Supreme Court New South Wales Medium Neutral Citation: Mobis Parts Australia Pty Ltd v XL Insurance Company SE (No 7) [2017] NSWSC 1321 Hearing dates: 29-31 May, 1, 5–8, 13–16, 19, 21-23 and 26-30 June 2017; further submissions 7 and 19 July 2017; further argument 27 July 2017; further submissions 28 July, 2, 3 and 9 August 2017; further argument 16 August 2017; further submissions 21, 23, 24, and 29 August 2017 Decision date: 29 September 2017 Jurisdiction: Equity - Commercial List Before: Stevenson J Decision: Mobis entitled to indemnity under the Local Policy Catchwords: INSURANCE – property damage and business interruption policy – warehouse collapse in a storm – whether plaintiff insured entitled to indemnity under a Local Policy or alternatively a Master Policy – whether insurer agreed conditionally to accept liability under the Local Policy – whether collapse was caused by hail or storm – whether on its proper construction Local Policy has the hail limit specified in the Master Policy – whether Local Policy should be rectified to include a hail limit – whether faulty design exclusion in Local Policy enlivened – whether plaintiff is an insured under Master Policy – whether plaintiff entitled to bring action under Master Policy – whether faulty construction exclusion in Master Policy enlivened – quantum of plaintiff's claim – whether plaintiff's stock was lost in collapse; CONTRACT – insurance policies – whether on its proper construction Local Policy has hail limit specified in Master Policy – whether policy should be rectified to include hail limit – whether on proper construction of Master Policy plaintiff entitled to indemnity under storm limit notwithstanding existence of hail limit Legislation Cited: Environmental Planning and Assessment Regulation 2000 (NSW) Insurance Act 1973 (Cth) Insurance Contracts Act 1984 (Cth) Cases Cited: ABN AMRO Bank NV v Bathurst Regional Council (2014) 224 FCR 1; FCAFC 65 Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652 Australian Gypsum Ltd v Hume Steel Ltd (1930) 45 CLR 54; HCA 38 Balent v National Insurance Co of New Zealand Ltd (1959) 59 SR (NSW) 275 Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243 British Traders' Insurance Co Ltd v Monson (1964) 111 CLR 86 Caine v Lumley General Insurance Ltd (2006) 14 ANZ Ins Cas 61-698; NSWSC 337 Caine v Lumley General Insurance Ltd [2008] NSWCA 4 Castellain v Preston (1883) 11 QBD 380 Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (1982) 2 ANZ Ins Cas 60-463 Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (1983) 155 CLR 279; 2 ANZ Ins Cas 60-514 Chapman v Pole (1870) 22 LT 306 Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 City Realties (Holdings) Ltd v National Insurance Co of NZ Ltd (1986) 4 ANZ Ins Cas 60-695 Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 Deaves v CML Fire & General Insurance Co Ltd (1979) 143 CLR 24 East End Real Estate Pty Ltd (t/as City Living) v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400 Federation Insurance Ltd v Wasson (1987) 163 CLR 303; HCA 34 Fowler v Fowler (1859) 4 De G & J 250; 45 ER 97 General Accident Fire & Life Assurance Corporation Ltd v Midland Bank Ltd [1940] 2 KB 388 General Accident Insurance Asia Ltd v Sakr [2001] NSWCA 402 General Newspapers Pty Ltd v Cigna Insurance (1991) 6 ANZ Ins Cas 61-086 Harris Paper Pty Ltd v FAI General Insurance Co Ltd (1995) 8 ANZ Ins Cas 61-276 HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601 Holmes v Payne [1930] 2 KB 301 Jones v Dunkel (1959) 101 CLR 298 Kuwait Airways Corporation v Kuwait Insurance Co SAK (No 1) [1996] 1 Lloyd's Rep 664 Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd (2005) 13 ANZ Ins Cas 61-643; NSWCA 66 Leppard v Excess Insurance Co Ltd [1979] 2 All ER 668; 1 WLR 512 Manufacturers' Mutual Insurance Ltd v Queensland Government Railways (1968) 118 CLR 314 Metlife Insurance Ltd v Visy Board Pty Ltd [2007] NSWSC 1481 Millman v Rochester Ry Co 3 App Div 109; 39 NYS 274 (1896) Mobis Parts Australia Pty Ltd v XL Insurance Company SE (No 4) (Supreme Court (NSW), Stevenson J, 5 June 2017, unrep) Moore v Evans [1917] 1 KB 458 Moore v The National Mutual Life Association of Australasia Limited [2011] NSWSC 416 National Vulcan Engineering Insurance Group Ltd v Transfield Pty Ltd; National Vulcan Engineering Insurance Group Ltd v Connell Wagner Pty Ltd; National Vulcan Engineering Insurance Group Ltd v Coffey Partners International Pty Ltd (2003) 59 NSWLR 119; NSWCA 327 Newton, Bellamy & Wolfe v State Government Insurance Office (Qld) [1986] 1 Qd R 431 Prime Infrastructure (DBCT) Management Pty Ltd v Vero Insurance Ltd [2005] QCA 369 Re Mining Technologies Australia Pty Ltd [1999] 1 Qd R 60 Scott v Copenhagen Reinsurance Co (UK) Ltd [2002] EWHC 1348 (Comm) Simic v New South Wales Land and Housing Corporation [2016] HCA 47 State of New South Wales v AXA Insurance Australia Ltd (2002) 54 NSWLR 409; NSWCA 63 Synergy Health (UK) Ltd v CGU Insurance Plc (t/as Norwich Union) [2010] EWHC 2583 (Comm) Taylor v Johnson (1983) 151 CLR 422 TEC Desert Pty Ltd v Commissioner of State Revenue (WA) (2010) 241 CLR 576 The Nominal Defendant v Gabriel (2007) 71 NSWLR 150; NSWCA 52 Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338; HCA 37 Thiess Pty Ltd v ERC Frankona Reinsurance Limited [2007] QSC 4 Webster v General Accident, Fire & Life Assurance Corporation Ltd [1953] 1 QB 520 Texts Cited: Australian Oxford Dictionary (online) Colinvaux's Law of Insurance (11th UK ed, Sweet & Maxwell) D Kelly and M Ball, Kelly and Ball Principles of Insurance Law, (2nd ed, 2001, LexisNexis) Macquarie Dictionary (online) Category: Principal judgment Parties: Mobis Parts Australia Pty Ltd (Plaintiff) XL Insurance Company SE (First Defendant) AIG Europe Limited (Second Defendant) UNIQA Versicherungs AG (Third Defendant) Representation: Counsel: N J Young QC with T Mehigan and E Ball (Plaintiff) J E Marshall SC with D S Weinberger (First Defendant) S Gray (Second Defendant) P S Braham SC with R Scruby (Third Defendant) Solicitors: Ashurst Australia (Plaintiff) McCabes Lawyers (First Defendant) Kennedys (Australasia) (Second Defendant) Hicksons Lawyers (Third Defendant) File Number(s): SC 2015/281297 TABLE OF CONTENTS Introduction - paragraph 1 The policy limits - paragraph 13 Issues Issues under the Local Policy - paragraph 20 Issues under the Master Policy - paragraph 26 Issues specific to UNIQA - paragraph 31 Decision - paragraph 36 Under the Local Policy - paragraph 1 Under the Master Policy - paragraph 1 UNIQA issues - paragraph 1 The Local Policy - paragraph 39 The Master Policy - paragraph 44 The Acceptance of Liability issue - paragraph 51 Was there a contract of settlement? - paragraph 59 If there was a contract of settlement, was there a change of the "known facts and circumstances"? - paragraph 77 Does the 5 June letter constitute a waiver by election? - paragraph 89 Is XL precluded from relying on the Faulty Design Exclusion by reason of s 14 of the Insurance Contracts Act? - paragraph 99 What was the cause of the collapse? - paragraph 101 The proximate cause of the collapse - paragraph 103 The rain and hail leading to the collapse - paragraph 116 Earlier rain events - paragraph 120 Mr Carolan's hypothesis - paragraph 128 The hail load versus the collapse load - paragraph 137 Temporal proximity of the falling of the hail and the collapse of the warehouse - paragraph 145 Conclusion as to proximate cause - paragraph 148 Does the Local Policy have a hail limit? - paragraph 150 Clause 1.9b - paragraph 154 Rectification Should the Local Policy be rectified to include the Hail Limit? - paragraph 162 Principles - paragraph 164 Background - paragraph 168 Negotiation of the 2010/2011 Master Policy - paragraph 186 Mobis joins XL's global insurance program - paragraph 205 Events leading to the 2011 Australian Local Policy wording - paragraph 269 Events thereafter – the "mistake" repeated - paragraph 348 Should the Local Policy be rectified? - paragraph 358 Has XL shown, to the relevant standard, there was a "mistake"? - paragraph 360 Mobis's intention - paragraph 387 Conclusion as to rectification - paragraph 400 Was there a variation of contract constituted by the issue of the Local Policy wording? - paragraph 402 The Faulty Design Exclusion - paragraph 404 The warehouse - paragraph 407 "Its own" faulty design - paragraph 417 Negligence not necessary - paragraph 431 Faulty design – "res ipsa loquitur"? - paragraph 432 When is a design "faulty"? - paragraph 436 Building Code of Australia - paragraph 453 AS/NZS 1170.0 - paragraph 456 AS/NZS 1170.1 - paragraph 465 The proper construction of Note 1 - paragraph 492 Load shedding to adjacent beams - paragraph 512 Is there a "robustness" requirement in the Standards? - paragraph 533 The Wind Standard Is it relevant? - paragraph 552 Did the design comply with the Wind Standard? Ridge vent throat width - paragraph 561 Terrain - paragraph 571 Doors - paragraph 578 Conclusion concerning the Wind Standard - paragraph 592 Conclusion as to compliance with the Standards - paragraph 593 Was the warehouse faulty even if it complied with the Standards? - paragraph 594 Conclusion as to the Faulty Design Exclusion - paragraph 605 Mobis is thus entitled to indemnity under the Local Policy - paragraph 606 Master Policy – the Faulty Construction Exclusion - paragraph 609 The Master Policy – the Overlap Clause - paragraph 618 UNIQA issues - paragraph 648 The Master Policy - paragraph 651 Is Mobis an "insured" under the Master Policy? - paragraph 657 Is Mobis entitled to make a claim under the Master Policy? - paragraph 689 Is the Master Policy a composite policy? - paragraph 705 Section 48 of the Insurance Contracts Act - paragraph 715 Conclusion as to Mobis's entitlement to sue - paragraph 721 Is UNIQA liable for losses in Australia? - paragraph 725 Illegality? - paragraph 741 Mobis's notice of motion filed 29 June 2017 - paragraph 750 Quantum - paragraph 753 Building claim - paragraph 756 FDC Construction and Fitout Pty Ltd building cost - paragraph 759 Removal of debris and professional fees - paragraph 762 Separate building costs - paragraph 763 The slab - paragraph 770 Do some components of the building claim represent a claim for contents? - paragraph 774 More robust construction - paragraph 777 Provisional sums and variations - paragraph 798 Provisional sum 6: landscaping $225,202 - paragraph 799 Provisional sum 7: IT requirements $708,912 - paragraph 805 Provisional sum 12: building code upgrades for additional fire services $191,564 - paragraph 808 Provisional sum 15: sub-terrain conditions $670,309.77 - paragraph 812 Variation 6: extra floor strength $37,828 - paragraph 813 Variation 8: glazed doors $152,259 - paragraph 817 Variation 9: additional lighting to warehouse $10,091 - paragraph 820 Variation 11: glazed balustrades $139,217 - paragraph 822 Variation 12: joinery $127,383 - paragraph 825 Variation 15: IT $25,572 - paragraph 829 Stock - paragraph 834 What happened to the stock at the time of and following the collapse? - paragraph 845 How much stock was "salvageable" at the date of the fire? - paragraph 864 How much stock was "lost" by reason of the warehouse collapse? When is insured property "lost"? - paragraph 895 Was any stock "lost"? - paragraph 903 The risk of a fire - paragraph 906 No stock was "lost" - paragraph 914 How much stock was destroyed or damaged? - paragraph 922 Stock that was not destroyed or damaged by the collapse - paragraph 923 Stock destroyed without inspection - paragraph 931 Stock that Mobis cannot replace - paragraph 940 Stock that Mobis has not yet replaced - paragraph 950 Why Mobis has not replaced this stock - paragraph 956 Is Mobis likely to replace this stock? - paragraph 960 Clause 4.2.1(d) of the Local Policy - paragraph 964 Does s 54 of the Insurance Contracts Act prevent XL from relying on cl 4.2.1(d)? - paragraph 974 Is Mobis entitled to indemnity for the "cost of replacement" of stock it has not replaced or cannot replace? - paragraph 981 Kia owned stock - paragraph 1002 Contents - paragraph 1014 The individual items (a) Skywire $75,754 - paragraph 1018 (b) Shockwatchers $35,485 - paragraph 1021 (c) Other items in Asset Register $49,423 - paragraph 1022 (d) Betterment on third level of racking $66,734 - paragraph 1025 (e) Rack and binning labels $49,798 - paragraph 1026 (f) Binning upgrade for fire compliance $181,486 and additional fire proofing $13,574 - paragraph 1027 (g) Binning dividers $74,676 - paragraph 1031 (h) Totes and tote trolleys $17,400 - paragraph 1033 Average - paragraph 1035 Business interruption - paragraph 1056 Loss of gross profit - paragraph 1060 Rate of gross profit - paragraph 1062 Period of lost sales - paragraph 1065 Rate of trend - paragraph 1069 Allowance for the fire - paragraph 1076 Increased cost of working Additional labour costs - paragraph 1081 General ledger costs - paragraph 1091 FDC $20,220 - paragraph 1095 Jenmarc $5,268 - paragraph 1097 Blacktown City Council $21,782 - paragraph 1098 Mobis head office $150,681 - paragraph 1099 Security $457,827 - paragraph 1102 PNL and Wrapfix $8,455 - paragraph 1108 Crown $30,701 - paragraph 1109 Assets of third party $80,045 - paragraph 1110 Various invoices for staff amenities $27,245 - paragraph 1111 DY Kim Language Services $7,467 - paragraph 1112 Miscellaneous $8,057 - paragraph 1113 Rent outside indemnity period - paragraph 1114 Relocation costs - paragraph 1122 Savings - paragraph 1123 Depreciation - paragraph 1125 IT expenses - paragraph 1139 Concluding remarks on quantum - paragraph 1144 Judgment Introduction 1. On 25 April 2015, a severe storm occurred in Sydney. It caused a warehouse owned by the plaintiff, Mobis Parts Australia Pty Ltd, to collapse. 2. Mobis is a wholly owned Australian subsidiary of Hyundai Mobis, a company incorporated in Korea which I will call "Mobis Korea". Mobis used the warehouse to store and distribute spare parts for Hyundai and Kia motor vehicles. 3. The warehouse was vast; equivalent in size to several city blocks. Fortunately, as the storm occurred on a public holiday, no one was in the warehouse when it collapsed. 4. A little under three months later, on 30 July 2015, the warehouse (and virtually all of its then contents, including a large amount of stock) was destroyed in a fire which broke out during the demolition recovery process. 5. Mobis seeks indemnity in respect of the loss that it claims to have suffered by reason of the collapse (but not the fire) from the first defendant, XL Insurance Company SE, under a Property Damage and Business Interruption Policy issued by XL for the period 23 June 2014 to 23 June 2015. The parties referred to this as the "Local Policy". 6. The Local Policy was issued by XL as part of an International Property Damage and Business Interruption Program. 7. Under that program, XL (together with the second defendant, AIG Europe Ltd, and the third defendant, UNIQA Versicherungs AG) issued a Property Damage and Business Interruption Policy (covering the period 23 June 2014 to 23 June 2016) in the name of another wholly owned subsidiary of Mobis Korea, Mobis Slovakia s.r.o. The parties referred to this as the "Master Policy". 8. Under the Master Policy, XL was the lead insurer (with a 50% share of risk); with AIG and UNIQA having a 30% and 20% share of the risk, respectively. 9. Mobis's primary claim is against XL under the Local Policy. Mobis only seeks indemnity under the 2014 Master Policy if, contrary to its case, the Local Policy does not respond to its claim. 10. Mobis seeks indemnity in the order of $62 million (less some $14.4 million already paid to it by XL, discussed below) in respect of: 1. the cost of rebuilding the warehouse (some $17.25 million); 2. the replacement value of the loss or damage of contents (some $8.5 million) and stock (the full amount of the policy sub limit of some $27.5 million); and 3. business interruption of some $9.1 million. 1. The hearing of this matter proceeded over 21 hearing days between 29 May and 30 June 2017. There was further argument thereafter on a number of points, resulting in further submissions delivered during July and August 2017. 2. I have been greatly assisted by the commendably competent and efficient manner in which the case was prepared by the solicitors for the parties and presented by counsel throughout that period. I have been particularly assisted by the comprehensive written and oral submissions I received following the conclusion of evidence. Much of what follows is taken, with gratitude, from those written submissions, especially as to uncontroversial and background matters. The policy limits 1. The Local Policy has a limit for "storm" damage of $72,105,000 (equivalent to EUR 50 million). 2. The Master Policy has a corresponding limit for storm damage (EUR 50 million). 3. The Master Policy also has a limit of EUR 10 million for "hail". The parties referred to this as the "Hail Limit". 4. XL contends that the agreement of the parties was that there should be a corresponding hail limit in the Local Policy. 5. No such limit appeared in the terms of the Local Policy as originally written with effect from 1 January 2011, or as renewed annually from 23 June each year until, and including, the relevant policy period (23 June 2014 to 23 June 2015). 6. A number of issues arise as a result of this omission. 7. On 5 June 2015, shortly after the warehouse collapsed, XL agreed to make a payment to Mobis in the amount of the asserted Hail Limit (hence the payment of some $14.4 million referred to at [10]; being the equivalent of EUR 10 million). Issues Issues under the Local Policy 1. The first issue is whether a letter that XL wrote to Mobis on 5 June 2015, Mobis's acceptance of the offer said to have been made in that letter and the subsequent payment by XL to Mobis of the $14.4 million referred to at [10] and [19], had the effect of foreclosing debate about XL's obligations under the Local Policy, other than as to whether the Local Policy has the Hail Limit and as to quantum. The parties referred to this as the "Acceptance of Liability" issue. 2. The second issue (which is relevant assuming that the Local Policy has the Hail Limit) is whether the cause of the collapse was hail or storm. This involves consideration of what meteorological event caused the collapse of the warehouse. 3. The third issue (which is relevant assuming the collapse was caused by hail) is whether, by reason of cl 1.9 of the Local Policy, the Hail Limit in the Master Policy is, in effect, imported into the Local Policy. 4. The fourth issue is whether the Local Policy should be rectified so as to incorporate the Hail Limit. 5. The fifth issue is whether the damage suffered by Mobis was caused by the "faulty" or "defective" design of the warehouse so as to enliven exclusion cl 3.2.1 of the Local Policy (the "Faulty Design Exclusion"). 6. Finally, there are issues as to quantum; particularly concerning Mobis's claim for the loss of and damage to stock in the warehouse on the date of collapse. Issues under the Master Policy 1. Assuming Mobis is not able to recover under the Local Policy, and must resort to the Master Policy, the following issues arise under the Master Policy. 2. The first is whether, in the events that have happened, the Hail Limit in the Master Policy is engaged (this is the same issue that arises under the Local Policy, assuming it has a hail limit). 3. The second issue is whether, by reason of Art 3.1.8 of the Master Policy (which the parties called the "Overlap Clause"), and assuming the damage was caused by "storm" as well as by hail, Mobis is entitled to indemnity up to the storm limit of EUR 50 million, even if the Hail Limit was engaged. 4. The third issue is whether the damage suffered by Mobis is the result of "faulty building construction" of the warehouse so as to enliven exclusion Art 6.3 of the Master Policy (the "Faulty Construction Exclusion"). This raises questions similar to, but not quite the same as, those which arise under the Faulty Design Exclusion in the Local Policy. 5. Again, issues of quantum arise. Issues specific to UNIQA 1. UNIQA (one of the three insurers under the Master Policy) raises the following issues (which are not raised by either XL or AIG). 2. The first is whether Mobis is an "Insured Company" under the Master Policy. 3. The second is whether, assuming Mobis is an Insured Company under the Master Policy, it is entitled to make a claim under that policy (or whether only Mobis Slovakia is entitled to bring a claim). 4. The third is whether, on the proper construction of the Master Policy, UNIQA is liable for risks in Australia. 5. The fourth is whether UNIQA's participation in the Master Policy would constitute a breach of s 10 of the Insurance Act 1973 (Cth) and thus not be "permitted" for the purpose of Art 5.1 of the Master Policy. Decision 1. Subject to a number of qualifications concerning the quantum of its claim, Mobis is entitled to indemnity under the Local Policy. 2. Accordingly, the question of whether the Master Policy would respond to a claim by Mobis does not arise. 3. The answers to the particular questions set out above are: Under the Local Policy 1. The letter written by XL to Mobis on 5 June 2015, Mobis's reply to that letter and the payment of $14.4 million did not constitute an "acceptance of liability" by XL (see [51] to [100] below); 2. hail was the proximate cause of the collapse of the warehouse (see [101] to [149] below); 3. cl 1.9 of the Local Policy does not have the effect of importing the Hail Limit in the Master Policy into the Local Policy (see [150] to [161] below); 4. the Local Policy should not be rectified so as to incorporate the Hail Limit (see [162] to [403] below); 5. the Faulty Design Exclusion is not enlivened (see [404] to [605] below). Under the Master Policy 1. Were Mobis to seek indemnity under the Master Policy: 1. the Faulty Construction Exclusion would not have been enlivened (see [609] to [617] below); 2. the Overlap Clause would not have had the effect that Mobis was entitled to indemnity up to the storm limit (see [618] to [647] below). UNIQA issues 1. Were Mobis to seek indemnity under the Master Policy: 1. Mobis is an "Insured Company" under the Master Policy (see [657] to [688] below); 2. only Mobis Slovakia, and not Mobis, is entitled to make a claim under the Master Policy (see [689] to [724] below); 3. UNIQA is not, in any event, liable for risks in Australia (see [725] to [740] below); and 4. UNIQA would not have been in breach under s 10 of the Insurance Act had it been liable to indemnify Mobis (see [741] to [749] below). The Local Policy 1. By the insuring clause under the Local Policy, XL agreed to: "[I]ndemnify [Mobis] by either payment or, at [XL's] option, by replacement or repair (both based on the cost of reinstatement) up to the Limit of Liability stated in the Schedule in respect of the coverage granted under: Section 1 – Property Damage Section 2 – Business Interruption resulting directly from any Damage during the Period of Insurance stated in the Schedule…". 1. There is no hail limit in the "Schedule" which is set out in cl 1.10 of the Local Policy as follows: Limit in respect of any on Occurrence Limit in the Aggregate during any on Period of Insurance Damage resulting from: Earthquake AUD 72,105,000 AUD 72,105,000 Earthquake – 13-39 Pilbara St, Amcap warehouse, WA 6986 Welshpool Perth AUD 14,421,000 AUD 28,842,000 Flood AUD 72,105,000 AUD 72,105,000 Storm AUD 72,105,000 AUD 72,105,000 Accidental damage AUD 14,421,000 Not Applicable Theft AUD 7,210,500 Not Applicable Riot, Civil Commotion and Malicious Damage AUD 7,210,500 Not Applicable Any other damage AUD 96,620,700 Not applicable 1. XL did not exercise its option to indemnify Mobis "by replacement or repair". 2. Thus, the basis of indemnity is the "cost of reinstatement". "Reinstatement" is defined in cl 4.2, to which I will return (see [843] below). 3. I will set out below other clauses in the Local Policy as necessary to understand the issues which arise. The Master Policy 1. The Master Policy had an insuring clause which, although expressed somewhat differently to that in the Local Policy, was to the same effect. 2. The Master Policy had limits for "storm", "wind storm" and for "natural peril events" (including a hail limit). 3. The table setting out the various liability limits was in the following form and headed "Insured Perils/Limits of Liability": Limit each loss (e.e.i.) PD/BI combined Limit in annual aggregate (a.a.g.) Peril Fire, Lightning, Explosion, Aircraft Impact (Flexa) 260,000,000 520,000,000 Fire, Lightning, Explosion, Aircraft Impact (Flexa) for Italian branch office only 2,500,000 2,500,000 Storm, Windstorm 50,000,000 50,000,000 Windstorm US – Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Texas, Puerto Rico (USA), Hawaii (USA), Caribbean Islands, Japan, Taiwan Not insured -- Flood 50,000,000 50,000,000 Flood in the US – Flood zone A Not insured -- Earthquake 50,000,000 50,000,000 - Earthquake (SAIC Greece only) Not insured -- - Earthquake in California (USA) and Japan Not insured -- - Earthquake Italy, Mexico, Chile, Alaska, Hawaii, Puerto Rico Not insured -- Earthquake Australia (named area Perth) 10,000,000 20,000,000 Natural peril events, hail, avalanche, weight of snow and ice, rockslide, falling stones, landslide 10,000,000 10,000,000 Contract Works and/or Property under construction 5,000,000 5,000,000 Machinery Breakdown 5,000,000 10,000,000 Electronic Equipment Breakdown 1,000,000 1,000,000 Theft following forcible or violent entry and damages to the insured property 5,000,000 5,000,000 Civil Commotion, Riot, Lock-out, Strike 5,000,000 5,000,000 Unnamed perils 10,000,000 20,000,000 1. The Hail Limit formed part of the limit: "Natural peril events, hail, avalanche, weight of snow and ice, rockslide, falling stones, landslide." 1. Somewhat repetitively, Art 13.2 of the Master Policy defined "Natural Peril Events (natural peril cover)" as follows: "a. High water/inundation (including tsunami); Inundation is deemed to have occurred when a water body overflows its natural or man-made boundaries, e.g. river banks, embankments or dykes, causing the surrounding land to be submerged in water. b. Windstorm (= winds with a minimum velocity of 75 km/h that uproots trees or take the roofs off buildings in the vicinity of the insured property); c. Hail; d. Avalanche; e. Weight of snow or ice; f. Rockslide; g. Falling stones; h. Landslide." 1. Thus, the limits of liability under the Master Policy were significantly different in nature to those in the Local Policy. 2. Again, I will set out below the other relevant terms of the Master Policy as necessary to understand the issues that arise. The Acceptance of Liability issue 1. The Acceptance of Liability issue is centred around a letter XL sent to Mobis's solicitors on 5 June 2015. 2. On 26 May 2015, Mobis's solicitor wrote to XL: "As you will be aware, our client's warehouse, located at 77 Peter Brock Drive, Eastern Creek, NSW, suffered extensive damage in the storm on 25 April 2015 with the loss of stock and other items located within the building. It has been over three weeks since the incident was reported and the initial meeting with your company's loss adjusters, Crawford, took place and, despite repeated requests by our client's broker, Marsh, there has been no formal response on whether or not your company accepts liability under the policy. … As the maximum indemnity period for business interruption cover under the policy is 12 months, our client needs to progress the reconstruction of its warehouse urgently. Your company is well aware of this and yet has delayed granting indemnity. This delay is causing (and will continue to cause) prejudice to our client. There is no reason for the delay. The loss was clearly caused by an insured occurrence. Our client has been cooperating fully with loss adjusters appointed by your company. Therefore, please let us have confirmation of the grant of indemnity by return." 1. On 5 June 2015, XL replied: "Investigations into and the adjustment of the loss by XL has [sic] been ongoing since the date of the loss. … XL accepts liability under the policy in respect of the loss on the basis of known facts and circumstances, and subject to the applicable terms and conditions. The maximum limit of liability applicable to the loss is EUR 10 million (the limit). XL is satisfied that the loss will exceed the limit and XL is therefore prepared to pay Mobis the amount of the limit forthwith. Please submit your bank details for electronic funds transfer. XL understands that Mobis does not agree that the limit applies to the loss. Accordingly, XL accepts that if Mobis takes payment of [EUR 10 million] at this time Mobis's rights remain reserved. XL otherwise reserves its position." 1. The investigations referred to in the 5 June 2015 letter included whether the warehouse complied with the Australian Standards for buildings of its type. Those investigations culminated in a report produced on 2 June 2015 by a firm of consulting engineers, Costin Roe Consulting. The Costin Roe report concluded that the warehouse's structural design complied with the requirements of the relevant Australian Standards. 2. On 12 June 2015, Mobis's solicitors replied: "Thank you for your letter dated 5 June 2015 (which we received on 9 June 2015). Please arrange for the EUR 10 million to be paid into the following account… … Mobis reserves its rights to contend that the limit of liability applying to the loss exceeds EUR 10 million." 1. On 23 June 2015, XL paid Mobis the Australian dollar equivalent of EUR 10 million (being the $14.4 million referred to at [10] and [19] above). 2. Mobis put its case on the Acceptance of Liability issue in three ways: 1. first, that the 5 June 2015 letter evidenced a settlement contract, the effect of which is that XL may not rely on the Faulty Design Exclusion and, subject to the question of whether the Local Policy has the Hail Limit, and to the questions which arise concerning quantum, XL is bound to indemnify Mobis for the loss it suffered as a result of the storm; 2. second, and to the same effect, that the 5 June 2015 letter constituted a waiver by election; 3. third, that by reason of the 5 June 2015 letter, XL may not rely on the Faulty Design Exclusion, as to do so would constitute conduct otherwise than with utmost good faith for the purposes of s 14 of the Insurance Contracts Act 1984 (Cth). 1. Mobis also submitted that the 5 June 2015 letter contained an admission by XL of its liability under the Local Policy. It clearly does and XL made no submission to the contrary. However, in closing submissions, Mobis did not submit that this fact alone was decisive of any question in the case; in particular, the question of whether the Faulty Design Exclusion was enlivened. This was no doubt because Mobis recognised that as the admission was made otherwise than in the course of a formal court process, it was merely an item of evidence to be weighed up against all other relevant evidence: see for example The Nominal Defendant v Gabriel (2007) 71 NSWLR 150; NSWCA 52 at [113] (Campbell JA). Was there a contract of settlement? 1. Mobis submitted that "the 5 June letter constitutes a settlement (subject to the applicable limit of liability) of Mobis's claim under the Local Policy, in relation to the issue of the warehouse's compliance with the applicable Australian Standards and the application of [the Faulty Design Exclusion]". 2. Mobis submitted: "In partially settling the potential dispute with Mobis on the terms set out in the 5 June Letter, Mobis and XL exchanged mutually binding promises that XL's payment and Mobis's acceptance of that payment would resolve all coverage and indemnity issues under the policy [except for the Hail Limit issue and 'on the basis of known facts and circumstances']." 1. Mobis contended that this case is relevantly indistinguishable from that considered by the Court of Appeal in Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243. 2. In that case, Allsop P (as his Honour then was) with whom Beazley JA (as her Honour then was) and Campbell JA agreed, considered a letter sent by an insurer to the insured stating that "we…confirm that indemnity is granted" pursuant to the policy and stating that: "The grant of indemnity is subject to the policy terms, conditions and exclusions and is based on the facts presently known to [the insurer]." 1. However, the only conclusion to which Allsop P came was that the letter constituted an admission by the insurer of its liability. Thus, his Honour said (at [290]): "The expression 'grant indemnity' in these circumstances at least contains the recognition or admission, in perhaps customary language, of liability under the policy." 1. His Honour did not conclude that the letter constituted a settlement contract. 2. Indeed his Honour continued (at [291]): "The 'grant of indemnity' or admission of liability may also be seen, in certain circumstances, to give rise to another agreement. For instance, if after some dispute as to coverage, an insurer stated that the parties should now proceed 'on the basis of an admission of liability', a fresh agreement, supported by fresh consideration may come into existence". 1. Allsop P referred to the observations of Chesterman J in Thiess Pty Ltd v ERC Frankona Reinsurance Limited [2007] QSC 4. 2. In that case, Chesterman J said (at [40] and [41]): "…an insurer's acceptance of its insured's claim does away with the potential uncertainties and their capacity to generate costs which the insurer may have to bear; if the claim is litigated, and replaces them with the insurer's intimation (or promise) that it will pay the claim. There is, in accepting a claim, an element of compromise, or of admission that the insured is entitled as a matter of contractual right to the indemnity contained in the policy. The consideration is the benefit to the insurer that it will not be liable to pay the insured's, and its own, costs of an action, and the detriment to the insured of forbearing to sue for the proceeds of the policy. The acceptance of the claim is in form and substance an agreement. Moreover it will normally amount to a contract, legally binding on the parties." 1. In reaching the conclusion that acceptance of a claim will "normally" amount to a legally binding contract, Chesterman J referred to Newton, Bellamy & Wolfe v State Government Insurance Office (Qld) [1986] 1 Qd R 431. 2. In that case, Andrews ACJ and Derrington J said (at 437): "Acceptance of liability is more than a bare admission of liability. In any event the arrangement here is supported by consideration. The insurer by accepting liability offers the other party an inducement and impliedly requests him to forebear from taking action with avoidance of costs of formal proceedings at the expense of the insured." 1. McPherson J said (at 444): "Here it is not at all difficult to discern in the correspondence at least an implied request by the S.G.I.O. that the plaintiffs refrain from suing pending an investigation by the former of the circumstances of the accident. It was in consideration of this forbearance, which was both a detriment to the promisee and a benefit to the promisor, that in the end the S.G.I.O. agreed to accept liability." 1. These authorities establish that a legally binding contract of settlement may be created between an insurer and an insured where the insurer states that it accepts liability to indemnify the insured under the policy in question, and where the insured can be shown to have given consideration for that acceptance, constituted, for example, by a forbearance to sue the insurer, following from the insurer's request (to be implied from its acceptance of liability) that it not do so. 2. But each case must depend on its own facts. 3. Here, it is plain from the terms of the 5 June 2015 letter, and the reply by Mobis's solicitor of 12 June 2015, that both parties accepted that Mobis reserved its right to contend that, contrary to XL's assertion, the limit of XL's liability under the Local Policy exceeded EUR 10 million. If any implication is to be drawn from the correspondence, it is that XL expected, or at least contemplated the possibility that Mobis would bring proceedings to establish the correctness of that proposition; hardly surprising, bearing in mind that the Local Policy did not, in terms, contain any limit of liability of the kind asserted by XL. 4. I see no basis to conclude that, by the 5 June 2015 letter, XL was impliedly requesting Mobis to forbear from bringing action against it. XL was simply stating its position, and accepting that Mobis reserved its rights about the correctness of that position. 5. Nor do I see any other consideration given by Mobis for the qualified acceptance of liability given by XL in the 5 June 2015 letter. 6. The letter contains an admission. But it does not evidence a contract. If there was a contract of settlement, was there a change of the "known facts and circumstances"? 1. If, contrary to my finding, there was a contract of settlement, it was a term of that contract that XL's acceptance of liability under the Local Policy was "on the basis of known facts and circumstances". 2. Mobis submitted that, assuming the 5 June 2015 letter bespoke a settlement contract, there was no relevant change in the facts and circumstances known to XL such as would, notwithstanding its acceptance of liability, justify it now relying on the Faulty Design Exclusion. 3. In view of the conclusion to which I have come concerning the contract of settlement issue, there is no need for me to express any opinion about this matter. 4. However, had it been relevant for me to do so, I would have accepted Mobis's submission. 5. In my opinion, a reasonable business person in the position of the parties would have understood that XL's reference to "known facts and circumstances" was a reference to facts and circumstances relating to what actually caused the warehouse to collapse. 6. The facts and circumstances known to XL, as at 5 June 2015, were that it had: 1. engaged Costin Roe to review the engineering aspects of the warehouse's design and to assess whether the design of the warehouse complied with the relevant Australian Standards; and 2. received from Costin Roe what was described as a "preliminary report" in which Costin Roe expressed the opinion that the warehouse complied with the relevant Australian Standards and that its collapse was caused by superimposed loading due to hail stones, water and ice that "greatly exceeded the design loads required in accordance with" those Standards. 1. XL does not contend that Costin Roe's opinion was expressed upon the basis of incorrect information about the design of the warehouse, or that any new material facts about that design have come to light since the Costin Roe report. 2. XL seeks to justify its change of position solely on the basis that it received a second opinion from a structural engineer, Mr Paul Summers, to the effect that the warehouse did not comply with the relevant Australian Standards and was, in fact, defectively designed. 3. I do not accept that the receipt of that second opinion is a further "fact and circumstances" that would, assuming there was a contract of settlement, have justified XL from departing from its terms. 4. I accept Mobis's submission that an opinion expressed by an expert after the loss is not a "fact or circumstance" relating to the loss but is rather, a means chosen by XL to evaluate the significance of the "known facts and circumstances". 5. XL's case seeks to read the words "on the basis of known facts and circumstances" as if they meant "as presently advised", or something to that effect. 6. Had it been relevant for me to consider this question, I would not have accepted XL's submission. Does the 5 June letter constitute a waiver by election? 1. Mobis submitted that the 5 June 2015 letter constituted an election by XL to accept liability under the Local Policy and not to rely on the Faulty Design Exclusion. 2. Mobis submitted that by accepting liability under the Local Policy, and making the payment of $14.4 million referred to at [10] and [19] above, XL acted inconsistently with the maintenance of a defence based on the Faulty Design Exclusion and has thus made an unequivocal election between inconsistent rights. 3. I do not accept this submission. 4. In final submissions, Mobis accepted that the election by an insurer to accept or deny liability under a policy does not, without more, constitute an irrevocable election. 5. So much is established, for example, in the decision of the Court of Appeal in National Vulcan Engineering Insurance Group Ltd v Transfield Pty Ltd; National Vulcan Engineering Insurance Group Ltd v Connell Wagner Pty Ltd; National Vulcan Engineering Insurance Group Ltd v Coffey Partners International Pty Ltd (2003) 59 NSWLR 119; NSWCA 327 in which Santow JA (with whom Ipp JA and Young CJ in Eq agreed) said (at [64]): "…acceptance by the insurer of a claim by an insured to which the policy does not extend cover cannot amount to an election." 