In the September 2006 issue of Insurance Focus we commented that the decision of Robert Lewis Caine v Lumley General Insurance Limited  NSWSC 337 indicated that insurers had weathered the trend to expansive interpretation of policy coverage. The NSW Court of Appeal recently reviewed this decision with the result that while the insurer did suffer a little more ‘weathering’, the outcome was one that generally favoured insurers.
Caine operated a caravan park. On 16 January 2002, the park was struck by a severe storm, including hail and torrential rain. Damage was sustained, including damage to caravans, annexes and tropical roofs over the caravans. The caravans were permanently located at the park. The ‘tropical roofs’ above them relied on the caravans for structural support.
In relation to the caravans, Caine sought recovery of the following:
- $95,700.00 for caravans.
- $85,031.25 for tropical roofs.
- $477,903.17 for annexes.
- $53,760.00 for extra costs of raising the annexe floors.
Caine also claimed an additional amount of $72,880 for the extra costs of reinstating the annexes and tropical roofs so as to comply with Council requirements.
Prior to the proceedings, the insurer, Lumley, had paid out $100,000 under the relevant policy for hail damage to the caravans. This was the limit arising under Exclusion 15 for damage caused by hail. Lumley argued that the annexes and tropical roofs formed part of the caravans. Caine argued that the annexes and tropical roofs did not form part of the caravans and therefore were not subject to the $100,000 limit.
Exclusion 15 provided that the policy did not cover damage to:
Caravans and all aluminium foam sandwich construction where caused by hail, unless the hail penetrates the entire thickness of the material damaged, causing water to enter. Limit of liability $100,000 any one year.
Caine argued that the annexes and tropical roofs did not form part of the caravans, citing dictionary definitions as well as the definition of ‘caravan’ in the Local Government (Caravan Parks, Camping Grounds and Moveable Dwellings) Regulation 1995 (NSW).
At first instance, Justice Einstein decided that in the context of the policy, the caravans were not used in the sense of a mobile home as typically understood. Instead, they were permanent or semi-permanent structures and the annexes and tropical roofs formed part of those structures. Consequently, the caravans, annexes and tropical roofs were to be treated as one and thereby subject to the one limit of indemnity, rather than a separate limit of indemnity.
The Court of Appeal agreed. It emphasised that the policy is a commercial document and must be interpreted in light of the commercial circumstances it addressed.
The Court observed that:
- The overwhelming conclusion to be drawn from the policy was that it was intended to cover ‘structures’ which Caine offered as accommodation. Those structures comprised the caravans, of which the tropical roofs and the annexes were a part.
- The identification of ‘caravans’ in the policy schedule, without reference to the tropical roofs or annexes (that they were not listed separately) demonstrated objectively that those three structures were regarded as constituting a ‘caravan’.
- Caine’s position focused on the hypothetical rather than the reality of the structures at the caravan park.
For Exclusion 15 to apply, the cause of the damage had to be hail. Caine argued that the damage was caused not only by hail, but also by wind and rain. As wind, rain and hail were each a proximate cause, Exclusion 15 did not apply as it only applied when the proximate cause was hail itself.
In a very good analysis for insurers, this reasoning was rejected by the Court of Appeal. The Court of Appeal observed that:
- The Court applies commonsense standards in determining what is the proximate cause.
- Damage which was caused by hail, without, at least elements of a storm coinciding, would be a meteorological anomaly. In other words, the policy was looking at a situation where hail fell as part of a storm but, in the circumstances, was the proximate cause of the damage.
- Even if there were two causes, one covered and the other excluded, the insurer was not liable. (This effectively followed a recent decision in the Federal Court of McCarthy v St. Paul International Insurance Co. Ltd  FCAFC 28.)
Small win for the insured
Clause D5 in the policy, ‘Basis of settlement’, provided that insurers would pay the extra costs of reinstatement necessarily incurred by the insured to comply with the requirements of any statute or regulation or of any municipal or statutory authority. While acknowledging that the D5 clause was not an insuring clause, the Court of Appeal held that it did mean that these reinstatement costs were not limited by the cap of $100,000 in Exclusion 15. While this was in effect only a small part of the claim, interest was also awarded on this amount at the rate of 11% from 7 February 2003.
While not agreeing with Lumley on one point, the Court of Appeal nevertheless generally accepted its interpretation of the policy. In the circumstances, this acceptance is encouraging. The Court of Appeal took a practical approach in that it looked at what was intended to be covered, rather than applying dictionary definitions out of context to enable an insured to recover.
The only possible warning for insurers is to ensure that any costs of settlement clauses, or similar clauses, do not operate to take certain costs outside an intended limit of indemnity.
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