BackgroundIn this controversial first instance decision, His Honour Justice Croft held that a ruptured fuse (pausing electrical supply) constituted "Damage" within the meaning of the insurance policy and therefore responded to the claim by the Insured.
Mainstream Aquaculture Pty Ltd (Mainstream) conducted a commercial business of breeding and selling fish. On 26 October 2008 Mainstream experienced a loss of electrical power and the loss of a stock of fish.
In May 2008, Mainstream purchased a generator to provide supplementary power to the property in the event of an interruption to the mains electricity supply. At the time of the accident, the fuse on the mains supply ruptured (it tripped which caused it to rupture) and switched power from the mains supply to the generator. However the generator failed to operate. The fuse was designed to trip in the case of an abnormal electrical event. Unlike a circuit breaker, it was not capable of being reset and would in such event have to be replaced.
The electricity provider for Mainstream was Powercor, it disposed of the fuse after the accident and before any of the parties were able to inspect it.
Mainstream held two insurance policies relevant to the subject accident. The first contract insured against property damage with CGU Insurance Ltd (CGU) and the second contract was for business interruption with Calliden Insurance Ltd (Calliden).
The relevant provisions of the Calliden policy were:
"Failure of Supply from Public Utilities or Telecom Service 3. We will treat loss or damage to the property of telecoms provider, or to the property at any installation or Electricity Station or Sub-Station, Gas Works, Water Works or Sewage from which you obtain Public Supply as being loss or damage to building(s) or other contents at your premises provided that such loss or damage results in the interruption or interference with your Business.
We will not pay for:
1. interruptions or interference to your Business arising from loss or damage caused by (unless otherwise stated):
... b. Mechanical, Electrical or Electronic Breakdowns or Breakages."
On construction of the policy and the relevant exclusion clauses, Calliden denied indemnity to Mainstream on 27 October 2008. The dispute at this Victorian Supreme Court hearing was whether the Calliden policy responded to the subject incident.
In order for Mainstream to succeed, it needed to establish the following issues:
- that the fuse constituted "property" within the terms of the policy;
- that the fuse was "damaged" within the terms of the policy; and
- that the "damage" to the fuse was a proximate cause of the interruption to business.
Before determining these issues, Justice Croft also had to determine the evidentiary and procedural question of admissibility of expert evidence sought to be led by Mainstream.
Mainstream engaged a Mr Mansourian, consultant engineer, who gave evidence in the proceedings that it was most likely that the fuse involved in the subject accident (October fuse) failed in the same way as a fuse which ruptured in another subsequent incident of failure of electricity supply on 14 May 2009 (May fuse). It was not disputed that the October fuse was not available for inspection and Calliden objected to Mr Mansourian's evidence on the basis that treating the May fuse as relevant evidence to speculate the nature of the failure of the October fuse was "flawed deductive reasoning". Nevertheless, Justice Croft admitted the evidence due to its value as circumstantial evidence from an expert.
In construing the Calliden policy, Justice Croft considered the apparent anomaly which would occur if a fuse had not been installed and there was (in example only) a power overload. His Honour pointed out that the power would traverse the circuit and Damage within the definition of the policy, would have occurred to the connected electrical appliances. Were this to occur, the damage would have been insured.
It was Calliden's submission that the intention of the parties to protect against business interruption was more limited, and that had the parties intended that an interruption to electricity supply would be covered, a clause would have been inserted in the policy to that effect.
Firstly, Justice Croft held and noted that it was common ground that the October fuse was capable of constituting "Property" within the terms of the policy.
Therefore, whether the policy responded was contingent on whether the fuse by being tripped (and rupturing) was capable of constituting "Damage" within the term of the policy.
Calliden had argued that the October fuse could not be said to be damaged as it had simply fulfilled its fundamental purpose by tripping. However, Justice Croft held that a ruptured (tripped) fuse was still "damaged" as it was "physically altered and could no longer fulfil its protective function, and time and resources must be expended to replace or repair it."
His Honour therefore took a literal rather than purposive view.
Furthermore, in acceptance of Mr Mansourian's evidence, His Honour somewhat hedged his bets and found that the nature of the damage to the October fuse was likely to be the result of the heat deforming it, as was the case with the May fuse, and probably did not come about as a result of a short circuit – as such, damage probably occurred prior to the fuse tripping.
Justice Croft also then held that the "damage" to the fuse was a proximate cause of the interruption to business.
Having found that the damaged fuse caused the interruption to Mainstream's business, Justice Croft held that the exclusion clause was not applicable, as to hold otherwise would mean that "Damage" to property could also be characterised as a "breakdown" or "breakage" which would prevent all claims for insurance in relation to a Failure of Supply from Public Utilities or Telecom Service.
This decision of Justice Croft is controversial due to the characterisation of a ruptured (tripped) fuse as "damaged" as contemplated by terms of the insurance policy. In ordinary circumstances, people may not consider a perfectly functioning tripping device which performs that function admirably to be "damaged". This is especially so in circumstances where the insurance policy expressly excluded "mechanical, electrical or electronic breakdowns or breakages" as being claimable. In this instance, the fuse had carried out its precise function by tripping in order to prevent a dangerous situation such as an overloaded circuit or short circuit to occur.
In coming to his decision in relation to whether the fuse was "damaged", His Honour relied on the decision of Ranicar v Frigmobile Pty Ltd  Tas R 113 (the scallops case), which employed a liberal interpretation of the word "damaged". His Honour also relied heavily on criminal cases interpreting the word "Damage" because such authorities he held, were based upon the ordinary meaning of the words rather than upon the context in which they appeared.
In our view, Ranicar was a case of pure economic loss rather than Physical Damage and may be decided differently now. It has however, provided the platform for the very literal and expansive constructions of what is "Damage" in decisions such as this. The current state of the authorities make it exceedingly difficult for practitioners and clients to know with any certainty what their insurance coverage will be.
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