The decision in Sheehan v Lloyds Names Munich Re Syndicate Ltd1 provides guidance on defining accidental damage and the importance of causation in the context of insuring clauses and exclusion clauses in insurance policies.
The insured commenced proceedings in the Federal Court of Australia against his insurer seeking indemnity under a policy of insurance for ‘accidental’ loss and damage to the starboard engine of his motor yacht.
The damage occurred on 17 September 2015 approximately one day after the insured vessel had been serviced. The vessel was operated for approximately five minutes before an alarm activated and the speed of both engines slowed down automatically to a ‘limp’ mode. Approximately eight minutes later, the starboard engine shut down completely and a subsequent mechanical inspection revealed extensive and irreparable damage.
A jointly-appointed expert referee considered that the damage was ‘a direct result’ of overheating and seizure of the engine due to loss of lube oil pressure, but also faulty design of the sealing arrangement between the lube oil cooler and the engine block.
The insurer declined indemnity on the basis that:
(a) the insured’s failure to read the vessel manual, know about the operation of alarms, recognise their significance and act reasonably means the damage was not ‘accidental’; or alternatively,
(b) certain exclusions in the policy were triggered including, amongst others, loss and damage arising from (i) faulty design; (ii) inherent defect; and (iii) structural design.
The Court accepted the insured’s evidence that, despite the vessel manual stating that the alarm would trigger a warning on an LCD screen that the engine oil pressure was low, no such warning was displayed. The insured’s evidence was that if it did, he would have turned off the engine. The Court held that the insured was not aware of the risk of damage to the engine by continued operation, and therefore could not have chosen to take that risk. Accordingly, the damage was ‘accidental’ within the meaning of the policy.
However, the Court also found that, notwithstanding the insured’s failure to turn off the starboard engine as being a possible cause of the damage, the single proximate cause was the failure of the gasket due to its faulty design. Therefore, although the Wayne Tank principle (whereby when there are multiple proximate causes and one is excluded under the policy, the insured will be unable to recover) did not apply, the damage was nevertheless excluded under the policy.