Abstract

Rectification -  Clarity of Proof

Mster Policy - Local Policy - Specific charistics difficult to generalise

Informal Contract - Whether parties intend to be Bound

Construction - Actual intention of parties

Loss of property - Possibility of recovery

Insurance Contracts Act - S 54 - Inherent limitation in claim

Value of property lost - Proof

Average - Designation of property for purpose of

Replacement clause - Property not replaced

Business Interruption cover - Depreciation

Costs - Sanderson Order

Interest - reasonable period for investigation

Article

Rectification

A policy should not be rectified if the evidence does not established in the clearest and most satisfactory manner either (a) that the parties had a common intention, at the relevant time that the policy would contain the disputed feature, or (b) that its omission was the result of an operative mistake on the part of the party seking rectification.

Rectification turns on proof both that the policy did not conform to the true agreement that it was intended to record by the presence of a defect, and that this was attributable to a common mistake rather than any deliberate choice. Each element must be proved to displace the inference from the execution of the written instrument, namely, that it is the true agreement of the parties: Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336 at 351 in the clearest and most satisfactory manner: Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85. Further, if each prior policy also bore the defect, the applicant for rectification must also displace the inference from each renewal by proving both elements in relation to each earlier policy.

This generally requires identification of some outward manifestation of each party’s actual intention in its words or conduct: Simic, citing Bush v National Australia Bank Ltd (1992) 35 NSWLR 390 at 405–406. Objective considerations of commonality or coincidence of the intentions or awareness, actual or constructive, of all parties may also arise

If a defective policy failed to adhere to a prior informal agreement because of a mistake in its issue, the mutual mistake would refer to the terms of the previous contract. The insurer’s mistake would have consisted of issuing a policy that was relevantly defective, and the insured’s mistake was in accepting the policy as issued without appreciating that it failed by reason of that omission to comply with the informal agreement. See Australian Gypsym Ltd & Australian Plaster Co Ltd v Hume Steel Ltd [1930] HCA 38; Slee v Warke (1949) 86 CLR 271 at 280; Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2018] NSWCA 342

Master Policies

 

The variety amongst international insurance programmes makes it difficult to attribute any specific characteristics to a “local policy” as compared with a “master policy”: Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2018] NSWCA 342, citing Derrington and Ashton, The Law of Liability Insurance, 3rd edn para 11-475.

 

Whether Parties are Bound when a Formal Contract is Contemplated

If the parties have reached informal accord, and agree to have it recorded formally there may be an issue whether they are bound by the preliminary accord. Depending upon the circumstances there are three possible conclusions. The first is that they have already reached finality and intend to be immediately bound but propose to have the terms more fully and precisely restated formally. Secondly, they may have agreed on all terms but intend that although there should be no variation, their performance is conditional upon the execution of a formal document. Thirdly, they may intend that there should be no concluded bargain unless and until there is a formal contract: Masters v Cameron (1954) 91 CLR 353, 360; John Kaldor Fabricmaker v Mitchell Cotts Freight (Aust) (1990) 6 ANZIC 60.960; Bawitco Invest v Kernels Popcorn (1991) 79 DLR 97; SR Intern’l Business Insce Co v World Trade Center Props 2003 US Dist LEXIS 1103. A fourth class has been  identified - that the remaining terms of the policy would be determined by some negotiation: Baulkham Hills Private Hosp v GR Sec (1986) 40 NSWLR 622 at 628; Mobis Parts Aust v XL Insce Co [2018] NSWCA 342; but tested objectively, in the case of a contract of insurance it may be equally open that the insurer has undertaken to issue, and the insured has undertaken to accept, a policy in accordance with the terms of an existing informal one: Aust Provincial Assce Assn v Producers and Citizens Co-op Assce Co of Aust (1933) 48 CLR 341; Southern Cross Assce Co v Aust Provincial Assce (1939) 39 SR (NSW) 174; Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2018] NSWCA 342.

 

Construction

If the parties’ actual common intention did not differ from that which a reasonable person would infer from their words and conduct, their meaning is to be read objectively: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, and the actual intentions of the parties are not significant to common intention, though they remain relevant to mutual mistake: Mobis Parts Aust v XL Insce Co [2018] NSWCA 342.

Loss

 

An argument that undamaged insured stock was physically lost upon the happening of the risk because, from that point, it was trapped and whether any of it would be recovered was uncertain because of the existence of various risks will depend on the degree of unlikelihood of recovery: Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2018] NSWCA 342. Of course, the insured risk must have been the proximate cause of the loss: Leyland Shipping Company Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350 at 363–364.

