In a case concerning destruction of organic material by fire, insurers successfully defended proceedings for alleged wrongful declinature based on Perils Exclusion 6(c)(i) and/or 6(c)(ii) of an ISR Mark IV Policy.
This article details the case and outlines the key implications for insurers.
Dalby loses material to fire
Dalby Bio-Refinery Ltd (Dalby) was the insured under an ISR Mark IV Policy issued by Allianz Australia Insurance Limited, Ace Insurance Limited (now Chubb Insurance) and Zurich Australian Insurance Limited (together, Insurers) for the period 30 June 2015 to 30 June 2016 (Policy).
On 2 March 2016, an employee of Dalby attended a storage facility in Dalby, Queensland (Facility), and observed the smouldering of stockpiles of dry distillers grain and solubles (DDGS) (Incident). As a result of the Incident, DDGS stored in Bays 1, 2, and 3 of the Facility were declared a write-off and had to be discarded.
Dalby sought indemnity under the Policy for its losses arising from the Incident (Claim).
Insurers decline to cover the Clain
Based on the evidence then available, Insurers declined to extend cover for the Claim based on Perils Exclusion 6(c)(i) and/or 6(c)(ii) of the Policy, which provided the following:
The Insurer(s) shall not be liable … in respect of:-
6. physical loss, destruction or damage occasioned by or happening through:-
(c) (i) spontaneous combustion
(ii) spontaneous fermentation or heating or any process involving the direct application of heat
Provided that Perils Exclusions 6(c)(i) and 6(c)(ii) shall be limited to the item or items immediately affected and shall not extend to other property damaged as a result of such spontaneous combustion, fermentation or heating or process involving the direct application of heat.
Dalby did not accept that the Perils Exclusion applied to exclude cover for the Claim.
Commencement of proceedings against Insurers
On 30 October 2017, Dalby commenced proceedings against Insurers, seeking indemnity for its alleged loss arising from the Incident (Proceeding).
Following the service of expert evidence and an unsuccessful mediation, given the technical nature of the issues in dispute, Insurers applied for the appointment of a referee under s54A of the Federal Court of Australia Act 1976 (Cth) and r 28.61 of the Federal Court Rules to determine the issues. After two case management hearings (the second of which dealt with the identity of the proposed referee), orders were made on 27 July 2018 referring two questions (Relevant Questions) to a referee, Dr Rodney Weber.
On 31 August 2018, Dr Weber issued his report, which was adopted by the Court. An order was also made for a supplementary report to clarify an issue that remained in dispute. This supplementary report was also adopted by the Court (collectively, Referee Reports).
The parties accepted that the Referee Reports concluded that it was more likely than not that the damage to the DDGS was occasioned by or happened through the process of self-heating.
Dalby's arguments at the hearing
The final hearing occurred on 31 October 2018 before his Honour Justice Lee.
Dalby said that Insurers had failed to discharge the burden of proving that the Perils Exclusion applied to the Claim. Dalby's principal arguments were that:
- the referee had been unable to determine the proximate cause of damage;
- self-heating is not within the Perils Exclusion. The Perils Exclusion should be interpreted to mean "spontaneous heating", that is the noun "heating" should be modified by the adjective "spontaneous" in Perils Exclusion (6(c)(ii));
- alternatively, there was ambiguity in the Perils Exclusion, which required the construction argument to be resolved in favour of Dalby; and
- the conclusion that "self-heating" had occurred was not to identify the cause of the damage, proximate or otherwise, and the referee was unable to determine the cause of the self-heating.
Insurers' position was that:
- that terms of the Perils Exclusion were evident, and the damage claimed fell squarely within the Perils Exclusion, being damage occasioned by or happening through “heating”;
- contrary to Dalby’s interpretation, the clause is not limited to “spontaneous heating” and there is no basis for construing “heating” as spontaneous heating only; and
- even if this is not the case, “self-heating” falls within the definition of “spontaneous heating”, and further, to the extent this process then led to spontaneous combustion, the damage caused by the Incident when the heating progressed to combustion was caused by “spontaneous combustion”, within the meaning of the Perils Exclusion.
