A recent decision of the Victorian Supreme Court is a sobering one for insurers seeking to run coverage cases before the Court. In Mainstream Aquaculture Pty Ltd v Calliden Insurance Ltd, Croft J had to decide the preliminary question of whether a business interruption insurance policy held by the Plaintiff with the Defendant responded to the subject event (failure of mains power, leading to the death of the Plaintiff’s fish stock).
The Plaintiff conducted a commercial fish breeding business (Business). At all material times, the Plaintiff held two insurance policies: one with CGU Insurance Ltd insuring against property damage and one with the Defendant for business interruption insurance.
This dispute involved the second policy (Policy), which would only indemnify the Plaintiff if suffered loss or damage to property, which resulted in the interruption or interference with the Plaintiff’s business.
On 26 October 2008, the property the Business was operated out of lost electrical power supply (Event) which resulted in the Plaintiff losing its stock of fish.
At the time of the Event, the loss of power was caused by the automatic transfer switch ‘tripping’ thereby switching power from the mains to the generator that had been purchased by the Plaintiff to provide supplementary power should the mains electricity supply be lost or interrupted. Unfortunately, the generator failed to provide alternative power.
It was a fuse on the electricity supplier’s pole mounted assets (located on the Plaintiff’s property) (Fuse) that tripped.
To determine whether the Policy responded, there were three preliminary issues that the Plaintiff had to establish:
Did the Fuse constitute “property” within the meaning of the Policy?
- Was the Fuse “damaged”?
- Was the damage to the Fuse a proximate cause of the interruption to the Business?
There was no dispute that the Fuse was “property” within the meaning of the Policy.
Was the Fuse “damaged”?
The Defendant argued that the Fuse had not been “damaged” when it tripped because by tripping it had performed its fundamental purpose – to close off the circuit in the event of a higher than acceptable or normal level of current.
Croft J discussed the authorities in which the word “damage” (or similar words) were interpreted, in particular, His Honour relied on the case of Ranicar v Frigmobile Pty Ltd.
Based on these authorities it was clear that the word “damage” should be given its ordinary meaning .
Croft J held:
On the basis of the preceding authorities, in my view, a ruptured (or ‘tripped’) fuse is still “damaged”, despite the fact that it is designed to operate in this manner (that is, to rupture or be ‘tripped’) to stop a potentially damaging overload of current. … That is to say, a fuse that has ruptured is physically altered; once ‘tripped’, it can [no] longer fulfil its protective function, and time (and resources) must be expended to repair or replace it. On this view of the meaning of “damage” in the present context, I find that the fuse was damaged, within the meaning of the Policy, on occurrence of the Event, on 26 October 2008.
Was the damage to the Fuse a proximate cause of the interruption to the Business?
The determination of this question required consideration of the exclusion where the interruption or interference to the Business arose from loss or damage caused by “mechanical, electrical or electronic breakdowns or breakages”.
The Policy contained “Additional Benefits” clauses, which, inter alia, insured against the failure of electricity supply, but stated that it was “subject otherwise to the Terms, Conditions, Special Provisions and Exclusions of this Policy”, whereas the exclusions applied “unless otherwise stated”.
Croft J presumed that this resulted in the Additional Benefits clauses being subject to the exclusions.
In these circumstances, the Defendant alleged the relevant exclusion was activated on two alternate grounds:
- the generator’s failure to provide alternative power constituted an electrical breakdown; or
- the damage to the Fuse constituted an electrical breakdown or breakage;
within the meaning of the exclusion.
Croft J held, in finding that the Defendant’s allegations could not be sustained:
… The generator’s failure may have been a contributing factor in failing to avert damage stemming from the power failure, on 26 October 2008, but, in the present circumstances, the damage to the property and the consequent loss to the Business, cannot be said to be “caused by” the failure of the generator to activate.
…This “damage” [to the Fuse], pursuant to the insuring provisions of the Policy, cannot be said to fall within the category of “Mechanical, Electrical or Electronic Breakdowns or Breakages”, envisaged in the Policy.
To hold otherwise … would mean that … the Failure to Supply provisions would be devoid of meaning; a result clearly out of line with the commercial purposes of the parties.
In the premises set out above, Croft J found that the Policy did respond to the Event.