Fogarty v CGU Insurance Ltd [2016] ACTCA 62

Legislation Cited: Insurance Contracts Act 1984 (Cth) s 57

Cases Cited: CGU Insurance v AMP Financial Planning Pty Ltd [2007] HCA 36; 235 CLR 1 Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64 Malec v JC Hutton Pty Ltd [1990] HCA 20; 169 CLR 638

Parties: Karen Narelle Fogarty (Appellant) CGU Insurance Ltd (Respondent)

Representation: Counsel Mr B W Walker SC and Dr A J Greinke (Appellant) Mr J E Sexton SC (Respondent)

Solicitors Colquhoun Murphy Lawyers (Appellant) Holman Webb Lawyers (Respondent)

File Number: ACTCA 14 of 2015 Decision under appeal: Court: ACT Supreme Court Before: Murrell CJ Date of Decision: 27 February 2015 Case Title: Fogarty v CGU Insurance Citation: [2015] ACTSC 44

The Court:

1. This is an appeal from a decision of a single judge of the Supreme Court (the primary judge) upholding an appeal by the respondent from a decision of a Magistrate. The appellant is the owner of residential premises in the Australian Capital Territory. On 12 May 2009, there was a fire in the kitchen of the premises, causing fire and smoke damage. The appellant held a home and contents insurance policy with the respondent. She made a claim with respect to the damage caused by the fire, and her claim was accepted by the respondent. A dispute arose between the appellant and the respondent concerning a small number of damaged floorboards in the kitchen. The respondent proposed repairing or replacing only the damaged floorboards, and then sanding the rest of the floorboards to achieve a consistent appearance. The appellant disagreed with this approach, maintaining that because of the condition of the undamaged floorboards there was a possibility that the floor would “fail” if it were sanded.

2. The floor in question had previously been sanded on a number of occasions. Most recently before the fire, it was sanded in 2007. The appellant was advised at that time that there could be problems with the floor were it to be sanded again. As we understand it, the concern was that further sanding could cause the timber above the grooves in the floorboards to become too thin to be structurally sound. If that were to occur, the floor, or the sections of it that had failed, would need to be replaced.

3. The original installation of the timber floor in the kitchen was defective in several respects. The installation had caused edge bonding, and no “slip tongue” had been inserted at “groove on groove” joins. Prior to the fire, neither the appellant nor the respondent was aware of these defects.

4. After the fire, the respondent appointed loss assessors and obtained a repair quotation from Reliance Building Services (Reliance). The quotation was for $6,199.00 and provided for sanding and re-sealing of the kitchen floor, but did not propose that any floorboards be replaced.

5. In June 2009, the premises were inspected by a representative of the respondent’s loss assessors. When the appellant expressed her concern that further sanding of the floor would cause it to fail and require replacement, he proposed that the floor be sanded and, if it failed, he would then recommend to the respondent that the floor be replaced. On 20 August 2009 and 10 December 2009, the respondent, however, advised the appellant that as the thickness of the kitchen floorboards was unrelated to the fire, should replacement of the entire floor prove necessary then the respondent would not meet the cost.

6. It is agreed between the parties that the contract of insurance allowed the respondent to decide whether any claim would be settled by repair, rebuilding or payment to the appellant of the cost of repair or rebuilding. On 10 December 2009, the respondent offered to settle the matter for $6,099.00, being the amount of the quotation from Reliance less the excess of $100.00. This was expressed as an offer to repair the floors for that sum, rather than as an offer to settle the whole claim for that sum. On 9 May 2011, the appellant rejected that 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 respondent.

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

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 [the respondent]... If, after the repair process, possible complaint and subsequent investigation by [the respondent], it is found by [the respondent] that the repair does not fulfil [the respondent]’s policy obligations then action will be taken by [the respondent] to remedy the problem.

8. The appellant was not content to accept the approach proposed by the respondent in the letter of 28 July 2011. In February 2012, the appellant 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 Insurance Contracts Act 1984 (Cth) (the ICA) for unreasonably withholding payment of the claim after 27 August 2009, interest and costs.

