Federal Court's 'hot' take on ISR exclusion clause
Originally Published by Benjamin Karalus and Shauntelle Lim on Thursday, June 6, 2019 2:18:20 PM
The Federal Court, sitting in its Appellate Jurisdiction, has found in favour of the Insurer(s) in a decision concerning the interpretation of the perils exclusion in the ISR Mark IV Policy.
Author(s): Benjamin Karalus and Shauntelle Lim
Judgment date: 24 May 2019
Citation: Dalby Bio-Refinery Ltd v Allianz Australia Insurance Limited [2019] FCAFC 85
Jurisdiction: Federal Court – Appellate Jurisdiction
Dalby Bio Refinery Ltd (Dalby), a manufacturer and distributor of ethanol, operated a bio-refinery in Dalby, South East Queensland (the Distillery). Dalby held an ISR Mark IV Policy of Insurance for the period ending 30 June 2016 (the Policy) issued by Allianz Insurance Limited, Chubb Insurance and Zurich Australian Insurance Limited (the Insurers).
In the early hours of 2 March 2016, smoke was detected in a storage bay at the Distillery and damage was discovered to four stockpiles of dry distillers' grain and solubles (the Incident).
Dalby's claim for indemnity for losses arising from the Incident was declined by the Insurers on the basis of the Perils Exclusion 6(c)(i) and/or 6(c)(ii) contained in the Policy.
The Perils Exclusion stated:
Judgment date: 24 May 2019
Citation: Dalby Bio-Refinery Ltd v Allianz Australia Insurance Limited [2019] FCAFC 85
Jurisdiction: Federal Court – Appellate Jurisdiction
Principles
- The proper meaning to be given to the perils exclusion is a businesslike construction, by reference to what a reasonable business person would have understood the words in their commercial context to mean.
- The term “heating” in the perils exclusion is to be qualified by “spontaneous” to read “spontaneous heating”. Spontaneous does not just mean sudden; rather, as the dictionaries show, it means self-generated or from within.
- The enquiry under the perils exclusion ceases at the finding of the answer to the question whether the damage was caused by spontaneous heating and does not go further to seeking to explain why the spontaneous heating came about.
- One needs to be careful with reliance on the contra proferentem rule, especially when there has been an evident degree of negotiation of the policy.
Background
Dalby Bio Refinery Ltd (Dalby), a manufacturer and distributor of ethanol, operated a bio-refinery in Dalby, South East Queensland (the Distillery). Dalby held an ISR Mark IV Policy of Insurance for the period ending 30 June 2016 (the Policy) issued by Allianz Insurance Limited, Chubb Insurance and Zurich Australian Insurance Limited (the Insurers).
In the early hours of 2 March 2016, smoke was detected in a storage bay at the Distillery and damage was discovered to four stockpiles of dry distillers' grain and solubles (the Incident).
Dalby's claim for indemnity for losses arising from the Incident was declined by the Insurers on the basis of the Perils Exclusion 6(c)(i) and/or 6(c)(ii) contained in the Policy.
The Perils Exclusion stated:
The Insurer(s) shall not be liable ... in respect of:-
...
1. physical loss, destruction or damage occasioned by or happening through:-
...
(c) (i) spontaneous combustion
(ii) spontaneous fermentation or heating or any process involving the direct application of heat
Provided that Perils Exclusions 6 (c)(i) and 6(c)(ii) shall be limited to the item or items immediately affected and shall not extend to other property damaged as a result of such spontaneous combustion, fermentation or heating or process involving the direct application of heat.
Cause of the Loss
A Court appointed referee (the Referee) prepared two reports addressing the cause of the loss, which were adopted by the parties. The Referee concluded that it was more likely than not that the loss was caused by the process of self-heating, though he could not be precise about the mechanism that brought about the self-heating.
Primary Judgment
Dalby submitted that the Insurers failed to discharge their burden of proof and that the Referee had failed to identify the proximate cause of the damage.
The Primary Judge considered in detail the construction of the perils exclusion clause, the meaning of 'spontaneous' heating and the Referees conclusion as to the cause of the damage, and found that the Insurers were entitled to rely on the perils exclusion to decline indemnity for the claim.
Decision
The following key matters were considered on Appeal:
1. Consideration of the Policy as a whole
- The Court considered the Policy had been clearly negotiated by important changes to the operation of the cover, the property exclusion and the perils exclusion. It was held that the Primary Judge displayed no error in not lengthening his reasons by referring to parts of the policy of no assistance, noting that none of the terms of the insuring clause, the level of deductibles, the insured property or the settlement clause assisted in ascribing meaning to the word "heating" in perils exclusion 6(c)(ii).
2. Construction of the exclusion clause
- It was confirmed that the proper meaning to be given to perils exclusion 6(c)(ii) is a businesslike construction, by reference to what a reasonable business person would have understood the words in their commercial context to mean.
- It was noted that the Policy was marked by a degree of precision and economy of language and as the Policy is carefully drawn, proper regard should be made to the language used, including usual grammatical and syntactical usage, without overly dwelling on choices of structure, syntax or punctuation that are open to different nuances.
- The Policy is to be understood in the context of Dalby's business, such that it stored large quantities of grain. Exclusion 6(c) can be seen to be removing certain matters from the risks that the Insurers were willing to accept and that were to be placed at Dalby's own risk.
- The Court held that the term 'heating' is to be qualified by 'spontaneous', to read 'spontaneous heating'. It was noted that if 'heating' were not qualified by the idea of self-generation in the meaning of 'spontaneous', there would be little need for the balance of part (ii).
3. The meaning of "spontaneous heating"
- The Court held the ordinary and proper meaning of the phrase “spontaneous heating” should be given objectively, as it would commend itself to businesspeople.
- It was noted that "spontaneous combustion” in exclusion 6(c)(i), is a phrase encompassing actual “combustion”. While it's spontaneous character may manifest itself in a sudden event of fire or ignition, spontaneous does not mean sudden. Rather, its meaning is broader, and as the dictionaries show, it means self-generated or from within. For example, "spontaneous fermentation" referred to in 6(c)(ii) was noted to be a self-generated, gradual process.
4. Proximate Cause of the loss
- The Court agreed with the Primary Judge that the perils exclusion dealt with damage caused by spontaneous heating, that is heating generated internally (as opposed to externally), and which involves environmental factors. The circumstances that provided the suitable conditions for the self-generated heating through oxidation explain why the spontaneous heating occurred. An inability to be precise or definite about why the process occurred is not doubt that the process occurred.
- The enquiry under the perils exclusion ceases at the finding that the damage was caused by spontaneous heating, and does not go further to seeking to explain why the spontaneous heating came about.
5. Contra Proferentem Rule
- The Court noted that one needs to be careful with reliance on the contra proferentem rule, especially when there has been an evident degree of negotiation of the policy. If there are two genuinely available alternatives, preference should be given to one that limits rather than expands the exclusion.
Why this case is important
- This is a signification decision for insurers and the wider industry, as it provides a detailed consideration of the construction of the perils exclusion under the ISR Mark IV policy.
- The decision is a reminder that when construing policy wordings in general, an undefined word or phrase must be given its natural and ordinary meaning, looking objectively at the policy as a whole and considering its commercial context.
- The decision also highlighted the reluctance of the Court to rely on the contra proferentem rule, particularly where there has been a degree of negotiation in the terms of the contract.