L7UNION DES ASSURANCES DE PARIS IARD v SUN ALLIANCE INSURANCE LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL PRIESTLEY, HANDLEY, SHELLER and SITJUDGE JJA 18 August 1994; 8 November 1994, 17 February 1995 [1995] NSWCA 539 Appeal from District Court — Judge Barbour QC INSURANCE — damages — contribution between insurers The appellant and respondent were both insurers of Mid Coast Co-Operative Meat Society Ltd (Midco). Midco was covered by an Industrial Special Risks Insurance policy (ISR policy) issued by the appellant and an Engineering Plant Insurance policy (EPI policy) issued by the respondent. On 11 March 1987 damage to one of the rotary boosters of the refrigeration system at Midco's plant resulted in the contamination of circulating ammonia and then in the contamination of lubricating oil in the oil collector causing damage to the monoscrew compressor which ultimately had to be replaced. In satisfaction of two claims made under ie EPI policy, the respondent paid Midco $75,275.70 for the costs incurred for damage to and replacement of equipment. The respondent claimed that the subject of the second claim was covered by the ISR policy and sought to recover $33,140.05 (50 per cent of the amount paid in respect of the second claim) together with interest by way of contribution from the appellant. The principle of contribution between insurers is applicable where a common insured has been issued with policies which cover the same risk although the policies need not be identical; Albion Insurance Co Ltd v Government Insurance Office of New South Wales (1969) 121 CLR 342 at 345 and 352. At first instance the trial judge entered a verdict in favour of the respondent. On appeal various clauses of the ISR policy were relied upon by the appellant to exclude liability in whole or in part. Firstly the appellant relied on perils exclusion CL7 (a) relating to mechanical breakdown (other than mechanical breakdown which resulted from or was occasioned by any peril (not otherwise excluded) to other property insured by the policy external to the machine falling within the proviso to the exemption) and CL8 which included contamination (other than sudden or unforeseen contamination) to exclude itself from liability. It submitted that the reference in the proviso to CL7 (a) to any peril (not otherwise excluded)" was a reference to contamination and hence the claim was not covered by the ISR policy. This argument was rejected by the Court which considered that "any peril (not otherwise excluded)" means any peril which is not excluded by some other provision of the policy. The words of CL8 indicate that the policy excludes damage resulting from contamination other ian unforeseen or sudden damage. Secondly the appellant claimed that it was not liable to pay both the cost of attempted repair of the monoscrew compressor and the cost of the installation of the replacement on the basis that pursuant to the Reinstatement and Replacement and Extra Cost of Reinstatement Memoranda, the appellant had the option to reinstate replace or repair any damaged item or pay the cost thereof. The decision to repair the monoscrew compressor was made by the respondent and the insured. The Court found that there was no basis to find that the claim had been brought within the ISR policy, namely that the repair had been done to prevent damage arising from a peril insured against. Accordingly the appeal as to this point succeeded and $8,811.90, the cost of attempted repair to the monoscrew compressor together with interest was deducted. 2 UNREPORTED JUDGMENTS Thirdly the appellant submitted that the refrigeration system (including the monoscrew compressor) or alternatively the monoscrew compressor was itself a "pressure vessel" and hence fell under property exclusion CL4. These arguments were rejected by the Court on appeal. Priestley JA I agree with Sheller JA. Handley JA I agree with Sheller JA. Sheller JA INTRODUCTION This is appeal from a judgment of his Honour Judge Barbour QC given on 7 April 1994 in proceedings in which the respondent, Sun Alliance Insurance Ltd (SA), claimed to recover an amount by way of contribution from L'Union des Assurances de Paris IARD (UAP) towards payment made by SA to the common insured Mid Coast Co-operative Meat Society Ltd (Midco) in respect of claims made under an Engineering Plant Insurance Policy (EPI policy) issued by SA. Midco was at the relevant time covered by an Industrial Special Risks Insurance Policy (ISR policy) issued by UAP. Essential to the application of the principle of contribution between insurers is that they have insured against the same risk, although it is not necessary the insurance should be identical; Albion Insurance Co Ltd v Government Insurance Office of New South Wales (1969) 121 CLR 342 at 345 and 352. It was common ground that SA was liable to pay and had paid Midco under the EPI policy the amount in respect of which contribution was claimed. UAP had not paid Midco anything under the ISR