3. The orders of the Magistrates Court are set aside.

4. There is a verdict for the respondent/cross-appellant.

5. Subject to any submissions that the parties wish to make, the appellant/cross-respondent is to pay the costs of the respondent/cross-appellant, including the costs of the proceedings in the Magistrates Court.

APPEAL - Civil - insurance contract - breach of contract - good faith

Magistrates Court Act 1930 (ACT) pt 4.5

Court Procedure Rules 2006 (ACT) rr 1702, 1720, 5052, sch 4

Insurance Contracts Act 1984 (Cth) ss 13, 46, 57

CGU Insurance v AMP Financial Planning Pty Ltd [2007] HCA 36; (2007) 235 CLR 1

Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64

Gary Wilson Kingston v Australian Capital Territory [2011] ACTSC 165

Goreski v de Costa [2014] ACTSC 233

Malec v JC Hutton Pty Ltd [1990] HCA 20; (1990) 169 CLR 638

Moss and Anor v Alliance Australia Ltd (1990) 93 ALR 592

Case Title: Karen Narelle Fogarty v CGU Insurance Ltd

1. The respondent (the insurer) entered a contract (the insurance contract) with the appellant (the insured). The insurer agreed to insure the building and contents of a residence in Deakin, ACT (the premises) against accidental loss or damage, including damage caused as a result of a fire.

2. On 12 May 2009, there was a fire in the kitchen of the premises. The insured made a claim for the fire damage. The insurer accepted the claim and elected to repair the damage.

3. Controversy arose in relation to damage that had been caused to three kitchen floorboards. Ultimately, the insurer proposed that the three damaged floorboards would be replaced and the entire kitchen floor would be re-sanded and re-sealed to a uniform finish. The insured was concerned that re-sanding would cause the kitchen floor to fail because it had been sanded on three prior occasions and was wearing thin. The insured pressed the insurer to accept responsibility for replacing the whole floor, in the event that sanding caused failure. The insurer declined to give that assurance.

4. To date, the floor has been neither repaired nor replaced.

5. The insured brought proceedings in the Magistrates Court, claiming damages (including "loss and inconvenience as a result of having to use the kitchen in an unrepaired state"), interest and costs pursuant to s 57 of the Insurance Contracts Act 1984 (Cth) (the Act) for the cost of repairs to the kitchen. The insured asserted that the insurer had breached the insurance contract by failing to repair the damage or pay for the proper cost of repairing it.

6. On 8 August 2014 the Magistrates Court entered judgment for the insured in the sum of $9,700 plus interest of $1,274, and ordered that the insurer pay the costs of the insured. The Court also ordered the parties to agree on a timetable for the commencement of repair work.

7. The insured appealed and the insurer cross-appealed.

(a) The Magistrate failed to determine the claim for breach of the insurance contract in relation to repair of the kitchen;

(b) The Magistrate erred in making orders in the nature of specific performance including directions as to how the remedial work was to be performed;

(c) The Magistrate failed to properly determine issues of credibility, contested facts and competing expert opinion; and

(d) The award of damages for inconvenience of $100 per week and interest should not have ceased on 8 August 2014 and should have continued for as long as the kitchen remained unrepaired or until the insured was awarded damages for breach of the insurance contract.

(a) The Magistrate erred in making orders in the nature of specific performance as he lacked jurisdiction to do so and because the insured's claim was limited to damages, interest and costs;

(b) The Magistrate erred in finding that the insurer had breached its contractual duty to act with utmost good faith;

(c) The Magistrate erred in finding that the insurer had breached its contractual obligations to repair the fire damage;

(d) The Magistrate failed to decide whether the fire damage could have been repaired by replacing only three fire- affected floorboards in the kitchen;

(e) The Magistrate should have found that the insurer had satisfied its contractual obligations by offering to conduct repairs to the damage in accordance with an assessment report of 15 May 2009;

(f) The Magistrate should have found that the insurer was entitled to rely upon exclusion clause 6 (the exclusion clause) in the insurance contract to limit liability to the replacement of the three fire-affected floorboards;

(g) The Magistrate misapplied s 46(2) of the Act in relation to the exclusion clause;

(h) The Magistrate erred in finding that the insured was entitled to damages;

(i) The Magistrate failed to provide reasons or explanation for assessing damages of $100 per week;

(j) The Magistrate erred in awarding interest pursuant to s 57 of the Act; and

(k) The Magistrate erred in awarding costs in favour of the insured.

