Rolleston v Insurance Australia Ltd

Court of Appeal (NSW)|2017-06-09|Before: Beazley P, Meagher JA, McDougall J

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] HEADNOTE [This headnote is not to be read as part of the judgment] Mr John Rolleston owned property and was constructing a residence (the Property) on it. He entered into a contract for insurance with Insurance Australia Ltd in respect of the Property. The Property was insured against fire for an agreed sum of $4.2 million. On 10 May 2013, the Property was damaged by fire. The cost of repair was agreed to be $991,946. Mr Rolleston made a claim under the insurance policy which was refused. On 27 February 2014 the Property was sold in its damaged state for $4,068,000. Mr Rolleston commenced proceedings against Insurance Australia, seeking loss and damage arising from fire damage to the Property that adversely affected its market value. The primary judge found that Insurance Australia was liable under the insurance policy. Mr Rolleston claimed an amount equal to the difference between the price that the Property sold for in its damaged state on 27 February 2014, and the amount that it would have sold for on that date, had the Property been repaired. He tendered a valuation report (the Report) which assessed the value of the Property at $7.5 million as at the date of sale and in a repaired state. The primary judge rejected the Report on the basis that it did not satisfy the requirements in s 79 of the Evidence Act 1995 (NSW). The Report did not disclose the valuer's reasoning process in arriving at the assessed value and it failed to show how the valuer's assessment was based on the application of his specialised knowledge to the facts. The primary judge also would have excluded the Report under s 135 of the Evidence Act. As the valuer's reasoning process was not apparent, Insurance Australia would have been put in the position of needing to expose the reasoning in cross-examination, or take the forensic decision not to question the Report and risk the Court accepting the valuer's opinions. His Honour found that this would be 'prejudicial in the extreme'. As there was no other evidence of the value of the Property before the Court, the primary judge awarded Mr Rolleston an amount equal to the cost of repairs. Mr Rolleston appealed the decision, claiming that the primary judge should have admitted the Report into evidence, and that any difficulties with the Report were only relevant to its probative weight, not its admissibility. The principal issues for determination on the appeal were: (1) whether the primary judge erred in rejecting the Report pursuant to s 79 of the Evidence Act; (2) whether the primary judge erred in the exercise of the discretion under s 135 of the Evidence Act. Emmett AJA: (Beazley P and Meagher JA agreeing) In relation to (1): (i) Section 79 of the Evidence Act will not be satisfied unless the opinion in question is that of a person who has specialised knowledge, being knowledge based on that person's training, study or experience and the opinion is wholly or substantially based on that specialised knowledge: [32] (Emmett AJA) (ii) The requirement that the opinion be based on specialised knowledge would normally be satisfied by the person who expresses the opinion demonstrating the reasoning process by which the opinion was reached. Thus, a report in which an opinion is recorded should expose the reasoning of its author in a way that would demonstrate that the opinion is based on particular specialised knowledge: [32] (Emmett AJA) Ocean Marine Mutual Insurance Association (Europe) OV v Jetopay Pty Ltd (2000) 120 FCR 146; [2000] FCA 1463 applied. (iii) Before the requirements of s 79 will be satisfied in relation to opinion evidence, the evidence must explain how the field of "specialised knowledge" in which the witness is expert applies to the facts assumed or observed so as to produce the opinion propounded. If that matter is not made explicit, it is not possible to be sure whether the opinion is based wholly or substantially on the specialised knowledge of the witness. If the Court cannot be sure of that, the evidence is, strictly speaking, not admissible: [33] (Emmett AJA) Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705; [2001] NSWCA 305 applied. (iv) The requirement that the relevant opinion be based wholly or substantially on specialised knowledge is an explicit precondition of admissibility: [34] (Emmett AJA) (v) The opinions of witnesses should be confined, in accordance with s 79 of the Evidence Act, to opinions that are wholly or substantially based on their specialised knowledge: [34] (Emmett AJA) In relation to (2): (vi) Evidence not satisfying the requirements in s 79 of the Evidence Act might be inadmissible on discretionary grounds under s 135 of the Evidence Act.