For Marine insurance, Section 60 of the Marine Insurance Act 1906 (UK) and the Marine Insurance Act 1909 (Cth) set the standard at the unlikelihood of recovery: Gibbs v Mercantile Mutual Insurance (Australia) Ltd (2003) 214 CLR 604, though there is nothing in the Act to show what degree of unlikelihood is required. But this does not generally apply to non-marine insurance: Moore v Evans [1918] AC 185, which does not in general constitute an insurance upon an adventure but upon property: Euro-Diam Ltd v Bathurst [1990] 1 QB 1 at 13, though the parties may introduce marine insurance principles into a non-marine policy by express provision. Otherwise, because of the difference in purpose and background of different forms of insurance, discrimination and care should be taken if the decision is made to apply the principles developed in one area in another; cf Great China Metal Industries Co Ltd v Malaysian International Shipping Corporation Berhad (1998) 196 CLR 161. Further, statute has made special provision for marine insurance in the Marine Insurance Act 1909 (Cth) and, on the recommendation of Australian Law Reform Commission, exclusively for non-marine insurance in the Insurance Contracts Act 1984 (Cth).

The first and natural meaning of ‘loss’ in a non-marine policy is being deprived of the object, but it is not every kind of deprivation. Mere temporary deprivation would not ordinarily be enough. Conversely, a certainty of non-recovery is not necessary. It is between these two extremes that the difficulties lie, and no assistance can be derived from putting cases which are clearly on the one side or the other of the dividing line between the two: Moore v Evans [1917] 1 KB 458 at 471. Suggestions that the test was uncertainty were made in Kuwait Airways Corporation and the Minister of Finance for the State of Kuwait v Kuwait Insurance Co [1996] 1 Lloyds Rep 664; Holmes v Payne [1930] 2 KB 301. (See also Webster v General Accident Fire & Life Assurance Corporation Ltd [1953] 1 QB 520; Re Mining Technologies Australia Pty Ltd (1999) 1 Qd R 60; McConnell Dowell Middle East LLC v Royal & Sun Alliance Insurance PLC [2008] VSC 501.) But in Kuwait and Holmes v Payne it was unnecessary to the decision and does not accord with the general principles stated by the Court of Appeal and House of Lords in Moore v Evans. And neither suggested that proof that the property was not absolutely certain was sufficient. Consequently. the insured must prove that the deprivation will probably be of sufficient permanence. See the history and analysis of this issue in Mobis Parts Aust v XL Insce Co [2018] NSWCA 342. are free to introduce marine insurance principles by express provision

 

Even if the standard of uncertainty as to a future happening were adopted, that it is different from unlikelihood. In uncertainty the balance of chance is even, an equal probability of recovery and non-recovery: in unlikelihood, the balance is against the chance: Rickards v Forestal Land, Timber and Railways Co [1942] AC 50 at 87.

This directs attention to two questions: the degree of permanence required of the deprivation, a question of construction, and the degree of confidence that such permanence has occurred, a matter of proof, as to which the burden of proof on the balance of probabilities is upon the insured.

Then, if some of the insured property may well be recovered, proof is necessary as to the amount which would, to the required degree, be lost. The actual or likely recovery of some undamaged property would defeat a claim that all of it had been lost at the time of the catastrophe: Re Mining Technologies Australia Pty Ltd [1999] 1 Qd R 60. This accords with the wait and see approach applied to loss by deprivation, particularly hijacking: Kuwait Airways Corporation at 688–689; Scott v Copenhagen Reinsurance Co (UK) Ltd [2003] 2 All ER 190 at [49], [76], [77], that is, the use inference from subsequent events to indicate the deprivation’s likely permanence at that earlier time. Cf Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28 at [169]; R v Biber [2018] NSWCCA 271 at [27]–[28].

Section 54 of the Insurance Contracts Act 1984

The section has no application to a restrictive provision upon which the insurer does not rely. If it does so there may be an issue whether compliance with it was a restriction or limitation inherent in the claim, such that it would not relieve the insured from compliance with it: FAI General Insurance Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641 at 659 [41]–[42], Maxwell v Highway Hauliers Pty Ltd (2014) 252 CLR 590 at [23]. This would have required consideration of the general insuring clause and specific provisions as to cover in a search for the essential character of the policy: Watkins Syndicate 0456 at Lloyds v Pantaenius Australia Pty Ltd (2016) 244 FCR 5 at [40]; Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2018] NSWCA 342.

Proof of Value of Property Lost

An insured may recover indemnity for a minimum amount of the value of lost insured property, provided that it is established on a balance of probabilities: Equitas Ltd v R&Q Reinsurance Co (UK) Ltd [2009] EWHC 2787 (Comm); [2010] Lloyds Rep IR 600. Subject to the policy’s language, there may be no basis for any allowance treating stock in wet or damaged packaging as undamaged, saleable and of some value: Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2018] NSWCA 342.

Designation of Property for the Purpose of Average

If the policy contains a provision that for the purpose of determining the heading under which any property is insured, the Company agrees to accept the reasonable designation under which such property has been entered in the Insured's records, it does not apply to a designation made in records for other purposes if the sum insured was not derived from them or calculated by reference to any of the categories adopted: Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2018] NSWCA 342.

 

Effect of Replacement clause - Property Not Replaced

If the insurer agrees to indemnity the insured by either payment or, at its option, by replacement or repair (both based on the cost of reinstatement) up to the limit of liability, this entitles the insured to indemnity for the estimated cost, notwithstanding that it does not propose to replace or reinstate the relevant property: CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 398. Similarly, if it agrees that the amount of indemnity is the cost of replacement of lost, destroyed or damaged stock by similar property as new, this describes a measure of loss or value rather than a requirement for recovery of the indemnity, so that replacement is not necessary to entitlement: Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2018] NSWCA 342.