1. I do not think the fact that XL's acceptance of liability was limited to EUR 10 million affects this conclusion. 2. In any event, in order for there to be a waiver by election, the election must be made with knowledge of the relevant facts (for example, see Moore v The National Mutual Life Association of Australasia Limited [2011] NSWSC 416 at [73] (Ball J)). 3. The knowledge that XL would have had to have had in order to make an election in this case is the (alleged) fact that the warehouse was defectively designed. 4. If that is the true position (and I deal with this below) there is no suggestion that XL knew this to be so when it wrote the 5 June 2015 letter. 5. On the contrary, at that time it had the advice of Costin Roe that the design of the building complied with the relevant Australian Standards. Is XL precluded from relying on the Faulty Design Exclusion by reason of s 14 of the Insurance Contracts Act? 1. As I have concluded that the 5 June 2015 letter neither bespeaks a settlement contract nor a waiver by election, I see no basis upon which I could conclude that XL's reliance on the Faulty Design Exclusion amounts to conduct otherwise than in accordance with its obligation to act with utmost good faith. 2. Whether XL is in fact entitled to rely upon the Faulty Design Exclusion is a matter which I consider later in these reasons. What was the cause of the collapse? 1. A vital question in this case is what, as a matter of fact, caused the collapse of the warehouse; in particular, whether it was caused by the hail that fell on the day. 2. As the answer to many of the legal questions which arise depends on the answer to that question, I shall deal with it before addressing those legal questions. The proximate cause of the collapse 1. The matter for consideration is the proximate cause, or causes, of the warehouse collapse. 2. Was that proximate cause hail alone, as XL contends, or storm (comprising a combination of rain and hail), as Mobis contends? 3. If the correct conclusion is that the proximate cause of the collapse was hail, and if the cover available to Mobis (whether under the Local Policy or the Master Policy) is confined by a hail limit, then Mobis's case fails, as XL has already paid it the amount of that limit. 4. "Storm" is defined (somewhat unhelpfully) in the Local Policy as "storm, tempest, windstorm, hurricane, tornado, cyclone and typhoon". 5. There is no suggestion is this case that what occurred on 25 April 2015 was anything other than a "storm" for the purpose of that definition (rather than a "tempest" and so on). I see no reason not to give the word "storm" its ordinary and natural meaning. 6. "Storm" is defined in the Australian Oxford Dictionary (online) as: "A violent disturbance of the atmosphere with strong winds and usually rain, thunder, lightning, or snow." 1. The definition in the Macquarie Dictionary (online) is: "1. a disturbance of the normal condition of the atmosphere, manifesting itself by winds of unusual force or direction, often accompanied by rain, snow, hail, thunder and lightning, or flying sand or dust. 2. a heavy fall of rain, snow, or hail, or a violent outbreak of thunder and lightning, unaccompanied by strong wind." 1. As those definitions and common experience suggest, hail is usually accompanied by rain. As Einstein J said in Caine v Lumley General Insurance Ltd (2006) 14 ANZ Ins Cas 61-698; NSWSC 337 (at [99]): "Hailstorms almost always involve rain and wind." 1. In Caine v Lumley caravans were damaged in a storm that included hail and torrential rain. The relevant insurance policy contained a provision which capped liability under the policy for damage to caravans caused by hail to $100,000. 2. Einstein J held: "[93] It is true to say that damage was caused to the caravans by storm including hail and torrential rain, as per paragraph 12 of the Agreed Facts. That is precisely what happened. But it is not inconsistent with hail being the proximate cause of the damage. Proximate cause is a concept which requires an assessment of the qualities of reality, predominance and efficiency in circumstances in which a number of factors contribute to the happening of the damage in question: HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601 at 608. … [95] It is not correct to say that two concurrent causes, properly so-called, were involved. … [96] In the present case, it is true that high winds were driving the hail but that is not a concurrent cause of the damage by hail. … [98] In the present case, there is an abundance of evidence that the effective, or dominant or operative cause of damage to the caravans, including the annexes and tropical roofs, was hail. [99] It is no answer that the hail fell during a storm which also involved torrential rain and high winds. Hailstorms almost always involve rain and wind. The policy singles out hail and specifically excludes cover for that risk, except in the circumstance in which the hail penetrates the entire thickness of the damaged matter, whereupon the $100,000 limit applies." 1. Einstein J's decision was upheld in the Court of Appeal in Caine v Lumley General Insurance Ltd [2008] NSWCA 4. 2. McColl JA (with whom Mason P and McClellan CJ at CL agreed) said (at [76]): "In considering the proximate cause of loss in the insurance context, the Court has regard to the reality, predominance and efficiency of a cause, rather than proximity in time: HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc (at 608) per Sheller JA (Beazley and Stein JJA agreeing); see generally Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd [(2005) 13 ANZ Ins Cas 61-643] [2005] NSWCA 66 (at [39]ff) per McColl JA (Ipp and Tobias JJA agreeing). The Court applies common sense standards in determining what is the proximate cause, approaching the question by reference to the understanding of 'the man in the street, and not as either the scientist or the metaphysician, would understand it': Lasermax (at [109] – [110])." 1. Her Honour then set out, with approval, the passages from the judgment of Einstein J to which I have referred and concluded (at [82]): "This analysis of the evidence compellingly demonstrates, in my view, that it was the penetration of the hail into, or through, the various fabrics of which the caravans (including the tropical roofs and annexes) were constructed which was the proximate cause of the damage to the caravans. Indeed [the insured] did not really challenge the proposition that hail was a proximate cause of the damage. Rather, he argued that it was but one of several proximate causes, the others being the wind and the rain. In my view [the insured] did not establish error in the primary judge's analysis of the evidence and his conclusion on proximate cause." The rain and hail leading to the collapse 1. A video shot by an independent witness, Ms Susan Bree, on her smart phone showed that the warehouse collapsed at, or more likely very slightly before, 3:49 pm. 2. Ms Bree was standing in or near a building immediately adjacent to the warehouse. At the start of the video one can hear what Mobis described in its submissions as a "rumbling sound" together with someone (presumably Ms Bree) exclaiming that "the whole Mobis building's gone down"; suggesting the collapse was either then underway, or had concluded. The collapse itself occurred over a very short time; some 15 seconds. 3. Each of Mobis and XL called meteorological experts: Mr Barry Cook for Mobis and Prof Michael Manton for XL. 4. The evidence of those experts established the following sequence of meteorological events: 1. there was continuous precipitation over the warehouse from at least 3:27 pm to the time of collapse; 2. rain was falling at 3:27 pm; 3. heavier rain was falling at 3:29 pm; 4. hail began falling at 3:31 pm; 5. steady or heavy hail fell between 3:31 pm until at least 3:46 pm or 3:47 pm or, possibly, 3:48 pm (in the view of Prof Manton); 6. the core of the storm passed over the warehouse by 3:46:27 pm; 7. a mixture of rain and hail was falling by no later than 3:47:55 pm; 8. the precipitation transitioned into rain at some point before the collapse (Mr Cook thought it would have been about 3:46 pm whereas Prof Manton thought that there was "potential for a mixture [of hail and rain] for the few minutes after [3:46 pm] before the roof collapsed; and 9. rain continued to fall after the collapse until at least 4:30 pm. Earlier rain events 1. The evidence pointed very strongly to the conclusion that the warehouse would not have collapsed from rain alone on 25 April 2015. 2. I did not understand Mobis to make a submission to the contrary. 3. Each party adduced evidence from an expert hydrologist: Dr Ian Joliffe for Mobis and Mr Drew Bewsher for XL. 4. In their joint report, Dr Joliffe and Mr Bewsher agreed that from their perspective, without the presence of hail, the roof would not have collapsed from rain alone had it been properly designed and constructed. 5. Further, the evidence established that since the warehouse was constructed in 2008, there had been a number of days when heavier rain fell than occurred on 25 April 2015, without causing the warehouse to collapse. 6. As recently as 21 March 2015 (only a month before the date of collapse) a rain storm of considerably greater severity than that of 25 April 2015 occurred over the warehouse without causing any damage to it. 7. It must follow that, on those occasions, notwithstanding the considerable amount of rain that fell, the roof of the warehouse, and its related drainage systems, were adequate to cope with the downfall. 8. Those facts point, strongly in my opinion, to the probability that on 25 April 2015, the hail was the proximate cause of the collapse. Mr Carolan's hypothesis 1. In their joint report, Dr Joliffe and Mr Bewsher also agreed that: 1. assuming there was no significant debris or other material on the roof (and there is no suggestion of this), the collapse must have been caused by either: 1. hail alone; or 2. hail and water; 1. in the absence of hail, and as a direct result of inferred rainfall intensity, it is likely that the maximum depth of rainwater on the roof would have only been about 5 mm; 2. assuming that a depth of 38 mm of rain would have been required to collapse the roof (in the absence of hail), hail must have been present to create the additional load required to collapse the roof; 3. this additional load would have, in the absence of any external debris loading (and there is no suggestion of that) been created by the mass of hail itself together with: 1. hail forming local ponding of water on the roof; and/or 2. hail otherwise impeding drainage of water off the roof. 1. Dr Joliffe and Mr Bewsher also agreed that: 1. there would have been very little movement, or mobilisation of hail on the roof of the warehouse prior to its collapse; and 2. hail on the roof would have impeded the movement of water off the roof both over and through the hail. 1. The structural engineer who gave evidence on behalf of Mobis, Mr David Carolan, expressed the opinion that the combination of hail and rain on the roof would have contributed to the imposed load on the roof structure. Mr Carolan opined that the combined weight of hail and rain caused the beams supporting the roof to deflect, creating reservoirs in which falling rain could pond, and that the combined weight of the ponded rain and hail led to the collapse. 2. Mobis submitted: "Mr Carolan explained that the deformation of the roof was non-linear and that the changes in slope and load 'represents a complex phenomenon' which gave rise to a feedback loop that eventually reached a 'point of no return'." 1. Mr Carolan prepared a computer model which sought to simulate this hypothesis. That model assumed a somewhat simplified sequence of weather events compared to those that actually occurred on the day. Nonetheless, it correctly predicted the timing of the roof collapse. 2. Mr Carolan explained that, on his hypothesis, it was a combination of the rain and hail that, in these circumstances, caused the roof to deflect. Mr Carolan hypothesised that the hail on the roof would have impeded the flow of water off the roof and caused water to leak through the "laps" in the roof sheeting and enter the building. This was consistent with images from CCTV footage within the warehouse which appeared to show water accumulating on the floor (evidently having leaked through the roof) some minutes before collapse. 3. The structural engineer retained by XL, Mr Summers, made some criticisms of Mr Carolan's hypothesis. 4. However, assuming Mr Carolan's hypothesis should be accepted, it suggests that it was the accumulation of hail, not rain, that was the real cause of the build-up of the load on the roof and the cause of rain water build up in reservoirs that Mr Carolan opined had been caused by such deflection. It seems probable that it was because of the hail on the roof that the rain water falling on the roof could not drain away. After all, the warehouse had successfully withstood heavier rain storms without the beams suffering deflection and without the warehouse collapsing. 5. That further suggests that it was the hail that caused the collapse. The hail load versus the collapse load 1. Mr Cook and Prof Manton agreed that: 1. between 6 and 10 cm of hail accumulated at the warehouse during the accumulation phase of the storm (that is, the period of building up hail stones falling to the ground); 2. the hail stone density was likely to be between 800 and 900 kg/m3; and 3. the packing density of the hail stones was likely to be between 63% and 70%. 1. Based on these figures, Mr Carolan and Mr Summers performed calculations to assess whether the hail load thereby caused exceeded the collapse load (that is, the load needed to cause the warehouse to collapse) of the building. 2. If the hail load (that is, leaving aside the effect of rain) exceeded the collapse load, that would suggest that the hail, alone, caused the collapse. 3. Mr Summers calculated a collapse load of 0.33 kPa. Mr Carolan calculated a collapse load of 0.37 kPa. I was not invited to make any assessment of which of these calculations was correct. 4. Assuming that the hail stone density and the packing density were at the midpoint of the figures agreed by Mr Cook and Prof Manton (that is, 850 kg/m3 and 66% respectively), the evidence showed that the hail load would exceed Mr Summers's collapse load if there was 6 cm of hail and would exceed Mr Carolan's collapse load if there was 7 cm of hail. 5. Further, if there was 7 cm of hail, the hail load would have exceeded Mr Summers's collapse load no matter what (within the range agreed by Mr Cook and Prof Manton) the hail stone density and packing density. 6. Even assuming the correctness of Mr Carolan's (higher) collapse load calculation, very little rain (over and above the hail) would have been needed to cause the combined rain/hail load to exceed the collapse load. 7. Again, those matters point to the conclusion that it was the hail that caused the collapse. Temporal proximity of the falling of the hail and the collapse of the warehouse 1. Finally, hail was falling onto and accumulating on the roof of the warehouse until a very short time before the collapse. 2. As I have described, the warehouse collapsed at, or probably very slightly before, 3:49 pm. Heavy hail had been falling onto the roof of the warehouse until very shortly before then; at most, 3 minutes, but perhaps only 1 minute: see [119] above). 3. There was thus only a brief period prior to the collapse when rain alone was falling onto the roof of the warehouse. During that brief period it seems very likely that most, if not all, of the hail that had fallen over the previous 5, 6 or 7 minutes remained on the roof, impeding the runoff of the rain and, on Mr Carolan's hypothesis, causing deflection of the beams, and creation of reservoirs for the rain. Conclusion as to proximate cause 1. When these factors are considered together, they persuade me that it was the hail that fell on 25 April 2015 that was the proximate cause of the warehouse collapse. 2. To adopt the language of McColl JA in Caine, my opinion is that when considering these matters, and applying a common sense standard, the man or woman in the street would reach the conclusion that the "reality, predominance and efficiency" of the impact of the hail in the storm that occurred shows that it was the proximate cause of the collapse. Does the Local Policy have a hail limit? 1. A critical issue in the proceedings is whether the Local Policy has a hail limit, notwithstanding the fact that the policy document issued by XL on 1 March 2011, and renewed annually thereafter, specifies no such limit. 2. XL contends that the Local Policy has such a limit for two reasons. 3. The first is the asserted effect of cl 1.9b of the Local Policy (although this argument was not maintained with great enthusiasm in final submissions). 4. The second is XL's contention that the Local Policy should be rectified to include the Hail Limit. Clause 1.9b 1. Clause 1.9 of the Local Policy provided: "This Policy, while an independent contract, forms an integral part of the International Property Damage and Business Interruption Programme for Mobis Slovakia… [Mobis] agrees that, where permissible under applicable law: … b. programme aggregate limits of indemnity may operate to reduce the limit of indemnity available under this Policy in respect of any covered loss, irrespective of whether any limit of indemnity of this policy has not been or would not be exceeded by such loss." 1. It is common ground that the reference to "programme limits of indemnity" in the clause is a reference to the aggregate limits of indemnity in the Master Policy. 2. In my opinion, the effect of cl 1.9b is that if payment of an earlier claim under the Master Policy eroded the aggregate limit available under the Master Policy for, say, a storm claim, then the amount available to Mobis under the Local Policy for a storm claim would be reduced accordingly; even if the amount of that claim did not exceed the storm limit in the Local Policy. 3. I accept Mobis's submission that cl 1.9b requires no more than a matching of limits of liability by reference to specific perils appearing in the Local Policy to determine whether the aggregate limits of liability under the Master Policy have been exceeded. 4. This is consistent with the third paragraph of cl 3.1.8 of the Master Policy which provides: "The limits of liability agreed in this Policy (in particular the annual aggregate limits) under Art 2 apply combined for all companies insured under this Master Policy and any local policies". 1. There is no suggestion that, so construed, cl 1.9b has been enlivened. 2. Contrary to XL's submission, I do not accept that the effect of this clause is to import the Hail Limit in the Master Policy into the Local Policy. 3. If the parties to the Local Policy had intended such a result, they would have used language more clearly directed to that result. Rectification Should the Local Policy be rectified to include the Hail Limit? 1. XL contends that the Local Policy should be rectified so as to include the Hail Limit. 2. In opening submissions, XL put its case succinctly: "The Local Policy was to be issued by XL's Australian office in relation to Mobis Australia. It should have contained the hail limit but did not due to a mistake". Principles 1. The relevant principles were recently restated by the High Court in Simic v New South Wales Land and Housing Corporation [2016] HCA 47; as follows: "[103] Rectification is an equitable remedy, the purpose of which is to make a written instrument 'conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately'. For relief by rectification, it must be demonstrated that, at the time of the execution of the written instrument sought to be rectified, there was an 'agreement' between the parties in the sense that the parties had a 'common intention', and that the written instrument was to conform to that agreement. Critically, it must also be demonstrated that the written instrument does not reflect the 'agreement' because of a common mistake. Unless those elements are established, the 'hypothesis arising from execution of the written instrument, namely, that it is the true agreement of the parties' cannot be displaced. [104] The issue may be approached by asking — what was the actual or true common intention of the parties? There is no requirement for communication of that common intention by express statement, but it must at least be the parties' actual intentions, viewed objectively from their words or actions, and must be correspondingly held by each party." [Gageler, Nettle and Gordon JJ] [Citations omitted] 1. Further, each of these matters must be established by clear and convincing evidence. As Kiefel J (as the Chief Justice then was) stated in Simic at [41]: "[The] intention must be proved by admissible evidence and proved to a high standard. In a passage from Fowler v Fowler [(1859) 4 De G & J 250 at 265; 45 ER 97 at 103], which has been cited with approval by this Court, Lord Chelmsford said that: 'a person who seeks to rectify a deed upon the ground of mistake must be required to establish, in the clearest and most satisfactory manner, that the alleged intention to which he desires it to be made conformable continued concurrently in the minds of all parties down to the time of its execution'." 1. Rectification is concerned with the subjective and actual state of mind of the parties, objectively ascertained. 2. As Kiefel J explained in Simic (at [42]): "What is necessary to be shown is the actual intention of each of the parties. This has often been referred to by intermediate appellate courts as the subjective intention of the parties. A court, in determining whether the burden of proof is discharged, may be said to view the evidence of intention objectively, in the sense that it does not merely accept what a party says was in his or her mind, but instead considers and weighs admissible evidence probative of intention." Background 1. The Local Policy was incepted on 1 January 2011, part way through the 23 June 2010 to 23 June 2011 period of the then current (and first) Master Policy. 2. The Local Policy wording was not provided by XL to Mobis's Australian broker, Marsh Australia, until 1 March 2011. It contained no hail limit. 3. Thus, the issue to be determined on XL's rectification case is whether, as at 1 January 2011, it was the agreement of XL and Mobis, or their common intention, that the Local Policy have the Hail Limit and that, by reason of common mistake, it did not. 4. The only witness called by XL to give evidence of having made a mistake of any kind was Mr Timothy Jones. Mr Jones was XL's Underwriting Manager in Australia and the person responsible for signing the Local Policy on behalf of XL. 5. In his affidavit, Mr Jones said: "After I reviewed the 2014/15 Master Policy I realised that the hail, weight of snow and ice limit was not included in the 2014/15 local policy as issued. I should not have signed the 2014/15 local policy as issued without the hail, weight of snow and ice limit. I also reviewed other documents in XL's electronic document management system, Documentum, at that time. It became apparent to me that none of the local policies relating to Mobis issued in Australia prior to the loss contained the hail, weight of snow and ice limit. It is clear to me from my review of each Master Policy since inception of the Mobis global program and the other documents available in Documentum that the hail, weight of snow and ice limit should have been included in each local policy for Mobis submitted to me in my role as the person responsible for authorising local policies. As a result of a breakdown in the system at XL none of the local policies which had been prepared and reviewed prior to being provided to me for signing (or the authorisation for someone else to sign) contained the hail, weight of snow and ice limit. As it is my responsibility before authorising the issue of a local policy it is ultimately my mistake that the local policies in Australia prior to the loss were issued without the hail, weight of snow and ice limit. I was not the person at XL to do the actual writing up of the local policy. The people who do that are junior to me. As I have explained above I rely upon others to prepare the documents for submission to me but it is still my ultimate responsibility." 1. The XL officer responsible for drafting the Local Policy wording issued on 1 March 2011 was Ms Denise Stanley. XL did not call Ms Stanley. Mr Jones said that Ms Stanley left XL "several years ago". XL offered no evidence as to any steps taken to locate and take a statement from Ms Stanley. Mr Jones did not suggest that Ms Stanley left XL's employ on bad terms. Although Mobis did not suggest that a Jones v Dunkel (1959) 101 CLR 298 inference should be drawn by reason of her absence from the witness box, the fact remains that there is no explanation from her as to how the Local Policy came to be worded as it is. 2. In his affidavit, Mr Jones said: "In or about 2011 XL India started to perform administrative functions for and on behalf of XL Australia which included the creation of policy documents, such as the production of local policies." 1. The implications of that evidence were not developed by Mr Jones in his affidavit, or by XL in its submissions. 2. However, as is revealed below, there is no suggestion in the written communications between the parties in January and February 2011 that Ms Stanley utilised the services of XL India to prepare the wording of the Local Policy. 3. As I explain below, the event which led to the issue of the Local Policy without the Hail Limit was an email that Ms Ladislava Hurtajova sent on 22 December 2010 to a colleague, Mr Patrick Hofmann. 4. Ms Hurtajova was, at the relevant time, XL's Upper Middle Markets Property Underwriter for the Austrian and Central and Eastern European markets. Ms Hurtajova held this position from 2009 until mid 2013; she was XL's program underwriter for the policy years 2010/11, 2011/12 and 2012/13. Ms Hurtajova was responsible for the writing of the original Master Policy and its renewal in those years. 5. In the circumstances I discuss below, it was Ms Hurtajova who determined that the Hail Limit should be included in the Master Policy. Ms Hurtajova gave evidence that she was not involved in the drafting of the Local Policy (although that assertion requires some qualification), and that, so far as she knew, at no time did anyone on behalf of Mobis Korea or Mobis request that a policy be issued without the Hail Limit. 6. Ms Hurtajova said she assumed and intended that the Local Policy would have the same limits as the Master Policy. 7. Ms Hurtajova said that the only exception to this was "that a local policy might have a lower limit if the declared values in that country were lower than the relevant limit in the Master Policy, or if a different coverage was specifically requested". The latter circumstance did occur in relation to the Local Policy in the 2012/2013 policy year after Mobis sought to have its newly acquired Perth premises covered. That led to a lower limit for earthquake loss specified in the case of Perth than for Eastern Creek (see [40] above). 8. Although in her affidavit Ms Hurtajova said the Local Policy "contained a mistake" in that it did not include the Hail Limit, she did not say that she made a mistake in her 22 December 2010 email. Indeed she did not mention that email at all in her affidavit. 9. XL also called evidence from Mr Stefan Rossa. Mr Rossa assumed the responsibilities formerly undertaken by Ms Hurtajova for the 2014/15 policy period. 10. Mr Rossa played no role in the issue and renewal of the Local Policy. However, like Ms Hurtajova, Mr Rossa gave evidence that he assumed, expected and intended that the Local Policy would have the same sub limits as the Master Policy. 11. The officer at Mobis most directly involved in the circumstances leading to the issue of the Local Policy was Mr Sam Papa, who was then Mobis's General Manager, Finance and Administration. Mobis did not call Mr Papa. Mr Papa has left Mobis's employ, evidently in less than happy circumstances. XL made no Jones v Dunkel submission concerning his absence. The result is that assessment of his state of mind at the critical time depends on his email communications (particularly with Mr Roman Kalocai, a Senior Client Executive from Mobis Korea's insurance broker, Marsh Europe). Negotiation of the 2010/2011 Master Policy 1. In December 2009, Mobis Korea appointed Marsh Europe as its worldwide insurance broker for property damage and business interruption insurance. 2. Thus, on 15 December 2009, Mobis Korea wrote a letter addressed "[t]o whom it may concern" stating: "This letter is to confirm that we, Hyundai Mobis appoints 'Marsh Inc', as our exclusive insurance broker in respect of Package Insurance, globally." 1. A few days earlier, on 8 December 2009, Mr Kalocai wrote to a colleague: "We are glad to advise that MOBIS has appointed MARSH as their world-wide insurance broker for [Property Damage/Business Interruption insurance]… MARSH was appointed to service their subsidiaries in Slovakia, Czech Republic, Germany, Belgium, UK, Sweden, Russia, UAE, Egypt and Australia… As MOBIS in Australia has its renewal date on 1st of January [2011], we will need assistance of MARSH in Australia… Please get in touch with local client… your Contacts in Australia [at Mobis] are [Mr Sam Papa and Ms Tammy Seow]." 1. On 1 April 2010, Marsh Europe sent XL (for the attention of Ms Hurtajova and others) a proposal for property damage and business interruption insurance for "Mobis subsidiaries" in the countries referred to in Mr Kalocai's email of 8 December 2009 above (including Australia). 2. The proposal specified an inception date of 1 January 2011 in the case of the "Mobis subsidiary" in Australia. 3. One of the sub limits that Marsh Europe proposed was EUR 50 million for "flood, windstorm, hail, earthquake". 4. At around the time Marsh Europe made this proposal, Ms Hurtajova told Mr Kalocai that: 1. once a Master Policy was finalised, XL's local offices (or fronting partners if applicable) would issue a Local Policy; and 2. those Local Policies would be based on the cover in the Master Policy, but would be drafted to meet local regulatory and legal requirements, and had wording known within XL as "good local standard" wording. 1. So far as concerns Marsh Europe's proposal that cover be granted with a EUR 50 million sub limit for hail, Ms Hurtajova said in her affidavit: "I was unwilling to offer such a high limit for hail on the Mobis global program. I was not prepared to offer a limit of EUR 50 million for hail". 1. Ms Hurtajova was not challenged about this evidence. 2. Ms Hurtajova prepared draft wording for the proposed cover. In her affidavit she said: "In the 2010/11 draft wording I proposed a lower limit for certain 'natural peril events' being 'hail, avalanche, weight of snow and ice, rockslide, falling stones, and landslide'. The limit I was prepared to offer was EUR 10 million for those 'natural peril events'". 1. Ms Hurtajova and Mr Kalocai met on 18 June 2010 at XL's Vienna office. Ms Hurtajova had sent her draft wording to Mr Kalocai the day before. It contained, and highlighted, the EUR 10 million limit for: "Natural peril events, hail, avalanche, weight of snow and ice, rockslide, falling stones, landslide". 1. Evidently, during the 18 June 2010 meeting, Ms Hurtajova and Mr Kalocai discussed the lower limits on which Ms Hurtajova was insisting. Thus, following the meeting, Mr Kalocai wrote to Ms Hurtajova: "I got back home safely. I'm still thinking about the deductible for [machinery breakdown] – please let me know if you have any space for lowering the deductible to EUR 25,000. Otherwise I may really have a problem because of this with the Koreans. As I mentioned, maybe you can lower the deductible and in return for this you can have the lower limits for the other perils we were talking about. I can imagine that next year you will be on the deductible you propose for [machinery breakdown]". 1. Ultimately, XL agreed to a lower deductible for machinery breakdown, evidently in exchange for Mr Kalocai's agreement that "you can have the lower limits for the other perils we were talking about". 2. After the 18 June 2010 meeting, neither Mr Kalocai nor anyone else from Marsh Europe or Mobis requested insurance for natural peril events (in particular, for hail) in an amount greater than EUR 10 million. 3. On 27 July 2010, the first Master Policy was issued with effect for the period 23 June 2010 to 23 June 2011. 4. It had a limit of EUR 10 million for: "Natural peril events, hail, avalanche, weight of snow and ice, rockslide, falling stones, landslide". and included the extended definition of "natural peril events" to which I have referred (see [48] above). 1. The Master Policy recorded that the inception date for Australia would be 1 January 2011. 2. On 26 July 2010, Ms Hurtajova made a file note in which she described the "Program Structure" as follows: "There are two main production sites in [Slovakia] and [Czech Republic] and warehouses/offices in all other countries. Master country Slovakia, [Freedom of Services] policies/coverages for Czech Republic; Germany, Belgium, UK, Sweden and local policies for Australia, Russia and UAE". 1. In her affidavit, Ms Hurtajova explained that "Freedom of Services" policies could be issued for all Mobis subsidiaries in the European Union but that for non-European countries "it would be necessary for XL to issue separate 'local policies' as different regulatory and legal requirements apply". Mobis joins XL's global insurance program 1. Evidently, no steps were taken to effect a Local Policy for Australia until September 2010. 2. On 28 September 2010, Mr Kalocai sent an email to a colleague at Marsh Australia (Ms Carmel Adelson): "I would like to come back to this client. As you remember, last year Mobis Korea did not send proper instructions to Mobis Australia, so they renewed insurance with existing broker. In the meantime, we Marsh Slovakia set an international program for all Mobis operations. It is necessary for Mobis Australia to join that program as from 1st of January 2011. Please contact them again and make sure that existing [Property Damage/Business Interruption] policy is cancelled. Marsh is globally appointed only as [Property Damage/Business Interruption] broker for Mobis, but in other countries we agreed with client to handle local policies as well. So if you are able to agree that with client, it would be perfect". 1. Mr Kalocai attached to that email a "Summary of Global Property Insurance" for Mobis for the period 23 June 2010 to 23 June 2011 (that is, the terms of the then current Master Policy). 2. That summary specified the "Main Sub-limits" as follows: Per Occurrence and in the aggregate: Earthquake, volcanic eruptions 50,000,000 EUR Flood, high water/inundation 50,000,000 EUR Windstorm = winds with a minimum velocity of 75 km/h 50,000,000 EUR Hail, avalanche, weight of snow and ice, rockslide, falling stones, landslide (each) 10,000,000 Erection and Construction 5,000,000 EUR Electronic Equipment Breakdown 1,000,000 EUR Machinery breakdown 5,000,000 e.e.l EUR 10,000,000 a.a.l Theft following forcible or violent entry and damages to the insured property 5,000,000 EUR 1. The summary thus included the Hail Limit of EUR 10 million. 2. It also stated: "The Master Policy issued in Austria will be Excess and Difference in Conditions/Difference in Limits for Worldwide" and, beside the words "Other Extentions [sic]": "Difference in Limits (DIL)/Difference in Conditions (DIC)". 1. This was a reference to Art 5.2 of the Master Policy. That article is headed "Difference in Limits (DIL)/Difference in Conditions (DIC)". The parties referred to the article as the "DIL/DIC clause". It provides: "If the insurance cover granted by this Master Policy exceeds that provided by the local policies, and this is permissible by law, this Master Policy shall provide additional cover over and above the indemnities under the local policies. The indemnifiable amount for the applicable local policies and the Master Policy together shall not exceed the aggregate limits or sub-limits set out in this Master Policy". 1. I will return to this article when discussing a later email exchange between Mr Kalocai and Mr Papa. 2. The summary stated that for Australia (that is, for Mobis) there was to be a Local Policy with an inception date of 1 January 2011. 3. On 27 October 2010, Ms Adelson sent an email to Mr Papa. This appears to be the first communication to Mobis following the issue of the Master Policy about the possibility of it becoming a party to a Local Policy with XL. 4. Ms Adelson's email stated: "I hope that you remember our communications late last year. I have been advised by my colleague that Mobis Korea have been in contact with you to discuss the change in broker to be implemented 1 January 2011. I hope that this is in fact the case. Attached please find the summary of the program for you[r] information. Would you please advise me of the following: 1. Have you had contact re this situation? 2. Would you please review the values set out on page 6 and confirm to me whether they are correct? 3. Provide me with confirmation that your current Property Policy will be cancelled effective 1 January 2011. I look forward to hearing from you." 1. Ms Adelson attached to that email the Summary of Global Property Insurance that she had received from Mr Kalocai. 2. On 29 October 2010, Mr Papa sent an internal email to Mr Chung at Mobis as follows: "This is the email I received from the Marsh broker... It looks like only some of the insurance (i.e. property) is going to them. It makes no sense for [Mobis] to have 2 brokers covering our total insurances requirements. I am happy to tell her to go away again and that I haven't heard anything." 1. On 4 November 2010 Mr Papa replied to Ms Adelson's 27 October 2010 email: 1. stating Mobis had not been contacted about a possible change in broker (and that it was working with its existing broker on renewals); 2. enquiring as to "what your brief is"; 3. enquiring "are you supposed to be quoting or implementing"; and 4. stating that "current policy is not being cancelled". 1. Ms Adelson replied stating: "What can I say… I would only be insuring the Property and it would be implementation not quoting. However I am going to advise my colleagues of the fact that you have already begun your process and they must take it from there." 1. Mr Papa's somewhat robust response to Ms Adelson's enquiries evidently prompted Mr Kalocai to intervene. 2. Mr Kalocai rang Mr Papa from Europe and, on 15 November 2010, wrote: "I would like to summarise our Friday's call. MARSH was appointed for [Property Damage/Business Interruption] insurance for Mobis in 11 countries – Australia included. We set up a program insurance with XL from Europe for those countries. As I understand, you heard about this new cooperation, but you were not directly instructed by Mobis HQ to start communication with us. With this email I copy Mr. YS Kim and Alex Jin, our MARSH colleagues who communicates [sic] with Mobis HQ and kindly ask them again to arrange that Mobis HQ sends this information (as confirmation) to Mr. Sam Papa at Mobis Australia. As I understood from our discussion, only Korean colleague at Mobis Australia was informed, but did not forward this information to you. Sam if I may ask you, please have a chat with Tammy Seow (I suppose this is the person who was informed by HQ). I understand that you are in the middle of renewal process with existing broker. Of course it is not our intention to break good relationship with you partners, but we have the instruction to attach Mobis Australia to our Pan-European [property damage/business interruption] program since November 2009 and the policy is already prepared and the coverage from 1st of January will be effective also for Australia. I also understand that your broker offers you a package of insurances. If you are interested, MARSH should be able to offer the same scope of services via out office in Sydney. … It is crucial not to renew your [Property Damage/Business Interruption] policy with existing broker / insurer (i.e. cancel the policy)". 1. Mr Papa replied on 25 November 2010 stating that "insurances have not been cancelled yet" and making enquiries about premium and applicable excess. 2. On 26 November 2010, Mr Kalocai sent Mr Papa a further copy of the Summary of Global Property Insurance document. 3. On 30 November 2010, Mr Kalocai sent an email to Mr Papa stating: "As I mentioned, we were instructed by Mobis HQ to attach Mobis Australia to our [Property Damage/Business Interruption] program as from 1st of January 2011. Could you please confirm if this is possible and we can proceed with preparing the coverage?" 