Fire sparks 'reasonable care' debate
By Peter Hunt, Partner, McElroys
The reasonable care provision and whether it requires subjective or objective recklessness was explored in a New Zealand case.
Hawk Packaging Ltd converted waste-paper fibre into trays and cartons used in the apple, avocado and egg industries. The factory operated 24/7 and the tray manufacturing process involved:
• A conveyor fed large quantities of waste paper into a hydro-pulper which pulped it and mixed it with water resin and dye.
• It was moulding into trays.
• Trays were conveyed through a dryer with gas burners at a temperature of about 230°C.
• Trays which were hot to touch or smouldering were removed, placed under the moulder and soaked with a hose.
• Defective trays went into a reject bin.
• Finished trays were stacked and shrink-wrapped.
On 27 February 2011 there was a fire in one of Hawk’s dryers. It spread along the roof of the building housing the dryers. The fire was caused by an ember in the dryer causing a small dust explosion which damaged oil lines, which fuelled the fire.
On 12 August 2011 there was a small fire in the paper room caused by a spark in the fuse box.
On 30 October 2011 a fire started in the paper room in a pile of waste paper. It burned out the ceiling and roof and transferred to palletised trays stacked against the outside wall. The fire also destroyed a dry powder fire extinguisher and two of the paper room’s three fire hoses.
On 7 November 2011 the Hastings District Council issued a dangerous building notice, which required building consent for demolition or repairs and that the works be completed by 7 December 2011.
On 10 November 2011 Hawk resumed using the paper room, without a roof. There had been no application for building consent and no repairs had been completed.
On 29 December 2011 there was another small fire in the paper room caused by smouldering trays placed there straight from the production line.
On 17 January 2012 there was another fire. That fire gave rise to the court proceedings, T&G Processed Foods Ltd v Hawk Packaging Ltd  NZHC 643.
The fire had spread to a neighbouring property and the neighbours sued for the property damage. The fire started in the paper room, spread to stacks of trays outside the paper room and then to the neighbouring property.
High Court Justice Rebecca Ellis found Hawk was negligent and that caused the fire. The negligence consisted of:
• Failure to replace or maintain fire-fighting equipment. Much of the fire-fighting equipment had been burned in the 30 October 2011 fire and not replaced. A new hose had been installed but it was too short to reach the paper pile in which the 17 January 2012 fire started.
• Storage of finished product and waste paper. The way Hawk stored trays against the outside of the building had been the subject of adverse comment by insurers and the NZ Fire Service.
• Operating without a roof. That meant the fire was easily transferred from the paper room to trays stacked against the outside of the building.
Reasonable care condition
The reasonable care condition in Hawk’s policy stipulated it was to:
• take reasonable measures to maintain all premises, fittings and plant in sound condition (condition 10(a));
• take all precautions to prevent property damage (condition 10(b)(i)); and
• take all reasonable precautions to comply and ensure its employees and agents comply with all statutory obligations, bylaws and regulations (condition 10(b)(iii)).
All parties accepted, at least for condition 10(b)(i), that a breach of the condition required more than carelessness but required recklessness or gross irresponsibility.
Justice Ellis discussed the distinction between subjective and objective recklessness. She said generally in Australia and the United Kingdom, the authorities preferred subjective recklessness as discussed in Fraser v B N Furman (Productions) Ltd 1967. That required an insurer to show the insured actually appreciated the relevant risk and took no, or took knowingly inadequate, measures to address it, not caring whether or not the danger was averted.
Justice Ellis then referred to NZ authorities, which referred to objective recklessness. In Roberts v State Insurance General Manager 1974, it was held that the proper construction was one that accepted from cover “acts or omissions which the insured either knows of but chooses to disregard or which ought to be so obvious to the ordinary man as to be inescapable”.
She referred to the Court of Appeal decision in Kelly v National Insurance Co of NZ Ltd 1995, which appeared to endorse that approach. She said while she was not required to determine the distinction between objective and subjective recklessness, she preferred the objective test.