This is an example of departure from the indemnity principle and defeats any argument that the property, being obsolete, had no value to the insured, or that its replacement would have been unreasonable, or that the cost of replacement would exceed the “actual loss.

Business Interruption Policy - Assessment of Loss of Profit - Depreciation

The formua provided for the assessment of the loss of gross profit may depend on the reduction in turnover, according to a different formula, the recoverable increase in cost of working, and any sum saved during the indemnity period in consequence of the damage in respect of such of the charges and expenses of the business payable out of gross profit, which directs attention to any sum saved  in respect of each of those amounts during the indemnity period in consequence of the damage. The expression, ‘payable out of gross ‘profit’ excludes charges and expenses used to calculate gross profit, since they are direct costs attributable to the production and sale of stock, and of charges and expenses which are not liable to be paid, such as depreciation.

As part of a commercial contract of insurance, notorious uncontroversial accounting facts as to the significance of depreciation as stated in Australian Accounting Standards 4 and 116, made under Corporations Act 2001 (Cth), s 334(1) may be judicially noticed: Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2018] NSWCA 342; JD Heydon, Cross on Evidence, (11th ed 2017, LexisNexis Butterworths) at [3020]; Massey Motor Inc v United States [1960] USSC 123; 364 US 92 at 96–97 (1960). Each is primarily directed to the ultimate question of characterisation, which is irrelevant.

As to whether a reduction in depreciation represents a potential saving under a Business Interruption policy, the Court must give a businesslike interpretation to the language used by the parties in light of the commercial circumstances which the document addresses and the objects which it is intended to secure. As the general object of a policy of this nature is to indemnify the insured against loss of its gross profit, the need for correct indemnification may colour the meaning of its language: Castellain v Preston (1883) 11 QBD 380.

 

If the promised indemnity is not against actual loss but is to be assessed according to a formula for the assessment of the insured loss, this qualifies and may depart from the principle of perfect indemnity in some circumstances: Coalex Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1988) 5 ANZ Ins Cas 60-858;British Traders’ Insurance Co Ltd v Monson (1964) 111 CLR 86 (a valued policy). The object of such a formula is to prevent lengthy disputes by an agreed method of ascertaining the loss. Sometimes it favours the insurer and sometimes the insured: Henry Booth & Sons v The Commercial Union Assurance Co Ltd (1923) 14 Lloyds LR 114. In Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2018] NSWCA 342, Synergy Health (UK) Ltd v CGU Insurance Plc (t/as Norwich Union) [2010] EWHC 2583 (Comm); [2011] Lloyds Rep IR 500 was not followed on the ground that it gave too much weight to the indemnity principle against the policy’s language in reducing the indemnity by deduction of the insured’s saving in depreciation. It was found that a reasonable businessperson would understand the language describing the method for ascertaining the loss as coloured by its immediate and commercial context so as to lead to the conclusion that the saving in depreciation should not affect the calculation of the loss as specified: see Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104.

 

That in the formulas for the assessment of indemnity an adjustment for depreciation of some assets is used for one purpose does not imply that the depreciation of other assets should be sused for a different purpose where an omission of any express reference to depreciation may be seen to have been deliberate: PMT Partners Pty Ltd (in liq) v Australian National Parks & Wildlife Service  (1995) 184 CLR 301

 

Costs – Sanderson Order

A Sanderson order (Sanderson v Blyth Theatre Co [1903] 2 KB 533) that a party pay directly the costs of another party to the litigation of defending the claim may be made under the Civil Procedure Act. For the principles, see Lackersteen v Jones (No 2) [1988] NTSC 72; (1988) 93 FLR 442; Stevedoring Industry Finance Committee v Gibson [2000] NSWCA 179; ACQ v Cook (No 2) [2008] NSWCA 306. For their application, see Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2018] NSWCA 342.

Interest

Section 57 of the Insurance Contracts Act provides that the insurer is liable to pay interest on any amount payable under the insurance for a period commencing on the day as from which it was unreasonable for the insurer to have withheld payment of the amount. That provision is exclusive of any other law that would otherwise apply. A reasonable period is to be given to the insurer to investigate and determine its position but the existence of a bona fide dispute as to the entitlement of the insured is not necessarily an answer to the complaint that the insurer has been acting unreasonably in withholding payment: Bankstown Football Club v CIC Insurance Ltd (1997) 187 CLR 384 at 410. It may require separate consideration of the circumstances in which the insurer sought and the insured provided information in relation to each of separate components of the total claim although they involved common as well as separate considerations. Although information may have been sought and provided more quickly than in fact occurred, it must be shown rather than speculated that this would have occurred, let alone in a six month period asserted to be reasonable for the insurer to determine its position. A “more reliable guide as to the timeframe in which information was reasonably sought and provided may be that generated by the conduct of the litigation: Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2018] NSWCA 342.