Virtually all liability (and most property) insurance policies contain a general Condition of Cover (sometimes expressed as an exclusion) requiring the insured to “take all reasonable precautions to prevent injury and damage” and advising that the amount of any benefit under the policy for a liability caused by the lack of taking appropriate “precautions, measures and compliances” will be reduced by the amount which fairly represents the extent of prejudice to the insurer. As insurance is designed to provide a safety net against unexpected accident which is often caused by negligence, the average consumer might be alarmed by such a condition as, in effect it says “I will insure you against your liability for negligence on condition that you are not negligent.”
The courts have easily negotiated around this apparent contradiction by construing the Condition so that it is not “repugnant to the commercial purpose of the contract”: Fraser v Furman (Productions) Ltd.1 This requires that the concept of reasonableness is measured as between the insured and its insurer having regard to the commercial purpose of the insurance contract which is primarily to indemnify the insured with respect to negligence. It does not focus on the casual acts of negligence of those responsible for causing the loss.
Australian courts have refined the test in decisions such as Legal and General Insurance Australia Limited v Eather;2 Vero Insurance Limited v Power Technologies Pty Ltd;3 CGU Insurance Ltd v Lawless4 and Plasteel Windows Australia Pty Ltd v Sun Alliance Insurance Ltd.5
To enforce such a Condition an insurer must establish that the insured not only recognized the nature of the risk but that it either took no steps to avoid the loss or took steps recklessly without caring if they were sufficient to avoid it. The insured must “court the risk.”6 Significantly, it is a subjective test which may be difficult to establish by cogent evidence especially in the face of bare denials or later reconstruction of the insured’s thought processes at trial. The essential analysis is focussed on the subjective perception of the risk held by the insured. But there comes a point where a court will be so influenced by background circumstances (and interpretation of them by expert witnesses) that no reasonable person could have held such a view.
To assist in establishing whether an alleged lack of perception is genuine, the Courts will construe particular policies in the context of the specified risks. In Eather, Kirby P offered three indicators to assist in determining whether a perception was reasonable in the particular circumstances of a claim. In his view, issues such as the value of the property at risk, the obviousness of foreseeability of that risk and the ease with which precautions could be taken, were factors which might sway a court in its determination.
A further problem arises in Queensland as the onus of proof rests on the insurer to establish a breach of the “reasonable precautions” condition: Bedford v James.7 In New South Wales, the onus is on the insured: Plasteel Windows Australia Pty Ltd v Sun Alliance Insurance Ltd.8 Here an insured is able to call evidence of loss and allege that the failure to take precautions was not due to a lack of concern to prevent damage but merely an error of judgement. The insurer must then prove the insured’s participation in a high risk activity (which should not be difficult) coupled with the difficult task of establishing the deliberateness or the necessary intention to “court the risk.”9 An insurer will generally need to rely upon inferences from proven facts to establish the necessary insured’s state of mind.
Excellent examples of the application of legal principles as to evidence of the insured’s state of mind are displayed in two relatively recent decisions of Limit No 3 Limited v ACE Insurance Limited10 and in CGU Insurance Limited v Lawless.11 Both decisions contain an instructive step by step consideration of the crucial evidence relevant to determining the state of mind of an insured.
In ACE Insurance the state of mind of the insured joint venture company was imputed from a senior employee, (a construction manager who was a qualified engineer), who was aware of the risk of subsidence during the course of the construction of a tunnel and the almost certain consequent damage to nearby buildings and infrastructure. Rein J stated “A failure to take reasonable precautions will occur only where there is a deliberate course of action or inaction which the insured realizes exposes him to the risk of someone being injured by the danger which has been recognized.” Compliance by an insured, he stated, can be established by proving there was no recognition of the danger, that particular precautions were not reasonable in the circumstances of that danger, that no precautions were practicable or that a failure to comply was not due to a lack of concern to prevent damage. Importantly, he recognized that there were outer limits to the acceptance of evidence about a belief of a particular fact or matter “which limits may equate to a requirement for the belief to be reasonable.” Where no action is taken by an insured to deal with a known risk I do not think that the condition will be readily satisfied by an assertion by the insured that it thought there was little likelihood of the risk materializing: see for an example of this, a finding of failure to establish compliance with the clause in the area of motor vehicle theft (Devco Holder Limited and Burrows and Payne Limited v Legal and General Assurance Society [1993] 12 Lloyds Rep 567, 570-572).”12 So, the intent is measured subjectively but with an overlay of reasonableness.
