Dalby Bio-Refinery Ltd v Allianz Australia Insurance Limited

The approach of the primary judge 12 The primary judge accepted the submission of the insurer that "heating" in exclusion 6(c)(ii) was not qualified by the word "spontaneous". The reasons for this conclusion were set out at [32]-[37]: Conclusions 32 It seems to me it is tolerably plain, from both the text of the exclusion and having regard to the relevant context, that the Insurers were not prepared to accept a risk of damage to the Product occasioned by or happening through heating of any type. I accept the submissions of the Insurers that there are a number of textual matters pointing against the constructions agitated by Dalby. 33 The first and most obvious is that the word heating is not qualified or modified by the word "spontaneous" as is the case with "combustion" or "fermentation". The notion that spontaneity qualifies all of the perils in cl 6(c)(ii) cannot be sustained in circumstances where one of the matters referred to in that clause involves what is clearly an external process (being the application of heat, and is itself qualified by the word "any"). 34 Secondly, there is a difference between damage occasioned by spontaneous combustion and damage that would be occasioned by any form of heating (including self-heating); it follows that "heating" has work to do in the exclusion clause properly construed. Indeed the circumstances of this case make it clear that there could be damage to the Product occasioned by heating which fell short of any combustion and it seems to me that this is precisely the sort of eventuality to which perils exclusion 6(c)(ii) is directed. 35 Thirdly, contrary to the submissions of Dalby, I do not believe that the proviso assists. The proviso refers to "property damage as a result of such spontaneous combustion, fermentation or heating or process involving the direct application of heat". 36 Plainly, given the comma between "combustion" and "fermentation" prior to the disjunctive appearing before the word "heating", "spontaneous" is qualifying "combustion" and "fermentation". What is also evident is that the insertion of the disjunctive before "heating" points to the fact that "heating" is embracing a broader causal concept as is "any other process involving the direct application of heat". For these reasons, I do not consider there to be any ambiguity and the Insurers' submissions as to the proper construction of the perils exclusion are to be preferred. 37 It also follows that the argument of Dalby based on the application of the contra proferentem rule, such as it is, must be rejected. 13 The primary judge then dealt with "spontaneous heating" should he be wrong about the word heating being unqualified by "spontaneous". It is at this point that the referee's second report becomes relevant: whether "self-heating" was a synonymous expression for "spontaneous heating". At [39]-[41] of his reasons the primary judge said: 39 In determining this issue, I was referred by the parties to various dictionary definitions. The Macquarie Concise Dictionary, 5th ed, provides a definition of "spontaneous" and a definition of "spontaneous combustion" in the following terms: spontaneous / adj. 1. Proceeding from a natural personal impulse, without effort or premeditation; natural and unconstrained; a spontaneous action; a spontaneous remark. 2. (of impulses, motion, activity, natural processes, etc.) arising from internal forces or causes, or independent of external agencies. 3. growing naturally or without cultivation, as plants, fruits, etc. 4. produced by natural process. spontaneous combustion / n. the ignition of a substance or body from the rapid oxidation of its own constituents, without heat from any external source. 40 The Oxford Encyclopaedic English Dictionary sets out definitions of the same terms as follows: spontaneous / adj. 1 acting or done or occurring without external cause. 2 voluntary, without external incitement (made a spontaneous offer of his services). 3 Biol. (of structural changes in plants and muscular activity esp. in young animals) instinctive, automatic, prompted by no motive. 4 (of bodily movement, literary style, etc.) gracefully natural and unconstrained. 5 (of sudden movement etc.) involuntary, not due to conscious volition. 6 growing naturally without cultivation. spontaneous combustion the ignition of a mineral or vegetable substance (e.g. a heap of rags soaked with oil, a mass of wet coal) from heat engendered within itself, usu. By rapid oxidation. 41 The Supplementary Report provides the referee's reasoning process for drawing some meaningful distinction between the concept of "self-heating" and "spontaneous heating". The referee expresses his view that they are "not quite synonymous terms". This is because, according to the referee, spontaneous suggests "an event or a suddenness" and self-heating can be a "very slow process" which can take months to reach "criticality". It is for this reason that the referee described the process as self-heating rather than spontaneous heating. Both parties agreed that it was for the Court to determine the content to be given to the word "spontaneous" as used in the Policy to the extent that it was relevant. It seems to me that the ordinary, usual and relevant meaning of the word "spontaneous", is that it describes the occurrence of something without external cause. Although spontaneous combustion is usually related to something that occurs with some rapidity, when talking about spontaneous in the sense of qualifying the causal concept of heating, it simply means that it occurs without external incitement or factors, rather it is something which occurs by reason of internal processes. 