Causation and the operation of the exclusion clauses
75 Much of the debate at the hearing (and the subject of further written submissions thereafter) focused on what should be considered to be the legal cause or causes of the damage to the starboard engine. This question is ultimately critical to whether the respondent is liable to indemnify the applicant, as the general exclusions are framed around damage "caused by or resulting from" the relevant excluded events.
76 The respondent relied upon a number of the general exclusions, as noted above. However, the applicant conceded that if his arguments about causation were not accepted then, at least, the faulty design exclusion would operate in relation to the defective oil cooler gasket.
77 The causal inquiry in insurance law is directed to the proximate cause of the relevant loss or damage. This means proximate in efficiency, not the last in time: Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350 at 369 per Lord Shaw; Global Process Systems Inc v Syarikat Takaful Malaysia Berhad (The "Cendor MOPU") [2011] UKSC 5; 1 Lloyds Rep 560 at 564 [19] per Lord Saville and 568 [49] per Lord Mance. A proximate cause is determined based upon a judgment as to the "real", "effective", "dominant" or "most efficient" cause: see Leyland Shipping [1918] AC at 370 per Lord Shaw; Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corp Ltd [1974] QB 57 at 66 per Lord Denning MR. What is the proximate cause is to be decided as a matter of judgment reached by applying the commonsense knowledge of a business person or seafarer: see The "Cendor MOPU" [2011] l Lloyds Rep at 564 [19] per Lord Saville and 568 [49] and 576 [79] per Lord Mance. There does not need to be a single dominant, proximate or effective cause of loss or damage: McCarthy v St Paul International Insurance Co Ltd [2007] FCAFC 28; 157 FCR 402 at 430 [90]. In City Centre Cold Storage Pty Ltd v Preservatrice Skandia Insurance Ltd (1985) 3 NSWLR 739 (referred to in McCarthy 157 FCR at 430 [90]), Clarke J at 745 approached the question as follows:
… to determine in the first instance whether there is one effective cause. But, recognising that in the present case there are a number of contributing causes, I do not propose straining to isolate one if it seems to me that two or more causes operated with approximately equal effect.
78 In the present case, the referee made a factual finding that the loss of lube oil pressure was due to the faulty design of the gasket, which led to the evacuation of the oil and the ultimate damage to the engine. However, the referee also found that the damage would have been avoided if Mr Sheehan had turned the engine off immediately.
79 Both the applicant and respondent submitted that there was a single proximate cause of damage in this case. Mr Sheehan submitted it was his failure to turn off the starboard engine once the alarm activated. The respondent submitted that the sole proximate cause was the defective gasket, owing to its faulty design. However, if it was found that both of these constituted multiple proximate causes then the respondent placed reliance upon McCarthy 157 FCR at 429-438 [88]-[116], and its discussion of the so-called Wayne Tank principle, which is to the effect that where there are multiple proximate causes and one is an excluded event under the policy then the insured will not be able to recover. It was asserted that the application of this principle would see the applicant's claim denied, as damage caused by faulty design was an excluded event under the policy. I will address the submissions of both parties on this issue in more detail shortly.
80 The following extract from McCarthy 157 FCR at 430-431 [91]-[93], 432 [97], 434 [104] and 438 [114] describes the approach to be taken where multiple proximate causes are found to exist, along with the proper analysis of the Wayne Tank principle:
91 It has been said that when an argument as to causation arises in respect of rival causes under a policy of insurance, the first task of the Court is to look to see whether one only of the causes can be identified as the proximate or efficient cause: The 'Alizia Glazial' [2002] 2 Lloyd's Rep 421 at 431. Nevertheless, if, applying commonsense principles and recognising the commercial nature of the insurance policy that is the context of the question, two causes can be seen as proximate or efficient, the terms of the policy must then be applied to those circumstances. Once the availability of two relevantly proximate causes is accepted, care is necessary in analysing the response of an insurance policy. If there are two concurrent causes one falling within the policy, the other simply not covered by the terms of the policy, the insured may recover: Dudgeon v Pembroke (1877) 2 App Cas 284 at 297; Grill v General Iron Screw Collier Co (1866) LR 1 CP 600 at 611; City Centre Cold Store v Preservative Skandia at 743-45; Reischer v Borthwick [1894] 2 QB 548 at 551; Ocean Steamship Co Ltd v Liverpool and London War Risks Insurance Association Ltd [1946] 1 KB 561 at 575; and The 'Miss Jay Jay' [1987] 1 Lloyd's Rep 82. …
92 More difficulty arises, however, where one can discern two proximate or efficient causes and one falls within, and the other is excluded from, the policy. That is the circumstance to which Wayne Tank was directed.
