State Government Insurance Commission v Robert John Lane and Judith Ilona Lane No. SCGRG 96/2051 Judgment No. 6122 Number of Pages 9 Insurance Marine Insurance

[1997] SASC 6122

IN THE FULL COURT OF THE SUPREME COURT OF SOUTH AUSTRALIA

COX, MILLHOUSE AND DEBELLE JJ

Insurance - marine insurance - losses and measure of indemnity - insured operated pleasure craft as a charter vessel - passengers allowed to sit in bosun's chair and be lowered to just above water level - activity called halyard flying - passenger injured when halyard flying - insurance policy indemnifying insured for liability for negligence to third parties - policy contained exclusion for liability for injury where a person was towed by the vessel or where the craft was operated in an unsafe manner - whether the injured party was being towed - whether the craft was operated in a unsafe manner - insurer not entitled to rely on exclusions. Davidson v Burnard (1868) LR CP 117 ; Pickup v Thames Insurance Co (1878) 3 QBD 594 ; Fraser v Furman (Productions) Ltd (1967) 1 WLR 898 ; Woodfall & Rimmer Ltd v Moyle [1942] 1 KB 66 ; Albion Insurance Co Ltd v Body Corporate Strata Plan 4303 [1983] VR
339 ; Legal and General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390 ; Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaishal [1962] 2 QB 26 ; Horn v Cia de Navegacion Fruco SA [1970] 1 LR 191 ; Hunter v Potts (1815) 4 Camp. 203 ; Pictorial Machinery Ltd v Nicolls (1940) 67 Lloyds LR 524 ; Schleimer v Brisbane Stevedoring Pty Ltd [1969] Qd R 46 , applied. Pasteel Windows v Sun Alliance Insurance Ltd (1989) 5 ANZ Ins. Cas., considered.

Procedure - costs - action to recover indemnity from insurer - costs ordered to be paid on solicitor and client basis - no manifest error - award of costs upheld. Colgate Palmolive Co v Cussons Pty Ltd (1993) 118 ALR 248, considered.

ADELAIDE, 3-4 March 1997 (hearing), 2 May 1997 (decision)

#DATE 2:5:1997

Appellant:

Counsel: Mr D Clayton QC

Solicitors: David Henderson Wilson

Respondents:

Counsel: Mr N Morcombe QC

Solicitors: Eaton & Associates

Order: appeal dismissed.

COX J

1. In my opinion this appeal should be dismissed. I am in general agreement with Debelle J's reasons. In the circumstances I do not find it necessary to decide whether the test of "operating the Pleasure Craft in an unsafe manner" is subjective or whether (as the learned trial judge found) it would be enough for the insurer to prove "a gross departure from the appropriate standard of care."

MILLHOUSE J

2. I agree that the appeal should be dismissed.

DEBELLE J

3. This is an appeal from a decision of a District Court Judge declaring that the respondents (plaintiffs) were entitled to be indemnified by the appellant (defendant) pursuant to the terms of a policy of insurance. I will refer to the parties as the plaintiffs and defendant.

4. The plaintiffs own a pleasure craft called "The Diva". The plaintiffs operate it as a charter vessel. As part of their business the plaintiffs take people out on pleasure cruises on "The Diva". The plaintiffs have insured "The Diva" under a policy of insurance with the defendant. The policy is called a Pleasure Craft Policy. Among other things, the insurance policy indemnified the plaintiffs in respect of their liability to third parties for bodily injury "arising from an event during the period of insurance as the result of an accident or happening in connection with the use or ownership of the Pleasure Craft." The policy contains several exclusions. Only two are relevant for process purposes. The first is under the heading "Specific Exclusions". It reads:

"Section 2 - Third Party Risks We shall not be liable for: ... 7. bodily injury to or liability of any waterskier being towed by you. 8. bodily injury to or liability of any persons (other than waterskiers) being towed by you."