1. On 7 December 2010, Mr Kalocai, in the course of responding to an enquiry by Mr Papa concerning premium and like matters, asked Ms Adelson to inform Mr Papa that: "There will be a local policy issued in Australia by XL Insurance in Sydney". 1. Later, on 16 December 2010, Mr Kalocai sent Mr Papa an email requesting that he "please provide us with your final decision". 2. Mr Papa replied on 17 December 2010 saying that he had been "waiting for the indication on pricing", that Mobis's "CEO wants to know total cost before I commit" and that "the sooner I get a response the sooner I can decide". 3. Ms Adelson replied the same day providing details of what the premium was to be. 4. On the same day Mr Papa wrote to Ms Adelson, and her colleague, Ms Cory Ormsby: "Do I assume there are no withholding tax issues for Mobis Australia as the policy is issued by the local insurance arm of XL insurance?" 1. Ms Adelson replied that this was correct. 2. Later on 17 December 2010, Mr Papa sent an email to Mr Shaun Ryu (a colleague within Mobis): "Following is a brief summary of the Insurance policy implemented by HQ. I received the Global cost quote this morning… On the understanding that HQ have implemented this policy Globally, unless you have any other objections, I will respond next week that we will accept the Global Policy". 1. The "brief summary" of the "[i]nsurance policy implemented by HQ" contained details of declared values and premium (but made no reference to policy limits). 2. On 20 December 2010, Mr Papa sent an email to, amongst others, Mr Kalocai and Ms Adelson: "I would like some clarifications regarding the wording in the Summary Document provided. What does the reference to: 'The Master Policy issued in Austria will be Excess and Difference in Conditions/Difference in Limits for Worldwide' mean for the local subsidiary? Does this mean we have locally defined excesses and coverage?" 1. Mr Papa was referring to a statement in the Summary Document that I set out at [210] above which summarised the effect of Art 5.2 of the Master Policy (the DIL/DIC clause). 2. Mr Kalocai replied on 21 December 2010 but did not, in terms, respond to Mr Papa's enquiry as to whether Mobis would have "locally defined…coverage" under the proposed local policy. 3. Rather, he said: "DIC/DIL clause: You will receive a local policy issued by XL Australia, following your legislative and 'best local standard wording'. If there is any risk not covered within you [sic] local policy (because of the wording or legislation) and it is covered within [the] Master program wording by XL Austria, you are covered for such a risk." 1. From this Mr Papa must have understood that XL Australia would issue a Local Policy that would accommodate any (local) "legislative" requirements and would be the "best local standard wording". 2. The fact that Mr Kalocai put quotation marks around the expression "best local standard wording" may have suggested to Mr Papa that the expression had some particular significance from XL's point of view. Earlier, Ms Hurtajova had explained to Mr Kalocai that "good local standard" wording meant wording drafted to meet local regulatory and legal requirements (see [192] above). 3. In his email, Mr Kalocai also explained to Mr Papa the effect of the DIL/DIC clause, and that by reason of that clause, Mobis might have more cover under the Master Policy than under the proposed Local Policy. 4. Mr Kalocai did not suggest, in terms, that the opposite might be the case: namely, that cover under the proposed Local Policy might be more generous than under the Master Policy. 5. But the descriptors "best" and "local" were apt to convey to Mr Papa that the wording of the proposed Local Policy would be as generous as XL was able to be in the local context. And the fact that Mr Kalocai did not disabuse Mr Papa from the notion that there might be "locally defined…coverage" was apt to leave Mr Papa with the impression that this might come to pass; that is, that there might be locally defined coverage. 6. The fact that, as I describe below, Mr Papa was, as soon as the Local Policy incepted on 1 January 2011, anxious to obtain the Local Policy wording, suggests he did have that impression. 7. In his 20 December 2010 email, Mr Papa also made an enquiry about a EUR 5 million sub limit for what he described as "building destruction". He asked: "Is Insurance limited to $5m [sic] Euro in case of building destruction (or becomes unusable other than by Earthquake, Volcano, Flood, High water inundation or Wind storm)?" 1. Mr Papa was evidently referring to the EUR 5 million sub limit for "Erection and Construction" referred to in the Summary of Global Property Insurance that he had received from Ms Adelson and from Mr Kalocai (see [208] above). His enquiry was whether cover for what he described as "building destruction" would be limited to EUR 5 million if the building became "unusable" for reasons other than the perils that had a EUR 50 million limit (earthquake, volcano and so on). 2. On 21 December 2010, in response to that enquiry, and in the same email in which he dealt with the DIL/DIC clause, Mr Kalocai replied: "I do not understand why 5,000,000 EUR. Main risks as Earthquake, Flood, Volcano…are limited by 50,000,000 EUR". 1. Although neither Mr Papa nor Mr Kalocai in this exchange referred to the EUR 10 million hail sub limit referred to in the Summary Document, it shows that Mr Papa was conscious of the various sub limits specified in that document and that issues might arise as to how they interplayed. 2. Later on 21 December 2010, Mr Papa replied to Mr Kalocai: "I understand the earthquake, flood and volcano but what of other incidents? Plane crash, or other catastrophic accident other than natural disaster?" 1. Again, this shows that Mr Papa had applied his mind to the sub limits in the Summary Document (and thus in the Master Policy). 2. A short time later Mr Papa sent a further email to Mr Kalocai which included: "My existing broker has been able to clarify some of the wording for me, so I am reasonably comfortable, except for [some queries concerning premium and declared value]. I would also like to see some of the [Terms and Conditions] for the local policy and ensure that the Australian company is not uninsured or exposed". 1. This email suggests that Mr Papa had discussed the Summary Document with Mobis's existing broker and that, following that discussion with that broker, he was "reasonably comfortable" with its terms. 2. Nonetheless, the email records that Mr Papa wanted to see the terms and conditions of the Local Policy before committing Mobis. 3. Mr Kalocai replied: "I am able to send you the policy with all terms and conditions. While preparing the program, we knew about Australia, there should not be any special exclusion related to your country." 1. Mr Papa must have understood that the only document that Mr Kalocai was then "able to send" him was the Master Policy. There is no suggestion in the evidence that the wording of the Local Policy was available at this time. 2. On 21 December 2010, Mr Papa wrote to Mr Kalocai stating: "Thanks for the details and I can confirm to proceed. $A will be fine for invoicing Can I pls see wording". 1. The next day, Mr Kalocai responded to Mr Papa's request for the "wording" by sending a copy of the Master Policy. 2. On 21 December 2010, Mr Kalocai sent an email to Ms Hurtajova (in Slovak): "Confirming the interest of Mobis Australia in coverage from 1.1.2011 in the sense of [sic: per translation] the reported insurance sums". 1. Mr Kalocai also provided Ms Hurtajova with the address of Mobis's warehouse. 2. Ms Hurtajova explained in her affidavit that Mr Kalocai's email "meant that he confirmed the interest of Mobis Australia was to be covered from 1 January 2011 and gave the location and values". 3. As reproduced in the Court Book, this email bears the date 22 December 2010. In her affidavit, Ms Hurtajova described the email as having the date 21 December 2010. The date ascribed to the email by Ms Hurtajova is more likely, as it appears to have led to an email Ms Hurtajova sent to her colleague, Mr Patrick Hofmann, to which I will return. Evidently, the date has altered from European to Australian time in the course of reproduction. 4. On 31 December 2010, XL issued an endorsement of the Master Policy showing as the "Reason for Issuance" the inclusion of, amongst other countries, Australia, "with effect of 01.01.2011". 5. The endorsement recorded revised declared values for Mobis's building, machinery and stock, and for business interruption cover. All these figures were greater than appeared in the Master Policy when issued earlier in 2010 (see [208] above). At least some were the result of instructions from Mr Papa. 6. The endorsement included the statement: "All other statements remain unchanged according to policy number AT00005276PR10A [i.e. the Master Policy]". 1. Also on 31 December 2010, Mr Kalocai sent Mr Papa a copy of that endorsement under cover of an email: "Attached please find confirmation of coverage from 1st of January 2011 for Mobis in Australia. Local insurer was instructed to issue local policy, so if you haven't been contacted yet by our colleagues, you will be in next days [sic]. Anyway, the coverage is valid". 1. The endorsement to the Master Policy had the effect that Mobis became an "Insured Company" under the Master Policy with effect from 1 January 2011. This was consistent with the proposed inception date for Australia specified in the Master Policy when it was issued on 27 July 2010 (see [200] above). 2. A Local Policy was to be issued, also with effect from 1 January 2011. 3. In final oral submissions, there was some debate as to what would have occurred had a storm (such as that of 25 April 2015) occurred on say 1 January 2011 itself. Mobis would then have had cover under the Master Policy. That cover would have been subject to the EUR 10 million Hail Limit in the Master Policy. But Mobis would also have had cover under the Local Policy, albeit on terms not yet published by XL. To ascertain Mobis's rights under the Local Policy, it would have been necessary for XL to publish those terms. I see no reason to assume those terms would have differed from those published in March 2011. 4. On 12 January 2011, Mr Papa wrote to Mr Kalocai saying that he had not been contacted by "your local offices" and that "as far as I know I don't have a copy of a local policy". Mr Papa asked for "a Certificate of Currency for our Financier (ANZ Bank) as they hold security over our building". 5. On 14 January 2011 Ms Adelson sent Mr Papa a "Certificate of Currency" for a total of $64.6 million. The certificate bore the policy number ultimately ascribed to the Local Policy. Events leading to the 2011 Australian Local Policy wording 1. As XL contends that the Hail Limit was omitted from the Local Policy wording issued under cover of Ms Stanley's letter of 1 March 2011 by common mistake, it is necessary to examine with some care how that circumstance came about. 2. XL's procedures at the time required that a "Local Policy Instruction" or "LPI" be prepared in order to generate the wording of a local policy. 3. Evidently, the person responsible for creating the relevant LPI was an officer of XL stationed in Zurich, Mr Patrick Hofmann. 4. As I have mentioned (see [256] above) on 21 December 2010, Mr Kalocai sent an email to Ms Hurtajova in Slovak which, Ms Hurtajova said, "meant that [Mr Kalocai] confirmed the interest of Mobis Australia was to be covered from 1 January 2011 and gave the location and values". 5. The translation of that email in evidence (which I have set out at [256] above) does not reveal that Mr Kalocai set out any "values". The translation simply reads that Mr Kalocai confirmed coverage "in the sense of [sic] the reported insurance sums". 6. On 22 December 2010, Ms Hurtajova sent Mr Hofmann an email. I infer Ms Hurtajova sent this email as a result of receiving Mr Kalocai's email of 21 December 2010. In her email, she gave instructions to Mr Hofmann as to the sub limits to be included in the Local Policy. 7. I see this email as being critical to XL's rectification case. XL did not refer to it in opening submissions. It was referred to, albeit obliquely, in Mobis's opening submissions and given careful attention during the cross-examination of Ms Hurtajova. It requires careful examination. 8. The email read: "[R]egarding Mobis Slovakia expansion per 01.01.2011 Australia please find attached following summary of data you will need: 1) Insured: Mobis Parts Australia Pty Limited 2) Address of the insured: 77 Peter Brock Drive, Eastern Creek NSW 2766 3) Risk location: 77 Peter Brock Drive Eastern Creek NSW 2766 4) Sublimits: a. Section No 7 – Coverage Extension & Exclusions (as per existing LPI) b. Section no 6 – Program scope of Cover: i. Policy limit: EUR 40 mil ii. Accidental Damage/All Risk: EUR 40 Mil iii. SCCR: EUR 40 Mil iv. Avalanche: EUR 10 Mil v. Flexa/Flexa BI: EUR 40 Mil vi. Landslide/Subsidence: EUR 10 Mil vii. Malicious acts/ Vandalism: EUR 40 Mil viii. Snow pressure: EUR 10 Mil ix. Sprinkler leakage: EUR 40 Mil x. Theft: EUR 5 Mil xi. Vehicle impact: EUR 40 Mil xii. Volcanic Eruption: EUR 40 Mil xiii. Water damage: EUR 40 Mil xiv. Flood: EUR 40 Mil xv. Earthquake: EUR 40 Mil xvi. Storm: 40 Mil 5) Deductibles as per existing LPI (please note that we have in Australia BI cover too)". 1. It will be recalled (see [47] and [48] above) that the relevant limit in the Master Policy of EUR 10 million was expressed to be in respect of: 1. natural peril events (which included inundation, windstorms in excess of 75 km/hour and tsunami); 2. hail; 3. avalanche; 4. weight of snow and ice; 5. rockslide; 6. falling stones; and 7. landslide. 1. In her email, Ms Hurtajova specified a EUR 40 million sub limit for "storm" and a EUR 10 million sub limit only for: 1. avalanche; 2. landslide/subsidence; and 3. snow pressure. 1. The first two of the perils corresponded with perils identified in the Master Policy as being subject to a EUR 10 million limit: "avalanche" and "landslide". The third ("snow pressure") corresponded, approximately, to "weight of snow and ice" (also with a EUR 10 million limit). 2. But Ms Hurtajova specified no limit for hail (or for any other peril the subject of the EUR 10 million limit in the Master Policy: inundation, windstorm in excess of 75 km/hour, tsunami, rockslide or falling stones). 3. A comparison between the limits Ms Hurtajova specified in her 22 December 2010 email with those then in the Master Policy is illustrated by this table (with the Hail Limit in the Master Policy emphasised): Hurtajova email to Hofmann 22.12.10 Equivalent peril as described in Master Policy Accidental damage/ All risk 40 million None None SCCR (Strike, civil commotion, riots) 40 million None None Avalanche 10 million Avalanche 10 million Flexa/Flexa (Fire, Lightning, Explosion, Aircraft impact) 40 million Fire, Lightning, Explosion, Aircraft Impact (Flexa) 115.25 million Landslide/ Subsidence 10 million Landslide 10 million Malicious acts/ vandalism 40 million None None Snow pressure 10 million Weight of snow and ice 10 million Sprinkler Leckage [sic] 40 million None None Theft 5 million Theft following forcible or violent entry and damages to the insured property 5 million Vehicle impact 40 million None None Volcanic eruption 40 million None None Water damage 40 million None None Flood 40 million Flood 50 million Earthquake 40 million Earthquake 50 million Storm 40 million Storm, windstorm 50 million None None Highwater/ inundation/ windstorm>75km/h 10 million None None Hail 10 million None None Rockslide 10 million None None Falling stones 10 million None None Landslide 10 million None None Contract Works and/or Property under construction 5 million None None Machinery Breakdown 5 million None None Electronic Equipment Breakdown 1 million 1. It can be seen that Ms Hurtajova specified a number limits that had no equivalent in the Master Policy (accidental damage/all risk, SCCR (strike, civil commotion, riot), malicious acts/vandalism, sprinkler leakage, vehicle impact, volcanic eruption and water damage). 2. On the other hand, Ms Hurtajova did not specify a number of sub limits that did appear in the Master Policy; most notably hail, but also high water/inundation/windstorm greater than 75 km/hour, rockslide, falling stones and landslide (which were grouped with hail in the Master Policy with a EUR 10 million limit) as well as contract works and/or property under construction, machinery breakdown and electronic equipment breakdown. 3. Ms Hurtajova also expressed lower sub limits for perils that were named in the Master Policy (FLEXA (fire, lightning, explosion, aircraft impact), storm, flood and earthquake). This was consistent with the existence in the Master Policy of the DIL/DIC clause (see [211] above) and Art 3.1.8 (the Overlap Clause; see below at [623]), as was the fact that Ms Hurtajova did not express any higher sub limits from the proposed local policy than existed in the Master Policy. 4. This suggests that Ms Hurtajova took great care with her email. She descended to a great deal of detail. But she did not, anywhere in her email, mention "hail". 5. As I have mentioned, Ms Hurtajova's evidence was that she was not "involved in drafting the local policy for Australia" but that she assumed and intended that the Local Policy would have the same limits as in the Master Policy. 6. But Ms Hurtajova's email shows that she was "involved" in drafting the Local Policy in that she started the process whereby the Local Policy came to be created. She did that by sending her email of 22 December 2010 to Mr Hofmann. That email is expressed to contain a "summary of data" for "Mobis Slovakia expansion per 01.01.2011 Australia" that Mr Hofmann would need. That "data" comprised a lengthy and evidently comprehensive list of the limits and sub limits to go in the Local Policy. 7. In those circumstances, one might have expected that if Ms Hurtajova's position was that she mistakenly failed to mention any limit for hail in her email, she would have said so. But at no time has Ms Hurtajova said this. She did not say so in her affidavit. She did not mention her email in her affidavit (which, I should add, comprised 97 paragraphs and was 18 pages long). 8. In cross-examination, Ms Hurtajova agreed that her email represented her instructions to Mr Hofmann about what was to go in the LPI (and it must follow, thereby into the Local Policy itself). 9. Thus: "Q. And this was your set of instructions to Mr Hofmann instructing him to commence drawing up a local policy, was it not? A. This was my email to Mr Patrick Hofmann. HIS HONOUR: Q. It was your instructions as to what was to go in the local policy instruction; is that right? A. I call it - this is a summary of the data he will need to fulfil the LPI instruction tool, to send the instruction. MR YOUNG: Yes. Q. But this item, 'Section no 6 - Program scope of Cover' - you were setting out the limits that you were instructing him to insert in the LPI for Australia? A. Yes. Q. Correct? A. Correct." 1. The impression I had of Ms Hurtajova was that she was attending carefully to each question put and taking care to answer only the precise question. Although her command of English was of a very high order, it is not her first language. Indeed, she had available an interpreter to translate into her native Slovak language (although she needed only very occasionally to have the interpreter's assistance). 2. The proposition put to Ms Hurtajova, and accepted by her, was that her email represented her "instructions" to Mr Hofmann as to the limits to be inserted in the LPI. Her affirmative response was, literally, correct. Her email did represent her instructions to Mr Hofmann about what limits were to go in the LPI. 3. That does beg the question of whether she was mistaken in giving those instructions; in particular, by not instructing Mr Hofmann to include a EUR 10 million limit for hail or, indeed, making any reference to hail in her email. 4. It was not put to Ms Hurtajova that she had made no mistake in giving those instructions, or that she deliberately refrained from instructing Mr Hofmann to include a EUR 10 million limit for hail. 5. That was no doubt because, although Ms Hurtajova said she expected and intended that the Local Policy would have the same limits as the Master Policy and that there was a "mistake" in the Local Policy, Ms Hurtajova has never asserted that she had made any mistake, whether by sending this email, or at all. 6. As Mobis submitted: "No attempt was made by XL in chief to prove that [the 22 December 2010 email and the LPIs] were infected by a mistake. In the circumstances, the 'the most natural inference' is that XL feared to lead such evidence. In Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd [(1991) 22 NSWLR 389], Handley JA cited with approval the following passage from Millman v Rochester Ry Co [3 App Div 109; 39 NYS 274 (1896)]: …the rule is as applicable to a case in which a party fails to interrogate a friendly witness, so situated as to be presumed to have knowledge of the existence or non-existence of the vital facts in issue, as it is to the case of a failure to produce such a witness. Indeed I think the omission to interrogate a friendly witness in respect to facts presumably within his knowledge is more significant than the failure to call such a person as a witness, and that the presumption that the testimony would not have been favourable to the party's case is stronger than the one which arises from the failure to produce such a person as a witness." [Footnotes omitted] 1. On 28 December 2010, Mr Hofmann replied by email to Ms Hurtajova attaching an "updated" LPI. The LPI contained details for local policies in the United Arab Emirates and Russia, as well as Australia. 2. That LPI stated that the limits for the Australian Local Policy were to include: 1. EUR 10 million for "Snow Pressure/Weight of Snow and Ice"; 2. EUR 10 million for "Avalanche"; and 3. EUR 40 million for "Windstorm/Hail". 1. Unsurprisingly, bearing in mind the contents of Ms Hurtajova's 22 December 2010 email, and the absence from that email of any reference to "hail", the LPI did not include any limit for "hail". 2. It did include a EUR 40 million limit for "Windstorm/Hail" (corresponding to Ms Hurtajova's proposed EUR 40 million limit for "Storm"). This, evidently, reflected Mr Hofmann's understanding of the effect of Ms Hurtajova's instructions of 22 December 2010. 3. A comparison between the limits and sub limits Ms Hurtajova specified in her 22 December 2010 email, and those set out in Mr Hofmann's LPI, is illustrated by this table (with the reference "Windstorm/Hail" highlighted): Hurtajova email to Hofmann 22.12.10 Equivalent peril as described in LPI Accidental damage/ All risk 40 million Accidental damage / All-risk 40 million SCCR (strike, civil commotion, riots) 40 million Civil commotion / Riot / Lock-out / Strike 40 million Avalanche 10 million Avalanche 10 million Flexa/Flexa 40 million FLExA 40 million Landslide/ Subsidence 10 million Landslide/ Subsidence 10 million Malicious acts/ vandalism 40 million Malicious Mischief / Vandalism 40 million Snow pressure 10 million Snow pressure / weight of snow and ice 10 million Sprinkler Leckage [sic] 40 million Sprinkler Leakage 40 million Theft 5 million Theft / Burglary / Robbery 5 million Vehicle impact 40 million Vehicle Impact 40 million Volcanic eruption 40 million Volcanic Eruption 40 million Water damage 40 million Water Damage / Escape of Water / Burst Pipe 40 million Flood 40 million Flood 40 million Earthquake 40 million Earthquake / Earthmovement [sic] 40 million Storm 40 million Windstorm / Hail 40 million 1. The table shows that Mr Hofmann matched each of Ms Hurtajova's proposed sub limits virtually word for word; but with "Windstorm/Hail" substituted for "Storm". As I have mentioned, Mr Hofmann did not give evidence. I therefore have no evidence before me as to why Mr Hofmann decided to make that change. 2. In his 28 December 2010 email, Mr Hofmann asked Ms Hurtajova to "please quickly check and confirm it so that I can then send it to the Australian PAM". In his affidavit, Mr Jones explained that "PAM" was an acronym used by XL for local policy administrators. At this time, the relevant Australian policy administrator was Ms Stanley (to whom I have referred at [173] and [176] above). 3. In cross-examination, Ms Hurtajova said that she was out of the office in the days following Christmas in 2010 and that she did not know how she "answered his request for checking". 4. However, as emerges below, Ms Hurtajova later checked and approved a version of the LPI which was, so far as concerned the sub limit descriptions, the same as that Mr Hofmann forwarded to her on 28 December 2010. 5. In cross-examination, Ms Hurtajova was taken to the entries in the LPI attached to Mr Hofmann's email concerning the UAE and Russia (which were relevantly in the same format as those for Australia, albeit with some differing monetary limits) and gave this evidence: "Q. And the instruction that is contained includes 'Windstorm/Hail', and the limit is 50 million euro; do you see that? A. I see that. Q. And 'Windstorm/Hail' means that this limit of 50 million is to apply to both windstorm and to a hailstorm? A. No. Q. It means it is to apply to hail, does it not? A. No. Q. That's what it says. That is the only item in this listed scope of cover that includes hail, is it not, the item that I drew your attention to? 'Hail' is nowhere else mentioned? A. Correct. Q. Can I then draw your attention to the next page, E1052. This sets out the scope of cover for the local policy to be issued in Russia, does it not? A. That's correct. Q. And that includes a limit for 'Windstorm/Hail' of 50 million euro, does it not? A. It does. Q. And that's the only instruction given in relation to hail by the document, isn't it? A. That's the only instruction." 1. Ms Hurtajova answered "No" to the two questions suggesting that the "Windstorm/Hail" limit of EUR 50 million in the LPI applied to both windstorm and hailstorm. But she then agreed that "that's what [the LPI] says" and that this was the only instruction given in the LPI concerning hail. 2. The implications of Ms Hurtajova's negative answers to these two questions were not explored in re-examination (although an attempt was made, by questions that I rejected, to deal generally with the "Windstorm/Hail" reference in a later version of the LPI to which I refer below). 3. Ms Hurtajova was then taken to the page in the LPI dealing with the Australian Local Policy, and gave this evidence: "Q. And can I then turn the page to 1053, and this is the equivalent instruction in respect of local policy instructions for Australia, is it not? A. It is. Q. And in the same entries, the last two entries in the bottom half of the table, there is a reference to 'Windstorm/Hail', 'Australia' and this time the limit is different, 40 million euro. Do you see that? A. I can see that. Q. And again, that is the only instruction given by this document relating to hail, is it not? A. It is." 1. Once again, Ms Hurtajova gave a literally correct answer to precisely crafted questions. 2. The following day, 29 December 2010, Mr Hofmann sent an email to Ms Stanley (at XL Australia) (with a copy to Ms Hurtajova): "Please find attached the updated [Local Policy Instruction] for Mobis Slovakia – a policy for Australia…needs to be set up for the period [1 January 2011 to 23 June 2011]… Due to some absences in the Austrian team, I supported them on a temporary basis only. Therefore, I think it would be best to contact [Ms Hurtajova] [Program Underwriter] in case of any questions." 1. The details for "snow pressure/weight of snow and ice" and "wind storm/hail" were now expressed to be in Australian dollars. The figure for "snow pressure/weight of snow and ice" cover was stated to be $13,397,000 (equivalent to EUR 10 million). The limit for "wind storm/hail" was stated to be $64,975,450. This was equivalent, for a reason not explained in the evidence, to EUR 48.5 million rather than EUR 40 million as set out in Mr Hofmann's 28 December 2010 draft LPI. Neither party contended this was significant. Ultimately, the "storm" limit in the Local Policy, as issued on 1 March 2011, was the Australian dollar equivalent of EUR 50 million. There was no limit for hail. 2. Ms Hurtajova gave the following evidence in cross-examination in relation to the LPI that Mr Hofmann sent Ms Stanley on 28 December 2010: "Q. Could I ask you to go back a moment to the updated LPI that Mr Hofmann sent to Australia that he copied you in on and go back please to page 1086. Can I draw your attention in the first box to item 8, 'Snow Pressure/Weight of Snow and Ice' - do you see that? A. I can see that. Q. There is a limit of 13,397,000 Australian dollars? A. I can see that. Q. Yes. And there is no equivalent limit in the version of the Australian policy that is issued by XL? A. There is no limit for this. Q. But there is a limit on the same page. You will see the figure of 64,975,450 for 'Windstorm/Hail'? A. Yes. Q. That has been implemented in the Australian policy by the limit for storm of the same figure of $64,975,450, hasn't it? A. It has." 1. Again, Ms Hurtajova attended closely to the question put and gave a literally correct answer. The proposition with which she agreed was that the instructions in the LPI sent by Mr Hofmann to Ms Stanley were "implemented" (by XL in Australia) in the Local Policy. That was true (save for the irrelevant difference that the "storm" limit which ended up being slightly higher). 2. By 8 February 2011, a final version of the LPI was created. 3. Ms Hurtajova signed this final version of the LPI on that day. This version of the LPI had the sub limits in Euros; namely EUR 10 million for "Snow Pressure/Weight of Snow and Ice" and EUR 50 million for "Wind storm/Hail" (a slight increase from the EUR 48.5 million limit referred to in earlier versions of the Local Policy Instruction). Again, there was no other, or lower, limit for "hail". 4. In cross-examination, Ms Hurtajova was taken to this document and gave this evidence: "Q. … What I have handed you, Ms Hurtajova, is the local policy instruction document for the 2010/11 year. Do you see that, on the front page? A. Yes. Q. You are named as the program underwriter - - A. Yes. Q. - under "Contacts", at the first page. Can I ask you to turn over, please, to page 5 of this print, section 5. Section 5 is headed "Client Specifics"; do you see that? A. I can see that. Q. And there are three countries mentioned, UAE, Russia and Australia, which have different inception dates. Below the print there is provision for a signature by an underwriter and there is a date entered of 8 February 2011 and a signature. Is that your signature? A. This is my signature. Q. Yes. That signature indicates, does it not, that you have checked and approved this policy instruction document as originally requested by Mr Hofmann? A. Yes, that does indicate this, yes." 1. It is hard to see how Ms Hurtajova could have "checked and approved" this document without noticing that it contained a EUR 50 million limit for "Windstorm/Hail", and no separate limit for hail. 2. Ms Hurtajova did not explain this in her affidavit. Indeed, she made no mention in her affidavit of signing this document. 3. Ms Hurtajova did not assert, in response to the questions put in cross-examination, that she was mistaken to have approved such a limit. It is true that such an assertion would not have been responsive to the careful questions put. But the fact remains that I have no explanation of how this came about. 4. Also on 8 February 2011, Ms Stanley wrote to Ms Ormsby at Marsh asking for "the address of the local client so that I can invoice". 5. Ms Ormsby replied on 14 February 2011, attaching the Summary of Global Property Insurance that Mr Kalocai had sent Ms Adelson on 28 September 2010 (see [207] above) and Mr Papa on 26 November 2010 (see [223] above) and was the subject of the email exchange between Mr Papa and Mr Kalocai in December 2010 that I have set out above (see [225] to [235] above). That document contained "the address of the local client" as requested by Ms Stanley. It also stated that the "Global" insurance was subject to the "Main Sublimits" set out above, including the EUR 10 million Hail Limit. 6. On 18 February 2011, Ms Ormsby wrote to Ms Stanley asking her to "send the policy document to Mobis" and stating that "the client requires a copy of the schedule and wording asap". 7. Ms Ormsby followed up on the matter on 22 February 2011 when she wrote to Ms Stanley saying that "the client has been chasing their policy document" and enquiring "can you please advise when to expect". 8. Ms Stanley replied within minutes: "I am working on this at the moment. I have a few urgent Wordings, so I will try my best". 1. On 23 February 2011, Mr Papa wrote to Marsh Australia: "Just wondering when we can expect policy issue confirmation/details. To date we haven't seen anything yet. If it's going to take months let me know.. so I don't chase you". 1. Ms Ormsby from Marsh Australia replied the same day: "Your insurer XL Insurance had to revise the version that had been sent to me last week. They are finalising the amended document today. Hopefully have it to you by the end of the week." 1. The "version that had been sent to [Ms Ormsby] last week" was not in evidence before me. Nor was there any evidence of what revisions were made to the wording at this time. 2. On 1 March 2011, Ms Stanley sent Marsh Australia the policy wording for the Local Policy. 3. It had the following limits: Limit in respect of any on Occurrence Limit in the Aggregate during any one Period of Insurance Damage resulting from: Earthquake AUD 64,975,450 AUD 64,975,450 Flood AUD 64,975,450 AUD 64,975,450 Storm AUD 64,975,450 AUD 64,975,450 Accidental damage AUD 64,975,450 Not Applicable Theft AUD 6,698,500 Not Applicable Any other damage AUD 64,975,450 Not applicable 1. Those limits differ slightly, but not relevantly, from those in the Local Policy at the time of the collapse. 2. A comparison of the limits on the 8 February 2011 LPI, and those in the Local Policy as issued, is illustrated in this table: Local Policy Instruction EUR Equivalent peril as described in Local Policy wording as issued AUD Accidental damage/ All-Risk 48.5 million Accidental damage 64,975,450 Avalanche 10 million None None Civil Commotion / Riot / Lock-Out / Strike 48.5 million None None FLExA 48.5 million None None Landslide/ Subsidence 10 million None None Malicious Mischief / Vandalism 48.5 million None None Snow pressure / Weight of snow and ice 10 million None None Sprinkler Leakage 48.5 million None None Theft / Burglary / Robbery 5 million Theft 6,698,500 Vehicle Impact 48.5 million None None Volcanic Eruption 48.5 million None None Water damage / Escape of Water / Burst Pipe 48.5 million None None Earthquake / Earthmovement [sic] 48.5 million Earthquake 64,975,450 Flood 48.5 million Flood 64,975,450 Windstorm / Hail 48.5 million Storm 64,975,450 None None Any other damage 64,975,450 1. The AUD figures correspond to the EUR figures at the prevailing exchange rate. 2. Although the LPI specified 15 separate perils and sub limits, the Local Policy specified only 6; 5 of which reflected the overall policy limit. 3. Mr Jones (to whom I have referred above: see [171] to [175]) said in his affidavit that "the process within XL by which local policies are prepared so as to be presented to the local underwriter for final review and signature" involved the creation of LPIs and the use of a "precedent or template wording for each of the countries in which a local policy is required as part of a global program of a particular insured known as Good Local Standard policy wording". 4. I infer from this evidence that Ms Stanley used the LPI certified as correct by Ms Hurtajova on 8 February 2011, as well as the template to which Mr Jones referred, to create the document issued on 1 March 2011. 5. Otherwise, there is no evidence to explain by what process Ms Stanley selected the limits which appeared in the Local Policy, and to explain, in particular, why the limits differ from those in the 8 February 2011 LPI and from the Summary of Global Property Insurance document sent by Ms Ormsby to Ms Stanley on 14 February 2011. 6. Under cover of a letter dated 1 March 2011, Ms Stanley sent Ms Ormsby the "Policy Wording" for the Local Policy (with no hail limit). 7. Evidently, on 3 March 2011 Ms Ormsby had not received that wording as, on that day, she sent an email to Ms Stanley: "The client has been following me up every day. If you could please issue the policy asap". 1. Ms Stanley replied saying that "the wording was mailed yesterday" and attached a "soft copy in the interim". 2. On 22 March 2011, Ms Ormsby wrote to Mr Papa: "Please see the attached policy document for your Industrial Special Risks Policy". 1. The cover page of that wording described Mobis's address as "77 Brock Drive, Eastern Creek". 2. Mr Papa replied to Marsh Australia pointing out that Mobis's address was in fact 77 "Peter" Brock Drive. 3. Mr Papa's reply was sent within an hour of his receipt of Ms Ormsby's email. However, the fact that Mr Papa was able to detect the slight error in Mobis's address as recorded on the cover sheet of the Local Policy, when considered in the context of the numerous enquiries he made in January and February 2011 concerning provision of the Local Policy wording (including a "copy of the schedule": see [323] above), suggests that it is probable that he read the wording when he received it and, at least, saw the limits stated in it. 4. XL does not suggest that Mr Papa saw that there was no hail limit in the policy, understood its absence to be inconsistent with what had been explained to him by Mr Kalocai in December 2010 and remained silent, knowing that XL had made an error. XL's case is not that there was a unilateral mistake (by it) known to Mobis in the sense considered in Taylor v Johnson (1983) 151 CLR 422. XL's case is that there was a common mistake. 5. I would infer that Mr Papa was expecting a policy which, although issued in the context of the global coverage of the Mobis group as a whole, and which thus involved the Master Policy, was to have "best local standard wording" (see [237] above), and which may well have "locally defined excesses and coverage" (see [233] and [235] to [236] above). 6. I infer, from the manner of Mr Papa's response when he finally received the Local Policy wording, that he saw nothing in it inconsistent with his discussions with Mr Kalocai in December 2010. Events thereafter – the "mistake" repeated 1. The first Local Policy was for the period 1 January 2011 to 23 June 2012. 2. Thereafter, it was renewed annually on terms which, relevantly, were the same as those of 1 March 2011 and did not include a hail limit. 3. For the policy year 23 June 2013 to 23 June 2014, Marsh Europe went to the market with a fresh request for proposal which sought insurance for a program, including a local policy for Australia, which had a hail limit of EUR 10 million. XL won that business and continued as insurer for the Mobis group. As XL submitted: "Unfortunately for XL the renewal process of the Local Policy for Australia repeated the mistake with respect to the hail limit. This was notwithstanding that there was a new arrangement which had stemmed from Marsh Europe going to the market". 1. On 27 April 2015, (two days after the collapse) Mr Kalocai sent an email to Mr Gerardo Pierro (at Marsh Sydney) stating: "Thank you very much for your update and your assistance. Please be supportive to the client locally. I will of course coordinate together with Alex Jin from Korea and XL Austria. Our big question is, what kind of peril caused the damage. I am asking because, we have big concern of come [sic] limitations in the policy: Limits are in EUR Limit each loss (e.e.l.) PD/BI combined Limit in annual aggregate (a.a.g.) Storm, Windstorm 50,000,000 50,000,000 Natural peril events, hail, avalanche, weight of snow and ice, rockslide, falling stones, landslide 10,000,000 10,000,000 Can you please give us at least your private opinion if the reason is not obvious yet?" 1. Mr Kalocai was referring to the Local Policy. His email suggests that he assumed that the Local Policy had the Hail Limit. 2. Mr Pierro's reply was that "the loss was caused by strong winds, hail and resulted water damage". 3. On 30 April 2015, Mr Nicholas Kerr (from Marsh Sydney) sent Mr Kalocai a copy of the wording of the Local Policy. 