policy. The point in dispute was whether UAP was liable to do so. Midco conducted an abattoir and related business at Wirrimbi via Macksville, New South Wales. The plant included a refrigeration system designed to lower the temperature of both the freezer room and chiller room. The system operated by circulating ammonia under pressure. The pressure was generated, inter alia, by Allis Chalmers rotary boosters and a Grasso monoscrew compressor. On 11 March 1987 one of the rotary boosters was damaged when a 10 cm portion of one of the rotor vanes fractured and punctured the internal lining of the water jacket fitted around the booster. As a result water entered the area where the ammonia gas was held and was driven out of the discharge side of the rotary booster through a series of pipes into an inter cooler. From there water vapour entered the Grasso monoscrew compressor where it condensed and mixed, in an associated oil collector, with oil used to lubricate the star gears and rotor of the monoscrew compressor. As a result of the contamination of the lubricating oil the star gears came into contact with the rotor which led to damage by overheating and consequent damage by scoring of the surfaces of the compressor. In brief the water coming from the water jacket of the rotary booster contaminated first the circulating ammonia and then the lubricating oil in the oil collector causing damage to the monoscrew compressor. An unsuccessful attempt was made to repair the monoscrew compressor. Ultimately the compressor had to be replaced. Midco made two claims under the EPI policy issued by SA. In satisfaction of those claims SA paid Midco $75,275.70 calculated as follows: Claim No 1 Replacement cost of Rotary Booster 11,477.60 Less Excess 2,500.00 WRINION DES ASSURANCES DE PARIS IARD v SUN ALLIANCE INSURANCE LTB (Sheller JA) q Claim No 2 (a) Cost of decontamination of the 8,648.68 refrigerant system (b) Cost of attempted repair of 8,811.90 Monoscrew Compressor (c) Cost of installation of 31,337.52 replacement compressor Less excess 2,500.00 { j SA claimed that the subject of claim No 2 was covered by the ISR policy. The amount of contribution sought in the proceedings was $33,140.05 (50 percent of $66,298.10) together with interest. Judge Barbour entered a verdict in favour of SA for $44,941.94 consisting of an amount of $23,270 damages and $21,191.94 interest. It is unnecessary to say anything about the way in which the amount of $23,270 was arrived at. It was the subject of a cross appeal by the respondent which the parties settled on the basis that if the appeal is dismissed the cross appeal should be allowed, the judgment set aside and a judgment in an amount of $53,930.40 substituted to take effect from 8 April 1994. In the event that the appeal succeeds in part the parties will bring in short minutes recalculating the amount of the judgment to be substituted taking account of the agreement reached between them. ISR POLICY Both before the trial judge and in its appeal UAP relied upon various clauses in the ISR policy to exclude liability in whole or in part. It is convenient to describe the general structure of the policy. The event upon the happening of which liability to indemnify arose was "any physical loss, destruction or damage not otherwise excluded". The property insured was "all real and personal property of every kind and description (except as hereinafter excluded)". UAP and another company, GRE Insurance Ltd, which was not a party to the proceedings but had agreed to be bound by its outcome, each agreed, subject to the terms, conditions, exclusions, memoranda, warranties, limitations and other provisions contained in the policy or endorsed thereon, for its own proportion to indemnify Midco against loss as specified therein occurring during the period of insurance up to a stated limit. The basis of cover was stated to be "Replacement and Reinstatement Conditions". S1 of the policy, with which these proceedings are concerned, was headed "Material Loss or Damage". $2 with which they are not concerned, was headed "Consequential Loss". The indemnity under S1 was described as follows: "In the event of any physical loss, destruction or damage (hereinafter in S1 referred to as 'damage' with 'damaged' having a corresponding meaning) not otherwise excluded happening at the situation to the property insured described in S1 the Company(ies) will, subject to the provisions of the Policy including the limitation of the Company(ies) liability indemnify the insured in accordance with the applicable Basis of Settlement." The companies also agreed to indemnify the insured for: 977.60 8,798.10 6,298.10 5.275.70 4 UNREPORTED JUDGMENTS (e) Costs and expenses necessarily and reasonably incurred in respect of "(ii) the demolition and removal of any property belonging to the insured which is no longer useful for the purpose it was intended, provided such demolition and removal is necessary for the purpose of the reinstatement or replacement