93 Wayne Tank¸ the cases referred to in Wayne Tank and other illustrations of the "principle" found in Wayne Tank can be seen as the operation of ordinary contractual principles upon facts revealing two proximate causes which are concurrent and interdependent, in the sense that neither would have caused the loss without the other. In such cases the two causes can be seen as inseparable and so, in effect, as joint: see, in a somewhat different context, Shipping Corporation of India Ltd v Gamlen Chemical Co Australasia Pty Ltd (1980) 147 CLR 142 at 163-64.
…
97 All the cases referred to in Wayne Tank involved factual circumstances in which the two proximate causes were concurrent and interdependent in the sense that neither would have caused the loss without the other. …
…
104 More difficulty may be encountered in circumstances where a policy excludes one cause, includes another and the loss is occasioned by the two causes operating concurrently, but independently, in the sense that each would have caused the loss without the other. At the outset, it may doubted that the solution in any given case is to be found in the application of any principle of insurance law, other than one which states that the rights of the parties to the policy are to be determined by reference to the terms of the contract as found. This was the principle applied by all three Lords Justices in Wayne Tank. Thus, it is always essential to pay close attention to the terms of any policy and the commercial context in which it was made, for it is out of these matters that the answer to the application of the policy to the facts will be revealed.
…
114 Once one concludes that, as a matter of construction of the contract, the insurer and insured have agreed that the cover does not extend to any loss caused by a particular cause, and that the loss was caused by that cause, the policy's lack of response can be seen as evident. It is only if one concludes that the parties have agreed that the policy will not respond if the excluded cause must be the sole cause, for the existence of a concurrent and not excluded cause to be relevant. Again this is a question of construction of the policy.
81 Thus, the Court should first seek to identify a single proximate cause of the loss or damage. If a conclusion is reached that there are instead multiple proximate causes, and one is an insured event but the other is not, then the insured will be able to recover. However, where there are two proximate causes and these are concurrent and interdependent, and where one is an insured event and one is an excluded event then as a matter of construction of the policy the insured will not be able to recover. The causes are inseparable, and as one is excluded under the policy recovery will not be possible. See also The "Cendor MOPU" [2011] 1 Lloyds Rep at 564 [22] per Lord Saville and 578 [88] per Lord Mance.
82 The applicant submitted that there was a single proximate cause of the damage to the starboard engine in the form of Mr Sheehan's failure to turn off the engine once the alarm sounded. Counsel for Mr Sheehan referred to Canada Rice Mills Ltd v Union Marine and General Insurance Co Ltd [1941] AC 55; Reischer v Borwick [1894] 2 QB 548 and Lind v Mitchell (1928) 32 Lloyd's LR 70 as authorities illustrating two principles. First, that where there is a voluntary intervening act between a certain event and loss or damage, and that act is in accordance with principles of ordinary seamanship, then there is no break in the causal chain between a potential causal event and damage. Secondly, there was said to be a "corollary" principle to the effect that where there is an intervening act that is not in accordance with ordinary seamanship this breaks the causal chain, with the result that the intervening act will be the proximate cause. It was submitted that in the ordinary course of things a reasonable operator of the vessel would have turned the engine off when the alarm sounded. Mr Sheehan did not, and it was submitted that Mr Sheehan's continued operation of the engine was analogous to a novus actus interveniens in tort law such that it became the sole proximate cause of the damage to the engine, overcoming the impact of the faulty design of the gasket. Relying upon the passage in City Centre Cold Storage extracted above, it was submitted that one did not need to strain the facts here to find a single proximate cause and that Mr Sheehan's conduct should be considered to be the proximate cause of the damage. The defective design of the gasket may have led to its failure and the decrease in oil pressure, however, Mr Sheehan's action was significantly more dominant than the design fault in bringing about the actual damage. As there was a single proximate cause, it was submitted that there was no role to play for the Wayne Tank principle discussed in McCarthy.
