Boat insurance claim sinks
In this matter, the applicant, Mr Brendan Sheehan, brought a claim for indemnity against the respondent, Lloyds Names Munich Re Syndicate Ltd (Lloyds), for loss and damage suffered to the starboard engine of his boat. Mr Sheehan contended the damage to the engine was within cover under the policy for accidental loss or damage. Lloyds contended that the damage could not be considered accidental as defined in the policy, or alternatively, that the damage was excluded.
The insured vessel was a 2009 Sunseeker Manhattan driven by a port and starboard engine. It was equipped with a monitoring and diagnostics system with a separate LCD display for each engine. Above the LCD displays were five analogue gauges which, among other things, gave oil pressure readings for each engine.
The system included a wide range of engine alarms, including an alarm concerning engine oil pressure. An alarm event would trigger both a very loud audible alarm and a visual on screen alarm. When the alarms were activated the LCD screens switched to an alarm screen which could not be overridden.
The vessel was equipped with a “limp mode” whereby the engine speed would automatically be reduced and restricted from the normal operating speed of 2250 rpm to 1500 rpm. This mode activated in certain circumstances, one of them being when a critical alarm was activated, such as low oil pressure.
When Mr Sheehan purchased the vessel he had been provided with a manual which included operating instructions and a description of the alarm features. Relevantly, the manual outlined that the engines should never be operated without oil and that if the oil pressure alarm was activated the engines should be shut off immediately.
Loss and damage
On 17 September 2015, Mr Sheehan left the marina at Hillarys Yacht Club, Western Australia. The vessel had been serviced either that day or the previous day. Mr Sheehan left the marina and once outside the marina heads increased his engine speed to 2300 rpm. Within approximately five minutes the alarm activated and the speed on both engines slowed to 1500 rpm. Mr Sheehan turned the vessel around and headed back towards the marina. Part of the way back to the marina the starboard engine shut down. Mr Sheehan continued back to the marina on one engine. When he arrived at the marina he looked into the engine room and saw the starboard engine covered in oil.
Mr Sheehan gave evidence that he had not read the operating manual and was not aware it existed. However, he was aware the vessel was fitted with a “limp mode” as he had been informed of as much by the sales representative.
Despite diagnostic tests indicating that the engine oil alarm had activated, and despite the operating manual stating the LCD screens would display a low engine oil warning, Mr Sheehan asserted that the screens did not display such a warning. Rather, he claimed that when the alarm activated the LCD screens read “limp mode” or “safe home mode”. There was nothing in the manual to indicate this warning could be displayed on the LCD screens, nor was this warning able to be replicated on the screens.
Mr Sheehan agreed he could have looked at the analogue gauges to see that the oil pressure was low, but stated he had not done so. Mr Sheehan also believed he could safely continue to operate the vessel in “limp mode”. Mr Sheehan stated that if he had known the oil pressure was low he would have stopped operating the vessel immediately.
The Court found Mr Sheehan to be a truthful witness. The Court was satisfied that Mr Sheehan did not continue to operate the engine with awareness that the oil pressure was low and that he did not know the continued operation of the starboard engine in limp mode would result in significant damage to that engine.
Expert referee report
The Court referred a number of technical issues to an expert who found that the damage to the starboard engine occurred as a result of its continued operation after the loss of oil pressure, which led to overheating and seizure. If the engine had been turned off immediately when the alarm sounded, the damage would not have occurred. Damage began to occur 10 to 15 seconds after the alarm sounded. The expert found that the loss of oil pressure was due to the oil cooler gasket, which failed, and the gasket could be considered to have failed as a result of faulty design or inherent defect.
The policy provided cover for accidental loss or damage to the vessel and its contents. Accident was defined as damage “that you did not expect or intend to happen”. In deciding whether the damage was accidental the Court concluded that the damage must be both unintended and unexpected. If a reasonable person, with the knowledge and experience of the insured, would not have expected damage to have occurred then it could be said to be accidental. Alternatively, where an insured was aware of the risk of damage but deliberately choose to take that risk it could not be said that damage which eventuated was accidental.
Since the Court had accepted Mr Sheehan’s evidence that he was unaware that the alarm related to low oil pressure, or that the continued operation of the vessel in limp mode would cause significant damage, the Court was satisfied that the damage was both unintended and unexpected, and therefore accidental within the meaning of the policy.
Having found that the damage was accidental as defined by the policy, the Court turned to the relevant exclusions. Lloyds relied on exclusions for deliberate action by an insured, faulty design, inherent defect, structural breakdown, and motor seizure and overheating.
In deciding whether or not an exclusion applied, the Court first had to determine the proximate cause of the damage. If there was a single proximate cause, which was excluded, then there would be no cover under the policy. If there were multiple proximate causes, one an insured event and one not, then the insured would be covered. If there were two concurrent and interdependent proximate causes, one covered and one excluded, then the claim would be excluded consistent with the Wayne Tank principle.
The Court found that there was a single dominant and effective cause of the damage to the vessel, which could be said to be the most efficient cause and therefore the proximate cause. This was the faulty gasket which allowed the engine to lose oil pressure and sustain damage within 10 to 15 seconds of the alarm going off. The Court found that the rapidity and significance of the gasket failure meant that it was the sole proximate cause of the damage to the vessel, despite Mr Sheehan’s continued operation of the vessel after the alarm had sounded.
In the circumstances, the Court found that the exclusion for faulty design operated and that Mr Sheehan was excluded from recovering from Lloyds.
The Court did not make any findings in regard to the other exclusions relied on by Lloyds.
This matter confirms that when determining whether damage is accidental, it must be both unintended and unexpected on the part of the insured. Further, in deciding whether an exclusion applies, the proximate cause (being the most efficient cause) must first be determined. If the proximate cause is excluded, there will be no cover under the policy. If there are multiple causes, and one is an insured event and one is not, the claim will be covered. If there are concurrent and interdependent causes, and one is covered and one is not, then there will be no cover under the policy in accordance with the Wayne Tank principle.
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