4. On the same day, Mr Kalocai replied, attaching a copy of the current Summary of Global Property Insurance under the Master Policy and continued: "Attached is short summary of global program, I saw some differences mainly in limits in local policy. This is not to be discussed with insurer yet, it is FYI only. We will coordinate later what to do. Our intention was not to put 100% of loss to hail as there is sublimit of 10 Mil EUR (combined PD/BI). We thought that the reason of loss was combined by hail and storm / windstorm – this gives to the client more space in indemnification." 1. Again, this email suggests that Mr Kalocai assumed there to be a hail limit in the Local Policy. 2. I will return to the significance (if any) of this fact. Should the Local Policy be rectified? 1. In order to succeed on its rectification case, XL must prove, to the relevant standard, that as a result of a mistake common to both XL and Mobis, the Local Policy does not reflect their common intention that it include the Hail Limit. 2. XL must prove these matters on the probabilities, but "to a high standard" and "in the clearest and most satisfactory manner" (see [165] above). Has XL shown, to the relevant standard, there was a "mistake"? 1. I have set out, in some detail, the circumstances that appear to have led to the absence of the Hail Limit in the Local Policy. 2. The trail of events started with Ms Hurtajova's email to Mr Hofmann of 22 December 2010. 3. As I have said, the detail in Ms Hurtajova's email of 22 December 2010, and the differences between the limits specified in it, compared to those then in the Master Policy, both suggest that Ms Hurtajova applied her mind carefully to the task of spelling out the precise limits that she wanted Mr Hofmann to include in the LPI. 4. The email does not have the appearance of being prepared by reference to a template. It appears to be a bespoke document, prepared by Ms Hurtajova for the purpose of giving Mr Hofmann instructions as to the sub limits he should include in the LPI. 5. Ms Hurtajova did not propose a hail limit in that email. 6. On 28 December 2010, Mr Hofmann prepared the "updated" LPI on that basis: without a hail limit. As Ms Hurtajova's email of 22 December 2010 made no reference to a hail limit, it is unsurprising that Mr Hofmann did not include any such limit in the LPI. How it was that he decided to add "hail" into the "Windstorm/Hail" limit of EUR 40 million is not explained on the evidence. 7. On 8 February 2011 Ms Hurtajova certified the final iteration of the LPI on that basis: without a hail limit. By then, that "Windstorm/Hail" limit had been increased to EUR 48.5 million. The LPI contained no other reference to "hail" and yet, Ms Hurtajova certified that iteration of the LPI as being correct. 8. When taken to the "Windstorm/Hail" references in the LPI, Ms Hurtajova rejected the proposition that the limit applied to both windstorm and hailstorm, despite the fact that is clearly what the document says. 9. However, as I have said, the implications of that answer were not explored in re‑examination. 10. Ms Stanley prepared the wording of the Local Policy on the same basis: without a hail limit. Evidently, Ms Stanley prepared the limits in the Local Policy by reference to the 8 February 2011 LPI and, consistently with that document, did not include a hail limit. 11. There is no evidence to explain why Ms Stanley decided to change the "Windstorm/Hail" limit to a "Storm" limit. 12. Thus, many matters are unexplained. 13. What is clear, however, is that the reason there was no hail limit in the wording of the Local Policy as published by Ms Stanley in March 2011 was the absence of any reference to a hail limit in Ms Hurtajova's email of 22 December 2010, and the fact that on 8 February 2011, Ms Hurtajova certified as correct the final iteration of the LPI which (consistently with her 22 December 2010 email) contained no hail limit. 14. Ms Hurtajova's evidence was that: 1. she understood and intended the Local Policy to have the same limits as the Master Policy; and 2. she later (although she did not say when: presumably when she was preparing her affidavit) saw that the Local Policy "contained a mistake because it did not have the [Hail Limit]"; 1. It might be thought to be implicit in that evidence, which was not challenged, that Ms Hurtajova made a mistake in her email of 22 December 2010 (by not specifying the Hail Limit) and in her 8 February 2011 certification of the LPI (by certifying, as correct, the LPI absent the Hail Limit). 2. But Ms Hurtajova did not say so. 3. And, in the absence of that evidence, I am not persuaded that I should find she was mistaken. 4. Although Ms Hurtajova was not challenged about her evidence as set out at [373], and although she determined that the Master Policy have the Hail Limit, I think the most reliable guide as to what she intended so far as concerns the Local Policy to be her contemporaneous, internal business communications (her 22 December 2010 email and her 8 February 2011 certification). 5. Ms Hurtajova created those documents at a time when there was no reason to think there would be any controversy about this matter. 6. Those communications suggest there was no mistake. At the very least, they are inconsistent with and cannot, in my opinion, be reconciled with a conclusion that there was a mistake. 7. I see this as being fatal to XL's case on rectification. 8. In oral closing submissions, Mobis put the matter this way: "Right down to the making of the local policy, [the evidence] falls hopelessly short. There is no evidence that they have led concerning the making of the local policy. You have the LPI instructions which are inconsistent with their case that there was a mistake, but they have not called any of the XL officers who were actually involved in the formulation of the local policy in any relevant year. That evidence was effectively in their camp to ascertain and lead; they have not done that. Rather, if one goes back to the affidavits, your Honour, of Ms Hurtajova, Mr Rossa and Mr Jones, their evidence doesn't rise higher than unilateral ex post assertions of an alleged intention or assumption that they made as to the desirability of having a hail limit in the local policy. Those assertions are all ex post, you don't find contemporaneously any documentation setting out the existence of such an assumption or the basis for such an assumption. They are not only ex post, they are irrational. The witnesses accepted that the very nature of the program was such that the local policies may well differ in terms of conditions and limits from the master policy. That was the whole concept. Likewise, it was the whole concept that the local policies would be finalised at a local level with a local insured making decisions about what should be covered and what limits should apply within a process of engagement with a local XL subsidiary. The assumptions or assertions of belief are likewise irrational because year in, year out, you have the demonstrable example of the local policies that were actually entered into in Australia, in Russia and the UAE, and in structure, in content and in limits, they differed very markedly from the global policy. And that was the whole scheme - the local policies could and would differ very substantially in their conditions and limits." 1. The reference in that submission to the acceptance by XL's witnesses that local policies might have different limits from those in the Master Policy and local policies comprised, first, this evidence from the cross-examination of Ms Hurtajova: "Q. Can I ask you this: clause 5.2 is headed 'Difference in Limits, Difference in Conditions'. Was there a similar clause in each of the master policies that you were involved in from 2010 onwards until your departure in 2014? A. Yes. Q. Do you agree with this: that clause contemplates that there may be differences in limits and in conditions when you look at a local policy compared to the master policy in any given year? A. Yes." And later: "Q. Ms Hurtajova, what I was putting to you is simply this: in paragraph 41 [of Ms Hurtajova's affidavit], are you suggesting that you were aware, at all relevant times during your involvement in the global program, that there might be cases where the applicable limits of liability in particular countries under local policies in fact differed from the limits in the master policy? A. Yes, I was aware of it." 1. Similarly, Mr Rossa gave this evidence: "Q. Yes. Were you conscious, when you became involved in the global program in 2013/2014, that the local insured entity would make decisions about precisely what conditions applied and what limits applied to the insurance it was taking out under a local policy? A. Yes." 1. Again, these questions were carefully framed. 2. But the answers given suggest that Ms Hurtajova and Mr Rossa contemplated that, in some circumstances, local policies might have different limits to the Master Policy. 3. That, too, is not consistent with the conclusion that there has been a mistake of the kind for which XL contends. Mobis's intention 1. In any event, I am not persuaded that Mobis intended the Local Policy to have the Hail Limit. 2. The email exchange between Mr Papa and Mr Kalocai in December 2010 concluded on the basis that: 1. Mr Papa had enquired whether the DIL/DIC clause in the Master Policy meant that Mobis would have "locally defined excesses and coverage" (see [233] above); 2. Mr Kalocai did not answer that question, save an explanation as to the effect of the DIL/DIC clause and said that XL Australia would issue a Local Policy "following your legislative and 'best local standard' wording'" (see [236]); 3. Mr Papa asked to see the Local Policy terms and conditions to ensure Mobis was not "uninsured or exposed" (see [249]); 4. Mr Kalocai then said he could send Mr Papa "the policy with all terms and conditions" and "they should not be getting any special exclusions relating to your country" (see [252] above); 5. Mr Papa confirmed that Mobis would proceed to enter the Local Policy after seeing the wording; and 6. Mr Kalocai provided him with a copy of the Master Policy. 1. As I have said, although Mr Papa asked for a copy of the wording in the Local Policy, he must have seen that the document with which he was provided was the Master Policy. 2. Mr Papa made numerous enquiries throughout January and February seeking a copy of the wording of the Local Policy, including "a copy of the schedule and wording" (see [323] above). 3. Mr Papa, finally, saw the policy wording on 22 March 2010. He, as I have found, reviewed it, noted a correction that needed to be made to Mobis's address but did not express, and I find did not detect, any inconsistency between the wording of the Local Policy and his discussions with Mr Kalocai in December 2010. 4. In those circumstances, I am not persuaded that XL has shown, to the requisite standard, that Mobis intended that the Local Policy have the Hail Limit. 5. The emails set out (at [352] to [357] above) show Mr Kalocai had assumed that the Local Policy would have a hail limit corresponding to that in the Master Policy. But the question here is what Mobis, subjectively and actually, intended (with such intention to be ascertained objectively). I do not see what relevance Mr Kalocai's assumption about the Local Policy, not based on any communication or information obtained from XL concerning the process whereby the Local Policy wording was created, and not communicated to anyone at Mobis, could have to that question. 6. When a contract is negotiated by a duly authorised agent, that agent's intention may be relevant for the purposes of rectification: Metlife Insurance Ltd v Visy Board Pty Ltd [2007] NSWSC 1481 at [32] (Brereton J citing the High Court in Australian Gypsum Ltd v Hume Steel Ltd (1930) 45 CLR 54; HCA 38 at 67). 7. Mr Kalocai negotiated the Master Policy (with a hail limit). 8. But he did not negotiate the terms of the Local Policy. 9. Mr Kalocai appears to have assumed that it, too, would have the Hail Limit. 10. But all Mr Kalocai knew was that: 1. XL's local office would issue the Local Policy; 2. the Local Policy would be based on the Master Policy; and 3. the Local Policy would be drafted to meet local regulatory and legal requirements and would have what XL called "good local standard" wording. 1. There is no evidence that Mr Kalocai knew what process XL followed to cause local policy wording to be prepared, nor what communications had occurred within XL that led to the Local Policy having wording which did not include the Hail Limit, let alone that he had any intention about those matters. Conclusion as to rectification 1. The conclusion to which I have come is that XL has not established its case for rectification to the relevant standard. 2. In those circumstances, it is not necessary for me to deal with UNIQA's submission that, in light of the effect that rectification of the Local Policy would or might have on its position as an insurer under the Master Policy, rectification should in any event, and as a matter of discretion, be denied to XL. Was there a variation of contract constituted by the issue of the Local Policy wording? 1. In oral submissions in reply, Mobis submitted (for the first time) that, assuming it was the common intention of the parties as at 1 January 2011 that the Local Policy have the Hail Limit, any agreement to that effect was varied by the issue of the Local Policy wording on 1 March 2011 (without the Hail Limit). 2. In view of the conclusion to which I have come, I do not need to deal with this submission. The Faulty Design Exclusion 1. In further answer to Mobis's claim, XL relies on the Faulty Design Exclusion in the Local Policy. 2. That exclusion is in cl 3.2.1(a) which provided that the Local Policy does not cover: "Damage or Business Interruption caused by or consisting of: i. inherent vice, latent defect, gradual deterioration, wear and tear, frost, change in water table level, its own faulty or defective design or materials, or any gradually occurring loss or any loss which commenced prior to the inception of the Policy … but this shall not exclude subsequent Damage or Business Interruption which results from a cause not otherwise excluded". 1. XL contends that the design of the warehouse was "faulty or defective". The warehouse 1. As I have said, the warehouse was vast. It was equivalent in size to several city blocks. It was some 246 m long and 123 m wide. 2. The structure of the steel frame of the warehouse was depicted in a diagram in one of Mr Carolan's reports: 1. The north side of the warehouse is shown by the line indicated by "A". "D" represents the southern edge of the warehouse. The red boxes depict office buildings on the north side of the warehouse. There were two internal rows of columns, which are shown as "B" and "C". The connections in the north to south direction ("A" to "D") were referred to by the parties as beams or rafters. Each was a little over 40 m in length. 2. A section from north to south was referred to by the parties as a frame. The primary components of the frame were the two end columns, the two middle columns and the three connecting beams. 3. There were 26 internal frames in addition to the west wall and the east wall. Each frame included 3 beams. Each of the beams in a frame is a "structural element" for the purpose of the relevant Australian Standards. 4. Purlins, running east to west were connected between each of the beams. There were some 20 purlins attached to each beam, and thus some 60 purlins attached to each frame as a whole. 5. A typical frame is shown in the following diagram: 1. There were three spans making up each frame. There were 78 spans (excluding the east and west wall). 2. As can be seen from the frame section, the ridge line was off-centre, being closer to the row of internal columns depicted as "C". 3. The roof had an average slope in the order of 2°. A roof of that slope would, to the naked eye, appear almost flat. However, water could easily drain off it. Indeed, as I have mentioned, the warehouse was, prior to 25 April 2015, subjected to rain storms far more severe than that which occurred on 25 April 2015. On those occasions the slope of the roof was adequate to cause rain to run off and be dealt with in the warehouse's drainage system. "Its own" faulty design 1. Clause 3.2.1(a) directs attention to "its own" faulty or defective design. A question arises as to the significance of these words. 2. The answer to that question is revealed once the exclusion is read incorporating defined terms and excluding unnecessary words, thus: "This Policy does not cover… [physical loss or destruction of or damage to the property covered by the Policy] or Business Interruption…caused by or consisting of…its own faulty or defective design or materials…but this shall not exclude subsequent [physical loss or destruction of or damage to the property covered by the Policy] or Business Interruption…which results from a cause not otherwise excluded." 1. This makes clear, in my opinion, that the word "its" in the expression "its own faulty or defective design" refers to the property the subject of the loss, and not to Mobis. 2. Thus, the "faulty or defective design" to which the exclusion is directed is of the "property covered by the Policy" which is the subject of the "physical loss or destruction…or damage" (that is, of the warehouse itself) and that what is excluded is a claim for the loss of that property if that loss be caused by the faulty or defective design of that property. 3. Accordingly, if it be the case that the collapse of the warehouse was caused by its faulty or defective design, Mobis's claim for damage to the warehouse itself would be excluded. But Mobis's claim for loss or damage to contents and stock would not be excluded as that loss would not have been caused by the faulty or defective design of the contents and stock. 4. As to business interruption, what is excluded is "business interruption…caused by or consisting of its own faulty or defective design". The wording is awkward as it is hard to see how "business interruption" could have a design, let alone one which was faulty or defective. The better reading of the exclusion is, probably, simply to ignore the words "business interruption" as it appears "clear that something has gone wrong with the language": see Chartbrook Ltd v Persimmons Homes Ltd [2009] 1 AC 1101 at [25] (Lord Hoffmann). 5. In any event, the proviso to the exclusion makes clear that, assuming the design of the warehouse was faulty or defective, only damage to the warehouse itself is excluded. 6. That proviso states that the exclusion does not apply to "subsequent" loss. 7. The effect of the proviso was that loss or business interruption which results from a cause "not otherwise excluded" is not excluded by cl 3.2.1(a). 8. In Prime Infrastructure (DBCT) Management Pty Ltd v Vero Insurance Ltd [2005] QCA 369, the Queensland Court of Appeal (at [33] and [38]) considered a proviso similar to that in cl 3.2.1(a) to mean damage "occurring or coming later or after; following in order or succession" or "causing or occurring later or after or following in order". It is not necessary that the "subsequent damage" be separate and distinct from the initial damage. 9. In the same case, the words "a peril (not otherwise excluded)" was held to mean a peril that is not excluded by any other provision in the policy. That is, the "proviso peril" could be a peril excluded by the clause containing the proviso, but not any other exclusion in the policy (Prime at [22]). 10. As all damage (other than to the building itself) is, in this sense, "subsequent" to the actual collapse of the warehouse and is not "otherwise excluded", it is not caught by cl 3.2.1(a). 11. In the result, all that is capable of exclusion by reason of cl 3.2.1(a) is Mobis's claim for damage to the building itself, not its claim for loss of stock, contents or for business interruption. 12. This argument was developed for the first time in UNIQA's opening submissions. In final submissions, it was embraced by Mobis, and barely disputed by XL. Negligence not necessary 1. In final submissions, Mobis accepted that the phrase "faulty or defective design" does not require XL to establish negligence or blameworthiness in order to engage the exclusion (for example, see Manufacturers' Mutual Insurance Ltd v Queensland Government Railways (1968) 118 CLR 314 at 323). Faulty design – "res ipsa loquitur"? 1. In its opening submissions, XL submitted that the mere fact that the warehouse collapsed showed that it was defective in design. XL accepted, at that point, that it was making a submission "close to" a res ipsa loquitur submission. 2. Although that proposition was barely (if at all) developed in final submissions, I should make clear that I do not accept it. 3. The Local Policy expressly provides for destruction of an insured building "caused by its own collapse" if the damage results from a "named peril" (which includes "storm": see cll 2.7 and 3.2.1(i)). 4. I accept Mobis's submission that when cll 3.2.1(a) and 3.2.1(i) are considered together, it is clear that the fact that the warehouse collapsed during a storm will not, itself, engage the Faulty Design Exclusion. As Mobis pointed out, a building might collapse even though its design complied with all applicable design standards. In those circumstances, it is not open to XL to resort to the res ipsa loquitur principle (or anything close to it). XL must establish that the warehouse was, objectively, defective in design. When is a design "faulty"? 1. In Manufacturers' Mutual, the High Court was concerned with the proper construction of an exclusion in an insurance policy for loss "arising from faulty design". 2. The plurality (Barwick CJ, McTiernan, Kitto and Menzies JJ) said (at 321): "To design something that won't work simply because at the time of its designing insufficient is known about the problems involved and their solution to achieve a successful outcome is a common enough instance of faulty design. The distinction which is relevant is that between "faulty", ie, defective, design and design free from defect." 1. Windeyer J said (at 322): "We are concerned with the word 'faulty' as descriptive of an inanimate thing. The words 'fault' and 'faulty' then have a different sense. They, again according to their derivation, connote a falling short; but not now a falling short in conduct or behaviour. They designate an objective quality of a thing. It is not up to a required standard. It is 'faulty', because it has defects, flaws or deficiencies. This use of the word 'faulty' in relation to a thing is old and quite common." 1. In Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (1982) 2 ANZ Ins Cas 60-463 Hutley JA said (at 77, 581): "A design is defective if it is not as adequate for the purpose as art or skill can make it". 1. Chalmers Leask was upheld on appeal (Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (1983) 155 CLR 279; 2 ANZ Ins Cas 60-514) and cited with approval by the Court of Appeal in State of New South Wales v AXA Insurance Australia Ltd (2002) 54 NSWLR 409; NSWCA 63 by Ipp AJA (with whom Mason P and Giles JA agreed). 2. His Honour said (at [39]): "In Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd…(upheld on appeal…) Hutley JA said (at 77,581) that '[a] design is defective if it is not as adequate for the purpose as art or skill can make it'. That formulation illustrates that the appropriateness of the design of a thing has to be measured against the purpose for which it is intended to be used." 1. I accept Mobis's submission that while it is implicit in the High Court's judgment in Manufacturers' Mutual that the "faulty design" in question fell short of an objective standard, the plurality did not need to articulate precisely what standard was being applied because it concluded that the factual findings made by the arbitrator (whose decision was in question) were sufficient to establish a departure. As I have set out, Windeyer J referred expressly to the design not being "up to a required standard". 2. In this case, the question arises in the context of the ability of the warehouse to resist loads. 3. That question is the subject of particular provisions in the Building Code of Australia and in the relevant Australian Standards. 4. As the warehouse was constructed in 2008, and in the events that have happened, the relevant Australian Standards are: 1. AS/NZS 1170.0: 2002: Structural Design Actions – General Principles; 2. AS/NZS 1170.1: 2002: Structural Design Actions – Permanent, Imposed and Other Actions; and 3. AS/NZS 1170.2: 2002: Structural Design Actions – Wind Actions. 1. As I discuss below, much of the dispute between the parties can be resolved by reference to the proper construction of the Note to Table 3.2 in AS/NZS 1170.1: 2002. 2. The parties adopted very different positions on this question. 3. Mobis contended that if the design of the warehouse complied with the Standards, it must follow that its design was not faulty. 4. On the other hand, XL submitted that if the design was not the product of "prudent design and engineering judgment" it was thereby defective, whether or not it complied with the Standards. 5. What was common ground was that if the design did not comply with the Standards, it was faulty or defective. 6. Accordingly, I will turn first to that question. 7. Before turning to the Standards, I will refer to the Building Code of Australia ("BCA"). Building Code of Australia 1. At the relevant time, reg 98(1)(a) of the Environmental Planning and Assessment Regulation 2000 (NSW) stated that, as a condition of development consent for any development involving building work "the work must be carried out in accordance with the requirements of the [BCA]". 2. The BCA provided that, so far as concerns the structure of the building, the structure: 1. "is to withstand the combination of loads and other actions to which it may be reasonably subjected" (Pt BF1.1); and 2. must "remain stable and not collapse; and prevent progressive collapse…by resisting the actions to which it may reasonably be subjected" (Pt BP1.1). 1. The BCA contained "Deemed-to-Satisfy Provisions" the net effect of which is that if a building like the warehouse complied with, relevantly, AS/NZS 1170.1 and AS/NZS 1170.2, it was deemed to comply with the BCA (Pt B1.0, B1.1 and B1.2). AS/NZS 1170.0 1. Section 2 of this Standard dealt with "Structural Design Procedure". 2. Clause 2.1 provided that structural design for "ultimate limit states" must be carried out using the procedure in cl 2.2. 3. "Limit states" were defined in the Standard as "states beyond which the structure no longer satisfies the design criteria". "Ultimate limit states" were defined as "states associated with collapse, or with other similar forms of structural failure". Relevantly, this meant the strength of the structure. 4. Clause 2.2 of this Standard set out the procedure to be followed to "design for ultimate limit states". 5. Relevantly, those procedures included: "(b) Determine the…imposed…loads in accordance with AS/NZS 1170.1 (c) Determine the ultimate loads for wind…in accordance with AS/NZS 1170.2 … (i) Design and detail the structure in accordance with – (i) Section 6 for robustness…". 1. The Standard required that when calculating strength, the "design capacity" of the building as built must be equal to or exceed its "design action effect" (the load the Standard states that it must bear). 2. There was little difference between Mr Carolan and Mr Summers as to the first of these elements: the "design capacity" of the warehouse. What divided Mr Carolan and Mr Summers on this question was the second of those elements: the "design action effect": the load that the Standard requires the as built structure to bear. 3. The parties referred to the relationship between these two concepts as the "Utilisation Ratio". 4. It was common ground that, in order to comply with the Standard, the Utilisation Ratio must be less than or equal to 1. AS/NZS 1170.1 1. The manner in which imposed loads on roof structures such as that at the warehouse were at the relevant time to be calculated was set out in Pt 3.5 of AS/NZS 1170.1; in particular, by reference to Table 3.2 in that part. 2. Table 3.2 was in the following form: 1. The relevant part of Table 3.2 is that dealing with "other roofs (i) Structural elements". 2. The "structural elements" in question are the 78 beams forming the 26 internal frames of the warehouse as I described above. 3. Each of those beams supported more than 200 m2 of roof area. 4. Accordingly, Note 1 to Table 3.2 was engaged and required that those structural elements: "…shall be designed to support 0.25 kPa on the 200 m2 of the supported area that gives the worst effect". 1. Table 3.2 thus sets out the minimum "imposed action" that the "structural elements", (that is, the beams) must bear. 2. It was common ground that the "supported area that gives the worst effect" was the weakest part of the beam, namely, the mid-point. Mr Carolan and Mr Summers both adopted a rectangular area of 9.1 m by 22 m as the 200 m2 "worst effect" area. 3. The commentary to AS/NZS 1170.1 stated (at Pt C3.5.1): "The limit of 0.25 kPa in Table 3.2 is intended to cover situations not covered elsewhere in the loading Standards, such as stacking of materials for maintenance or for local accumulations of hail". 1. The matter that divided the parties was the proper construction of Table 3.2 and, in particular, Note 1. 2. XL contended that, on its proper construction, Table 3.2 required that all structural elements in the building of the kind referred to in the Table, relevantly the beams, be able simultaneously to sustain application of the 0.25 kPa pressure at their points of worst effect. That is, looking at the warehouse, that each beam be able simultaneously to withstand 0.25 kPa pressure, as depicted in the following diagram (in which the pink highlighting represents an example of the points at which pressure was to be applied): 1. If the construction of Note 1 for which XL contended is correct, the warehouse had a Utilisation Ratio of more than 1 (Mr Summers calculated it to be 1.03) and did not comply with the Standard. 2. Mobis contended that XL should not be permitted to advance this argument because, it was said, XL had not made clear (through the evidence of Mr Summers or otherwise) until final submissions that it wished to do so. In view of the conclusion to which I have come on the question of the proper construction of Note 1, it is not necessary for me to deal with this argument. 3. On the other hand, Mobis contended that, on its proper construction, Note 1 required only that each structural element (that is, relevantly, each beam) separately, be able to withstand that imposed action; as illustrated in the following diagram: 1. If Mobis's construction of Note 1 is correct, and subject to the "load shedding" point that I discuss below at [512] to [532], the warehouse had a Utilisation Ratio of less than 1 and complied with the Standard. 2. Mobis submitted that, properly understood, Mr Carolan's evidence was that, at the point where the collapse occurred, the Utilisation Ratio of the warehouse was well under 1: namely 0.86. 3. In his report of 21 October 2016, Mr Carolan said: "Using member loads from the elastic analysis with geometric non‑linearity, checks for code compliance show that all members are adequate for all load combinations. Detailed calculations are [sic] for the elements are shown below. Code Compliance factor is also displayed. 1. The figure that followed was in the following form: 1. As Mobis explained in its final submissions, this diagram shows that Mr Carolan performed six compliance checks on structural elements at different locations. The Utilisation Ratio of 0.99 was a result of a check performed on a beam on the second frame from the end of the warehouse: described as "Check 1" in the diagram. Mr Carolan calculated a lower Utilisation Ratio (0.86) from a check he did of a beam in the middle of the warehouse: at "Check 3". 2. Mr Carolan gave this evidence: "Q. Whether or not the structure complies, even using your interpretation of the way to apply the 0.25, it would be a close thing between you and him; correct? 0.99 on one hand, 1.03 on the other? A. Yes, 4 per cent difference, yes. Close." 1. Mr Carolan was not asked to identify which area of the structure his Utilisation Ratio of 0.99 related to. However, it is apparent from Mr Carolan's diagram that, as I have said, he calculated that Utilisation Ratio in relation to the second frame from the end (Mr Carolan's "Check 1"). 2. It is common ground that the three end frames on both the western and eastern ends of the warehouse are not "typical" frames. They are designed differently from the rest of the warehouse. They are more heavily braced to withstand lateral wind loads and include thicker and heavier rafter beams. 3. Mr Carolan and Mr Summers agreed that the end frames were not the cause of the collapse. They agreed, and this was in any event apparent from the CCTV footage shown during evidence, that the collapse initiated near the loading dock in the northern span of one or more of the middle frames of the warehouse. The collapse then spread out towards the eastern and western edges of the structure. 4. Mr Carolan illustrated the location of the actual collapse in a diagram he included in his report of 19 February 2016. 5. In final submissions, Mobis produced a marked up version of that diagram showing (in yellow) the frame tested in Mr Carolan's "Check 1" that produced the Utilisation Ratio of 0.99. 6. That diagram follows: 1. The Utilisation Ratio of 0.99 for "Check 1" was the highest Utilisation Ratio that Mr Carolan calculated for the structure. However, as Mobis submitted, the relevant Utilisation Ratio for present purposes is the one Mr Carolan produced at "Check 3" – that is, 0.86, which is the highest Utilisation Ratio for the relevant part of the structure. The proper construction of Note 1 1. I am persuaded that Mobis's construction of Note 1 is correct. This is for a number of reasons. 2. First, as a matter of language, Note 1 to Table 3.2 directs attention to the pressure that each of the "structural elements" in a roof must withstand and identifies the pressure that that element must bear. The Table does not, in terms, call for multiple spans of the roof to be simultaneously loaded. 3. "Structural element" is defined in cl 1.4.20 of AS/NZS 1170.0 as a "physically distinguishable part of a structure, for example, wall, column, beam, connection". 4. As Mobis submitted, the term does not refer to types of elements collectively, but to each physically distinguishable part individually. 5. In this case, the "structural elements" are the rafters or beams depicted in "Figure 4" at [408] above and described at [468] above. 6. Note 2 to Table 3.2 (which explains the meaning of "A" in the formula referred to in the body of Table 3.2 (1.8/A + 0.12)) refers to "the" member under analysis, suggesting (as Mobis submitted) that Table 3.2 contemplates that the 0.25 kPa is to be applied to one member (or structural element) at a time. 7. Note 1 calls for each structural element to be designed to support "the" 200 m2 of "the" supported area that gives the worst effect; suggesting again, that one structural element at a time is to be considered. 8. Those factors point to the correctness of Mobis's construction. 9. There was controversy between the parties as to what light an earlier provision of the Standard cast on the proper construction of Note 1. 10. That earlier provision dealt with "Partial Load" and was in the following terms: "3.3 PARTIAL LOAD The imposed action shall be considered to be absent from any parts of a structure if its absence will cause more adverse effects on that or any other part. For floor loads, the intensity of the imposed load shall be appropriate to the loaded portion of the area under consideration (see Clause 3.4.2). For design situations involving wind, earthquake or fire emergency conditions, partial loading of alternate spans of continuous beams or slabs need not be considered. For partial loading on continuous beams, the span (or two adjacent spans) that contains the effect under consideration shall be loaded with an imposed load intensity, as determined from Clause 3.4.2, appropriate to the tributary area supported by the span (or spans). Other spans that are required to be loaded to cause the most adverse effect shall be assumed to be loaded with a load intensity appropriate to the span multiplied by the long-term factor (Ψl) given in AS/NZS 1170.0." 1. It is common ground that although the balance of cl 3.3 concerns imposed actions on floors (that is, not roofs), the first sentence is of general application, including to roofs. 2. The first sentence states that imposed actions shall be considered "to be absent" (that is, they are not to be taken into account) from any parts of the structure if such "absence" would cause "more adverse effects" on "that or any other part". 3. The wording is awkward, but I read it to mean that if there would be a "more adverse" effect on any part of a structure were the imposed actions not to be applied to a particular part of the structure, then consideration of the building's ability to withstand the imposed action (that is, its strength) must be considered in that context. 4. This is how Mr Carolan, who is deeply experienced in this area, understood the provision. His evidence was that this sentence was concerned with the "absence" of imposed actions and simply required the designer to "apply either the live load or not [apply] the live load, whichever produced the worst effect". 5. There is no suggestion in the evidence that, for the beams in the Mobis warehouse, the absence of a live load would cause a worse effect than the presence of a live load. 6. The position may be different in a differently designed structure. For example, Mobis suggested that on a cantilevered rafter, the absence of the live load could have a worse effect on the rafter than the presence of a live load, because the live load could act as a counterweight to the dead load of the cantilevered section. However that may be, I do not see anything in the first sentence of cl 3.3 which casts light on the proper construction of Note 1 to Table 3.2. 7. I accept Mobis's submission that nothing in cl 3.3 purports to: 1. modify the way in which values for the imposed actions are to be determined (for roofs, in accordance with Table 3.2); or 2. require that additional load must be imposed on the structure beyond the requirements of Table 3.2. 1. Further, as Mobis pointed out, in the case of floors, the Standard states in terms that loading of multiple spans is required: see the third paragraph in cl 3.3 (commencing with "[f]or partial loading on continuous beams"). 2. As Mobis submitted, the specific stipulation that spans supporting floors be subjected to multiple loading, and the absence of such a specific stipulation in the case of roofs, suggests that the drafters of the Standard did not intend such a requirement in the case of roofs. 3. For all those reasons, my conclusion is that the construction of Note 1 for which Mobis contended is to be preferred. What is required, in my opinion, is that each beam, separately, be able to support 0.25 kPa on the 200 m2 of supported area that gives the worst effect. Load shedding to adjacent beams 1. XL submitted that even if the Standard was to be construed this way, the warehouse's compliance with the Standard depended on: "a. [W]hether, in checking for compliance with AS 1170.1, it is permissible to shed load to the adjacent rafters; and b. if it is permissible to shed load, the extent to which it is permissible to shed load (i.e. whether it is permissible to shed 25% of the load)." 1. The point arises this way. 2. In applying the load specified in the Note to Table 3.2, Mr Carolan attributed approximately 75% of the load to the beam in question and assumed that the balance of the load was shed, equally, to the adjacent beams through the purlins (which, as I have said, connected the beams from east to west throughout the warehouse: see [412] above). 3. Thus, Mr Carolan applied the load as depicted below: 1. XL accepted that, if that was the correct way to proceed, the beams complied with the Standard. 2. On the other hand, Mr Summers applied the whole of the load specified in the Note to Table 3.2 (as a "line load") to the beam itself, as illustrated in this diagram: 1. If that is the correct way to proceed, the beams do not comply with the Standard. 2. However, I do not accept that the Standard requires the course taken by Mr Summers. 3. Note 1 to Table 3.2 requires that the beam support the 0.25 kPa pressure on the 200 m2 of the roof area that which gives the worst effect. That is, the Note requires that the beam support such a load over the whole of that area and thus calls for the force to be uniformly distributed over that area. 4. In my opinion, as there are purlins between each of the beams, which purlins span some 20 spans, the course adopted by Mr Carolan responds to the requirements of Note 1 to Table 3.2, as it has the effect of simulating uniform distribution of the load as required by the Note. 5. In his report of 21 October 2016, Mr Carolan included Fig A9.2 as follows: 1. This figure was included in an appendix to Mr Carolan's report headed "Structural Calculations to Check Compliance with Australian Standards". 