Insured cannot ‘court the risk’ where risk is unknown
An insured's deliberate action in continuing to operate a faulty boat engine did not mean that damage to the engine was not accidental within the meaning of the policy, but the court found that a defective design exclusion relieved the insurer of the obligation to indemnify.
- Whether the damage amounted to “accidental loss“ within the meaning of the policy.
- Whether any of the exclusion clauses present in the policy were operative.
- What was/were the proximate cause(s) of the damage.
- Whether the cause(s) were excluded under the policy.
The applicant, Mr Sheehan, was insured under a policy underwritten by the respondent, Munich Re, which provided cover for damage occasioned to the engine of a motor yacht owned by the applicant.
On 17 September 2015, while being operated by the applicant, the vessel’s starboard engine suffered significant damage. The engine sounded an alarm and the speed of the engine significantly slowed. The applicant continued to operate the vessel, navigating it back to the marina, following which he observed that the starboard fuel tank was covered in oil.
The applicant contended that the damage to the engine was within the cover for accidental loss or damage under the policy. The respondent denied indemnity for the claim on the basis that the damage was not caused by ‘accidental loss’ or alternatively, was excluded pursuant to an exclusion for ‘inherent defects, structural faults, faulty workmanship or faulty design’.
The applicant issued proceedings in the Federal Court of Australia seeking indemnity under the policy.
A number of complex factual questions were referred by the parties to a referee, who determined that the applicant had failed to comply with the vessel’s operating manual, the presence of oil and ultimate damage to the engine was likely due to the faulty design of the gasket and the damage to the engine could have been avoided had the applicant ceased operating the engine when the alarm had first activated.
Whilst noting that the applicant had demonstrated ‘poor seamanship’, the court accepted the applicant’s submission that the damage to the engine was ‘accidental’ in that he did not expect it to happen, and rejected the respondent’s argument that the applicant had ‘courted the risk’ by failing to read the operating manual. In finding that the damage was ‘unintended’ the court applied an objective test, incorporating the specific knowledge and experience of the applicant.
However, the court determined that the sole proximate cause of the damage to the engine was the defective design of the gasket, rather than the applicant’s failure to turn off the engine when the alarm sounded. As a result, the court held that the damage was excluded under the policy as being loss or damage caused by faulty design.
Implications for you
The decision confirms the principle that in order for an insured to ‘court the risk’, the insured must know of that risk and deliberately choose to accept it.
In this case, the risk of damage to the engine was not known to the applicant as he had not read the operating manual and therefore was considered to be ‘unintended’. The case also serves to emphasise that, when investigating policy response, it is necessary to identify the proximate cause of any loss. In determining that the damage to the engine was caused by defective design rather than Mr Sheehan’s questionable seamanship, the insurer was able to rely on the faulty design exclusion to decline cover.
The referral of factual issues to a referee allowed the efficient determination of complex factual issues by an expert in the field, resulting in significant cost savings to the parties.