(Unreported, County Court of Victoria, Judge Kennedy, 14 August 2012)

INSURANCE - House fire - Fraud - Insurer resisting claim for indemnity on basis of allegation that insured connived in fire - Evidence - Circumstantial case - Insured in straightened economic circumstances - Competing expert opinions as to possibility of forced entry by unrelated third party - Whether judge erred in failing to find insured had powerful financial motive to burn house - Whether judge erred in failing to accept one expert opinion over another - Whether judge erred in deciding on basis of insurer's failure to exclude reasonable possibility of forced entry by unrelated third party as opposed to proof on the balance of probabilities - Appeal dismissed - Transport Industries Pty Ltd v Longmuir [1977] 1 VR 125, considered and explained; Luxton v Vines [1952] HCA 19; (1952) 85 CLR 352, 358; Chamberlain v The Queen (No2 ) [1984] HCA 7; (1984) 153 CLR 521; RJE v Secretary, Department of Justice [2008] VSCA 265; (2008) 21 VR 526, referred to.

INSURANCE - Interest on claims - Day from which unreasonable for insurer to withhold payment - Whether period of six months' unreasonable - Insurer's delay in obtaining forensic report - Whether delay justified because of insured's perceived financial difficulties - Costs - Indemnity costs - Calderbank offer - Whether insurer's rejection of Calderbank offer unreasonable - Costs order varied in consequence of allowance of additional interest - Hazeldene Chicken Farms Pty Ltd v Victorian Workcover Authority No 2 [2005] VSCA 298; (2005) 13 VR 435, applied - Insurance Contracts Act 1984 (C'th) s 57.

1 This is an appeal from a judgment given in the Commercial List of the County Court in favour of the respondent.

2 At relevant times, the respondent owned a house situate at 9 Bittern Drive, Endeavour Hills where he lived with his wife and children. The house was insured with the appellant against fire. On the night of Saturday 27 March 2010, the house was destroyed by fire when the respondent and his wife and children were away in Gippsland for the weekend. Following the fire, the respondent made a claim for indemnity under the policy. The appellant, however, rejected the claim on a number of bases, including an allegation that the respondent had connived in setting the fire. The judge below rejected the appellant's defences and gave judgment for the respondent in the sum of $525,162 with interest fixed at $74,688 and costs to be taxed as between party and party.

3 The appellant now appeals against the judge's rejection of the appellant's allegation that the respondent caused the fire. The respondent cross-appeals as to the amounts of interest and costs which were allowed.

4 The appellant's notice of appeal of 27 August 2012 alleged 27 grounds of appeal. Since then, however, the appellant has narrowed the ambit of its complaint. It now contends that the judge fell into error by failing to evaluate the evidence as a whole; by compartmentalising her consideration of issues; and by making two critical findings of fact against the evidence and the weight of evidence, namely: (1) that the respondent was not financially motivated to destroy the house by fire; and (2) that the house was forcibly entered before the fire was set within.

5 Beginning with the two disputed findings of fact, counsel for the appellant submitted that the judge was in effect bound to find that the respondent was aware that he was in serious and irreparable financial difficulty immediately before the fire, based on the following facts:

1. In April 2009 the respondent paid $18,000 (being about a quarter of his annual income) in bank fees to refinance and pay out his credit care debt of which he said he had 'had enough'.

2. By March 2010, his credit card debt increased to $65,000, to a point where his loan facilities were all but exhausted and his income was barely sufficient to meet his interest payments.

3. Although the respondent consulted his finance broker in 2009 when he still had about $15,000 of available credit, he did not consult his finance broker in 2011 when his lines of credit were nearly exhausted and thus when, in the appellant's submission, he must have appreciated that he was about to run out of money.

6 In counsel's submission, given those facts, it was glaringly improbable that the respondent was unaware that he was in serious and irreparable financial difficulty, and thus glaringly improbable that he was without a powerful financial motive to connive in setting the fire.

7 We do not think that submission to be persuasive. In her reasons for judgment, the judge dealt at length and in detail with each of the factors on which the appellant now relies and, in the result, reached views which, to our way of thinking, closely accord to the weight and reliability of the evidence. Among other considerations which pointed strongly against the conclusion that the respondent was financially motivated to destroy his home were the following:

1. First, as the judge said, the appellant's contention that the borrowing pattern of the respondent suggested that he had gone financially backwards over the 10 years preceding the fire paid no regard to the extent to which the value of the respondent's three real properties had increased in value over that time.[1]

2. Secondly, although the appellant relied upon a raft of financial calculations to support its contention that the respondent had to have realised that he was in parlous financial circumstances, there was no evidence that the appellant ever undertook any such calculations, still less considered that his borrowings had increased to such an extent that he was in financial trouble; made any inquiries about selling any of the three properties; or sought any rearrangement of his finances.[2]

3. Thirdly, although it was true that in 2009 the respondent paid out some $18,000 in bank fees to procure finance aimed at clearing his credit card debt, and that the amount of his credit card debt was back up to approximately $65,000 only 11 months later, there were good reasons to conclude that the increase in debt was not the result of financial difficulty. As the judge explained:

The plaintiff agreed that he went to the bank in 2009 because he wanted to pay out his existing credit cards, and also wanted to refinance the three properties.

In the result, the NAB letter of 15 April 2009 details that of the $603,000 provided, $524,508.02 paid out the previous financier; $18,010.64 paid for fees and charges and $60,481.34 was 'surplus' paid into the Golden Beach loan account.

The plaintiff said that he had some $52,000 worth of credit card debt at this time, but that he only paid $25,000 off this debt, using the remainder of the $60,000 to renovate his sister's bathroom, and send

money to Armenia. He was therefore left with a credit card debt of $27,000.

The defendant made much of this, and compared it with the plaintiff's later apparent agreement to the proposition that 'having started with a nil balance, you're back up to $65,000 within 11 months'. I was also invited to reject the plaintiff's evidence (that he did not actually reduce his credit card to zero) on the basis that he did not produce credit card statements for April 2009, which would show how much of the credit card he had actually paid off.

I am not prepared to reject the plaintiff's evidence on this aspect. As he stated his documents were destroyed in the fire. In any event, his expenditure on his family appears highly plausible while the difference between a 'nil' position and the plaintiff's evidence only amounts to some $27,000.

