Dalby Bio-Refinery Ltd v Allianz Australia Insurance Limited

1. The appeal be dismissed with costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

THE COURT: 1 This is an appeal from orders made by a judge of the Court in the Insurance List dismissing an application by an insured to enforce a claim for material damage under an Industrial Special Risks Policy issued by the respondent insurer. 2 The appellant carries on business as a manufacturer and distributor of ethanol. In carrying out that business it carries on a bio-refinery at Dalby in South East Queensland. 3 In the early hours of 2 March 2016, fire and emergency services attended the premises at Dalby in respect of damage that had occurred and was occurring to stockpiles of dry distillers' grain and solubles in four bays (numbers 1, 2, 3 and 4). The primary judge summarised the matter at [3] of his reasons: At approximately 6.30 am on 2 March 2016, smoke was detected in Bay 2. Queensland Fire and Emergency Services attended the site and conducted tests on small samples which indicated that the Product was unlikely to develop into large scale flaming combustion. When the stockpile of Product in Bay 2 was opened, there was significant discolouration below the surface, while Product near the surface remained pale. The Product had a "burnt smell" and, as a result, the entire stockpile of the Product in Bay 2 was discarded. Subsequent inspection of the Product in Bays 1 and 3 uncovered significant damage and the stockpiles were also discarded. Bay 4 was in a separate part of the storage shed, was only partially filled at the time, and the Product showed no sign of damage. 4 The issue in the case and on appeal was the operation of a perils exclusion in the policy. There was no argument that the policy otherwise would respond to the relevant physical damage. The terms of the perils exclusion were as follows: Perils Exclusions: The Insurer(s) shall not be liable … in respect of:- … 6. physical loss, destruction or damage occasioned by or happening through:- … (c) (i) spontaneous combustion (ii) spontaneous fermentation or heating or any process involving the direct application of heat Provided that Perils Exclusions 6 (c)(i) and 6(c)(ii) shall be limited to the item or items immediately affected and shall not extend to other property damaged as a result of such spontaneous combustion, fermentation or heating or process involving the direct application of heat. 5 The circumstances that gave rise to the damage were referred to a referee for a report. The referee (Rodney Weber B.Sc. (Melb.) and Ph.D. (Tas.)) prepared a report and supplementary report which (subject to questions of the construction of the policy) were agreed by the parties to be adopted. 6 It is convenient to recite [9]-[12] of the primary judge's reasons to understand the essence of the referee's views that were adopted: 9 On 27 July 2018 the referee was asked to address two questions. They are worth setting out in full: 1 Whether, in the opinion of the referee, it is more likely than not, that the damage to the Applicant's product (stockpiles of dry distillers grain and solubles) was occasioned by or happened through: (i) spontaneous combustion of the product; (ii) or spontaneous fermentation; (iii) or heating; (iv) or any process involving the direct application of heat. 2 Whether, in the opinion of the referee, it it is more likely than not, that the damage to the Applicant's product was occasioned by or happened through some other process and, if so, what caused the damage. 10 Following the filing (but prior to the adoption) of the Referee Report, Dalby submitted that the report was not pellucid in that it referred to the term "self-heating". Reference was made to earlier expert reports (not in evidence on the final hearing) to suggest that there was an important scientific distinction between "self-heating" and "spontaneous combustion", and that the Referee Report did not explain what led to the combustion and damage to the Product. It was in these circumstances that an application was made for the referee to answer further questions aimed at clarifying this issue. This occurred by direction being made pursuant to FCR 28.67(1)(b) that the referee explain by further report: (a) whether his conclusions that the damage to the Applicant's product was occasioned by or happened through self-heating means that damage was occasioned by or happened through spontaneous heating; (b) if the answer to question (a) is either yes or no, please explain; and (c) if the answer to question (a) is not necessarily, please explain. 