5. The second is under the heading "General Exclusions". It provides:

"5. Drink Driving and Unsafe Use (a) you being less capable than usual of taking care of yourself due to mental unsoundness or because of intoxicating liquor, narcotics or drugs (unless the drugs are taken on medical advice and in accordance with the advice of a legally qualified medical practitioner). (b) operating the Pleasure Craft in an unsafe manner."

6. The issues in this appeal concern the meaning and operation of these exclusions. Nothing turns on the fact that one exclusion is a specific exclusion and the other a general exclusion.

7. On 27 February 1993 the plaintiffs were operating "The Diva" on charter. Mr Lane, the first named plaintiff, was in command of the vessel. One of the guests of the charterer was a Mrs Deverson. In the course of the charter Mrs Deverson was injured while participating in an activity called "halyard flying". Mrs Deverson has made a claim against the plaintiffs for damages for the injuries she received. On receipt of the claim, the plaintiffs sought indemnity from the defendant under the insurance policy. The defendant has refused to indemnify the plaintiffs on the grounds that the claim fell within the above exclusions. The defendant says, first, that whilst engaged in halyard flying, Mrs Deverson was being towed by "The Diva". Secondly, the defendant says that "The Diva" was being operated in a unsafe manner. The trial judge found that the defendant was not entitled to rely on either exclusion. The defendant appeals from that decision.

Halyard Flying

8. The practice of halyard flying involves the use of a bosun's chair. The chair is secured by a halyard which runs up inside the mast and is controlled by a winch on the deck. When halyard flying, a person sits in the bosun's chair. Once the person is in the chair, the halyard is winched up thus hoisting the person off the deck. The person in the chair is not able to control the halyard or the boat. The boat must heel or lean for halyard flying to be successful. A moderate wind and an appropriate course are necessary to ensure that, once the person is in the chair and the chair is raised, the person is then swung from the boat to the leeward side. The halyard is controlled either to keep the person suspended just above the water so as to be wet with spray but not dragged through the water or to enable the person's feet to touch the water. Mrs Deverson was injured when "The Diva" hit a sudden squall causing Mrs Deverson to be struck against the side of "The Diva".

Was Mrs Deverson being towed?

9. In ordinary parlance, the verb "to tow" denotes the act of pulling a person or thing. In the case of sailing vessels, a vessel is towing a person or thing when it is pulling that person or thing on or through the water: see Oxford English Dictionary and Macquarie Dictionary. As might be expected, dictionaries of marine terms adopt the meaning used in day to day life. Thus "to tow" is defined in these terms: "to pull along, through water": see Naval Terms Dictionary (5th ed); The Marine Encyclopaedic Dictionary, The Sailing Dictionary; The Oxford Companion to Ships and Sea; the Dictionary of Nautical Terms. The law adopts the same meaning. For centuries "towage" has meant "the towing or drawing a ship or barge along the water by men or beasts on land, or by another ship or boat fastened to her": Cowell's Interpreter by Tho. Tanley
(1672).

10. When Mrs Deverson was halyard flying, she was suspended above the water at the side of "The Diva" and moving along with the vessel. She was not being towed. The activity of halyard flying is no more akin to the act of towing than if Mrs Deverson had been sitting in a bosun's chair fixed to the side of the hull in such a way as to be suspended over the water.

11. Mr Clayton QC submitted that it was not necessary for an object to be towed that it should be towed through the same medium as the person or thing which is pulling. He gave a number of examples of towing where the thing or person being towed is in a different medium from the object or person being towed. They included:

* a winch towing a glider,
* a car towing a glider,
* a horse or motor vehicle moving along a tow path towing a barge, and
* a speed-boat towing a para-glider.

