Lasermax Engineering Pty Limited v QBE Insurance

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

Friday 21 May 2004 ex tempore Revised 17 June 2004

50052/03 Lasermax Engineering Pty Limited v QBE Insurance (Australia) Limited & Ors JUDGMENT 1 The plaintiff, Lasermax Pty Limited ("Lasermax") carries on the business of manufacturing and metal processing at premises located 152-154 Shellharbour Road, Kemblawarra ("the premises"). 2 The proceedings concern damage to a laser ("the laser") used by Lasermax for the purposes of welding, cutting and treating materials. The laser was apparently the subject of a hire purchase agreement entered into between Lasermax and a finance company. 3 The material allegations made in the summons identify the damage as having occurred as follows: · The laser was at all material times powered by electricity drawn from the premises. · Electrical power has at all material times been supplied to the premises by way of electrical wires supported by poles ("power poles") located outside the premises. · Each power pole has an upper horizontal arm supporting electrical wiring carrying approximately 11,000 volts, ("the upper arm"), and a lower horizontal arm supporting electrical wiring carrying approximately 415 volts, ("the lower arm"). · On or about 11 November 2002, a fire occurred, ("the fire"), on a power pole in the vicinity of the premises. · As a direct result of the fire, electrical wiring supported by the upper arm of the aforesaid power pole fell onto electrical wiring supported by its lower arm and a power surge of approximately 11,000 volts of electricity passed to the premises and through to the laser, ("the power surge"). · The fire, and through it the power surge, resulted directly in further fire, smoke, overheating and burning in and about the laser and by these means or otherwise damaged the laser. 4 The first and second defendants were the insurers under a contract of insurance with Lasermax and Chromax Hard Chrome Pty Limited [which was the owner of the premises] apparently entered into in early February 2002, providing various forms of cover, including accidental damage as defined by the policy with a limit of $50,000. Lasermax claims that upon a proper construction of the subject policy, each of the first and second defendants were liable to indemnify it for 50 per cent of the damage caused to the laser. Lasermax alleges that the policy properly construed responds because the insurers are liable to indemnify it in respect of physical loss or damage to the laser directly caused by the fire, the allegation being that the fire on the power pole was a direct cause of the damage to the laser. 5 The relevant insuring clause under the "Property" section is to be found at page 4 of the policy. It provides:

"2. We will indemnify You up to the limit specified in the Schedule: 2.1 In respect of physical loss of or damage to;. . . (b) Contents . . . directly caused by the following insured events . . . … 3.1 Fire." 6 The insurers have submitted that the policy responds to damage caused to the laser by the power surge under the head of "Accidental damage" (see clause 3.11 of the "Property" section of the policy). The maximum amount payable under that head, $50,000, has been paid to the plaintiff by the insurers (see defence of first and second defendants' paragraph 14). 7 Lasermax has also joined Integral Energy Australia ("Integral"), as a defendant and pursues a cause of action in negligence against Integral. That claim is grounded upon the following allegations made in the summons:

· At all material times Integral was the owner and responsible for the care, control and maintenance of power lines and power poles that provided electrical power to the premise. · At all material times, Integral was the supplier of electrical power to the premises. · Initially in about 1998, Chromax and Integral discussed the provision of electricity to the premises ("the discussion") and in particular the break-up of supply to tenants of the premises. · In approximately late 2001 or early 2002 Integral were made aware that Lasermax was from that time operating the laser from the premises and that new mains power had to be installed by a contractor on behalf of Lasermax to properly and adequately supply power to the laser. · In late October or early November 2002, Lasermax was experiencing low-voltage supply from the power sources provided by Integral Energy and, as a consequence of that, defective supply, Integral inspected the electricity supply to the premises and in particular to the laser. · As a consequence of the above, Integral was aware:

(a) that Lasermax conducted business from the premises;