14 Thus, the primary judge concluded that there had been shown to be "spontaneous heating", if the word "spontaneous" qualified the word "heating". 15 The third question dealt with by the primary judge was the argument of the appellant encapsulated by the primary judge at [42] of his reasons: The above is not sufficient to determine the case because Dalby argues that the Insurers have failed to discharge their evidentiary and persuasive burden of identifying that heating (or more precisely, self-heating) is the proximate cause of the damage. Reliance is placed by Dalby on the cautions, or more specifically, the "caveat" expressed by the referee. In the Referee Report, under the heading "Overall Caveat", the following appears: Without detailed records of the manner in which Bays 2, 1 and 3 were stacked with product (DDGS); including the quantities delivered, the dates of delivery, the temperature of each delivery and the ambient temperature and relative humidity at each delivery, and without further information of the physical properties of the product (DDGS), one cannot be absolutely certain of the most probable cause of damage to the Applicant's product. Unfortunately, based upon the information and materials available, it is not possible to identify a single cause for the self-heating which probably led to combustion and damage of the Applicant's product. It may well be that all of the factors identified above acted together to cause the damage, but without conducting large scale tests, it is likely that detailed causal relationships will remain unknown. 16 At [44]-[48] the primary judge examined the reasons of the referee as follows: 44 What the referee was relevantly reporting upon was his opinion as to what was the likely cause of damage to the Product. As both parties accepted on the application for adoption of the Referee's Report, the referee properly attended to his task and his process of reasoning set out in the Referee's Report is relatively clear. He starts by identifying that the damage to the Product "was most likely occasioned by or happened through self-heating". He then proceeds to note that "as there is more than one mechanism that can cause self-heating, each of these mechanisms need to be considered in turn". The reference to "cause" in this context needs to be examined more closely. Although the referee was expressing a view that damage was caused through self-heating, the referee was also directing himself to the anterior issue as to the mechanism which itself caused the self-heating. 45 The referee then considers various "mechanisms" which could cause self-heating, being: ambient temperature and stockpile size, initial temperature and stockpile size, wetting, and spontaneous fermentation. Dealing with each of these in turn, the referee notes that the ambient temperature and stockpile size could only have caused self-heating leading to spontaneous combustion if the stockpile size was significantly larger than the stockpile size that had been referred to in the reports provided to him. As to initial temperature and stockpile size, the referee considered it was difficult to estimate its contribution as there was, apparently, insufficient material available to make an estimate of the critical stockpiling sizes or stacking temperatures at the relevant times. 46 As to wetting, while there was evidence that ingress of water caused localised wetting, the referee considered the amount of water appeared to be quite small in comparison to the overall size of the stockpile. This factor, and other indications, suggest that wetting would have had little effect on heating, although it could not be conclusively ruled out. The conclusion was formed that it seemed unlikely to be a singular cause of the self-heating. 47 Finally, the referee ruled out spontaneous fermentation as all investigators had concluded that there were insufficient quantities or sources of yeast within the stockpile. 48 In this way, what can be observed is that the referee was carefully going through the various factors which either individually or together might have been the basis for self-heating to occur. The way in which Dalby puts it, is that it could not sensibly be said that self-heating was the real and proximate cause of the damage, but rather there needs to be recognition of the fact that the referee could not identify what, in fact, caused the loss and damage to the Product. 17 After referring to Gunns Forest Products Ltd v North Insurances Pty Ltd [2006] VSCA 105; 14 ANZ Insurance Cases 61-691, the primary judge concluded that the referee's inability to explain why the self-heating took place did not undermine his conclusion that, whatever the causative mechanism, the appellant was seeking to make the insurer liable for damage occasioned by or happening through self-heating and so (spontaneous) heating, within perils exclusion 6(c)(ii) of the policy.