12. He also submitted that it is not necessary that the person or thing being towed should be behind the person or thing which is pulling. Thus, a horse or vehicle moving along a tow-path while pulling a barge is not necessarily in front of the barge. Similarly, a water skier may ski out at the side of the boat which is towing the skier. However, what is common to all of the examples mentioned by Mr Clayton is that, for the greater time, the tower is pulling the person or thing being towed whether that person or thing is immediately behind the tower or not. It might be possible to envisage some activity which might not involve towing in the ordinary sense of that word but would, nevertheless, be held to be towing. The resolution of the issue whether an activity constitutes towing might involve questions of fact and degree. But, in this case, it is necessary to determine what towing means in the context of this policy insuring, as it does, the operation of this pleasure craft. The exclusion must be considered with regard to the commercial purpose of the policy. It is intended to exclude liability for towing in the sense in which that word is used in ordinary parlance and in maritime usage, namely, pulling a person or thing along or through water. It is unnecessary in this case to determine whether it extends to towing for the purpose of paragliding as "The Diva" is not capable of that task. It is a misuse of language to say that "The Diva" was towing Mrs Deverson. The trial judge was, therefore, correct in concluding that the exclusion as to towing did not apply.

An Unsafe Operation?

13. The incident in which Mrs Deverson was injured occurred when several gusts of wind struck "The Diva" causing it to heel over to a greater extent. Between the gusts, the vessel stood upright causing Mrs Deverson to be swung back towards the vessel. On one such occasion she struck the side of "The Diva" and it is then that it is alleged she was injured. The defendant submits that "The Diva" was being operated in an unsafe manner in two respects. The first is that, the practice of halyard flying was intrinsically unsafe. The second is that "The Diva" did not have a sufficient number of crew members to deal with the sudden gusts of wind. In particular, the defendant says, the person at the helm was not experienced. It was submitted that, if an experienced person had been at the helm, the injury to Mrs Deverson would not have been caused.

14. The defendant concedes that it bears the onus of proving that "The Diva" was being operated in an unsafe manner. The concession was properly made. The exclusion from liability when the vessel was being operated in an unsafe manner is similar in effect to the implied warranty of seaworthiness in policies of marine insurance. It is well established that the burden of proof on the issue of unseaworthiness is on the insurer: Davidson v Burnand (1868) LR 4 CP 117; Pickup v Thames Insurance Co (1878) 3 QBD 594. It is also well established that the burden of proof that the situation comes within an exclusion clause is normally on the insurer: see Sutton, Insurance Law in Australia (2nd ed.) para 9.81 and the cases there cited.

15. It is first necessary to determine the meaning of the expression "operating the Pleasure Craft in an unsafe manner". Some assistance may be gleaned from those cases dealing with insurance policies which require the insurer to take reasonable steps to prevent loss. Various formulae have been used either in conditions of the policy or in exclusion clauses. They include the expression "the assured shall take reasonable precautions to prevent accidents," an expression which has been considered by courts both in this country and in England. Such a provision cannot be equated with negligence for that would be contrary to the purpose of the policy which is intended to provide indemnity to the plaintiffs for negligence. It would deprive the plaintiffs of a large measure of the protection intended to be provided by the policy.

16. The requirement to take "reasonable precautions" was examined in Fraser v Furman (Productions) Ltd [1967] 1 WLR 898. The Court of Appeal had to consider a condition in a policy of employers liability insurance which included a condition stating, "The insured shall take reasonable precautions to prevent accidents and disease". The issue was whether an insurer was entitled to repudiate the policy for breach of that condition. Diplock LJ delivered the judgment of the court which followed and applied an earlier decision in Woolfall & Rimmer Ltd v Moyle [1942] 1 KB 66. His Lordship expressly recognised that, when interpreting clauses of this kind, it is necessary to have regard to the commercial purpose of the contract of insurance. In his view it was not enough to satisfy the requirement that the employer should take reasonable precautions that the employer should have been negligent. Instead, the conduct of the employer must at least be reckless in the sense that the employer recognised that a danger existed and did not care whether or not it was averted. It is helpful to quote from His Lordship's reasons at some length:

"It means reasonable as between the insured and the insurer having regard to the commercial purpose of the contract, which is inter alia to indemnify the insured against liability for his (the insured's) personal negligence. That, too, is established by the case that I have cited. Obviously, the condition cannot mean that the insured must take measures to avert dangers which he does not himself foresee, although the hypothetical reasonably careful employer would foresee them. That would be repugnant to the commercial purpose of the contract, for failure to foresee dangers is one of the commonest grounds of liability in negligence. What, in my view, is "reasonable" as between the insured and the insurer, without being repugnant to the commercial object of the contract, is that the insured should not deliberately court a danger, the existence of which he recognises, by refraining from taking any measures to avert it. Equally, the condition cannot mean that, where the insured recognises that there is a danger, the measures which he takes to avert it must be such as the hypothetical reasonable employer, exercising due care and observing all the relevant provisions of the Factories Act 1961, would take. That, too, would be repugnant to the commercial purpose of the contract, for failure to take such measures is another ground of liability in negligence for breach of statutory duty.

What, in my judgment, is reasonable as between the insured and the insurer, without being repugnant to the commercial purpose of the contract, is that the insured, where he does recognise a danger should not deliberately court it by taking measures which he himself knows are inadequate to avert it. In other words, it is not enough that the employer's omission to take any particular precautions to avoid accidents should be negligent; it must be at least reckless, that is to say, made with actual recognition by the insured himself that a danger exists, and not caring whether or not it is averted. The purpose of the condition is to ensure that the insured will not, because he is covered against loss by the policy refrain from taking precautions which he knows ought to be taken. On that construction of the condition, which seems to me to be implicit, though not expressly stated, in some obiter dicta of Goddard, L J, in Woolfall & Rimmer Ltd v Moyle."

17. These decisions of the Court of Appeal have been followed and applied in Australia. It is sufficient to refer to Albion Insurance Co Ltd v Body Corporate Strata Plan 4303 [1983] VR 339 and to Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390 where the decisions in this country, in England and New Zealand are reviewed. Both decisions followed and applied the principles in Fraser and held that it was necessary to have regard to the commercial purpose of the contract of insurance. Thus, the requirement to take "all reasonable precautions" required the insured to take such steps to protect the property the subject of the policy as are reasonable having regard to the dangers which he recognises: see Eather per McHugh JA at 407 with whom Glass JA agreed. As Glass JA noted at 403:

"The insured person will not be in breach if he shows either that he did not recognise that a danger existed or that perceiving its existence he took some action to avoid it and was not indifferent to whether the danger was averted or not."

18. To like effect are the observations McGarvie J, with whom Young CJ and Anderson J agreed, in Albion Insurance Co Ltd at 345. His Honour said:

"The test which Diplock LJ propounded is not whether the insured who recognises a danger, takes no measures or takes measures which he knows to be inadequate to avert it. The test is whether the insured deliberately courts the danger by refraining from taking any measures or by taking measures which he knows to be inadequate to avert it. The word 'deliberately' indicates intentional, considered action or inaction. The verb 'court' suggests action or inaction which invites the danger of accident. The test requires more than a recognition of the danger and failure to take any measures or any measures known to be adequate to avert it. It requires that this be due to a deliberate decision to court the danger."

19. Thus, when construing clauses of this kind, regard will be had to the commercial purpose of the contract of insurance. Such a clause will not be construed to mean that every negligent act of an insured constitutes a breach of the policy or triggers the operation of the exclusion clause. Instead, the condition to take reasonable precautions requires that the insured is not reckless in the sense explained in the decisions I have mentioned. It will have been noticed also that the test of recklessness is subjective, not objective. So in Plasteel Windows v Sun Alliance Insurance Ltd (1989) 5 ANZ Ins. Cas. 60-918, it was held that the test of the existence of a risk should be determined by the perception of the insured and not by that of a reasonable person. See generally the discussion in Sutton, op. cit., para 10.27 to 10.29.

