Suncorp Insurance and Finance v MIM Holdings Ltd

[1994] QCA 431

IN THE COURT OF APPEAL	[1994] QCA 431
SUPREME COURT OF QUEENSLAND

Appeal No. 73 of 1994.

Brisbane

[Suncorp & Ors. v. MIM & Ors]

BETWEEN:  MIM HOLDINGS LTD, MOUNT ISA MINES LIMITED, BRITTANIA REFINED METALS LIMITED AND OTHERS

(Applicants) Respondents

AND:  SUNCORP INSURANCE AND FINANCE,
SWITZERLAND INSURANCE AUSTRALIA
LIMITED, NZI INSURANCE AUSTRALIA
LIMITED, CE HEATH CASUALTY AND
GENERAL INSURANCE LIMITED AND COMMERCIAL
UNION ASSURANCE CO OF AUSTRALIA LTD

(Respondents) Appellants

____________________________________________________________

_____

Pincus J.A.
Davies J.A.
McPherson J.A.
____________________________________________________________

_____

Judgment delivered 26/10/1994

Judgment of the Court
____________________________________________________________
_____

APPEAL AND CROSS-APPEAL ALLOWED, ORDERS AND DECLARATIONS MADE BY THE LEARNED PRIMARY JUDGE SET ASIDE AND IN LIEU IT IS DECLARED THAT THE APPLICANTS (RESPONDENTS IN THIS COURT) ARE ENTITLED TO INDEMNITY BY REASON OF A REDUCTION IN OUTPUT OF ZINC AND LGM IN THE SUM OF $141,079.50 (EXCLUDING INTEREST).

PARTIES MAY MAKE WRITTEN SUBMISSIONS, WITH RESPECT TO COSTS
HERE AND BELOW, WITHIN 7 DAYS.
____________________________________________________________

_____

CATCHWORDS:	INSURANCE - CONSTRUCTION OF POLICY - conveyor system at respondents' mine collapsed - crushed ore unable to be conveyed to concentrator over six day period - loss of production of high grade lead concentrate - stockpile of high grade lead concentrate used in smelter - production of silver lead bullion blocks did not decrease - bullion blocks sent to England for further refinement - no sale of concentrate involved in process - no relevant loss of production of final product - whether loss of production of high grade lead concentrate fell within the meaning of "reduction of output" in terms of indemnity policy.
Counsel:	Mr D F Jackson QC, with him Mr G A Thompson for the appellants. Mr R N Chesterman QC with him Mr L D Bowden for the respondents.
Solicitors:	Gadens Ridgway for the appellants. Minter Ellison Morris Fletcher for the respondents.
Date of hearing:	22 September 1994.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 73 of 1994.

Brisbane

[Suncorp & Ors. v. MIM & Ors]

Before	Pincus J.A. Davies J.A. McPherson J.A.
BETWEEN:	MIM HOLDINGS LTD, MOUNT ISA MINES LIMITED, BRITTANIA REFINED METALS LIMITED AND OTHERS

(Applicants) Respondents

AND:  SUNCORP INSURANCE AND FINANCE,
SWITZERLAND INSURANCE AUSTRALIA
LIMITED, NZI INSURANCE AUSTRALIA
LIMITED, CE HEATH CASUALTY AND
GENERAL INSURANCE LIMITED AND COMMERCIAL
UNION ASSURANCE CO OF AUSTRALIA LTD

(Respondents) Appellants

REASONS FOR JUDGMENT - THE COURT

Judgment delivered 26/10/1994

This is an appeal by insurers from a judgment of the Supreme Court in a claim under an insurance policy. The primary judge made a declaration that the applicants (the respondents to this appeal) are entitled to be indemnified under a policy of insurance in respect of a reduction in output of certain material as a result of damage to a conveyor. The judgment also fixed the amount of the entitlement.

The principal issue is whether there was a "reduction in output" within the meaning of the policy. There is also a point raised, by notice of contention, which bears upon the proper amount of the indemnity.

The respondents are a group of companies engaged in the mining industry and related activities, in Australia and elsewhere. The policy covers the group and by cl. 21 any loss under the policy is to be determined and settled "according as whether [the group] as a whole has suffered or will suffer loss without regard to any arrangements or agreements between the various companies". It is therefore unnecessary, in general, to discriminate between the various companies in the group and their respective activities, when discussing the claim.