Moreover, even presuming that the plaintiff started with a credit card balance at 'nil', which increased by $65,000 some 11 months later, there was no evidence that the plaintiff himself felt significant financial pressure and certainly none such as would cause him to burn his house down. Instead, he described his financial situation as 'normal', which was consistent with the absence of default notices or other indicia of problems with his financiers.[3]

4. Fourthly, it was apparent that much of the appellant's case as to the existence of the allegedly powerful financial motive for the respondent to destroy his home was based on financial calculations and predictions of the respondent's net income which were prepared for the appellant by a Mr Wallace-Smith. The judge found that those calculations were significantly compromised by Mr Wallace-Smith's lack of knowledge of several key factors concerning on the respondent's financial position. As her Honour explained:

Defendant's figures

The defendant also relied upon evidence of Mr Wallace-Smith who opined that for the period of 1-27 March 2010 the plaintiff's income was $4284.24 (constituted by the plaintiff's wages and his wife's benefit), while his expenses were $6907 (which included living expenses as well as loan and credit card payments), leaving him with a deficiency of $2659.44.

Plaintiff's figures

The plaintiff's Counsel provided his own figures (in exhibit F), which suggested that the plaintiff had $55,227.12 in income ($907.85 per week in salary and $154.21 per week in his wife's benefits). From this was to be reduced loan repayments of $34,580 ($1090 a fortnight for the home and $240 per fortnight for Golden Beach) leaving $20,647.12 remaining. When credit card payments of $12,800 were subtracted ($6,400 per annum based on 20% on $32,000 each), the plaintiff was left with available funds of some $7847.12 to live on.

Consideration

Mr Wallace-Smith only considers the position during a very limited time period notwithstanding that it is safer to examine a longer period of time. Mr Wallace-Smith's evidence also does not take into account the evidence from the family since it was not available to him at the time.

Thus, there was also evidence that the plaintiff received further help from his sister who paid him $1000 a month. He also received help from his mother of $400-$500 a month. She also paid him $1000 every six months, although it was unclear when this commenced.

These amounts were confirmed by the plaintiff's mother and sister. The sister's capacity was also explained by the evidence of her daughters. Thus, Asya paid mainly $250 per week and Shoghik $250$300 per fortnight.

I accept this evidence as plausible, given my observations of the family dynamic, and the extent to which the plaintiff had supported his mother and sister both prior to and after arrival in Australia.

The result is that the plaintiff had access to some $16,800 to $18,000 extra per year, although this meant that the plaintiff had little to live on, even on the plaintiff's own figures.[4]

5. Fifthly, a further substantial part of the appellant's case as to financial motive was based on Mr Wallace-Smith's calculations of the respondent's net asset position; and the judge found that those calculations were significantly compromised by Mr WallaceSmith's failure to bring to account that, in effect, the respondent had interests in three real properties and was able to and did deploy them on a group basis to secure his borrowings. As the judge explained:

Assets versus Liabilities

The defendant relied on the plaintiff's perception of his asset position as being a negative amount of $180,000. The defendant suggested the assets constituted the value of the home at $275,000 ($280,000 less costs of sale of $5000) and the value of Golden Beach at $45,000 ($50,000 less costs of sale of $5000) and his Nissan car at $10,000 giving a total of assets of $330,000, from which was to be deducted the value of liabilities of $510,000, giving a $180,000 deficiency.

The defendant also prepared calculations to demonstrate that the plaintiff would be better off if he made an insurance claim, given that the amount he would receive would be some $755,000 (constituted by the land value of the home net costs at $255,000, plus the proceeds of the insurance at $440,000, plus the [G]olden [B]each land at $50,000, plus the Nissan at $10,000).

Even if the amount of his debts of some $510,000 was subtracted, the plaintiff would be in a 'net positive' position.

An immediate difficulty with these calculations is that, again, they do not take into account the value of the Charles Green property. In fact, the plaintiff's evidence was that the total value of the three properties was around $680,000 to $730,000 (constituted by amounts of $280,000; $50,000 and $350,000-$400,000), which would have been sufficient to cover the plaintiff's indebtedness ($510,000), and even that of his sister ($143,000 in March 2010).

The plaintiff's valuation also had some foundation given it is unlikely that the NAB would have advanced the sum of some $600,000 in 2009, unless the value of the three properties comfortably exceeded such an amount.

In any event, there is, again, absolutely no evidence that the plaintiff saw things as the defendant did. To the contrary his evidence was that 'before I wasn't involved in this case I never understand what's a liability, what's whatever and I would never try to sell my house....'

6. Sixthly, there was no evidence of defaults or attempts to improve liquidity by the realisation of assets or that the respondent considered himself in any way to be in financial difficulty. Still less was there reason to suppose that the respondent would resort to the extreme measure of burning down his house rather than selling or refinancing it.[5] To the contrary, the weight of evidence was to the effect that he was more than happy to live there with his wife, and the two children he had longed for years to have, and to refinance as and when necessary in order to provide his family with the sort of lifestyle he believed they deserved. As the judge said:

He described a close-knit family with his mother and sister. His mother, Marouisa, was on her own after divorcing the plaintiff's father when he was about 3 or 4 years old. His sister, Araksya, was a single mother with 2 girls. The plaintiff gave evidence that he sent money to both his mother and sister in Armenia prior to their arrival in Australia, given life was very hard in that country. He also later sponsored both of them to Australia. This was generally corroborated by his mother and sister, who also gave evidence at the trial.

The plaintiff purchased the Bittern Drive property for $98,000 in early 2000, where he lived with his mother after the breakdown of his first marriage. He said this marriage broke down because of the absence of children. Later his second wife, Lilit, who also came from Armenia, lived with him there. The couple have two children together, both girls aged 5 and 4.

In 2001 the plaintiff purchased some land in Golden Beach. He paid $5000 using a credit card for this purchase.

In 2002 the plaintiff's sister came to live in Australia with her 2 daughters. At this time the plaintiff also purchased another house at 66 Charles Green Avenue, paying $200,000 for it with a bank loan and registering the property in his name. The property was then furnished by him using a GE line of credit in an amount of $14,500. The plaintiff continued to pay the mortgage and other expenses on this house whilst his sister attended English classes in order to gain work. In 2005 this property was transferred into his sister's name.[6]

...