20. How then is the clause excluding liability if the vessel is operated in an unsafe manner to be understood? The operation and effect of exclusion is so very similar to the requirement to take reasonable precautions that it is appropriate to apply the principles identified in the cases mentioned. First, regard should be had to the commercial purpose of the policy. This insurance policy is intended, among other things, to indemnify the plaintiffs from liability to third parties for injury negligently caused in the operation of the vessel. In this context, the epithet "safe" means not involving danger or risk of injury: see Shorter Oxford English Dictionary and the Macquarie Dictionary. It would be repugnant to the commercial purpose of the contract to construe "unsafe manner" to mean negligence or a failure to foresee danger. When sailing or operating a pleasure craft of this kind, there is an obvious potential for acts which, viewed objectively, would be characterised as negligent. The exclusion from liability where the vessel is being operated "in an unsafe manner" will apply where the vessel is being operated recklessly in the sense described by Diplock LJ. The exclusion will, therefore, apply when the insurer satisfies the court that when operating or sailing the vessel, the insured recognised that a danger existed and, perceiving its existence, took no action to avoid it and was indifferent to whether the danger was averted or not.

21. Although not explicitly stated in his reasons, the trial judge adopted a similar approach. He held that to interpret "in an unsafe manner" so as to include negligence would defeat the intent of the policy. In his view, the exclusion would be satisfied if the insurer proved what he called "a gross departure from the appropriate standard of care," a requirement very similar to that of recklessness. If anything, the judge's conclusion is more favourable to the defendant insurer. He concluded that the vessel was not being operated in an unsafe manner. I turn to examine whether the trial judge was correct. I deal first with the practice of halyard flying.

Is Halyard Flying Unsafe?

22. The trial judge did not make a finding whether engaging in the activity of halyard flying constituted operating the vessel in an unsafe manner. There was no evidence that halyard flying was an unsafe method of sailing or operating a vessel such as "The Diva". Neither of the experts called by the parties said it was unsafe. The defendant's expert, Mr Mitchell, described it as an activity in which he would not participate but he stopped short of describing it as an unsafe practice. The trial judge found that the first plaintiff, Mr Lane, was a very experienced sailor and sailing instructor who was held in high regard by each of the experts who gave evidence. The trial judge found him to be an impressive witness. Mr Lane described the practice as safe. The plaintiffs' expert, Mr Barnes, did not describe it as unsafe. In all circumstances, the defendant did not discharge the burden of proving that halyard flying involved sailing or operating "The Diva" in an unsafe manner.

An Inadequate Crew?

23. The crew on this day comprised Mr Lane and a person called Scott. Scott was not an experienced yachtsman or crew member. He had been out on "The Diva" on several occasions and had assisted Mr Lane. On those occasions he had not been acting as a member of the crew. However, on this occasion he was acting as a member of the crew. Lane said that Scott could easily do most of the task he was required to do. When Mrs Deverson was halyard flying, Lane was standing at halyard to control the halyard. Scott was attending to other tasks. At the helm was a women who was one of the guests on "The Diva" that day. She had been at the helm for about forty to fifty minutes before the incident when Mrs Deverson was injured. It was Lane's evidence that, for the whole of the time which included the time when halyard flying was taking place, this woman had steered competently and had responded appropriately to his directions. Having observed her over that period of time, he was confident in her ability to maintain the boat as directed as she had done for the period of time before the first gust of wind. He said that, when that first gust struck "The Diva", she had responded appropriately to his directions to bring the boat up into the wind.

24. It is well established by the law of marine insurance that, in order to satisfy the implied condition of seaworthiness, a vessel must have a competent master and crew and that there must be a sufficient number of crew members: Davies & Dickey, Shipping Law, (1990) 177 and 178 referring to Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaishal [1962] 2 QB 26 and Horn v Cia de Navegacion Fruco S.A. (The Heinz Horn) [1970] 1 L.R. 191; Hardy Ivamy, Marine Insurance, (3rd ed.) 325; and Arnould's Law of Marine Insurance and Average, (16th ed.) vol 2, para 739 -740. The crew must be adequate to discharge the usual duties and to meet the usual dangers to which the ship is exposed: Hunter v Potts (1815) 4 Camp. 203, 171 E.R. 65. The defendants submitted that the same principles should apply when determining whether "The Diva" was being operated in an unsafe manner. The translation of the concept of unseaworthiness to this exclusion clause is open to question. I am, however, prepared to determine the question on that footing.