The result in ACE Insurance depended upon a consideration of technical engineering evidence and the relevant state of mind of a qualified engineer who superintended the difficult task of constructing a tunnel. It was his decision to proceed with further excavation after he had been put on notice of the risk and he was aware that there were steps that could be taken to deal with the problem, for example redirecting the route of the tunnel, delaying excavation or permitting other stabilization works before proceeding with construction.
The construction manager, in his evidence, doggedly insisted that the tunnelling work needed to proceed in order to avoid a collapse. However, he was simply not believed in the context of the information available to him and because of effective cross examination in circumstances where his affidavit contained assertions which conflicted with his oral evidence as to his state of mind.13
In the end, the insured offered up three separate explanations as to why the joint venture continued excavating. Firstly, they believed there was no real cause for concern in the circumstances or that adequate steps had been taken to prevent soil collapse and finally that the only means of dealing with the problem was to continue with the work. Given the full context of the state of knowledge of the construction manager and given the expert opinions advanced at trial Rein J stated: “I find that Mr Embery was aware of the risk of collapse with consequent settlement and was aware of the steps available to remove or reduce the risk, which he failed to take, and I am not persuaded that his failure to take appropriate steps was reasonable or arose out of a genuine belief that they were not needed or could not be instituted.”14
The ACE Insurance decision contains an excellent description and analysis of the case law in this area and provides a good demonstration of the application of the law to complex facts.
The decision of CGU Insurance Limited v Lawless15 was endorsed by Rein J as a leading Australian authority on this point of interpretation. It also provides another practical demonstration of the evidentiary difficulties experienced by insurers in establishing the state of mind of the insured. There the circumstances were in stark contrast to those in the ACE Insurance decision. It concerned a family environment where a grandfather (insured) inadvertently (and unfortunately seriously) injured his 10 year old grandson while operating a post driver machine on the family property. The insured was highly experienced and had never been involved in an incident before. He had removed a guard from the machine so that it would operate more efficiently. He gave sworn evidence at trial that his grandson had, at the last moment, put himself in harm’s way. However, contradictory evidence was accepted on this point and it was specifically held that the child was taking part in the work by holding the post steady with the knowledge of the insured. Given that the insured’s direct testimony was not accepted there was an absence of evidence as to his precise state of mind at the time of the event. The insurer failed and on appeal, the Court highlighted the ample circumstantial evidence from which it was possible to infer that the grandfather had not deliberately “courted the danger.” Important factors included that he had considerable experience and apparently genuinely believed it was a safe method of operation. Further, the insured cared deeply for his injured grandson and, importantly it appeared to the Court that he had a generally limited insight and understanding.
This decision provides a clear analysis of a family scenario where truly subjective factors, such as the perspicacity of the insured, were real factors in determining that the subjective state of mind of the insured was genuine and reasonable. This contrasts with the ACE Insurance decision where the stated genuineness of a declared state of mind in a commercial setting was disproved.
These decisions provide good contrasting examples where, in each circumstance, the insurer was required to thoroughly analyse all of the circumstances and to mount a strong evidential challenge to the stated intention of the insured.
By Peter Corkery
Footnotes
- [1967] 1 WLR 898 at 905-906
- (1986) 6 NSWLR 390
- [2007] NSWCA 226
- (2008) 15 ANZIC 61-755
- (1989) 5 ANZIC 60-918 (NSWSC)
- Ibid note 1
- [1986] 2 Qd R 300, 308
- (1989) 5 ANZIC 60-918 (NSWSC)
- Ibid note 1
- [2009] NSWSC 514 (delivered 4 June 2009)
- [2008] VSCA 38
- Ibid at para 222
- See paragraph 250 of judgment
- Para 251 of judgment
- [2008] VSCA 38
