Insurable Interest – Issue 43

Contents

Unproductive
To see or not to see
‘Yes’…then no
Trampoline park dodges appeal
When professional is unprofessional
Insurer must cover burnt out brothel with Comancheros affiliations

Unproductive

A Supreme Court of Queensland judge has considered the definition of ‘Products’ in the context of a broadform liability policy, and in particular whether a house constructed by the insured was a Product.

The insured constructed a house with aluminium windows. A few years later a severe storm blew in the windows and wind and water tore through the house. The poor old homeowners made a claim against the builder.

The builder turned to his broadform liability insurer, which refused indemnity on the basis of a typical ‘product defect’ exclusion in the policy, namely: Property Damage to products if the damage is attributed to any defect in them or to their harmful nature or unsuitability.

The insurer’s position was that the house, which suffered damage because of the deficiently installed windows, was the builder’s Product. In that regard, the policy had a typical definition of ‘Products’: Products means anything which is or is deemed to have been manufactured…assembled, erected or constructed by you.

The judge relied on an English Court of Appeal decision in which it was decided that a product is something which (at least originally) is a tangible and moveable item which can be transferred from one person to another, and not something which only came into existence to form part of the land on which it was created. On that basis, the judge decided that the product defect exclusion did not apply.

However, the English decision concerned a policy which had a different definition of ‘Product’ the definition was: any product or goods manufactured, constructed, installed…by the insured.

Contrast that with the definition anything assembled, erected, etc in the broadform policy. The English court focused on the word ‘product’ which was used in the definition. That word was not used in the broadform policy definition. So instead of relying on a case which considered whether a house was a ‘product constructed by the insured’, he should have considered whether the house was ‘any thing constructed by the insured’.

Further, the policy reviewed by the English Court was a ‘building services liability policy’, intended to cover liability for faulty workmanship, materials or design. The English court thought it would be contrary to the essential purpose of the policy to construe the exclusion as removing cover in respect of defects in the insured’s buildings. That was, of course, quite a different kind of policy to the broadform liability policy considered by the Queensland judge.

The judge went on to find support for his conclusion that the house was not a Product from the presence of another exclusion in the broadform policy, which excluded cover in respect of: personal injury or property damage caused by the demolition…removal of support…alteration…construction, erection of and/or addition to any building by or on behalf of the insured. That exclusion had no relevance to the claim because of a write-back in respect of contracts worth less than $500,000. However, the judge thought that the write-back would be ‘rendered completely meaningless’ if cover written back was then taken away by the product defect exclusion.

In that regard, the judge appears to have read the words property damage caused by the…construction…of any building as excluding cover in respect of damage arising from defects in a building. That is a surprising construction of the clause.

Bigby v Kondra and Zurich Australian Insurance Ltd

This is the first Australian superior court decision concerning the question of whether a house constructed by an insured is a ‘Product’ for the purpose of a broadform liability policy. The judge concluded that a house is not a Product. In our view the decision is wrong because it relies on an English decision concerning a different kind of policy with a differently worded exclusion, and because comfort is drawn from another exclusion in the broadform policy which has a different purpose.

This article was written by Andrew Lyle, Partner.


To see or not to see

Mrs Shinnaoui suffered injury as a result of tripping on a kerb when returning to her vehicle in an underground car park. It was accepted that she had negotiated a similar concrete kerb in the car park just prior to the incident.

When approaching the second concrete kerb, Mrs Shinnaoui became distracted by another patron pushing a trolley close to her vehicle. Whilst her attention was directed to this, she tripped on the second concrete kerb causing her to fall and suffer injury.

Mrs Shinnaoui alleged that the owner and the managing agent of the shopping centre failed to properly illuminate the car park to adequately reveal the concrete kerb or maintain the painted surface markings on the kerb, which had become faded.

Findings as to obvious risk

An “obvious risk” is defined in sections 5F and 5G of the Civil Liability Act 2002 (NSW) (CLA) as a risk that, in the circumstances, would have been obvious to a reasonable person in the position of the plaintiff.

The District Court judge concluded that the risk of tripping on the kerb was an obvious risk within the meaning of sections 5F and 5G of the CLA, and consequently, no warning of the risk was required. In dismissing the claim, His Honour focused on particular facts, including that:

  • the lighting of the car park was not related to Mrs Shinnaoui’s fall
  • although the paint on the kerb was worn, and to maintain the paint is good practice, the failure to do this does not itself amount to a failure to exercise reasonable care and
  • the risk of tripping was “obvious” and consequently Mrs Shinnaoui ought to have been aware of it – this was apparent from her ability to negotiate the first kerb.

Shannaoui v Perron Investment Pty Ltd [2017] NSWDC 54

In assessing “obvious risk” under the CLA, consideration ought to be given to the Mrs Shinnaoui’s familiarity with the premises, the level of the her attention to their surroundings at the time of the incident and the existence of any external factors to divert the plaintiff’s attention to their surroundings.

This article was written by Mitchell Stein, Senior Associate.