of property insured under this Section and is consequent upon damage to insured property by a peril hereby insured against." The basis of settlement was relevantly: "On buildings, machinery, plant and all other property and contents (other than those specified below) the Company(ies) may at its option and in accordance with the Reinstatement and Replacement and Extra Cost of Reinstatement Memoranda set out herein, reinstate replace or repair any damaged item or pay the cost of such reinstatement, replacement or repair." In the memoranda to S1 under the heading "Reinstatement and Replacement" applicable to buildings, machinery, plant and all other property and contents was the following provision: "The basis upon which the amount payable is to be calculated shall be the cost of reinstatement of the property damaged at the time of its reinstatement, subject to the following provisions and subject also to the terms conditions and limits(s) [sic] or sub-limit(s) of liability of the policy. For the purpose of the insurance under this Memorandum 'reinstatement' shall mean: (a) Where property is lost or destroyed, in the case of a building, the rebuilding thereof, or in the case of property other than a building, the replacement thereof, by similar property, in either case in a condition equal to but not better or more extensive than its condition when new. (b) Where property is damaged, the repair of the damage and the restoration of the damaged portion of the property to a condition substantially the same as but not better or more extensive than its condition when new." Under the heading "Provisions",para(ii) provided that, when any property insured to which the memoranda applied, was damaged in part only, the liability of the company should not exceed the sum representing the cost which the companies could have been called upon to pay for reinstatement if such property had been wholly damaged. The policy contained exclusions applicable to all sections grouped under two headings, "Property" and "Perils". The relevant property exclusion upon which I JAP relied was as follows: "The policy does not cover physical loss destruction or damage directly or indirectly to: 4. any boiler (other than boiler used for domestic purposes) economiser or other pressure vessel, including pipes, valves and other apparatus thereof in respect of which a certificate is required to be issued under the terms of any statute or regulation occasioned by or arising from explosion, rupture, collapse, bursting, cracking or overheating thereof provided that this exclusion shall be limited to the aforementioned items immediately affected and shall not extend to other property as a result of such loss destruction or damage. The exclusion shall not apply to S2 as specifically stated therein." The principal exclusion upon which UAP relied was perils exclusion 7 (a) which related to machinery breakdown. It relied also on perils exclusion 8 which included contamination. Perils exclusions 7 and 8, so far as presently material, were in the following terms: "The company(ies) shall not be liable in respect of: URINION DES ASSURANCES DE PARIS IARD v SUN ALLIANCE INSURANCE LTB (Sheller JA) 7. physical loss, destruction or damage directly or indirectly caused by or arising out of: (a) mechanical breakdown of any machine; (b)...... Providing that the exclusion 7 (a) shall not apply to further loss, destruction or damage to the machine, immediately affected by such breakdown, which results from or is occasioned by any peril (not otherwise excluded) nor the subsequent loss, destruction or damage caused by any peril (not otherwise excluded) to other property insured by the policy, such other property being external to the machine, device or processing system in which such loss, destruction or damage occurs. 8. physical loss, destruction or damage directly or indirectly caused by or arising out of: (a)...., Contamination... (other than sudden and unforseen damage resulting therefrom). Provided that exclusion 8 ('Perils') shall not apply to subsequent loss, destruction or damage to property insured by the policy occasioned by a peril (not otherwise excluded) resulting from any event, occurrence or peril referred to in this exclusion." UAP claimed that * perils exclusions 7 (a) and 8 (a) operated to exclude all the claims in respect of which SA sought contribution; * the basis of settlement did not cover claim 2 (b); * property exclusion 4 operated to exclude claims 2 (b) and 2 (c); * para(e) (ii) of the indemnity clause did not insure $20,640.68 of claim 2 (a). The trial judge's judgment involved rejection of all these arguments. PERILS EXCLUSIONS 7 (a) and 8 (a) It is convenient to deal with these together. SA accepted that claim | paid under the EPI policy consisted of physical loss or damage directly or indirectly caused or arising out of mechanical breakdown of a machine excluded by perils exclusion 7 (a). The question was whether exclusion 7 (a) applied to the cost of