McLennan v Insurance Australia Ltd

Judgment 1THE COURT: The issue in this appeal is whether an insured under a contract of insurance, which covered the risk of fire, had the burden of proving that the fire which damaged her home was not deliberately started by her or someone who had entered her home with her consent. 2The respondent insurer (NRMA) indemnified the appellant under a Home Insurance, Buildings and Contents policy during the period 22 September 2006 to 22 September 2007. The appellant's home in Orange and its contents were severely damaged by fire on 27 December 2006. The appellant claimed an indemnity and commenced proceedings in the District Court. NRMA contested that claim. 3The policy separately enumerated the risks insured. The Fire cover was described in the following terms: POLICY WHAT YOU ARE COVERED FOR Fire we will under contents insurance however If your home or contents suffer loss or damage caused by fire - replace or repair your damaged contents - we will NOT cover loss or damage as a result of fire started with the intention of causing damage by you or someone we will under buildings insurance who lives in your home, or - rebuild or repair that part of your home that was damaged who has entered your home or site with your consent, or the consent or a person who lives in your home if you are a landlord this includes your tenants - we will NOT cover loss or damage as a result of scorching or melting where there was no flame, or your home/contents did not catch fire - we will NOT cover loss or damage to any heat or fire-resistant item if it self combusts - we will NOT cover loss or damage caused by bushfire for the first 48 hours of this Policy, unless ...

4The primary judge (Neilson DCJ) accepted NRMA's submission that in order to make out her entitlement to an indemnity under these provisions, the appellant had to establish that her home was damaged by fire and that the fire was not started with the intention of causing damage by her or someone who had entered the property with her consent: McLennan v Insurance Australia Ltd t/as NRMA Insurance [2013] NSWDC 148 at [99]. His Honour held that the appellant had not discharged that onus and entered judgment for NRMA. This appeal is from that judgment.

The issue in the appeal 5The only issue is whether the appellant had the onus of proving that the fire was not deliberately started and thus not within the first qualification to the Fire cover, introduced by the word "however". If that question is resolved in favour of the appellant, it is conceded that the appeal should be allowed and judgment entered for her for $750,000 plus interest. Although initially pressed by NRMA in its written submissions to this Court, arguments based upon other grounds of defence, which were not dealt with by the primary judge, were abandoned at the commencement of the hearing of the appeal.

Relevant principles 6This case requires consideration of the principles which underlie the proposition that the High Court (French CJ, Gummow, Hayne, Heydon and Kiefel JJ) described in Wallaby Grip Ltd v QBE Insurance (Australia) Ltd [2010] HCA 9; 240 CLR 444 at [25] as "well accepted", namely that "the insurer must prove that a loss falls within an exception". 7A contract of insurance may make express provison as to who bears the burden of proving the existence or non-existence of a particular fact for the purpose of establishing an entitlement to indemnity. In Levy v Assicurazione Generali [1940] AC 791 the contract of insurance provided that where the insurer relied upon a condition excluding loss or damage occasioned by specified occurrences, which included "civil commotion", the "burden of proving that such loss or damage is covered shall be upon the insured". Citing the judgment of Scrutton LJ in Re Hooley Hill Rubber and Chemical Co and Royal Insurance Co [1920] 1 KB 257 at 272-273, the Privy Council said at 798: "... [the onus of proving that one or other of the occurrences specified in sub-clause 2 of condition 6] was placed upon the appellant [insured] by the express terms of the contract. There can be no doubt that as a matter of agreement between parties the onus of proof of any particular fact, or of its non-existence, may be placed on either party in accordance with the agreement made between them." 8In Spinney's (1948) Ltd v Royal Insurance Co Ltd [1980] 1 Ll Rep 406, Mustill J described a clause in the same terms as that in Levy as a "reverse burden clause" (411 (col 1); 412 (col 1)). Whilst accepting that its validity was "not in doubt" (426 (col 2)), Mustill J read the clause down and held that it did not apply unless the insurer had first established that it was arguable that the exclusion on which it relied might apply. There is no such clause in the present policy although, as will be seen, there is an evidentiary provision which qualifies the cover provided in relation to the risk of Explosion. 