When is property in your physical or legal control for the purposes of an exclusion clause?
In this interfamilial dispute involving the destruction of a large number of railway sleepers in a rural fire, the Court had no difficulty finding the defendants liable to the plaintiff, and then had to decide whether an exclusion in the defendants’ liability policy applied to exclude the defendants' claim.
- The significant issues in this case were the question of whether the sleepers were in the physical and legal control of the defendant for the purposes of an exclusion clause in the defendants’ policy and who bore the onus of proving the relevant policy wording.
The plaintiff had a contract to purchase and remove wooden rail sleepers, which had been replaced by concrete sleepers, from along several rail corridors in Western NSW. The plaintiff’s business involved grading and selling the sleepers for building, garden and horticulture or firewood at various prices depending on their condition. The defendants, who were relatives of the plaintiff’s directors, owned several large rural properties in the Central West. The parties came to an arrangement whereby some of the sleepers were stored on one of these properties.
The defendants alleged that this arrangement was only to be for 3 months and that they had told the plaintiff’s directors that the responsibility for the sleepers remained with the plaintiff. This was denied by the plaintiff’s directors at trial. The sleepers were not insured by the plaintiff.
In mid-December 2016 the first defendant was welding on top of a silo on the property where the sleepers were stored. A spark escaped, causing a grass fire which spread to the sleepers, destroying a large number.
The defendants argued that the plaintiff was guilty of contributory negligence because the sleepers were not placed by the plaintiff in the area specified by the defendants, and therefore the defendants had only been able to make a firebreak on one side of the pile of sleepers.
The insurer denied the liability claim by the defendants based on the following exclusion in the 2015 policy wording:
“We do not cover property damage:
- owned by or leased or rented to you;
- not belonging to you but in your physical and legal control.”
The defendants argued that the sleepers were not in their physical and legal control and that control of the sleepers in the relevant sense always remained with the plaintiff. They also sought to make a distinction between control over, and control in relation to, the sleepers. The insurer argued that the sleepers were clearly within the physical and legal control of the defendants at the time of the fire.
The defendants also argued that an earlier policy wording from 2012 (with a slightly different exclusion clause) applied and that pursuant to section 58 of the Insurance Contracts Act 1984 (ICA) the onus was on the insurer to prove that the 2015 wording was applicable.
The decision at trial
The trial judge (N Adams J) had little difficulty in finding the defendants negligent in relation to the fire. She also found that the plaintiffs were guilty of contributory negligence in ignoring the defendants’ request and placing the sleepers in an area where a complete firebreak could not be created around them.
Whilst acknowledging the possibility of a distinction between control over and control in relation to goods for the purposes of construing such exclusion clauses, she said that the latter case usually arose where a party did not have complete control over goods, whereas in the present case the defendants had complete control over the sleepers in the relevant sense whilst they were on the defendants’ property.
In construing the exclusion clause in the policy, the judge said regard must be had to the High Court’s oft expressed position that the meaning of the terms of a commercial contract (of which an insurance contract is one example) is to be determined by what a reasonable businessperson would have understood those terms to mean. The sleepers were clearly in the “physical and legal control” of the defendants in the ordinary, common-sense meaning of that phrase and therefore the exclusion applied.
In relation to the argument that section 58 of the ICA imposed an onus on the insurer in this case to prove which policy wording applied, the judge disagreed, finding that the section is intended to cover the situation whereby a policy holder finds himself or herself uninsured because the insurer did not remind them that their policy was due for renewal, and does not create an evidentiary burden on an insurer to prove that a particular policy wording applies.
Implications for you
This case is an important reminder that when drafting or construing insurance policies, regard should be had to the ordinary commercial meaning of words and phrases such as “physical and legal control”.