The loss was brought about by the collapse of a conveyor system at Mt Isa. The function of that conveyor is to carry crushed lead/silver/zinc ore to a concentrator which turns such ore into three separate components, one of which is high grade lead concentrate; that will be called "lead concentrate" for short. Despite its name, this concentrate contains some silver as well as lead. Because of the conveyor accident the concentrator which produces, amongst other things, the lead concentrate, ran out of crushed ore; the conveyor was inoperative for 6 days. The interruption in the supply of crushed ore caused the concentrator to be out of operation for part of that period;

it is the consequent loss of production of lead concentrate
which is the subject of the claim. The primary judge valued
the lead concentrate not produced, which amounted to 2,713
tonnes, and subject to a reduction which requires no present
discussion, decided that the respondents were entitled to
that value.

The appellants contend that his Honour erred because, they say, the lost lead concentrate was not part of the respondents' "output" within the meaning of the policy. That is so, the appellants contend, because the lead concentrate the subject of the claim was not destined for sale; in accordance with the ordinary course of the respondents' operations, it would have been smelted at Mt Isa to produce silver/lead bullion, cast into 4 tonne blocks. Those blocks would then be shipped to England and there refined by one of the respondents to produce silver and lead for sale. As an alternative, the appellants' contention is that only a loss of the final or finished product is recoverable. Here, there was no loss of production of refined silver or lead.

To sum up the process, ore is mined, then crushed, then conveyed to a concentrator to produce lead concentrate (and other substances); the lead concentrate is smelted to produce bullion, which is refined to produce silver and lead. Although any of these products - the crushed ore, the lead concentrate, the bullion, the refined silver and lead - could no doubt be the subject of a contract of sale, only the refined silver and lead, in the respondents' operations as conducted at the relevant time, would be sold. The other products may conveniently be called "intermediate products".

If the respondents' contention is correct, any of those intermediate products, and in particular the lead concentrate, may properly be described as "output" within the meaning of the policy. The appellants contend that only the final product is "output".

As it happened, there was no relevant loss of production of bullion or of refined lead and silver; that was so because the respondents had enough stockpiled lead concentrate available to keep the smelter which produces bullion (the next stage after production of lead concentrate) operating without interruption. It is the circumstance that there was no relevant loss of production of the final product which has led to the dispute about the right to indemnity in respect of a loss of production of an intermediate product.

It is necessary to explain the content of the relevant parts of the policy; for the sake of brevity this will be done, in part, by way of summary and paraphrase. The introductory part of the policy contains an agreement by the appellants to indemnify the respondents if during a period of insurance there shall happen, within certain territorial limits, "an occurrence or event as hereinafter provided for in the insuring clauses...". Those clauses include provisions contained in a s. 2A, which requires the insurers to pay "loss as set out in the Basis of Settlement hereunder resulting from" events of a certain kind; it is not in issue that those events occurred, and the question is whether there has been a loss as set out in the Basis of Settlement.

The first part under the heading "Basis of Settlement"

is:

"The measures of payment to the Insured in the

event of loss, destruction or damage shall be:

(i) the Loss Period:
The sales value of the reduction in
output, plus the reduction in any other
earnings derived from the operations of
the business, less such variable expenses
which are avoided where such avoidance

In respect of a Reduction in Output during damage."

There is a definition of the word "output" which

begins:

"The amount of production which would have been achieved by the Insured during the Loss Period but for the occurrence of the loss, destruction or damage. "

There is also a definition of "Loss period" and one of "Reduction in Output", neither of which throws any particular light on the present problem. But the definition of "Sales Value of the Reduction of Output" appears to be of assistance; it is, in full:

"The sales value of the reduction in output shall be the selling price as evidenced in Sales Contracts if applicable or as evidenced in the Insured's records identifying the selling price for that output which the Insured has been unable to achieve as a result of the loss, destruction or damage.

No variation shall be made to this established selling price and the particulars and method of calculation contained in the Insured's records shall be accepted as conclusive evidence of the selling price of output for the purpose of calculating a loss under this policy."

It appears, on the face of it, that this definition helps the appellants, in that it suggests that the character of the lost output the subject of the indemnity is that its selling price is able to be fixed, either by reference to sales contracts relating to it, or by reference to records "identifying" its selling price. The natural reading of this definition is such that the first part would apply where the lost output has been sold forward, and the latter part where it has not been so sold, but records of the insured reveal, or enable the calculation of, selling prices achieved for such output close to the relevant time. The way in which the value of the lead concentrate was worked out in the present case was by starting from the market prices of the ultimate product - refined lead and silver - which would have been obtained after processing the 2,713 lost tonnes of concentrate, and deducting the costs of processing. Some such method must be adopted if one starts with the postulate that intermediate product, of a kind intended to be further processed rather than sold, is "output"; for there will be, with respect to such a product, neither sales contracts nor records "identifying" its selling price, unless an unusual meaning is to be given to the expression "identifying". The wording of the definition last quoted suggests that the lost "output" would if produced have been sold and that the insurer has to pay the price which would have been paid for it.