9In the absence of a provision expressly dealing with the question of onus, the principles which apply are those referred to by Jordan CJ (delivering the judgment of the Court) in Kodak (A/asia) Pty Ltd v Retail Traders Mutual Indemnity Insurance Association (1942) 42 SR (NSW) 231. In that case there was an issue as to whether the insured bore the burden of proving fulfilment of a condition necessary to the accrual of the insurer's liability. A distinction was drawn between such a condition and one which created a particular exception to the insurer's obligation to indemnify. When considering that question of onus, his Honour observed (at 237) in relation to a condition of the latter kind: "Again, a plaintiff seeking to enforce an obligation qualified by a general exception which is applicable to all cases must negative the exception; but if the obligation is general and qualified only by particular exceptions, a person seeking to rely on an exception must prove himself within it: Munro Brice & Co v War Risks Association; Pye v Metropolitan Coal Co Ltd; Willeston on Contracts (1936) III, p. 1939. Similarly a person who seeks to escape an accrued liability by a claim that it has been discharged by breach of a condition subsequent must prove the breach; and a person who contends that a contract has been rescinded in pursuance of a resolutive condition must produce evidence in support of his contention ..." [Footnotes omitted] 10His Honour had earlier considered and applied the same principles to an issue as to onus arising in relation to the application of a provision allowing for the termination of a contract of employment: see Gordon v Australian & New Zealand Theatres Ltd (1940) 40 SR (NSW) 512. 11In Munro, Brice & Co v War Risks Association Ltd [1918] 2 KB 78 the sailing ship Inveramsay was insured under a marine policy which excepted the risks of "capture, seizure, and detention, and the consequences thereof". The issue was whether the insured, having established that the vessel was lost at sea, also had to show that the sea peril was not the result of a cause excluded by this 'free of capture and seizure' clause. Bailhache J held that it did not. After reviewing a number of authorities, including Gorman v Hand in Hand Insurance Co (1877) IR 11 CL 224, his Honour formulated (at 88-89) what he described as the "rules now applicable for determining the burden of proof in such a case as the present". 12Those principles, in their application to the onus of proof in contracts of insurance, are summarised in the following passage from Williston, A Treatise on the Law of Contracts (rev ed 1936, Baker, Voorhis & Co) III at 1939, which is cited by Jordan CJ in Kodak at 237: "The test [as to which party bears the burden of pleading and proving a qualification or proviso in an insurance or transportation contract] no longer depends upon whether the limitation upon the promise is to be found in a separate clause or not, but, instead, on whether the exception is as wide as the promise and thus qualifies the whole promise, or whether it merely excludes from the operation of the promise particular classes of matters which but for the exception would fall within it, leaving some part of the promise unqualified and absolute. In the case of a qualified promise, that is, where the exception would defeat the whole promise, a plaintiff cannot make out a prima facie case unless he alleges the promise and negatives the exception as of old, whereas, if the promise is simply subject to some exceptions, it is sufficient for the plaintiff to bring himself within the general terms of the promise, leaving it to the defendant to allege and prove that the plaintiff's claim in fact falls within an excluded exceptional class." [Footnotes omitted] 13This summary follows the language of the second and third of Bailhache J's propositions which draw a distinction between a provision that qualifies the whole scope of a promise and one that excludes from the operation of the promise particular classes of case which, but for the provision, would fall within it: Munro, Brice & Co at 88. Reference also must be made to Bailhache J's fourth proposition that whether "a promise is a promise with exceptions or whether it is a qualified promise is in every case a question of construction of the instrument as a whole" (at 89). 14That proposition means, as the Court observed in Wallaby Grip Ltd at [27], that "the matter of proof follows largely upon the construction of the terms of the contract of insurance and the insurer's promise contained within it". The result is that much may turn on how the insurer's promise is formulated (Wallaby Grip Ltd at [29]) because, as Bailhache J pointed out, "a promise with exceptions can generally be turned by an alteration of phraseology into a qualified promise" (at 89). 