Although the plaintiff should have appreciated that his assets were not unlimited, he did not present as a sophisticated man. Rather, he presented as someone who wanted to provide his children 'everything' by regularly refinancing on the strength of the three properties.

When it was put to the plaintiff that he knew he would receive $444,000 if his house was destroyed by fire he gave the following evidence:

I think they won't approve it for I burn my house, but accounting for my insurance money to pay my mortgage off. That's not true. I didn't burn my house and I never counted the money, whatever can get it from insurance or why I can't do rest. And I never have a difficulty with my financial stuff because in 2010 after when I refinanced my bank to the National Bank, after that I never got any financial institution to get the refinancing or I never got any broker to ask them to give me more money or I never mean to sell my house, even it's a lend, which I can sell it easy for $50,000 but I never did because I wasn't in financial difficulty. And my life was good and was happy because I have my family around me and I was living fine. I've got two kids, which I was dreaming for four years, and I was happy to spend everything, whatever I can to make them happy. And whatever you're saying, sir, is proving for I was calculating the insurance money to burn my house to get the money from there, that's not true.

The plaintiff also gave evidence that he told an insurance investigator that he did not want money; he just wanted them to build whatever was already there.

I found this evidence credible. It was consistent with the relationships within the family; with the childless first marriage; and with the absence of any objective evidence that the plaintiff obtained any valuations and/or approached an estate agent and/or mortgage broker leading up to March 2010.

7. Finally, on this aspect of the matter, the improbability of the respondent torching his home was corroborated by the testimony of Detective Senior Constable Polson, an experienced policeman who interviewed the respondent only days after the fire and observed him at that time to be very distressed by the destruction of his home;[7] by the fact that, when interviewed by the appellant's loss-adjuster, the respondent stated that he did not want money but rather wanted the appellant to rebuild his home; and by the fact that all of the respondent's possessions, including mementoes relating to his children which he valued beyond money, were not relocated before the fire and consequently were destroyed in it.

8 Counsel for the appellant submitted that the judge should have rejected the respondent's denial of lack of complicity in the fire because the respondent gave false evidence on oath as to his tax affairs.

9 We do not accept that submission either. Evidently, the judge had regard to the questionable nature of the respondent's evidence concerning his taxation affairs but reached the view that, despite the doubts about it, there were good reasons to accept the respondent's testimony as to his lack of involvement in the fire. As her Honour explained:

The defendant made various criticisms of the plaintiff's evidence. In particular, it was suggested:

that the plaintiff 'systematically lied' in relation to his tax returns;

...

Although the plaintiff answered questions about his tax returns without objection, his evidence on this aspect was unsatisfactory. For example, many of his claims for phone expenses and car expenses in his tax returns during 2008-2011 appear unjustified, given that he was provided with a work phone and, from June 2009, a company car. He was unable to provide an acceptable explanation for some of these claims and, despite suggesting that he would call his accountant and employer to explain some of the claims, he did not do so. This suggests that their evidence would not have assisted him.[8]

...

The plaintiff was not an untainted witness, and indeed had prior convictions in relation to driving, including drink driving. However, consistent with his general directness, he gave evidence of a subsequent disqualification even before it was raised with him.[9]

...

The plaintiff gave unsatisfactory evidence in relation to his tax returns. However, his evidence was otherwise generally consistent, plausible and firm, particularly in relation to the critical events of 27 and 28 March 2010.[10]

10 We agree. The fact that the respondent may have lied about his tax returns was relevant to the assessment of his credit, as the judge expressly recognised. But it hardly compelled the conclusion that he was lying about his lack of involvement in the fire. The weight of objective evidence supported his testimony that he was not involved in the fire and plainly enough the judge was entitled to accept some aspects of the respondent's testimony without accepting others[11] Further, as counsel for the appellant properly and fairly conceded, this was a case in which the judge had a distinct advantage over this court in terms of her Honour's ability to see and hear the respondent cross-examined, and thereby to assess the credibility and reliability of his testimony.[12] From our point of view, her Honour's conclusions were far from glaringly improbable or contrary to compelling inferences.[13]

11 Turning to the second of the two disputed findings of fact, counsel for the appellant contended that the judge should have found on the balance of probabilities that the house was locked and secured at the time of the fire and, therefore, that there was no forced entry. He submitted in particular that:

1. The judge erred in principle by applying a test of possibility rather than of probability.

2. The respondent did not call an expert witness on the issue of forced entry.

3. The appellant's expert witness considered that there was no forced entry prior to the fire and, in the appellant's submission, there was no sufficient basis for the judge to reject that opinion.

4. The judge erred in concluding that it was certainly possible that there had been a forced entry via the laundry window.

5. The judge erred in requiring the appellant in effect to exclude the possibility of a forced entry through the lounge room window.

12 We shall take each point in turn. Under cover of the first, counsel argued that the judge erred by proceeding by reference to competing possibilities rather than competing probabilities and that, if the judge had approached the task in accordance with correct principle, her Honour would have been bound to conclude that it was more likely than not that the respondent had a powerful financial motive to burn his home and that there was no forced entry by an unrelated intruder. Counsel based the argument on the observation of Tadgell JA in Transport Industries Pty Ltd v Longmuir[14] that:

The law in a case like this is concerned, as has been often said, with probabilities, not possibilities. The persuasiveness of evidence of the respondent's obvious opportunity to light the fire must no doubt be measured by reference to any evidence of the probable opportunity of others to do so.[15]

13 As we apprehended counsel's submission, it was that Tadgell JA's reference to 'the probable opportunity of others to do so' constrained the judge to consider only such alternative possibilities as were probabilities (by which, counsel said, he meant alternative possibilities which were shown to be more likely than not as opposed to alternative possibilities which were not shown to be more likely than not); and thus it was an error for the judge to approach the task, as her Honour did, by assessing the likelihood of financial motive and lack of forced entry by reference to alternative possibilities (which is to say, alternative scenarios which, although real and substantial possibilities, were not shown to be more likely than not).

