Rain, hail or shine: Is cover available to the insured?
- Published 17.10.2017
Mobis Parts Australia Pty Ltd v XL Insurance Company SE (No 7)  NSWSC 1321
The New South Wales Supreme Court recently considered whether insurance policy exclusions for hail damage and faulty design operated to limit a claim for storm damage to a warehouse. The Court clarified the common sense approach that should be taken in proximate cause cases. The case also provides an example of a property damage exclusion not extending to exclude business interruption and other subsequent losses.
Mobis Parts Australia (‘Mobis’) stored car parts intended for sale in its Sydney warehouse. On 25 April 2015, the warehouse collapsed during heavy rain, wind and hail.
Mobis held a Property Damage and Business Interruption Policy with XL Insurance Company SE (XL), known as the “Local Policy”. It was part of an International Property Damage and Business Interruption Program known as the “Master Policy”.
Mobis sought indemnity under the Local Policy for the damage caused to the warehouse and its stock held there as a result of the collapse. While XL accepted that indemnity was available under the Local Policy, it contended that various sub-limits applied. Mobis commenced the proceedings against XL in the Supreme Court.
An eye witness video recorded hail falling upon the warehouse and provided detailed evidence of the events, including the collapse of the warehouse itself. Using that evidence and meteorological data, experts were able to establish a timeline of events but the difficulty lay in determining whether the proximate cause of the collapse was rain, hail or both.
XL argued that the damage was caused by hail, rather than a storm, in seeking to rely on a hail damage sub-limit.
In dealing with the issue of proximate cause, Stevenson J had regard to the authorities requiring the Court to consider the ‘reality, predominance and efficiency of a cause rather than proximity in time’. His Honour also determined the matter by reference to the ‘understanding of the man in the street, and not as either the scientist or the metaphysician, would understand it.’
While there were various expert opinions, the evidence demonstrated that the warehouse had previously withstood higher levels of rain in the past. The difference was that, on the day of the collapse, hail weighed down the roof and caused areas of “deflection” that allowed rain to pool and created an additional weight on the roof. These combined weights caused the collapse.
As the rain alone would not have caused the collapse, and it occurred very shortly after the hail started, his Honour held that the man or woman in the street would conclude that, in reality, the hail caused the collapse.
Faulty Design Exclusion
XL also relied on a faulty design exclusion for property damage or business interruption.
Stevenson J interpreted the wording as meaning that property damage was excluded if the faulty design was in the property (being the warehouse) itself, as opposed to a faulty design by the insured. His Honour determined that the warehouse was built to the relevant Building Code of Australia and relevant Australian Standards before concluding that XL had failed to prove that the faulty design exclusion applied.
His Honour also observed that the wording of the exclusion when applied to business interruption alone was ‘awkward’ because it excluded cover for “business interruption…caused by or consisting of its own faulty or defective design.” The view he arrived at was that if the exclusion applied, only damage to the warehouse itself would be excluded; business interruption cover would still have been available because the wording could not logically operate to exclude it.
This decision concerned a number of aspects of policy interpretation. It illustrates that the test for proximate cause is the most likely or most ‘efficient’ cause as opposed to the ‘nearest’ in time. It also demonstrates the application of the objective measure of the reasonable person i.e. ‘the man or woman in the street’ in the context of technical arguments derived from expert evidence adduced to determine what the causes were and whether cover is excluded.
The case also demonstrates the literal approach a court will adopt when examining the application of an exclusion clause. It is a reminder that even though an exclusion might be applied to exclude cover for property damage, it will not necessarily exclude business interruption cover or subsequent losses.
Care should be taken to ensure that exclusions are drafted so as to have the desired effect in respect of different areas of cover both generally and specifically.
Who does this decision affect?
Claims teams, loss adjusters and underwriters.