Greg Nelson v The Hollard Insurance Company Pty Ltd

CATCHWORDS : Statutory Interpretation - Insurance Contracts Act 1984 (Cth) - Section 46 (2) construed in the context of Act as a whole - Plaintiff claiming to be indemnified by insurer in respect of damage suffered to yacht

LEGISLATION CITED : Insurance Contracts Act 1984 (Cth) Marine Insurance Act 1909

CASES CITED : Asteron Life Limited v Zeiderman [2004] NSWCA 47 George Maurice Norman Farkas v Northcity Financial Services Pty Ltd & 3 Ors [2004] NSWSC 706

PARTIES : Mr Greg Nelson (Plaintiff) The Hollard Insurance Company Pty Ltd

COUNSEL : Mr T Anderson (Plaintiff) Mr I Griscti (Defendant)

SOLICITORS : Piper Alderman (Plaintiff) McCabe Terrill (Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

2009/298694 Greg Nelson v The Hollard Insurance Company Pty Ltd JUDGMENT The proceedings 1 The proceedings before the Court are brought by the plaintiff Mr Greg Nelson against The Holland Insurance Company Pty Ltd. 2 Mr Nelson wished to purchase a yacht. Prior to purchase, he inspected the 'Barracuda' 2004 Ronautica 400 himself and carried out his own investigations before then retaining a qualified marine surveyor to prepare a report regarding the vessel's condition. The report was prepared by Mr Sven Runow, who reported to Mr Nelson orally on 7 November 2008 that the vessel was 'built with quality materials and it is in reasonable condition' and confirmed in his written survey report of 10 November 2008. On 7 November 2008 the vessel was insured with the defendant via its agent, Nautilus Marine. On 21 November 2008 the vessel was slipped for routine maintenance and suffered a structural failure while in the cradle and was severely damaged. 3 The proceedings concern the plaintiff's claim that the insurer has breached a contract of insurance by failing to indemnify the plaintiff against damages suffered when the plaintiff's yacht was slipped for maintenance suffering a substantial structural failure requiring repairs. 4 Mr Nelson made a claim on the defendant and the claim was denied, with the defendant relying on an exclusion clause for 'inherent defects, structural faults, faulty workmanship or faulty design.' The issue before the Court 5 The issue before the Court is whether the plaintiff is entitled to be indemnified by the defendant under a "Private Pleasure Boat Insurance Policy" ("the Policy") in respect of damage sustained to his yacht, when it suffered structural damage while being slipped and cradled at the Royal Sydney Yacht Club in Kirribilli on 21 November 2008. Section 46 of the Insurance Contracts Act (Cth) 6 Section 46 in the following terms:

(1) This section applies where a claim under a contract of insurance (other than a contract of insurance that is included in a class of contracts declared by the regulations to be a class of contracts in relation to which this section does not apply) 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. 7 There are apparently no reported cases dealing with the effect of section 46. However similar issues are dealt with in the New South Wales Court of Appeal's decision in Asteron Life Limited v Zeiderman [2004] NSWCA 47, which dealt with section 47 of the Act which is in virtually identical terms to section 46, albeit that it refers to pre-existing sickness and disabilities. Section 47 of the Insurance Contracts Act (Cth) 8 Section 47 is in the following terms: Pre-existing sickness or disability

(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 sickness or disability to which a person was subject or had at any time been subject

(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 sickness or disability, 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 a sickness or disability to which the insured was subject at a time before the contract was entered into

The agreed statement of facts 9 The parties have usefully agreed on a statement of facts which is in the following terms:

i. At all material times the Plaintiff was the owner of "Barracuda", a 2004 Ronautica 400 with registration IDL861N ("the Yacht").

ii. Prior to the purchase of the Yacht in October 2008, the Plaintiff engaged independent marine surveyor, Sven Runow of Marineasses, to prepare a survey report on the condition of the Yacht.

iii. Mr Runow provided a Survey dated 10 November 2008, in which he states, inter alia:

A. The Yacht appeared to have been professionally built using quality marine materials and products;

B. The Yacht presented in reasonable condition for its age ; and

C. The hull structure had been thoroughly inspected from stem to stern where access permitted and no obvious signs of failure were detected. iv. A policy of insurance Policy, no PRI-5758 was issued to the Plaintiff on behalf of the Defendant by Nautilus Marine Insurance Agency Pty Ltd (Nautilus Marine) for the insurance of the Yacht for the period 7 November 2008 to 7 November 2009 ("the Contract").

v. The terms and conditions of the Contract are contained in the Nautilus Marine Combined Company Product Disclosure Statement and Financial Services Guide and Certificate of Insurance.

vi. Pursuant to the Contract, the Defendant agreed to cover the Yacht during the period covered by the Contract and subject to its terms and conditions, inter alia for:

D. Accidental loss or damage to the Yacht and its contents; and

E. Loss or damage arising out of the occasional slipping, cradling and launching for the purpose of maintenance and repair.

vii. On 21 November 2008, while the Yacht was being slipped and cradled at the Royal Sydney Yacht Squadron at 33 Peel Street, Kirribilli, New South Wales, it suffered a structural failure and sustained damage ("the Failure").

viii. The damage sustained in the Failure comprised numerous cracks about 1mm wide around the internal structural grid aft of the keel ("the Damage").

ix. The Damage to the Yacht was caused by or resulting from either an inherent defect, structural fault, faulty workmanship or faulty design of the Yacht, or a combination of these factors which was not detected by Mr Runow's inspection of the Yacht.

x. On or about the 24 November 2008, the plaintiff lodged an electronic insurance claim form, notifying the Defendant of the Incident ("the Claim").

xi. On 17 December 2008, the Defendant denied liability to indemnify the Plaintiff for the Claim stating, inter alia,

a) the loss is not a covered peril within the policy; and

b) the Plaintiff was not covered for any loss or damage caused by or resulting from structural faults, faulty workmanship or faulty design. xii. Exhibited to this Agreed Statement of Facts is an Agreed Bundle of Documents consisting of the following documents:

(ii) Certificate of Insurance issued by Nautilus Marine for Policy PRI 5758;

(iii) The terms and conditions of the Contract: Nautilus Marine Combined Company Product Disclosure Statement and Financial Services Guide;

(iv) Boat Insurance Claim Form 24 November 2008; and

(v) Letter from Nautilus Marine to the Plaintiff dated 17 December 2008. Further matters agreed between the parties 10 By the commencement of the hearing the parties had also reached agreement to the following effect:

ii. There is no evidence that Mr Runow did not perform his tasks competently and diligently.

iii. The defendant does not contend that Mr Nelson had any reason to believe that Mr Runow performed his tasks other than competently and diligently.

iv. The circumstances of the claim fall within the exclusion clause provided for at page 17 of the Nautilus Marine Private Pleasure Boat Insurance and Combined Product Disclosure Statement and Financial Services Guide.

v. The sole issue for determination is whether section 46 of the Insurance Contracts Act ('the Act') prohibits the defendant from relying on the exclusion clause. 11 In consequence the only issues in dispute between the parties are whether section 46 of the Insurance Contracts Act ('the Act') negates the exclusion clause relied upon by the defendant and quantum. The policy 12 The policy contains the following key provisions:

i. Page 3 of the certificate of insurance (Doc 2) specifically states that the vessel is covered for, '...loss or damage arising out of occasional slipping, cradling and launching for the purpose of maintenance and repair.'

ii. Page 4 of the Policy (Doc. 3) sets out the insured's usual duty of disclosure, stating that the insured must, '...tell us everything that you know, and which a reasonable person in the circumstances, could be expected to know, is relevant to our decision to insure you and, if so, on what terms...If you fail to comply we may reduce or deny any claim you make and/ or cancel the policy.'

iii. Pages 9 to 12 then set outs the events that Mr Nelson is insured against, the first being, 'accidental loss or damage to your boat and contents.'

