Tropical Reef Shipyard Pty Ltd v QBE Insurance

REASONS FOR JUDGMENT 1 The applicant, Tropical Reef Shipyard Pty Ltd, provides engineering, repair and maintenance services for commercial vessels from a shipyard facility at Portsmith in Queensland. Its major piece of infrastructure is a 3000 tonne slipway. By policies of insurance called "Instant Profits Insurance - Cash Flow Insurance - Simplified Business Interruption Insurance", the respondent, QBE Insurance (Australia) Limited, agreed to indemnify the applicant, first, for the period 31 October 2005 to 31 October 2006 (2005 Policy) and, second, for the period 31 October 2006 to 31 October 2007 (2006 Policy), for "an amount in respect of weekly loss of Turnover suffered … if the Business is interrupted or interfered with due to … property … having sustained … loss or damage". The applicant alleges that during the term of each policy events occurred which interrupted its business and caused it to suffer loss. A dispute has arisen regarding the manner in which the applicant has calculated its loss of turnover (assuming it has suffered any loss at all). The resolution of that dispute depends upon the proper construction of each policy. It has been agreed that issues regarding construction should be determined before trial. 2 The background to the dispute is straightforward. The applicant alleges that three incidents which occurred, respectively, on 4 September 2006, 2 November 2006 and 3 April 2007, each caused distinct damage to the slipway. The first incident was when the vessel "Castel Braz" collided with the bottom end of the slipway causing the bottom 15 metres to bend and detach. No loss of turnover is said to have arisen from this incident until early April 2007. The applicant claims indemnity in respect of the first incident for the period between the week ending 12 April 2007 and the week ending 3 April 2008. The amount of the alleged loss of turnover is $5,626,000. 3 The second incident occurred when the vessel "Mathamarfach" became stuck on the slipway in the course of being slipped when several bogies derailed from the slip and the cradle on the side of the Mathamarfach separated from the front bogies. As a result (a) the bogey near the front right of the cradle separated from the cradle and was damaged (b) four bogies were damaged and left hanging off the slipway rails and (c) a number of piles on the slipway were damaged and required replacement. The applicant claims loss of turnover for the period from the week ending 22 February 2007 to the week ending 14 February 2008. The amount claimed is $5,281,400. 4 The last incident was when an arm of the cradle on the slipway collapsed and bogies derailed from the slip while a Department of Primary Industries Pontoon was being slipped. As a result the bogies and the cradle were damaged. This incident is said to have resulted in loss of turnover for the week ending 12 April 2007. The amount of the alleged loss is $213,900. 5 The manner in which the loss is to be calculated is the same under each policy. It will be sufficient, therefore, to refer only to the terms of the 2005 Policy. The insuring clause provides that "for each week we will pay an amount based upon Weekly Calculations not exceeding the Weekly Sum Insured each week in respect of loss of Turnover suffered by you during the Indemnity Period", such payment to "be made every seven days whenever practicable". The Weekly Sum Insured is defined to mean "the sum insured for each week which you have selected and which appears in the Schedule. All calculations shall be on a weekly basis". The amount which appears in the Schedule is $201,000. (For the 2006 Policy it is $183,900). The policy provides that the respondent "will pay [the applicant] … for each week … the loss of Average Weekly Turnover based upon Weekly Calculations adjusted and agreed". The expression Average Weekly Turnover is not defined. But the expression Actual Average Weekly Turnover is defined to mean "the Actual Average of the Turnover for the twelve (12) months preceding the commencement date of the interruption [to be expressed as a weekly figure]". Turnover means the "money paid or payable by you for goods sold and for services rendered". 6 There are several exclusions. Relevantly the exclusion clause provides: "We will not pay for … [a]ny loss or claim under this Policy after the expiration of: (a) [o]ne year from the end of the Period of Insurance; (b) [t]hree months from the date on which payment shall have been made or liability admitted by the Insurers covering the loss or damage giving rise to the said claim unless such claim shall have in the meantime been referred to Arbitration or legal action". 