25. The parties called two experts, Captain Barnes and Mr Mitchell. Mr Mitchell, who was called by the defendant, said that the crew required when a person was halyard flying was at least three competent persons who had a considerable understanding of what they were doing. Captain Barnes, who was called by the plaintiffs, agreed that the vessel should have an adequate number of crew members when halyard flying was in progress. He was not, however, asked how many persons were required to constitute the crew. The licence for "The Diva" required a crew of one able bodied person.

26. When stripped to essentials, the defendant's submission was that the person at the helm was not sufficiently experienced to notice the approach of the gusts and to deal with them when they struck "The Diva". An experienced person, it was said, would have seen the gusts approaching and taken evasive action. However, Captain Barnes gave evidence that, once the first gust hit the boat, all that was necessary was to turn it up into the wind. He believed that it would not be difficult for a previously inexperienced person who had been at the helm for fifty minutes or thereabouts and who had steered the vessel satisfactorily to turn it up into the wind on being directed to do so. Although he acknowledged that an experienced person at the helm may have seen the approaching gusts on the water, if he had been looking, it was not realistic to be looking at the water all of the time having regard to the overall tasks of steering the vessel and allowing for other matters which require attention. The approach of the gusts did not, he said, constitute an emergency.

27. The effect of Captain Barne's evidence was that, when sailing with a person participating in halyard flying, the vessel was not being operated dangerously even with a relatively inexperienced person at the helm. The trial judge preferred the evidence of Captain Barnes.

28. He also relied on the evidence of Mr Lane, who he found to be an impressive witness, that the woman at the helm responded to his command when the wind struck his vessel. There was no evidence that there was anything inherently dangerous in the activity of halyard flying nor anything dangerous in participating in that activity with an inexperienced person at the helm. Until the gusts of wind struck, the vessel was sailing in conditions which were suitable for halyard flying. The woman at the helm responded immediately to the directions given by Mr Lane. In short, the evidence did not establish that, at the time Mrs Deverson was halyard flying, Mr Lane knew that the activity was dangerous and had deliberately courted that danger. The sailing of the vessel was not in any sense reckless or even a gross departure from the appropriate standard of care. The trial judge was, therefore, correct in concluding that the vessel was not being operated in an unsafe manner.

The Award of Costs

29. The trial judge ordered that the defendant pay the plaintiff's costs. He also ordered that those costs be taxed on a solicitor and client basis. The defendant appeals from the latter order submitting that it should have been liable only for party and party costs. The principles relating to the circumstances in which it is appropriate to order payment of costs on a solicitor and client basis have been frequently examined. The principles are well settled. A recent review of the authorities was undertaken by Sheppard J in Colgate Palmolive Co v Cussons Pty Ltd (1993) 118 ALR 248. The ordinary rule is that costs are paid on a party and party basis. Generally speaking, some special or unusual feature is required to warrant a departure from the usual practice. However, an order to pay costs on a solicitor and client basis will not be found to have miscarried unless it appears that the order involves a manifest error or injustice.

30. In this action, the plaintiffs were suing to enforce their entitlement to an indemnity under the insurance policy. That fact, standing alone, may not be sufficient to justify the order. However, some support for the order of the trial judge may be found in the fact that, had the plaintiffs treated the defendant's denial of liability to indemnify as a repudiation of the contract, they could have recovered as damages their costs on a solicitor and client basis: Pictorial Machinery Ltd v Nicolls (1940) 67 Lloyds L.R. 524; Schleimer v Brisbane Stevedoring Pty Ltd [1969] Qd R 46 at 67.

31. The reasons for the order made by the trial judge are not before this court. The defendant is unable to point to a manifest error of injustice. I do not think there is any reason to interfere with the exercise of the trial judge of his discretion as to costs.

32. The plaintiffs had filed a notice of contention. Given the above conclusions, there is no reason to deal with the issues raised in that notice.

33. For these reasons I would dismiss the appeal.