Construction of the Perils Exclusion
His Honour reiterated that commercial contracts, including insurance contracts, should be given a business-like interpretation and attention should be given not only to the language used by the parties but also the commercial circumstances addressed by the document and the objects which it intends to secure.
His Honour concluded, from both the text of the Perils Exclusion and having regard to the context, that Insurers were not prepared to accept a risk of damage occasioned by or happening through heating of any type and accepted the Insurers' submissions. His Honour concluded that:
- the word heating is not qualified or modified by the word “spontaneous” as is the case with “combustion” or “fermentation” — the notion that spontaneity qualifies all perils in cl 6(c)(ii) cannot be sustained when one of the matters referred to in that clause involves what is clearly an external process (being the application of heat, and is itself qualified by the word “any”);
- there is a difference between damage occasioned by spontaneous combustion and damage occasioned by any form of heating (including self-heating); and
- contrary to Dalby's submissions, the proviso did not assist Dalby's case — the proviso refers to “property damage as a result of such spontaneous combustion, fermentation or heating or process involving the direct application of heat”.
Further, given the comma between “combustion” and “fermentation” prior to the disjunctive before the word “heating”, “spontaneous” is qualifying “combustion” and “fermentation” only. It is evident that the insertion of the disjunctive before “heating” points to the fact that “heating” is embracing a broader causal concept as is “any other process involving the direct application of heat”.
For the above reasons, his Honour did not consider that there was any ambiguity and the Insurers’ submissions on the proper construction of the Perils Exclusion were to be preferred.
The meaning of Spontaneous Combustion
His Honour also concluded that, if he was wrong on the issue of construction, it seemed clear that the self-heating referred to by the referee would, in any event, be a form of “spontaneous heating” and hence fall within the Perils Exclusion. In determining this issue, his Honour made reference to the various dictionary definitions for "spontaneous" and "spontaneous combustion". He also made the following comments:
4. the ordinary, usual, and relevant meaning of the word “spontaneous”, is that it describes the occurrence of something without external cause; and
5. although spontaneous combustion is usually related to something that occurs with some rapidity, when talking about spontaneous in the sense of qualifying the causal concept of heating, it simply means that it occurs without external incitement or factors, rather it is something which occurs by reason of internal processes.
Dalby argued that Insurers had failed to discharge their evidentiary and persuasive burden of identifying self-heating as the proximate cause of the damage. Dalby placed reliance on caveats expressed by the referee that various factors could cause self-heating.
His Honour considered that the referee carefully went through the various factors that individually or together might have been the basis for self-heating to occur. The relevant distinction was between:
- a cause in the sense that physical loss, destruction or damage was occasioned by or happened through the existence of a phenomenon; and
- the question of the reason for the existence of the phenomenon.
This distinction can be seen in an analogous context in the decision of the Victorian Court of Appeal in Gunns Forest Products Ltd v North Insurances Pty Ltd  VSCA 105.
His Honour considered that this was a matter of the construction of the Policy and the relevant question was whether the parties intended the Policy to respond to physical loss, destruction or damage occasioned by or happened through heating. In his view, there was no reason:
- (in the context of the Perils Exclusion or the Policy as a whole) to search for antecedent events in order to identify anterior causes of the heating; or
- to think that the Perils Exclusion was not intended to cover what could be reasonably characterised as damage occasioned by or happening through heating.
For the reasons outlined above, Dalby's application was dismissed with costs in favour of the Insurers.
Key implications for the insurance industry
The Federal Court has confirmed the following key matters in respect of the Perils Exclusion:
- the word "heating" is not qualified or modified by the word “spontaneous”;
- when talking about "spontaneous" as qualifying the causal concept of "heating", it simply means that it occurs without external incitement or factors, rather it is something that occurs by reason of internal processes; and
- in respect of physical loss, destruction or damage occasioned by or happened through heating, there is no reason to search for antecedent events in order to identify the anterior cause(s) of the heating.
Dalby has recently filed an appeal of the full judgment and a further update will follow the hearing of the appeal in 2019.