That is not the only difficulty the respondents must overcome, if the judgment is to be upheld. As was pointed out during the hearing, on the respondents' construction, a loss of production of any intermediate product would be a fit subject of a claim under the relevant part of the policy; so that a break-down early in the chain of processes could produce a series of lost outputs, of intermediate products as well as the final product. Mr Chesterman Q.C., who led for the respondents, accepted that his argument implied that such a breakdown might produce claims in respect of all those successive losses. He added the qualification that the claim could relate to only one product unless there were a series of identifiable separate losses, but it is unclear what, in a practical sense, the effect of that qualification would be. It is also unclear how, in the circumstances postulated, it would be determined at which stage of the production process the indemnity would apply; perhaps the respondents would say that the insured could elect to have the value of the loss at any point. But it seems improbable that if an election of that kind had been intended, it would not have been mentioned in the policy.

Mr Chesterman relied upon arguments based on provisions of the policy other than those which have been discussed above, as tending to suggest that the value of lost production is recoverable, even if there is no loss of sales revenue. He referred the Court to cl. 6, under the heading "Special Clauses Section 2 - Business Interruption", which reads as follows:

Alternative Basis Clause
"the Insured, the term 'Reduction in Sales' may be substituted for the term 'Reduction in Output', in which case 'Sales' shall mean:

The money paid or payable to the Insured for goods sold and delivered and for services rendered in the conduct of the business.

It is agreed that, except in the definition of Output, the word 'Output' wherever used in this policy shall be read as 'Output or Sales'".

It appears likely, although the point was not argued fully, that the last sentence of this clause applies whether or not the option referred to in the clause is exercised by the insured; the effect of the sentence, even if one construes it in that way, remains obscure. Mr Chesterman's point is that, if only loss of the final product as opposed to intermediate products was intended to be covered by the relevant part of the policy, that would be equivalent to indemnifying the insured against loss of sales revenue, and the first sentence of cl. 6 would be redundant.

Leaving aside the difficulty of ascertaining the effect of the second sentence, it appears that the intended effect of the first is that, on exercise of the option, the insured would be entitled to the amount of the reduction in sales revenue during the loss period; that result is arrived at if one notes that a substitution of "Reduction in Sales" in the text of the sub-heading under the heading "Basis of Settlement" quoted above makes that sub-heading "In respect of a Reduction in Sales during the Loss Period". The intention appears to be that one compares the sales revenue during the loss period with that during some other (unspecified) period or periods, to arrive at a figure for reduction in sales revenue. The result of exercise of the option would be that, without the necessity of tying such a loss in sales revenue to a loss of output, the insured would be entitled to recover the former. So read, cl. 6 presents a genuinely alternative basis of claim, even if the appellants' submission is accepted; there may well be a substantial difference between the sales value of the reduction in output on the one hand and the reduction in sales revenue on the other, during the loss period, such as to make the exercise of the option to take one rather than the other worthwhile from the point of view of the insured.

That could occur, for example, if the output were being

largely stored, rather than sold.

It was also contended that the respondents' construction gains support from the terms of para. (ii), under the heading "Basis of Settlement". Paragraph (ii) reads as follows:

"In respect of an Increase in Cost of Working and
Additional Expenditure:
The additional expenditure reasonably incurred to
avoid or minimise a reduction in output and/or in
the earnings derived from the operation of the
business. The additional expenditure incurred
shall be the excess over and above those costs
that would normally have been incurred to conduct
the business during the same period had no loss,
destruction or damage occurred. However, in no
event shall the aggregate of such additional
expenditure exceed the measure of payment
described in (i)".

The argument, which appears to have attracted the primary judge, was that if the insured had bought lead concentrate to replace the lost production instead of using part of its stockpile, then the cost of the bought-in product would be recoverable under para. (ii); it would be anomalous, so it was contended, if that sum were recoverable, but not the value of the lost production of lead concentrate.

An initial difficulty about the argument, insofar as it is based upon the proposition that the respondents could have recovered the cost of bought-in lead concentrate, is that it is by no means clear that that cost would have been "reasonably incurred to avoid or minimise a reduction in output and/or in the earnings derived...". The stockpile was ample; the facts postulated in this Court by Mr Chesterman included the hypothesis that, as a matter of policy, the insured would desire to keep the stockpile up to a certain level. It is questionable whether fulfilment of that purpose would answer the criterion of being "incurred to avoid or minimise a reduction in output and/or in the earnings derived...". Apart from that, it must be kept in mind that it is likely to happen that some sets of facts will give rise to a loss within a policy, and others which are roughly equivalent, in a commercial sense, will not. That a construction can produce arguably anomalous results, at the margins, does not mean that it is not the right construction.