14 We reject the submission. It takes Tadgell JA's reference to 'the probable opportunity of others to do so' out of context. Read in context, the reference appears as follows:

As to the non-exclusiveness of opportunity, his Honour referred to Smith v Royal Insurance Co. Ltd,[16] a decision of the Alberta Court of Appeal, but the extent of his reliance on it is not clear. The case was like the present in that a fire insurer had declined liability for loss caused by a deliberately-lit fire in a building on the ground that the owner had motive and opportunity and could thus be shown to be the arsonist. The defence succeeded at first instance but the insured succeeded on appeal on the footing that the facts showed that three employees of the owner's, who had keys to the building, also had an opportunity. Belzil J.A., speaking for the court, said at 581:

Opportunity is the sine qua non of crime, but it is not evidence of commission of the criminal act, unless, as said in R. v Ferianz[17] it is exclusive opportunity.

It could not be said in this case that Smith had exclusive opportunity.

If that statement means that a fire insurer, raising a defence of arson by an insured in answer to a claim under a fire policy, cannot rely on evidence of the insured's opportunity to commit the arson unless the opportunity of all others to commit it be excluded, I should respectfully doubt its correctness. The case seems rather to be understood, however, as one depending on its own facts, the existence of opportunity of other persons having precluded a finding against the insured on the balance of probabilities. Prime Forme Cutting Pty. Ltd. v Baltica General Insurance Co. Ltd,[18] to which we were referred, is another example illustrating the same point. The weight to be accorded in the present case to evidence of the respondent's opportunity to light the fire is in my opinion to be assessed in association with any evidence of the opportunity of others to do so, and in the context of the evidence as a whole. The law in a case like this is concerned, as has been often said, with probabilities, not possibilities. The persuasiveness of evidence of the respondent's obvious opportunity to light the fire must no doubt be measured by reference to any evidence of the probable opportunity of others to do so. It follows from my comments on Bohnenkamp's evidence that, as evidence showing opportunity competing with that of the respondent, it is at best very slim.[19]

15 So read, it is apparent that, in referring to 'evidence of the probable opportunity of others to do so', Tadgell JA was referring back to the 'evidence of the opportunity of others to do so ... in the context of the evidence as a whole'. The suggestion that his Honour intended to exclude consideration of competing possibilities which were not established as such as probabilities runs counter to his Honour's express recognition, immediately before the subject reference to 'the probable opportunity of others to do so', and apparent approval of, cases like Baltica, where the real possibility of other persons having caused a fire, assessed in light of the evidence as a whole, was held to have entitled the court not to be satisfied on the balance of probabilities that the plaintiff is responsible. That is made still clearer a little later in Tadgell JA's judgment by his Honour's invocation of the locus classicus of proof on the balance of probabilities in a circumstantial case:

In a civil case like this, where there is no direct evidence of a fact that a party bearing the onus of proof seeks to prove, 'it is not possible to attain entire satisfaction as to the true state of affairs: Girlock (Sales) Pty. Ltd. v Hurrell.[20] In such a case, however, the law does not require proof to the 'entire satisfaction' of the tribunal of fact. A definition of the sufficiency of circumstantial evidence in a civil case to support proof by inference from the directly proved facts was given by the High Court in the unreported case of Bradshaw v McEwans Pty. Ltd. (27 April 1951) in a passage since repeatedly adopted: e.g. Luxton v Vines;[21] Holloway v McFeeters;[22] Jones v Dunkel;[23] Girlock's case.[24] The relevant passage in Bradshaw's case is this:

Of course as far as logical consistency goes many hypotheses may be put which the evidence does not exclude positively. But this is a civil and not a criminal case. We are concerned with probabilities, not with possibilities. The difference between the criminal standard of proof in its application to circumstantial evidence and the civil is that in the former the facts must be such as to exclude reasonable hypotheses consistent with innocence, while in the latter you need only circumstances raising a more probable inference in favour of what is alleged. In questions of this sort, where direct proof is not available, it is enough if the circumstances appearing in evidence give rise to a reasonable and definite inference: they must do more than give rise to conflicting inferences of equal degrees of probability so that the choice between them is mere matter of conjecture: see per Lord Robson, Richard Evans & Co. Ltd. v Astley.[25] But if circumstances are proved in which it is reasonable to find a balance of probabilities in favour of the conclusion sought then, though the conclusion may fall short of certainty, it is not to be regarded as a mere conjecture or surmise ...[26]

16 Counsel for the appellant submitted that, be that as it may, the judge in this case had failed to heed relevant principle inasmuch as her Honour decided the case on the basis that there was a 'real possibility' of forcible entry via a door or though a window by an unknown arsonist rather than deciding on the balance of probabilities. Counsel emphasised the following passage of the judge's reasons in support of that submission:

The evidence of the two firefighters, Matt Kree and David Black, may well have clarified which, if any door, the CFA had forcibly entered, but they were not called. Both Counsel suggested that the other party should have called them. However, I do not consider that either side might be naturally expected to call these men who were not in the 'camp' of one side more than the other.

This, however, leaves the evidence in an unsatisfactory state such that a forcible entry via a door (by an unknown arsonist and not the fire brigade) remains a real possibility.[27]

...

Under cross examination, however, he [the appellant's expert, Mr Barnes] accepted that he could not exclude the possibility that the sooted glass outside had been compromised by the weather (though he did not form that opinion at the time).[28]

..

The evidence of both Mr Lia and Ms Noble allow for the possibility of a break in through the front lounge room given the damage done by the fire. Mr Barnes' opinion that the windows were closed is based on an examination of window glass some 8 months after the fire, and in circumstances where he could not exclude the possibility of 'compromise'. He also conceded that the glass fragments could be consistent with the application of external force, including a break in.

In the light of the evidence of these witnesses, a forced entry through the lounge room windows is, at least, a real possibility.[29]

...

However, Mr Barnes himself accepts that he did not actually test the laundry window by winding it. The evidence of Detective Polson that the window could be closed after entry is also consistent with an intruder closing the window on exiting the premises, and therefore consistent with the presence of sooting observed by Mr Barnes. There is also no actual evidence that any firefighter did the damage as Mr Barnes speculated. In any event, there appears no reason for a firefighter to break the chain for ventilation rather than simply opening the window.

