Mobis Parts Australia Pty Ltd v XL Insurance Company SE

The plaintiff, Mobis Parts Australia Pty Ltd, is the owner of a warehouse at Eastern Creek in Sydney that was severely damaged in a storm on 25 April 2015. A large amount of hail accumulated on the warehouse roof and it collapsed. The plaintiff made a claim under a Property Damage & Business Interruption Policy issued by the defendant, XL Insurance Company SE, on 8 August 2014 (the Policy).

On 28 April 2015 a senior account manager with XL wrote to XL’s Loss Adjusters in relation to the Australian Standards in particular AS/NZS 1170.0: 2002 Structural Design Actions – General Principles. That email included the following:

Costin Roe, a consulting engineering firm, was retained to undertake a structural engineering review of the warehouse, the objective of which was to assess compliance with the relevant Australian Standards for buildings of this type.

On 26 May 2015 the plaintiff’s solicitors, Ashurst, wrote to XL requesting a response to the plaintiff’s claim under the Policy. That letter included a reminder that XL owed the plaintiff a duty of utmost good faith and an assertion that the delay in responding to the claim was causing prejudice to the plaintiff. Ashurst advised that since the maximum indemnity period for business interruption cover was 12 months, the plaintiff needed to progress the reconstruction of its warehouse urgently.

On 2 June 2015 Costin Roe provided a report of that date to XL. Although Costin Roe had access to structural drawings for the purpose of its review it did not have access to the architectural drawings. It advised XL that its report was “preliminary” until it had the opportunity to review the architectural drawings to allow the firm “to verify all dimensions used in our analysis and issue our finalised report”. There is no evidence that such a “finalised report” was produced. The preliminary report included the following:

On 5 June 2015 XL wrote to Ashurst in the following terms (emphasis added):

The plaintiff commenced proceedings in the Commercial List on 25 September 2015 seeking a declaration that XL is liable to indemnify it in respect of Storm Losses. It also sought an order that the defendant indemnify it under the Policy.

XL filed a Commercial List Response on 4 December 2015 seeking, inter alia, an order for rectification of the Local Policy to include the limitations that were included the Master Policy. If the Policy were to be rectified then the plaintiff’s claims in respect of storm damage would be excluded.

On 16 December 2015 the Commercial List Judge fixed the proceedings for hearing on 19 September 2016 “with an estimate of 10 days”. Orders were made on that occasion for the service of both lay and expert evidence.

The plaintiff served expert reports of David Carolan, an engineer, and Barry Cook, a meteorologist. Mr Carolan’s investigation included a review of available structural drawings and other design documentation. He expressed the opinion that the warehouse collapse was caused by vertical downward load on the roof in excess of its load-carrying capacity. Mr Carolan also expressed the opinion that the roof structure had capacity to support a relatively small imposed load (over and above the dead load) before failure occurs, that is, an imposed load, greater than 38kg/m². Mr Carolan also expressed the view that in addition to dead load, the vertical downward loads that were applied to the roof on the day of the collapse were caused by a combination of wind, rain and hail. Mr Carolan also expressed the view that the most highly stressed part of the structure was the end span of the portal frames with no loading dock roof structure attached, which was the area of initial roof collapse.

Mr Cook expressed the opinion in his report that hail accumulated at the site during a 6-minute period but advised that he was unable to form a reliable view as to how much hail had accumulated at the site during that period.

After these reports were served on XL, its solicitor, Stuart James Clarke Windybank of McCabes Lawyers, observed that: (a) Mr Carolan was not asked to check the structural design of the warehouse; (b) that as rain falls on the warehouse roof it gathers and accumulates thereby creating a reservoir; (c) the hail on the roof restricted the flow of rain water off the roof; (d) the roof structure had capacity to support a relatively small imposed load over and above its dead load; and (e) the weather conditions on 25 April 2015 were a 1:5 or as much as a 1:20 year average recurrence interval (ARI); in other words the weather event was not particularly out of the ordinary. Mr Windybank concluded that if these observations were correct, the warehouse had collapsed by reason of a 1:5 ARI and at the outside a 1:20 ARI weather event, and due to a relatively small imposed load. In those circumstances Mr Windybank formed the belief that the warehouse may have been defectively designed which led him to explore whether it was designed in accordance with applicable Australian Standards. This was of relevance to XL because of an exclusion clause in the Local Policy in respect of “faulty or defective design or materials”.

In February 2016 Mr Windybank had been informed by an engineer from Costin Roe that the firm had designed other structures in the Eastern Creek area that had also sustained damage in the storm on 25 April 2015. He formed the view that it was not appropriate for an engineer from that firm to be appointed as an independent expert to assist XL in these proceedings. Accordingly on 4 March 2016 Mr Windybank instructed Mr Paul Summers, the Senior Principal of the engineering firm, Simpson Gumpertz & Heger, to prepare a report on various matters including whether the design and construction of the warehouse complied with the relevant Australian Standards.

Mr Summers produced a report dated 27 May 2016 in which he expressed the opinion that the design did not comply with the relevant Australian Standards.

On 2 June 2016 the defendant filed its Notice of Motion seeking leave to amend its Commercial List Response to include a defence that it is not liable to the plaintiff because clause 3.2.1 (a) of the Local Policy excludes “faulty or defective design or materials”. The particulars to the claim in the draft pleading includes reliance upon a number of the opinions expressed by Mr Carolan and a claim that the design and construction of the warehouse failed to comply with the “strength requirements for permanent and imposed loads” and “design requirements for wind” under the Australian Standards.