9. In a sensible attempt to resolve the conflict, the parties agreed that an expert, Mr Swindale of Thrust Floors International Pty Ltd would be engaged to provide a report. In August 2012, Mr Swindale reported that the burn marks could be sanded from the three damaged floorboards, and that the kitchen floorboards retained sufficient wood to enable re-sanding. In later evidence in the Magistrates Court, Mr Swindale accepted that there was a theoretical possibility that re-sanding could cause floor failure. In subsequent correspondence, the appellant sought an assurance from the respondent that, should sanding of the floor cause the floor to fail, the respondent would replace the floor.

10. On 27 September 2012, the respondent wrote to the appellant maintaining that the damaged floorboards did not require replacement and that the floor could withstand re-sanding. It asserted that the original offer of $6,099.00 had been reasonable and should have been accepted in 2009. It offered, however, to pay the appellant the sum of $7,860.00, the amount of an updated quotation from Reliance. The appellant did not accept the offer. In August 2013, the respondent filed a defence in the Magistrates Court proceedings stating that it had accepted the claim and made an early, fair and reasonable offer to repair the premises but the appellant had unreasonably rejected the offer. It relied upon an exclusion clause in the contract of insurance, 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 obliged to replace the floor under the terms of the contract of insurance.

11. The claim proceeded to hearing before a Magistrate. The appellant’s claim was expressed as one for damages for breach of contract. It is important to note that the claim pleaded by the appellant was that the respondent breached its contractual obligations to the appellant by reason of its proposed method of repair of the kitchen floorboards. At the hearing, evidence from another expert, a Mr Powell, was called by the appellant. The effect of that evidence was that it was not possible to know how the floor would respond until sanding had commenced. The Magistrate concluded that the approaches of Mr Swindale and Mr Powell were “not inconsistent”. The Magistrate found that the respondent had breached its contractual duty to repair the damage, and had breached its duty to act in utmost good faith. Instead of awarding damages, the Magistrate made orders akin to specific performance, ordering that the three damaged floorboards be carefully sanded by the respondent in an attempt to remove the burn marks. The whole floor should then be sanded and, if any part failed, it should be replaced. The Magistrate directed the parties to agree to a timetable for the performance of the necessary work. He further ordered that the respondent pay the appellant $9,700.00 (being $100.00 per week for 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 amounting to $1,274.00. The Magistrate ordered the respondent to pay the appellant’s costs of the proceedings either as agreed by the parties or as assessed by the Registrar in accordance with the provisions of the Court Procedures Rules.

The appeal to a single judge

12. The appellant appealed from the decision of the Magistrate and the respondent cross appealed. The appeals were heard by the primary judge. Both the appellant and the respondent agreed before the primary judge that the orders of the Magistrate requiring specific performance should be set aside on the grounds that the appellant had not sought such orders, and the respondent had not had an opportunity to address the issue before the Magistrate.

13. With regard to the finding by the Magistrate that the respondent had breached its contractual obligations to repair the fire damage, the primary judge found that the Magistrate had erred in determining that the evidence was capable of supporting such a finding. Her Honour found that the Magistrate made the following findings of fact, and that there was ample evidence to support each of the 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.

14. The Magistrate found that breach of contract by the respondent was evidenced by that portion of the respondent’s letter of 28 July 2011, set out at [7] above, which he interpreted as effectively informing the appellant that the respondent would do nothing more than the proposed sanding of the damaged floorboards, and re-sanding of the remainder of the kitchen floor. The primary judge concluded that there was no factual basis for finding a breach of the agreement to repair, saying at [46]-[48]:

From the outset, the [respondent] 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 [appellant] the alternative of a cash settlement calculated by reference to the cost of re-sanding (rather than replacing) the floor. Fairly read, the [respondent]’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. At no stage did the [respondent] dispute that it was contractually obliged to repair the floor, although the [respondent] did dispute the content of that contractual obligation.