10. The insurance contract provided coverage "for loss or damage as a result of a fire". It excluded "any loss or damage as a result of, or caused by... a defect in an item, structural defects, or faulty workmanship or design". It provided that the insurer would decide whether the claim would be settled by repair, rebuilding, or payment to the insured of the cost of repair or rebuilding.

11. The original installation of the timber floor in the kitchen was defective in several respects: the installation had caused edge bonding and clumping, and no "slip tongue" had been inserted at "groove on groove" joins. Prior to the fire, neither the insured nor the insurer was actually aware of those defects. Although the evidence referred to the defects, the relevance of the defect evidence is unclear.

12. When the kitchen floor was re-sanded in 2007, the insured was advised that the sanding should withstand 10 years of use. She was further advised that, on the next occasion when re-sanding was required, the re-sanding could compromise the structural soundness of the floor, and the floor may need to be replaced.

13. After the fire on 12 May 2009, the insurer appointed loss assessors and obtained a repair quotation from Reliance Building Services (Reliance). The quotation of 15 May 2009 was for $6,199. Relevantly, it provided for sanding and re-sealing of the kitchen floor, but did not propose that any floorboards be replaced.

14. On 10 June 2009, the premises were inspected by Mr Cooper of the insurer's loss assessors. When the insured expressed her concern that re-sanding would cause the floor to fail and need replacement, he proposed that the floor be sanded first and, if it failed, then he would recommend to the insurer that the floor be replaced.

15. However, on 20 August 2009 and again on 10 December 2009, the insurer advised the insured that, as the thickness of the kitchen floorboards was unrelated to the fire, should replacement of the entire floor prove necessary then the insurer would not meet the cost.

16. On 10 December 2009, the insurer offered to settle the matter for $6,099 (the original quotation of $6,199 less the excess of $100). Unfortunately, this was mistakenly expressed as an offer to repair the floors for that sum, rather than as an offer to settle the whole claim for that sum.

17. On 9 May 2011, the insured rejected the offer. She maintained that, but for the fire, the kitchen floor would have required neither sanding nor replacement for many years and the cost of immediate replacement should be borne by the insurer.

18. By a letter dated 28 July 2011, the insurer confirmed that it had elected to repair the three damaged floorboards and re-sand and re-seal the remainder of the floor to achieve uniform appearance. The insurer went on to state:

If, after the repair has been conducted, you feel that there is a problem with the repair then you may have your complaint investigated by CGU... If, after the repair process, possible complaint and subsequent investigation by CGU, it is found by CGU that the repair does not fulfil CGU's policy obligations then action will be taken by CGU to remedy the problem.

19. In February 2012, the insured commenced proceedings in the Magistrates Court, claiming breach of contract (including failure to pay for replacement of the whole floor), breach of s 57 of the Act for unreasonably withholding payment of the claim after 27 August 2009, interest and costs.

20. In an attempt to address the impasse, the parties agreed that a Mr Swindale of Thrust Floors International Pty Ltd should be engaged. In August 2012, Mr Swindale reported that the burn marks could be sanded from the three damaged floorboards. Further Mr Swindale reported that the kitchen floorboards retained sufficient wood to enable re-sanding. In evidence, he conceded the theoretical possibility that re-sanding would cause floor failure.

21. In August 2012 and again in November 2012, the insured proposed that the insurer obtain an up-to-date quotation for sanding and re-sealing of the floor. Further, the insured sought an assurance from the insurer that, should sanding of the floor cause the floor to fail, then the insurer would replace the floor. The latter proposal was expressed to be made as a Calderbank v Calderbank offer.

22. On 27 September 2012 the insurer made a final offer. The insurer maintained that the damaged floorboards did not require replacement and the floor could withstand re-sanding. It asserted that the original offer of $6,099 had been reasonable and should have been accepted in 2009. However, it offered to pay the insured $7,860 (the amount of an updated quotation from Reliance). It noted that, should the insured reject the offer, then the letter would be relied upon in relation to interest and costs. The insured did not accept the offer.