‘Yes’…then no

Glenn Wright claimed that he suffered pure mental harm when a co-worker, Nathanial George, attempted to throw him off a building occupied by Optus on 15 March 2001. At the time of the incident, the co-workers were employed by a labour-hire company and attending a training course conducted by Optus.

Mr Wright sued Optus in the Supreme Court of NSW and was successful, with the trial judge finding that Optus owed him a duty of care in respect of pure mental harm under the NSW Civil Liability Act 2002. The trial judge identified the risk of harm as the risk that Mr George might inflict personal injury on Mr Wright, including mental harm, in circumstances actually known to Optus’ employees. His Honour found that that risk was not insignificant and that a reasonable person in Optus’ position would not have put Mr Wright in harm’s way by exposing him to Mr George’s behaviour. Judgment was entered in favour of Mr Wright for approximately $4 million.

The Court of Appeal overturned the judgment of the trial judge and found that Optus did not owe Mr Wright a duty not to cause mental harm in accordance with section 32 of the Act. In doing so, the Court of Appeal held that the primary judge had incorrectly aggregated the knowledge of various Optus staff members and incorrectly attributed that knowledge to Optus. Furthermore, because there was no finding by the trial judge that it was foreseeable that an assault of the kind inflicted on Mr Wright might cause a person of normal fortitude to suffer a psychiatric illness, Optus was under no duty to take reasonable care to protect Mr Wright against mental harm.

Optus Administration Pty Limited v Glenn Wright by his tutor James Stuart Wright [2017] NSWCA 21

This decision is a useful reminder that the test for establishing a duty of care for pure mental harm is different to the general duty of care. This case also highlights the importance of properly understanding and applying the tests for determining whether a duty of care arises in respect of pure mental harm.

This article was written by Andrew McArthur, Senior Associate.


Trampoline park dodges appeal

Bounce Australia Pty Ltd (Bounce) operates a trampoline park in Melbourne. At the park, people can participate in games of ‘trampoline dodgeball’, where teams throw balls at each other whilst bouncing on trampolines. The plaintiff broke his leg during a game when his right foot landed on padding covering the trampoline springs. The plaintiff issued proceedings against Bounce in the County Court of Victoria.

Bounce called evidence at trial which established that there were warning signs advising of risk and of customer responsibility. They were located at the entrance foyer, registration desk, and at various locations throughout the park. Participants (including the plaintiff) wore wrist bands referring to the conditions displayed on these signs. Safety rules were also noted on signs, including one outside the dodgeball court, which included ‘Don’t jump or land on padding’. The plaintiff denied seeing the signs or having his attention drawn to them.

At trial, the jury dismissed the claim.

The jury answered the following two questions which gave rise to an appeal by the plaintiff:

2. … did the defendant fail to take reasonable care in giving warning of the risk to the plaintiff or in giving the plaintiff relevant safety information, and if so, was that failure a cause of the plaintiff’s injury? — Yes.

4. If yes to question 2 …, did the plaintiff voluntarily accept the risk of sustaining injury? — Yes.

The plaintiff argued that it was necessarily inconsistent for the jury to have answered ‘yes’ to both of these questions. If the defendant’s failure to warn of risk had been a cause of the plaintiff’s injury, the plaintiff could not have been aware of the risk. If the plaintiff was not aware of the risk, he could not voluntarily agree to accept it.

Fundamentally, the plaintiff’s appeal both arose from, and failed due to, the poor drafting of questions 2 and 4. There were separate questions posed in question 2 – whether there was a failure to warn of risk; and whether there was a failure to provide safety information. The Court noted that it was entirely possible for the jury to have found that the plaintiff was warned (and therefore aware of) the risks of trampoline dodgeball but was not given safety information, and that it was the failure to give safety information which was a cause of the plaintiff’s injury. If that was the rationale behind the positive answer to question 2, it would not be inconsistent with the finding that the plaintiff had voluntarily assumed the risk of being injured whilst playing the dodgeball game.

The plaintiff’s appeal therefore failed.

Rakich v Bounce Australia Pty Ltd [2016] VSCA 289

This decision highlights that people engaging in inherently dangerous recreational activities are required to take personal responsibility for the risks associated with those activities, where adequate warning of the risks has been provided. A failure to provide information as to how to engage in dangerous activities more safely does not negate the participant’s voluntary decision to assume risk.

This article was written by Zoe Keith, Partner.


When professional is unprofessional

The plaintiff purchased a property in early December 2011. Prior to the purchase, she engaged the defendants to prepare a building inspection report. On 17 December 2011, the plaintiff’s 7-year-old daughter was playing on the balcony when she fell through a baluster and landed on the concrete pavement below.

The trial dealt with liability against the building inspector. The inspector brought a cross-claim against his insurer who had denied coverage under a combined professional indemnity/liability insurance policy. The NSW District Court Judge found in favour of the plaintiff against the defendant and for the defendant against their insurer.

The plaintiff’s evidence was that whilst she only ‘skim read’ the property inspection report, she was looking out for any major defect with the property. Her evidence, which was accepted, was that she would have viewed an issue with the balustrade as a major defect.