Judgment

BEAZLEY P: I have had the advantage of reading in draft the reasons of Emmett AJA. I agree with his Honour's reasons and proposed orders. I also agree with the additional observations of Meagher JA.
MEAGHER JA: I agree for the reasons given by Emmett AJA that this appeal should be dismissed with costs. I make the following additional observations in amplification of those reasons.
The primary judge identified the respects in which the valuation opinion did not expose Mr Lechner's reasoning sufficiently to demonstrate how it was based on his specialised knowledge.
The valuer adopted the comparable sales method. That method involves the identification of qualities or characteristics of the relevant comparable properties which are considered to be indicators of value, or as contributing to value or perceptions of value; and the comparison and assessment in terms of value of those qualities and characteristics as between the property being valued and the comparable sales properties.
Ultimately that comparison must provide a basis for expressing an opinion as to the value of the subject property. That exercise may involve deriving, from the comparable sales, measures of value for particular characteristics and applying those measures to the subject property. It also may involve, in forming an opinion as to value, the making of adjustments to comparable sale prices to take account of differences in those characteristics as between the comparable sale properties and the property being valued.
These and other analyses undertaken by the valuer will involve estimate, inference, deduction and other judgments that are not likely to be exact or precise. Nonetheless, the valuer must lay out the process by which this method has been followed. It is not sufficient, as happened in this case, for the valuer to identify in fairly general terms the differences and similarities between the various comparable sale properties and the subject property, and then to express a view as to the value of that property. The valuer must explain, in a way which demonstrates the application of the adopted methodology and specialised knowledge, how the comparable sales justify the conclusion as to value.
EMMETT AJA: This appeal is concerned with the admissibility as opinion evidence of a valuation report (the Valuation Report) concerning land and buildings situated in Mosman, New South Wales (the Property). The Valuation Report was tendered by the appellant, Mr John Rolleston, in proceedings brought by Mr Rolleston against the respondent, Insurance Australia Ltd (the Insurer), in the Commercial List of the Equity Division of the Supreme Court (the Proceedings). The Valuation Report was rejected by a judge of the Equity Division sitting in the Commercial List (the primary judge) on the basis that it did not satisfy s 79 of the Evidence Act 1995 (NSW) (the Evidence Act) and, if it did, his Honour would have rejected it under s 135 of the Evidence Act. Mr Rolleston now appeals from the final judgment and orders made by the primary judge on the basis that his Honour erred in rejecting the Valuation Report.
Section 76 of the Evidence Act provides that evidence of an opinion is not admissible to prove the existence of a fact about the existence of which the opinion was expressed. However, s 79 provides that, if a person has specialised knowledge based on the person's training, study or experience, the rule stated in s 76 does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge. Section 135 of the Evidence Act provides that the court may refuse to admit evidence if its probative value is substantially outweighed by the danger that the evidence might be unfairly prejudicial to a party, might be misleading or confusing or might cause or result in undue waste of time.

