Judgment date: 25 July 2011
JSM Management Pty Ltd v QBE Insurance (Australia) Ltd  VSC 339
Supreme Court of Victoria1
- The operation of a container forklift on a concrete hardstand, which was not of sufficient capacity to bear the weight of the forklift, caused substantial cracking and damage to the hardstand.
- The court considered significant questions as to the proper interpretation of 2 provisions of an ISR policy.
- The first was whether an exclusion clause with respect to liability for wear and tear to the insured premises would apply.
- The second was whether a condition which required an insured to take reasonable precautions in respect of damage to the insured premises would apply in circumstances where the insured knew the container forklift was being used.
JSM Management Pty Ltd (JSM) held an industrial special risks insurance policy (Policy) with QBE Insurance (Australia) Ltd (QBE). The Policy was for a 12-month period and provided cover for loss or damage to insured premises. The insured premises consisted of a transport warehouse. The warehouse was leased to Gaffney's Logistics Pty Ltd (Gaffney's), who used the warehouse as a transport/depot yard.
A hardstand area adjacent to the warehouse formed part of the leased premises and was used by Gaffney's to carry a container forklift. The hardstand was not of capacity to bear the weight of the container forklift. Gaffney's continued to use the container forklift on the hardstand, despite requests by JSM and its agents to stop. Consequently, the hardstand sustained damage and JSM sought indemnity pursuant to the Policy. QBE denied indemnity on the basis of the exclusion clause for damage sustained to insured premises as a result of wear and tear and alternatively for breach of the reasonable precautions provision.
Clause 4(b) of the Policy excluded liability for:
"... physical loss, destruction or damage occasion by or happening through:
(b) wear and tear, fading, scratching or marring, gradual deterioration or developing flaws, normal upkeep or making good"
Condition 11 of the Policy relevantly provided:
"The insured shall take all reasonable precautions to prevent loss, destruction or damage to the property insured by this policy."
JSM brought the matter before the Victorian Civil and Administrative Tribunal (the Tribunal).
The Tribunal found that the hardstand was damaged through the weight of the container forklift which continued to be operated upon the hardstand over a period of approximately 8 months while Gaffney's was in occupation of the property. It was accepted that the hardstand was built to withstand 10 tonne axle loads, however the container forklift could potentially weigh in the order of 100 tonnes under load.
JSM's contention that there were ongoing repeated requests to Gaffney's not to use the container forklift on site was not accepted, but there was an initial warning by JSM's agent with a follow-up by Mr Marro (JSM's representative) and then further follow-up by JSM's business associate (but, only after damage was present and obvious). JSM was clearly attempting to negotiate with Gaffney's to reinforce the hardstand as part of a business opportunity.
The Tribunal construed the 2 terms "wear" and "tear" separately. "Wear" was distinguished from "tear" on the basis that "wear" related to use of a thing, whereas "tear" related to the impact of natural forces on something2. The Tribunal found that this matter only involved "wear". The Tribunal found that the operation of the forklift on the hardstand or the use of the hardstand by the forklift caused "wear" and thus the damage to the hardstand was excluded.
QBE also raised JSM's obligation to take all reasonable precautions to prevent loss. JSM submitted that they had repeatedly requested Gaffney's to not use the container forklift on the hardstand. The Tribunal found that:
- there were only 3 attempts made by agents of JSM requesting that Gaffney's not continue to use the container forklift on the hardstand;
- JSM had knowledge that the unauthorised use of the container forklift on the hardstand was occurring; and
- JSM had the right to bring the lease to an end, however, evidence was adduced that JSM refrained from acting on their rights of re-entry and termination under the lease, preferring instead to negotiate with Gaffney's and preserve/improve their commercial interests/position. JSM was clearly attempting to negotiate with Gaffney's to reinforce the hardstand as part of a business opportunity.
Despite these factual findings, without reason, the Tribunal concluded that:
"... in the circumstances the Insurer cannot rely upon the reasonable precautions ground to avoid indemnity ..."3
Appeal to Supreme Court
JSM sought review of the decision of the Tribunal on the following grounds:
- The Tribunal erred in law in its interpretation of the phrase "wear and tear" in the Policy as including damage being caused by other than ordinary and normal use; and
- The Tribunal erred in finding that the damage was caused by the weight, rather than by the operation, of the forklift.
QBE alternatively contended that JSM had failed to take all the reasonable precautions in breach of condition 11.
The appeal proceeded only upon the first basis and QBE's contention regarding the reasonable precautions condition. Osborne J found that the second ground was not a correct reflection of the decision of the Tribunal, which concluded that the hardstand sustained damage due to a combination of excessive weight and continued operation over a period of 8 months.Wear and Tear JSM submitted (both throughout the Tribunal proceedings and the Appeal) that any "wear" in terms of "wear and tear" should be "... equated with ordinary wear ..."4 and the use of the hardstand in these proceedings was "... not 'ordinary wear' ..." 5
Justice Osborne agreed with this interpretation, citing dictionary references from both the Macquarie and Oxford Dictionaries that the primary meaning of "wear" is "... damage due to or sustained during ordinary usage ..."6 Osborne J qualified the definition of "wear" when considering the "tear" element, noting that "... the concept unifying both words is damage caused by ordinary, as against extraordinary, events ..."7
Justice Osborne referred to London and Provincial Leather Processes Ltd v Hudson8, where it was held that "... wear and tear is regarded as a consequence of ordinary usage and ordinary weather.." He also referred to a notable judicial authority9 concerning the interpretation of a "wear and tear" exclusion clause in an insurance policy:
"... 'wear and tear' mean simply and solely that ordinary and natural deterioration or abrasion which an object experiences by its expected contacts between its component parts and outside objects during the period of its natural life expectancy. We do not find that the modifiers 'ordinary' or 'natural' add anything to the commonly understood meaning of 'wear and tear' ..."10
Counsel for QBE submitted that the use of the container forklift on the hardstand constituted ordinary use since this use continued throughout Gaffney's occupation of the leased premises and was not objected to, nor prevented by JSM (despite JSM's rights to do so pursuant to the lease).