15. The Magistrate made a finding that the respondent had breached its contractual duty to act towards the appellant with utmost good faith. Such an allegation had not been pleaded by the appellant, however, in closing argument before the Magistrate submissions about breach of the duty were made by the appellant without objection from the respondent. The primary judge found that the respondent had accepted liability for repair from the outset, but that repairs were not undertaken because the appellant sought assurance that the respondent was not prepared to give concerning the possibility that repairs would result in further damage. Her Honour concluded that the respondent was under no contractual obligation to give the assurance required by the appellant. Citing CGU Insurance v AMP Financial Planning Pty Ltd [2007] HCA 36; 235 CLR 1 (per Kirby J at [131] and Callinan and Heydon JJ at [257]), her Honour said that the actions of the respondent in declining to provide the assurance demanded by the appellant 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. Her Honour was therefore satisfied that the Magistrate had erred in finding that the respondent breached its duty of utmost good faith to the appellant.

16. With regard to the award of damages made by the Magistrate for inconvenience, the parties to the appeal before the primary judge agreed that such damages were available only in relation to any breach of the obligation to act in utmost good faith. It followed from her Honour’s finding that there had been no breach of the respondent’s duty to act in utmost good faith that the award of damages for inconvenience made by the Magistrate could not stand. Her Honour found it unnecessary to deal with other grounds of appeal concerning the award made by the Magistrate under this head of damage.

17. In the proceedings before the primary judge, the appellant submitted that the proper quantum of damages for the cost of repairing the floor should include an allowance for the real possibility that, after sanding occurred, the whole floor would fail. The appellant relied upon Malec v JC Hutton Pty Ltd [1990] HCA 20; 169 CLR 638, and Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64, submitting that in the latter case the High Court had decided that, in breach of contract cases (as in tort cases) damages should be adjusted to take account of contingencies, regardless of whether the contingencies were established to be more probable than not. In rejecting that proposition, the primary judge said at [54]-[57]:

The [appellant]’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 position 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]. The argument of the [appellant] fails to distinguish between establishing that a breach of the contract has occasioned damage (that must be established on the balance of probabilities) and the quantification of established damage. 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 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 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. (emphasis added) 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.

18. The respondent cross appealed the decision of the Magistrate to award interest pursuant to s 57 of the ICA on the damages for inconvenience. The determination of the primary judge that the appellant was not entitled to damages for inconvenience made it unnecessary for her to further consider this issue.

19. The primary judge determined that the appellant did not have a proper basis for refusing the respondent’s original offer to repair the damage. Her Honour subsequently set aside the orders of the Magistrate and substituted a verdict for the respondent with costs.

The present appeal

20. The appellant appealed from the orders made by the primary judge. At the hearing of the appeal, the appellant sought leave to amend the Notice of Appeal. The respondent consented and the Court granted leave for the Notice of Appeal to be amended as sought by the appellant. The grounds of appeal, as set out in the Amended Notice of Appeal are:

1. The learned [primary judge] erred in failing to find that the respondent had breached its contractual obligations to repair the damage caused by fire, and accordingly was wrong to find error with the findings of the learned Magistrate. 2) The learned [primary judge] erred in failing to consider the circumstances that: (a) the [respondent]’s obligation was either to carry out repairs or to pay to the appellant the cost of such repairs; (b) the [respondent] had failed to carry out any repairs, whether to the floorboards or otherwise, and failed to pay to the [appellant] any monies towards any repairs at all; (c) these failures constituted breaches of contract, irrespective as to any question as to the extent of repairs required. 3) The learned [primary judge] erred in finding that unperformed offers or proposals to repair or make payment to the appellant were able to, or did, discharge the [respondent]’s contractual obligation to repair. 4) The learned [primary judge] erred in finding at paragraph 72 that section 57 of the Insurance Contracts Act did not apply, or alternatively ought to have found that pre-judgment interest was payable under Rule 1616. 5) The learned [primary judge] erred in making no damages award in favour of the [appellant] in circumstances where the learned Magistrate found that the fire had damaged the kitchen. 6) [appeal ground withdrawn]. 7) [appeal ground withdrawn]. 8) The learned [primary judge] ought to have found that the learned Magistrate did not make the purported findings recited at paragraph 49 or that such findings were in error. 9) The learned [primary judge] erred by rejecting the application of Malec v J C Hutton Pty Ltd (1990) 169 CLR 638 and Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 to the assessment of damages in this case. 10) The learned [primary judge] erred in finding at paragraph 69 that damages for inconvenience were available only in relation to any breach of the obligation to act in good faith, and ought to have found that such damages were available for breach of the respondent insurer’s obligation to repair.