7 Now that the policy terms have been set out, it is convenient to explain what brings the parties to court. It will be recalled that the September 2006 incident is said to have caused loss of Turnover for the period between the week ending 12 April 2007 and the week ending 3 April 2008. There was not, however, a loss of Turnover in each week during that period. In some weeks the applicant's actual Turnover for the week was greater than the Actual Average Weekly Turnover (I will refer to that difference as an "increase in Turnover"). The applicant is not seeking indemnity in respect of those weeks. In other weeks, the applicant's actual Turnover for the week is alleged to be less than the Actual Average Weekly Turnover (I will refer to that difference as a "decrease in Turnover"). It is only in respect of those weeks that the applicant seeks indemnity. Moreover, when calculating what is said to be due under the policy, the applicant contends that an increase in Turnover in one week need not be offset against a decrease in Turnover in another week. 8 The issues are the same in respect of the November 2006 incident in that during the period in which loss is being claimed (the week ending 22 February 2007 to the week ending 14 February 2008) there were some weeks in which there was an increase in Turnover and other weeks in which there was a decrease in Turnover. 9 The first question to be determined is how loss of Turnover is to be calculated under the policies. 10 The method proposed by the applicant involves the following steps. First, Actual Average Weekly Turnover is calculated by reference to total invoiced sales in the 12 month period preceding the interruption. Second, the applicant's actual weekly Turnover is calculated by reference to the sales invoiced in each week. There is an alternative for the second step which is to calculate actual weekly Turnover as the sum of sales invoiced in each week and any movement of work-in-progress. Third, for each week during the indemnity period, the applicant's actual weekly Turnover is subtracted from Actual Average Weekly Turnover. If that calculation produces a positive amount, that amount is said to be the loss covered by the 2005 Policy (capped to the amount of the Weekly Sum Insured). If the calculation produces a negative amount, no insurable loss is suffered. 11 Although this approach properly reflects the policy's focus, which is on loss of Turnover looked at on a weekly basis, it has the potential to produce a windfall gain. For example, if calculated on an annual basis the loss of Turnover from the September 2006 incident is $1,776,772, whereas the loss of Turnover using the applicant's method of calculation is $11,678,735. Moreover, there was no loss of Turnover on an annual basis flowing from the November 2006 incident. In fact, there was an increase in Turnover of $591,227. Nonetheless, the loss of Turnover said to result from the November 2006 incident according to the applicant's method is $11,088,176. 12 The respondent, by several means, seeks to avoid a construction that will result in what may be seen as a windfall gain. Its principal argument is that the policy ought be given a businesslike interpretation taking into account the commercial circumstances it was intended to address: McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579. It calls in aid of this construction the obligation of good faith and the provision of the policy which requires claims to be "adjusted and agreed". On this basis, the respondent says that the appropriate method for determining the amount of cover is as follows. First, in each week during the indemnity period weekly loss of Turnover is calculated by subtracting the applicant's actual weekly Turnover from Actual Average Weekly Turnover. Second, the amount so calculated (which can be a positive amount or a negative amount) is "placed" in a nominal running account. Third, if the balance of the nominal running account is positive, that amount (up to the Weekly Sum Insured), is the loss which is covered and the amount when paid must be deducted from the nominal running account. 13 By way of example, assume that (a) the Weekly Sum Insured is $183,900 (b) as the result of an insurable event the applicant's actual weekly Turnover for three weeks is respectively $60,577, $18,157 and $1,121,363 and (c) the Actual Average Weekly Turnover is $361,840, the calculations are as follows: (1) Applicant's actual weekly Turnover (2) Actual Average Weekly Turnover (2) - (1) Running Account (pre-payment) Payment for weekly loss of Turnover Running Account (post-payment) $60,577 $361,840 $301,263 $301,263 $183,900 $117,363 $18,157 $361,840 $343,683 $461,046 $183,900 $277,146 $1,121,363 $361,840 -$759,523 -$482,377 $0 -$482,377