In this case, an insured challenged an insurer’s reliance on an exclusion clause to decline a claim made following heat damage to the insured’s stockpiles of grain. The case is of interest to all those of you who are interested in the nitty gritty of policy interpretation.
The interpretation of an exclusion clause in a policy.
The insured was a manufacturer of ethanol. It held first party property cover under an Industrial Special Risks policy with Allianz Australia in respect of a bio-refinery near Dalby in South East Queensland. The insured suffered a loss when several stockpiles of dry distillers grain were heat damaged.
The insured made a claim under its ISR policy. The matter was referred to a referee who prepared a number of reports about the cause of the damage to the grain. The referee concluded that the damage to the grain was caused by 'self-heating'. He could not, however, be precise about the mechanism that brought about the self-heating. He also drew a distinction between self-heating and spontaneous heating based upon his understanding that the word 'spontaneous' connoted a degree of suddenness.
The claim was declined by Allianz who relied on a perils exclusion. That exclusion stated that:
“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.”
The insured challenged the declinature on the basis that:
- The exclusion applied only to 'spontaneous' heating; and
- Insurers had failed to establish to the requisite standard that the damage to the grain had been caused by spontaneous heating.
The Decision at Trial
The trial judge accepted the submission of the insurer that 'heating' in exclusion 6(c)(ii) was not qualified by the word spontaneous. In coming to this conclusion, he noted that:
- It was plain, having regard to the text of the exclusion and the relevant context, that the insurers were not prepared to accept a risk of damage to the grain occasioned by or happening through heating of any type;
- The word 'spontaneous', having regard to its ordinary, usual and relevant meaning, described the occurrence of something without external cause. In this regard, the word 'spontaneous' could not qualify all of the perils in sub-paragraph 6(c)(ii) because one of the matters referred to in that clause involved what was clearly an external process (being the application of heat);
- The wording of the proviso did not suggest that the word 'spontaneous' qualified heating. The trial judge noted that the comma between the words 'combustion' and 'fermentation', prior to the disjunctive appearing before the word 'heating', indicated that 'spontaneous' qualified only 'combustion' and 'fermentation' while the remainder of the clause embraced a broader causal concept.
The trial judge found that the damage to the grain had happened through a process of self-heating which was, in his view, synonymous with spontaneous heating. The judge rejected the referee’s own interpretation of the word “spontaneous” in favour of an interpretation based on dictionary definitions. The referee’s inability to identify the precise mechanism by which that self-heating occurred did not undermine the conclusion that the damage had happened through self-heating.
The insurer’s declinature was upheld.
The Issues on Appeal
The insured appealed the decision, claiming that the trial judge had failed to consider the whole of the policy in coming to his preferred construction of the exclusion.
The Decision on Appeal
In construing the policy, the Court of Appeal emphasised that "the meaning to be given to the exclusion is a businesslike construction by reference to what a reasonable business person would have understood the words in their commercial context to mean”. The appeal judges observed that the policy had been carefully drawn and noted that proper regard should be made to the language used, including usual grammatical and syntactical usage, without overly dwelling on the choices of structure, syntax or punctuation that are open to different nuances.
The Court of Appeal acknowledged the force of the primary judge’s reasoning and noted that his conclusion with respect to the qualification of the word 'heating' by the word 'spontaneous' was supported by the repetition elsewhere in the policy of a relevant modifier (such as in perils exclusion 4(e) which referred to 'faulty materials or faulty workmanship').
However, the Court of Appeal held that the context made it apparent that 'heating' was to be qualified by the word 'spontaneous'. The Court of Appeal reasoned that:
- If 'heating' was not qualified by the idea of spontaneity (meaning self-generation), there would be little need for the words that referred to 'any process involving the direct application of heat' and
- The structure of the proviso, which referred to 'spontaneous combustion, fermentation or heating or process involving the direct application of heat', tends to confirm that 'spontaneous' was intended to qualify 'heating'.
The Court of Appeal noted that their difference of view with the primary judge was as much, if not more, a conclusion drawn from impression of meaning as it was from any logical reasoning. They also added that, although one needs to be careful with reliance on the contra proferentem rule, especially where there has been an evident degree of negotiation of the policy, if there are two genuinely available alternatives preference should be given to the one that limits rather than expands the exclusion.
The Court of Appeal agreed with the trial judge that the word 'spontaneous' should be given its ordinary and proper meaning notwithstanding the view of the referee. They upheld the trial judge’s decision that the damage to the grain was occasioned by or happened through spontaneous heating. It was not necessary for insurers to establish precisely why or how the process of spontaneous heating occurred.
The insurer’s declinature was upheld.
Implications for you
The case is a good reminder of some of the more commonly encountered principles of policy construction. The fact that the trial judge and the court of appeal judges applied the same general principles of construction to achieve different and seemingly reasonable outcomes demonstrates the difficulty that insurers and lawyers can face when construing policies. The case also provides a good example of how the contra proferentum rule is applied only as a rule of last resort. It is interesting to note that the Court of Appeal acknowledged that its interpretation of the policy was based more on impression of meaning than logical reasoning. That seems very subjective and may limit the precedent value of the case. However, contrary to the Court’s comment in this regard, the decision sets out a process of reasoning that is easy to follow and should provide useful guidance to those attempting to interpret similarly constructed exclusions.