Vero Insurance Ltd & Ors v Prime Infrastructure (DBCT) Management Pty Ltd

[2006] HCATrans 142

[2006] HCATrans 142

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Brisbane  No B94 of 2005

B e t w e e n -

VERO INSURANCE LIMITED (FORMERLY KNOWN AS ROYAL & SUN ALLIANCE INSURANCE AUSTRALIA LIMITED)

First Applicant

AMERICAN HOME ASSURANCE COMPANY

Second Applicant

ZURICH INSURANCE AUSTRALIA LIMITED

Third Applicant

QBE INSURANCE (AUSTRALIA) LIMITED

Fourth Applicant

and

PRIME INFRASTRUCTURE (DBCT) MANAGEMENT PTY LTD

Respondent

Application for special leave to appeal

GUMMOW J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

FROM BRISBANE BY VIDEO LINK TO CANBERRA

ON FRIDAY, 10 MARCH 2006, AT 2.08 PM

Copyright in the High Court of Australia

__________________

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friend, MS W.A. HARRIS, for the applicants. (instructed by Minter Ellison) 

MR W. SOFRONOFF, QC:   If the Court pleases, I appear with my learned friend, MR D.B. FRASER, QC, for the respondent.  (instructed by Freehills)

GUMMOW J:   Yes, Mr Jackson.

MR JACKSON:   Your Honours, I should read formally the affidavit of David James Hoffman sworn 28 October 2005 in support of the application.  I take it your Honours have that?

GUMMOW J:   Yes, we have.

MR JACKSON:   Your Honours, his affidavit makes it apparent the frequency with which the former wording used relevantly in the policy is encountered in Australia.  Could I say that in the application book the relevant part of the policy is at page 51, and it is clause 4 commencing at the top of the page.  Your Honours, may I just say something very briefly about the facts which are germane to what I want to say.  The machinery in question was a reclaimer.  It ran on a track, reclaimed the coal from the stockpiles beside the track and dumped the coal onto conveyor belts which carried the coal to a wharf for loading on ships.  You will see that in Justice Chesterman’s reasons paragraphs [1] and [2], page 2.  It collapsed onto the ‑ ‑ ‑

GUMMOW J:   Do we see it in a photograph on page 29 and following?

MR JACKSON:   Yes, your Honour, but not well, if I can say that.

GUMMOW J:   Right.

MR JACKSON:   What you will see, your Honour, I think, at the bottom of page 30, in the left photograph, you will see a thing, if I can put it that way, that looks like a crane.

GUMMOW J:   Yes.

MR JACKSON:   What it has at one end is a counterweight and at the other end, to put it loosely, a bucket.  It moves, the bucket picks up coal from the stockpiles beside it, puts it in and then moves it, puts it onto the conveyor belts below it.  The reclaimer – there are a number of reclaimers; this was No 1 – collapsed onto the conveyors.  It collapsed because, as Justice McMurdo said at page 75, in paragraphs [4] to [5], a weld at the base was defective.  The defect was a crack.  It increased in size over time.  The result was that the reclaimer collapsed, which damaged itself very substantially and also damaged the conveyors. 

Your Honours, the development of the crack occurred slowly, of course, but once it developed the collapse occurred rapidly.  Your Honours, it was accepted, if I can go back to page 51 and the policy, that the crack was due to “faulty workmanship”, which is referred to in exclusion 4(e):

4.physical loss, destruction or damage occasioned by or happening through:

. . . 

(e)faulty materials or faulty workmanship

Your Honours, that meant that that perils exclusion was applicable, and that was so unless the proviso in the three lines under (e) on page 51 came into play.  Your Honours, that gave rise to three related issues. 

The first was – and I do not put these in any really temporal sense –was the damage something that could be described as subsequent?  Your Honours will appreciate that what was physically damaged was that the reclaimer twisted, to put it shortly, and then collapsed.  It collapsed onto the conveyors.  The reclaimer was very badly damaged.  The conveyors suffered damage. 

Your Honours, one could perhaps accept that the damage to the conveyors might perhaps be regarded as subsequent – I am not saying that, I am suggesting the possibility – but the Court of Appeal took the view that the damage to the reclaimer itself caused by its collapse was itself subsequent and the damage to which it was subsequent was the initial damage caused by the faulty weld.  Your Honours, that can be seen in two passages.  First at page 83, in paragraph [36] and in particular in the third line of paragraph [36]:

In this case, the faulty weld caused a fatigue fracture or fractures which grew over years until finally the flange and diaphragm in the concealed box of a reclaimer leg separated and a rapid ductile (tearing) fracture developed leading to the collapse of the reclaimer legs and then the entire reclaimer onto the conveyor belts.