The arguments on appeal and their resolution 18 There was no disagreement between the parties as to the principles of construction of insurance policies. The proper approach to construction of insurance policies, and in particular the resolution of the meaning of exclusion clauses, as a species of commercial contract is to be found in decisions of the High Court: Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; 161 CLR 500 at 510; Johnson v American Home Assurance Company [1998] HCA 14; 192 CLR 266 at 272-276 [19] (Kirby J, albeit in a dissenting judgment); McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; 203 CLR 579 at 589 [22]; Wilkie v Gordian Runoff Ltd [2005] HCA 17; 221 CLR 522 at 528-529 [15]-[16]; Selected Seeds Pty Ltd v QBEMM Pty Ltd [2010] HCA 37; 242 CLR 336 at 344 [29]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 256 CLR 104 at 116-117 [46]-[52]; and Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 251 CLR 640 at 656-657 [35]. 19 Complaint was made by the appellant that the primary judge had failed to consider the whole of the policy in coming to his preferred construction of the exclusion. In support of that submission, the appellant referred to the structure and various parts of the policy. It is unnecessary to deal with every refinement of this submission. 20 The policy had clearly been negotiated by important changes to the operation of the cover, the property exclusions and the perils exclusions. None of the terms of the insuring clause, the level of the deductibles, or the property insured (subject to property exclusions) or the basis of settlement clause assists in ascribing meaning to the word "heating" in perils exclusion 6(c)(ii). 21 It was submitted that the changes to property exclusion 16 dealing with machinery breakdown, to property exclusion 17 dealing with boiler and pressure vessel explosion, the extension of cover for computer and electronic equipment breakdown and the extension of cover for fusion assisted in understanding that the word "spontaneous" qualified the word "heating" in perils exclusion 6(c)(ii). None does so. Property exclusion 16 was replaced in the endorsement by a completely new regime for indemnification and exclusion (property and perils) for "sudden and unforeseen physical loss of or damage to Machinery [as defined] occasioned by or happening through any mechanical, electrical, electromechanical, electronic or hydraulic malfunction, failure, derangement, breakdown or non-operation of any kind except as otherwise specifically excluded". A regime of property and perils exclusions that took precedence over the exclusions applicable generally was then set out. It was submitted that the indemnity in this new regime covered heating. So much can be accepted, but the operation of this clearly separated and coherently drafted regime of coverage for machinery breakdown does not assist the understanding of perils exclusion 6(c)(ii). 22 The computer and electronic equipment breakdown extension of cover in the endorsement excluded perils exclusion 6(c). It was submitted that this showed that "heating" in perils exclusion 6(c)(ii) was "spontaneous heating". That does not follow at all, other than by bare assertion. 23 The new regime for boiler and pressure vessel explosion by the replacement of property exclusion 17 and the extension of cover for fusion in electrical equipment by the endorsement likewise do not assist. 24 The primary judge displayed no error in not lengthening his reasons for judgment by referring to parts of the policy of no assistance. 25 The proper meaning to be given to perils exclusion 6(c)(ii) is a businesslike construction, by reference to what a reasonable business person would have understood the words in their commercial context to mean. 26 Here, the policy is carefully drawn and proper regard should be made to the language used, including usual grammatical and syntactical usage, without overly dwelling on choices of structure, syntax or punctuation that are open to different nuances. 27 The reasons of the primary judge for the lack of qualification to the word "heating" by the word "spontaneous" set out at [12] above have force. They are supported, as was submitted by the insurer, by the repetition elsewhere (such as in perils exclusion 4(e) of a relevant modifier: "faulty materials or faulty workmanship"). 28 If anything, the policy is marked by a degree of precision and economy of language. For instance, in perils exclusions 1-7 the phrase "physical loss, destruction of or damage to the Property" does not require the repetition of "physical" before "destruction" on "damage" for the word "physical" to pervade the expression. 29 The policy is to be understood in a context where the insured stored large quantities of grain. Perils exclusion 6(c) can be seen to be removing certain matters from the risks that the insurer was willing to accept and that were to be placed at the risk of the insured. Perils exclusion 6(c)(i), "spontaneous combustion", is a phrase encompassing actual "combustion". Its spontaneous character may manifest itself in a sudden event of fire or ignition, but spontaneous does not mean sudden; rather, as the dictionaries show, it means self-generated or from within. That is, the thing itself, by reason of its particular environmental or internal conditions will oxidise and heat and through a feedback mechanism ultimately raise the temperature leading to the point of ignition or fire, which a layman would consider to be combustion; a more technical viewpoint, though, may consider combustion to be merely a synonym of oxidation. The first part of perils exclusion 6(c)(ii), "spontaneous