Indemnity washed away by flood exclusion in Brisbane7 August 2018 | Insurance Issues
The first plaintiff was the owner of a commercial building (the building) in Brisbane’s CBD. It leased the premises to the second plaintiff, a law firm. Both plaintiffs were named on a Steadfast industrial special risk policy (the policy) which was underwritten by the defendant.
In January 2011, Brisbane suffered extensive flooding. Although direct overflow from the Brisbane River did not reach the building, water entered the basement of the building through the wall, causing damage along with disruption to the second plaintiff’s business. The first plaintiff made a claim on the policy for loss of rental income while the second plaintiff made a claim for property damage and business interruption.
The policy contained a flood exclusion which excluded physical loss and damage occasioned by or happening through:
“…flood which shall mean the inundation of normally dry land by water escaping or released from the normal confines of any natural water course...”
The defendant declined the claims on the basis that the loss and damage was caused by flood water within the meaning of the exclusion.
Issues in dispute
The issues in dispute concerned the source of the water that entered the basement and whether the damage caused by the water fell within the scope of the flood exclusion.
The court heard evidence from hydrologists who were called by both the plaintiffs and the defendant. The hydrologists agreed that the inundation of the basement was not caused by either overland flow from the Brisbane River or local runoff. Rather, the water came from old clay storm water pipes (the pipes) that ran past the building. The pipes were cracked and in poor condition. Water from the pipes escaped into the subterranean soil adjacent to the basement and (along with the water that was already present in the soil) entered and inundated the basement.
The hydrologist called by the plaintiffs contended that the first water that escaped from the pipes included local runoff that was forced out of the pipes and into the surrounding subterranean soil due to water being pushed up the pipes by the rising river level. On the other hand, the hydrologists called by the defendant asserted that while some local runoff would have been pushed out of the pipes, the water that inundated the basement was primarily, if not entirely, river water that had forced its way up the pipes and into the subterranean soil next to the basement.
As it turns out, the outcome of the matter did not hinge on whether the water that first entered the basement was local runoff, river water or water that was already present in the subterranean soil. To the extent that it mattered, the court held that the first water to enter the basement was probably a mix of all three sources. However, as the river continued to rise, so did the proportion of river water in both the pipes and the basement until the point was reached where almost all the water that was entering the basement was river water.
While accepting that the water that entered the basement was primarily river water, the court acknowledged that the water that caused the damage was derived from multiple sources. However, only damage caused by river water was caught by the flood exclusion. This made it necessary for the court to consider the eponymously named principle arising out of the decision in Wayne Tank and Pump Co Limited v Employers Liability Insurance Corporation Limited. Although the court’s analysis is far more nuanced, the “Wayne Tank principle” stands for the proposition that where damage is caused by two or more proximate or concurrent causes, one being covered by a policy and the others excluded, an insurer is entitled to rely on the exclusion to avoid liability.
In the present situation, the court accepted that (at least initially) the water that caused the damage consisted of a mixture of local runoff and river water. While the damage caused by the river water would attract the operation of the flood exclusion, any damage caused by the runoff would not. Given the presence of two proximate causes (one covered and one excluded), the Wayne Tank principle entitled the defendant to rely on the flood exclusion to decline indemnity.
The court dealt with a couple of additional arguments raised by the plaintiffs. First, the plaintiffs sought to argue that the escape of water in the subterranean soil did not constitute the escape of water into normally dry land. In a related argument, they also contended the “normally dry land” cannot be the same as the insured property. The court rejected both arguments. The court found that the subterranean soil constituted normally dry land. Further, after considering the commercial intention of the policy, the court held that normally dry land could include the insured premises. Consequently, the entry of river water into the basement constituted the entry of water into normally dry land.
Second, echoing arguments raised in LMT Surgical Pty Limited v Allianz Australia Insurance Limited, the plaintiffs submitted that the water that entered the pipes was not water that had escaped the river for the purpose of the flood exclusion. In LMT Surgical, water from the Brisbane River surged into drainage pipes and inundated the plaintiff’s property. The court held that the flood exclusion in that case did not apply because river water that backflowed through drainage pipes had not overflowed from normal confines of a natural watercourse within the meaning of the exclusion. However, the court noted that the flood exclusion in the present case differed in one critical respect from the clause considered in LMT Surgical. Here, the exclusion referred to water that had escaped or been released from the confines of a watercourse rather than overflow. While the backflow of river water into drainage pipes might not constitute overflow, the court accepted that river water that had entered the pipes and inundated the basement clearly constituted water that had escaped or been released from the normal confines of a natural watercourse.
In the circumstances, the court held that the defendant was entitled to rely on the flood exclusion and dismissed the plaintiffs’ claims.
Good quality hydrology evidence is usually fundamental to the outcome of flood claims. In this case, however, the evidence of the hydrologists in relation to the issues that determined the application of the flood exclusion was fundamentally similar. Rather, as is usually the case, policy response was determined by having regard to the language of the policy along with a little assistance from the body of case law dealing with flood claims.
Many insurers would have been looking forward to seeing LMT Surgical overturned. However, the case was distinguished as a result of key differences in the wording of the respective flood exclusions. If underwriters wish to avoid an outcome like the one in LMT Surgical, the flood exclusion should refer to water that has escaped or been released from a watercourse, rather than simply overflowed.