15This is well illustrated by Welford and Otter-Barry in their work The Law Relating to Fire Insurance (3rd ed 1932, Butterworth & Co). The authors refer (at 124-125) to conditions in a policy, the object of which "is to exempt the insurers from liability in certain cases where the assured sustains a loss which would be prima facie covered by his policy". They note that such conditions "are usually called exceptions" and that, subject to the language of the policy, "it is for the insurers to show that they are protected by an exception". They continue (at 125): "A different method may be adopted and the exemption from liability, instead of being framed as an exception, may be expressed as a qualification or limitation upon the undertaking of the insurers ... The contract of the insurers then ceases to be a general undertaking to indemnify the assured, subject to exceptions, in which case the insurers are liable, unless the exception applies: the contract is a qualified undertaking only, and no liability arises, unless the loss falls within the qualification. The distinction may be illustrated thus. If the insurers wish to exclude liability for incendiary fire, they may do so by either method. If the method of using an exception is adopted, their undertaking will be expressed in general terms as a contract to insure against 'loss by fire, except incendiary fire.' By the second method the undertaking will be qualified: it will be an insurance against 'loss by non-incendiary fire.' Though both methods accomplish the same result, namely, the exclusion of liability for incendiary fire, the distinction between them is not merely one of expression, it is a distinction of substance having an important bearing upon the onus of proof, since, by the second method, the onus is placed upon the assured to prove that the loss falls within the undertaking as qualified ..." 16The principles formulated by Bailhache J have been said to turn on a distinction which is not logically defensible because every qualification of a class can equally be stated, without any change of meaning, as an exception to the class: see Professor Stone, "Burden of Proof and Judicial Process: A Commentary on Joseph Constantine Steamship Ltd v Imperial Smelting Corporation Ltd" (1941) 60 LQR 262 at 279-281. However, as the above discussion shows, where the legal burden of proof lies is not determined by the overall effect of the policy provisions when read as a whole. It turns on the content and scope of the insurer's promise and what facts the insured must prove to bring its claim within the terms of that promise. Those matters depend on the proper construction of the contract of insurance. The parties to that contract may expressly agree as to who has that burden or leave that question to be determined in accordance with principles which have been regarded as settled for nearly 100 years. 17An early example of the application of the principles summarised by Bailhache J may be seen in the decision of Palles CB in Gorman v Hand in Hand Insurance Co. Bailhache J considered that case to have been correctly decided. Palles CB's reasoning was as follows: "The policy is not in its terms limited to damage by accidental fire: 'the Society agrees (subject to the conditions indorsed, which are to be taken as part of the policy) that if the property described shall be destroyed or damaged by fire ... they will ... pay or make good all such loss and damage.' The third indorsed condition provides that the policy shall not cover, inter alia, loss or damage caused by the act of an incendiary; and reading this condition, as we are bound to do, as part of the policy, the contract is that the Defendants shall be liable for loss by fire, provided it be not the act of an incendiary. When, therefore, it is once shown that the loss resulted from fire, the Plaintiff has established a prima facie case, and the onus is thrown upon the Defendants to prove that the act which caused the fire was within the proviso. The defence is not in any sense a traverse of an allegation comprised within the general averments of the plaint; it is a plea in confession and avoidance, and the proof of it is upon the Defendants." 18As the decision of the High Court in Pye v Metropolitan Coal Co Ltd [1934] HCA 9; 50 CLR 614 shows, albeit in a statutory context, the application of these principles depends on the construction of the provisions to which they are being applied. The matter in issue was whether a worker claiming to have suffered an "injury" under s 6(1) of the Workers Compensation Act 1926-1929 (NSW) bore the onus of establishing that his pulmonary fibrosis was not "a disease caused by silica dust". The majority (Rich J, Evatt J and McTiernan J) construed those words as introducing a limited exception to the circumstances in which the employer was liable and held that the employer bore the onus of proving that exception; whereas the minority (Gavan Duffy CJ and Starke J) considered that those words were part of the description of the ambit of the disease for which the employer was responsible. Accordingly the minority considered that the worker had to prove that the qualification did not apply. 19Professor Clarke, in The Law of Insurance Contracts (6th ed 2009, Informa) refers to an exception which qualifies the insurer's promise in all of the circumstances in which it applies as a general exception and one which does not as a specific exception. At par 16-3C1, he gives the following examples of specific exceptions: "For example, it is usually enough for the insured to show that his property was damaged by fire; it is for the insurer to show that the fire damage was caused by an exception, such as riot or inherent vice in the subject-matter of the insurance. The scope of the exception (fire damage caused by riot or inherent vice) is narrower than the scope of the cover (fire from whatever cause). Again, it is enough for the insured to prove that his ship was lost by perils of the sea; it is for the insurer to prove that it was sunk by enemy submarines and thus within a war risk exception. The scope of the exception (sinking by war risk) is narrower than the cover (loss at sea from any cause)."