Background

On 10 May 2013, Mr Rolleston was the owner of the Property, at which time a large and expensive residence was being constructed on it. On that day, a fire broke out and caused substantial damage to the building. At the time of the fire, the Property was insured against fire for an agreed sum of $4.2 million under a contract of insurance with the Insurer (the Policy). Mr Rolleston made a claim under the Policy. The cost of the rectification of the damage to the building caused by the fire was agreed between Mr Rolleston and the Insurer, for the purpose of the Proceedings, to be $991,946. However, the Insurer declined Mr Rolleston's claim under the Policy on various grounds, with the consequence that Mr Rolleston did not have the financial means to carry out the rectification of the damage caused by the fire. On 27 February 2014, the Property was sold by Mr Rolleston in its damaged state after the fire.
Mr Rolleston commenced the Proceedings on 11 June 2014 after the sale. In his Commercial List Statement, Mr Rolleston asserted, relevantly, that he suffered loss and damage arising from fire damage to the Property that adversely affected its market value. His primary claim against the Insurer was for an amount equal to the difference between what he asserted would have been the value of the Property on 27 February 2014, if the fire damage had been fully rectified, and the amount realised by him when he sold the Property in its damaged state on that date. He contended that, if the fire damage had been rectified, the Property would have realised the sum of $7.5 million, whereas it realised only $4,068,000 upon sale.
The Valuation Report was the only evidence relating to the value of the Property adduced by Mr Rolleston. It is undated and is based on an inspection of the Property on 22 January 2014 by its author, Mr Alex Lechner. The Valuation Report was tendered on the second day of the hearing of the Proceedings on 18 October 2016. Counsel for the Insurer objected to it. No application was made on behalf of Mr Rolleston to be given the opportunity of adducing further evidence from Mr Lechner. The primary judge rejected the tender of the Valuation Report, indicating that he would give reasons when he gave judgment with the other issues in the case.
The other issues concerned allegations by the Insurer that:

Mr Rolleston or someone at his urging or with his connivance started the fire;
Mr Rolleston's claim was made fraudulently within the meaning of s 56 of the Insurance Contracts Act 1984 (Cth);
Mr Rolleston was not truthful and frank in dealing with the Insurer's employees and investigators; and
Mr Rolleston did not act with the upmost good faith. The Insurer contended that, by reason of those matters, it was not liable to Mr Rolleston under the Policy.

On 4 November 2016, the primary judge published his reasons for finding in Mr Rolleston's favour on the allegations advanced by the Insurer as to why it was not liable under the Policy. His Honour directed judgment for Mr Rolleston against the Insurer in the sum of $1,147,628.67, being the sum of $991,946 plus interest of $155,682.67. Mr Rolleston contends that, had the Valuation Report been admitted, he would have been entitled to a verdict substantially in excess of the sum of $1,147,628.67.
In the Valuation Report, Mr Lechner gives his opinion as to the value of the Property as at 27 February 2014, on the assumption that the fire damage had been fully rectified as at that date. As opinion evidence, it would be inadmissible unless it satisfied the requirement of s 79 of the Evidence Act. The primary judge concluded that the Valuation Report did not "pass through the s 79 gateway". His Honour said that, in any event, if he were wrong in that conclusion, he would have excluded the Valuation Report in the exercise of the discretion conferred by s 135 of the Evidence Act.
In his reasons for rejecting the Valuation Report, the primary judge concluded that it did not enable an assessment to be made of the validity of the reasoning process that Mr Lechner undertook. His Honour considered that the Valuation Report did not show that the conclusion expressed by Mr Lechner was based on, or the result of, the application of his specialised knowledge to the facts stated in the Valuation Report. Further, his Honour considered that it would be wholly unfair to the Insurer to expect it to elucidate Mr Lechner's reasoning process in the course of cross-examination and then to challenge that process without the opportunity of reflecting on it. His Honour considered that although some time could have been given to allow that to occur, he did not regard a staged process of cross-examination of an expert witness as a just, quick and cheap resolution of the real issues in dispute.