23. In August 2013, the insurer filed a defence, stating that it had accepted the claim and made an early, fair and reasonable offer to repair the premises but the insured had unreasonably rejected the offer. It relied upon the exclusion clause, claiming that it was not liable for replacement of the floor to the extent that any need for replacement was caused by defects, faulty workmanship or design. It denied that it was liable for replacement of the floor.

25. At the hearing, the insured relied upon the expert evidence of Mr Powell. In his decision at [67] his Honour noted Mr Powell's evidence that it was not possible to know how the floor would respond until sanding had commenced. At [83] - [85], his Honour concluded that the approaches of Mr Swindale and Mr Powell were "not inconsistent".

26. The Magistrate reached the common sense conclusion that the three damaged floorboards should be carefully sanded in an attempt to remove the burn marks. The whole floor should then be sanded and, if any part failed (whether the three damaged floorboards that required extra sanding or a greater part of the floor), it should be replaced.

27. The Magistrate directed the parties to agree a timetable for the performance of the work.

28. The Magistrate ordered that the insurer pay the insured $9,700 ($100 per week x 97 weeks) for the "practical inconvenience of having the effective loss of and utility afforded to any family in having a fully functioning kitchen", plus interest on that sum of $1,274. The interest related to the period up to judgment.

29. The Magistrate ordered the insurer to pay the insured's costs in an amount agreed by the parties pursuant to r 1702 of the Court Procedure Rules 2006 (the CPR). In default of the filing of an agreement under the rule within 28 days of the date of the order, then pursuant to r 1720 of the CPR, the amount was to be assessed by the Registrar in accordance with the scale of costs in Schedule 4 to the CPR.

30. Civil appeals from the Magistrates Court to the Supreme Court are governed by Part 4.5 of the Magistrates Court Act 1930 (ACT) and r 5052 of the CPR. It is necessary for this Court to determine whether the Magistrates Court erred in law, or made a finding of fact that was clearly wrong: per Refshauge J in Gary Wilson Kingston v Australian Capital Territory [2011] ACTSC 165 at [59]. As noted in Goreski v de Costa [2014] ACTSC 233 at [7]:

Such an appeal is a rehearing on the evidence with a power to receive new evidence. The appellate court must conduct a "real review", weighing conflicting evidence, and drawing its own inferences from the undisputed and established facts, but bearing in mind the advantages of the primary judge in relation to fact finding...

Anticipatory breach considered by the Magistrate

31. Under the heading of "Findings" at [76], the Magistrate observed that the approach taken by the insurer in December 2012 was contrary to its position of 28 July 2011, created uncertainty and constituted an arbitrary change of position. The Magistrate noted that, in earlier correspondence, the insurer had overstated the amount that it was prepared to allow for damage to the floor. The Magistrate considered that the insurer had "(clung) to defect as an exclusion". The Magistrate characterised these behaviours as the persistent maintenance of an untenable construction of the insurance contract that was not consistent with the continuing intention to observe the contractual obligations.

32. The Magistrate's language suggests a finding of anticipatory breach. However, in the course of the proceedings the insured had neither pleaded nor submitted that there had been an anticipatory breach. The question was raised only incidentally by the insurer.

33. Despite [45] of her submission, on the appeal, the insured did not rely upon any finding of anticipatory breach. Rather, it was submitted that the Magistrate's decision was correct for other reasons.

Specific performance (appeal ground 2, cross-appeal ground 1)

34. The Magistrate made orders in the nature of orders for specific performance, requiring the parties to agree a timetable for the performance of work.

35. The insured had not sought specific performance and the insurer had not addressed the issue.

36. The parties agreed that the Court should allow the grounds of appeal and cross-appeal relating to specific performance.

37. The insurer argued that the Magistrate misapplied s 46(2) of the Act in relation to the exclusion clause.

(1) This section applies where a claim under a contract of insurance... is made in respect of a loss that occurred as a result, in whole or in part, of a defect or imperfection in a thing.

