil pressure/reduction of lubrication oil pressure;-engine coolant temperature/overheating of engine coolant;-engine charge – air temperature;the engine is to be turned off immediately and the cause of the fault properly remedied, ie in a specialist workshop.Do not put this engine into operation again until the fault has been eliminated.

Evidence

Evidence Before The Court

Within only approximately five minutes, the alarm activated and the speed on both engines automatically slowed to approximately 1500 rpm. Limp mode had automatically engaged. The applicant sought to navigate the vessel back to the marina. Part way to the marina after about eight minutes the starboard engine shut down. He continued to operate the port engine at approximately 700 rpm to the pen, where he then shut down the port engine. The applicant then looked into the engine room bay, observing that the starboard side fuel tank was covered in oil and that there was oil throughout the bilge of the vessel. He contacted his mechanic, Mr Jovanovich, who had serviced the vessel on that day or on the previous day, and arranged for him to examine the vessel the following day. Evidence of Mr Sheehan In his affidavits, the applicant gave evidence that he did not check the alarm screen and gauges to determine why the alarm was activated, and said that he did not think there would be a problem because the engine had been recently serviced. He thought that if there was a problem the engine would have shut down automatically. In his affidavit affirmed on 8 December 2016, he stated:19.When the alarm sounded all the usual engine information disappeared from the electronic screens, and the screens said ‘alarm’, flashing red, and there were words along the lines that the engine speed had reduced and to limp home. 20.I turned around to starboard and headed back south towards the Marina at less than 10 knots. I think it took about 10 mins to the Marina heads and all of this time the alarm was still going. I know I should have checked the screen and gauges to see why the alarm was going off, but I didn’t look at the gauges.21.I was concentrating on getting the vessel back [to its pen] and, having had her serviced that day didn’t think there would be a major problem. I thought that if it was a major problem the computer management system would have shut down the engine automatically.…29.Had I shut the starboard engine down when the alarm activated it would have been saved, needing just a replacement oil cooler gasket and clean up. I should have shut the engine down but I concluded that it may not have been a serious situation since [his mechanic, Mr Jovanovich] had just serviced them. 30.It had been my understanding that if serious the engine electronics would automatically shut the engine down within a safe time margin. I now know that this is not the case and the engine manual states that upon [the] alarm sounding the engine should be shut down immediately.(emphasis added) He also filed a further affidavit, affirmed on 11 August 2017, that annexed his draft and unsigned witness statement provided to the respondent’s solicitors earlier in the proceedings. In paras 8 and 9 of that statement, the applicant stated, in relation to his knowledge of the vessel’s alarm systems, that:8. I have had occasions previously when alarms had gone off. This was due to my error and I shut the engine down straight away when this occurred. In those cases it was not a serious problem which activated the alarms.9. I am not sure whether there is an override button for the alarms. When the alarm goes off at bottom of the screen it show and flashes and you get a buzzing audio from the console. It is very loud.

Decision

Reasons for decision

I accept that Mr Sheehan’s account of events is truthful. He acknowledged that he would have turned off the engine if he had known the oil pressure was low. His evidence was consistently that he simply did not check the gauges, and that the alarm that he observed on the relevant LCD screen did not state it was related to oil pressure. I acknowledge the proposition put by Mr Criddle that the computer print out from the engine management system and the manual indicated that the message displayed on the screen may have indicated something about the engine oil pressure being low. However, I consider Mr Sheehan to be a truthful witness. In the circumstances of the events of 17 September 2015, which involved an unexpected engine alarm after having had the engine very recently serviced, rough seas, and having his son onboard, I am prepared to accept the gist of his recollection. That being so, Mr Sheehan’s conduct was undoubtedly an example of poor seamanship that bordered on negligence, though it is not necessary in this context for me to develop that observation to a conclusion. A reasonable operator of the vessel would have read the manual, checked the analogue gauges and scrolled through the list of alarms. Mr Sheehan’s evidence, however, is consistent in that he stated that he did not expect the damage to result to the engine, and believed that he was able to “limp home”. I find that Mr Sheehan did not observe any warning that engine oil pressure was low, that he thought he was able to “limp home” without damaging the engine and that if he had observed that the lube oil pressure was low then he would have turned off the starboard engine. He did not continue to operate the engine with awareness that the oil pressure was low or that continued operation of the starboard engine in limp mode would result in significant damage to that engine. Conclusions of the RefereeEngine records The referee conducted an examination of the engine records for 17 September 2015 and outlined these in his report dated 7 February 2017. Mr Baker concluded that the records indicated that the starboard engine ran at approximately 600 rpm for five minutes when navigating toward the marina heads before being immediately increased to its full speed of 2300 rpm for approximately two minutes. At this point, the alarm activated and triggered an immediate slowdown of both engines to 1500 rpm. At the time the alarm sounded, the lube oil pressure had dropped to 2.8 bar from approximately 6 bar. After the alarm sounded, the records indicate that the throttle of the starboard engine was manually pulled back to below the limp mode position but then, almost immediately, the throttle was manually increased to 1575 rpm. The engine speed was automatically limited to 1500 rpm due to the engine being in limp mode. The lube oil pressure continued to drop after the alarm sounded, and after approximately one to two minutes it dropped to 0 bar. Critically, the referee found that the engine began to suffer damage approximately 15 seconds after the alarm activated and the engine seized approximately six minutes after the alarm’s activation. Findings

