Sunshine after the storm: $7M win for insured in property damage/BI appeal4 February 2019 | Insurance Issues
The NSW Court of Appeal partially allowed an appeal from an insured, and dismissed a cross appeal by the primary insurer in a complex property damage and business interruption case. In doing so it considered the requirements for granting equitable relief of rectification in insurance contracts, the common law principle of 'permanent deprivation' in establishing total loss under a non-marine policy, and the application of Sanderson cost orders against a primary insurer.
- Whether a property damage and business interruption policy should be rectified to introduce a limit to aspects of cover
- Entitlement to indemnity for property damage
In April 2015 a severe storm in Sydney caused the collapse of a warehouse owned by Mobis Parts Australia Pty Ltd (Mobis). The warehouse was used to store parts for Hyundai and Kia cars.
Mobis made a claim (totalling $62M) under a property damage and business interruption policy for Australia (the Local policy) issued by XL as part of an international property damage and business interruption program. XL (with other co-insurers) also issued a Master policy (the Master policy) to a subsidiary of Mobis’ parent company, which was the subject of an alternative indemnity claim.
The Local policy had a ‘storm’ limit of $72.105M (EUR 50M) but (unlike the Master policy) no limit for hail damage. XL argued there should be a corresponding limit for hail damage in the Local Policy (for consistency with the Master policy) and that its omission was an oversight that warranted rectification of the Local policy.
XL initially accepted liability for the loss under the Local policy, subject to an asserted hail limit of $14.4M (EUR 10M). XL also contended (after the grant of indemnity) that a faulty design exclusion precluded cover for the warehouse loss.
The Decision at Trial
The trial judge found that Mobis was entitled to indemnity under the Local policy up to the storm limit. Hail was determined to be the proximate cause of the loss. However, it was held that the Local policy did not import the hail limit in the Master policy (and there was no evidence of a mistake warranting rectification). The faulty design exclusion had no application. The trial judge also determined several issues as to quantum and ultimately found that Mobis’ entitlement to indemnity was $17.73M. Mobis appealed and XL cross-appealed, against various conclusions as to quantum, costs and interest.
The Issues on Appeal
- Whether the Local policy should be rectified to insert the hail limit.
- Whether all stock damaged after the collapse was physically lost (and indemnifiable) because of its uncertainty as to recovery.
- Whether Mobis was entitled to indemnity for stock not replaced.
- Whether the trial judge wrongly exercised his discretion by ordering XL (as primary insurer) to pay the other insurers’ costs pursuant to a Sanderson order.
The Decision on Appeal
The Court of Appeal upheld the trial judge’s finding that the ‘hail limit’ did not apply to the Local policy. Although an informal contract of insurance came into existence when Mobis agreed to participate in the international insurance programme, that contract was not shown to have included – or required – XL to issue a local policy including the hail limit. Significantly, there was a “Difference in Limits/Difference in Conditions” clause of the Master policy which anticipated premium, limit and deductible differences between the Master policy and Local policy.
Further, there was no clear evidence to the relevant standard that, by reason of a mistake on the part of XL, the Local policy had failed to express the parties’ common intention by not including the hail limit. Accordingly, there was no basis for granting the equitable relief of rectification to the terms of the Local policy.
As to the uncertainty of recovery of some stock, the Court of Appeal also upheld the trial judge’s finding that Mobis had not established that ‘permanent deprivation’ had occurred. Mobis asserted that undamaged stock was physically lost upon the collapse because that stock was ‘trapped’ and whether any of it would be recovered was ‘uncertain’. The Court of Appeal confirmed that a claim for total loss under a non-marine policy requires proof by the insured that a deprivation has occurred that, more probably than not, will be sufficiently permanent to constitute a loss. As the recovery of insured property was uncertain, there was an equal probability of recovery and non-recovery. It was not enough for Mobis to assert that recovery was not absolutely certain. In any event, the fact that Mobis would recover some stock was certain. Mobis’ burden of proving this loss had not been met.
As to whether Mobis was entitled to indemnity for stock not replaced, the Local policy had a condition precedent to liability that “No costs of reinstatement shall be payable under this Policy until such costs have been incurred by the Insured”. The trial judge had rejected Mobis’ claim of $3.037M for the hypothetical replacement cost of stock damaged but not replaced, on the basis that this clause required the cost of replacement actually incurred. The Court of Appeal disagreed with this and allowed recovery for the claimed amount on the basis of the cost of reinstatement, notwithstanding that Mobis did not propose to replace or reinstate the relevant property. It held this was consistent with the construction of similarly worded provisions in other policies and cases. According to the Court of Appeal , the language of the clause “forecloses any argument that such stock had no value to Mobis, that replacement would have been unreasonable or that the cost of replacement would exceed Mobis’ actual loss.”
The Court of Appeal also applied a complex business interruption clause of the Local policy in Mobis’ favour to find that $1.45M of its claim should not be deducted. This result was based upon a “businesslike interpretation” to the language being given to the Local policy, in light of the “commercial circumstances and objects” of the policy.
Finally, the trial judge’s Sanderson costs order against XL in favour of the other insurers was upheld. As XL’s representation that no privity issues would arise in a claim under the Master policy (and that as lead insurer it had authority to bind co-insurers), prompted Mobis to reasonably bring such a claim against them, XL’s challenge to the Sanderson costs order was not made out.
In the result, the Court of Appeal found that Mobis was entitled to a further indemnity under the Local policy of an amount exceeding $7M.
Implications for you
- Policy terms will not be rectified by a court, absent compelling evidence of a common mistake causing the policy not to express the parties’ common intentions.
- The burden of proving a loss always rests upon the insured. If there is uncertainty as to whether insured property will be recovered, that is insufficient to constitute a ‘permanent deprivation’ and indemnifiable loss. The courts will not apply marine insurance principles to property loss.
- If loss is established by an insured, the courts will give a broad interpretation to insuring clauses providing for reinstatement costs, even where an insured does not propose to replace or reinstate the relevant property. A similar approach will also be applied to business interruption claims, when consistent with the policy terms and its commercial objects.
Lead insurers should be aware of the risks of Sanderson costs orders against them if co-insurers are joined to proceedings and an argument run by the lead is unsuccessful.