2. In cross-examination, Mr Carolan said that "we've done our own calculation to verify the 75 per cent on the centre rafter". 3. Mr Carolan described that what he had done was an "elastic analysis" using "Strand7" (a computer program). Mr Carolan said: "The model comprises all structural elements and purlins. The purlins are pinned and provide lateral restraint to the rafters. Loads are applied as line loads along the rafter." 1. Although this may not be obvious to a lay observer, Figure A9.2 shows that in his modelling, Mr Carolan applied 75.24% of the 0.25 kPa load called for by Note 1 to the beam in question, and 12.32% to each adjacent rafter. 2. In his report of 18 June 2017, Mr Carolan said: "My views on the application of roof support are described in [my 21 October 2016] report. The live load of 0.25 kPa over 200 m2 should be applied as a pressure on the roof surface. When applied this way, some of the live load (about 25 per cent) gets distributed via the purlins to the adjacent rafters as shown in [Figure 1 as set out at [515] above]". 1. In cross-examination it was put to Mr Carolan that: 1. the 75% figure was based on the purlins being simply supported; 2. the roof purlins in fact overlap; 3. the purlins therefore "should be treated as continuous spans rather than simple spans"; and 4. Mr Carolan "should have considered 89 per cent should be applied to the beam". 1. Mr Carolan's evidence in response was that: 1. "[w]e have, in terms of the purlins, the purlins are spanning many more than two spans, 20 or more spans, so that's one point I would make"; 2. "I understand that the purlins overlap…it is standard practice in Australia and that's what we base our calculations on"; 3. "the 89% figure postulated…is incorrect because it is: based…on a two-span situation, which is not what we have. …the purlins are spanning many more than two spans, 20 or more spans"; and 4. "a two span situation will produce a worse effect than a four-, five-, or six-span situation". 1. Mr Summers's evidence was that he did not model the purlins. 2. The only evidence before me as to what proportion of the load on the beam would be shared to adjacent purlins is that of Mr Carolan. Such challenge as was made to Mr Carolan's calculations in the cross-examination to which I have referred, does not persuade me that Mr Carolan's calculations are not correct. 3. Accordingly, my conclusion is that, in checking for compliance with AS/NZS 1170.1, it is appropriate to take account of the shedding of load through the purlins to the adjacent beams, and I accept Mr Carolan's opinion that some 25% of the load should be so shed. Is there a "robustness" requirement in the Standards? 1. As I have discussed, cl 2.2 of AS/NZS 1170.0 provided that "ultimate limit states" for imposed loads (such as hail) are to be determined in accordance with AS/NZS 1170.1 (relevantly, in accordance with Table 3.2: see the discussion above) and for wind loads, in accordance with AS/NZS 1170.2 (see below from [552] to [592]). 2. Clause 2.2(i) also provided that: "Design for ultimate limit states shall be carried out by the following procedure: … (i) Design and detail the structure in accordance with – (i) Section 6 for robustness". 1. "Structural robustness" was defined at cl 1.4.21 of the AS/NZS 1170.0 as the: "Ability of a structure to withstand events like fire, explosion, impact or consequences of human errors, without being damaged to an extent disproportionate to the original cause". [Emphasis added] 1. Part 6.1 and 6.2 of the Standard provided, under the heading "Structural Robustness": "6.1 GENERAL General detailing of components of the structural force-resisting system and of other components shall be in accordance with this Section. Structures shall be detailed such that all parts of the structure shall be tied together both in the horizontal and the vertical planes so that the structure can withstand an event without being damaged to an extent disproportionate to that event. Clause 6.2 is deemed to satisfy this Clause. 6.2 LOAD PATHS 6.2.1 General The design of the structure shall provide load paths to the foundations for forces generated by all types of actions from all parts of the structure, including structural and non-structural components. The minimum actions shall be as given in Clauses 6.2.2 to 6.2.5." [Emphasis added] 1. Thus, the notion of "robustness" in the Standard was concerned with the "detailing" of the structure (including the provision of "load paths") so as to ensure that the damage sustained to the structure following the event that causes that damage (in this case, hail) is not "disproportionate" to that event. 2. Clause 2.2(i) required that both the "design and detail" of the structure achieve this object. 3. The question of "robustness" was dealt with further in the Supplement (or Commentary) to AS/NZS 1170.0 (AS/NZS 1170.0 Supp 1:2002). 4. It stated (at C1.1): "The general principles given in the Standard are relevant to the design of any structure. However, the information may not be sufficient for some structure types because their design is more complex (due to the inherent behaviour of the structure) or involves loadings that are not covered (type of action or load case), or other Standards give design criteria. Structures and structural elements should be designed so that they are suited for their intended use during the design working life. ISO 2394 states the following: 'In particular, they shall fulfil, with appropriate degrees of reliability, the following objectives: (a) They shall perform adequately under all expected actions. (b) They shall withstand both extreme actions and frequently repeated actions occurring during their construction and anticipated use. (c) They shall have structural robustness.' These three objectives enunciate the serviceability, ultimate and fatigue, and progressive collapse (structural robustness) aspects of design." [Emphasis added] 1. Section C6.1 of the Commentary dealt further with "Structural Robustness" and states: "C6.1 GENERAL A structure should be designed and constructed in such a way that it will not be damaged by events like fire, explosion, impact or consequences of human errors, to an extent disproportionate to the original cause. The potential damage may be avoided or limited by use of the following: (a) Avoiding, eliminating or reducing the hazards which the structure may sustain. (b) Selecting a structural form that has a low sensitivity to the hazards considered. (c) Selecting a structural form and design that can survive adequately the accidental removal of an individual element or a limited part of the structure or the occurrence of acceptable localised damage. (d) Avoiding as far as possible structural systems that may collapse without warning. The design should provide alternate load paths so that the damage is absorbed and sufficient local strength to resist failure of critical members so that major collapse is averted. The materials design Standards usually contain implicit consideration of resistance to local collapse by including such provisions as minimum levels of strength, continuity, and ductility. Connections for example should be designed to be ductile and have capacity for large deformation and energy absorption under the effect of abnormal conditions. C6.2 LOAD PATHS C6.2.1 General The existence of load paths in the structure will provide a measure of robustness to the structure." [Emphasis added] 1. I accept Mobis's submission that the Supplement or Commentary to AS/NZS 1170.0:2002 cannot enlarge the requirements of that Standard. But the Supplement emphasised the need for a structure to be designed so that it did not respond disproportionately to an event causing damage and gave examples of how that might be achieved: for example, a design that caused the structure to collapse progressively (C1.1); and not collapse without warning (C6.1(d)); and not be sensitive to the "hazards considered" (C6.1(b)). 2. Mr Carolan agreed that the warehouse was sensitive to hail damage. Thus, he gave this evidence (in response to questions from me): "Q. I think yesterday you told me, tell me if I have got this right, that you agreed that a building with a large flat roof with only two rows of columns would have a high sensitivity to a hail hazard; is that correct? A. That's what I said yesterday, I believe, your Honour, yes. Q. I think Mr Marshall's proposition is that such a structural form would not have a low sensitivity to a hail hazard. What do you say about that? A. I would agree with that." 1. Mr Carolan made no separate analysis in his reports of the "robustness" of the building. His analysis was directed to whether the building could withstand imposed loads (see above) and wind loads (see below). 2. The warehouse did collapse very suddenly. Rain and hail fell during the periods to which I have referred. Within a number of minutes after the hail ceased, the load on the warehouse reached the collapse load. Thereafter, the warehouse collapsed in approximately 15 seconds. Mr Carolan described what happened as an "un-zippering" effect. One beam failed and then, virtually immediately, many others followed. 3. This was revealed in the vision from CCTV within the warehouse. Mr Carolan said that, had he been in the warehouse at the time, he (with his expert eye) would have been able to detect some deflection in the beams before the moment of collapse. 4. However, after the relevant vision was displayed in Court, Mr Carolan gave this evidence in response to questions from me: "Q. But before this moment, when the collapse is occurring obviously to the east – A. Yes. Q. -- I couldn't see any deflection in any other structural member? A. I couldn't either, your Honour, and I think it's some distance in that view before you are able to see any of the rafters. I think, given the quality of that video, I'd say that, in my view, it's impossible, in that view, to see rafter deflection happening appreciably before the collapse occurred. Q. In the far background where the collapse is occurring, are they a number of rafters falling, or is it – A. They are. They are. And they are all - the one that's about to hit the floor is – Q. The furthest away? A. Is the one that started it all and it's taking its neighbours down with it." 1. Thus, the warehouse did not collapse progressively; and it did collapse without any, or any great, warning. 2. However, in final submissions, my attention was not directed to any evidence which showed that the design or "detailing" of the warehouse was what led to the "un-zippering" phenomenon; nor to any respect in which there was a shortcoming in the manner in which the structure of the warehouse was "tied together both in horizontal and vertical planes" (see [536] above); nor to any shortcoming in the provision of "load paths to the foundations" of the warehouse (see [536] above), such as would suggest that the design of the warehouse was not "robust". 3. Nor was my attention directed to any evidence showing what damage to the warehouse would have been "proportionate" to the hail load; or to contrast the damage which did occur with the damage that would have occurred had the detailing of its design and the provision of load paths been different. 4. In those circumstances, I am not persuaded that the design of the warehouse failed to achieve the requisite "robustness" or that the collapse of the warehouse was caused by any such short coming in the design. The Wind Standard Is it relevant? 1. Clause 2.2(c) of AS/NZS 1170.0:2002 requires that the ultimate limit states for a structural design to comply with wind loads are as specified in AS/NZS 1170.2 (which I call "the Wind Standard"). 2. The Design Exclusion, construed as I have set out above, is enlivened only if the damage to the warehouse was caused by its faulty design. 3. There is no suggestion that wind caused the warehouse collapse. There was very little wind on the day of collapse. 4. There is thus no suggestion that any failure of the warehouse to comply with the Wind Standard itself led to the collapse. 5. However, XL contended that had the warehouse been designed to comply with three particular requirements of the Wind Standard, it would have been sufficiently strong to withstand the weather events of 25 April 2015. 6. Mr Summers identified those three requirements as relating to: 1. the width of roof vent throats; 2. assumptions as to surrounding terrain; and 3. assumptions as to the number of doors left open from time to time. 1. However, it does not necessarily follow that, had the warehouse been designed to satisfy what Mr Summers said were the wind standard requirements in these three respects, it would not have collapsed. 2. As Mobis submitted: "…Mr Summers assumed, without expressly saying so, that a building able to withstand stronger wind actions would have been more strongly built… Mr Summers did not, however, specify how that hypothetical building would have been constructed and in what way it would have been built more strongly. Nor did he give any evidence as to why that building would not have been damaged in the storm on 25 April 2015… XL's evidence falls short of proving that any part of Mobis' loss was caused by or consisted of faulty or defective design due to a failure to comply with the wind Standard. XL made no effort to prove that the warehouse would not have collapsed if it had been better able to withstand a windstorm which did not occur." 1. In any event, for the reasons that follow, I am not satisfied that XL has proved that the warehouse failed to comply with the Wind Standard. Did the design comply with the Wind Standard? Ridge vent throat width 1. The warehouse had ridge vents along the ridge line. 2. Ridge vents have throats to allow the passage of air and thus contribute to the equalisation of air pressure within and without the warehouse. 3. What divided Mr Carolan and Mr Summers was the assumption that should be made as to the width of the ridge vent throat in the warehouse as constructed. 4. Mr Carolan assumed such width to be 1000 mm and that the ridge vent had an efficiency of 35%. 5. On the other hand, Mr Summers, by reference to a photograph of the ridge vent taken from the floor of the warehouse, calculated the width of the vent to be 900 mm. 6. I do not consider I need to come to any conclusion as to which of these was correct. 7. That is because Mobis's General Manager, Warehouse and Logistics, Mr Malcolm Stoddart (to whom I refer later when discussing quantum) gave evidence that, in addition to the roof vents (and no matter how wide their throats were), there were venting devices in the southern wall of the warehouse. 8. Neither Mr Carolan nor Mr Summers took these vents into account. 9. In cross-examination, Mr Summers accepted that the Wind Standard permitted the use of other design alternatives, such as a venting device, to make a structure comply. He said that "adding vents changes everything" and that adding vents "would change the whole functionality of the building". 10. It was for XL to show that the warehouse design did not comply with the Wind Standard. As Mr Summers did not address what effect the vents in the southern wall had on the capacity of the warehouse to bear wind loads, I am not persuaded that the ridge vent width bespoke a want of compliance with the Standard. Terrain 1. The terrain category in the Wind Standard is relevant to assumptions made by the designer as to the force of wind on the structure. 2. There was no dispute between Mr Carolan and Mr Summers as to the kind of terrain categories that the warehouse designer should take into account. 3. The matter that divided Mr Carolan and Mr Summers was as to what terrain the warehouse designer should assume for the purpose of considering winds coming from the south. 4. In cross-examination, Mr Summers said that "the terrain category is the most subjective issue that one faces as a designer and when designing for wind loads". 5. Ultimately he gave this evidence in response to questions from me: "Q. Is the choice between [Terrain Category] 3 and [Terrain Category] 2.5, a matter about which engineering minds could reasonably differ? A. Absolutely, your Honour." 1. In light of that evidence, I accept the following submission from Mobis: "At the very least, Mr Carolan's assessment that the use of terrain category 3 for winds from the south was appropriate was [sic] a reasonable one that a component and experienced engineer could have adopted and implement". 1. In those circumstances, I am not satisfied that XL has established that the warehouse design did not comply with this aspect of the Wind Standard. Doors 1. The issue here is as to the assumption a designer of a structure should make as to which doors would be open when a wind event occurred. 2. Mr Carolan contended that a reasonable assumption for a designer to make was that 50% of the doors would be open when a wind event occurred. 3. In his first report, Mr Summers performed his calculations assuming that no doors were left open. 4. In his final report, Mr Summers assumed that all doors were left open. 5. Argument before me proceeded upon the basis that, all other things being equal, adoption of Mr Carolan's assumption would have caused the design of the warehouse to have a Utilisation Ratio which was (just) under 1. 6. It was for XL to show that the assumption that Mr Carolan made was not reasonable. 7. The Commentary to the Wind Standard is set out at C5.3.1 and provides: "In determining the most critical loading condition, the designer may use his discretion as to which opening can be relied upon to be closed, with closures capable of withstanding peak wind forces, at the critical loading conditions. Possible debris effects may also require attention." 1. In one of his reports, Mr Carolan stated: "It is reasonable to expect that all doors would be closed when the warehouse is not operating and most doors would be closed when a high wind is expected. In our calculation of internal wind pressures we have assumed that the doors on the north face are half open and half closed." 1. Later in his report, he continued: "The building has doors primarily on the north face. As a secure facility doors on the other walls are for emergency exit and normally closed. It is also expected that all doors may be closed when a high wind is expected. The north face doors appear, in CCTV footage, to be all shut at the time of the collapse (around 3.50pm on a public holiday weekend) so it can be assumed that they generally all shut outside normal work hours (i.e. 2/3 of the time). It is assumed for calculations that the doors on north side will be half open and half closed during a wind event." 1. In a later report Mr Carolan said: "The Mobis facility is a secure facility. It was built to house motor vehicle spare parts. The designer could therefore reasonable assume that most of the time, the doors to the warehouse would not only be shut, but locked. It is reasonable to allow for the loading doors to be open during operating house. After operating hours, all doors could be expected to be shut and locked. It is appropriate to allow for human error, namely that a door could be accidentally left open. But it is improbable that all doors of a facility like this would be left open in error and that such an error would happen at the same time as a 1 in 500 year wind. Therefore, in my view, allowing for 50% of the doors to be left open is a reasonable assumption, and in my view, is on the conservative side and consistent with the intent of AS 1170.2 as explained in clause C5.3.1 of the Commentary." 1. I accept Mobis's submissions that the assumption Mr Carolan made was, in all the circumstances, conservative. It is true that the warehouse had a design life of many decades and that Mobis might in the future be replaced by another occupier. Nonetheless, the warehouse was purpose designed, and unlikely to be used for anything else other than as a warehouse. That points to the reasonableness of Mr Carolan's assumption. 2. On the other hand, Mr Summers's assumption was that all doors would be open, even during a windstorm. He justified this assumption by saying that: "…the structure would have to withstand a situation where the doors were inadvertently left open as a result of human error". 1. That appears to me to be a very unlikely circumstance and one that would not be reasonable for a designer to contemplate. 2. Overall, I am not persuaded that the assumption that Mr Carolan said a reasonable designer should adopt was not, itself, reasonable. Conclusion concerning the Wind Standard 1. For those reasons, my conclusions are that XL has failed to show that: any failure of the design of the warehouse to comply with the Wind Standard caused the warehouse collapse and thus enlivened the Design Exclusion; or that the design of the warehouse did not comply with the Wind Standard. Conclusion as to compliance with the Standards 1. For those reasons, I am not satisfied that the design of the warehouse failed to comply with the relevant Standards or that the design of the warehouse was for that reason "faulty". Was the warehouse faulty even if it complied with the Standards? 1. The question which then arises is whether XL has shown that the design of the warehouse was, nonetheless, faulty. 2. The authorities to which I have referred have held that a design is faulty if it: 1. does not work because at the time of designing insufficient is known about the problems involved and their solution to achieve a successful outcome (Manufacturers' Mutual at [437] above); 2. is not up to a required standard (Manufacturers' Mutual at [438] above); or 3. is not as adequate for the purpose for which it was designed as art or skill can make it (Chalmers Leask at [439] above). 1. Further, the appropriateness of the design must be measured against the purpose for which it was intended to be used (AXA at [441] above). 2. Manufacturers' Mutual was concerned with the design of a railway bridge, Chalmers Leask with the design of a cofferdam and AXA with a child's toy. 3. None of those cases addressed a circumstances where, as here, there were detailed standards specifying what the design must achieve. 4. The parties to the Local Policy agreed that Mobis would have no cover for the warehouse if it was damaged by reason of "its own faulty or defective design". 5. In my opinion, reasonable business people in the position of the parties would have understood the words "faulty or defective design" to refer to a design which was (to adopt the language of Windeyer J in Manufactures' Mutual) "not up to a required standard". 6. In this case, that standard was that required by the BCA and thus AS/NZS 1170.0, 1170.1 and 1170.2. 7. XL has failed to show that the design of the warehouse did not comply with those Standards. 8. Mr Summers expressed the opinion that the design of the warehouse was not "prudent" for various reasons. 9. Whether or not the design was or was not "prudent", it has not been shown to be "not up to [the] required standard". Conclusion as to the Faulty Design Exclusion 1. For those reasons, my conclusion is that XL has failed to establish that the Faulty Design Exclusion has been enlivened. Mobis is thus entitled to indemnity under the Local Policy 1. For these reasons, and subject to questions of quantum, Mobis is entitled to indemnity under the Local Policy. 2. Accordingly, the question of whether Mobis would be entitled to indemnity under the Master Policy does not arise and a number of issues, which occupied time during the hearing, are now moot. 3. However, in deference to the detailed submissions of the parties, I shall deal with a number of them. Master Policy – the Faulty Construction Exclusion 1. The first of those issues is that arising under the Faulty Construction Exclusion. 2. Article 6.3(j) of the Master Policy provided that the policy did not cover loss or damage: "[D]ue to subsidence, poor building land, faulty building construction, earth-moving operations by cracking, sinking, settling, shrinking or expansion of buildings or building units, especially foundations, walls, floors and ceilings. Consequential losses or damages to other insured property are insured". 1. The article raises issues similar to, but not the same as those which arise under the Faulty Design Exclusion. 2. Article 6.3(j) of the Master Policy directs attention to the "construction" of the building and not its design. 3. I accept Mobis's submission that the expression "faulty building construction" is apt to encompass a process by which a building is constructed – essentially workmanship – but not apt to cover the design itself. 4. There is no suggestion that there was any deficiency in the manner in which the warehouse was constructed. 5. If the parties to the Master Policy had intended that Art 6.3(j) apply in cases of faulty design, it would have been very easy for them to say so (as did the parties to the Local Policy). 6. I see no reason to give the word "construction" in this article anything other than its ordinary meaning. 7. It follows that assuming Mobis had a claim under the Master Policy, it would not have been excluded by this article. The Master Policy – the Overlap Clause 1. Had I been persuaded to rectify the Local Policy to include the Hail Limit, it would have followed from that conclusion and from my conclusion that the proximate cause of the collapse was hail that Mobis had no further entitlement to indemnity under the Local Policy (as XL has paid Mobis an amount equal to what the Hail Limit would have been). 2. The question would then have arisen as to whether, by reason of the DIL/DIC clause in the Master Policy, Mobis could have claimed indemnity under the Master Policy, notwithstanding the existence of the Hail Limit in that policy. 3. In that event, a question would have arisen as to the proper construction of the Overlap Clause: Art 3.1.8. 4. Mobis submitted that Art 3.1.8 had the effect that had it been necessary for it to make a claim under the Master Policy, it would have been entitled to indemnity up to the storm limit (EUR 50 million), notwithstanding the EUR 10 million Hail Limit. 5. For the following reasons, I do not accept that submission. 6. Article 3.1.8 of the Master Policy provided: "Maximum Indemnities and Deductibles In accordance with Arts 2 and 10.4 In the event of an overlap between different limits of liability and deductibles, the highest of the agreed amounts shall apply. The different limits of liability cannot be accumulated. The limits of liability agreed in this Policy (in particular the annual aggregate limits) under Art 2 apply combined for all companies insured under this Master Policy and any local policies. In the case of the exhaustion of an annual aggregate limit, any indemnity payments made under this Policy shall be repaid by the Policyholder named in this Policy to ensure that no more than the agreed annual aggregate limit is paid by the Insurer. The Policyholder named in this Policy shall pay the corresponding amount to the Insurer within four weeks of receipt of the request for payment." 1. The first sentence of the article refers to Arts 2 and 10.4 of the Master Policy. 2. Article 2 set out the "Limits of Liability and Deductibles" (including the limits as set out at [46] above). 3. Article 10.4 was in the following terms: "Deductibles The deductibles agreed in this Policy shall be deducted from the insured loss and before application of the agreed limit of liability. If different items of property, costs, earnings and/or several insured locations are affected by the same loss event, the deductible shall be deducted from the total loss only once. The deductibles set out in this Master Policy do not apply to losses covered by the local policies, unless the local deductible is lower than the programme deductible of this Policy. In this case, the difference shall be deducted in addition. The following principle applies: no double application of deductibles." 1. Article 3.1.8 provided a mechanism for resolving any "overlap" between different limits of liability and different deductibles and provided that, in the event of such an overlap, the highest limit applied. 2. The issue on which the parties were divided was as to whether the mechanism was directed to overlaps within the Master Policy (as Mobis contended) or overlaps between the Master Policy and the Local Policy (as XL and UNIQA contended). 3. Article 5.2 of the Master Policy (the "DIL/DIC clause" (see [211] above)) contemplated that there may be wider cover under the Master Policy than under the Local Policy for a particular peril and that in that event, the Master Policy "shall provide additional cover over and above the indemnities under the local policies". 4. The Master Policy thus contemplated that Mobis might make a claim under the Master Policy for a peril which was also insured under the Local Policy (to take advantage of the wider cover offered under the Master Policy for that peril). 5. In those circumstances, there might have been an overlap between the deductibles and limits of liability in each policy. 6. The first paragraph in Art 3.1.8 of the Master Policy stated that, what followed, was: "In accordance with Arts. 2 and 10.4". 1. The third paragraph of Art 10.4 dealt with the circumstances in which there was an overlap between deductibles under the Local Policy and the Master Policy. 2. That paragraph had the effect that if Mobis made a claim under the Master Policy for a peril also covered by the Local Policy: 1. if the deductible for that peril under the Local Policy was lower than the deductible for that peril under the Master Policy then, for the purposes of the claim being made under the Master Policy, there was to be added to the deductible under the Master Policy "the difference" between the deductibles which "shall be deducted in addition"; with the effect that the deductible under the Master Policy would become the sum of the two deductibles; and 2. if the deductible under the Local Policy was the same as, or more than the deductible under the Master Policy, then the deductible under the Master Policy did "not apply" so that the deductible under the Local Policy prevailed and there was "no double application of deductibles". 1. Thus, that paragraph of Art 10.4 set out the rules to be applied when there was a claim made under both the Local Policy and the Master Policy and there was an overlap in deductibles. 2. That suggests that the parties intended that Art 3.1.8 deal with overlaps in deductibles between the two policies. Why else would Art 3.1.8 state that its contents were "in accordance with" Art 10.4? 3. The first paragraph of Art 3.1.8 also stated that that paragraph is to be "in accordance with" Art 2 of the Master Policy. 4. Article 2 of the Master Policy set out limits of liability, but also the deductibles under the Master Policy. 5. For "property damage" those deductibles were as follows: Perils Property Damage & Business Interruption combined Property Damage Business Interruption General deductible for all locations €25,000,000 3 days, min. €100,000,000 Fire, Lightning, Explosion, Aircraft impact (Flexa) for Italian branch office only €250,000,000 3 days, min. €100,000,000 Theft, vandalism €10,000,000 3 days, min. €100,000,000 Machinery Breakdown €25,000,000 Not insured Inland Transit/Goods in Transit €25,000,000 Not insured All other losses €25,000,000 3 days, min. €100,000,000 1. Thus, there was a deductible of EUR 25 million as a "general deductible for all locations" and a deductible of EUR 10 million for theft and vandalism. 2. As UNIQA pointed out in final submissions, if, as Mobis contends, the second paragraph of Art 3.1.8 was directed to overlapping deductibles within the Master Policy (and directed that the higher deductible apply) then, as the "general deductible for all locations" was EUR 25 million, and was thus higher than the EUR 10 million deductible for theft and vandalism, the latter would never apply. It is unlikely that the parties intended this result. 3. This suggests, strongly in my view, that the parties intended that the second paragraph of Art 3.1.8 deal with any overlap in deductibles between the Master Policy and the Local Policy (and not any overlap of deductibles within the Master Policy). 4. If the parties intended that this paragraph deal with overlaps in deductibles between the Master Policy and the Local Policy, they must also have intended that the clause govern an overlap between limits of liability between those two policies. 5. It is true, as Mobis pointed out, that the third paragraph of Art 3.1.8 (which deals with aggregate limits of liability) made particular reference to "local policies", whereas the second paragraph of Art 3.1.8 did not. 6. However, in my opinion, the second paragraph of Art 3.1.8 must be read in light of the first paragraph which, as I have said, made particular reference to Art 10.4 and states that what follows is to be "in accordance" with that paragraph. 7. For those reasons, I am persuaded that XL's construction of Art 3.1.8 is correct. 8. It follows that Mobis's position under the Master Policy would be no better than under the Local Policy, assuming it were rectified to include the Hail Limit. UNIQA issues 1. UNIQA contended that, in any event, it had no liability to Mobis under the Master Policy. 2. In light of my conclusions thus far, the question of what UNIQA's liability to Mobis is under the Master Policy, all other things being equal, does not arise. 3. Nonetheless, in deference to the detailed submissions put by Mobis and UNIQA on the question, I shall deal with it. The Master Policy 1. UNIQA is a Lichtenstein insurer. 2. When the Master Policy was first written in July 2010, XL was the only insurer. XL continued as the only insurer for the years ended 23 June 2012, 2013 and 2014. 3. UNIQA and AIG became insurers under the Master Policy for the year ended 23 June 2015, with participations of 20% and 30% respectively. 4. At all relevant times the "Policyholder" named in the Master Policy was Mobis Slovakia. 5. Mobis Slovakia is a sister company to Mobis; they are both wholly owned subsidiaries of Mobis Korea. 6. Mobis did not execute the Master Policy although, as discussed below, it is included in a "List of Insured Companies". Is Mobis an "insured" under the Master Policy? 1. UNIQA contends that, on the proper construction of the Master Policy, Mobis is not an "Insured Company". 2. I do not agree. In my opinion, Mobis is an "Insured Company" under the Master Policy. 3. There is no insuring clause in the Master Policy of the kind found in the Local Policy. 4. The Master Policy refers to both the "Policyholder" (Mobis Slovakia) and to "Insured Companies", one of which is Mobis. 5. The critical provisions were Arts 4.1 and 5.1 which, relevantly, were in the following terms: "4 Insured Companies 4.1 General Provision This Policy covers the Policyholder, its subsidiaries and companies in which it holds participations. The Insured Companies form a financial entity with central management. The Policyholder directly or indirectly holds at least 50% of the voting share capital and/or has management responsibility. In the absence of any special agreement to the contrary, insurance cover of the Insured Companies in question shall cease upon failure to comply with these provisions. The Policyholder shall provide a list of all companies insured as per the expiry date, which forms an integral component of this Policy. 4.2 List of Insured Companies Insured Companies / Risk Locations … [Mobis Slovakia] EuroPass Policy (FoS) – Certificate / Invoice for each company: ... [8 European Mobis companies named] … Local Policies: … [Mobis United Arab Emirates company named] Australia MOBIS PARTS AUSTRALIA Pty. Ltd. 77 Peter Brock Drive Eastern Creek NSW 2766 Australia Risk Locations: 77 Peter Brock Drive, Eastern Creek NSW 2766 Australia 13-39 Pilbara St, Amcap warehouse, WA 6986 Welshpool, Australia … 5 Function of this Insurance Programme 5.1 Cover Principle This Master Policy is issued as part of an international property and business interruption insurance programme. The local policies form an integral part of the programme. Insurance cover under this Master Policy (e.g. Difference in Limits and Difference in Conditions) is provided subject to the registration of the Insured Companies, or such companies for which the Policyholder is insured, with and [sic] acceptance by the Leading Insurer (see also Art. 4 Insured Companies). (Reference to automatic extension of cover). Cover is granted under this Master Policy to the foreign companies included thereunder only if permitted by the relevant laws and regulations applicable to any one or more of the parties to the Master Policy and to the parties involved in the conclusion of the Policy; it shall neither be granted in favour of foreign companies if impermissible under the relevant laws and regulations applicable to the foreign companies, Insurer and broker nor if it has been rendered impermissible during the term of the Policy under the circumstances of the conclusion of the Policy in particular. If local policies have been issued for the companies participating in the programme and if other insurers are involved, this Master Policy is valid only insofar as the Leading Insurer or an insurer appointed thereby is participating locally and/or the share insured with a third-party insurer is reinsured with the Leading Insurer. These regulations may be subject to special agreements." 1. Article 5.1 dealt with the "Function of this Insurance Programme" and the "Cover Principle" of the policy. 2. The first paragraph of Art 5.1 recited that the Master Policy was issued as part an "international property and business interruption insurance programme". 3. The second paragraph of Art 5.1 provided that cover under the Master Policy "is provided subject to the registration of the Insured Companies…with and acceptance by the Leading Insurer [that is, XL]". 4. It is not clear what "registration" was contemplated by this provision. What it does make clear, however, is that cover under the Master Policy is extended to "the Insured Companies" once they are "accepted" (as Insured Companies) by XL. 5. Thus, once such registration has occurred (and there is no suggestion that it has not) then cover "is provided" to, amongst others, the Insured Companies. 6. Reference is then made to Art 4 ("see also Art 4. Insured Companies") suggesting that that article is relevant to the question of whether the leading insurer (XL) has "accepted" companies as Insured Companies. 7. Article 4 deals with "Insured Companies". There was no other definition of "Insured Companies" in the Master Policy or any other provision directed, in terms, to the question of what entities are "Insured Companies". 8. A striking feature of Art 4 is that Art 4.2 contains a "List of Insured Companies". That list includes Mobis. 9. The first three sentences of the first paragraph of Art 4.1 might, absent context, suggest that the parties intended that "Insured Companies" be subsidiaries of Mobis Slovakia (being companies in which Mobis Slovakia "directly or indirectly holds at least 50% of the voting share capital") or companies in which Mobis Slovakia "holds participations" (companies in which Mobis Slovakia has "management responsibility"). 10. Thus, the first sentence of Art 4.1 stated that the Master Policy covered the Policyholder (Mobis Slovakia) and its subsidiaries and companies "in which it holds participations". Although the wording is awkward, the third sentence of Art 4.1 appears to be intended to cast light on the meaning of the expression "in which it holds participations" in the first sentence and stated that this requirement was satisfied if Mobis Slovakia held 50% or more of the voting share capital or had "management responsibility". The function of the intervening sentence is not clear but may constitute a further requirement for a company to be an "Insured Company"; namely, that it constitute "a financial entity with central management". 11. Mobis does not qualify as an Insured Company if that expression is to be read as the first paragraph of Art 4.1, seen in isolation, might suggest. It is not a subsidiary of Mobis Slovakia. Mobis Slovakia holds no "voting share capital" in it. Nor, so far as the evidence reveals, does Mobis Slovakia have any "management responsibility" for it. 12. But Art 4.1 must be seen in the context in which is appears; particularly Art 4.2. 13. Article 4.2 is headed "List of Insured Companies". Included in the list is Mobis, notwithstanding the fact that Mobis does not answer to the descriptions in Art 4.1. 