High Court confirms insurers are not liable for damage caused by spontaneous heating
Insurance Law & Litigation update - 25 September 2019
Lander & Rogers previously published two articles regarding the successful defence of a claim against insurers for alleged wrongful declinature based on Perils Exclusion 6(c)(i) and/or 6(c)(ii) of an ISR Mark IV Policy (Perils Exclusion).
The proceeding concerning the destruction of organic material has now concluded with the High Court dismissing the insured's special leave application with costs.
Dalby Bio-Refinery Ltd (Dalby) was insured under an ISR Mark IV Policy issued by Allianz Australia Insurance Limited, ACE Insurance Limited (now Chubb Insurance) and Zurich Australian Insurance Limited (together, Insurers) for the period 30 June 2015 to 30 June 2016 (Policy).
On 2 March 2016, an employee of Dalby attended a storage facility in Dalby, Queensland (Facility), and observed the smouldering of stockpiles of dry distiller's grain and solubles (DDGS) (Incident). As a result of the Incident, a large quantity of DDGS stored in the Facility was declared a write-off and discarded.
Dalby sought indemnity under the Policy for its alleged losses arising from the Incident (Claim).
Position on indemnity and proceedings
Insurers declined to cover the Claim based on the Perils Exclusion. Dalby did not accept that the Perils Exclusion applied to exclude cover for the Claim. On 30 October 2017, Dalby commenced proceedings against Insurers seeking indemnity for the Claim.
The Federal Court, in first instance, found in favour of Insurers, concluding the declinature was valid, Dalby Bio-Refinery Ltd v Allianz Australia Limited  FCA 1806 (Federal Court Judgment).
Dalby's appeal of the Federal Court Judgment was heard on 14 May 2019. Judgment was delivered on 24 May 2019, with the Federal Court of Appeal dismissing Dalby's appeal with costs, Dalby Bio-Refinery Ltd v Allianz Australia Limited  FCAFC 85 (Federal Court of Appeal Judgment).
On 21 June 2019, Dalby filed an application for special leave to appeal the Federal Court of Appeal's decision. In a judgment delivered on 16 September 2019, Dalby's application for special leave to the High Court was refused with costs.
Key Implications for the insurance industry
The High Court confirmed the Federal Court of Appeal's judgment, which establishes four key points regarding the Perils Exclusion:
- the word "heating" is to be qualified by “spontaneous” to read “spontaneous heating”;
- the proper meaning be given to Perils Exclusion 6(c)(ii) is a businesslike construction, by reference to what a reasonable businessperson would have understood the words in their commercial context to mean;
- the definition of "spontaneous" is broader than the notion of an event of some suddenness, as shown by the directory definition; and
- in respect of physical loss, destruction or damage occasioned by or happened through self-heating, there is no reason to search for antecedent events to identify the anterior cause(s) of the self-heating.
This is a significant decision not only for Insurers but the commercial property and ISR industry more broadly.
It confirms that cover under an ISR Mark IV policy does not extend to physical loss, destruction or damage occasioned by or happening through spontaneous combustion, fermentation or heating.
This is a risk that insurers are not willing to accept, as it is a well-known risk that is within the control of insureds dealing with bulk store of organic material.
All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.