21. The matter came on for hearing before the Court of Appeal on 6 November 2015. The Court gave the parties an opportunity during the hearing to see if they could more valuably proceed to mediation and when they indicated that they wished to complete the hearing, the Court nevertheless gave express encouragement to them to undertake mediation before a judgment was given. Upon completion of the hearing the matter was adjourned on the following conditions:

(a) that the parties proceed to mediation in the meantime; and

(b) the matter be listed before a single judge on 1 February 2016 either to enter consent orders or to make a direction for the re-commencement of the appeal hearing.

22. On 1 February 2016, the parties appeared before Burns J and indicated that mediation was unsuccessful. On that date, Burns J also directed the matter be listed before the Registrar to enable the matter to be set down for continuation before the Court of Appeal. On 17 March 2016, the matter came before the Registrar and the parties indicated that no further submissions were to be filed and that the matter could be determined on the papers by the Court of Appeal.

The appellant’s submissions

23. The appellant submitted that the primary judge was in error in setting aside the finding of the Magistrate that the respondent had breached its obligations under the insurance contract by failing either to repair or to pay the cost of repairs. The basis of the decision of the primary judge, the appellant submitted, was a finding that the obligation to repair was fulfilled by the respondent making an offer to repair. Secondly, the appellant submitted that there had been no offer made by the respondent to the appellant, and as such the primary judge was in error in finding that the appellant had acted unreasonably in rejecting the supposed offer made in the letter of 28 July 2011. The appellant submitted that the letter of 28 July 2011 was simply a statement of the effect of the insurance policy. The essential submission made by the appellant was that the insurance contract required the respondent to either repair the damage or pay for the repair of the damage, and it had done neither. The appellant submitted that the respondent did not allege in its pleadings that the appellant had refused access to the premises, and had only pleaded an earlier refusal to accept an “offer of settlement”. Even if the appellant had refused access to the respondent to undertake repairs, the appellant submitted, it could still have paid her the cost of the repairs, but it did not.

24. In any event, the appellant submitted, whilst the focus of the proceedings in the Magistrates Court and before the primary judge was on the issue of the damage to the kitchen floor, the appellant should have been entitled to judgment for the cost of the other repairs to the fire damage.

The respondent’s submissions

25. The respondent submitted that there was now no challenge to the finding of the Magistrate, upheld on appeal before the primary judge, that, on the balance of probabilities, it was not necessary for the respondent, in complying with its contractual obligations, to replace all of the kitchen floor and that the respondent’s obligations would be met by its proposed method of repair, being to sand the floor and re-seal it. There being no breach of the insurance contract, the respondent submitted, it could not be liable to pay damages and thus the appellant failed on the only cause of action pursued by her. The respondent submitted that it offered to carry out its side of the contractual bargain by electing to carry out repairs through Reliance, which, based on the findings of the Magistrate and of the primary judge, represented compliance with its policy obligations. The only reason this work had not been undertaken was because the appellant rejected that approach, demanding that the respondent agree to replace all of the floorboards. The respondent submitted that it was not possible for it to enter the appellant’s premises and undertake the repair of the kitchen floor because of the refusal of the appellant to accept this approach.

26. The respondent complained that the appellant was now attempting to raise issues not raised in the Magistrates Court or before the primary judge. It submitted that the only issue raised before the Magistrate was an alleged breach of contract by the respondent in failing to replace the floorboards, and that no allegation of breach by reason of failure to repair or pay for repair of other items damaged in the fire had been previously raised. The respondent submitted that the appellant should not now be permitted to raise issues that were not raised before either the Magistrate or the primary judge.