14. The listing of the companies in Art 4.2 is consistent with the provision in Art 5.1 that cover is extended to Insured Companies once they are "accepted" as Insured Companies by XL. 15. I cannot see why the parties to the Master Policy included Mobis as one of the "Insured Companies" if they did not intend that Mobis be an Insured Company. Indeed, the inclusion of Mobis in Art 4.2 made clear that XL had "accepted" it as an Insured Company. 16. Indeed, XL has admitted this. In its amended commercial list response, XL admitted that Mobis "is an insured under the 2014 Master Policy subject to its terms and conditions". 17. Ultimately, in final submissions, UNIQA submitted that Art 4.2 was merely a list of "potential candidates" as "Insured Companies". To attribute to the parties the intention that Art 4.2 have this effect carries with it the implication that the parties contemplated that although Mobis was not currently an Insured Company (because it was not a subsidiary of Mobis Slovakia or a company in which Mobis Slovakia held "participations"), that circumstance might change, and that Mobis might one day become a subsidiary of Mobis Slovakia or a company in which Mobis Slovakia held "participations" and thereby be transformed into an Insured Company. There is no suggestion that the parties had any such contemplation. I do not accept that this is what a reasonable business person in the position of the parties would have thought the words to mean or that the contract would have this effect. 18. UNIQA also drew attention to the final sentence of the first paragraph of Art 4.1 which provided that, subject to any "special agreement": "…insurance cover of the Insured Companies in question shall cease upon failure to comply with these provisions". 1. I do not see that this takes the matter any further. 2. The sentence was expressed in prospective terms and contemplated a circumstance where a company once complied with the provisions of the first paragraph of Art 4.1, but no longer did so. That provision did not apply to Mobis as it was never a subsidiary of Mobis Slovakia or a company for which Mobis Slovakia had management responsibility. The effect of the sentence is merely that a company that qualified as an Insured Company by reason of compliance with the requirements of Art 4.1 ceased to do so if it ceases to comply with those requirements. 3. Looking more widely in the Master Policy there are other indicators that the parties intended that Mobis be an Insured Company. 4. Article 1 of the Master Policy provided that the insurance under the Policy "shall cover", amongst other countries, Australia (with particular limits being specified for property damage and for business interruption). 5. Further, in Art 2, one of the limits of liability was for "Earthquake Australia (named area Perth)" with a lower limit of liability, EUR 10 million, than the general earthquake limit of EUR 50 million. 6. Further, the second paragraph of Art 5.1 states that cover was subject to "acceptance by the Leading Insurer"; that is, XL. 7. Mobis also submitted that there was a "special agreement" between it and XL for the purposes of the last sentence of the first paragraph of Art 4.1 and that UNIQA was estopped from denying that Mobis is an Insured Company. 8. In view of the conclusions to which I have come, I do not need to deal with these matters. 9. For those reasons, my conclusion is that Mobis is an "Insured Company" under the Policy. Is Mobis entitled to make a claim under the Master Policy? 1. UNIQA submitted that, even if Mobis is an Insured Company under the Master Policy, its rights under the Master Policy would only be enlivened at the suit of Mobis Slovakia. 2. I accept that submission. 3. That submission directs attention to the question of whether Mobis was a party to the Master Policy. 4. The fact that Mobis is an "Insured Company" for the purpose of the Master Policy does not mean that it is a party to the policy. 5. As the Full Court of the Federal Court said in ABN AMRO Bank NV v Bathurst Regional Council (2014) 224 FCR 1; FCAFC 65 (Jacobson, Gilmour and Gordon JJ) at [1629]: "A party to a contract of insurance, depending on the particular kind of policy, need not necessarily be an insured person under it. Likewise an insured person need not be a party." 1. Mobis is not identified as a party to the Master Policy. The Master Policy was executed by Mobis Slovakia, as the (only) Policyholder on the one hand and the three insurers, XL, AIG and UNIQA on the other. 2. There is no term in the Master Policy that, in terms, gave Mobis an entitlement to make a claim under it. 3. Indeed, there were terms of the Master Policy which suggest that Mobis had no such right. 4. For example, the second paragraph of Art 5.2 (the DIL/DIC clause – see [211] above) provides: "Notwithstanding any agreement to the contrary, such differences in indemnity shall be paid to the Policyholder in the country of the Master Policy". [Emphasis added] 1. Mobis submitted this constituted no more than a direction (by Mobis) to pay. I do not accept that submission. It does not take into account the fact that Mobis Slovakia, and not Mobis, was the Policyholder. I see the provision as a fundamental obligation imposed on the insurers to pay any amount payable under the DIL/DIC clause to Mobis Slovakia. There was no provision in the Master Policy obliging the insurers to make a payment to any of the Insured Companies (other than Mobis Slovakia). I see nothing in the Master Policy which contemplated the possibility that this might happen. 2. Article 5.3 provided for "Financial Interest Cover". No claim is made for such cover in these proceedings. However, it casts light on the question to hand. The article provided that if an Insured Company suffered loss which cannot be recovered because of being "legally prohibited" for the purposes of the third paragraph of Art 5.1: "Insurance cover shall be granted for the direct financial prejudice arising to the Policyholder in accordance with the following provision…". [Emphasis added] 1. Further, the last paragraph of Art 3.1.8 (which I dealt with earlier in a different context: see [623] above) provided that: "In the case of the exhaustion of an annual aggregate limit, any indemnity payments made under this Policy shall be repaid by the Policyholder named in this Policy to ensure that no more than the agreed annual aggregate limit is paid by the insurer". [Emphasis added] 1. Article 12.5 (the "Agent/Intermediary/Broker Clause") provides: "The agent/intermediary/broker is authorised to conduct business transactions between the Policyholder and the Insurer on behalf of the former". [Emphasis added] 1. Article 10.5 dealt with "Payment of Indemnity" and provides (in its last two paragraphs): "In principle, the indemnity shall be paid in the currency and at the domicile of the Insured Company in the country in which the loss occurred, provided that the local policy was issued by the Leading Insurer or an insurance company appointed thereby. In the case of losses that are covered only through this Master Policy, claims payments shall be made to the Policyholder's domicile in Euro (EUR), converted from the currency of the country in which the loss occurred at the mean exchange rate (mean value bid/ask) on the date on which the indemnity is paid." [Emphasis added] 1. Although Art 10.5 provides that "in principle" a payment under the policy must be made in the currency at the domicile of the Insured Company, they do not provide that the payment must be made "to" the Insured Company. The second quoted paragraph makes clear that payments must be made to the Policyholder. 2. The provisions set out in the preceding paragraphs point to the conclusion that the parties to the Master Policy intended that only the Policyholder, Mobis Slovakia, could bring proceedings to recover the loss suffered by any Insured Company (such as Mobis). Is the Master Policy a composite policy? 1. Mobis sought to meet the implication of these provisions in the Master Policy by submitting that: "The…Master Policy is a composite policy. In other words, it is a bundle of separate insurance contracts between the insurers (XL, AIG and UNIQA) and each Insured Company listed in article 4.2. One of the contracts in the bundle includes that between Mobis and UNIQA." 1. In support of that proposition, Mobis cited the following passage from the United Kingdom text book, Colinvaux's Law of Insurance (11th UK ed, Sweet & Maxwell), at [15-003]: "Where two or more persons are insured under a single policy, it is important to determine whether the policy is joint or composite, in that the former is regarded as a single contract whereas the latter is a bundle of contracts. The distinction is as a matter of construction based on the nature of the interests of the assureds. If the assureds share a common interest in the insured subject-matter, for example where they are joint owners of property, or partners, the policy is joint. By contrast, if the parties have different interests, as in the case of a landlord and tenant or a mortgagor and mortgagee, the policy is composite." 1. However, the authors of Colinvaux went on to say (at [15-006]): "Although there is a clear distinction between joint and composite insurance, the nature of a composite policy remains uncertain. There are two possible interpretations: a composite policy is a single contract covering assureds individually; or a composite policy is a bundle of separate contracts with different assureds on the same terms and comprised for convenience in a single policy document." 1. In any event, the first passage quoted from Colinvaux does not appear to reflect the position in Australia. 2. In Federation Insurance Ltd v Wasson (1987) 163 CLR 303; HCA 34 Mason CJ, Wilson and Dawson JJ said (at 303 and 314) that: "A policy of insurance by which the insurer indemnifies the co-insured for loss or damage to their respective rights and interests in one item of property is a composite contract… By a composite contract we mean a contract by which an insurer undertakes separate and distinct obligations to the various insured." 1. Thus, as UNIQA submitted, a composite policy is one contract with multiple insureds, not multiple contracts with individual insureds. 2. The plurality in Federation Insurance quoted with approval (at 310) the description of a composite policy by Sir Wilfrid Greene MR in General Accident Fire & Life Assurance Corporation Ltd v Midland Bank Ltd [1940] 2 KB 388 at 404-405: "Such a policy, in my judgment, may be more accurately described as a composite policy, because it comprises, for reasons of obvious convenience, in one piece of paper the interests of a number of persons whose connection with the subject-matter of the insurance makes it natural and reasonable that the whole matter should be dealt with in one policy." 1. This description ("one piece of paper", "one policy"), also, is inconsistent with the proposition that a composite policy is in reality a series of individual contracts. A similar point was made by Gibbs ACJ in Deaves v CML Fire & General Insurance Co Ltd (1979) 143 CLR 24 at 41: "…although the policy is a composite one, all four insured are parties to it; the policy may embody two insurances, but it constitutes one contract." 1. In any event, looking at the terms of the Master Policy, I cannot see how it can be construed as being other than one contract that confers benefits and liabilities on Mobis Slovakia. 2. In my opinion, on its proper construction, the Master Policy was one contract of insurance that provided Mobis Slovakia with direct cover for losses Mobis Slovakia itself suffered, and also constituted an agreement whereby the insurers agreed to pay to Mobis Slovakia the value of specifically identified property owned by the various Insured Companies (whether or not they be subsidiaries of Mobis Slovakia) when property was lost or damaged in the circumstances set out in the Master Policy. Section 48 of the Insurance Contracts Act 1. Section 48 of the Insurance Contracts Act provides that: "(1) A third party beneficiary under a contract of general insurance has a right to recover from the insurer, in accordance with the contract, the amount of any loss suffered by the third party beneficiary even though the third party beneficiary is not a party to the contract. (2) Subject to the contract, the third party beneficiary: (a) has, in relation to the third party beneficiary's claim, the same obligations to the insurer as the third party beneficiary would have if the third party beneficiary were the insured; and (b) may discharge the insured's obligations in relation to the loss. (3) The insurer has the same defences to an action under this section as the insurer would have in an action by the insured, including, but not limited to, defences relating to the conduct of the insured (whether the conduct occurred before or after the contract was entered into)." 1. However, the Insurance Contracts Act only applies if the proper law of the insurance contract in question is a State or Territory of Australia (s 8(1)). 2. Mobis submitted that the proper law of the Master Policy was Australian law because the subject of the proceedings was a warehouse located in Australia and because Art 10.5.1 of the Master Policy provided that any indemnity to which Mobis was entitled would be paid in Australian dollars and in Australia. 3. However the Master Policy: 1. was executed in Slovakia; 2. names eight European and one UAE Insured Company in addition to Mobis; 3. is governed by Slovakian law (Art 12.7); and 4. provides that the place of jurisdiction for any dispute arising under the Policy is Bratislava. 1. The only connection with Australia is the fact that Mobis and some of the insured property is in Australia. As UNIQA submitted, that fact alone does not distinguish Australia from any of the other 10 jurisdictions in which an Insured Company under the Master Policy was domicile and held property. 2. In my opinion, the proper law of the Master Policy is likely to be that of Slovakia. It certainly is not Australia. Conclusion as to Mobis's entitlement to sue 1. For those reasons, my conclusion is that although Mobis is an Insured Company for the purposes of the Master Policy, it has no standing to bring proceedings under that Policy. 2. Any proceedings must be brought by Mobis Slovakia. 3. Contrary to Mobis's submissions, it does not follow from that conclusion that the Master Policy could never respond to losses suffered by the Insured Companies named in Art 4.2 of the Master Policy or that those entities would be "effectively uninsured". 4. The conclusion means only that it is Mobis Slovakia, the Policyholder named in the Master Policy, that must bring proceedings to seek the benefit of the Master Policy for those Insured Companies. Is UNIQA liable for losses in Australia? 1. UNIQA submitted that, in any event, on the proper construction of the Master Policy, it is not liable for any risks in Australia. 2. In that regard, UNIQA relied upon a Note in Art 3.1.3 of the Master Policy. To place that Note in context it is necessary to have regard to the whole of the article: "3.1.3 Insurer Leading insurer: XL Insurance Company Plc, Zweigniederlassung fur Osterreich Share 50% Co-insurers: AIG Europe Limited Share 30% UNIQA Versicherungs AG, Liechtenstein Share 20% Note: UNIQA Versicherungs AG, Liechtenstein is not taking any share of local policies in UAE and Australia. The share of XL Insurance Company Plc, Zweigniederlassung fur Osterreich on the local policies in UAE and Australia is 70%." 1. Article 3.1.1 defined the share of risk to be undertaken by each of XL, AIG and UNIQA under the Master Policy: 50% to XL, 30% to AIG and 20% to UNIQA. 2. The statement in the Note operated as a qualification to that risk sharing regime. So far as concerns "local policies" in Australia, the Note stated that UNIQA "is not taking any share" and XL's share increases (correspondingly) from 50% to 70%. 3. Although the Note referred to a share of "local" policies, it is clear that the Note addressed UNIQA's exposure under the Master Policy to claims which also arose under the relevant local policy: here, the Local Policy. Thus, it stated that XL's liability in such circumstances was 70%: 20% more than what would otherwise be its share of liability. 4. Thus, the effect of the Note was that, in the circumstances to which the Note referred, XL would bear, in addition to its 50% share of liability, UNIQA's 20% share. 5. Mobis submitted that the words in the Note are directed solely to UNIQA's position under the Local Policies. 6. But that cannot be right. If that were so, there would be no reason to make any reference to an increase in XL's "share". 7. Further, were the Note to be construed as being directed solely to UNIQA's position under the Local Policies, it would be superfluous and included in the Master Policy without any apparent purpose. 8. Mobis submitted that its construction of the Note was consistent with email correspondence between XL and UNIQA in June 2014 (shortly before UNIQA became an insured under the Master Policy on 23 June 2014) which, Mobis submitted, showed that UNIQA's non-participation in the Australian and UAE local policies was based upon it being rejected as a reinsurer of those local policies. 9. Thus, as an example, Mobis drew attention to an email of 13 June 2014 from XL to UNIQA stating: "[W]e received the answer from our Credit Security Office. Due to the lack of rating and the relatively low total shareholders' equity (only about CHF 6m) [UNIQA] cannot be accepted as a re-insurer for the local policies in AU and UAE, unless you will be prepared to provide us with a collateral (which I do not believe that is an option for you). Therefore, please confirm that you will be interested in taking a share on the program excluding AU and UAE." [Mobis's emphasis] 1. This material was not, in my opinion, admissible on the question of the proper construction of the Master Policy. 2. However, to the extent that it is relevant, it points in UNIQA's favour. 3. When the full context of the email exchange is examined, it is clear that XL's request that UNIQA confirm that it would be interested in "taking a share in the programme excluding AU and UAE" was directed to UNIQA's potential participation as an insurer accepting 20% share of the risk under the Master Policy; and that the reason Australia and the UAE were to be excluded was because XL was not able to provide UNIQA with "risk engineering information" for those countries. 4. That exchange indicates that the construction of the Note for which UNIQA contends, and which I accept, is not one which is commercially absurd. Indeed, Mobis did not submit that it was. 5. Accordingly, my conclusion is that, for this reason alone, on the proper construction of the Master Policy, UNIQA has no liability for Mobis's claim. Illegality? 1. The third paragraph of Art 5.1 of the Master Policy (set out at [661] above) provides relevantly that: "Cover is granted under this Master Policy to the foreign companies included thereunder only if permitted by the relevant laws and regulations applicable to any one or more of the parties to the Master Policy and to the parties involved in the conclusion of the Policy; it shall neither be granted in favour of foreign companies if impermissible under the relevant laws and regulations applicable to the foreign companies, Insurer and broker…". 1. UNIQA submitted that the effect of Art 5.1 would be to exclude any liability it had to extend cover to Mobis because the affording of such cover would be "impermissible" under Australian law. 2. That is because, UNIQA submitted, for it to afford cover to Mobis in such circumstances would be to carry on insurance business in Australia contrary to s 10 of the Insurance Act. 3. Section 10 of the Insurance Act relevantly provides that a body corporate commits an offence if (a) the body corporate "carries on insurance business in Australia" and (b) the body corporate is not a "general insurer" and (c) there is no determination in force under s 7(1) that s 10 does not apply. 4. Subsections (b) and (c) of s 10 are satisfied in the present case. UNIQA is not and never has been a "general insurer". That term is defined in s 11 to mean a body corporate that is authorised under s 12 to carry on business in Australia. UNIQA has never been authorised under s 12. Further, there has never been any determination in force under s 7(1) that s 10 does not apply. 5. The question then is, on these assumptions, would UNIQA be carrying on insurance business in Australia within the meaning of s 10(a) so as to deprive Mobis of what would otherwise have been its entitlement to cover under Art 5.1 (and substitute an entitlement to Financial Interest Cover under Art 5.3 in favour of Mobis Slovakia). 6. UNIQA has no place of business in Australia. Its participation in the Master Policy is the only occasion upon which it has done any business having any connection with Australia. 7. I do not consider that, in those circumstances, it can be said that UNIQA was "carrying on business" in Australia. 8. The notion of carrying on a business involves the repetition of acts. Entry into an isolated transaction of a business nature does not constitute "carrying on a business" (see, for example, Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338; HCA 37 at 347 (Dawson J) and 359 (McHugh J)). Mobis's notice of motion filed 29 June 2017 1. By notice of motion filed in Court on 29 June 2017, Mobis sought leave to amend its claim against, relevantly, UNIQA to include the underlined words as follows: "[I]ndemnify the plaintiff under the 2014 Master Policy by paying to the plaintiff or, alternatively, Mobis Slovakia s.r.o., such sum as is determined by this Honourable Court to be the value of the plaintiff's right to indemnity under the 2014 Master Policy…". [Emphasis in original] 1. In view of the conclusions to which I have come it is not necessary for me to deal with this application to amend. 2. In any event, I would not be prepared to allow the amendment. Any such order could only be made at the suit of Mobis Slovakia. In due course I will order that Mobis's notice of motion be dismissed. Quantum 1. Mobis claims to be entitled to indemnity under the Local Policy in the sum of $62,190,665 calculated as follows: Buildings $17,247,234 Contents $8,545,089 Stock Warehouse stock $26,911,372 Loss of margin/additional cost of replacement $3,042,593 Salvage -$123,589 Obsolescence -$26,271 Kia $460,482 Total stock $30,264,587 Policy sub-limit $27,573,108 Business interruption Loss of Gross Profit $318,557 Additional Labour $768,569 FX on Settlement $908,357 GL Costs $5,346,507 Additional Rent outside of Period $1,562,547 Relocation Costs $896,549 Savings -$694,930 Total business interruption $9,106,156 Deductible -$280,922 Total claim $62,190,665 1. This amount does not take into account the amount already paid to Mobis by XL, referred to at [10] above. It is common ground that this amount must be brought to account in due course. 2. Numerous issues arose in respect of quantum. I have endeavoured to deal with them all. I have not, however, attempted to calculate what final figure XL must pay Mobis. Indeed, as I explain below (see [795] – [797], [936] – [937], [1076] – [1080] and [1086] – [1090]), there are a number of topics in respect of which I have not been able to come to a conclusion and in respect of which I will invite further submissions. In the meantime, I invite the parties to confer and agree on the arithmetic consequences of the various conclusions to which I have come. Building claim 1. The warehouse has been replaced. 2. Mobis claims $17,247,234 for the cost of replacing the warehouse. 3. That claim is made up as follows: FDC Construction and Fitout Pty Ltd building cost $19,717,498 Separate building costs $289,833 Less replacement of slab -$3,165,869 Less provisional sum 15 to FDC contract -$670,309.77 Less uninsured betterment of variation 8 to FDC contract -$141,400 Less uninsured betterment portion of variation 11 to FDC contract -$108,700 Less difference of betterment portion of Provisional Sum 7 -$80,001.49 Sub-total $15,841,051 Removal of debris $1,181,451 Professional fees $244,732 Total building claim $17,247,234 FDC Construction and Fitout Pty Ltd building cost 1. The starting point of the claim is the cost of rebuilding the warehouse. 2. Mobis engaged FDC Construction and Fitout Pty Ltd to build the new warehouse. 3. It is common ground that the total amount paid by Mobis to FDC to construct the new warehouse was $19,717,498 comprising: 1. the contract sum in the FDC contract of $18,529,884; and 2. "provisional sums and variations" totalling $1,187,613. (The sum of the latter two figures is $1 less than the agreed total of $19,717,498. That discrepancy was not explained in submissions). Removal of debris and professional fees 1. There is also now no controversy about the last two items claimed by Mobis in the above schedule, namely removal of debris ($1,181,451) and professional fees (which, Mobis accepts, are subject to a policy limit of $100,000). Separate building costs 1. Mobis seeks to add to the costs of construction of the new warehouse an amount it described as "Separate Building Costs" of $289,833. 2. Mobis's quantum expert, Mr Paul Johnson, stated in his report of 1 June 2016: "My review of the General Ledger highlighted that $289,833 included building costs separate from the FDC Construction quote for costs incurred which, as a matter of accounting practice (see AASB116 at [16]) would be capitalised." 1. Mr Johnson did not identify what building costs constitute the figure of $289,833. 2. However, his evidence about this matter was not challenged by XL's quantum expert, Ms Kimberley Daley, or in cross-examination. 3. In its submissions, XL stated that "there is a real risk of such costs being duplicated by items of expenditure specifically claimed by reference to the general ledger". 4. However, Ms Daley did not identify any such duplication. 5. In those circumstances, I accept Mobis's submission that Mr Johnson's unchallenged evidence should be accepted and that this figure should be added to Mobis's building claim. The slab 1. The slab on which the warehouse was constructed was not damaged by the collapse. It was, however, damaged by the fire. 2. The cost of replacing the slab is included in the amount of the FDC contract and, thus, must be deducted from Mobis's claim. 3. Mobis accepts that $3,165,869 must be deducted from the amount of the FDC building cost on this account. That is the amount that Mobis claimed in a Notice of Dispute it wrote on 19 October 2015 to the demolition contractor it had engaged to demolish the warehouse, Metropolitan Demolitions Pty Ltd (see [867] below). 4. However, as XL pointed out, in a demand sent to Metropolitan (on 18 January 2016: see [873] – [874] below), Mobis's solicitor contended that the cost of replacing the slab was $3,865,000; $699,161 more. That figure is very close to provisional sum 15 ($670,309.77) which, as the above table reveals, Mobis has already deducted from its building claim. Provisional sum 15 relates to the costs of remediating the foundations underpinning the slab. In those circumstances, I accept Mobis's submissions that I should draw the inference that the figure of $3,165,869 represents the net cost of remediating the foundations of the warehouse and that, as provisional sum 15 is to be deducted from Mobis's claim, no further deduction is called for on account of the replacement of the slab. Do some components of the building claim represent a claim for contents? 1. XL contends that certain items that Mobis has included in its building claim (for items such as air-conditioning units, dock levellers, lifts, switchboards, carpets, signage, exhaust fans, security systems, switchboard generators, roller doors and smoke alarms) should be deducted from Mobis's building claim, and included as part of its contents claim (and thus be subject to average under cl 4.2.1(e) of the Local Policy). 2. For the reasons I set out below at [1035] to [1055], I accept that submission. 3. There is otherwise no dispute as to the amount in respect of which Mobis is entitled to indemnity for these items. More robust construction 1. The warehouse that Mobis has constructed to replace that which collapsed is more robust than its predecessor. 2. Mobis incurred some $793,000 costs in relation to extra steel work that was incorporated into the reconstructed building, and makes no claim on XL for that cost. 3. However, XL submitted (and Mobis did not in its final submissions dispute) that the evidence revealed that the additional steel columns that were installed throughout the reconstructed warehouse resulted in the need for additional piles, pile capping and pad footings. 4. XL submitted that the cost incurred by Mobis in carrying out this work should also be deducted from the building claim. 5. There is, however, no evidence which identifies the cost of this work. 6. Mobis and XL disagreed as to which of them had the onus to prove this cost. 7. The question is one of betterment. 8. Both parties relied on the decision of the Court of Appeal in General Accident Insurance Asia Ltd v Sakr [2001] NSWCA 402. 9. As I read Sakr, it is authority for the propositions that: 1. an insurer has the evidentiary onus of showing that there has been betterment; and 2. once an insurer has sustained that onus and demonstrated betterment, in order to sustain its onus to prove the loss for which it is entitled to indemnity, the insured must prove what deduction or allowance should be made for betterment. 1. Thus, at [71] Giles JA said: "It is correct that the [insured] as claimants had to establish their damages, and so had to establish what the appellant had been obliged to pay or do under the policy. There had to be an appropriate reduction for wear and tear and betterment. But the basis of settlement clause did not compel a reduction: a reduction was required only if, on betterment principles, more than indemnity would be provided to the [the insured]." 1. As I read this passage, his Honour held that the insured must establish what the insurer was obliged to pay under the policy but that there was no onus on the insured to prove the absence of betterment. 2. Hodgson JA substantially agreed with Giles JA and stated (at [77]) that the onus was on the insured to prove their damages but stated (at [78]) that so far as concerns betterment "an evidentiary onus" was cast on the [insurer] to prove some betterment for which a reduction should be made. 3. Sperling J said (at [88] and [89]): "So, what of the question of betterment where there is simply an obligation to make a payment sufficient to indemnify against the loss caused by damage to property? In such a case, I would regard evidence of the cost of repair as prima facie evidence of the payment necessary and sufficient to indemnify against such a loss. An evidentiary burden then shifts to the insurer to establish that payment of the cost of repair would exceed an indemnity for the loss." 1. In my opinion, XL has sustained its evidentiary onus of showing betterment; namely, that the reconstructed warehouse, as well as having additional steel columns, has additional piles, pile capping and pad footings. 2. Mobis has not proved, and allowed as a deduction of its claim, the value of that betterment. 3. But some allowance must be made. 4. In Sakr, Hodgson JA said at [79] that in such a circumstances: "The situation would be one where a judge would have to do his or her best on the basis of inadequate material, erring within the area of uncertainty against the party responsible for the deficiency of evidence." 1. Here the party "responsible for the deficiency of evidence" is Mobis. 2. Even doing the best I can, on the basis of the "inadequate material" before me, I can only guess what part of the amount claimed by Mobis for the reinstatement of the warehouse is referrable to the extra piles, pile capping and pad footings. 3. In those circumstances, one alternative is simply to reject Mobis's building case in its entirety on the basis that it had not proved the damage in respect of which it is entitled to indemnity. 4. However, I will invite submissions as to whether there is an alternative course available. Provisional sums and variations 1. XL contends that the following further amounts should be deducted from Mobis's claim. These relate to "provisional sums" and "variations" under the FDC building contract. I will deal with these in turn. Provisional sum 6: landscaping $225,202 1. Mobis incurred this sum to restore landscaping around the warehouse. 2. The question is whether these costs are attributable to the warehouse collapse or the demolition process. 3. The invoice for this amount from FDC is dated 8 June 2016. 4. The process of demolition did not start until early July 2015. 5. This suggests that the cost of landscaping work is attributable to the warehouse collapse, rather than its later demolition. 6. Accordingly, my conclusion is that this amount should not be deducted from Mobis's claim. Provisional sum 7: IT requirements $708,912 1. This is an expense incurred by Mobis to reinstate "IT requirements". 2. In an appendix to Mobis's submissions, it accepted that $419,622.49 of this sum amounted to "betterment". 3. I am not satisfied that XL has sustained its evidentiary onus of showing that the balance of provisional sum 7 amounts to betterment and I propose to allow it. Provisional sum 12: building code upgrades for additional fire services $191,564 1. This sum represents the cost of installing sprinklers on an additional mezzanine level in the reconstructed warehouse. 2. Mr Stoddart gave evidence that, prior to its collapse, the warehouse had a sprinkler system suitable for what the parties described as a "third level of binning". 3. I am not satisfied that XL has sustained its evidentiary onus of showing that this cost amounts to betterment. 4. Accordingly I do not propose to deduct this amount from Mobis's claim. Provisional sum 15: sub-terrain conditions $670,309.77 1. As I have indicated above, Mobis accepts that this amount should be deducted from its claim. I have concluded that, for that reason, no further amount should be deducted from Mobis's claim on account of the replacement of the slab, beyond that set out in the table at [753] above. Variation 6: extra floor strength $37,828 1. This amount represents the cost to Mobis of designing and installing an additional thickness to the concrete slab. 2. According to an email from FDC to Mr Stoddart this work was needed: "…as a result of the additional loads of the Dexion racking within the mezzanine/binning area". 1. Mr Stoddart said in cross-examination that the cause of these "additional loads" was an error made by FDC, and that this expense was incurred to correct that error. 2. In those circumstances, I do not see this expense as betterment. Variation 8: glazed doors $152,259 1. This item concerns glazing costs incurred by Mobis due to a directive from Mobis Korea. 2. In final submissions, Mobis accepted that $141,400 of the claim constituted betterment. 3. XL made no submissions as to the balance of $10,859, which should be allowed as part of Mobis's claim. Variation 9: additional lighting to warehouse $10,091 1. This cost was in respect of lights that Mr Stoddart accepted were not present in the warehouse at the date of collapse. 2. They should not be allowed as part of Mobis's claim. Variation 11: glazed balustrades $139,217 1. This item relates to glazed balustrades installed in the rebuilt warehouse as a result of a directive from Mobis Korea. 2. In final submissions Mobis accepted that $108,700 of this amount constituted betterment and did not form part of Mobis's claim. 3. No challenge was made to the balance of Mobis's claim for this item ($30,517) and I propose to allow it. Variation 12: joinery $127,383 1. This expense related to joinery upgrades. The relevant invoice stated: "The Mobis representative from Korea changed some of the interior finishes in order to comply with the Mobis global standards document". 1. XL accepted that Mobis is entitled to claim $52,885 on account of this item but submitted that the balance (of $74,498) should be rejected because: "There is no evidence which demonstrates that this variation was required in order to conform with the standard and quality of joinery in existence on the day of the collapse". 1. Mr Stoddart gave this evidence in cross-examination: "Q. … It is joinery of a superior quality to the joinery which was there as at Anzac Day, wasn't it? A. Some of it is not. Q. And some of it is, agreed? A. It looks different. Q. Do you agree that some of the joinery is of a superior quality to the joinery which was there as at Anzac Day 2015, yes or no? A. No. Q. How do you know it is not? A. It's different, it looks different. It's a different appearance. Q. How do you know that as a result of the fact that – A. I don't know. HIS HONOUR: Q. Are you a carpenter? A. No." 1. In light of this evidence, I am not satisfied that any of the cost of the joinery amounts to betterment and propose to allow the item without deduction. Variation 15: IT $25,572 1. This expense relates to upgrades in IT and comprised 13 individual expense items. 2. Mr Stoddart gave this evidence about this item: "Q. Would you go, please, to page 1697. This concerns variation 15. Do you have that page, Mr Stoddart? A. Yes. Q. You will see item 1 commences with the words "Extra over". Do you see that? A. Yes. Q. Again, that is an example of betterment, would you agree? A. I can't answer that. Q. So you don't know one way or the other, is that the position? A. Yes. Q. Is that the position in relation to all the items on page 1697? A. Let me read it. Some of those items are upgrades to meet new IT requirements. What exactly is betterment, I'm not sure. Q. Thank you. In that case, I'll move on." 1. Although Mr Stoddart agreed that some of these items were "upgrades to meet new IT requirements" he also added "[w]hat exactly is betterment, I'm not sure". 2. XL had the evidentiary onus to show that these items amounted to betterment. I am not satisfied that, by this cross-examination, XL has sustained that onus. 3. Accordingly, my conclusion is that Mobis is entitled to this amount. Stock 1. Mobis claims that stock to the value of $30,264,587 was either physically lost, destroyed or damaged when the warehouse collapsed. 2. The policy sub limit for stock is $27,573,108. Accordingly, Mobis makes a claim for the full amount of that sub limit. 3. The historic cost of stock in the warehouse when it collapsed was $26,911,372. 4. Mobis has replaced some, but not all, of the stock that was in the warehouse on the date of collapse. 5. The replacement cost of the stock that Mobis has replaced was $20,283,301. The historic cost of stock that was in the warehouse on the date of collapse but which had not been replaced was, as at December 2016, $9,797,372. The sum of those two figures is $29,682,339, which exceeds the stock sub limit. 6. The insuring clause under the Local Policy provides for indemnity under section 1 ("Property Damage") "resulting directly from any Damage during the Period of Insurance". 7. "Damage" is defined in cl 2.6 of the Local Policy to mean "physical loss or destruction of or damage to the Property Insured caused by an Occurrence". 8. "Property Insured" includes stock (cl 2.23). "Occurrence" is defined to mean "one loss or a series of losses arising out of and directly resulting from one original cause" (cl 2.22). 9. Clause 4.2 provides that the basis of settlement is to be "reinstatement". 10. Clause 4.2.1(g) provides that reinstatement shall be "the cost of replacement of lost, destroyed or damaged Stock…by similar property as new". 11. Mobis summarised its case on stock as follows: "All the stock in the warehouse was physically lost or destroyed or damaged (within the meaning of those terms in the definition of Property Damage in the Local Policy) when the warehouse collapsed. Mobis is entitled to an indemnity based on the cost of replacing the stock – whether or not the stock is actually replaced." What happened to the stock at the time of and following the collapse? 