(2) Where, at the time when the contract was entered into, the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the defect or imperfection, the insurer may not rely on a provision included in the contract that has the effect of limiting or excluding the insurer's liability under the contract by reference to the condition, at a time before the contract was entered into, of the thing.

39. The insurer contended that flooring defects and poor workmanship associated with the original installation of the floor may increase any risk of floor failure associated with re-sanding. The insurer claimed that the effect of the exclusion clause was that it was "not liable for the costs of repair or replacement of the floor to the extent that the repair or replacement is a result of or caused by the [pre-existing] defects, faulty workmanship or design".

40. In response, the insured relied on s 46(2) of the Act in its oral submissions.

41. At [57] - [65], the Magistrate referred to the exclusion clause. The Magistrate decided that the insured should be permitted to rely upon s 46(2) of the Act, although it had not been pleaded in the original claim. The Magistrate referred to the flooring defects that had been identified, such as clumping and edge bonding. But the Magistrate made no express finding that such defects were associated with any risk of floor failure. The Magistrate's ultimate findings seem to be unrelated to the relevant defects, the exclusion clause or s 46.

42. This ground of the cross-appeal is not made out; it is not apparent that the Magistrate misapplied s 46 in a manner that materially affected the outcome.

Breach of contractual obligation to repair (cross-appeal ground 3)

43. The insurer submitted that the Magistrate erred in finding that the insurer had breached its contractual obligations to repair the fire damage.

44. At [80], the Magistrate found that breach of contract was evidenced by the insurer's letter of 28 July 2011:

when it effectively informed the plaintiff it would do nothing more and if the plaintiff was not satisfied with any repair work undertaken it should make a further complaint to CGU.

45. There was no factual basis for finding a breach of the agreement to repair. Indeed, the Magistrate did not clearly make such a finding.

46. From the outset, the insurer had accepted that it was liable to repair the burn damage to the three damaged floorboards and to re-sand and re-seal the whole floor. Later, it offered to replace the three damaged floorboards (although the need to do so was never established on the probabilities). Still later, it offered the insured the alternative of a cash settlement calculated by reference to the cost of re-sanding (rather than replacing) the floor.

47. Fairly read, the insurer's letter of 28 July 2011 was not a statement that it "would do nothing more". Rather, it was a confirmation that, in the first instance, the insurer would only pay for the re-sanding and re-sealing of the floor. The letter left open the possibility that, should the floor fail as a result of re-sanding, then the insurer would consider whether it was contractually obliged to remedy the problem.

48. At no stage did the insurer dispute that it was contractually obliged to repair the floor, although the insurer did dispute the content of that contractual obligation.

49. The Magistrate did not clearly express his factual findings about the content of the contractual obligation to repair in this case. From the Magistrate's reasons and the terms of the orders for specific performance, it is apparent that he made the following findings:

(a) While it was possible that the three floorboards could not be repaired and would require replacement, this was not established on the balance of probabilities;

(b) Although there was a possibility that re-sanding of the whole floor to achieve a uniform finish would cause floor failure, this was not established on the balance of probabilities; and

(c) If it became necessary to replace the three floorboards or to replace the entire floor, the need for replacement would be causally related to the fire.

50. There was ample evidence to support each of these findings, including the assessment report of Reliance dated 14 May 2009, the report of Mr Cooper of the loss assessors dated 17 June 2009, and the report of Mr Swindale.

51. When the Magistrate's factual findings about the content of the contractual obligation to repair are compared to the insurer's offer of 28 July 2011 (and earlier offers) it is apparent that the Magistrate erred in finding that the insurer breached its contractual obligation to repair.

Damages for breach of agreement to repair (appeal ground 1, cross-appeal grounds 4, 5 and 8)

52. The insured submitted that the proper quantum of damages for the cost of repairing the floor should include an adjustment to allow for the real possibility that, when re-sanding occurred, the whole floor would fail. The insured submitted that the Magistrate should have decided the degree of possibility that the floor would fail and reflected that possibility in the damages award.