decontamination of the refrigerant system, the cost of attempted repair of the monoscrew compressor and the cost of the installation of a replacement compressor or whether this loss or damage was subsequent loss or damage caused by a peril (not otherwise excluded) to other property insured by the policy external to the machine falling within the proviso to the exemption. UAP submitted that an obvious case falling within the proviso was the destruction of the building by a fire caused by a mechanical breakdown of a machine. Fire was not a peril excluded under the policy and the building was insured under it. UAP submitted that subsequent loss or damage will not be excluded so long as it is not caused by an excluded peril and is to other property insured by the policy. The argument was developed in two ways. First UAP said that the proviso did not apply to the loss the subject of claim 2 because it was not a subsequent loss but a continuation or part of the mechanical breakdown. The mechanical breakdown was the fracturing of the rotor vane and puncturing of the water jacket of the rotary booster. The ammonia gas and the monoscrew compressor were external to the rotary booster, in which the mechanical breakdown occurred. I do not think that the sequence of events which flowed from and followed the mechanical breakdown can be described as part of it. This first way of putting the argument was not pressed much beyond assertion and on the facts as they are revealed by the evidence I would reject it. 6 UNREPORTED JUDGMENTS Of more substance was the next argument. Perils exclusion 8 provides that UAP shall not be liable in respect of physical loss, destruction or damage directly or indirectly caused by or arising out of contamination (other than sudden and unforeseen damage resulting therefrom). UAP submitted that the proviso to exclusion 7, when speaking of any peril (not otherwise excluded), meant simply contamination. UAP accepted that in this case the damage resulting from contamination was sudden but said it was not unforeseen. "Unforeseen" does not mean "unforeseeable" either as a matter of language or law. The former is subjective and speaks of the mind of the insured. The latter is objective and speaks of the object of perception or thought. Before the event nobody at Midco knew that the damage which resulted from the contamination would occur. It was unforeseen. But the important point UAP sought to make was that, whether or not the resulting damage was sudden and unforeseen, the excluded peril referred to in the proviso to exclusion 7 was "contamination". If this is right the proviso did not apply, exclusion 7 (a) did and claim 2 was not covered by the ISR policy. I am of opinion that when the proviso to exclusion 7 (a) refers to "any peril (not otherwise excluded)" it denotes any peril which in the circumstances is not excluded by some other provision of the policy. It is a mistake to approach the ISR policy on the basis that it lists "excluded perils" such as contamination. To say that contamination is an excluded peril is to say that loss, destruction or damage caused by contamination is not covered by the policy. But that does not accurately describe the exclusion in the ISR policy. Physical loss, destruction or damage directly or indirectly caused by or arising out of contamination is excluded but sudden and unforeseen damage resulting from contamination is not. In my opinion the expression "any peril (not otherwise excluded)" must be construed accordingly in the proviso to exclusion 7. This is entirely consistent with the philosophy of the exclusion. The proviso is not intended to enable recovery for physical loss, destruction or damage caused by a peril which in the circumstances is excluded by some other provision in the policy. On the other hand the proviso is intended to enable recovery for physical loss, destruction or damage, subsequent to that caused by or arising out of mechanical breakdown, caused by a peril, which in the circumstances is not excluded by some other provision in the policy, to other property insured by the policy and external to the machine in which loss, destruction or damage caused by mechanical breakdown occurred. I am of opinion that neither perils exclusion 7 (a) nor 8 (b) operates to exclude UAP from liability under the policy. THE BASIS OF SETTLEMENT UAP's argument was directed to the cost of attempted repair of the monoscrew compressor (claim 2 (b)). By para(a) of the basis of settlement UAP had the option, in accordance with the Reinstatement and Replacement and Extra Cost of Reinstatement Memoranda, to reinstate, replace or repair any damaged item or pay the cost of such reinstatement, replacement or repair. UAP denied it was liable to indemnify Midco under the ISR policy. The decision to repair the monoscrew compressor was made by SA and the insured. Absent some agreement outside the terms of the ISR policy, and none was suggested, there is no basis for saying that UAP was obliged