83 The respondent's submission was also that, although not required, a single proximate cause could be identified. However, the respondent submitted that the sole proximate cause was the failure of the gasket due to faulty design, as it was the dominant and most efficient cause. Counsel indicated that "there [was] no real comparison in the causative input in the failure". It was contended that there was no independent act by Mr Sheehan that enveloped the causal effect of the gasket failure. Mr Sheehan's conduct led to the occurrence of what was an ultimately inevitable seizure of the engine caused by the defective gasket, and the damage to the engine started only 10 to 15 seconds after the alarm sounded.
84 If the Court was not satisfied that there was a single proximate cause, then the respondent submitted that it should conclude that there were multiple proximate causes. It submitted, however, that Mr Sheehan's actions did not constitute a concurrent and interdependent cause of the damage, as his actions did not cause the damage in their own right independently of the defectively designed gasket. Mr Sheehan's failure to turn off the motor was causally relevant only by reason of it bringing about the inevitable consequence of the gasket failure. With respect, it is difficult to see how this differs from an argument that it was a concurrent and interdependent cause. However, the respondent's further submission was that if the Court found that both occurrences were concurrent proximate causes then as the gasket failure was the subject of an exclusion under the policy, Wayne Tank and McCarthy applied and the respondent was not liable to Mr Sheehan.
85 The approach taken by the parties to contend for a single proximate cause while also considering whether there may be multiple proximate causes is consistent with the principles outlined above from City Centre Cold Storage, Wayne Tank and McCarthy. It should be emphasised that this is not to be done in a staged inquiry, but as one which looks at all the facts and circumstances to determine the dominant and effective cause or causes. Furthermore, given the necessity of the gasket failure to the extensive damage that resulted after the engine continued to be operated by Mr Sheehan after the alarm sounded, there is an initially attractive argument that there were multiple concurrent causes of the damage. However, for the reasons that follow I am satisfied that there was one dominant and effective cause of the damage.
86 In my view, the proximate cause of the damage to the starboard engine was the rapid and massive evacuation within a short number of minutes of the engine lube oil, which was referrable directly to the gasket that was defective due to its faulty design.
87 The faulty design of the gasket led to the significant and rapid drop in oil pressure that continued until the engine ultimately seized and ceased operation only six minutes later. The finding of the referee was that the gasket failed before the alarm sounded, and within little more than three seconds the oil pressure dropped from 6.4 bar to 2.8 bar, at which point the alarm sounded. Within one to two minutes after limp mode engaged, the lube oil pressure had dropped to zero. The rapidity of the gasket failure is also illustrated by the fact that the referee found that damage began to occur to the engine only 10 to 15 seconds after the alarm sounded. This rapid and significant failure of the gasket indicates clearly that it was the dominant and indeed, most efficient, cause of the damage that ultimately occurred to the engine.
88 If this case had involved a different set of facts, for example, a slow oil leak that eventually resulted in damage to the engine due to the operator continuing to operate the engine, then there would be a case for saying that the operator's actions were the cause of the damage (or perhaps that there were concurrent and interdependent proximate causes). However, given the rapidity and significance of the failure of the gasket, I am satisfied that it was the sole proximate cause in the circumstances of this case.
89 Thus, I agree with the applicant that the Wayne Tank principle does not apply in this case. However, I consider that the proximate cause of the damage was the failure of the gasket due to its faulty design. The referee found that the gasket was faultily designed, which led to its failure. This being the proximate cause of the damage means that the faulty design exclusion operates to exclude any recovery by the applicant from the respondent. This was conceded by the applicant at the hearing. It is therefore unnecessary to deal with the application of any of the other exclusion clauses relied upon by the respondent. Thus the application should be dismissed.