Matton Developments Pty Ltd v CGU Insurance Limited (No 2) considered whether taking a known and appreciable risk amounted to 'accidental damage' under a Contractors Plant and Machinery policy of insurance.
The decision demonstrates the importance of forensic and eyewitness evidence in challenges to an insurer's decision to refuse cover. In this case, the evidence allowed the insurer to successfully defend proceedings alleging not only wrongful declinature, but also allegations that it had breached its duty of utmost good faith.
The decision is one of the first reported cases to consider the 2013 amendments to the Insurance Contracts Act 1984 (Cth).
In Matton Developments Pty Ltd v CGU Insurance Limited (No 2)1, CGU Insurance Limited (CGU) successfully defended proceedings brought by Matton Developments Pty Ltd (Matton) in response to CGU's decision to decline indemnity under a Contractors Plant and Machinery policy. The cause of the damage to a large Telescopic Crawler Crane (Crane) was in dispute, in particular, whether the damage was "accidental, sudden and unforeseen".
Matton submitted a claim to CGU seeking indemnity for damage to the Crane in February 2009 when its boom collapsed while lifting concrete slabs. Matton alleged that the cause of the collapse was a pre-existing defect in the base of the boom and, as such, the claim was either covered by the ‘Material Damage’ section of the policy, or the ‘Accidental Overload’ clause in the Additional Benefits section.
Matton's expert engineering evidence was that the Crane collapsed due to pre-existing structural damage in the welds at the base of the boom.
CGU's expert engineering evidence2 was that the Crane was being operated on a slope in contravention of Australian Standards and manufacturer’s guidelines and so the damage was not ‘accidental, sudden and unforeseen’ (within the meaning of the policy).
CGU also relied on exclusions in the policy, which excluded cover where the Crane was not operated in the manner for which it was designed and/or in accordance with the manufacturer’s guidelines.
Cause of collapse
The Court accepted the unanimous opinion of CGU’s experts that the collapse occurred due to structural overload as opposed to any material defect. This was considered the most logical explanation particularly in light of photographs taken after the incident which suggested that the Crane had been operated on a slope.
The ‘Material Damage’ section of the policy covered Matton for accidental, sudden and unforeseen damage to the Crane while it was located, and in use, in the manner in which it was designed to be used.
The Court considered it significant that the operator was aware that operating the Crane on a slope would create a real risk of the boom collapsing, and that he proceeded despite this knowledge. The Court held that ‘accident’ meant ‘unintended and unexpected’ and found that Matton had failed to establish that the collapse of the boom fell within that description because the Crane was being operated on a slope which was a known overload risk.
The policy's Additional Benefit section included damage caused by ‘Accidental Overload’. Matton submitted that the term ‘overload’ in the policy extended to a situation where the Crane was overloaded due to it being operated on a slope.
The Court rejected this submission, and concluded that the ‘Accidental Overload’ cover responded to accidental ‘physical’ overloading of the Crane in circumstances where it had otherwise been operated in the manner for which it was designed. As the Crane was operated in contravention of manufacturer’s guidelines, this additional cover did not respond.
Duty of utmost good faith
Matton relied on the duty of utmost good faith implied by section 13 of the Insurance Contracts Act 1984 (Cth) (Act) into contracts of insurance. It argued that CGU's failure to indemnify amounted to a breach of this implied term and, as such, CGU was liable for damages for all causally connected loss, including default interest on the finance of the Crane. It also argued that section 13 gave rise to a statutory duty, the breach of which also gave rise to an entitlement to damages.
The Court undertook a detailed examination of the authorities on section 13 and confirmed that it was enacted to clarify that the duty of utmost good faith applied to both the insured and insurer and that it provided a basis for either party to seek contractual damages for its breach.
It also considered the recent amendments to the Act, which deem a breach of the duty of utmost good faith to be a breach of the Act.3 It ruled that those amendments only give rise to regulatory sanctions by ASIC.
In the circumstances, the Court held that section 13 does not support the existence of a concurrent liability in tort, either by way of breach of a statutory duty or a tort of bad faith.
Matton also submitted that CGU had breached its duty of utmost good faith by relying on conclusions drawn by its own experts, rather than giving due consideration to the insured's witnesses who gave evidence that the Crane was being operated on level ground prior to collapse.
The Court accepted that CGU's decision to decline the claim was made after careful consideration of the available evidence, including the lay evidence. It held that an insurer was not obliged to accept the statement of the operator or even an insured, since they may be honestly mistaken. Based on this, the Court concluded that the refusal of cover by CGU did not constitute any breach of its duty of utmost good faith.
This decision confirms that damage which occurs as a result of a known risk is, depending on the terms of the relevant policy, unlikely to be regarded as accidental damage. It also demonstrates the importance of evidence, including expert, photographic and eye-witness evidence, when making a decision to refuse cover under a policy.
The decision is also useful for its comprehensive review of the Australian law relating to the duty of utmost good faith. It is one of the first decisions to consider the impact of the amendments to the Act made by the Insurance Contracts Amendment Act 2013(Cth). Since the amendments relating to the duty of utmost good faith only apply to contracts of insurance entered into or renewed after 28 June 2013, they were not strictly relevant to this dispute and so the Court's pronouncements on their relevance are strictly non-binding. Nevertheless, they do provide useful guidance on how a court may interpret their impact on any alleged breaches of duty under policies to which they do apply.