Was the loss of stock caused by flood?

I read the InsuranceNEWS article on AFCA‘s decision on the flood claim involving the loss of frozen foods when the electricity company turned off the power in advance of an expected flood.

The following is a run down of my review of the decision, which I have posted in response to a number of people that have contacted me expressing their horror and why I can see the determination may have been made.

It is good risk management practice for an electricity supplier to turn off the power to substations and other infrastructure in advance of a fire. If the power is left on, the equipment may short circuit, catch fire and/or we have electrolysis take place, which can cause serious damage to the equipment. Of course, there is also the chance of someone being electrocuted.

It is my understanding the only reason the power went off was due to the impending flood.

If we look at the traditional definition of proximate cause, we go back to the Pawsey v Scottish Union & National Insurance Co (1907). The following definition was the answer to a stock question every year in the “Document Drafting and Claims” subject of the old Australian Insurance Institute, and was worth a guaranteed 15% of the paper. As such, most people of my vintage know it by heart.

As we will see, however, the term ‘proximate cause’ is a much more difficult concept than one simple definition.

The term was used long before Pawsey’s case in 1908. Regulation 1 of Maxims of the Law [1] by Lord Bacon (1630), was quoted (with approval) by Watkin Willis J. in Lawrence v Accident Insurance Co[2]. The quote is provided below.

This very early position that the proximate cause was the last cause, was overruled[3]. In Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Limited[4], it was held that the cause that was proximate in “efficiency” is the proximate cause. In Wayne Tank and Pump Co. Ltd v Employers’ Liability Assurance Corp Ltd [5], it is described as the “real”, “effective” or “dominate” cause[6]. Clarke (1981)[7] states that proximate cause requires a causal connection “tighter than” an unbroken chain between cause and effect.

An old principle lying at the basis of the Doctrine of Proximate Cause is expressed in the legal maxim: “In jure, non remota causa sed proxima spectatur” meaning “The law looks to the proximate, not a remote cause”, Everett v London Assurance (1865)[8].

I have to stop myself here or I will be writing another book :). To learn more, please refer to Part B: “A Study of Proximate Cause” in Volume 3 of my book set Understanding the ISR Policy.

Many would argue that the flood was the root cause of this damage, as the electricity company always turn off the power in the face of an event like this one, and had the forecast flood not occurred, they would not have turned off the power. Others may take a more conservative approach and say that there was human intervention between the flood and the power going off, and so the flood was not the direct cause of the damage.

Flood is one of those perils that can create an enormous amount of accumulated risk for an insurer, as it can effect a vast number of major losses over a very wide geographical area. In the 2011 floods in Queensland, an area the size of Germany and France combined was under flood water.

As such, insurers rate this carefully and in cases where the risk is in a high-risk area of being flooded, they will not insure it. Each insurer setting their own risk appetite in consultation with their reinsurers.

To overcome disputes over whether flood is the proximate cause or not, the insurance industry adopted a preamble to their exclusion that broadened it to make it clear that flood was not covered. If I refer to the Australian Mark IV Industrial Special Risk (“ISR”) Policy the preamble to Perils Exclusion 3 reads:

“The Insurer(s) shall not be liable under Sections 1 and/or 2 in respect of:…

3.         physical loss, destruction or damage occasioned by or happening through: (a)     flood, …….

In Switzerland General Insurance Co v Lebah Products Pty Ltd[9], it was held that “occasioned by or happening through” imposes a lesser requirement of causal connection than proximate cause. Therefore, with the policy using the phrase “resulting from or happening through”, it appears clear to me that what is intended is that flood need not just be the proximate cause of the loss or Damage.

I checked the wording of two of the Suncorp brands. The first, a direct product, and the second a well known intermediary brand. The words are the same in each and not as I would have written the exclusion.

We will not cover:
(a) loss or damage caused by:
(i) flood;

To me, the use of the words in this exclusion confine the exclusion for flood to the proximate cause, and so I can understand why AFCA may well have found in favour of the Insured.

Policy Drafting is a very complex area, and the policies of today are considerably more complex than when I joined the industry in the days of the Tariff. It is a part of LMI that started out with me doing the odd wording, but now has five highly-experienced experts working full time. It is another area of insurance where you never stop learning and this case adds to our knowledge.

[1]     Bacon F., (1630), Maxims of the Law, printed by the Assignes of I. More Esq., London, reprinted 2003 by The Lawbook Exchange Ltd., New Jersey.

[2]     Lawrence v Accident Insurance Co (1881) 7 Q.B.D. 216.

[3]     Ionides v Universal Marine Insurance Co. (1863) 143 ER 445; (1863) 14 CBNS 259.

[4]     Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Limited (1918) AC 350 at 369.

[5]     Wayne Tank and Pump Co. Ltd v Employers’ Liability Assurance Corp Ltd. (1974) 1QB 57 at 66.

[6]     Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Limited (1918) AC 350 at 369.

[7]     Clark M., 1981, Insurance: The Proximate Cause in English Law, 40 CLJ 284, p.285

[8]     Everett v London Assurance (1865) 19 CBNS 126.

[9]     Switzerland General Insurance Co v Lebah Products Pty Ltd (1983) 2 ANZ Insurance Cases 60-498.