Secondly, your Honours, in paragraph [40] at page 84, you will see – I will not read out the whole of the paragraph but your Honours will see it and then it is said, particularly around line 37:

Only when the fatigue crack or cracks developed over many years and finally severed the flange and diaphragm so that a rapid ductile (tearing) fracture developed, did the collapse of the reclaimer become inevitable.

Your Honours, if I could just stay with the reclaimer for a moment to make it simpler, to take the view that the damage to the reclaimer itself was subsequent damage is, in our submission, to involve a distortion of events by, in effect, undue subdivision.  If one asks in terms of the exclusion, to take the opening words of it, “What physical loss, destruction or damage was occasioned by or happened through the faulty workmanship?” the answer, in our submission, would be “At least the damage to the reclaimer”.

The undue subdivision, if I can use that expression, can be seen clearly enough spelt out in our learned friend’s submissions at page 112, paragraph 10, where they refer to there being three stages of damage:

First . . . the weld was damaged by faulty workmanship –

and they say, they do not make – or perhaps with great respect, generously perhaps:

No claim is made, nor could have been made, for the cost of repairing the original damage to the weld . . . 

Second, subsequent to the original damage, the weld gradually deteriorated and developed flaws which initially revealed and then extended a crack in the weld which reduced the effectiveness of the join between the flange and the diaphragm.

That too is a second suggestion of damage.

No claim is made, nor could it be made, for the cost of repairing the deteriorating crack . . . 

Third . . . there was a rapid ductile fracture of other non-defective welds –

leading, to put it shortly, really to the collapse of the reclaimer and that, it is said, was “subsequent”.  Your Honours, if I could pause there ‑ ‑ ‑

GUMMOW J:   It says:

in the sense that it was both later in time and different in character.

MR JACKSON:   Yes, your Honour.  That is what their submission is, but the point we would seek to make is if one is looking at a clause of this kind, what one sees is that one is looking to an exclusion in respect of damage, one asks in the ordinary sense of language, “What is the damage caused by the faulty workmanship?”  The damage caused by the faulty workmanship in the weld is that, inevitably, in the sense of if not stopped, it progresses to a stage where the item of which the weld is part collapses.

CRENNAN J:   Treating it as a continuum?

MR JACKSON:   Yes, your Honour, exactly.

GUMMOW J:   What work does that give the proviso to do?  That is what has been concerning me.

MR JACKSON:   To put it shortly, if it be that the reclaimer had collapsed and the result was a spark, a fire started and the coal beside it went on fire, that would be it.  The damage to the coal would be covered, but that is one example, your Honour.  No doubt there are others. 

Could I just say that Justice McMurdo at page 84, paragraph [40], the paragraph I took your Honours to before, that she appears to treat the fact that the faulty weld could have been repaired at some point before collapse as being of some significance.  The point we would seek to make, your Honours, is, in a sense, why that would often be true of damage caused by faulty workmanship.  If one identified and rectified the faulty workmanship early enough, the damage would not have been sustained.

The second point, your Honours, we would seek to agitate is what was the second peril.  Now, your Honours, I use that as a shorthand expression for the fact that the proviso at page 51 requires that:

subsequent loss, destruction of or damage to the Property Insured be occasioned by a peril (not otherwise excluded) resulting from any event or peril referred to in this exclusion.

The view adopted in this case by the President appears in paragraph [41] at page 85 at the top of the page, your Honours, about line 8.  The way in which she dealt with it was to say:

The subsequent damage to the reclaimer and conveyor belts was occasioned by the faulty workmanship in the weld and was also occasioned by a peril not otherwise excluded under the policy, namely the risk of danger that if the faulty weld and subsequent fatigue cracking was not repaired, over time the internal diaphragm connecting the top flange of the leg box could sever and cause a rapid ductile (tearing) fracture . . . 

Your Honours, that turns again, in our submission, on the very narrow view taken of “damage” and “subsequent damage” and, in any event, why, in our submission, would one regard the risk of danger that if the faulty weld and subsequent fatigue cracking, et cetera, was not repaired, that that is something one would regard as a peril in the ordinary sense of the contract of insurance?

Your Honours, the third point concerns the words “(not otherwise excluded)” in clause 4 of the proviso, page 51.  Your Honours, Justice McMurdo posited that that meant excluded by a peril other than one referred to in any part of exclusion for itself.  Your Honours will see that referred to in two passages.  Page 81, paragraph [27], about line 32:

In my view, for the proviso to apply, there must be damage occasioned by a peril separate to the peril in perils exclusions cl 4.

Your Honours, one sees it also a couple of paragraphs back, paragraph [22] at page 80, and your Honours will see her Honour referring to, in a somewhat fuller form, to that same proposition.  The better view, your Honours, in our submission, is that taken by Justice Jerrard at page 88, paragraph [53].  Your Honours will see that in that paragraph, particularly about line 19, he said:

What the appellants argue –

and this is a proposition his Honour accepted –

is that where an excluded peril, such as faulty workmanship, caused another excluded peril, such as a developing flaw –

as to the case we contended for here –

the insurer should not be in any worse position regarding damage occasioned by the second excluded peril which had resulted from another excluded peril, than it would have been if all damage resulted from only one excluded peril.