fermentation", occurs in the process of sugar being converted to alcohol in the presence of and by yeast. Again, this is a self-generated process. The second part of perils exclusion 6(c)(ii), "heating", is explicable in the context where perils exclusion 6(c)(i),"spontaneous combustion", as understood by a layman, is only the endpoint of and may not capture the self-generated heating prior to that endpoint , which self-generated heating may (as here) damage property such as grain, hay and the like. Accordingly the context makes it apparent that "heating" is to be qualified by "spontaneous" to read "spontaneous heating". And that is an open grammatical construction, with the word "spontaneous" in the phrase "spontaneous fermentation and heating" being applied distributively. Now up to this point these perils exclusions are dealing with internally generated processes. Contrastingly, the balance of (ii): "or any process involving the direct application of heat" involves the external application of heat. Indeed, if "heating" were not qualified by the idea of self-generation in the meaning of "spontaneous" there would be little need for the balance of (ii). 30 Also the structure of the proviso - "such spontaneous combustion, fermentation or heating" -tends to confirm that spontaneous in the sense of self-generated heating was intended to qualify heating. 31 On this view, the clause would cover self-generated combustion, fermentation and heating as well as the external application of heat. 32 This difference of view with the primary judge is as much, if not more, a conclusion drawn from impression of meaning as it is from any logical reasoning. Further, though one needs to be careful with reliance on the contra proferentem rule, especially when there has been an evident degree of negotiation of the policy, if there are two genuinely available alternatives preference should be given to one that limits rather than expands the exclusion. That is not to approach the matter other than as dictated by the Court in Darlington v Delco 161 CLR at 510. 33 Thus, we respectfully disagree with the primary judge on the qualification of the word "heating" with the adjective "spontaneous". 34 We agree, however, with the alternative reasoning of the primary judge that the referee's report and the ordinary and proper meaning of the phrase "spontaneous heating" that should be given objectively as that which would commend itself to business people lead to the conclusion that the self-heating, caused by whichever mechanism or combination of mechanisms, was spontaneous heating. 35 The appellant accepted that the meaning of "spontaneous" included the notion of self-generation or arising from internal forces or causes. It urged, however, a meaning that was more colloquial that included the notion of an event or some suddenness. We do not see that as being a necessary part of the meaning of spontaneous. It may be within the meaning of the composite phrase "spontaneous combustion" (if one conceives of combustion as immediate or sudden). It may, in some contexts (such as a spontaneous human gesture), sometimes carry a sense of immediacy. But its meaning is broader, as the dictionaries show. Further, there is no reason why "spontaneous fermentation" would be understood as in any way sudden. Fermentation is a gradual process. Thus, we agree with how, in [41] of his reasons, the primary judge dealt with the referee's views that "self-heating" and "spontaneous heating" were "not quite synonymous". There is no basis to conclude that the referee's second report was other than his understanding of the word "spontaneous". It was not put by him as a term of scientific art or as a matter of science. The primary judge was entitled to approach the meaning of the word as a matter for him. He was correct in his analysis and conclusion. 36 The appellant also submitted that there was required to be proved by the insurer an absence of an independent cause, which it was said had not occurred, because of the doubts of the referee as to the cause of the self-heating and the possibility of wetting (as an external cause, independent of self-heating, it was submitted). 37 Once again we agree with the way the primary judge dealt with the issue. The perils exclusion dealt with damage occasioned by or happening through (a process of) spontaneous heating. Spontaneous heating, that is heating generated internally (as opposed to externally), involves environmental factors providing oxygen, whether through air or water, for a process of oxidation and heating. The circumstances that provided the suitable conditions for the self-generated heating through oxidation explain why the process of spontaneous heating occurred. An inability to be precise or definite about why the process occurred is not doubt that the process occurred. 38 The sense of this approach can be seen if one appreciates that the circumstances and control of the environment which may lead to spontaneous heating or combustion or fermentation are likely to be, in significant part, in the control of the insured: the exposure of the property likely to be subject to such processes to conducive environments of moisture, heat and oxygen. In these circumstances, the enquiry under the perils exclusion ceases at the finding of the answer to the question whether the damage was occasioned or happened through (the process of) spontaneous heating, and does not go further to seeking to explain why the (process of) spontaneous heating came about. 39 For these reasons the appeal should be dismissed with costs. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Allsop, and Justices Beach and Anastassiou.