The Valuation Report

Mr Lechner stated in the Valuation Report that his instructions were to give his opinion as to what the market value of the Property would have been as at 27 February 2014, on the assumption that the fire damage to the Property had been fully rectified prior to that time. He said that he understood the concept of "market value" to be the estimated amount for which "an asset should exchange", on the date of valuation, between a willing buyer and a willing seller in an arms-length transaction after proper marketing, wherein the parties had each acted knowledgably, prudently and without compulsion. There is no complaint about that formulation of "market value". An issue did, however, arise during the course of the hearing of the appeal about the relevant date for the valuation. That matter is discussed below.
Mr Lechner identified the Property by physical inspection on 22 January 2014 and by reference to the relevant deposited plan. He described its location in Mosman, saying that it is in an elevated position and enjoys good harbour water views. He described the site as rectangular in shape with a moderate to steeply sloping topography to its rear boundary and a west aspect to the street. He said that the site appeared to provide a satisfactory building platform and satisfactory drainage. He described the improvements as a three to four level, large architect designed residence with double garage, in-ground pool and established landscaped grounds.
In the Valuation Report, Mr Lechner said that, for the purposes of his opinion, he had investigated a series of sales, a selection of which was set out in the Valuation Report. He explained that sales and information on the "comparable sales" utilised by him had been obtained from "RP Data Records, including information published by local real estate agents". He then proceeded to describe seven properties in the Mosman area that had been sold between 12 October 2012 and 19 February 2014 for prices ranging from $5.25 million to $11.06 million.
Having set out descriptions of the seven properties, Mr Lechner indicated, in a section headed "Valuation Assessment" towards the end of the Valuation Report, that he had adopted a "direct comparison approach", which he said involved comparing the Property with sales of "other relatively comparable properties", making adjustments for points of difference. He explained that in the assessment of value, he considered the following:

the quality of finishes;
land area;
location;
accommodation;
proximity to local amenities;
views;
adjacent pedestrian walkway;
vehicular access; and
market conditions.

Mr Lechner then said that that variation in the values of the seven properties reflected characteristics such as location, land size, views, quality of improvements, functionality, accommodation, parking, vehicular access, building size and topography. He then said that the most comparable properties were four of the seven that he described. In the Valuation Assessment section of the Valuation Report, he described those four properties as follows:

Property sold on 27 September 2013 for $7.35 million: set in a quiet position and comprising a slightly inferior high quality, three level, architect designed residence situated on a far smaller sized parcel of land albeit in a superior location with more expansive views (Property 1).
Property sold on 14 February 2014 for $9.25 million: set on a smaller parcel of land although is only one lot removed from middle harbour with more expansive harbour water views, more level usable land and comprising a broadly comparable modern high quality, two level architect designed residence (Property 2).
Property sold on 19 February 2014 for $6.7 million: set on a far smaller parcel of land with inferior improvements, inferior views, mainly from first level bedrooms and pool area although situated in a superior location (Property 3).
Property sold on 18 December 2013 for $11.06 million: set on a smaller parcel of land with inferior improvements although located on a direct north facing steep waterfront allotment with more expansive water views and enjoying boating facilities (Property 4).

Mr Lechner said that the most comparable sales ranged in value between $6.7 million and $9.25 million, referring to Property 1, Property 2 and Property 3. He expressed the view that Property 1 was "broadly comparable overall"; that Property 2 was "superior overall"; that Property 3 was "inferior overall"; and that Property 4 was "far superior overall". He concluded the comparison by saying that, on a direct comparison basis, the sales evidence was considered to support a valuation assessment for the Property of $7.5 million. He then stated that the market value of the Property, assuming that the fire damage had been fully rectified prior to sale, was $7.5 million.
Although Mr Lechner considered Property 4, which sold on 18 December 2013 for $11.06 million, to be one of the four most comparable properties "detailed in market evidence", he did not explain why it was not within his assessed range. Mr Lechner also failed to explain why those four properties were considered "most comparable" whereas three other properties that he had investigated were not regarded as comparable.
In Mr Lechner's detailed description of the seven properties, Property 1 is described as "broadly comparable", as it was in the Valuation Assessment section. Property 4, which was described in the Valuation Assessment as being "far superior", was described as being merely "superior" in the detailed description. Two of the properties that were not mentioned in the Valuation Assessment were described as "inferior" in the detailed description. The seventh property received no assessment of being "comparable", "inferior", or "superior". No explanation was given by Mr Lechner by reference to the criteria adopted by him as to why the Property was inferior or superior to the other properties.
In relation to four of the seven properties, Mr Lechner included the comment "local residential market having improved post this transaction". He did not explain what he meant by that or how that fact was taken into account, if at all, in arriving at the opinion that he expressed as to the value of the Property. He did not indicate any facts that gave rise to his conclusion that the local residential market had improved post the relevant transaction.