The critical point is whether "output" in the context means, to put the point accurately enough for present purposes, the output of the whole enterprise or that of any or all of the series of operations or processes which in the end produces the final output. A practical consideration in favour of the former view is that one would not expect all the operations or processes to proceed at just such a rate as to match the production of all the others. The development of a stockpile at one or more points would be a natural consequence. It appears unlikely that an insured would need to receive money for, or an insurer agree to pay money for, a mere diminution in such a stockpile, whose size would obviously be subject to fluctuation, accident or no. Commercially, a more plausible intention is that lost production would be paid for only if it appeared at the end of the chain of processes - costing the insured income, or at least potential income, from that which has been produced for sale.

The better view seems to be that use of the word "output" in this context means what the whole set of operations puts out as an end product, rather than material passing from one operation to another, in the progress towards the end product.

As has been mentioned a second point in the case is raised, by a notice of contention; it concerns the amount which has to be deducted as "variable expenses" mentioned under the heading "Basis of Settlement", in a part of the policy which it is convenient to quote again.

(i) the Loss Period:
The sales value of the reduction in
output, plus the reduction in any other
earnings derived from the operations of
the business, less such variable expenses
which are avoided where such avoidance

In respect of a Reduction in Output during damage."

There is a definition of "Variable Expenses" as

follows:

"Variable Expenses:

Those charges and expenses which increase or reduce generally in proportion to an increase or reduction in production and which would be expected to cease or reduce during the loss period following insured loss, destruction or damage.

Wages and salaries paid to employees of the Insured and payment for services rendered or supplied by either M.I.M. Holdings Limited Group subsidiary companies are not included as a variable expense."

It is common ground that some variable expenses have been avoided as a result of the loss, destruction or damage, and that those expenses are to be calculated at $11 per tonne of ore. The appellants' contention is that the appropriate deduction for variable expenses is calculated by multiplying the $11 by 37,500, that being the number of tonnes of ore which would have passed along the conveyor to the concentrator but for the accident we have mentioned. The respondents admit that 37,500 tonnes would have so passed, but say that the amount of ore which was won while the conveyor was inoperative should be deducted from the 37,500; that amount was 12,634 tonnes.

That is, the respondents' contention is that the variable expenses avoided did not include the cost of producing the ore which was won while the conveyor was inoperative, but did not pass along it.

On the face of it, the respondents' contention has some attraction; it is not easy to see why one should say that the admitted variable mining cost of $11 per tonne constitutes, with respect to ore won while the conveyor was inoperative, an expense which has been avoided as a result of the accident to the conveyor. That is, the respondents simply say that those variable costs were incurred, not avoided.

But the appellants contend that is of no consequence.

The learned primary judge explained the argument put on

behalf of the appellants (respondents below) as follows:

"...the Basis of Settlement clause in referring to the sales value of the reduction of output is speaking of a 'notional' product which was not produced and...as against the sale value of that notional product must be set off a notional cost of production i.e. what it would have cost to mine all of the ore required to produce the notional end product".

His Honour accepted this argument, principally because in the definition "Variable Expenses" set out above, there can be found the expression "and which would be expected to cease or reduce during the loss period"; the judge thought that this supported the conclusion that the variable costs attributed to 12,634 tonnes of ore should be treated as having been avoided.

In our respectful opinion, the first sentence in the definition of "Variable Expenses" is intended to assist in discriminating between charges and expenses whose character is such that one would expect them to go up or down with the volume of production, and those which are not of that character; for example, power costs could be expected to be affected by the volume of production, but the amount of rental of hired equipment would not. In our view, confining the expenses which are to be taken off to those which are "variable" cuts down the types of expenses which are taken into account, but has no bearing on the answer to the question whether there has been an avoidance of expense. Here, the expense of mining the 12,634 tonnes was not in fact avoided; that is common ground. Further, we see no reason why one would say that it is a sum which one would expect to have been avoided; the state of the conveyor had no direct effect upon the production of ore and the only reason that production of ore ceased was that the respondents ran out of space to store the ore produced.

It follows that the point raised by the notice of contention succeeds. But it affects only the amount payable in respect of the loss of output, and on the view we have taken on the main point argued, there was no loss of output, within the meaning of the policy, of lead concentrate. The output lost was of other substances - zinc concentrate and what is called LGM concentrate. On the agreed figures the sum payable in respect of the respondents' claim is $141,079.50, reflecting the variable expenses which are to be deducted in relation to the latter two substances.

It will therefore be ordered that both the appeal and cross-appeal be allowed, the orders and declarations made by the learned primary judge will be set aside and in lieu it will be declared that the applicants (respondents in this Court) are entitled to indemnity by reason of a reduction in output of zinc and LGM in the sum of $141,079.50 (excluding interest).

The parties may make written submissions, with respect to costs here and below, within 7 days.