In the light of all this evidence, a forced entry via the laundry window was certainly possible.[30]

17 We reject the submission. It is evident from the judge's consideration of relevant principle earlier in her reasons that she well understood that the test to be applied was whether the appellant had established the defence of arson on the balance of probabilities As her Honour said:

In assessing this case, it is important to refer to the standard of proof which operates. This is a civil proceeding, and the civil standard, namely, the balance of probabilities, applies. The plaintiff submitted that I should also be guided by the principles in Briginshaw[31], which suggest that I would only be entitled to be satisfied, on the balance of probabilities, should I be satisfied that the proofs adduced are cogent.[32] In any event, pursuant to s140(2)(c) of the Evidence Act 2008, I am to take into account a number of matters, including the gravity of the matters alleged.[33]

18 It is also clear that, although her Honour spoke in terms of possibility of the chance that one or other windows of the house had been forced prior to the fire, her Honour decided the issue on the balance of probabilities by weighing all of the relevant circumstantial facts and possibilities. Hence, as her Honour concluded:

The evidence presented allows for a number of potential means of forced entry. These include via a door and/or window, and particularly the laundry window. Although it is possible that the home was in fact secure, it is, at least, equally likely that there was a forced entry in the light of the available evidence.

Given the scope for a forced entry, I am therefore unable to be satisfied, as the defendant contends, that the house was locked and secured at the time of the fire.[34]

19 The judge's approach to the assessment of a circumstantial case was, therefore, in accordance with relevant principle[35] and, contrary to counsel's argument, stands in contrast to the kind of reasoning criticised by this court in Transport Industries Pty Ltd v Longmuir:[36] where the trial judge attempted to assess the possibility of an unknown intruder setting fire to premises without taking into account as part of the assessment clear evidence that the plaintiff was on the premises at about the time the fire started. Here, the judge assessed the possibility of an unknown intruder setting fire to the premises by taking into account all of the facts and circumstances which bore upon that possibility. Significantly they included that the respondent was nowhere near the house at the time of the fire - he was in Gippsland with his wife and children; there was an absence of evidence of connivance other than the inferences which the appellant submitted ought be drawn from the respondent's supposedly difficult financial position and a dearth of evidence as to the identity of another possible culprit; and there was no immediately obvious reason for the respondent to prefer setting fire to his home to refinancing or selling one or more of his properties.

20 Counsel for the appellant submitted that, however that may be, in this case a lack of a financial motive for the respondent to destroy his home and lack of forced entry by an unrelated third party intruder were in effect essential intermediate facts[37] and it followed that, unless those facts were established on the balance of probabilities, the judge was logically compelled to conclude it was more likely than not that the respondent was complicit in the fire.

21 We reject that submission, too. For even assuming, without deciding, that it would follow from proof on the balance of probabilities of motive and lack of forced entry that the respondent was complicit, the notion that the judge was bound to hold for the appellant unless satisfied on the balance of probabilities as to a lack of financial motive or forced entry would reverse the onus of proof. It was not for the respondent to establish that he was without a financial motive or that there was not forced entry by an unrelated third party intruder. It was for the appellant to adduce

21 evidence sufficient to persuade the judge on the balance of probabilities of each of those facts. And, as is evident from the judge's reasons, the appellant failed to do so.

Respondent's failure to call expert evidence and whether open to reject appellant's expert

22 Counsel for the appellant contended that, because the respondent did not call any expert evidence as to the issue of forced entry, the judge was bound to accept the expert opinion of the appellant's expert witness, Mr Barnes', that the premises had not been forcibly entered.

23 We do not accept that contention. This was not the sort of case in which an expert called by one party expresses such a clear and unqualified opinion that, in the absence of a competing expert opinion, the judge is more or less bound to accept the one expert opinion which is on offer.[38] To the contrary, as her Honour explained in the following passages of her reasons, Mr Barnes' views on critical aspects of the evidence were problematic in that they were distinctly at odds with the opinions of other, independent, expert witnesses.

Whether intruder may have entered through front or rear door

24 As to the possibility that an intruder may have entered by forcing the front or back door, the judge observed that:

I accept that Mr Barnes possessed impressive qualifications and experience as earlier set out. However, Ms Noble, the arson chemist employed by Victoria Police, also had a Bachelor of Science and Master of Applied Science and, significantly, had an opportunity to make observations on the morning after the fire [compared to Mr Barnes who did not inspect the premises until seven months after the fire].

In the light of his impressive qualifications and experience, I have generally accepted Mr Barnes' opinions that the fire was deliberately lit by the spread and ignition of flammable liquid on the floor of the front entry and lounge - and not from the laundry.[39]

...

Under cross-examination, he conceded 'as a generalisation' that it was possible that someone other than the fire brigade forcibly opened the rear door, but that it was his 'experience' that the fire brigade would have entered from the back.

The evidence of Mr Barnes is consistent with there being forcible damage to the back door of the home. However, his views that the fire brigade were responsible are somewhat speculative in the absence of appropriate evidence from the firefighters concerned.[40]

...

Mr Lia had little independent memory and the fire report itself is unclear. Although Mr Barnes appeared to opine that the doors were closed and locked at the time of the fire, his own evidence clearly allows for the real possibility of a forced entry via the back door. However, the direct observation of Detective Polson was that there was a forced entry via the front door.[41]

...

This, however, leaves the evidence in an unsatisfactory state such that a forcible entry via a door (by an unknown arsonist and not the fire brigade) remains a real possibility.[42]

Whether intruder may have entered through lounge room window

25 As to the possibility of whether or not one of the lounge room windows may have been forced so as to allow an intruder to enter, her Honour noted that:

... His [Mr Barnes'] reasons for this opinion included an examination of the wind out windows, which were in the 'closed position' and also that an examination of the window glass (located external to the windows), revealed the presence of sooting and associated post combustion debris, consistent with the windows being closed at the time of the fire.

Under cross examination, however, he accepted that he could not exclude the possibility that the sooted glass outside had been compromised by the weather (though he did not form that opinion at the time).

Mr Barnes also agreed that it would be very difficult to determine whether the frames of the lounge windows were damaged before the fire, given they were severely burnt and almost destroyed. He also conceded that there were small amounts of glass fragments found in the lounge room, such that he could not exclude the possibility of some external force having broken the glass. He accepted, too, that the application of external force was consistent with some sort of a break in, though he suggested that there were a number of other possible explanations with degrees of 'likelihood probability', but did not elaborate further.

