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Supreme Court 6 July 2007

Brescia v QBE

[2007] NSWSC 598

Fraud & dishonesty
INSURANCE PROPERTY DESTROYED BY FIRE INSURED SEEKS DAMAGES FOR BREACH QUANTIFYING LOSS

Citation: Brescia v QBE [2007] NSWSC 598
Court: Supreme Court of New South Wales (Equity Division, Commercial List)
Date: 6 July 2007
Judge: Hammerschlag J

Background

A furniture retailer held an Industrial Special Risk (ISR) policy covering property damage (Section 1) and consequential loss of profits (Section 2) for the period 30 June 2004 to 30 June 2005. On 11 March 2005, the insured's flagship furniture showroom and warehouse at Parramatta Road, Ashfield was destroyed by fire. The building had three levels and housed a substantial volume of retail stock.

The insured sought indemnity from its two insurers. The insurers refused and the insured commenced proceedings for damages for breach of the insurance contract.

The insurers contested both liability and quantum. Their principal liability defences were that the insured had failed to take reasonable precautions as required by the policy, and that the stock loss and business interruption claims were fraudulent under section 56(1) of the Insurance Contracts Act 1984 (Cth).

  • Whether the insured failed to take "reasonable precautions" within the meaning of the policy, and what test applies to that question
  • Whether the stock loss and business interruption claims were established by fraud, engaging section 56(1) of the Insurance Contracts Act 1984 (Cth)
  • Whether the measure of loss for the building was reinstatement value, indemnity value, or the difference in market value before and after the fire
  • How to quantify the stock loss, business interruption, and other components of the claim
  • The extent of the insured's obligation to act with reasonable dispatch after the policy ended by effluxion of time
  • Whether consequential damages were available where the policy was not terminated for breach

Decision

Reasonable precautions defence. Hammerschlag J rejected the insurers' argument that the insured had failed to take reasonable precautions. This was the threshold defence: had it succeeded, it would have defeated the entire claim. The court's analysis of the applicable test and the factual findings resulted in this defence failing entirely.

Fraud defences. The court found the fraud allegations against the insured's principal witnesses did not come close to succeeding. The credit attacks on the insured's three main witnesses all failed. Accordingly, the section 56(1) defence based on fraudulent claims was also rejected.

Measure of loss for the building. The court adopted the indemnity value measure for the building, arriving at a figure of $9,120,757. The judgment worked through the competing valuations and the policy response before settling on this approach and figure.

Quantification of remaining losses. The court awarded $3,909,554 for stock loss, $2,013,422 for business interruption, and $1,657,110 for plant and equipment, together with amounts for debris removal, consulting engineers, claim preparation, and fire extinguishing costs. A gross profit rate of 47.84 per cent was adopted for the business interruption calculation. The court also held that consequential damages were available given the policy had not been terminated for breach, with the precise quantum of consequential loss to be calculated by the parties in accordance with the court's findings.

Orders Made

The orders formally entered are not reproduced in the provided text, but the court directed as follows:

  • Verdict for the plaintiff (the insured) in the total sum of $17,305,275.66, comprising amounts for the building, stock, business interruption, plant and equipment, consulting engineers, debris removal, claim preparation, and fire extinguishing costs
  • The parties were directed to bring in Short Minutes reflecting the calculation of consequential loss in accordance with the court's findings
  • The court indicated it would hear the parties on costs
  • The matter was stood over to enable Short Minutes, cost submissions, and any further issues to be addressed

Key Takeaways

  • The Supreme Court rejected both the reasonable precautions defence and the fraud defences, confirming that allegations of fraud against an insured must be established on the evidence and that mere suspicion is insufficient to defeat a claim.
  • Where an insurer refuses indemnity and the policy is not terminated for breach, consequential damages remain available to the insured; the court confirmed this position as part of its analysis of the available remedies.
  • Indemnity value, rather than reinstatement value or the difference in market value before and after the event, was the appropriate measure of loss for the building in the circumstances of this claim.
  • For business interruption quantification, the court preferred expert evidence that reflected a modest but not radical decline in gross profit rate, adopting 47.84 per cent rather than the more aggressive reduction proposed by the insurers' expert.
  • Attacks on the credit of key witnesses, and fraud allegations, carry significant forensic risk: the court noted the proceedings were characterised by such attacks and allegations, none of which succeeded.

Legislation and Cases Referenced

Legislation
- Insurance Contracts Act 1984 (Cth), section 56(1)

Cases
- Stuart v Guardian Royal Exchange Assurance of New Zealand Limited (No.2) (1988) 5 ANZ Insurance Cases 60-844
- Moss v Sun Alliance Australia Limited (1990) 55 SASR 145
- Legal & General Insurance Australia Limited v Eather (1986) 6 NSWLR 390
- Fraser v BN Furman (Productions) Limited [1967] 1 WLR 898
- Ghazal v Government Insurance Office of New South Wales (1992) 29 NSWLR 336
- Briginshaw v Briginshaw (1938) 60 CLR 336
- CIC Insurance Limited v Bankstown Football Club Limited (1997) 187 CLR 384
- Hadley v Baxendale (1854) 9 Exch 341
- Jones v Dunkel (1959) 101 CLR 298
- Castellain v Preston (1883) 11 QBD 380
- British Traders' Insurance Company Limited v Monson (1964) 111 CLR 86
- Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563
- VACC Insurance Ltd v BP Australia Ltd (1999) 47 NSWLR 716
- Kodak (Australasia) Pty Limited v Retail Traders Mutual Indemnity Insurance Association (1942) 42 SR (NSW) 231
- State Rail Authority of New South Wales v Brown (2006) 66 NSWLR 540
- Ferrcom Pty Limited v Commercial Union Assurance Co of Australia Limited (1989) 5 ANZ Ins Cas 60-907
- Various other ANZ Insurance Cases and New Zealand authorities as listed in the judgment