Your Honours will see that his Honour accepted that proposition.  Your Honours, we would also say, in any event, why would there be a need for the words “not otherwise excluded” in respect to exclusion clauses other than clause 4 because they would operate of their own force?

Your Honours, may I conclude by saying this, that the approach taken by the Court of Appeal to these issues gives a very wide operation to the proviso.  In this case, the damage altogether is about $8 million.  That is page 3, paragraph [5].  Mr Hoffmann’s view is that the value of property insured in Australia with this wording is in excess of $400 billion.  We appreciate, your Honours, that the mere question of money is not a determining factor at all, but this is a policy of very general application, as appears from his affidavit.    Your Honours, those are our submissions.

GUMMOW J:   Thank you, Mr Jackson.  Yes, Mr Sofronoff.

MR SOFRONOFF:   Your Honours, in our submission, there are three reasons why special leave ought not be granted. The first is that there is no general principle involved in this case.  In view of the decision of the Court of Appeal and the reasons of the trial judge, the insurers are free to change their wording.  Indeed, Mr Hoffmann’s affidavit, if I could take your Honours to that, shows that that is indeed what the insurers do when circumstances, in their view, justify it.  At paragraph [12], after saying that a clause like this is used by the applicant very much, he then goes on in the third sentence of paragraph 12 to say that:

Only the very largest of risks are not underwritten using the standard wording; in those cases, a specific wording for the particular risk will be drafted –

So this is a case where what is being sought is a review of this Court on appeal of a particular clause that can be changed to a peculiar set of facts.  Indeed, this policy itself shows how the wording can easily be changed.  If your Honours would go to page 52, there is another exclusion there, clause 7.  It excludes:

physical loss . . . occasioned by or happening through:-

. . . 

(c)erosion . . .  or collapse resulting therefrom

So the possibilities are infinite as to how the insurer might wish to offer a fresh clause in the business.  Can I say this about Mr Hoffmann’s affidavit?  What it does not say is whether there is a single other claim which might fall within an exclusion like exclusion 4 and whether there is a single other claim, if there is one, to which exclusion 4 would apply, which might trigger the proviso.  So to say that there are many policies out there this year, including this exclusion clause in this form, in our submission, does not demonstrate a point of general importance that should justify the grant of special leave.

The second reason, your Honours, is that the case cannot succeed wholly on appeal, in any event, because there were two things that were damaged here.  The first piece of equipment was the reclaimer, which is like a crane that moves along tracks picking coal from piles that are adjacent to the tracks.  It then places the coal that it picks up onto a conveyor belt.  The conveyor belt was damaged when the reclaimer fell on it.  The conveyor belt was damaged, obviously, because something fell on it and the impact damaged the conveyor.  On no possible construction of this policy could it be said rightly that the conveyor belt was damaged by faulty workmanship.  So, in any event, the applicant, in our submission, is going to lose at least with respect to the conveyor belt.

GUMMOW J:   Did the primary judge make any point about that?

MR SOFRONOFF:   He did, your Honour, at application book 14, paragraph [51].

GUMMOW J:   Yes, that is right.  How would the dissenting judge in the Court of Appeal have dealt with that?

MR SOFRONOFF:   I think I am right in saying that he did not deal with it, your Honour, because he summarised his conclusion on page 90 and his concern was with damage to the retainer and the idea that it was caused by the developing flaw. 

In our respectful submission, your Honours, the third and final reason why leave ought to be refused is that the decision appealed from is plainly correct.  The applicant’s construction would give the proviso no work to do.  The example given by my learned friend, Mr Jackson, was that if the reclaimer fell and caused a spark and the spark caused a fire to damage some other property, that would be an example where the proviso would do some work, but, in our respectful submission, if one looks at the clause itself, plainly, the damage to the property by fire would not, on any construction of this clause that is rationally open, be damage that was caused by exposure to a peril which is an excluded peril.  It would be caused by fire.  On no possible construction could it be said that the fire damage to some other property other than the reclaimer was physical loss caused by faulty workmanship, except in the most philosophical sense that it all originated with the faulty workmanship.

Could I direct your Honours’ attention to the use of the word “occasioned” in the clause at page 51.  What is excluded is:

physical loss, destruction or damage occasioned by or happening through –

the excluded perils, and then what the proviso allows is coverage for:

damage to the Property insured occasioned by a peril. 