11 During the course of oral submissions today, it was accepted by Mr Horgan QC (who appeared with Mr Murphy on behalf of Dalby) that the referee's opinion, as demonstrated by the Reports, was that it was more likely than not that the damage to the Product was occasioned by or happened through the process of self-heating. This was plainly correct. If one looks at the Referee Report, this conclusion is expressed on five separate occasions with the referee noting: (i) In my opinion the damage to the [Product] was most likely occasioned by or happened through self-heating. (ii) The most probable cause of the damage to the [Product] is self-heating. (iii) The observations that: • product in the first Bay to be filled; namely Bay 2, which was where the smoke and localised flaming was first noticed, had reached a temperature in excess of 65 degrees Celsius, had a burnt smell and was found to be damaged within the stockpile; • product in the next Bay to be filled; namely Bay 1, had also reached a temperature of 65 degrees Celsius and was found to have similar damage within the stockpile; and • the last Bay to [be] filled; namely Bay 3, was also found to have product damage (no temperature measurements given) but deeper within the stockpile; lead me to conclude that the most probable cause of the damage to the [Product] was self-heating. (iv) The most probable cause of the bulk of the damage to the [Product] is self-heating. (v) One cannot be absolutely certain of the most probable cause of damage to the [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 [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. 12 Further, in the Supplementary Report, the referee noted: Unfortunately, it is not possible to be certain of all the factors that contributed to the product damage in the current case. In particular, the cause of the observed flaming combustion on 2 March 2016 cannot be determined with certainty; it may have been self-heating reaching criticality, but it may have been the result of a more complex mix of factors. In my opinion the most probable cause of damage to the [Product] was self-heating and the observations on the 2nd March 2016 were an alert that product damage had occurred. 7 The circumstances of the loss were set out by the referee in a document called "Background Information Relevant to Report". This is annexed and marked as A. 8 The referee sought to explain why the self-heating had happened. He said that there was more than one mechanism that can cause self-heating. These were not causes of the damage distinct from self-heating, but the mechanisms that brought about the self-heating. They were: ambient temperature and stockpile size, initial temperature and stockpile size, wetting, humidity and spontaneous fermentation. The last factor (spontaneous fermentation) was ruled out because of the insufficiency of yeast within the stockpile. The referee said: The self heating may be the result of the manner in which the stockpiles were constructed, including height of these stockpiles, combined with ambient conditions of high temperature and at times high humidity, and possibly exacerbated by moisture adsorption from a humid atmosphere and water ingress prior to 2nd March 2016. Whether the self heating actually led to the observed combustion in Bay 2, or whether the combustion was locally initiated by a more complex combination of self heating and water ingress cannot be conclusively determined based upon the information available. 9 The question of the effect of wetting was then referred to in the answer to question 2, as set out at [6] above: In my opinion water ingress would have contributed to discolouration of the product through the oxidation reaction referred to above. However, it seems unlikely to have been the sole reason for any temperature increase, so in my opinion, the most probable cause of the bulk of the damage to the Applicant's product (DDGS) is self heating. 10 The second report answers the further questions as follows: In my opinion self-heating, an increase in temperature due to internal exothermic reactions, and spontaneous heating are not quite synonymous terms. Spontaneous suggests an event or a suddenness. Self-heating can be a very slow process and if conditions are such that a stockpile is close to critical, it can take months for the temperature in the stockpile to either reach equilibrium, or to reach criticality. It is for this reason that the process is described as self-heating rather than spontaneous heating. If the stockpile reached criticality, then the related ignition event would be described as spontaneous. Additionally, because the self-heating can be a slow process, this allows for the possibility that other factors could influence the final outcome; particularly if it is a large stockpile of product. Unfortunately, it is not possible to be certain of all the factors that contributed to the product damage in the current case. In particular, the cause of the observed flaming combustion on 2nd March 2016 cannot be determined with certainty; it may have been self-heating reaching criticality, but it may have been the result of a more complex mix of factors. In my opinion the most probable cause of damage to the Applicant's product (DDGS) was self-heating and the observations on the 2nd March 2016 were an alert that product damage had occurred. 11 From these reports it is clear that the referee concluded that the damage was caused by self-heating, though he could not be precise about a cause or mechanism that brought about the self-heating, which may have included wetting from rain. His view about a difference between spontaneous heating and self-heating was explained in his second report as based on his understanding of the English meaning of the word "spontaneous".