Mr Lia's evidence was that he could not give a conclusive opinion as to what position the lounge windows were in before the fire given the damage.

Ms Noble also said she was unable to reach any conclusion as to whether the windows had been forced or damaged or broken before the fire because they were too extensively damaged.

The evidence of both Mr Lia and Ms Noble allow for the possibility of a break in through the front lounge room given the damage done by the fire. Mr Barnes' opinion that the windows were closed is based on an examination of window glass some 8 months after the fire, and in circumstances where he could not exclude the possibility of 'compromise'. He also conceded that the glass fragments could be consistent with the application of external force, including a break in.

In the light of the evidence of these witnesses, a forced entry through the lounge room windows is, at least, a real possibility.[43]

Whether intruder may have entered through laundry window

26 Concerning the possibility that an intruder may have entered through the laundry window, the judge observed that:

It was suggested to Mr Barnes that Ms Noble's observation on the Sunday was that the laundry wind-out window was definitely open at the time of the fire, and that there was some damage to the chain attached to the window. However, Mr Barnes, somewhat dismissively, suggested that Ms Noble could not say if it was open or closed at the time of the fire 'either absolutely'.

He then went on to suggest that it was his experience that the fire brigade will open windows to vent, although there was absolutely no evidence of this occurring in this case.

In fact, the observation of Ms Noble (who attended the morning after at about 10.25 am), was that the laundry window appeared to have been open at the time of the fire. Her evidence was that she observed some damage to the chain being 'fully retracted out of its casing' at the time, which told her the chain was 'pulled out prior to the fire'.[44]

...

The evidence of Detective Polson is somewhat inconsistent as to the extent the window could open, but is evidence of the laundry window being open and damage done within 12 hours of the fire.

This evidence is also consistent with the observations of Ms Noble.

Both of these witnesses were experienced impartial police witnesses who gave evidence that is consistent with a forced entry via the laundry window.[45]

...

The defendant submitted that the court should not reject the opinion of Mr Barnes without the benefit of a forensic expert called by the plaintiff.

However, Mr Barnes himself accepts that he did not actually test the laundry window by winding it. The evidence of Detective Polson that the window could be closed after entry is also consistent with an intruder closing the window on exiting the premises, and therefore consistent with the presence of sooting observed by Mr Barnes. There is also no actual evidence that any firefighter did the damage as Mr Barnes speculated. In any event, there appears no reason for a firefighter to break the chain for ventilation rather than simply opening the window.

In the light of all this evidence, a forced entry via the laundry window was certainly possible.[46]

27 With respect, we perceive no error of fact or principle in any of those aspects of the judge's reasoning. We share her Honour's view that Mr Barnes' opinion failed to exclude the real and significant possibility that the premises were forcibly entered by an unknown intruder prior to the fire.

28 Counsel for the appellant argued that so to conclude was in effect to require the appellant to exclude the possibility of a break-in as a reasonable possibility when the correct test was whether on the balance of probabilities it was more likely than not that the offender was someone acting in concert[47] with the respondent.

29 For the reasons already expressed, we do not accept that is so. As we have said, it is apparent that the judge's approach was one of considering all of the relevant physical and financial possibilities on which the appellant relied as indicative of the respondent's involvement and weighing them together in order to decide whether the appellant had established on the balance of probabilities that the respondent was complicit. Hence, as her Honour explained:

Given that I was not satisfied that the plaintiff had an opportunity to personally light the fire, the issue before the court came down to a choice between an 'unknown conniver' connected to the plaintiff, and an 'unknown criminal' (being an unknown enemy or otherwise).

As indicated already, the defendant relied on a number of matters to suggest that the evidence pointed to a person conniving with the plaintiff, on the balance of probabilities.

I accept that:

• the house is a well screened brick veneer house in a quiet residential street;
• the fire occurred at approximately 11.00 pm on a Saturday night on 27 March 2010 with no occupants in the house at the time of arrival of the CFA;
• there are more than 8000 residences in the suburb of Endeavour Hills and no evidence adduced of a house fire save for the fire at Bittern Drive;
• the plaintiff's evidence was that he only told his mother and sister he was going to Golden Beach while the wife's evidence was that she only spoke to her husband about it;
• there was no known enemy of the Khatchmanians identified on the evidence;
• the fire was deliberately lit; and
• there was no known fire bug operating in the area.

• the plaintiff denied being involved in the fire. His evidence was generally consistent, plausible and firm, particularly in relation to the critical events of 27 and 28 March;
• Detective Polson, an experienced policeman, observed that the plaintiff was very distressed by what had happened to his home soon after it occurred;
• there was no clear 'conniver' identified on the evidence;
• there was no evidence of belongings or possessions being removed before the fire;
• there was no connection identified between the plaintiff and the lighting of the fire, such as, for example, the purchase of the accelerant used;
• I am unable to be satisfied that the house was locked and secure at the time of the fire;
• the evidence does not establish that the plaintiff himself was aware of any serious financial difficulty. Moreover, I am not satisfied that the plaintiff was likely to have taken the extreme measure of burning down his house to the extent he was aware of any difficulty;
• it is more common than not that a vandal culprit will not have been the owner of the property and not generally a serial arsonist; and
• the use of petrol in house fires not lit by the owner is something 'commonly seen'.

When consideration is given to all of the above matters, an unknown criminal is, at least, as likely as an unknown conniver, with the choice between them 'a mere matter of conjecture'[48].

I am therefore not satisfied that the defendant has discharged its onus in showing, on the balance of probabilities, that the plaintiff lit, or connived at the lighting of, the fire at his home. This is particularly the case having regard to the gravity of the matter alleged.

It follows that the first defence is rejected.[49]

30 We agree with her Honour's analysis. Given that, on the evidence, the respondent did not have a significant concern about his financial position prior to the fire; that he was not being pressed by creditors for payment prior to the fire; that he was achieving modest reductions in the amount of his indebtedness prior to the fire; and that, once Mr Barnes' evidence was assessed against the several competing aspects of the police expert witnesses' evidence, it left open a real and substantial possibility of the house having been forcibly entered by an intruder prior to the fire, we are left without a feeling of actual persuasion that the respondent was complicit in the arson.[50]

32 On 14 August 2012 the judge delivered a separate judgment dealing with interest and costs. Mr Khatchmanian (the 'cross-appellant') appeals against her Honour's orders.