Reasoning of the Primary Judge

The primary judge considered that there was "no identified reasoning whatsoever" to show how the sales data identified by Mr Lechner supported his ultimate conclusion. His Honour said that there was no reasoning process deployed in the Valuation Report to show why the "sales evidence … is considered to support" the valuation of $7.5 million. His Honour said that, for all the Valuation Report showed, that figure "might have been plucked out of the air".
More particularly, the primary judge observed that Property 1, which Mr Lechner identified as being "broadly comparable", had been sold for $7.35 million some five months before the valuation date. However, his Honour considered that the relevant date for the valuation was 10 May 2013, the day of the fire, rather than the date of sale. At the hearing before this Court, counsel for Mr Rolleston said that that was an error on the part of his Honour. However, since that matter was not raised in the notice of appeal, it cannot be raised for the first time at the hearing of the appeal.
Further, the primary judge said there was a substantial amount of detailed work to be done to finish the construction and bring the building on the Property into a state where it would be fit for sale. However, his Honour said that nothing in the Valuation Report showed why the Property was considered to be worth more, in its incomplete state, than Property 1, identified in the Valuation report as being "broadly comparable".
The primary judge also drew attention to the references made by Mr Lechner in the Valuation Report to "local residential market having improved post this transaction". Mr Lechner provided no data to support that assertion. He provided no information to show the way in which market prices for broadly comparable properties in the Mosman area had moved. He did not explain how, if at all, the suggested improvement in the market might have affected the valuation exercise that he was purporting to carry out. Counsel for Mr Rolleston conceded that no such evidence had been adduced before the primary judge.
The primary judge concluded that the Valuation Report did not enable any assessment to be made of the validity of the reasoning process undertaken by Mr Lechner. In his Honour's view, the Valuation Report did not show that the conclusion expressed by Mr Lechner was based on, or was the result of, the application of his specialised knowledge to the facts stated in the Valuation Report.
In any event, the primary judge considered that it would be wholly unfair to the Insurer to expect it to elucidate Mr Lechner's reasoning process in the course of cross-examination and then to challenge that process without the opportunity to reflect on it. His Honour observed that an assessment of the integrity of Mr Lechner's reasoning process was a necessary element of cross-examination and it would not be practical for the Insurer to make such an assessment. In general, his Honour observed, cross-examination of an expert is directed towards the assumptions on which the opinion is based or on the reasoning process that traces the link between the assumptions of fact to the opinions expressed, or both.
The primary judge considered that, in the absence of reasoning being exposed in the Valuation Report, counsel would be put in an entirely unsatisfactory position of needing to expose the reasoning in cross-examination before the reasoning could be impugned. On the other hand, if counsel took the forensic decision not to question the expert on the reasoning process, there would be a risk that the Court may accept the expert's opinion. His Honour did not consider that it was fair to put counsel in such a position and that to do so would be "prejudicial in the extreme". Hence, his Honour concluded that, in any event, the Valuation Report would be excluded under s 135 of the Evidence Act.

Some Relevant Principles

Section 79 of the Evidence Act will not be satisfied unless the opinion in question is that of a person who has specialised knowledge, being knowledge based on that person's training, study or experience and the opinion is wholly or substantially based on that specialised knowledge. The requirement that the opinion be based on specialised knowledge would normally be satisfied by the person who expresses the opinion demonstrating the reasoning process by which the opinion was reached, provided of course that it exposes the author's reasoning in a way that shows that the opinion is based on particular specialised knowledge. [1]
Evidence not satisfying those requirements might be inadmissible as being irrelevant; as not complying with s 79; or on discretionary grounds under s 135. Before the requirements of s 79 will be satisfied in relation to opinion evidence, the evidence must explain how the field of "specialised knowledge" in which the witness is expert applies to the facts assumed or observed so as to produce the opinion propounded. If that matter is not made explicit, it is not possible to be sure whether the opinion is based wholly or substantially on the specialised knowledge of the witness. If the Court cannot be sure of that, the evidence is, strictly speaking, not admissible. [2]
The requirement that the relevant opinion be based wholly or substantially on specialised knowledge is an explicit precondition of admissibility. Like other preconditions under s 79, it is to be established by the party tendering the evidence in examination-in-chief either during the trial or on the voir dire. The opinions of witnesses should be confined, in accordance with s 79, to opinions that are wholly or substantially based on their specialised knowledge. A witness who ventures an opinion outside the field of specialised knowledge of that witness may otherwise invest such "opinions" with a spurious appearance of authority and, with a consequence that legitimate processes of fact finding may be subverted. [3]

