A common condition in insurance policies requires the insured to take all reasonable precautions to prevent risks from coming to fruition. The recent Western Australian District Court decision of Canny v Primepower Engineering Pty Ltd [2015] WADC 81 demonstrates an example of an insurer successfully relying upon a reasonable precautions condition in a policy to deny a claim for indemnity.

In this case, Mitchell Canny, an electrical apprentice employed by Primepower, suffered severe burns when a fireball engulfed an engine at Primepower’s place of business. At the time of the accident, Primepower employees were attending a social function at the premises and at least some of them were consuming alcohol. Mr Canny, some of his colleagues and at least one member of the public were attempting to seize an unused engine by getting it to run faster than intended. Some of Primepower’s supervisors provided advice on how to seize the engine. Primepower’s managing director also permitted the activity to take place. At the precise moment the accident occurred, Mr Canny was decanting petrol from one container to another while one of his colleagues was spraying a flammable liquid and attempting to start the engine.

Her Honour Judge Stewart found that Primepower breached the duty of care it owed to Mr Canny in its capacity as his employer by failing to provide a safe place of work and by failing to provide a safe system of work. However, Judge Stewart also found that Mr Canny’s conduct contributed to his injuries and assessed his degree of contributory negligence at 15 percent, on the basis that while Mr Canny was not responsible for providing a safe place of work, and he did not institute the system of work adopted on the day of the accident, his actions in decanting petrol while his colleague sprayed flammable liquid nearby was not the conduct of a prudent and reasonable man.

At the time of the accident, Primepower held an employers’ indemnity policy with Allianz Australia Insurance Ltd.  Primepower joined Allianz as a third party to the proceedings and sought an indemnity in relation to any liability it had against Mr Canny. Allianz argued that Primepower’s reckless disregard for the safety of its employees (including Mr Canny) amounted to a breach of a reasonable precaution provision in the policy. The specific provision stated:

[Primepower] must take all reasonable precautions to prevent injury to Workers and must comply with all relevant laws, including the Occupational Safety and Health Act 1984 as amended and replaced and Regulations.

In assessing the application of the provision, Her Honour adopted three principles set out in Brescia Furniture Pty Ltd v QBE Insurance Australia) Ltd [2007] NSWCA 598, those being:

  1. Where the onus lies depends on the proper construction of the provisions of the policy.
  2. The appropriate test of reasonableness is a test of whether the insured perceived and deliberately courted the risk.
  3. In order to attribute a state of mind to a company, the collective states of mind of officers of the company relevantly connected with it are treated as being the state of mind of the company.

In relation to principle 1, Judge Stewart held that the onus rested on Primepower, because the relevant condition was a condition precedent to the indemnity under the policy. It was not in issue that the knowledge to be examined was the knowledge of Primepower’s managing director and that the condition would not be breached simply by a finding of negligence on behalf of Primepower.

When applying the test of courting the risk, Her Honour considered a number of authorities and ultimately held that Primepower courted the risk (and also breached the Occupational Safety and Health Act 1984). She reached this conclusion because Primepower’s managing director took no steps to protect Primepower’s employees who were working on the engine, his actions were not inadvertent, he deliberately allowed the consumption of alcohol by apprentices over a long period of time with no limits, he gave no instructions to the employees not to work on the engine if they consumed alcohol, and that his conduct was serious and more than negligence. As a result, Primepower did not comply with the reasonable precautions clause of the policy and Allianz’s denial of indemnity was appropriate.

This case highlights the importance of reasonable precaution conditions in insurance policies and provides a reminder to insurers as to when they can rely on these conditions to deny indemnity to unreasonable insureds. From an insured’s perspective, this case represents a textbook example of what not to do and the significant consequences of breaching a reasonable precautions condition.