1. Following the collapse, Mobis engaged loss adjusters who, in turn, engaged Costin Roe. 2. On 27 April 2015, Costin Roe sent an email to the loss adjusters stating: "Structural failure of the warehouse building occurred due to excessive loading of the roof with hail/ice during a heavy hail storm on Saturday 25/04/15. The majority of the warehouse portal frame structure has collapsed. Full height precast concrete walls to the south, east and west elevations have not fully collapsed and appear to be propped in place by partially collapsed columns along these walls. These walls are badly damaged and in danger of further collapse. The connections to the cantilever awning to the north elevation do not appear to have failed and this awning is still attached to collapsed portal frame columns. The proposed awning has partially collapsed also. There is a danger of further collapse occurring to the full height precast walls and both awning structures described above. In our opinion an exclusion zone should be installed to the permitter of the building. This exclusion zone should extend to a distance 1.5 x building height from the external building wall on the north and east sides of the building. The public footpath to the west and south sides of the building should be closed from access also." 1. On 11 June 2015, Dexion, the manufacturer of the racking in the warehouse, carried out an inspection and reported that: "…the structural integrity of the majority of racking looked at has been compromised by the forces acting on it by the steel structure, and even if it was possible to retrieve some racking and shelving, no product warranty could be applied to it. Furthermore, any unloading process of stock from the racking should be sanctioned by a structural engineer, since the unload process could cause weight transfer and lead to secondary collapse actions of the racking." 1. At about this time, Mr Stoddart, who, as I have mentioned, was Mobis's General Manager Warehouse and Logistics, prepared a document called "Demolition and Recovery Process". That document stated that: 1. Mobis aimed to recover as much stock from the warehouse as possible; 2. Mobis aimed to ensure that "all good quality product is returned to the supply stream" and prevent damaged stock being returned to the market through the "grey market"; 3. part of the warehouse was to be designated as the "Demolition Zone" (to be controlled by the proposed demolition contractor) and another part to be designated as the "Quarantine Zone" (to be controlled by Mobis); 4. stock recovered from the Demolition Zone that was in "reasonable physical condition" was to be placed in the Quarantine Zone and inspected by Mobis personnel; 5. if that stock appeared to be in "saleable condition" it was to be removed from the warehouse for further inspection in warehouses that Mobis had rented nearby and an assessment made as to whether it was in "saleable condition" (which assessment "may involve unpacking for detailed inspection" or "technical advice and testing"); and 6. stock that did not meet Mobis's quality standards was to be destroyed. 1. This process was followed. The value of stock so recovered in saleable condition was nominal; some $123,590. 2. Any stock that was in a package that was damaged (whether by water or otherwise) was regarded as unsaleable and destroyed. Mobis's Senior Manager of After Sales and Marketing, Mr Anthony Lasan, explained that this was because of concerns about consumer safety, an apprehension that Hyundai's dealers would not purchase stock in damaged packaging, concern about damage to the "Hyundai brand" and Mobis's experience that its dealers regarded stock in damaged packaging as creating a warranty risk. 3. No doubt because of an apprehension of further possible collapse and difficulties in gaining access to stock within the damaged warehouse, Mobis investigated, appointing a contractor to perform the demolition and stock recovery process. 4. Mobis also appointed a project manager to manage the demolition and reconstruction of the warehouse. That project manager obtained quotations from three demolition contractors and reported that one of those contractors, Metropolitan (referred to at [772] above), had a "methodology for lifting sections of the roof which is best suited to maximising salvage of stock" and was "an obvious choice". 5. On 2 July 2015, Mobis entered a "Demolition and Stock Recovery Contract" with Metropolitan. 6. Pursuant to that contract, Metropolitan agreed that it would: 1. be responsible for the care of recovered stock; 2. be responsible for any loss or damage to stock "other than damage in accordance with [the contract] or to the extent caused by an excepted risk"; and 3. indemnify Mobis against any loss or damage to Mobis's stock during the demolition process. 1. Metropolitan took possession of the site on 6 July 2015. Demolition commenced that day. 2. The demolition process involved cutting away sections of the roof with oxyacetylene torches. This generated sparks. It also involved demolition workers hosing down the stock with water while oxyacetylene cutting was being performed (to prevent sparks from the oxyacetylene torches igniting the stock). Nonetheless, at least one spot fire broke out during the demolition process. 3. Mr Stoddart explained that it was physically impossible to remove some stock. Many pallets of stock were not full and were unbalanced, which meant stock could not be retrieved without dropping the packages. Further, some stock was stored in narrow aisles, which required specialist equipment not available to the demolition contractors. 4. On 21 July 2015, Mr Stoddart reported to Mobis's CEO, Mr Jay Suh: "To date our salvage program is not as productive as we had planned. We are not recovering much as saleable items. Due to recent Sydney weather and rain, the majority of bumper covers and security items have been wet as soon as the demolition team has made the area safe to access by removing overhead dangers. Subject to weather, our salvage success should increase as we move into the racking area next week." 1. On 24 July 2015 Mr Stoddart reported to Mr Suh: "So far this week we have salvaged waste compactors from outside the building (value approx $110,000). Stock recovery has been well below expectation due to the unstable/unsafe roof and wet weather conditions. We continue to monitor our parts being recovered from the area to ensure they are damaged beyond saleability before removal from site". 1. And on 29 July 2015: "This week there is not much actual building demolition happening. The demolition team are sorting through the piles of demolition rubbish to sort into recycle products and clearing the 'Floor area' before starting any further demolition. The demolition team have stripped the floor area and racking rows 33 and 34. There has been very minimal salvage of parts." 1. Despite his email correspondence with Mr Suh, Mr Stoddart gave this evidence in cross-examination: "Q. You accepted a few moments ago that you had a number of discussions following the collapse on Anzac Day with Mr Suh about the demolition and salvage process, right? You told him that the majority of the stock was capable of being salvaged, didn't you? A. I probably did. Q. Mr Suh was particularly interested to know the approximate value of the stock which you considered was likely to be salvaged in a condition suitable for sale and distribution, wasn't he? A. I don't recall the conversation, but he would have asked that, for sure. Q. There were email communications between yourself and Mr Suh between Anzac Day and the date of the fire about the stock in the warehouse which might be salvaged in a condition suitable for sale and distribution; correct? A. I kept him informed at every step. Q. Including by email? A. Absolutely. Q. And you told him prior to the fire that, in your opinion, the majority of the stock was capable of being salvaged for sale and distribution, didn't you? A. Probably. A. Yes. Q. Yes or no? A. Yes." 1. A major fire broke out on 30 July 2015. The warehouse was destroyed. All the contents of the warehouse which had not been retrieved by then were (with only minor exceptions) lost. 2. At the time of the fire, the demolition process was still at an early stage. It had proceeded from the eastern wall up to, in effect, four or five rows in the racking area. How much stock was "salvageable" at the date of the fire? 1. Evidently, Mobis contended that Metropolitan was responsible for the fire. 2. Thus, in August 2015, following the fire, Mobis's solicitors asked Mr Stoddart to provide an estimate as to the loss that Mobis had suffered as a result of the fire. Mr Stoddart prepared an estimate and sent it to Mr Suh, who then told Mr Stoddart to send the material Mobis's solicitors. 3. The amount of that estimate was $17,545,389. 4. On 19 October 2015, Mobis sent a Notice of Dispute to Metropolitan in which it stated that its present estimate of its loss in relation to stock was $17,545,389. 5. In cross-examination, Mr Stoddart said that this estimate was "broad brush". Mr Stoddart said, in answer to questions from me, that he had arrived at the estimate of $17,545,389 by ascertaining the value of the stock in the warehouse at the time of the collapse and deducting 25% on account of stock that was "probably wet and irretrievable". 6. Thus, Mr Stoddart gave this evidence: "Q.You came up with a figure of $17.5 million and that is 25 per cent of all stock? A. Sorry, the stock in the warehouse at the time of [sic] fire was 22, nearly $23 million, so very clearly able to identify the stock that remained in the building at the time of fire. I thought 75 per cent of the stock still in the building was probably salvageable, so $17.5 million is 75 per cent of the 22 that we thought was in there." 1. Mr Stoddart said that the "first figure" (referring to the $23 million) was accurate, but that the second (referring to the $17.5 million) was "pure estimate". 2. However, Mr Stoddart's initial estimate of $17,545,389 was the subject of a process of refinement. 3. Mr Stoddart said that between 19 October 2015 (the date of the Notice of Dispute) and 18 January 2016 he spent "some time to ascertain with a degree of precision the amount of stock which perished in the fire". When asked about the exact process he undertook in order to derive the precise figure of $18,438,945.49 he said "we extracted the information from the computer, the total stock". He was assisted by Mr David Peterson who was responsible for inventory control. He agreed that Mr Peterson (whom he described as "very good with his inventory analysis") came to the view in January 2016 that approximately $18.5 million of stock suitable for consumption and distribution was destroyed in the fire. 4. On 18 January 2016, Mobis's solicitors sent Metropolitan a "Demand for Indemnity" which quantified Mobis's loss in relation to stock "as a result of the fire" at $18,438,945.49. 5. The letter stated: "1. Your company and our client were parties to a contract entitled 'Demolition and Stock Recovery Contract' dated 2 July 2015. Under that contract your company undertook, among other things, to conduct demolition works at our client's site. 2. Pursuant to clause 10.1 of that contract, your company covenanted to indemnify our client against loss or damage to our client's property 'arising out of or as a consequence of the carrying out of WUC'. 3. On 30 July 2015, your company performed work on our client's property. During the course of that work employees of your company caused a fire which: (a) destroyed most of the salvageable property of our client at the site; (b) destroyed such parts of the structure on site as might otherwise have been saved. 4. Our client's loss as a result of the fire is set out in the Table below: Head of Loss Quantum of Loss (Present estimate) Building $3,865,000.00 General contents $54,023.95 Stock $18,438,945.49 Extra security $58,099.07 TOTAL (AUD) $22,416,068.51" 1. Mr Stoddart agreed that it was likely that he was the person that established the figure of $18,438,945.49 as being the "salvageable property" of Mobis at the site. 2. In a letter that Mobis's solicitors sent Metropolitan's solicitors on 2 February 2016, Mobis's solicitors stated that Metropolitan had "been provided with extensive documentation and information which substantiate the quantum of our client's loss". 3. During the hearing, XL served a notice to produce on Mobis seeking production of that "extensive documentation". Mobis claimed that those documents were the subject of legal professional privilege. I upheld that claim for reasons I gave in a judgment on 5 June 2017: Mobis Parts Australia Pty Ltd v XL Insurance Company SE (No 4) (Supreme Court (NSW), Stevenson J, 5 June 2017, unrep). 4. Nonetheless, the evidence showed that Mobis, through Mr Stoddart, made a precise calculation of the value of the "salvageable property" at the warehouse as at the date of the fire for the purposes of making its claim on Metropolitan, and that calculation was based on the "extensive documentation and information" that Mobis had provided to Metropolitan (and that Mobis objected to being placed into evidence). 5. Mr Stoddart gave this evidence: "Q. The reality is your true belief as at January 2016 was the value of the stock which was suitable for sale and distribution and which perished in the fire was approximately $18.5 million, wasn't it? A. Yes." 1. Mobis's solicitors' letter of 18 January 2016 referred to "salvageable" property, being the stock stated to have a value of $18,438,945.49. 2. It is clear from the letter that its author was speaking of property "salvageable" by Mobis, in the sense of being "suitable for sale and distribution" (as Mr Stoddart agreed in the answer referred to in the evidence just quoted). 3. The figure of $18,438,945.49 was calculated as a result of a request by Mobis's legal counsel, Ms Kim, to obtain updated estimates in order to brief Mobis's solicitors to commence proceedings against Metropolitan. 4. On 1 June 2016, Mr Stoddart swore an affidavit in which he set out what he said was a calculation of the proportion of stock at the warehouse that "might have been salvaged had there been no fire". 5. Once again, it is clear from the context, that Mr Stoddart was referring to stock "salvageable" by Mobis. 6. Mr Stoddart said in that affidavit: "I do not, however, wish to convey the impression that the figures produced by my calculations are…mathematically precise, but rather that they provide an indication of the value of the stock that, in my opinion, might have been salvaged [but for the fire]." 1. Mobis described the process undertaken by Mr Stoddart as follows: 1. he estimated the total value of the stock in the warehouse prior to the collapse; 2. based on the observations he made when he entered the warehouse, he estimated the value of the stock which would have been damaged or destroyed when the warehouse collapsed. This process was performed for each section of the warehouse separately; 3. he then tried to calculate how much stock would, in his opinion, have been recovered during the demolition process, taking into account damage which was inevitable due to the nature of the demolition process itself and matters relevant to the layout of the warehouse (for instance, the fact that much of the racking was configured in "narrow aisles"). Mr Stoddart made different assessments for each part of the warehouse depending on the configuration of that part of the warehouse. 1. Mr Stoddart's conclusion was that there was "a chance of stock with a value of about $4,399,858.72 could have been recovered [from the warehouse] had the salvage process been completed". 2. I understood Mr Stoddart to be saying that stock to this value could have been recovered in a saleable condition. 3. The process by which Mr Stoddart reached this conclusion was summarised in a table headed "Possible Salvage Calculation" which is attached to this judgment [Possible Salvage Calculation table (944 KB, pdf)]. 4. Counsel for XL did not in cross-examination challenge Mr Stoddart about the detail of his process of estimation, but did put that Mr Stoddart had "sought to exaggerate the value of stock which was lost by reason of the collapse". 5. One difficulty with Mr Stoddart's "calculation" is that it assumed that stock to the value of $8,540,902 "would have been damaged during the demolition process". The basis for that assertion was a statement made by Mr Stoddart earlier in the affidavit which, because of its form, I rejected. I granted leave to Mobis to adduce evidence from Mr Stoddart in proper form, if such evidence was available. That leave was not taken up. Accordingly, the basis for this aspect of Mr Stoddart's "calculation" fell away. 6. Thus, I am faced with two opinions expressed by Mr Stoddart as to the value of the stock that, but for the fire, could have been "salvaged" by Mobis; the $18,438,945.49 estimate made in January 2016 and the estimate of $4,399,858.72 made by Mr Stoddart in his affidavit of 1 June 2016 (suffering, as it does, with the difficulty to which I have referred). 7. Overall, I am persuaded that I should prefer the higher figure to the lower, essentially for the reasons set forth in UNIQA's submissions as follows: "First, unlike Mr Stoddart's estimate [in his affidavit], the $18,438 million figure is truly the plaintiff's estimate. Apart from the fact that Mr Stoddart believed it was accurate, it was the result of input from Mr David Peterson, who was very good with inventory analysis. It was also approved by internal and external legal advisers. It was approved by the plaintiff's CEO. In contrast, the estimate in Mr Stoddart's affidavit appears to be something he came up with on his own. In this regard, his affidavit estimate is no better than his initial estimate in August 2015 of $17.545 million. Mr Stoddart did not claim to have been assisted by Mr Peterson in arriving at the figure in his affidavit. Other than saying that his figures came from AMOS, Mr Stoddart does not explain their genesis. Secondly, the Court is entitled to be bold in drawing inferences from the absence of any evidence from the plaintiff to explain or qualify the $18.438 million figure. Mr Stoddart did not refer to any claims against Metropolitan Demolitions in chief. A full explanation of the $18.438 million figure, and the discrepancy between it and the estimate in Mr Stoddart's was matter ripe for re-examination. That was not attempted. Mr Peterson and Mr Suh were not called and their absence was unexplained. There is no proper basis for drawing the inferences sought by [Mobis] that Mr Peterson's role was no more than assisting Mr Stoddart in his initial 'broad brush' assessment. The inferences sought are also contrary to Mr Stoddart's evidence that Mr Peterson was involved in the process of refinement that produced the $18.438 million figure". 1. I accept those submissions and I am persuaded that I should infer that: 1. the $18,438,945.49 figure remains Mobis's best estimate of the stock that was destroyed by the fire; 2. that figure was based on a more accurate and reliable process of assessment than the estimate in Mr Stoddart's affidavit evidence; and 3. that claim is the best and most reliable estimate of the stock destroyed as a result of the fire. How much stock was "lost" by reason of the warehouse collapse? When is insured property "lost"? 1. As I have set out above (see [840]) "damage" is defined in the Local Policy to include "physical loss" of Mobis's property (the full expression being "physical loss or destruction of or damage to" that property). 2. The question is whether, as Mobis contends, there was a "physical loss" of all the stock (that is, the stock was "lost" for the purposes of the policy) as soon as the warehouse collapsed. 3. The "lost" stock that is relevant, in monetary terms, is that which was otherwise undamaged; there is no controversy that Mobis is entitled to indemnity in respect of damaged stock (save for that which it has not replaced: see below). 4. But an analysis of what stock has been "lost", as opposed to "damaged", directs attention to all the stock, damaged or not, that is said to have been lost by reason of the collapse. 5. My attention has been drawn to a number of authorities in which the question of whether insured property has been lost has been considered. 6. It is common ground before me that, as this is a non-marine case, no question of "constructive loss" arises. 7. Those authorities (and, indeed, common sense) establish the following propositions concerning establishment of loss for these purposes: 1. each case must be determined on it owns facts: Webster v General Accident Fire & Life Assurance Corporation Ltd [1953] 1 QB 520 at 531 (Parker J); 2. it is impossible to lay down an accurate test that will fit all circumstances: Webster v General Accident, Fire & Life Assurance Corporation Ltd at 529 and Holmes v Payne [1930] 2 KB 301 at 310 (Roche J); 3. mere temporary deprivation, even if for an extended period, will not under ordinary circumstances constitute loss: Moore v Evans [1917] 1 KB 458 at 471 (Bankes LJ); 4. it is not necessary to demonstrate complete deprivation amounting to a certainty that the goods will never be recovered: Moore v Evans at 471 (Bankes LJ); 5. loss of physical possession of property may amount to loss of the property: Harris Paper Pty Ltd v FAI General Insurance Co Ltd (1995) 8 ANZ Ins Cas 61-276 at 76,061 (Ashley J); 6. an item can be physically lost even if it remains on the insured's premises: Holmes v Payne at 605 to 307 (Roche J); Harris Paper v FAI at 76,063; Re Mining Technologies Australia Pty Ltd [1999] 1 Qd R 60 at 86 (McPherson J); 7. it is necessary to demonstrate that recovery is uncertain after all reasonable steps have been taken: General Accident Fire & Life Assurance Corporation Ltd at 532 (Parker J), cited with approval in Balent v National Insurance Co of New Zealand Ltd (1959) 59 SR (NSW) 275 at 279 (Else-Mitchell J); in Re Mining Technologies Australia Pty Ltd at 76; in Kuwait Airways Corporation v Kuwait Insurance Co SAK (No 1) [1996] 1 Lloyds Rep 664 (Rix J); and in Scott v Copenhagen Reinsurance Co (UK) Ltd [2002] EWHC 1348 Comm at [67] (Langley J); and (this is perhaps saying the same thing) after a reasonable time has elapsed to allow a diligent search and attempt of recovery to be made: (Holmes v Payne at 310 (Roche J). 1. The parties devoted many pages of their submissions to a detailed analysis of the factual circumstances considered in these cases. I do not find it necessary to conduct such an analysis in these reasons. The facts in those cases were very different than that before me. The cases are valuable in so far as they lay down the guidelines that I have referred to in the preceding paragraph. Otherwise, this case must be determined on its own facts. Was any stock "lost"? 1. Mobis's case is that all the stock in the warehouse was lost when the warehouse collapsed because, at that point, its prospects of recovery in an undamaged condition was uncertain because: "(a) [T]here was a risk of further collapse, not only of the warehouse structure, but also, if salvage was attempted, of the racking on which the stock was stored (because the roof had collapsed upon the racking); (b) there were other factors which, due to the configuration of the warehouse and difficulties and operating conditions, made it difficult for much of the stock to be recovered; and (c) attempting salvage itself gave rise to a significant risk of fire which, as it turns out, came to pass." 1. There were 88,080 lines of stock and approximately 1.5 million individual items in the warehouse at the time of collapse. Following the collapse, all of those items of stock remained in the warehouse, which Mobis owns. Each of the items remained in the warehouse until Mobis itself retrieved and moved some of the stock and, thereafter, engaged Metropolitan to recover stock and demolish the warehouse pursuant to the 2 July 2015 Demolition and Stock Recovery Contract to which I have referred. 2. The process came to an end when the fire destroyed what remained on 30 July 2015. The risk of a fire 1. Mobis makes no claim for indemnity in respect of the fire. Its only claim is in respect of the damage caused by the collapse. Mobis made, but has now withdrawn, a claim under the 2015/2016 Local Policy for indemnity in respect of loss or damage arising from the fire. 2. Nonetheless, Mobis submitted that: "…fire was a real and significant risk from the time the warehouse collapsed and had to be demolished. The risk that fire would destroy all the stock (along with the other difficulties recounted by Mr Stoddart) rendered the stock recovery process uncertain…[and that] a real and significant risk of fire existed from day one". 1. Mobis's submission was, thus, that: 1. the storm and collapse on 25 April 2015 and the fire on 30 July 2015 should be seen as being part of the one event, with the latter being a virtually inevitable consequence of, or at least inextricably linked to, the former; and 2. because, as at the date of collapse, there was such a high risk that the stock in the warehouse on 25 April 2015 not then lost might later be lost in a fire, it should be concluded that all the stock (including that actually lost in the fire) was lost in the collapse. 1. I do not accept that submission. 2. A fair reading of the evidence is that the fire was an unexpected event. It was in no sense a consequence of the storm of 25 April 2015. It was not a necessary or direct consequence of the storm or the collapse. It was an intervening cause of damage and destruction. 3. It is true that Metropolitan used oxyacetylene torches to dismantle parts of the warehouse. 4. There is in evidence, photographs showing Metropolitan employees using oxyacetylene equipment and of sparks flying while that equipment is in use. There is also in evidence, vision of a spot fire that broke out (and was contained) prior to 30 July 2015. 5. But I do not accept that it follows from this evidence that, as Mobis has submitted, "attempting salvage itself gave rise to a significant risk of fire", let alone that fire was an inevitable consequence of the collapse. Indeed, the fact that Metropolitan engaged in a process of pre-wetting stock (which Mobis relies upon to show how some of its stock was damaged) shows that Metropolitan adopted a procedure directed to minimising the risk of fire which it was obviously confident would be effective; hence the wide ranging warranties that it gave Mobis in the Demolition and Stock Recovery Contract (see [854] above). No stock was "lost" 1. Unlike the circumstances discussed in many of the authorities to which I have referred, this is not a case where the insured property became missing or was mislaid. Mobis did not lose physical possession of the stock. 2. I do not accept that, at the time of the collapse, it was "uncertain" that Mobis would recover any stock from the warehouse. 3. No witness was called by Mobis to say that. 4. In my opinion, the proper conclusion from the evidence is that, as at the date of the collapse, it was simply too early to say to what extent Mobis would be able to recover stock from the warehouse. The photographs taken by Mr Stoddart on the day after the collapse suggest that there was at least some stock that could be recovered (albeit much of it was wet and otherwise damaged). 5. In my opinion, as at the date of the collapse, Mobis was not in a position to form any view as to whether it was "uncertain" that it could recover its stock until it took reasonable steps to investigate the situation. 6. And that is what Mobis did. Mr Stoddart conceived and implemented the Demolition and Recovery Process to which I have referred. Once that process was completed, Mobis engaged a project manager to investigate the engagement of a demolition contractor. Mobis then engaged a demolition contractor whose processes seemed most likely to maximise the recovery of the stock still within the warehouse. 7. When the fire broke out, all of the stock that had not been removed from the warehouse was still in the warehouse. As I have said, the most reliable guide as to how much of that stock was still in saleable condition when the fire broke out is the analysis that Mr Stoddart undertook in January 2016, in which he concluded that saleable stock to the value of $18,438,945.49 was present in the warehouse at the date of the fire. The remaining stock was, Mr Stoddart opined, in damaged condition. Some of it may not have been able to be retrieved separately from the components of the warehouse structure that Metropolitan was to demolish. But that stock was not "lost". It was still in Mobis's possession, albeit doubtless to some extent in an unsaleable condition. 8. As at the date of the collapse, the only "uncertainty" that existed was as to the extent to which the stock was damaged or destroyed. There was no "uncertainty" as to whether the stock was lost. How much stock was destroyed or damaged? 1. However, much of Mobis's stock was destroyed or damaged in the collapse. Stock that was not destroyed or damaged by the collapse 1. The best evidence available as to what stock was not destroyed or damaged by the collapse (but which was ultimately destroyed in the fire) is the amount that Mr Stoddart calculated in January 2016 and which was the subject of the demand made by Mobis on Metropolitan on 18 January 2016; namely $18,438,945.49. 2. The historic cost of Mobis's stock in the warehouse at the date of collapse was $26,911,372 according to Mobis's database, AMOS. 3. Thus, as Ms Daley has calculated, some 69% ($18,438,945.49/$26,911,372 x 100) of Mobis's stock was not damaged or destroyed in the collapse, and, but for the fire, would have been "salvageable" in the sense I have set out above (that is, saleable). 4. The balance of stock, some 31%, was thus damaged or destroyed by the collapse. 5. Mobis has replaced stock to the value of $20,283,301. On the face of it, therefore, Mobis is entitled to indemnity for 31% of that amount: namely $6,287.823. 6. There are, however, two further matters to consider. 7. The first is that Mobis destroyed some stock, which may not have been damaged, without inspecting it. 8. The second is that Mobis has not yet replaced stock with an historic cost of $9,797,372. Based on the above analysis, some 31% of that stock was damaged or destroyed: an amount in the order of $3,037,171. The question is whether Mobis is entitled to indemnity for that amount. Stock destroyed without inspection 1. Much of the stock in the warehouse at the date of the collapse comprised spare parts in cardboard packaging, which packaging was damaged (most commonly by water) during the collapse. Mr Lasan (from Hyundai) and Mr Murray (from Kia) gave evidence to the effect that it was the policy of Hyundai and Kia, for reasons of consumer safety and brand protection, to destroy stock in damaged packaging, without investigation of whether or not the spare parts themselves were compromised. 2. Mr Stoddart accepted it was possible that, in some cases, although the packaging of an item of stock was wet or damaged, the stock itself housed in plastic wrapping, was dry and could otherwise be in good condition. However, according to Mr Stoddart, those parts were not capable of inspection because "there are millions of parts" and "we just couldn't have done it". 3. Nonetheless, as I have set out above (see [848]), Mr Stoddart's Demolition and Recovery Process anticipated that, as part of the "further inspection" of stock that Mobis removed from the Demolition Area to the Quarantine Area, and then to neighbouring warehouses, might be unpacked "for detailed inspection". 4. It seems likely that some stock in saleable condition (albeit in damaged packaging) was thereby destroyed. There is no suggestion in the evidence that Mr Stoddart took such stock into account when coming to his estimate as to the amount of saleable stock at the warehouse at the time of the fire. 5. There is no evidence before me as to how much stock was destroyed for this reason, or what its value was. 6. Some allowance must be made on this account. 7. It is for Mobis to prove how much of its stock was damaged by the collapse. As it appears likely that Mobis has, evidently for reasons of practicality, itself destroyed stock which was not damaged in the collapse, unless Mobis proves the value of the stock so destroyed, it cannot make out the total claim that should be the subject of indemnity. 8. As in the case of the extra piles and footings issue (see [795]-[797] above), one possible course is simply to dismiss Mobis's claim for damage to stock for the reason that this element (which would constitute a deduction from its claim) is not proven. 9. However, I will invite submissions as to whether any alternative course is available and preferable. Stock that Mobis cannot replace 1. There was stock at the warehouse on the date of collapse that Mobis has classified in its records as being obsolete. 2. Mobis's Senior Manager for Sales and Marketing, Mr Mark Harrington explained that: "An 'obsolete' classification means the stock is no longer moving and has been assessed by Mobis's parent company headquarters in South Korea as having no future prospects of sale". 1. Stock is only declared obsolete (by Mobis Korea) after Mobis has considered whether any "local factors" (such as service recalls or other campaigns in Australia) militate against such classification. That suggests that, once stock is declared obsolete, Mobis has formed the view that there will be no further call for the stock. That is no doubt because, as Mobis put it in final submissions, obsolete stock represents parts used in vehicles that are "long out of production". 2. Once stock is declared obsolete, it is written off in Mobis's books. 3. Stock that has been declared obsolete includes stock no longer manufactured. In that regard, Mr Harrington said: "Some of the older spare parts which were held in Mobis' warehouse before the ANZAC day storm are now difficult to replace because they are no longer being manufactured. It would be possible to make those parts but factories and machines would have to be reconfigured. It is therefore more practical for Mobis to try to source these parts from another Hyundai Mobis group warehouse when required, rather than attempt to replace these parts." 1. Thus, stock declared to be obsolete is not necessarily irreplaceable. 2. Mr Harrington also said that 6,137 of the 88,080 lines of stock in the warehouse at the date of collapse could not be replaced as at October 2016 for a number of reasons, including that the part was no longer available (by which I assume Mr Harrington meant, readily available) from suppliers. Ms Daley's investigation of Mobis's records reveals that this is the explanation for almost all of those stock lines. 3. The Inventory Soundness Report records that as at April 2015 there was present in the warehouse obsolete stock to the value of $29,185.52. 4. Mobis has made provision in its financial records for obsolete stock at the date of collapse of $245,059.61. 5. That appears to me to be the most reliable guide as to the value of stock in the warehouse that Mobis believed to be obsolete on the date of the collapse. Stock that Mobis has not yet replaced 1. Ms Daley has ascertained that 42,591 of the 88,080 line items of stock in the warehouse at the date of collapse were not replaced within the 13 month period following the collapse; and that of those 42,591 line items, no example of 27,058 of the line items had been sold since January 2014 (15 months before the collapse). 2. Mr Harrington said that as at October 2016 (approximately 18 months after the collapse), Mobis had replaced only 39,242 of the 88,080 lines of stock. 3. Ms Daley has calculated, by reference to Mobis's records, that Mobis has not replaced stock to the value of $9,797,372 (based on historical costs) that was in the warehouse on the date of the collapse. Of that sum, $6,425,641 represents lines of stock not replaced at all, and the balance, $3,371,731, partly replaced lines of stock. 4. According to Mobis's profit and loss accounts, it had a turnover of some $100 million for the calendar year 2014, some $106 million for the calendar year 2015 and some $29 million for the three months to March 2016. In those circumstances, XL submits, and I accept, that it is reasonable to infer that Mobis has sold in excess of $200 million worth of parts, and has ordered parts to about that value, since the date of the collapse. 5. Mobis has procedures for classifying certain stock as "non-moving". Mobis classifies its stock into five classes. It deems stock in one of those classes as "non-moving" if it is not sold for more than 5 years, and stock in another class as not moving if not sold within 12 months. 6. As at April 2015, Mobis's records (in the form of an "Inventory Soundness Report") identified non-moving stock at the warehouse in the order of $1.25 million. Mr Harrington accepted that, were it not for the collapse of the fire, in all likelihood, some of the stock which perished in those events would also have been declared to have been "non-moving". Why Mobis has not replaced this stock 1. Mobis has a policy of retaining spare parts for older model cars to cater for the possibility that they might be needed from time to time. 2. In that regard, Mr Harrington gave this evidence: "5. … It is strategically important to our business to protect the Hyundai and Kia brands by making sure that customers with older model cars can obtain genuine parts. If a customer develops a loyalty to Kia or Hyundai then he or she will be more likely in the future to buy another Kia or Hyundai. Over time this grows Mobis' market share. But if a part cannot be sourced then it would be necessary for the dealer or repairer to supply an aftermarket non-genuine part. Not only would Mobis then lose the sale but, in my experience, some customers would be unhappy with Hyundai or Kia. 6. I cannot say that Mobis will replace all of the parts which were in the warehouse before the ANZAC day storm. In my experience, different older model vehicle parts will be ordered from time to time, but it is not possible to foresee which parts will be required and when they will be required. 7. Mobis will continue to replace parts previously held in the warehouse as they are required, with the process of sourcing such parts from sister companies continuing well into the future. It is possible that some parts may never be replaced but it is not possible to foresee at this time which ones fall into that category." 1. Mr Harrington also gave this evidence: "39.1 In my experience, simply because a part is old or has not been sold for a period of time does not mean the part cannot or will never be sold. Vehicle owners may keep their vehicles for many years, and expect manufacturers to have spare parts available to repair those vehicles. 40. Mobis's practice is to keep stock on hand to meet this demand, and to have stock available for its customers to repair vehicles, even if those vehicles are old. A lot of stock must be kept for this reason, even if that stock is slow moving, old or no longer being manufactured by Mobis's suppliers." 1. Mr Harrington said that "we replaced what was required at the time". Is Mobis likely to replace this stock? 1. It may be that, from time to time, customers with an older model Hyundai will require a spare part of a kind that was present in the warehouse at the date of collapse but which Mobis has not replaced or cannot readily replace. 2. However, it seems highly unlikely that any more than a minute fraction of this stock will ever be called for. It is now almost two and a half years since the collapse, and yet, so far as the evidence reveals, the demand for these components is as I have set out. 3. The question is whether Mobis is entitled to indemnity under the Local Policy for that proportion of this stock (that is, some 31%) as was damaged or destroyed in the collapse. 4. It is necessary first to consider cl 4.2.1 (d) of the Local Policy. Clause 4.2.1(d) of the Local Policy 1. Mobis is entitled to indemnity for destroyed stock on the basis of the "cost of replacement" of that stock: cl 4.2.1(g). 2. Clause 4.2.1(d) is in the following terms: "d. Condition Precedent to Liability No costs of reinstatement shall be payable under this Policy until such costs have been incurred by the Insured." 1. The question arises as to whether the effect of this clause is that Mobis is not entitled to be indemnified for the "cost of replacement" of stock until that cost has been actually incurred. 2. Mobis submitted that cl 4.2.1(d) only had effect if XL had exercised its option (set out in the insuring clause: see [39] above) to replace or repair the damaged property. 3. That submission was based on the proposition that earlier subclauses of cl 4.2.1 (especially cll 4.2.1(a) and (b)), by their terms, could only have relevant application in circumstances where XL had exercised its option under the insuring clause, and that the same can be said for cl 4.2.1(d). 4. Clauses 4.2.1(a) and 4.2.1(b) are in the following terms: "a. Timeliness It is a Condition of this Policy that the Insured shall procure that reinstatement of damaged or destroyed Property Insured shall commence and/or proceed without unreasonable delay. b. Alternative Sites The work of Reinstatement may be carried out on another site from that where the destroyed or damaged Property Insured was originally located and in any manner suitable to the requirements of the Insured. However, the liability of the Company under the Policy shall not thereby be increased." 