to pay for the attempted repair of the monoscrew compressor as well as the cost of the installation of the replacement. The only basis advanced by SA to bring this claim within the ISR policy was to say that the repair was done to prevent damage arising from a peril insured against. We were referred to paral5.8 in Sutton, Insurance Law in Australia, 2nd URINION DES ASSURANCES DE PARIS IARD v SUN ALLIANCE INSURANCE LTD (Sheller JA) ed. which discusses recovery where action is taken in an emergency to avert further damage after the peril insured against has begun to operate. There is nothing in the evidence to support a claim so formulated. In my opinion it has no substance. Accordingly to this extent the appeal succeeds. The cost of attempted repair of the monoscrew compressor, $8,811.90 together with the amount allowed for interest thereon, should be deducted from the verdict. PROPERTY EXCLUSION 4 UAP put this argument in two ways. First it claimed that within the meaning of that clause the whole of the refrigerating system including the piping and the monoscrew compressor was a pressure vessel. There was debate about the meaning of this expression and reference to some evidence by an engineer, Mr McCaffrey, which is inconclusive and somewhat contradictory. In Pt3 of the Factories, Shops and Industries Act 1962, which concerns health, safety and welfare in factories, shops and other industries, Division 11 provides for "Boilers, Pressure Vessels, Engines, Refrigerating Systems, Refrigerated Compartments and Pressure Testing". S9 (1) in Pt3 defines "Pressure Vessel" in the Part to mean any vessel subjected to pressure (including pressure due to a static head) by liquids, vapours or air or other gasses. The definition goes on to refer to particular items not included and not presently relevant. We were referred also to the definition of "Refrigerating System" in the Boiler and Pressure Vessel Regulations made under the Act. The Macquarie Dictionary gives the meaning of vessel, in this context, as a hollow or concave article, as a cup, bowl, pot, pitcher, vase, bottle etc for holding liquid or other contents. In my opinion the word "vessel" means something intended to be used for storing or holding a liquid or other contents. Reg28 in Pt3 of the regulations prohibits the owner of a pressure vessel using it unless a certificate of inspection has been issued in accordance with the regulations in respect of the pressure vessel and is in force for the time being. Inspection certificates under the regulations for pressure vessels had issued in respect of various components of the refrigerating system including the liquid receiver, accumulators and ammonia oil separator. Such certificates as were relevant were apparently admitted into evidence. No certificate was issued for the system as a whole or for the monoscrew compressor. This demonstrates, prima facie at least, that neither the system as a whole nor the monoscrew compressor was considered a pressure vessel by either the insured or those responsible for administering the regulations. In the light of the description of the system given in evidence I do not find this surprising. In my opinion the system as a whole has not been shown to be a pressure vessel. The alternative way in which the case was put on this exception was to say that the monoscrew compressor was a pressure vessel because it operated to increase the pressure of the ammonia and was subjected to that pressure. It was conceded that not large amounts of ammonia were contained in the monoscrew compressor at any one time and that it could not be described as a reservoir. Nevertheless it was argued that it was a vessel. I do not think a compressor comes within any definition of pressure vessel. This explains why no certificate of inspection was issued in respect of it. THE ARGUMENT BASED ON INDEMNITY CL(e)(ii) UAP did not press this as a separate ground of exclusion. ORDERS 8 UNREPORTED JUDGMENTS In my opinion the appeal succeeds to the extent that the trial judge erred in giving judgment for an amount which included the claims for the cost of the attempted repair of the monoscrew compressor. Accordingly the judgment needs to be set aside to take account of this and the agreement reached on the cross appeal. The appeal should be adjourned to be listed before a single judge to enable the parties to bring in short minutes of the orders to be made. ORDERS The appeal succeeds to the extent that the trial judge erred in giving judgment for an amount which included the claims for the cost of the attempted repair of the monoscrew compressor. Accordingly the judgment needs to be set aside to take account of this and the agreement reached on the cross appeal. The appeal should be adjourned to be listed before a single judge to enable the parties to bring in short minutes of the orders to be made. COUNSEL: Appellant: JE Marshall Respondent: JJ Graves SOLICITORS: Appellant: Moray and Agnew Respondent: Dunhill Madden Butler