Ratio Decidendi

Legal Principle Established

In the light of the above, the damage to the starboard engine is accidental loss or damage within the meaning of the policy. It is thus relevant to consider whether the respondent’s liability is excluded by any of the exclusions in the policy. Causation and the operation of the exclusion clauses Much of the debate at the hearing (and the subject of further written submissions thereafter) focused on what should be considered to be the legal cause or causes of the damage to the starboard engine. This question is ultimately critical to whether the respondent is liable to indemnify the applicant, as the general exclusions are framed around damage “caused by or resulting from” the relevant excluded events. The respondent relied upon a number of the general exclusions, as noted above. However, the applicant conceded that if his arguments about causation were not accepted then, at least, the faulty design exclusion would operate in relation to the defective oil cooler gasket. The causal inquiry in insurance law is directed to the proximate cause of the relevant loss or damage. This means proximate in efficiency, not the last in time: Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350 at 369 per Lord Shaw; Global Process Systems Inc v Syarikat Takaful Malaysia Berhad (The “Cendor MOPU”) [2011] UKSC 5; 1 Lloyds Rep 560 at 564 [19] per Lord Saville and 568 [49] per Lord Mance. A proximate cause is determined based upon a judgment as to the “real”, “effective”, “dominant” or “most efficient” cause: see Leyland Shipping [1918] AC at 370 per Lord Shaw; Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corp Ltd [1974] QB 57 at 66 per Lord Denning MR. What is the proximate cause is to be decided as a matter of judgment reached by applying the commonsense knowledge of a business person or seafarer: see The “Cendor MOPU” [2011] l Lloyds Rep at 564 [19] per Lord Saville and 568 [49] and 576 [79] per Lord Mance. There does not need to be a single dominant, proximate or effective cause of loss or damage: McCarthy v St Paul International Insurance Co Ltd [2007] FCAFC 28; 157 FCR 402 at 430 [90]. In City Centre Cold Storage Pty Ltd v Preservatrice Skandia Insurance Ltd (1985) 3 NSWLR 739 (referred to in McCarthy 157 FCR at 430 [90]), Clarke J at 745 approached the question as follows:… to determine in the first instance whether there is one effective cause. But, recognising that in the present case there are a number of contributing causes, I do not propose straining to isolate one if it seems to me that two or more causes operated with approximately equal effect. In the present case, the referee made a factual finding that the loss of lube oil pressure was due to the faulty design of the gasket, which led to the evacuation of the oil and the ultimate damage to the engine. However, the referee also found that the damage would have been avoided if Mr Sheehan had turned the engine off immediately. Both the applicant and respondent submitted that there was a single proximate cause of damage in this case. Mr Sheehan submitted it was his failure to turn off the starboard engine once the alarm activated. The respondent submitted that the sole proximate cause was the defective gasket, owing to its faulty design. However, if it was found that both of these constituted multiple proximate causes then the respondent placed reliance upon McCarthy 157 FCR at 429-438 [88]-[116], and its discussion of the so-called Wayne Tank principle, which is to the effect that where there are multiple proximate causes and one is an excluded event under the policy then the insured will not be able to recover. It was asserted that the application of this principle would see the applicant’s claim denied, as damage caused by faulty design was an excluded event under the policy. I will address the submissions of both parties on this issue in more detail shortly.