iv. Page 17 contains an exclusion from liability '...for any loss of damage caused by or resulting from, or the costs incurred from or of: inherent defects, structural faults, faulty workmanship or faulty design.' The law 13 As the contract for insurance covers a pleasure craft, the Marine Insurance Act 1909 does not apply. At issue is whether or not the defendant can enforce its exclusion of liability clause at page 17 in light of section 46 of the Act. 14 Mr Nelson submits that the effect of section 46 of the Act is that where a reasonable person in his position was not at the time of the contract being entered, aware of, and could not be expected to have been aware of, the defect or imperfection of the vessel, the underwriter should not be in a position to deny or limit indemnity by relying on an exclusion clause. 15 Asteron Life permitted a life insurance underwriter to successfully deny indemnity to an insured who was diagnosed with cancer within three months of the insured taking out cover. However, in Mr Nelson's submission, that case can be distinguished because the policy provided an exclusion for pre-existing illnesses and any cancer diagnosed within three months of the policy commencing. 16 In Mr Nelson's submission, Asteron Life can be distinguished because the Court did not give any consideration to that part of section 47 that deals with the insured's awareness of the pre-existing illness at the time cover was issued, which is said to be the critical issue in this matter. The wording of both sections 46 and 47 is identical in that respect, stating: '...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...' 17 Mr Nelson's submissions drew the court's attention to the Australian Law Reform Commission's 1982 report into the creation of the Act stated at paragraph 184 that:

'...an insurer should not be able to rely on that exclusion [clause] if the insured proves that, at the time the contract was entered into, he did not know, and a reasonable man in is circumstances would not have known, of the existence of the relevant state or condition.' 18 Mr Nelson's contentions include the proposition that the above statement was made in the context of misrepresentations. 19 In Mr Nelson's submission, it can be applied to section 46. His further contentions make the point that consistently with the ALRC's report, Halsbury's Laws of Australia have interpreted sections 46 and 47 as being designed to render void any insurance policy clause that seeks to exclude the underwriter from liability, or limit liability, in relation to facts of which the insured was reasonably unaware upon entering into the contract. 20 Mr Nelson also draws attention to Regulation 30 of the Insurance Contracts Regulations (SR 1985 No 162) which prescribes a number of classes of insurance contract to which section 46 does not apply, for example, product liability insurance, business losses or 'broad form'. This proposition is that the fact that there are certain prescribed areas where an insurer can exclude pre-existing injuries/damage even when they were unknown to the insured, indicates that it has been a very deliberate decision by the Parliament to prohibit underwriters from denying indemnity in all circumstances. 21 It is Mr Nelson's submission that he is the very type of person that section 46 was designed to protect and that he should be entitled to cover under the policy. The defendant's submissions 22 The insuring clause at page 9 of the Policy relevantly states; "We will cover you for accidental loss or damage to your boat…". In addition, the certificate of insurance provides that the yacht is covered for "loss or damage arising out of occasional slipping, cradling and launching for the purpose of repair". 23 As has already been made apparent, the defendant accepts that the plaintiff's claim comes within the above insuring clauses but contends the plaintiff is not entitled to indemnity by reason of policy exclusion that applies "…for any loss or damage caused by or resulting from, or the costs incurred from or of: inherent defects, structural faults, faulty workmanship or faulty design". 24 Likewise the parties agree that the circumstances of the claim fall within the terms of the exclusion, however the plaintiff asserts the defendant is prevented from relying on the exclusion by reason of section 46 of the Act. 25 The defendant accepts that the Policy is not one excluded from the operation of section 46 by the Regulations referred to in section 46(1). 26 The defendant contends that section 46(2) is not applicable. It submits the exclusion is not a provision 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", 27 The gravamen of the defendant's position is to be seen in terms of three arguments. 28 In summary these arguments are as follows:

i. An exclusion of a particular event without reference to when it occurs does not transgress section 46;

ii. In any event, the various conditions said to be the basis of the exclusion's operation are not conditions, by necessity, that existed at a time before the contract was entered into as required by section 46;

iii. Further, the exclusion does not operate " by reference to " the relevant conditions. 29 It is appropriate to treat with these arguments seriatim. Argument 1 30 As the defendant has contended:

i. The Court of Appeal in Asteron Life has considered the relevantly identical part of section 47 of the Act. In Asteron , the Court of Appeal held by majority (Meagher JA and Bergin JA, Spigelman JA dissenting) that an exclusion in a life insurance policy in respect of cancer first diagnosed within three months of policy commencement did not offend section 47(2).

