September 2018

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Exclusion clause beats flood claim


by John Reynolds and Kate Tilley, KT Journalism


A Brisbane law firm has failed to claim for repairs and lost earnings after its building's basement was inundated in the 2011 Queensland floods.

Qld Supreme Court Justice Peter Davis ruled the CBD building was damaged by river water pushing through the pipes, which activated the IAG policy's flood exemption clause.

Justice Davis was told Murphy Schmidt Solicitors' (MSS) building was flooded during heavy rain on 11 and 12 January 2011. Basement fittings needed replacing and the firm was closed during cleaning and repairs.

MSS lodged a $851,153 claim with IAG for repairs, lost earnings, interest on loans and other expenses. Building owner Wiesac Pty Ltd, whose directors were MSS's equity partners, claimed another $131,192 for lost rent.

Justice Davis said, but for the exclusion clause, MSS and Wiesac would have received $783,860.

Justice Davis was told IAG initially said it would pay the claim but later denied liability because claims for loss "occasioned by or happening through" flood were exempted. It defined flood as "the inundation of normally dry land water escaping or released from the normal confines of any natural water course or lake".

IAG argued subterranean soil between underground pipes and MSS's basement wall was "normally dry land" and the flooding was caused by Brisbane river water being pushed up the pipes and leaking into MSS's property.

MSS argued subterranean soil with water pipes running through it could not be considered "normally dry". It said the basement's inundation was caused by several factors, including rain runoff, which was not covered by the exclusion.

On 1 June, Justice Davis rejected MSS's arguments. He accepted some water that entered the basement was rain runoff but found the majority of the damage was caused by pressure forcing river water up the pipes.

"This is a case where there are multiple causes of damage and only one of those causes is caught by the flood exclusion. As the river water was a cause, and indeed the dominant cause, the exclusion clause is engaged," he said.

Justice Davis said it was common ground between expert hydrologists who gave evidence that water in the pipes has been forced under pressure through cracks in the pipes and into the subterranean soils between the pipes and the basement. That water, together with water already in the subterranean soils (groundwater), was pushed into the basement.

He said the first water to reach the basement wall and enter the basement may have been groundwater, local runoff, river water, and probably a mixture of all three. As the river continued to rise and the proportion of river water in the pipes increased, the proportion of river water entering the basement rose, so most of the 520 cubic metres of water that entered the basement was river water.

Justice Davis said multiple causes of damage with only one caught by the flood exclusion raised consideration of Wayne Tank and Pump Co Ltd v Employers Liability Insurance Corporation Ltd.

The "Wayne Tank principle" said where there were two proximate or substantial causes of the one loss and only one fell within an exclusion clause, the insurer may rely on the exclusion and avoid liability.

Justice Davis said treating inundation of the insured property itself as the requisite 'inundation of normally dry land' introduced incongruity and redundancy.

"All insured premises will always be 'normally dry land'. Insurers do not insure buildings or other property in swamps or rivers or underwater. Thus, if it were in contemplation that inundation of the insured building was the only necessary object of attention, the definition of flood should simply read: …the inundation of the insured property by water escaping or released from the normal confines of any natural watercourse…The expression 'of normally dry land' would simply have no work to do."

Wiesac Pty Ltd & Anor v Insurance Australia Ltd [2018], QSC 123, 01/06/2018

 
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the New Zealand Insurance Law Association.