The defendant inspector could not recall the inspections he had conducted at the property. He gave evidence that his usual practice was to visually inspect the balustrades, which included attempting to shake the rails and apply some force to some of the balusters. He conceded that photographs that were taken by the police after the incident showed a balustrade that was hazardous and that the screws attaching the balusters were rusted.

The Court accepted that the evidence led to an ‘unavoidable’ conclusion that the balustrade was hazardous and this would have been detected by a prudent inspection conducted by a certified building inspector.

The defendant denied that he owed a duty of care to the daughter. The Court concluded that, as the risk was foreseeable and not insignificant within the meaning of section 5B of the Civil Liability Act 2002, but for the negligence, the plaintiff most likely would have repaired the balustrade or would not have purchased the property and therefore, the negligence caused the daughter’s injuries.

The insurance dispute

From the description of cover in the schedule and the insuring clause, it was found that the clear intention was to provide the insured with cover for the Business Activity of residential building inspections and ‘work carried out in that activity’ which would include the subject report and any ‘legal liability relating to actual or alleged breach of the defendants’ professional duty in connection with the provision of the report’.

The insurer relied on the Professional Liability exclusion under the General and Public Liability Policy which excluded liability for ‘provision of or failure to provide professional advice or services… or advice, design or specification given by you for a fee or otherwise in carrying out any Business Activities’.

‘Professional’ was not defined under the policy, making it difficult for the insurer to prove the intended scope of the exclusion.

The Court considered the purpose of the contract was to cover any liability arising from the provision of inspection and report services. The intention was to cover those business activities but to exclude cover for professional advice beyond those activities. On that basis, the insurer’s submitted construction of the contract was not commercial and would inappropriately limit the cover to the point of ‘virtually defeating it’.

Doosey v Walsh & Complete Building Inspection Services Pty Ltd [2017] NSWDC 8

The decision is a reminder to insurers that the Courts apply the same principles of interpretation to commercial insurance policies as for other commercial contracts. In order for exclusion clauses to be effective, they must make sense when read as part of the contract as a whole, and all key terms need to be defined to avoid uncertainty.

This article was written by Emma Baker, Senior Associate.


Insurer must cover burnt out brothel with Comancheros affiliations

The insured company operated a brothel from premises located in the ACT. The premises were insured against property damage and liability pursuant to the ‘Adult Industry Insurance Policy’ issued by Calliden. On 1 January 2012, the brothel was extensively damaged by fire. The insured made a claim for damage to contents and for business interruption with Calliden.

At first instance

Calliden denied the insured’s claim on the basis that, at the time the policy was renewed, it failed to comply with its duty to disclose pursuant to section 21 of the Insurance Contracts Act (Act). Calliden’s denial was based on the fact that the insured failed to disclose that its director and brothel manager were both members of the Commancheros, an outlaw motorcycle gang (OMCG) and that it failed to disclose that the brothel’s registration had lapsed. Justice Schmidt found that the insured had failed to comply with its duty of disclosure in relation to the above matters and that, had they been disclosed, Calliden would not have renewed the policy and been at risk at the time of the fire. Accordingly, Her Honour held that Calliden was entitled to have its liability reduced to nil pursuant to section 28 of the Act.

Court of Appeal

The insured appealed to the NSW Court of Appeal which allowed the appeal and ordered Calliden to pay the insured $500,000 on the claim plus interest and costs.

Under section 21 of the Act, Calliden needed to prove that a reasonable person in the position of the insured company would have known that the insured’s association with the Comancheros was relevant to Calliden’s decision to accept the risk. The Court noted that the test is not satisfied if a reasonable person could be expected merely to have suspected that the information might be relevant to the insurer’s decision.

The Court also noted that a reasonable person in the insured’s position would have known that Calliden had a specialised scheme for adult industry risks and that Calliden understood the use of the premises as a brothel would increase the risk of property damage and liability claims given the participation by people of ‘dubious repute’ in that industry.

The Court unanimously found that a reasonable person (with this insight into Calliden’s risk appetite) could not be expected to know that the insured’s association with the Comancheros was a matter relevant to Calliden’s decision whether to renew the policy. The Court was also not satisfied that Calliden, had it been made aware of the insured’s ‘dubious’ associations, would have declined to renew the insured’s policy.

In relation to the registration not being current it was held that, had that information been disclosed (as it ought to have been), the insured would have taken simple steps to have the brothel registered (by paying $160 and filling in a form). In those circumstances, it is likely that Calliden would still have been on risk on the date of the fire.

Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Ltd [2017] NSWCA 17

This decision confirms that the bar is set high for insurers alleging non-disclosure under section 21 and invoking remedies under section 28 of the Act. However, outlaw bikies ought not to take too much comfort from this decision. It can be inferred from this judgment that an insured would ordinarily be obliged to disclose a close association with an OMCG when seeking cover for a mainstream commercial enterprise. The reasonable person test was resolved in the insured’s favour on this occasion mainly because Calliden was well aware of the heightened risks and dubious characters associated with brothels and because it failed to ask any specific questions about OMCG associations.

This article was written by Terri Hirbod-Bassi, Senior Associate.


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