Osborne J reinforced that the wear and tear terms of the Policy are to be given their usual, business-like meaning, saying that:
"... when the policy is read as a whole there is no contextual reason for giving the phrase wear and tear other than its usual meaning ..."11
He described that the use of the overweight container forklift on the hardstand could not"... objectively be described as 'ordinary use' ..."12 and rejected the submission by counsel for QBE that the "... objective onlooker would be amazed ..."13 if the damage did not constitute wear and tear and therefore come within the exclusion.
Accordingly, he found that the first ground of the appeal must succeed.
Justice Osborne acknowledged that this obligation had been narrowly construed in many cases. Osborne J followed long-standing authority14 (and discussed more recent cases in relation to this test) citing that where an insured identifies a danger, they:
"... should not deliberately court it by taking measures which he himself knows are inadequate to avert it. In other words, it is not enough that the employer's omission to take any particular precautions to avoid accidents should be negligent; it must be at least reckless, that is to say, made with actual recognition by the insured himself that a danger exists, and not caring whether or not it is averted ..."15
Counsel for QBE submitted that this obligation should be construed differently in policies for property insurance, and that the NSW Court of Appeal decision of Legal and General Insurance Australia Limited v Eather16 (Eather) should not be followed. In Eather, it was decided that the interpretation of this obligation should not be contingent upon the different coverage provided in various policies. Osborne J did not depart from this standard, citing that:
"... An industrial special risks policy provides indemnity for any loss, damage or destruction of the insured property unless caused by an event specifically excluded. The question of what are 'reasonable precautions' must be construed in light of this commercial purpose ..." 17
Justice Osborne found the Tribunal's conclusion that "...in the circumstances the Insurer cannot rely upon the reasonable precautions ground to avoid indemnity' ..."18 to be inherently unsatisfactory. The findings of the Tribunal raised a seriously arguable issue as to whether the condition was or was not satisfied. Firstly, it followed from the Tribunal's findings that this case concerned damage which was in fact foreseen as distinct from foreseeable by JSM. Secondly, the Tribunal found that JSM knew that the forklift was in fact being used on a continued basis throughout the lease. Thirdly, by February 2008, JSM knew that serious damage was in fact eventuating, and that Gaffney's was continuing to use the forklift. Lastly, JSM elected not to stop the damage as it could have done by terminating the lease, but to negotiate with a view to reconstructing the hardstand by agreement on commercial terms. It did this knowing that the damage was continuing.
On the face of the Tribunal's findings there was, at least from February 2008, a deliberate course of inaction which JSM realised would result in continuing damage to the property. In effect, JSM elected to keep receiving the rent, knowing that damage was occurring, but hoping to reach a new commercial agreement as to the construction of further improvements to the premises.
The Tribunal did not analyse the facts as it found them by reference to the requirements of
the reasonable precautions condition. It did not identify the factual basis on which it found that the test was met.
Despite urging from both parties the court was not prepared to draw its own conclusions
and the matter was remitted to the Tribunal.
The court noted an additional complication which was that the reasonable precautions condition may result in only a partial defence to the claim if the Tribunal concluded that JSM's conduct was not reckless in the relevant sense until February 2008 or some other point during Gaffney's 8-month occupation. If it were proven by JSM that at least some part of the loss was incurred prior to any reckless omission by it, s 54 of the Insurance Contracts Act 1984 (Cth) may operate to prevent the insurer from refusing to pay that part of the claim. Furthermore, if only part of the claim succeeded, not only will the extent of the insured's liability involve questions of fact and degree, but difficult issues of quantum may also arise.
The wear and tear exclusion is likely to be interpreted as only excluding wear and tear from damage sustained during ordinary usage or during the course of the 'fair' or 'reasonable' use of the premises for any of the purposes for which they were let.
Abnormal or extraordinary wear is unlikely to be excluded.
Knowledge of the extraordinary use or abnormal wear and tear by the policy holder together with a failure to stop the extraordinary use could constitute a failure to take reasonable precautions to prevent damage to the insured premises but this will depend upon close consideration of all the facts in the case.
The interpretation of the reasonable precautions condition in an ISR policy is the same as the approach or interpretation given under a liability policy which requires an insurer to establish that an insured has deliberately courted a risk by taking measures which he himself knows are inadequate to avert it.
1 Justice Osborne
2 Taylor v Webb (1937) 2 KB 283 at 302-304 per Scott LJ
3 Justice Osborne at 70
4 Para 18
5 Ibid (para 18).
6 Para 24
7 Para 25
8  KB 724 per Goddard LJ
9 Cyclops Corporation v Home Insurance Company 352 F Supp 931 (1973)
10 Para 33
11 Para 42
12 Para 45
13 Para 46-47
14 Fraser v BN Furman (Productions) Limited  1 WLR 898 ('Fraser') per Diplock LJ
15 Para 52
16 6 NSWLR 390
17 Para 63
18 Para 7
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