27. In summary on the issue of liability, the respondent submitted that in order to establish breach of contract in the proceedings before the Magistrate, the appellant was required to establish that the respondent’s proposed method of repair was contrary to its contractual obligation to repair. She failed to satisfy the onus of establishing breach, with a consequence of that her claim was ultimately unsuccessful.

28. The respondent further submitted, on the question of damages, that the appellant was not entitled to damages for inconvenience as assessed by the Magistrate.

Consideration

29. It is convenient to initially consider the appellant’s grounds relating to liability, all of which raise a similar issue concerning the obligation of the respondent under the insurance contract. In our opinion, the present appeal on liability must fail. There is no dispute that the insurance contract between the respondent and the appellant permitted the respondent, where damage occurred which was covered by the insurance contract, to elect either to repair the damage or to pay for the cost of repair of the damage. There is no dispute that damage was occasioned to the kitchen of the appellant’s residence in a fire on 12 May 2009. There is no dispute that the respondent was obliged by the terms of the insurance contract to either repair the damage or to pay the appellant the cost of repair. The damage included damage to a small number of floorboards in the kitchen. The respondent elected to repair the floorboards and proposed a method of repair which is no longer challenged. The respondent was effectively precluded from undertaking the repairs by the refusal of the appellant to accept the method of repair proposed by the respondent, even when the respondent attempted to compromise by offering to replace the small number of floorboards that were actually damaged. It is disingenuous of the appellant to now suggest that there is no allegation pleaded by the respondent of actual refusal on her part to allow the respondent to access her home. The proceedings before the Magistrate, and before the primary judge, were conducted on the basis that the respondent had elected to repair the damage but this election had been frustrated by the appellant’s refusal to accept the proposed method of repair. The evidence very clearly supports the finding that the appellant was not willing to allow the respondent to undertake the repairs in the manner proposed by the respondent.

30. The submission that judgment should have been entered for the appellant in the proceedings below although her claim failed concerning the alleged breach of the insurance contract regarding the kitchen floorboards is without merit. The proceedings before the Magistrate were conducted on the basis that the issue was the proposed method of repair to the floorboards. The pleadings in the Magistrates Court raised one issue: had the respondent breached its contractual obligations with regard to its proposed method of repair to the kitchen floorboards? The Magistrate would not have been entitled, as now seems to be suggested, to have entered judgment for the cost of repair or replacement of other items damaged in the fire, but about which no complaint of breach of contract was made by the appellant. The primary judge was similarly constrained by the appellant’s pleadings in the Magistrates Court. The appellant should not now be permitted to depart from her forensic decision as to the matters in issue in these proceedings. To do otherwise would potentially work injustice on the respondent, which has never had an opportunity to address the issue the appellant now seeks to raise.

31. It was accepted by the appellant that she had an obligation to exercise her best endeavours to permit the respondent to discharge its obligations under the insurance contract. The respondent has been precluded from discharging its obligations because of the refusal of the appellant to allow it to undertake the proposed repairs. To put it simply, the respondent stands willing to discharge its obligations if it is permitted to do so by the appellant. No occasion for breach of the insurance contract by the respondent has yet arisen. In our opinion, the appellant has not demonstrated error in the decision of the primary judge on the question of liability. As the appellant has been unsuccessful on her appeal on liability, it is unnecessary to consider those grounds of appeal concerning damages.

32. The appeal must be dismissed and the appellant should pay the respondent’s costs unless there is a reason for any special order. If either party seeks a special order, that party should file and serve written submissions within 7 days and the other party file and serve any response within 7 days of service of those submissions. If no submissions are received within 7 days, the appellant is then ordered to pay the respondent’s costs.

33. The parties agreed that the resolution of the appeal would not resolve the question of what, if any, obligation the respondent had or still has under the contract of insurance issued by the respondent to the appellant. The effect of the orders of the Court on the appeal simply resolves the question that, when the appellant commenced the proceedings in the Magistrates Court, the respondent had not, by action taken or not taken by it, breached the contract of insurance, whatever rights the appellant may or may not have under it.

I certify that the preceding thirty-three [33] numbered paragraphs are a true copy of the Reasons for Judgment of the Court.

Associate:

Date: 17 November 2016