(b) that the aforesaid business involved the use of the laser; and

(c) that the laser was powered by electricity. · As a result of the matters [pleaded in the above paragraphs], Integral owed a duty to Lasermax to exercise all reasonable care in the provision of electricity to the premises. · The fire [as pleaded above] and the damage caused to the laser [as particularised above] were caused by the negligence of Integral. Particulars of Negligence (a) Failure to exercise reasonable care in the maintenance of insulators on the Power Pole;

(c) Failure to install adequate insulators on the Power Pole;

(d) Failure to exercise reasonable care in the prevention of current leakage on the Power Pole

(e) Failure to exercise reasonable care in the prevention of fire on the Power Pole;

(f) Failure to exercise reasonable care in the prevention of power surges. · As a result of the aforesaid damage to the laser, the plaintiff:

(d) has suffered a diminishment in the value of its goodwill. 8 By a recent amendment to the summons a count by way of failure to warn has been added. 9 On 19 December 2003, the court [2003] NSWSC 1268 ordered that a separate question be determined, namely: whether, on the agreed and assumed facts, damage to the plaintiff's laser was "directly caused" by fire within the meaning of the policy. That judgment covers a deal of background matters and explains the considerations which led to the separate question order. 10 The relevant facts as set out in the statement of agreed and assumed facts and before the court as part of the agreed bundle [exhibit PX] are as follows:

(1) The plaintiff has an insurable interest in a Lumonics AM 356 Laser ("the Laser).

(2) The Laser was, at all relevant times, located in premises occupied by the plaintiff and known as 152-154 Shellharbour Rd, Kemblawarra ("the Premises).

(3) By a policy of insurance number 31A233731BPK ("the Policy") the first and second defendants agreed, subject to the terms of the Policy, to indemnify the plaintiff, up to the limit specified in the Policy, in respect of damage to machinery, plant and equipment, where such damage was directly caused by fire.

(4) The Laser was machinery, plant or equipment within the meaning of the Policy.

(5) At all relevant times, the Laser was connected to and powered by electricity supplied by the third defendant to the Premises.

(6) Electricity is supplied to the Premises by wires supported by a series of power poles located in the street outside the Premises ("the Power Poles").

(7) The Power Poles are made of wood and have an upper horizontal wooden arm supporting insulators for electrical wiring carrying approximately 11,000 volts ("the Upper Arm") and a lower horizontal wooden arm supporting insulators for electrical wiring carrying approximately 415 volts ("the Lower Arm").

(8) On 11 November 2002 there was a fire, within the meaning of the Policy, on one of the Power Poles which was located two power pole spans away from the Premises at a distance of approximately 55 metres ("the Burnt Pole").

(9) The fire caused the Upper Arm on the Burnt Pole to fail.

(10) The wiring supported by the Upper Arm on the Burnt Pole came into contact with the wiring supported by the Lower Arm, causing a high voltage/low voltage intermix ("the Intermix").

(11) The Intermix caused a power surge to the Premises and the Laser.