The terms of the NRMA policy 20The Home Insurance, Buildings and Contents contract of insurance included liability cover as well as cover against loss of or damage to the buildings and contents insured. The latter is not in the form of an "all risks" cover which, subject to any express qualifications, insures against all risks, but not certainties, that it is lawful to cover: per Lord Sumner in British & Foreign Marine Insurance Co Ltd v Gaunt [1921] 2 AC 41 at 57. It is described by reference to the individual risks insured. They include earthquake, explosion, fire, unintentional breakages, impact damage from falling, flying or moving objects, lightning, leaking or escaping oil, riots, civil commotion, industrial or political disturbances, storm, theft or attempted theft and water, leaking or escaping. 21The contract wording is divided into eight sections. Section 1 describes what the insured is "covered for". As may be seen from the coverage clauses in respect of Fire (set out in [3] above) and Animal damage and Explosion (set out below), the description of what is covered is contained in three columns: POLICY WHAT YOU ARE COVERED FOR Animal damage we will under contents insurance however If your home or contents suffer loss or damage caused by animals - replace or repair your damaged contents - we will NOT cover loss or damage caused by we will under buildings insurance vermin, rodents, insects or birds - rebuild or repair that part of your home that was damaged domestic cats or dogs, or any other animal kept at the site. POLICY WHAT YOU ARE COVERED FOR Explosion we will under contents insurance however If your home or contents suffer loss or damage caused by an explosion or a landslide or subsidence that happens immediately as a result of an explosion - replace or repair your damaged contents - there must be physical evidence of the explosion we will under buildings insurance - we will not pay to repair or replace the item that exploded. - rebuild or repair that part of your home that was damaged

22The first column is in the form of a conditional clause and describes the subject matter of the insurance and peril insured. The second is in the form of a promise and describes what the insurer will do by way of indemnifying the insured in the event of the occurrence of that peril. The third is in the form of a qualification. In some cases the qualification excludes from what would otherwise be covered, loss or damage attributable to specified causes. In others, it does so in respect of loss or damage occurring in specified circumstances. In others again, it excludes from what would otherwise be covered, loss or damage to a specified item of property or property having a specified characteristic. There are also qualifications which apply and have effect whenever the peril insured against materialises. An example is the first qualification to the Explosion cover which requires that there be "physical evidence of the explosion". 23Section 1 also describes the "liability cover". The third column for that cover includes after the word "however", the words "For liability exclusions, see pages 36 to 37". Each of the exclusions referred to is introduced by the familiar words "we will NOT cover". What is not covered includes liability arising or resulting from "any deliberate and unlawful act by you or your family, or a person acting with the consent of you or your family". 24Section 8, which is headed "What you are not covered for" includes what are described as "General exclusions". Each exclusion is introduced by the words "we will NOT cover". There is a significant overlap between the scope of one of those exclusions and the first (and critical) qualification in the third column of the Fire cover. The general exclusion provides that NRMA does not cover "loss or damage intentionally caused by you or your family or a person acting with the consent of you or your family". This exclusion is not materially different in its terms and operation, to that first qualification. It was pleaded by NRMA in one of the defences which was not dealt with by the primary judge and does not arise for consideration on appeal. In that defence NRMA affirmatively pleaded that the fire was intentionally started. 25There is one further matter that should be noted. The NRMA policy is a prescribed contract within ss 34 and 35 of the Insurance Contracts Act 1984 (Cth): see Insurance Contracts Regulations 1985, Part II, Div 2. The object of those provisions is to ensure that exclusions or limitations in such policies that are other than as prescribed are brought to the insured's attention before the contract of insurance is made. Neither party submitted that these provisions were relevant to the questions of construction and onus which arise in this appeal.