Justice Ellis then referred to examples where the reasonable care condition had been breached and not breached. Examples of breaches included:
• An insured had a bulldozer driver tow part of a house, on a trailer, down the road to a new site, without asking what experience he had or adequately checking for obstacles on the road.
• An insured had left a boat parked in the street outside his house without securing it against theft.
• A petrol station customer was injured after petrol sprayed onto her and was ignited because the petrol station manager had allowed a malfunctioning bowser (which would occasionally spontaneously discharge fuel) to remain in use, while waiting for it to be repaired.
• An insured left a pizza delivery vehicle unlocked with the keys in the ignition.
• A housing trust did nothing after being warned twice by a tenant that a gas stove was malfunctioning leading the tenant’s daughter being injured.
Cases where the clause had not been breached included:
• An insured’s car was stolen (and later destroyed) after he left his car outside his house unlocked with a set of keys hidden under the seat.
• An insured’s house was destroyed by an arsonist after he left it locked but with the windows open to provide ventilation of painting fumes.
• An insured’s van was stolen and burned out after he left it in an open-sided car port with the keys in the glovebox or under the driver’s doormat.
• An insured’s jewellery was stolen after he had left it under a towel in a locked car, en‑route to a bank to deposit it.
In the Hawk case, Justice Ellis found there had been a breaches of the reasonable care condition by subjective recklessness.
Justice Ellis found condition 10(a) had been breached because Hawk chose to leave its firefighting equipment in a damaged, uncertified and inadequate state.
She found condition 10(b)(i) was breached because, by re-occupying the roofless paper room and resuming its normal business operation without adequate firefighting equipment, Hawk deliberately courted the risk of another fire and, due to the inadequate fire protection, the risk of property damage.
Hawk breached condition 10(b)(iii) by continuing to use the paper room while cartons were stacked up against the wall, which was in breach of a regulation which had been notified to Hawk.
Justice Ellis said the test of materiality was “whether the matter, if disclosed, would have led a prudent underwriter not to write the cover or to write it only on materially different terms”.
The insurer alleged that, at the renewal before the fire, Hawk failed to disclose material facts, including:
• the way Hawk stored substantial quantities of flammable waste paper and finished product on its site created a high fire loading risk and serious risk of fire transfer to neighbouring property;
• Hawk’s MD/BI insurers had repeatedly raised concerns about the high fire risk posed by its operations; and
• the Fire Service had written to Hawk about its storage of flammable material in breach of regulations.
The insurer’s difficulty was all that information was known to Hawk’s broker.
Section 10(2) of the Insurance Law Reform Act 1977 deems the insurer to know matters known to a representative of the insurer who, at section 10(3), is defined to mean a person entitled to receive commission from the insurer. Justice Ellis found the broker was paid a percentage of the premium and therefore fell within the definition of a representative of the insurer. Because the broker knew the facts which the insurer asserted were not disclosed, the action for non-disclosure was unsuccessful.
Hawk argued the insurer had waived its right to avoid by:
• declining cover based on a policy condition
• extending the policy following the claim
• not advising Hawk of its election to avoid until May 2016, whereas it had declined for breach of policy condition in February 2013.
Unfortunately, Justice Ellis did not deal with the waiver arguments. It would have been useful for her to determine the points, particularly about the insurer’s attempt to reserve its rights. When it first declined Hawk’s claim, the insurer expressly reserved “any other rights which Vero Liability may have in connection with the claim or the policy”.
Often insurers exercise rights under a policy while wishing to reserve a common law right, including avoidance, and it would have been useful to have appropriate wording for that reservation. It would be better to specifically reserve a common law right by wording such as: “The insurer expressly reserves its rights under the policy and at law, including the right of avoidance, and nothing said or done by the insurer can be taken as a waiver or forbearance of those rights.”
The case is a useful illustration of the operation of the reasonable care condition, which appears in many liability and material damage policies. The conflict between the tests for objective and subjective recklessness has not been resolved and will continue to be a point of some uncertainty.