(12) The power surge caused damage to the Laser, the extent of which has not yet been determined. The policy 11 The relevant clauses of the policy are clauses 2 and 3 in the section headed "Property section - Fire and other insured events". 12 Pursuant to clause 2, the insurers have indemnified the plaintiff for damage to "contents" "directly caused" by one of the events in clause 3 - relevantly, "Fire" (clause 3.1). 13 It is agreed that the laser forms part of the "Contents" for the purposes of clause 2.1(b) and that the fire on the power pole is a "fire" for the purposes of clause 3.1. The question for determination 14 The question to be determined is whether the damage assumed to have been caused to the laser was "directly caused", within the meaning of clause 2 by the fire on the power pole. The principles 15 Plainly enough, the meaning of the phrase "directly caused" is ultimately a question of construction of the policy. The ordinary rules of contractual interpretation apply to the construction of a policy of insurance, although a liberal interpretation in favour of the insured should be adopted in so far as the ordinary and natural meaning of the words used by the insurers permits this to be done: Australian Casualty Co. Limited v Federico [1986] 160 CLR 513 at 520-521, per Gibbs J. 16 In general terms, the following principles which apply to the interpretation of contracts in general and contracts of insurance are taken as a given. · "A policy of insurance, even one required by statute, is a commercial contract which should be given a businesslike interpretation. Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses and the objects which it is intended to secure [per Gleeson CJ, McCann v Switzerland Insurance Australia Limited (2003) 203 CLR 579 at [22]] · In Robertson v French (1803) 4 East 130 at 135-6 [1803-13] All ER Rep 360 Lord Ellenborough put the matter as follows: "[A Contract of insurance] is to be construed according to its sense and meaning, as collected in the first place from the terms used in it, which terms are themselves to be understood in their plain ordinary and popular sense." · In order to depart from the plain and ordinary meaning of a word or phrase, a good reason must be given. Star Fire Diamond Rings Pty Limited Angel [1962] 2 Lloyds Rep 217 at 219: · the meaning should take account of the context in which the words appear; · the meaning should take into account the main object or the commercial purpose of the contract; · if the words are ambiguous they should be construed contra proferentem. The submissions from the parties 17 The plaintiff and the first two defendants advanced detailed written submissions and the plaintiff's senior counsel spoke to the plaintiff's submissions. The first, second and third defendants were not called upon. A number of authorities were cited. 18 Whilst I accept the importance of looking to particular decisions, ultimately the question presently before the court is no more than one of impression. It is trite to observe that in every case the particular facts before the court need to be carefully understood in order to follow the reasons for decision. 19 In deference to the care with which the parties in their written submissions, and the plaintiff complementing its submissions at the bar table, took the court through decided cases, it is appropriate to acknowledge those submissions. The plaintiff helpfully gave a number of authorities as examples of events being held to be the "direct" or "proximate" cause one of another. · In Re Etherington and Lancashire and Yorkshire Accident Insurance Co [1909] 1 KB 591, a policy insured against death caused by accidental means provided "the accident is the direct or proximate cause of death". The insured fell off a horse and became wet. He rode home and came down with pneumonia and died. The insurer was held liable under the Policy by the Court of Appeal. Vaughan Williams LJ stated at 598.5: "'direct or proximate cause' covers … not only the immediate result of the accident, but also all those things which may fairly be considered as results usually attendant upon the particular accident in question" · In Lynn Gas & Electric Co v Meriden Fire Ins Co 33 NE 690 (1893) a policy insured machinery in a factory against damage caused by fire. The factory was large and the machinery was only in one part of it. A fire occurred in a different part of the factory and caused a short-circuit in the electricity supplied throughout the factory, which in turn caused the machinery to malfunction and resulted in damage to it. Knowlton J in the Supreme Court of Massachusetts held that the fire was the "direct, proximate" cause of the damage. · In Transport Accident Commission v Jewell [1995] 1 VR 300, the Full Court of the Supreme Court of Victoria considered the legislation insuring an occupier if his injuries were "directly caused" by the driving of a motor vehicle. A farmer, whilst driving his truck, snapped the ignition key in the ignition. He managed to stop the truck, turn off the engine, dismantle and re-assemble the ignition and remove the key. He left the truck in low gear. He then leant into the engine compartment from outside the truck and tested the new key, causing the truck to move forward and crush him. The Full Court held that the snapping of the key was the "direct cause" of his injuries". Tadgell J, with whom Ormiston J agreed, stated (at 308): "[leaving the truck in low gear] was immediate in the sense that it was linked, not merely casually, coincidentally or adventitiously, but centrally, in time and place, to the happening of the incident. In my opinion it would be contrary to common sense, when determining the circumstances out of which the incident arose, to divorce the circumstance of leaving the truck in low gear from the circumstance of turning the ignition key" · In Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350, a vessel was torpedoed but made port. Port authorities ordered that she be moored outside the harbour in case she sank and blocked the harbour entrance. The vessel sunk in a storm after having been moved outside the entrance. The House of Lords held that the insurer was protected under an exclusion clause which absolved it from liability in the event the vessel was lost as a result of war or hostilities. Their Lordships were satisfied that the torpedoing of the vessel was the proximate cause of its sinking. Lord Finlay LC said of the vessel at 355: "[s]he was not lost by any new peril, but by the natural consequence of the explosion of the torpedo". Lord Dunedin stated at 364 "[w]hat happened in the circumstances was the natural sequel to injury by the torpedo". 20 The plaintiff then submitted that from the case law, the following propositions may be derived:

(1) "Direct cause" and "proximate cause" are the same or relevantly the same concept and both can be assimilated to the concept "dominant and effective cause": State Government Insurance Commission v Sinfein Pty Ltd (1996) 15 WAR 434 at 443-5, 454; Transport Accident Commission v Jewell [1995] 1 VR 300 at 306-7. Both connote a more proximate relationship between two events than does the phrase "arising out of": City Centre Cold Store Pty Ltd v Preservatrice Skandia Insurance Ltd (1985) 3 NSWLR 739 at 742; (2) A "direct cause" need not be the most immediate cause of, or the cause nearest in time to, the event in question: Transport Accident Commission v Jewell [1995] 1 VR 300 at 306-7; Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350 at 369. Another way of putting this is to say that the peril insured against need not be the agent of destruction: MacGillivray on Insurance Law (10th ed, 2003) at [19-2]. In Boiler Inspection and Insurance Co of Canada v Sherwin-Williams Co of Canada Ltd [1951] AC 319 at 333, Lord Porter put the matter this way: " Whatever meaning the word 'direct' may have …, it does not imply that there can be no step between the cause and the consequence ". (3) It follows from (2) that a fire may be the "direct cause" of damage to an item without actually burning that item, and without being on the same premises in which that item is located: Lynn Gas & Electric Co v Meriden Fire Ins Co 33 NE 690 (1893); Sutton, Insurance Law in Australia (3rd ed, 1999) at [9.8]; MacGillivray on Insurance Law (10th ed 2003) at [26-6]; 43 Am Jur (2d) at [477].

(4) One event will not be the "direct cause" of another if the latter is not the "natural and probable consequence" of the former, or if there is some novus actus interveniens between the two.

(5) There can be more than one "direct" or "proximate" cause of an event: City Centre Cold Store Pty Ltd v Preservatrice Skandia Insurance Ltd (1985) 3 NSWLR 739 at 742. Where there are competing "direct" or "proximate" causes of an event, and loss from one such cause is insured against and the recovery of loss from the others is not expressly excluded by the Policy, the insured is entitled to recover: HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601 at 612B. 21 The plaintiff's submission was that the present case is really on all fours with Lynn Gas. The only distinguishing feature of the present case was said to be that the fire was not on the same premises as the machinery damaged by the power surge or short circuit. That point of distinction, so the plaintiff submitted, did not detract from the directness of the fire as a causative event. The plaintiff observed that Lynn Gas was cited without disapproval in MacGillivray at [26-28]. 22 The defendants' submissions essentially took the court to the proposition that this is not a case where the "directly caused by fire" phrase has any technical meaning. On the contrary, the plain English form of wording was said to militate against the technical interpretation. I accept the submission as of substance. 23 I further accept as of substance and adopt a number of the further submissions put by the defendants. 24 The presumption is that the ordinary meaning of the words used is the one intended by the parties unless it can be shown that there is a good reason to depart from that ordinary meaning because the word used, for example, is a term of art: L Schuler AG v Wickman Machine Tool Sales Limited [1974] AC 235 at 264:

"Most words in English are capable of a number of meanings, either in a popular sense or as legal terms of art or both. In either category, prima facie, they will be read according to their most usual and natural, (or primary) sense. But this…is a rebuttable presumption; so that a word will be construed in a less usual or natural (or secondary) sense if the instrument shows that it is intended in such a sense." 25 No special or technical or term of art is in issue here and the phrase "directly caused by fire" should be construed according to its ordinary and natural meaning. See also Nishina Trading Co Limited v Chiyoda Fire and marine Insurance Co Limited [1969] 2 QB 449 at 462. Dictionary definitions 26 As the defendants have pointed out, a starting point is the dictionary definition of a word. Such a course has been sanctioned by the court in State Chamber of Commerce and Industry v The Commonwealth (1987) 16 3 CLR 329 at 348; and Provincial Insurance Australia Pty Limited v Consolidated Wood Products Pty Limited (1991) 25 NSWLR 541 at 553 per Kirby P (as he then was). 27 The word "directly" is an adverb of ordinary usage well understood. 28 The Oxford English Dictionary on line (Oxford University Press 2004) 2nd ED 1999 defines the word "directly" as the adverbial form of the word "direct" which is in turn defined as: "in a direct manner or way".

"1(a) in a straight line of motion: with undeviating course: straight

4. Completely, absolutely, entirely, exactly, precisely, just"

10. Without intervention of a medium or agent: immediately, by a direct process or mode." 29 The Australian Concise Oxford Dictionary defines "directly" as:

"1. Adv in a direct manner: exactly (directly in front of): at once, without delay: presently, in no long time…" 30 The Macquarie Dictionary 3rd ED defines "directly" as: (Adverb):

"In a direct line, way or manner: straight. Without delay: immediately, presently, absolutely; exactly; precisely". Dealing with the issue 31 What then was the direct cause of the damage to the laser on the assumed and agreed facts? To my mind, the answer is that upon the proper construction of the subject policy, the direct cause of the damage was the electrical surge which caused that damage. The surge was caused by the cross-arm on the power pole falling onto the wires, allowing them to touch and create the surge. The cross-arm fell onto the conductors because of the fire on the pole. Looked at in this way, I accept that the answer is obvious and straightforward. The electrical surge, I accept, could, in turn, presumably have been caused by a number of elements, not just a fire on a power pole. In other words, it was not necessarily, it seems to me, a natural consequence of the fire, that the power surge took place. 32 Ultimately, the court's decision is clearly assisted by the fact that a close examination of the whole of the policy throws up a variety of descriptions of causal connections, as the plaintiff usefully pointed out in their own written submissions: · The policy contains a broad spectrum of descriptions of causal connections. The weakest of these is the phrase "directly or indirectly caused by or contributed to by or arising from" under clause 2 of the section headed "General exclusions." The strongest of these is "caused solely as a result of" in clause 6(1)(a)(iii) in the section headed "Electronic Equipment Section". · Between these two descriptions are a variety of descriptions of causal connections: "caused by" (see, for example, cl 3.5(c) in the "Property Section"), "occasioned by or in consequence of", "arising out of" (see, for example, cl 3.7 of the "Property Section"), "direct result" (see, for example, cl 4.7 of the "Property Section"), "resulting from" (see, for example, cl 2.1 of the "Business Interruption Section", "in consequence of" (cl 3.1 of the "Business Interruption Section"), "caused by or arising out of" (see, for example, cl 2.3 of the "Broadform Liability Section"); "arising directly or indirectly out of or in the course of" (cl 3.1(a) of the "Broadform Liability Section"), "due to" (see, for example, cl 3.3 of the "Broadform Liability Section"), "caused by or naturally resulting from" (cl 5.3(c) of the Electronic Equipment Section"), "occurring by reason of" (cl 6.1 of the "Electronic Equipment Section"), "consequent upon" (cl 2.1 of the "Theft Section"), "attributed to" (cl 3.3 of the "Money Section"), "arising out of or resulting from" (cl 3.4 of the "Money Section"), "directly or indirectly caused by or arising from" (cl 3.14 of the "Broadform Liability Section"), "caused directly or indirectly by" (cl 3.25 of the "Broadform Liability Section"), "directly or indirectly caused to or contributed to by" (cl 7 of the "General Exclusions"). 33 It is clearly appropriate for the court to look at the whole of the policy. That examination points up that it was seen as appropriate to differentiate between a variety of descriptions of causal connections. As already noted, in so far as the relevant insuring clause is concerned, it provided:

"We will indemnify you up to the limit specified in schedule 2.1 in respect of physical loss of or damage to…

(b) Contents… directly caused by the following insured events…

3.1 Fire." 34 That was to choose a clear and more proximate causal connection rather than, for example, to choose words such as "directly or indirectly, caused by or contributed to by or arising from". 35 The plaintiff has taken the court to a number of authorities where courts have dealt in general terms with issues of causation and in particular have interpreted the words "proximate cause" as appropriate to mean "direct cause", and have held that there are in particular contexts, no difference in meaning between the word "direct" and the word "proximate". Those authorities, for example, include City Centre Cold Store v Preservatrice Skandia Insurance Ltd (1985) 3 NSWLR 739, where at 742 Clarke J observed that the approach which the trial judge took accorded with the statement of Lord Porter in Boiler Inspection and Insurance Co of Canada v Sherwin-Williams Co of Canada Ltd [1951] AC 319 at 333:

"Whatever meaning the word 'direct' may have in qualifying the word 'result', it does not imply that there can be no step between the cause and the consequence. It is unnecessary to multiply examples."

Likewise in State Government Insurance Commission v Sinfein Pty Limited (1996) 15 WAR 434, Ipp J observed at 452:

"Senior counsel for the appellant accepted (correctly, in my view,) that 'directly' did not mean 'immediately' (i.e. coming in time immediately after the driving of the vehicle.)". [proceeding to cite the above passage from Lord Porter's speech] 36 Notwithstanding those authorities to which the court was taken in such detail and notwithstanding acceptance of the notion that in determining the issue of causation for the purpose of the law of tort, causation is to be determined in accordance with common-sense notions March v Stramare, to my mind, the proper approach to the question which is separated out here is simply one of construction of the particular policy before the court. 37 To the extent that it may be germane to look, however, in terms of the subject policy under construction, to questions of separation, the position would seem to be that there was, clearly, a separation in terms of place, because

2. the effect of the surge to the laser took place within the premises. 38 The plaintiff has from the bar table indicated, as I understood it, that experts' reports to be mobilised at some stage in the proceedings have suggested that there was but a nano-second in time as between the fire and the power surge. As a matter of principle, it would seem logical that there had to have been a separation in terms of time as between the two events even if it was only a nano-second in separation. The matter is not the subject of an agreed or assumed fact. It is sufficient to simply make the point that if separation be presently relevant, there was separation. 39 The very matters which occupied the careful consideration by the court of whether or not it was here appropriate to order the separate question are perhaps also germane to the decision on that question. I refer here to the fact that the effect of the power surge, in terms of its possible consequences, may have been arguably different depending upon the precise structure of the laser. The whole universe of working out precisely why and how the power surge may have caused damage to the laser is a matter for examination, but that question is all about the power surge and its effect upon the laser and does not require any examination of the disparate matter, namely, how the fire on the electricity pole, in fact, caused the power surge. 40 The many authorities dealing with questions of proximate cause and the learning to be derived from those authorities have presumably resulted in Mr Williams, leading counsel for the plaintiff, at the commencement of his address, taking exception to the way in which the defendants have formulated the question for the court in their written submissions. The defendants' formulation was that the relevant question is "What was the direct cause of the damage to the laser?" Mr Williams in his submissions made plain that whilst the plaintiff would accept as correct, the question formulated as "What was the proximate cause of the damage to the laser?", they did not accept that the proper question for the court was as formulated by the defendant. 41 That submission was then followed by a careful analysis of the case law in relation to what a proximate cause has been held to be and to the many places where courts have held that there is no difference in meaning between the word "direct" and the word "proximate". 42 My own view is that neither counsel identified the question correctly. The question for the court is: "Upon the proper construction of the subject insurance policy and clause, what was the direct cause of the damage to the laser?" 43 For those reasons, in my view, the separate question posed should be answered "No".

I certify that paragraphs 1 - 43 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 21 May 2004ex tempore and revised on 17 June 2004

      Susan Piggott
      Associate

17 June 2004

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