In Issue

  • Whether a ‘hail limit’ of $14.4M contained in a master policy applied to the local policy
  • The effect of Mobis’ acceptance of XL’s early offer to pay $14.4M under the Policy pursuant to the asserted hail limit
  • Application of the faulty design exclusion
  • Existence of betterment

The Background

On 25 April 2015, a severe storm in Sydney caused a warehouse owned by the plaintiff, Mobis Parts Australia Pty Ltd (Mobis), to collapse. Mobis is a wholly owned Australian subsidiary of Hyundai Mobis, a company incorporated in Korea. The warehouse was used to store and distribute spare parts for Hyundai and Kia motor vehicles.

Mobis sought indemnity in respect of the loss (amounting to $62M) that it claimed to have suffered by reason of the collapse under a property damage and business interruption policy (the Local policy) issued by XL as part of an international property damage and business interruption program. Under that program, XL issued a property damage and business interruption policy (the Master policy) in the name of another wholly owned subsidiary of Mobis Korea.

Mobis’s primary claim was against XL under the Local policy and in the alternative under the Master policy if the Local policy did not respond.

The Local policy had a ‘storm’ limit of $72.105M (EUR 50M) but (unlike the Master policy) no stated limit for hail damage. XL argued there should be a corresponding limit for hail damage in the Local Policy (for consistency with the Master policy) and that its omission was an oversight that warranted rectification of the Local policy.

XL initially accepted liability for the loss, subject to the asserted hail limit of $14.4M (EUR 10M) and the Local policy terms. XL also contended (on the basis of expert structural engineering evidence obtained after the grant of indemnity) that a faulty design exclusion precluded cover for the warehouse loss.

The Decision at Trial

Stevenson J found that Mobis was entitled to indemnity under the Local policy up to the storm limit (subject to certain issues relating to quantum). Hail (which by definition is usually accompanied by rain) was determined to be the proximate cause of the warehouse collapse. However, the Local policy (as a matter of construction and based upon limited underwriting evidence), did not import the hail limit in the Master policy (and there was no evidence of a mistake warranting rectification). The absence of any evidence from the XL underwriter responsible for drafting the Local policy wording was telling in this regard.

The court also held that XL’s initial grant of indemnity contained an admission by XL but did not evidence a contract. Both parties had accepted Mobis reserved its rights to contend the hail limit did not apply. Accordingly, there was no ‘settlement contract’ and XL was able to rely on the faulty design exclusion (to the extent it could prove the exclusion applied). However, this exclusion had no application as the design of the warehouse complied with relevant standards.

Mobis’ entitlement to indemnity under the Local policy meant that the question of whether Mobis was entitled to indemnity under the Master policy did not arise

As to quantum, the court affirmed that an insurer has the onus of showing there has been betterment. However, once that is shown, the insured must prove what deduction should be made for betterment. The court held that it was entitled to reject Mobis’ building case in its entirety on the basis it had not proved the relevant damage. However, submissions were invited from the parties as to an alternative course.

Implications for you

Draft grant of indemnity letters carefully, as a legally binding contract can arise which might prevent an insurer from relying on relevant limits or exclusions at a later time. Underwriting evidence can be crucial to policy disputes. It is therefore important to have (and adhere to) clear underwriting guidelines and maintain detailed contemporaneous records of policy inception. Finally an insured must be able to prove its damage, including any allowance for betterment.

Mobis Parts Australia Pty Ltd v XL Insurance Co SE (No 7) [2017] NSWSC 1321