53. In support of its contention, the insured relied on Malec v JC Hutton Pty Ltd [1990] HCA 20; (1990) 169 CLR 638, a tort case. In Malec at [7], the plurality stated that a Court was required to assess the degree of probability that an event might occur and adjust the award of damages to reflect that probability. The insured submitted that, in Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64, the High Court had decided that, in breach of contract cases (like tort cases), damages should be adjusted to take account of contingencies, regardless of whether the contingencies were established to be more probable than not .

54. The insured's reliance on Amann is misguided. Amann did nothing to disturb the basic principle that damages for breach of contract are awarded on the basis that the injured party is to be placed, as far as monetary compensation can do, in the same situation as if the contract had been performed. The injured party must demonstrate on the balance of probabilities that the outcome for which damages are sought would have resulted if the contract had been performed: Amann per Mason CJ and Dawson J at [24].

55. The argument of the insured fails to distinguish between establishing that a breach of the contract has occasioned damage (a matter that must be established on the balance of probabilities) and the quantification of established damage.

56. Amann considered the proper approach to quantifying the damage associated with the loss of a chance to make a profit, where the loss of the chance was caused by a breach of a contract. In such a case, the plaintiff must still prove on the balance of probabilities that a breach of contract caused the relevant loss of a chance. In Amann at [42], Mason CJ and Dawson J said:

In the case of aleatory contracts, damages are awarded for loss of a chance and the burden of establishing the existence and loss of this chance as a result of the defendant's breach lies on a plaintiff although, as has already been observed, mere difficulty of estimation does not relieve a court or jury, in appropriate cases, of the task and responsibility of placing a value on the chance lost.

57. In this case, the insurance contract was not an aleatory contract. The alleged breach of the obligation to repair was quite different from the sort of breach that was considered in Amann. It was not a breach that caused the loss of a commercial opportunity or the "loss of a chance" to make a commercial profit or otherwise benefit.

Duty of utmost good faith (cross-appeal ground 2)

58. The insurer submitted that the Magistrate erred in finding that the insurer had breached its contractual duty to act with utmost good faith.

59. In the Magistrates Court, the insured did not plead breach of the duty of good faith. However, in closing argument, submissions about breach of the duty were made by the insured without objection from the insurer.

60. The Magistrate found a breach of the duty of utmost good faith. His Honour observed:

70. Given that evidence from the defendant's own expert, it is difficult to reconcile why the warranty sought by the plaintiff back in 2011 was not subsequently given by the defendant to the plaintiff following the receipt of Thrust Report by the defendant on or about the 1 August 2012.

71. Adopting the approach as set out in the defendant's final letter of offer of 2012 in response to the plaintiff's claims by filing a Defence so as to advance the issue further down the litigation process was a breach of the defendant's contractual duty to act with the utmost good faith, for the reasons set out above.

72. Carrying out repair or to give effect to a genuine repair strategy that included the whole kitchen floor and advise the plaintiff of that strategy in a timely and reasonable manner was an obligation owed by the defendant and breached by the defendant. At worst for the defendant was the potential for a [sic] additional floorboards being replaced on the basis they might fail because of either edge bonding or clumping or reverse parallel laying, to which the defendant could have no understanding of when the policy was entered.

...

73. [The insured's letter of 28 July 2011] failed the test of acting in the utmost good faith by the defendant insurer to the plaintiff insured...

61. At [74] his Honour referred to the decision in Moss and Anor v Alliance Australia Ltd (1990) 93 ALR 592. The insurer in that case was found to have breached the duty to act with utmost good faith by unreasonably delaying in admission of liability and withholding payment. At [75], his Honour noted that, in December 2012, three months after receiving Mr Swindale's report, the insurer:

maintained its opposition to providing the assurances sought by the plaintiff by offering and [sic] increased cash sum to settle.

62. Section 13 of the Act provides:

(1) A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.

(2) A failure by a party to a contract of insurance to comply with the provision implied in the contract by subsection (1) is a breach of the requirements of this Act.

63. In relation to the duty of an insurer to act with utmost good faith, in CGU Insurance v AMP Financial Planning Pty Ltd [2007] HCA 36; (2007) 235 CLR 1 at [131] Kirby J stated:

...the criteria of dishonesty, caprice and unreasonableness more accurately express the ambit of what constitutes a breach of s 13 of the [Insurance Contracts] Act.