Decision 26The peril insured against by the Fire cover is "loss or damage caused by fire". The subject matter of that cover is described in Sections 2 and 3 under the headings "Buildings - what we will cover under buildings insurance" and "Contents - what we will cover under contents insurance". Here, that subject matter was the appellant's home at Orange and its contents. 27In a policy of marine insurance, the peril "fire" is ordinarily construed as not confined to an accidental or fortuitous fire and as including one that has been started deliberately (at least, other than by the insured or with the insured's connivance): Slattery v Mance [1962] 1 QB 676 at 680-681 (Salmon J); The Galatia [1979] 2 All ER 726 at 742 (Donaldson J); The Captain Panagos DP [1986] 2 Lloyd's Rep 470 at 510-511 (Evans J); The Alexion Hope [1988] 1 Lloyd's Rep 311 at 316-317 (Lloyd LJ, Purchas and Nourse LJJ agreeing). The position is the same under a non-marine policy of insurance: Midland Insurance Co v Smith (1881) 6 QBD 561 at 568; Welford and Otter-Barry, The Law Relating to Fire Insurance at 62; Professor Clarke, The Law of Insurance Contracts at par 17-2B1. That the word "fire" as used in the NRMA policy extends to fires started deliberately is confirmed by the description of what is not covered. The qualification in relation to fires started with the intention of causing damage does not extend to all fires that have been deliberately started. 28It is not controversial that even in the absence of an express provision excluding cover for a fire deliberately started by or with the connivance of the insured, the insurer is not liable for loss or damage so caused. In Beresford v Royal Insurance Co [1938] AC 586, Lord Atkin said (at 595) that this is "not the result of public policy but of the correct construction of the contract". Also, it is accepted that in such a case, the onus of making out that defence is upon the insurer: Slattery v Mance at 681; GRE Insurance Ltd v Ormsby (1982) 29 SASR 498 at 501; Craig v Associated National Insurance Co Ltd [1984] 1 Qd R 209; Sutton, Insurance Law in Australia (3rd ed 1999, LBC) at par 15.7. In The Alexion Hope at 317, Lloyd LJ observed that the judgment of Salmon J in Slattery v Mance implies that fire includes, as a matter of construction, a fire started deliberately by the insured. It would follow, consistently with the observation of Lord Atkin, and the application of the principles formulated by Bailhache J, that the insurer bears the relevant onus because its promise to indemnify is subject to an implied exception or qualification in respect of loss or damage deliberately caused or brought about by the insured. 29The second column contains the respondent insurer's promise in the event that there is loss or damage to insured property caused by fire. That is plain from the use of the conditional clause introduced by "If" in the first column. Together, columns 1 and 2 contain the insurer's promise to indemnify, by replacing or repairing or rebuilding any insured buildings and their contents damaged by fire. The insured event is loss or damage by fire. The subject matter of the insurance is buildings and contents and the risk insured against is fire. The word "however" which introduces the third column is used in the sense of "nevertheless" or "in spite of". It contains qualifications to the insurer's promise. 30Addressing then the principles formulated in Munro, Brice & Co, the insurer's promise is to indemnify the appellant insured, by repairing or replacing or rebuilding any loss or damage to her home or contents caused by fire. In order to establish an entitlement to that indemnity, the appellant had to prove that there was loss or damage to her home and contents and that the cause of that loss or damage was fire. 31The qualifications in the third column do not describe circumstances necessary to be established by the appellant before NRMA could be said to be obliged to indemnify. They describe limited circumstances in which the insurer's promise is not to apply. Those limited circumstances are not all of the circumstances in which the promise applies and the qualifications do not apply in all of those circumstances. In the language of Bailhache J, the exceptions do not qualify the whole of the general promise. 