33 The cross-appellant was entitled to interest on the judgment under s 57 of the Insurance Contracts Act 1984 (Cth), which operates to the exclusion of ss 58 and 59 of the Supreme Court Act 1986. Section 57 provides that:

57 Interest on claims

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

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

(a) the day on which the payment is made;

(b) the day on which the payment is sent by post to the person to whom it is payable ...

(4) This section applies to the exclusion of any other law that would otherwise apply.

(5) In subsection (4):

law means:

(a) a statutory law of the Commonwealth, a State or a Territory;

34 In determining the period during which interest would run on the award, her Honour said that factual decisions as to what was reasonable in other cases were of limited assistance.[51] She held that 'having regard to all of the complexities involved in the case' the insurer was entitled to take six months to complete its investigations.

Accordingly, she ordered that interest was payable from six months after the date of the fire.[52]

35 Her Honour rejected the cross-appellant's argument that he was entitled to costs on an indemnity basis, because the insurer had acted in a high handed manner in resisting his claim. She also rejected the cross-appellant's claim for indemnity costs based on a Calderbank offer to settle the claim for $575,000, in November 2011.[53]

36 After referring to the principles in Hazeldene Chicken Farms Pty Ltd v Victorian Workcover Authority No 2,[54] her Honour said that:

Applying these principles to the present case, the offer was made at an appropriately advanced stage ( November 2011) with a trial soon to follow at the beginning of the following year (in January 2012); the time allowed was reasonable (25 November-9 December); the offer was clear; and foreshadowed an indemnity costs application.

However against this , the extent of the compromise was extremely small ...

The offer also gave little consideration to the defendant's prospects of success, notwithstanding that the court has found that there was a case to answer on the main arson defence.

Taking all these factors into account, I do not consider it was unreasonable for the defendant to reject the offer.[55]

37 The respondent contends the judge's conclusion that interest should only begin to run from six months after the fire and against the refusal to award him indemnity costs.

38 We deal first with the question whether the judge should have awarded interest on the judgment sum from an earlier date.

39 On appeal the cross-appellant argued that the trial judge should not have found that it was reasonable for the insurer to withhold payment for six months and that a two month period was all that was required. He submitted that the insurer could have obtained earlier access to the reports of Detective Senior Constable Polson and the forensic chemist Ms Rachelle Noble, who inspected the premises on the day after the fire. Although the insurer had alleged that the cross-appellant had a financial motive for arson, it did not commission Mr Wallace-Smith to examine his financial position until five months after proceedings were issued and three months after the applicant had filed a defence alleging the arson.[56] Mr Barnes was not asked to examine the causes of the fire until seven months after it had occurred. Further, the applicant had continued to assert that one motive for the arson was that the respondent knew his house was termiteinfected, despite the evidence of Mr Hendy and Mr Thornton, that termite activity was usually difficult to detect and that houseowners were often unaware that termites were present.[57]

40 The insurer submitted that the insurer could not obtain access to the report of the forensic chemist, Ms Noble until some months after the fire and that Ms Noble was a critical witness. One of the reasons for the insurer's suspicions about the financial motive for arson was the cross-appellant's failure to tell the insurer that both his mother and sister contributed to his living expenses. This had required the insurer to pursue the question whether he had a financial motive for burning down the house. Further, in the proceedings below the cross-appellant had initially claimed to be entitled to interest after three months, although he had ultimately sought the payment of interest from two months after the fire.

41 In our view her Honour was in error in holding that it was reasonable for the insurer to withhold payment of the amount payable under the insurance contract for six months. The cross-appellant was interviewed by the insurer shortly after the fire and again on 13 September 2010. In the second interview he frankly disclosed that he had convictions for traffic offences and had once had his car insurance cancelled. He told the interviewer that if it was necessary to obtain a history of his re-financing arrangements he could telephone the respondent's financial adviser. As the cross-appellant submitted, it was unreasonable for the insurer to wait seven months before arranging for a fire investigation report from Mr Barnes and to fail to interview Ms Noble about her examination of the property until October 2011.

42 Although her Honour's reasons on this point are very brief, it is possible that she erred because she took account of the applicant's subjective belief that the respondent had burned down his own house. But, as Bongiorno J (as he then was) held in HIH Casualty & General Insurance v Insurance Australia ( No 2),[58] the insurer's bona fides in withholding payment are not relevant in applying s 57. In that case Bongiorno J said that:

Once the court has rejected the insurer's defence to a policyholder's claim, that defence becomes irrelevant as does the fact that the insurer had a bona fide belief in its efficacy. To hold otherwise would put a premium on erroneous advice. Taken to its logical extreme, an insurer which relied upon incorrect legal advice or an inadequate report of a loss adjuster to form a belief as to the possibility of its successfully defending a policyholder's claim would be advantaged by having obtained bad legal or loss adjusting advice. The successful policyholder would be correspondingly disadvantaged by the same irrelevant circumstance.[59]

43 Although there were objective circumstances which justified some investigation of the claim, any such investigation should, in our view, have been completed by the applicant by three months after the date of the fire. Consequently, interest should run from that date.

44 The cross-appellant argued that the trial judge erred in the exercise of her discretion in rejecting the argument that the insurer's conduct in defending the claim justified a special order as to costs. He submitted that the insurer's conduct in maintaining its defence, despite its knowledge that there was no evidence to support the allegation that the fire was deliberately lit, justified the making of an order for indemnity costs.[60]

45 We reject that argument. Her Honour correctly identified the matters to be taken into account in deciding whether an order for indemnity costs should be made because of the conduct of the unsuccessful party. There is no basis for setting aside the conclusion she reached on that issue. However, for the reasons explained below, we are disposed to order that the costs be taxed on an indemnity basis.

46 Because interest is now payable from three months, rather than six months after the date of the fire, the disparity between the amount of the Calderbank offer made by the respondent and the amount of the award is greater than that considered by her Honour. According to the respondent's submissions, he is entitled to payment of $84,284.97 in interest, instead of the sum of $74,688.00[61] and the total amount of the judgment is $609,446.97, compared with the total of $599,850.00 awarded by her Honour.