The Motion was listed for hearing before the List Judge on 17 June 2016 at which time Mr D Weinberger, of counsel, appeared for the defendant and Mr T Mehigan, of counsel, appeared for the plaintiff. The plaintiff argued that if the amendment were to be allowed the trial date would be in jeopardy. The List Judge allocated a further four days for the trial and heard argument in relation to whether the amendment should be allowed. His Honour indicated that if the amendment were to be allowed the plaintiffs would have leave to plead waiver, accord and estoppel and whatever else it wanted to plead in answer to the claim and it would have extra time to respond to Mr Summers’ report. His Honour also indicated that if the defective design point failed at trial the defendant would have to pay the costs of that issue on an indemnity basis (the amendment conditions). Ultimately his Honour formed the view that the matter should be argued more fully and listed the Motion for hearing on 28 June 2016.

On 28 June 2016 the appearances remained the same except that Mr JE Marshall SC appeared leading Mr Weinberger for the defendant. The defendant relied upon a number of affidavits sworn by Mr Windybank. The plaintiff relied upon the number of affidavits of its solicitor Wen-Ts’ai Lim. The defendant indicated that if leave is granted to amend the Commercial List Response it would consent to the imposition of the amendment conditions and an order that it pay any costs thrown away by reason of the amendment.

Mr Lim’s evidence exposed a prospect that if the amendment were to be allowed, the plaintiff may wish to bring a claim under the Master Policy which does not include a faulty design exclusion clause. The plaintiff was concerned that this may not be possible by reason of a privity of contract problem. The defendant indicated that consent would be given to an amendment whereby the plaintiff might bring the same claim that it presently brings but under the Master Policy as an alternative to its present claim under the Local Policy and that service may be effected on McCabes Lawyers (MFI A).

The real issue is whether the defendant is precluded from defending the proceedings on the basis of the faulty design exclusion clause because it has admitted liability and should not be permitted to withdraw that admission.

The plaintiff submitted that any suggestion that the defendant’s letter of 5 June 2015 did not constitute an admission of liability should be rejected. In this regard the plaintiff relied upon the decision in Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd & Ors [2008] NSWCA 243. However it seems to me that this decision also assists the defendant. In that case the insurer had written to the representative of the insured in terms that included the following:

The primary judge concluded that the letter was not an admission of liability. On appeal, Allsop P, with whom Beazley and Campbell JJA agreed, regarded the letter “as an admission of liability, though in some respects qualified” (at [286]).

In the present case, liability was admitted “based on known facts and circumstances” and the defendant reserved its position “otherwise”. In this regard, after referring to Chesterman J’s finding in Thiess Pty Ltd v ERC Frankona Reinsurance Limited (2007) 14 ANZ Ins Cas 61-717 at [41] that the “acceptance of the claim is in form and substance an agreement” and “will normally amount to a contract, legally binding on the parties”, Allsop P said in Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd & Ors at [292]:

The plaintiff submitted that there is no new fact or circumstance that would warrant the defendant withdrawing its admission. It was submitted that the defendant investigated the very matters that it now wishes to propound as a defence, and admitted liability after investigating those matters.

The defendant accepts that it investigated whether the design of the warehouse complied with the Australian Standards. Indeed its own account manager thought there was a problem, albeit that he had not been in practice as an engineer for 25 years. However the defendant contends that the circumstances in which it admitted liability included the engineer’s opinion in a preliminary report that now appears to be erroneous. It contends that it has received the opinion of Mr Summers (and indeed the opinion of Mr Carolan) which changes the known circumstance which existed at the time it admitted liability.

The commercial community depends upon insurers dealing with claims with promptitude. The defendant was investigating a large claim (approximately $68 million) in urgent circumstances in which it had received a preliminary report. In complying with its obligations of the utmost good faith, the defendant admitted liability to the extent that it saw fit, reserving its position in respect of the issue that had arisen in respect of the extent of its liability, and qualifying its admission as being made on the basis of the facts and circumstances then known. As a matter of practicality for the commercial community, such qualified admissions may be seen as preferable to a declination of a claim. The insured runs the risk (in many cases not a great risk) of acting upon the qualified admission with the prospect that there may be the change in circumstance that may justify the insurer withdrawing the admission. However if the insured is in a position where it must restore the asset for the purpose of operating its business, it may be thought that some payment by the insurer to assist in that restoration, even on a qualified basis, would be preferable to no payment at all. It may enable the insured to restart its business and earn income, even if at a later time it is liable to repay some amount to the insurer. Whereas if there is a declination of the claim the insured may not be able to recommence its business operations.

It is important to emphasise that this is at the preliminary stage of considering pleadings and whether there is a seriously arguable case that should be allowed to go forward. The defendant has acted promptly in bringing this application forward and both parties have complied with their obligations under ss 56 and 57 of the Civil Procedure Act 2005 (CPA).

I am satisfied that there is a seriously arguable case that the receipt of the expert opinions both from the plaintiff and from its own expert that differ from Costin Roe’s opinion in its preliminary report is a change in circumstance to that which existed at the time the defendant admitted liability. In considering the relevant matters under s 58 of the CPA, I am satisfied that justice dictates that the defendant should not be shut out from having this matter litigated, subject to (as the defendant accepts it must be) the plaintiff being entitled to claim that the defendant is estopped from relying upon this defence in the circumstances.

The defendant is granted leave to file and serve an Amended Commercial List Response which includes a defence in reliance upon clause 3.2.1 (a) of the Policy. Such leave is conditional upon the amendment conditions to which the defendant has consented. The defendant is to pay any costs thrown away by reason of the amendment.

I will hear the parties on the further directions and orders that are to be made consequent upon this grant of leave.