ii. The Court of Appeal made observations in respect of both sections 46 and 47. Spigelman CJ usefully summarises the position regarding exclusion of particular events: "An insurer is entitled to exclude cover for particular events, irrespective of when they occur, and an exclusionary provision of that character does not fall within the statutory preclusion in either s46 or s 47 of the Act because it could not be said that a limitation or exclusion was made "by reference to" a condition of a thing or a sickness or disability at the time the contract was entered into. When the time of entry into the contract is irrelevant to the exclusion, the sections do not apply." [Spigelman CJ at 590 [16]. Although his Honour was in the minority the Court was ad idem on this issue: see also Meagher JA at [47]-[48], with whom Bergin J agrees] 31 The defendant has argued that applied to the current facts, the insurer is entitled to exclude cover for the particular events identified in the exclusion. For example, by way of comparison, in Asteron it was accepted that the life insurer was able to identify otherwise insured events, such as particular types of cancer and expressly exclude these from cover without falling foul of section 47. [Spigelman CJ at [15]] 32 By analogy, in the same way that a life insurer can expressly exclude specified events such as certain tumours or skin cancers, so can an insurer such as the defendant exclude loss or damage arising from inherent defects, structural faults, faulty workmanship and faulty design. 33 Quite clearly in relation to these present proceedings, the particular event referred to is the occurrence of the loss or damage that is caused by all resulting from the inherent defects, structural faults, faulty workmanship or faulty design 34 I accept that the fact that on the particular facts of this case the relevant condition appears to have been one pre-existing the entry to the policy does not assist the plaintiff. Section 46(2) requires an examination of the relevant policy terms and not the particular facts of the case: this is accepted by all members of the Court of Appeal in Asteron. 35 These arguments are accepted as of substance. Argument 2 36 Likewise there is substance in the defendants second argument, which makes the point that the matters the subject of the current exclusion are not necessarily matters that pre-existed the commencement of the Policy. I accept that it ought not be assumed that "inherent defects", "structural faults" and "faulty design" are matters describing a condition of a yacht from its original construction or any other time prior to policy inception. These are all matters that can conceivably arise at any time - for example, any of these conditions can be the result of modification of the vessel or addition of any new part or equipment to the vessel. As the defendant has observed, faulty workmanship can occur at any time and not necessarily prior to entry into the Policy. Argument 3 37 I further accept as correct the proposition that the exclusion does not, in the current case operate "by reference to [a] condition or thing, at a time before the contract was entered into, of the thing". Rather it operates by reference to a subsequent event of loss or damage caused by or resulting from the inherent defect, structural fault, faulty workmanship or faulty design. Cf by way of comparison the analysis of Bergin J in Asteron:

"The core purpose of section 47(2) is to mitigate the effects of certain contractual provisions where liability is sought to be avoided "by reference to" a sickness or disability to which the insured was subject at a time before the contract was entered into. The contract of insurance in this case has the effect of limiting the relevant liability not by reference to (or because of or on the basis of) pre-contractual pathology but by reference to post contractual diagnosis irrespective of pre-contractual pathology, that is, irrespective of whether the insured was subject to the particular sickness or disability at a time before the parties entered into the contract." [At 595 [53]. See also Meagher JA at 594 [45]-[47]]

Cf Bergin J in George Maurice Norman Farkas v Northcity Financial Services Pty Ltd & 3 Ors [2004] NSWSC 706 at 93. 38 As counsel for the insurer submitted the exclusion does not operate by reference to a condition of being at a time before the contract was entered into. That is because the trigger for the exclusion is not the relevant inherent defect, faulty workmanship or the like. It is in fact a separate event being the subsequent event of loss or damage caused by or resulting from the inherent defect. In relation to the instant facts the trigger is not the pre-existing condition of the yacht, nor the inherent defect nor the faulty workmanship. It is in fact the subsequent event of loss or damage that is the focus of the exclusion. 39 It is appropriate to add that I accept that section 46 must be construed in the context of the Act as a whole and that remedial provisions are to be beneficially construed. Notwithstanding that acceptance I am unable to discern that the present proceedings can be distinguished from the decision of the Court of Appeal in Asteron Life. **********************

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