The learned primary judge found and the learned President found that term “occasioned” is a term of the widest import.  So what we have here is a clause that assumes a continuum.  It assumes that there has been damage occasioned to property and that one can, by stretching backwards, link it to an excluded cause and then it asks the question, “Is there then some peril which has occasioned damage to insured property which is a peril that is not otherwise excluded?”  In our respectful submission, the relevant peril in this case is the collapse, or certainly in the case of the conveyor one can say it was the impact. 

We know that a collapse for the purposes of this policy is a peril because your Honours have seen at page 52 one of the perils excluded is “Erosion . . . or collapse resulting therefrom”.  So a collapse is regarded as a peril within the meaning of this policy for at least one purpose.  In our respectful submission, the learned trial judge, in his analysis at page 12, paragraphs [42] and [43], was right in the conclusion that he came to there.  It is, in our respectful submission, a simple and correct construction:

there is damage to the insured property caused by faulty workmanship –

that is, the defective weld.  What was common ground, your Honours, was that the defective weld which resulted from the faulty workmanship fell within the exclusion.  It was not, as our learned friend put it, that the crack which flowed from the faulty workmanship fell within the exclusion.  Then:

there is subsequent damage, i.e. damage which follows the first damage in time and consequence –

This certainly followed in time – 20 years in time, in fact – and it was different in consequence in that on no view, except the most philosophical, could one say that the faulty weld caused the impact damage which resulted when the structure collapsed.  The subsequent damage which occurs is not by means or by peril excluded from cover under the policy by an exclusion other than clause 4 and, indeed, by any other clause.  In our respectful submission, that is correct. 

The way he alternatively expresses it in paragraph [43] is also, in our submission, correct, and the President at page 85 came to the same view –paragraph [41] at the top of the page.  There is faulty workmanship causing a faulty weld.  We could not recover for the faulty weld, for the cost of rectifying that, but the result of that, because of the pressures on the machine, is the severing of a part of it from another part of it, the collapse of one leg and then another leg, fracturing, and then the ultimate collapse.  In our respectful submission, the learned President analysed the application of the clause correctly when she said about six lines from the top of page 85:

The subsequent damage to the reclaimer and conveyor belts was occasioned by the faulty workmanship in the weld and was also occasioned by a peril not otherwise excluded under the policy, namely the risk or danger that if the faulty weld and subsequent fatigue cracking was not repaired, over time the internal diaphragm connecting the top flange of the leg box could sever and cause a rapid ductile (tearing) fracture, buckling the reclaimer’s leg structure and causing it to collapse on to nearby equipment such as the conveyor belts.

So, in our submission, the application of the clause is straightforward on the facts of this case and the learned trial judge and the learned President, with whom Justice Mullins agreed, were right.  Those are our submissions, your Honour.

GUMMOW J:   Thank you, Mr Sofronoff.  Yes, Mr Jackson.

MR JACKSON:   Your Honours, may I deal with our learned friend’s three points.  The first one, saying this is not a question of general principle – and, of course, one can always say that in relation to cases turning on insurance policies or contracts – and it is said it is possible to change the policy but, your Honours, there are many, many clauses in this form and one could say that about every clause and it is not easy to change

every one.  My learned friend says you cannot point to any other single other claim.  There are likely to be a few more now, in our submission.  That is the first point.

The second point, in relation to the conveyor belt, your Honours will notice a couple of things about that.  One is that when I was making my submissions earlier, what I said was that one could perhaps accept that damage to the conveyor belt might be regarded as subsequent but that the Court of Appeal, in any event, took the view that the damage to the reclaimer itself was subsequent and, your Honours, that perhaps is a matter which lies at the heart of the case.  Could I say that when one is looking at what was done in the Court of Appeal, your Honours will see at page 79, paragraph [18], that what is said there is that:

The faulty weld which ultimately caused the damage to the respondent’s reclaimer and conveyor belts was occasioned by faulty workmanship –

Your Honours, one sees in those circumstances that, going to the terms of clause 4, of course what is the subsequent loss has to be, for the proviso to apply, something that is itself a loss “occasioned by or happening through” the faulty workmanship.

The third thing, your Honours, is that our learned friends says the judgment below is plainly correct.  We would submit that to divide up the events which happened, albeit over some time, in the way in which the Court of Appeal’s reasons, and to some extent those of the primary judge, require them to be subdivided gives, with respect, an air of complete unreality to the events which occurred in this case. 

Could I say one other final thing, your Honours?  I thought I had said when I was making those submissions earlier that the value of property insured in Australia with this wording according to Mr Hoffmann’s affidavit was in excess for $400 billion.  Someone suggested I had said $400 million.  If I am out in that regard, I make a thousand apologies.

GUMMOW J:   Thank you, Mr Jackson. 

There are insufficient prospects of success on an appeal in displacing the construction which the relevant provisions set out at page 51 of the application book were given by the majority in the Court of Appeal of Queensland.  Accordingly, special leave is refused with costs.

AT 2.37 PM THE MATTER WAS CONCLUDED