64. At [257] Callinan and Heydon JJ agreed with the Chief Justice and Crennan J that a lack of utmost good faith is not to be equated with dishonesty only and said that:

Utmost good faith will usually require something more than passivity: it will usually require affirmative or positive action on the part of a person owing a duty of it.

65. In this case, the insurer accepted liability for repair at the outset. At that stage, there was no debate about quantum; the insurer was prepared to effect repairs itself. The repairs were not undertaken because the insured sought an assurance that the insurer was not prepared to give concerning the possibility that the repairs would result in further damage. While it may have been helpful to do so, the insurer was under no contractual obligation to make the assurance. The actions of the insurer in declining to provide the assurance fell well short of the type of act of dishonesty, caprice or unreasonableness that would constitute a breach of the duty of utmost good faith.

66. The Magistrate erred in finding that the insurer breached its duty of utmost good faith.

Damages for inconvenience (appeal ground 4, cross-appeal ground 9)

67. The insurer submitted that the Magistrate failed to provide reasons for assessing the damages for inconvenience in the amount of $100 per week from 27 September 2012 to 8 August 2014. Although the insured had suggested a figure of $5 - 10 a day, the Magistrate awarded a much greater sum, and did so without adequate explanation.

68. The insured submitted that, as the kitchen remained unrepaired, the damages of $100 per week should have continued for as long the kitchen remained unrepaired or until the insured received damages for breach of contract. It was further submitted that there was no basis for the Magistrate to select the date of 27 September 2012 (the date of the insurer's final offer) rather than the date when the duty of utmost good faith was breached as the date from which damages for inconvenience should be awarded.

69. The parties agreed that damages for inconvenience were available only in relation to any breach of the obligation to act in utmost good faith. For the reasons stated above, the Magistrate erred in finding that there was a breach of the obligation to act in utmost good faith. Consequently, it is not necessary to decide these grounds.

Interest and s 57 of the Act (cross-appeal ground 10)

70. The insured had claimed interest pursuant to s 57 of the Act and the Magistrate awarded interest on the damages for inconvenience.

71. As I have decided that the insured was not entitled to damages for inconvenience, it is not necessary to decide this ground. However, I note that s 57 of the Act provides:

(1) Where an insurer is liable to pay to a person an amount under a contract of insurance or under this Act in relation to a contract of insurance, the insurer is also liable to pay interest on the amount to that person in accordance with this section.

(2) The period in respect of which interest is payable is the period commencing on the day as from which it was unreasonable for the insurer to have withheld payment of the amount and ending on whichever is the earlier of the following days.

72. Under the insurance contract, the insurer elected to undertake repairs rather than make a payment. Section 57 relates only to contractual liability to pay a sum of money. Further, the Magistrate made no clear findings as required by s 57(2) of the Act.

73. The insured has failed on the appeal and her claim should have failed in the Magistrates Court. She has established no proper basis for refusing the insured's original offer to repair. Subject to any submissions that the parties wish to make, the insured should bear the costs of the proceedings in this Court and in the Magistrates Court.

76. The orders of the Magistrates Court are set aside.

77. There is a verdict for the respondent/cross-appellant.

78. Subject to any submissions that the parties wish to make, the applellant/cross-respondent is to pay the costs of the respondent/cross-appellant, including the costs of the proceedings in the Magistrates Court.

I certify that the preceding seventy-eight [78] numbered paragraphs are a true copy of the Reasons for Judgment of her Honour Chief Justice Murrell.

1. That in the head note "Decision" order 5 deleted and replaced with "Subject to any submissions that the parties wish to make, the appellant/cross-respondent is to pay the costs of the respondent/cross-appellant, including the costs of the proceedings in the Magistrates Court".

2. That at [73] the word "Consequently" deleted and replaced with "Subject to any submissions that the parties wish to make".

3. That [78] deleted and replaced with "Subject to any submissions that the parties wish to make, the appellant/cross-respondent is to pay the costs of the respondent/cross-appellant, including the costs of the proceedings in the Magistrates Court".