1. I see force in the argument that these two subclauses could only have logical application had XL exercised its option under the insuring clause. 2. But I do not see that the same applies to cl 4.2.1(d). 3. Mobis submitted that, if that were the correct conclusion, then cl 4.2.1(b) operates as a condition precedent to liability and thus engages the provisions of s 54 of the Insurance Contracts Act. 4. I now turn to that issue. Does s 54 of the Insurance Contracts Act prevent XL from relying on cl 4.2.1(d)? 1. Section 54(1) (when read with s 54(6)) provides: "Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act [or omission] of the insured…being an act [or omission] that occurred after the contract was entered into…the insurer may not refuse to pay the claim by reason only of that act but the insurer's liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of that act." 1. Mobis submitted that a failure by Mobis to incur the cost of replacing stock for the purposes of cl 4.2.1(d) was an omission of the kind to which s 54(1) is directed. 2. In that regard Mobis drew my attention to the decision of the Court of Appeal in East End Real Estate Pty Ltd (t/as City Living) v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400 (in particular, the observations of Gleeson CJ at 403E and of Mahoney JA at 406E) and of the High Court in Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652. 3. Mobis submitted that: "The type of insurance provided by the Local Policy in respect of stock is for physical loss, damage, or destruction during the period of insurance. The condition precedent to liability alleged to arise under clause 4.2.1(d) is not a restriction or limitation on Mobis' cover inherent in its claim: in fact, any contractual right to require replacement of the stock presupposes that the stock is physically lost, damaged, or destroyed and covered by the insurance. The effect of section 54 is to prevent clause 4.2.1(d) from operating to limit Mobis' claim in the manner suggested by XL." 1. In its further submissions in reply, XL did not dispute these matters but simply submitted: "If the Court is satisfied that the plaintiff is not entitled to be indemnified for stock which is obsolete or which will not be replaced or otherwise for the reasons submitted…, then section 54 [of the Insurance Contracts Act] is of no assistance to the plaintiff. Section 54 [of the Insurance Contracts Act] does not have the effect of transforming the absence of a loss into an obligation upon an insurer to indemnify." 1. I read those submissions as, in effect, abandoning reliance on cl 4.2.1(d) (while maintaining XL's submission that Mobis is not entitled to indemnity for stock which it cannot or will not replace). 2. Ultimately, XL accepted that it was not entitled to refuse to pay Mobis's claim by reason only of the fact that Mobis had not complied with cl 4.2.1(d). Is Mobis entitled to indemnity for the "cost of replacement" of stock it has not replaced or cannot replace? 1. As I have mentioned, the total value (historical cost) of stock that Mobis has not replaced is $9,797,372, of which a small proportion ($245,059.61: see [948] above) has been classified as being obsolete and, evidently, cannot be readily replaced. 2. As a result of the collapse, Mobis has suffered a loss in respect of 31% (see [926] to [930] above) of that stock, in that it acquired that stock, presumably at some cost, and now cannot sell it, as it has been damaged and rendered unsaleable. 3. If, as seems probable, the fact is that Mobis will not in any event be able to sell that stock (because there is and will be no demand for it), that will be a loss it would have suffered in any event; that is, whether or not the warehouse had collapsed. 4. The question, then, is Mobis's entitlement under the Local Policy in respect of this stock. 5. I see this question as depending on the proper construction of the Local Policy. 6. The general principle was stated in D Kelly and M Ball, Kelly and Ball Principles of Insurance Law, (2nd ed, 2001, LexisNexis) at [12.0120.25] as follows: "…while an insured who has been paid on the basis of the replacement value is not normally under an obligation to expend the money on reinstatement of the property, a court may decline to assess the insured's loss on the basis of replacement value if it believes that the insured may not intend to reinstate the insured property, or where reinstatement is impossible…". 1. The learned authors referred to the decision of the Court of Appeal in Leppard v Excess Insurance Co Ltd [1979] 2 All ER 668; 1 WLR 512. The issue in that case was whether the insured was entitled to indemnity on the basis of the costs of reinstatement or market value. The Court concluded that the insured was entitled to recover his real loss, but not exceeding the cost of replacement, and that the real loss was the market value of the insured property. 2. The Court referred to the general principle enunciated in Castellain v Preston (1883) 11 QBD 380 in which Brett LJ said (at 386): "The very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely that the contract of insurance…is a contract of indemnity, and of indemnity only, and that this contract means that the assured, in the case of a loss against which the policy has been made, shall be fully indemnified but shall never be more than fully indemnified." 1. The question was also considered by the High Court in British Traders' Insurance Co Ltd v Monson (1964) 111 CLR 86. The issue in that case was whether the insured could recover the full insured value of property destroyed by fire or merely a loss of their interest (as lessee) of the property. 2. The plurality (Kitto, Taylor and Owen JJ) said (at 94): "…no approach can be valid which fails to accept as its first step that a policy showing, as the policy here shows unmistakably, that it is intended as a policy of fire insurance must be construed as a contract for indemnification only. The celebrated judgments in Castellain v Preston…show that that is the fixed and central point to which all else in the policy is subordinate. It could not be otherwise, for as Lord Cockburn CJ said in charging the jury in Chapman v Pole [(1870) 22 LT 306 at 307], the law will not allow of gambling in the form of insurance." 1. XL's promise under the Local Policy was to indemnify Mobis based on the cost of reinstatement for property damage. In the case of stock, the promise was to pay "the cost of replacement of…damaged Stock…by similar property as new". 2. The Local Policy is thus a reinstatement policy. 3. In CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 the majority (Brennan CJ and Dawson, Toohey and Gummow JJ) discussed reinstatement policies and said at 395: "Reinstatement [The general principles that are involved with reinstatement policies] reflect the frequently stated proposition that a contract of insurance such as that contained in the Policy is one for the provision of an indemnity. That, in turn, and as was explained in British Traders' Insurance Co Ltd v Monson has reflected the policy of the law not to allow gambling in the form of insurance. Nevertheless, as was pointed out in argument in the present case, the long acceptance of provisions for reinstatement has tended to diminish any requirement for precise indemnity." [Footnote omitted] Later their Honours said (at 398): "It is suggested that in Australia it is becoming increasingly common for contracts of insurance, especially fire policies, to provide expressly for an indemnity based on the cost of reinstatement so that it is open to the parties to a policy which is not a valued one to agree in advance that, in the case of a loss, indemnification will be assessed on the basis of the current cost of replacement in a condition equal to new. In New Zealand there is recent authority which suggests that, under such a policy, where the property is damaged by fire and the insured wishes to leave it damaged and not reinstate it, recovery will be allowed on the basis of the cost of reinstatement. This is subject to the proviso that there is no further requirement in the policy that the cost of reinstatement must actually have been incurred before there arises the liability of the insurer to pay". [Footnotes omitted] 1. I was not able to find in the New Zealand case cited by their Honours (City Realties (Holdings) Ltd v National Insurance Co of NZ Ltd (1986) 4 ANZ Ins Cas 60-695) a statement to the effect set forth by the majority. It seems Palmer AJ came to the same conclusion in General Newspapers Pty Ltd v Cigna Insurance (1991) 6 ANZ Ins Cas 61-086 at 77,321-2. 2. However, it appears that the majority did not disapprove of the suggestion that they saw as being contained in City Realties. 3. However, as their Honours made clear, that view was subject to the proviso that there be no requirement in the policy such as is contained in cl 4.2.1(d) of the Local Policy. 4. XL accepts that, by reason of s 54 of the Insurance Contracts Act, it may not refuse Mobis's claim by reason only of the fact that Mobis has not satisfied the "condition precedent to liability" set out in cl 4.2.1(d). 5. However, the fact remains that the wording of the Local Policy included cl 4.2.1(d). That is part of what the parties agreed. Section 54 does not have the effect that cl 4.2.1(d) is statutorily written out of the Local Policy. 6. I cannot see why it is not available to assist understand what the parties meant when they agreed that Mobis's indemnity for damaged stock would be the cost "of" replacement of that stock; and not, for example, the "replacement cost" of that stock. 7. In my opinion, the wording of cl 4.2.1(d) suggests that the parties intended that the "cost of replacement" of damaged stock was the cost actually incurred by Mobis in replacing that stock. Why else would the parties have agreed that a condition precedent to XL's liability to pay Mobis's reinstatement costs (which must include the cost of replacing damaged stock) be the actual incurring of those costs by Mobis. 8. For those reasons, my conclusion is that XL is not liable to indemnify Mobis for the cost of stock it has not replaced. Kia owned stock 1. At the time of the collapse, Mobis was storing in the warehouse stock owned by Kia Motors Australia Pty Ltd. 2. Mobis claims that the value of that stock was $460,482. 3. On 2 June 2015, Kia made a claim on Mobis for that sum and described its claim as being in respect "the value of goods owned by [Kia] which was stored at [the warehouse]". 4. In an affidavit, Mr Harrington said that: "The Kia merchandise included after-sales products like tools, engine oils, car-polish, and seat covers. It also included marketing and promotional merchandise like clothing, key-rings and brochures." 1. In closing submissions, Mobis drew my attention to a Memorandum of Understanding made in March 2013 between Mobis and Kia pursuant to which Mobis agreed to "assume ownership and management of [Kia] inventory of A/S parts and accessories". 2. However, on 2 June 2015, Kia wrote to Mobis stating: "It is clear that the above Agreement only relates to Parts warehousing and logistics services and the other services provided for at Schedule 1, Part 1, (f)(listed above). The Agreement does not provide for the storage of [Kia] goods otherwise stored at Mobis, particularly marketing and promotional material, to which Schedule 1 clearly states will be negotiated separately. It also does not provide for storage of Special Service Tools, as these Tools do not fall within the definition of 'Parts' or within the 'Services' agreed to be provided by Mobis under the attached Agreement.' [Emphasis in original] 1. Kia concluded: "We would be grateful if we could meet with you to discuss the above issue and to request your assistance with submitting a claim to Mobis' insurer for the value of [Kia] goods stored at Mobis. As stated above, [Kia] considers that Mobis remains responsible for the value of its goods destroyed in the collapse of the Mobis facility." 1. It is plain from this correspondence that the relevant material belonged to Kia, not Mobis. 2. In those circumstances I do not see how the Local Policy can respond to it. 3. Mr Harrington seems to have had the same view as, on 2 June 2015, he wrote to Kia: "We believe that the chances of this being covered given the current agreements are basically zero." 1. I am not satisfied that Mobis is entitled to indemnity in respect of any property belonging to Kia which was damaged or destroyed in the collapse. 2. Indeed, the matter was barely pressed in final submissions. Contents 1. Mobis claims an amount of $8,545,089 for contents lost when the warehouse collapsed. 2. Two issues arise. The first is in respect of a number of individual items. 3. The second is whether the contents claim should be subject to average. 4. I will first deal with the individual items that are still in contention. The individual items (a) Skywire $75,754 1. This item concerns "finger scanners" (devices used to record stock) lost in the collapse. 2. Ms Daley opined that this claim may have been duplicated. However, Mr Stoddart gave evidence that there was no duplication and that these items were lost as a result of the collapse. 3. I allow this claim. (b) Shockwatchers $35,485 1. The claim for this item was withdrawn in final submissions. (c) Other items in Asset Register $49,423 1. Ms Daley was only able to identify $15,877 of the amount claimed in Mobis's Asset Register. 2. However, Mr Guangxiang Liang, an accountant employed by Mobis, gave evidence that the items were not in the Asset Register as they were consumable items. He provided a photograph which showed the existence of the racking and binning labels at the time of collapse. 3. I allow those items. (d) Betterment on third level of racking $66,734 1. The claim for this item was withdrawn in final submissions. (e) Rack and binning labels $49,798 1. XL accepted this claim in final submissions. (f) Binning upgrade for fire compliance $181,486 and additional fire proofing $13,574 1. This is the cost of the supply and installation of intumescent coating to steel columns and the supply and installation of fire rated materials within the warehouse following the collapse. 2. XL submitted that the claimed expense duplicated a claim already made. 3. But that suggestion was not put to Mr Stoddart and is inconsistent with his evidence. 4. I allow this amount. (g) Binning dividers $74,676 1. Although Ms Daley pointed out that these items are not included in Mobis's Asset Register, Mr Stoddart gave evidence that these dividers were installed during the original construction of the warehouse and were present at the time of the collapse. 2. I allow these items. (h) Totes and tote trolleys $17,400 1. Mr Stoddart gave evidence that these items were purchased in 2005 and were still in the warehouse and in use at the time of collapse. 2. I allow this item. Average 1. The sum insured under the Local Policy for contents was $9,683,269 (as set out in the Asset Schedule to the policy). 2. Clause 4.2.1(e) of the Local Policy provided for average in respect of contents (and also, but not relevantly, for buildings) and was in the following terms: "e. Average Each Sum Insured stated in the Asset Schedule in respect of Buildings and Contents is declared to be separately subject to the following condition of Average, namely; If, at the time of Reinstatement of any Property Insured, the sum insured in respect of such Property at the commencement of the covered peril causing Damage represents less than eighty-five per cent of the cost which would have been incurred in Reinstatement if the whole of the item of Property insured had been destroyed or damaged, then the Insured shall be considered as being his own insurer for the difference between the sum insured and the cost of Reinstatement of the whole of the Property Insured, and shall bear a rateable proportion of the loss accordingly." 1. The effect of cl 4.2.1(e) was that if the sum insured for contents was less than 85% of the cost that would have been incurred for reinstatement of all the contents insured, Mobis's entitlement to indemnity was rateably reduced in that proportion. 2. The question of whether average applies depends upon whether certain items that are part of Mobis's claim for damage to the building (see [774] above) should be characterised as "contents". 3. Those items comprise air-conditioning units, dock levellers, lifts, switchboards, carpets, signage, exhaust fans, security systems, switchboard generators, roller doors and smoke alarms. 4. If those items should be characterised as "contents", the result is that Mobis was underinsured for contents such as to enliven the average provision. The parties are in agreement as to the amount that should be deducted from Mobis's claim if this is the correct conclusion. 5. Clause 2.23.1 of the Local Policy defined "Buildings" as, relevantly: "The word 'Buildings' shall mean buildings that are the property of the Insured or for which the Insured is responsible, including a. Landlord's [sic] fixtures and fittings b. Tenants' [sic] improvements and betterments…". 1. On the other hand, cl 2.23.2 defined "Contents" to mean, relevantly: "The word 'Contents' shall mean machinery, plant and other contents belonging to the Insured…(other than landlord's [sic] fixtures and fittings, tenants' [sic] improvements and betterments, Stock and other property more specifically insured by this Policy whilst in or on the Buildings…". 1. At all relevant times it was a mutually known fact that Mobis owned the warehouse. It was not a "tenant". There was no "landlord". Hence, the use of those words in the Local Policy was inapt. The reference "[l]andlord's fixtures and fittings" and "[t]enants' improvements and betterments" should be read as any fixtures, fittings, improvements or betterments in the warehouse. 2. On the face of it, the items in question are fixtures, fittings and improvements, and thus part of the building. As Mobis submits, they are all attached to the building and form an intrinsic part of its function as a warehouse. They are "annexed" to the property in the sense described by the High Court in TEC Desert Pty Ltd v Commissioner of State Revenue (WA) (2010) 241 CLR 576 at 585 (French CJ, Gummow, Heydon, Crennan and Kiefel JJ). 3. However, XL pointed to the fact that the items are listed in Mobis's "Asset Register" as items of machinery or hardware, as thus as contents, rather than components of the building. 4. In that regard, XL relied on cl 4.16 of the Local Policy which provided: "For the purpose of determining the heading under which any property is insured, [XL] agrees to accept the reasonable designation under which such property has been entered in [Mobis's] records." 1. By this clause, XL agreed, for the purposes of determining whether to insure Mobis's property as "contents" rather than "buildings", to accept the manner in which Mobis described the property in its own records (provided such description was reasonable). 2. The question may well have been relevant to the level of premium; although there is no evidence about whether XL would have charged a different premium if Mobis had included the value of these items as part of the building. 3. The amount Mobis nominated to XL as the value of its contents for the purposes of the Local Policy was $9,683,269. This is the figure specified as "General Contents" in the Asset Schedule of the Local Policy. That figure is recorded in Mobis's Asset Schedule as the value of its contents, and included the items in question. 4. Although XL did not see Mobis's Asset Register when it wrote the Local Policy, by cl 4.16 it agreed to accept Mobis's designation that these items should be included in the Asset Schedule to the Local Policy, and thus be insured as contents. I would infer that XL assumed (correctly) that this was how Mobis characterised the items in its own records. 5. In my opinion, it is implicit in cl 4.16 that the parties agreed that if XL insured Mobis's property on this basis, Mobis could not later contend that the property be differently characterised. 6. As XL submitted, Mobis has taken the benefit of the clause by designating these items as contents and cannot be now heard to say that they are not. I accept the submission that the designation clause should not be treated as being ambulatory and thus permitting Mobis to alter the heading under which its property is claimed. 7. In my opinion, on the proper construction of cl 4.16, it represents an agreement between Mobis and XL by which: 1. XL agreed to accept the designation given by Mobis in its records to its property for the purpose of determining how that property was to be insured; and 2. Mobis agreed that, if XL insured the property on that basis, when making a claim under the policy it could not seek to advance an inconsistent position. 1. Accordingly, the parties should be taken to have agreed that the items in question were "contents". 2. The average provision is thus enlivened. Business interruption 1. Mobis claims various amounts on account of business interruption. The Local Policy provides cover for Mobis's loss of gross profit and increased cost of working resulting from the interruption to and interference with its business caused by the warehouse collapse. 2. Thus, cl 7 of the Local Policy provides, relevantly: "If during the Period of Insurance Property [Mobis] shall sustain Damage, and in consequence of the Damage: (a) Business of [Mobis] at the [warehouse] is interrupted or interfered with; … [XL] will…indemnify the Insured in respect of loss of: - Gross Profit - Additional Increase in Cost of Working … sustained during the Indemnity Period and directly resulting from such interruption or interference of the Insured's Business". 1. Clause 7.1.1(a) provides for the calculation of the loss of gross profit by reference to cll 8.1 and 8.7. 2. Clause 7.1.1(b), when read in conjunction with the last two lines of cl 7.1.1, defines "Increase in Cost of Working" as follows: "[T]he additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the reduction in Turnover which, but for the expenditure, would have taken place during the Indemnity Period in consequence of the Damage… less any sum saved during the Indemnity Period in consequence of the Damage in respect of such of the charges and expenses of the Business payable out of Gross Profit ". Loss of gross profit 1. Mr Johnson has assessed Mobis's loss of gross profit at $318,557; Ms Daley at $34,735. 2. The matters that divide the parties on this question are: 1. the appropriate rate of gross profit that should be adopted in respect of lost sales; 2. the period of over which lost sales should be considered; 3. the rate of growth for sales (the "trend") that should be applied to lost sales; and 4. what, if any, allowance should be made for the impact of the fire. Rate of gross profit 1. Mr Johnson, on behalf of Mobis, applied a rate of 28.95% to lost sales. Ms Daley, on behalf of XL, applied a rate of 27.99%. 2. Neither Mobis nor XL offered any submission as to which of these rates was to be preferred. 3. In the absence of such submission, I find that the halfway point: 28.47% should be adopted. Period of lost sales 1. Mr Johnson calculated loss over a period of eight months; Ms Daley over three months. 2. The only direct evidence on this issue was from Mobis's sales and marketing manager, Mr Harrington. His evidence was that there was (unsurprisingly) a drop in revenue from the date of collapse (25 April 2015) to the end of May 2015, followed by a surge in sales from June to late September 2015 and a dip in sales after September 2015 (compared to budget). 3. That evidence suggests that the period over which to assess loss of sales lies somewhere between the figures adopted by Mr Johnson and Ms Daley. 4. I propose to adopt the period from the date of collapse to the end of September 2015 (a little over five months); being the period the subject of Mr Harrington's evidence. Rate of trend 1. The question here is what rate of sales growth should be assumed to have occurred but for the warehouse collapse. 2. Mr Johnson calculated a trend for sales growth of 11.49%; Ms Daley 5.62%. 3. Ms Daley opined that the best indicator of expected trend was the six month period prior to the collapse: 5.62%. 4. But the sales growth actually experienced by Mobis between April and September 2014 (which corresponds, approximately, to the period I have adopted for present purposes) was 13.65%. The growth during the period April to September 2015 was 8.26%, and during the period April to September 2016 it was 20.7%. These figures suggest that Ms Daley's figure is somewhat pessimistic. 5. Mr Harrington's evidence of a drop followed by a surge in sales following the warehouse collapse must be considered in the context of his evidence that most of Mobis's customers are Hyundai and Kia dealers who, typically, hold an average of 45 days' worth of spare parts in their own inventories and Mr Stoddart's evidence that temporary warehouses were fully operational by 30 June 2015. Further, there is no evidence to suggest that the demand for Hyundai and Kia spare parts would have changed during the five month period following the collapse (compared to the corresponding period before the collapse). 6. That evidence suggests that, despite the warehouse collapse, the sales growth actually achieved in the five month period following the collapse was in the same order it would have been but for the collapse. 7. In those circumstances, I propose to adopt the figure of 9%; being slightly more than that actually experienced from April to September 2015. Allowance for the fire 1. Both Mr Johnson and Ms Daley assumed that the fire on 30 July 2015 had no effect on Mobis's gross profit. 2. But it must have; some part of Mobis's loss of profit must be attributable to the extra disruption caused by the fire. 3. In the absence of evidence on the subject, I can only guess as to what that effect was. 4. Just as in the case of the extra pilings issue in the building claim (see [795] to [796] above) and the saleable stock destroyed without inspection (see [931] to [939] above) one possible course, is that I simply disallow this aspect of Mobis's claim for business interruption because of this hiatus in the evidence. 5. However, I will invite submissions as to whether an alternative course is available and preferable. Increased cost of working Additional labour costs 1. Mobis claims an amount of $768,569 for additional labour costs. 2. XL accepts all but $39,104 of this claim. 3. The difference between the parties is principally a product of the differing methodology adopted by Mr Johnson and Ms Daley. 4. Mr Johnson used average wage costs for the period before and after the collapse, whereas Ms Daley adopted the actual hours worked and hourly rates to ascertain the incremental increase in labour costs. 5. Ms Daley's methodology appears to me to be more reliable, as it is based on actuality. I propose to adopt it. 6. However, once again, neither expert made any allowance on account of labour costs caused by the fire. 7. It seems likely that Mobis incurred some additional labour costs because of the fire. 8. But, again, I could only guess what those costs were. 9. And, again, one course I could follow is simply to dismiss this aspect of Mobis's claim. 10. However, I will invite submissions as to whether there is any other course I should follow. General ledger costs 1. These are costs recorded in a ledger created by Mobis to record expenses incurred by reason of the collapse and the fire. 2. Mobis claims $5,346,507 under this head, whereas XL contends the correct figure is $4,495,010: a difference of $851,497. 3. Clause 7.1.1(b) of the Local Policy requires that Mobis demonstrate, in each case, that the additional expenditure was: 1. incurred in consequence of the damage caused by the collapse of the warehouse; 2. "necessarily and reasonably incurred"; and 3. incurred "for the sole purpose of avoiding or diminishing the reduction in turnover". 1. I will deal with each of the items in dispute in turn. FDC $20,220 1. The bulk of this amount ($18,000) relates to charges from the local council for road blocks around the damaged warehouse. Mr Stoddart gave evidence that Mobis was required by NSW Fire & Rescue to set up road closures and safe access to the damaged warehouse. 2. I am not satisfied this expenditure was for the sole purpose of avoiding or diminishing reduction in turnover. It thus does not satisfy the "sole purpose" test. Jenmarc $5,268 1. This cost was incurred to re-establish power to the damaged warehouse. Turnover could not be generated without power. I am satisfied the sole purpose test is satisfied. Blacktown City Council $21,782 1. This is a cost levied by the local council for road closures. It does not satisfy the sole purpose test. Mobis head office $150,681 1. Mr Stoddart and Mr Harrington gave evidence that these costs related to travel and accommodation expenses of key decision makers from Mobis Korea who travelled to Australia immediately following the collapse to facilitate the making of urgent decisions concerning significant items of expenditure, such as leases, fitout, equipment and staffing. 2. Mr Stoddart said that the presence in Australia of these key decision makers assisted in getting Mobis's business up and running and thereby diminished any reduction in Mobis's turnover. 3. Although there was no evidence before me of any breakdown or itemisation of these figures, I am satisfied that they are incurred and that they satisfy the sole purpose test. Security $457,827 1. This expense was for security guards for the warehouse. 2. Mr Stoddart gave evidence that this cost was incurred to protect potentially salvageable items of stock and other assets, and to also protect Mobis from the risk of people entering the premises and sustaining injury. 3. However, over half of these costs ($295,000) were incurred after the fire. 4. Mr Stoddart gave evidence that the security was required "to prevent people going inside and doing whatever those sort of people do". 5. That evidence makes clear, in my opinion, that the purpose of the security guards was not to avoid or diminish the reduction of turnover. In any event, much of the expenditure was related to the consequences of the fire, and not the collapse. 6. The sole purpose test is not satisfied. PNL and Wrapfix $8,455 1. These costs were incurred for packing and wrapping stock that Mobis consumes in the course of its business. The items were ordered prior to the date of the collapse as spare stock. Because existing stock was lost when the warehouse collapsed, these items were used to replace it. I do not see how this cost satisfies the sole purpose test. Crown $30,701 1. Mr Johnson agreed (in the Joint Report with Ms Daley) that this item is included in Mobis's contents claim. I reject it as part of this claim. Assets of third party $80,045 1. This represents the cost of replacement of printers and photocopiers destroyed in the collapse. The amount was paid to the supplier of this equipment (which was leased to Mobis). It does not satisfy the sole purpose test. Various invoices for staff amenities $27,245 1. This is a claim for the cost of catering which, according to Mobis's submissions, was "incurred to keep staff motivated as they worked very long hours in the weeks following the storm" and was part of Mobis's "effort to ensure the temporary warehouse was set up as quickly as possible". It does not satisfy the sole purpose test. DY Kim Language Services $7,467 1. This is an amount incurred to translate the Local Policy from English to Korean. It does not satisfy the sole purpose test. Miscellaneous $8,057 1. This amount is said to relate to various items such as a Bureau of Meteorology Report and Work Health Safety costs and accommodation costs (evidently for a Korean lawyer). I am not satisfied these satisfy the sole purpose test. Rent outside indemnity period 1. Following the collapse of the warehouse, Mobis leased two temporary premises nearby. Mobis was not able to negotiate a lease term of less than 15 months from 6 May 2015 for one of those premises, and 18 months from 1 June 2015 for the other. 2. The issue which arises is whether the rental payments made by Mobis under the leases beyond the expiry of the Indemnity Period (on 25 April 2016: see cl 8.3 and item 1.14 in the Schedule) are covered. 3. The amount claimed by Mobis totals $1,562,547. 4. The cover under the Local Policy for increased cost of working was for additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing reduction in turnover which turnover would, but for that expenditure, have taken place "during the Indemnity Period": cl 7.1.1(b). 5. The clause thus directs attention to expenditure made for the purpose of avoiding reduction of turnover that would otherwise have taken place "during the Indemnity Period"; that is, from the date of the collapse on 25 April 2015 to the end of the Indemnity Period 12 months later on 26 April 2016. 6. Whether or not Mobis, by executing the leases during the indemnity period, can be said to have "incurred" an obligation to pay rent beyond that period, I cannot see how the incurring of that obligation can be said to have been made for the purpose (let alone "sole purpose") of avoiding a reduction in turnover within the period of indemnity. It may have been a necessary consequence (because a shorter lease term could not be negotiated) of the incurring of expense which was for that purpose; but it was not itself incurred for that purpose. 7. In closing submissions, I was informed that Mobis's reduction in turnover all occurred within the period of indemnity. That may be how things turned out, but there is no evidence to which my attention has been directed that this was known or expected when these leases were entered into. 8. For that reason, my conclusion is that Mobis is not entitled to indemnity for this amount. Relocation costs 1. For the same reason, Mobis is not entitled to costs paid by it after 25 April 2016 to move back to its replacement warehouse. Savings 1. Clause 7.1.1 of the Local Policy provides that there is to be deducted from the amount payable under the policy for loss of gross profit and increased cost of working, any "sum saved" during the period of indemnity: "…in consequence of the Damage in respect of such of the charges and expenses of the Business payable out of Gross Profit". 1. XL contends that there are sums "saved" for the purpose of this provision in respect of depreciation ($1,449,509) and IT expenses ($287,642). Depreciation 1. The issue is whether a depreciation expense in Mobis's financial records which is no longer booked because the assets in question were destroyed is an "expense…payable out of gross profit" which has been "saved" for the purpose of cl 7.1.1 and should thus be deducted from the quantum of Mobis's claim. 2. The amount in question is $1,449,509. 3. The depreciation expenses that Ms Daley identified in Mobis's financial records relate to plant and equipment. 4. Mobis devoted a number of pages of its submissions to authorities dealing with the meaning of "gross profit". 5. However, those authorities are of little assistance as the expression "gross profit" is defined in the Local Policy in cl 8.1 as follows: "The amount by which a. the sum of the amount of the Turnover and the amounts of the closing stock and work in progress shall exceed b. the sum of the amounts of the opening stock and work in progress and the amount of the Uninsured Working Expenses. Notes - The amounts of the opening and closing stocks and work in progress shall be arrived at in accordance with the Insured's normal accountancy methods, due provision being made for depreciation. - The words and expressions used in this definition shall have the meaning usually and reasonably attached to them in the books and account of the Insured." 1. The definition thus contemplates that, for the purpose of calculating gross profit, provision will be made for depreciation in opening and closing stock and work in progress. It seems to me to be beside the point that the depreciation in question here is in respect of plant and equipment, rather than stock. The point is that for the purposes of the definition of "gross profit" in the Local Policy, depreciation is taken into account. 2. The question is whether depreciation can be said to be an expense "payable out of" gross profit. 3. As Mobis has acknowledged, there is authority for the proposition that it is. In Synergy Health (UK) Ltd v CGU Insurance Plc (t/as Norwich Union) [2010] EWHC 2583 (Comm) Flaux J considered a policy which had terms indistinguishable from those under consideration here and concluded that depreciation was a sum "payable out of gross profit" that had been "saved". 4. His Lordship stated: "[256] More formidable is the second ground upon which [the insured] submits that any saving in respect of depreciation does not have to be brought into account upon the true construction of the policy. This is that depreciation is simply not a charge or expense 'payable' out of gross profit within the meaning of the provision. [The insured] submits that the word 'payable' connotes something that would be 'paid' to somebody, whereas depreciation is never paid in that sense. Rather it is an accounting exercise that spreads the cost of assets over a number of years … [258] Although the [insurers'] construction stretches the word 'payable' somewhat, it seems to me that it is to be preferred to [the insured's] construction, which leaves the saving in respect of depreciation out of account. My principal reason for that conclusion is that it seems to me that, as a matter of principle, a policy should be interpreted as providing an indemnity for the loss suffered not for more than such an indemnity. … [260] Furthermore, in my judgment the word 'payable' does not have as inflexible and narrow a meaning as that for which [the insured] contends. I agree with [counsel for the insurers] that, whilst accountants might not ordinarily refer to depreciation being payable, in accounting terms depreciation is a charge or expense deducted from gross profit to arrive at net profit and to that extent, as [an expert account] said, something payable out of gross profit. Thus an accountant would understand why a saving in depreciation was a saving in respect of charges and expenses of the business payable out of gross profit." 1. Mobis submitted that Synergy Health should not be followed because: "…it seems that no argument was addressed to the Court on the fundamental proposition that gross profit (the subject of the indemnity) is the profit of a business before depreciation (and certain other) expenses are taken into account. Flaux J, with respect, appears not to have taken into account this basal proposition". 1. But here, because of the definition in the Local Policy, gross profit is not profit before depreciation. It is profit which takes into account depreciation in respect of stock. 2. In any event, I find Flaux J's decision to be directly on point and I am persuaded that I should follow it. 3. It follows that there has been a saving which must be taken into account. 4. If, as Mobis appears to submit, there is some controversy about the manner in which Ms Daley has assessed the amount of the depreciation expense, that matter can be referred out for separate determination. IT expenses 1. The issue here is what savings Mobis made concerning IT by reason of the collapse. 2. An assistant accountant at Mobis, Mr Liang, gave unchallenged evidence that Mobis had five IT accounts, and that only one, the "network account" was directly connected to the warehouse collapse and that only the IT expenses recorded in Mobis's "network account" were saved. 3. Ms Daley's assessment of the amount of IT expenses saved ($287,642) was calculated on the basis that all five IT accounts were affected by the collapse of the warehouse. Mr Liang's evidence is that this was not so, that the other IT expenses were not affected by the collapse and should not be treated as a saving. 4. Mr Johnson's calculation is based upon that evidence. Mr Johnson assessed the savings at $52,185. 5. I propose to adopt that figure. Concluding remarks on quantum 1. The parties raised numerous issues concerning the quantum of Mobis's claim. I have endeavoured to address and decide all of the issues raised by the parties. 2. I now invite the parties to confer and agree as to whether any further issues remain for consideration and as to the monetary consequence of the decisions I have made. 3. I also invite submissions as to how the issues that I have not been able to deal with should be progressed. ********** Amendments 03 October 2017 - corrected formatting DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 October 2017