32The four qualifications to the Fire cover may be contrasted in their application to that of the first qualification to the Explosion cover (set out in [21] above). The latter applies to all explosions. It is an example of an exception which qualifies all of the circumstances in which the promise applies. If the insured does not establish that there is some physical evidence of explosion, it cannot make out a prima facie case because it has not negatived a qualification to which the insurer's promise is subject. 33The scope of the first qualification to the Fire cover (loss or damage caused by a fire started with the intention of causing damage, either by the insured or by someone in her home with her consent) is within but narrower than the subject-matter of the insurer's promise (loss or damage caused by fire). With reference to Bailhache J's second proposition, it is an exception which excludes from the insurer's promise a particular class of case which would otherwise be within it. It follows in our view that if NRMA wanted to rely on the application of the first qualification in relation to the Fire cover, it bore the onus of proving that the qualification applied. 34This conclusion gives the language used its ordinary meaning and the outcome could not be described as unexpected or lacking commercial common sense. The use in this case of a qualification introduced by the words "will not cover" does not lead to a different conclusion from that reached by Palles CB in Gorman v Hand in Hand Insurance Co where the relevant qualification was introduced by the words "shall not cover". Nor would this conclusion lead to the burden of proof being imposed differently as between the operation of the general exclusion of loss or damage intentionally caused and the operation of the specific provision in the Fire cover relied on by NRMA. 35NRMA's argument for a contrary conclusion was put in various ways. First, it was said that the qualification in column three is a general one because it applies to all cases. That is only correct in the sense that it is capable of applying to any fire. But that is not to the point. The relevant question is whether it applies in all of the circumstances in which the promise, which it qualifies, will apply. It does not and applies only to a subset of those circumstances. 36Secondly, it was said that the qualification in column three was as wide as the promise because wherever it applies there is no promise. That is not so. The unstated premise is that the qualification applies in all of the circumstances in which the insurer's promise will apply. That premise is not correct. The qualification leaves "some part of the general scope of the promise unqualified" (Munro, Brice & Co at 88). 37Thirdly, it was argued that the effect of the first qualification in column 3 is that all fires within it are not covered. Accordingly, it was said the subject matter of the qualification does not form part of the promised indemnity and, for that reason, in this case there is no general promise qualified by a particular exception. This argument depends upon the construction of the policy and of the insurer's promise. We have concluded that the insurer's promise is to indemnify against loss or damage to the house and its contents caused by fire. The qualification relied on by NRMA is a specific exception to that promise.

Conclusion 38The primary judge erred in concluding that the appellant insured had the burden of proving that the fire was not deliberately lit by her or someone who had entered her home with her consent. 39We make the following orders: (1)Appeal allowed. (2)Set aside the judgment of the District Court given on 16 August 2013. (3)Judgment for the appellant against the respondent in the amount of $750,000. (4)The respondent pay the appellant interest on that judgment sum calculated in accordance with s 57 of the Insurance Contracts Act 1984 (Cth) from 27 June 2007 until the day on which payment of the judgment sum is made. (5)Respondent pay the appellant's costs of the proceedings in the District Court. (6)Respondent pay the appellant's costs of this appeal.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 September 2014