47 Since her Honour formulated her costs order on an incorrect basis, this reopens the costs discretion. The insurer argued that the ambiguity in the evidence as to whether there was a forced entry and the cross-appellant's weak financial position made it reasonable to consider that it was likely to succeed in its defence that the fire was deliberately lit and that consequently it was reasonable for it to refuse the Calderbank offer made by the respondent.

48 The insurer's case was not a hopeless one, but nor was it particularly strong. We agree with her Honour that the offer to settle the claim for $575,000 inclusive of interest, plus costs, was clear and made at an appropriate time, and that the insurer had a reasonable time to consider it. The Calderbank offer foreshadowed an indemnity costs application. We also note that, at the trial, the insurer continued to pursue the claim that the respondent himself lit the fire, despite considerable objective evidence that he was at Golden Beach when the house burnt down.

49 On balance, we consider that it was unreasonable for the insurer to refuse the Calderbank offer. Accordingly, we shall order that the cross-respondent pay the cross-appellant's costs below on an indemnity basis.

[11] Dublin, Wicklow and Wexford Railway Co v Slattery (1878) 3 App Cas 1155, 1201; Christmas v Nicol Bros Pty Ltd [1941] NSWStRp 47; (1941) 41 SR (NSW) 317, 322; Cubillo v The Commonwealth [2000] FCA 1084; (2000) 103 FCR 1, 46-7[119]-[123].

[12] Fox v Percy [2003] HCA 22; (2003) 214 CLR 118, 132,[41] Gleeson CJ, Gummow and Kirby JJ) and 146[90] (McHugh J); Australian Securities Commission v Hellicar [2012] HCA 17; (2012) 86 ALJR 522,[130]; Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357, 381[76]; Board of Bendigo Regional Institute of Technical and Further Education v Barclay [2012] HCA 32; (2012) 86 ALJR 1044, 1067,[130].

[13] Brunskill v Sovereign Marine & General Insurance Co Pty Ltd [1985] HCA 61; (1985) 59 ALJR 842, 844.

[14] [1997] 1 VR 125, 141.

[16] [1983] 3 WWR 577

[17] [1962] OWN 40; 37 CR 37 (CA).

[18] (1990) 6 ANZ Insurance Cas. 61-028.

[19] [1997] 1 VR 125, 140-141.

[20] [1982] HCA 15; (1982) 149 CLR 155, 169 (Mason J).

[21] [1952] HCA 19; (1952) 85 CLR 352, 358.

[22] [1956] HCA 25; (1956) 94 CLR 470, 480-1.

[25] [1911] AC 674, 687 (Emphasis added).

[26] [1997] 1 VR 125, 141.

[29] Reasons, [76]-[77] (Emphasis added).

[30] Reasons, [90]-[91] (Emphasis added)

[31] Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336, 350 (Rich J), 362-3 (Dixon J).

[32] Oakley and Anor v Insurance Manufacturers of Australia Pty Ltd [2008] VSC 68, [12] (Kaye J) citing Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336, 350 (Rich J), 362-3 (Dixon J); Rejfek and anor v McElroy and anor [1965] HCA 46; (1965) 112 CLR 517, 521.

[35] Belhaven v Stenton Peerage (1875) 1 App Cas 278, 279 (Lord Cairns LC); Luxton v Vines [1952] HCA 19; (1952) 85 CLR 352, 358 (Dixon, Fullagar and Kitto JJ); Chamberlain v The Queen (No2) [1984] HCA 7; (1984) 153 CLR 521, 535-9 (Gibbs CJ and Mason J).

[36] Transport Industries Pty Ltd v Longmuir [1977] 1 VR 125, 130.

[37] See and compare, in the criminal context, Shepherd v The Queen [1990] HCA 56; (1990) 170 CLR 573, 585 (Dawson J).

[38] Cf Taylor v R (1978) 22 ALR 599, 608 (Smithers J) and 618 (Connor and Franki JJ); RJE v Secretary, Department of Justice [2008] VSCA 265; (2008) 21 VR 526, 532-3[19]-[20] (Maxwell P and Weinberg JA).

[43] Reasons, [71]-[77] (citation omitted).

[47] Likardopoulos v The Queen (2012) 86 ALJR 1168; [2012] HCA 37, [21] (Gummow, Hayne, Crennan, Kiefel and Bell JJ).

[48] Transport Industries v Longmuir (1997) 1 VR 125, 141.

[50] Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336, 361 (Dixon J).

[51] Plaintiff's submission on costs in the County Court, [24]. The plaintiff submitted the following cases as guidance as to what constitutes a reasonable period: Moss v Sun Alliance Aust Ltd (1990) 55 SASR 145; Melin v Mutual Community General Insurance Pty Ltd (1991) 6 ANZ Ins Cas - 61 - 057; VL Credits Pty Ltd v Switzerland General Insurance Co Ltd (No 2) [1991] VicRp 71; [1991] 2 VR 311.

[52] Khatchmanian v Mutual Community General Insurance [2012] VCC 1123 ('Costs Reasons'), [8]-[9].

[54] [2005] VSCA 298; (2005) 13 VR 435.

[56] Mr Wallace Smith's financial report dated 14 October 2011 was requested by the insurer's lawyers on 27 September 2011.

[57] Termite detection report dated 8 December 2010 (Mr Hendy). Report of John Thornton and Associates dated 21 October 2011, especially at 21.

[58] [2006] VSC 128.

[59] Ibid [8]-[9]. Bongiorno J cites the discussion of the insurer's bone fides in withholding payment in VL Credits v Switzerland General Insurance [1991] VicRp 71; (1991) 2 VR 311, Max Hams & Anor v CGU Insurance Ltd [2002] NSWSC 843, Settlement Wine Company Pty Ltd v National and General Insurance Co Ltd (1994) 62 SASR 70, and Bankstown Football Club Ltd v CIC Insurance Ltd (Unreported, NSWSC, Cole J, 17 December 1993).

[60] The appellant cites Etna &Ors v Arif [1999] VSCA 99; (1999) 2 VR 353, Farnell v Penhalluriac [2008] VSCA 250 and Spotless Group Ltd v Premier Building and Consulting Pty Ltd & Anor [2008] VSCA 115 as authorities supporting that proposition.

[61] The calculation is made on the same basis as the calculation of six month's interest.