The Primary Judge Made no Error

The Valuation Report does not demonstrate how the opinion expressed by Mr Lechner is based on his specialised knowledge. There is nothing in the Valuation Report to explain how the sales of Property 1, Property 2, Property 3 and Property 4, for prices of $7.35 million, $9.25 million, $6.7 million and $11.06 million respectively, led to his conclusion that the Property would be likely to have a value of $7.5 million, as at 27 February 2014, on the assumption that the fire damage had been rectified. There was no error on the part of the primary judge in rejecting the tender of the Valuation Report.

Further Hearing

If this Court were to conclude that the rejection of the Valuation Report involved an error, the question would arise as to whether the matter should be remitted to the primary judge for further hearing. If that course were adopted, it would be on the basis that Mr Rolleston would not be entitled to adduce further evidence, although Mr Lechner would be available for cross-examination on behalf of the Insurer. Whether the Insurer would be entitled to adduce further evidence on the basis of answers given in cross-examination would be a matter for the primary judge.
The Valuation Report assumes that the fire damage had been rectified, but gives no attention at all to the question of the cost that was required to rectify the damage. No attempt was made to explain why the value of the Property without fire damage was any different from the price realised plus the cost of rectification. Nor was any attempt made to adduce evidence to show that the value of the Property as at 10 May 2013 was diminished by any amount other than the cost of making good the damage occasioned by the fire. That is to say, the Valuation Report contains no material that would support a conclusion that there is a difference between the price that might be realised for the Property had the fire damage been rectified in full, on the one hand, and the price realised for the Property, on an arms-length sale, plus the cost of that rectification, on the other hand. In the absence of any evidence beyond that contained in the Valuation Report, it would seem highly probable that there would be no difference. It seems logical that the difference between the value that the Property would have had, had the rectification been carried out, and the value that it had without carrying out the rectification would be the cost of rectification. It was agreed that the cost of rectification of the damage occasioned by the fire was $991,946. If the Property was sold for $4,068,000 in February 2014, without that expenditure having been outlaid, one might draw the inference that the value of the Property as at the date of sale with the damage rectified was approximately $5 million.
Counsel for Mr Rolleston confirmed that that was not the way in which the case was presented to the primary judge. It was also suggested that that kind of assessment is not within the expertise of a valuer, although it is difficult to see why that would be so. In the absence of such evidence, there could be no basis for a finding that the difference between the value before rectification and the value after rectification was anything other than the cost of rectification.
In the circumstances, even if the Valuation Report were admitted into evidence, there would be little utility in returning the matter to the Equity Division for cross-examination of Mr Lechner. Whatever he might say in cross-examination would be unlikely to throw any light on the question of why the difference between the value before rectification and the value after rectification would not simply be the cost of rectification.

Conclusion

There was no error on the part of the primary judge in rejecting the Valuation Report. The appeal should be dismissed with costs.

Endnotes

See Ocean Marine Mutual Insurance Association (Europe) OV v Jetopay Pty Ltd (2000) 120 FCR 146; [2000] FCA 1463 at [23] ('Ocean Marine').
See Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705; [2001] NSWCA 305 at [85].
See Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588; [2011] HCA 21 at [98]-[99]; Ocean Marine at [22]-[23]; Cadbury Schweppes Pty Ltd v Darrell Lea Chocolate Shops Pty Ltd (2007) 159 FCR 397; [2007] FCAFC 70. 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: 12 July 2017

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