FEDERAL COURT OF AUSTRALIA

Tropical Reef Shipyard Pty Ltd v QBE Insurance (Australia) Limited [2009] FCA 1088

INSURANCE – business interruption policy – indemnity for loss of weekly turnover – in some weeks there is a loss of turnover in other weeks a gain – construction of policy – gains not to be brought to account

Bruce v Jones (1863) 1 H & C 769

McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579

TROPICAL REEF SHIPYARD PTY LTD v QBE INSURANCE (AUSTRALIA) LIMITED

VID 157 of 2009

FINKELSTEIN J

25 SEPTEMBER 2009

MELBOURNE

THE COURT ORDERS THAT:

1.  The applicant bring in short minutes of proposed orders to give effect to these reasons.

2.  The parties file proposed directions for the further conduct of the trial within three days.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

REASONS FOR JUDGMENT

1                          The applicant, Tropical Reef Shipyard Pty Ltd, provides engineering, repair and maintenance services for commercial vessels from a shipyard facility at Portsmith in Queensland.  Its major piece of infrastructure is a 3000 tonne slipway.  By policies of insurance called “Instant Profits Insurance – Cash Flow Insurance – Simplified Business Interruption Insurance”, the respondent, QBE Insurance (Australia) Limited, agreed to indemnify the applicant, first, for the period 31 October 2005 to 31 October 2006 (2005 Policy) and, second, for the period 31 October 2006 to 31 October 2007 (2006 Policy), for “an amount in respect of weekly loss of Turnover suffered … if the Business is interrupted or interfered with due to … property … having sustained … loss or damage”.  The applicant alleges that during the term of each policy events occurred which interrupted its business and caused it to suffer loss.  A dispute has arisen regarding the manner in which the applicant has calculated its loss of turnover (assuming it has suffered any loss at all).  The resolution of that dispute depends upon the proper construction of each policy.  It has been agreed that issues regarding construction should be determined before trial. 

2                          The background to the dispute is straightforward.  The applicant alleges that three incidents which occurred, respectively, on 4 September 2006, 2 November 2006 and 3 April 2007, each caused distinct damage to the slipway.  The first incident was when the vessel “Castel Braz” collided with the bottom end of the slipway causing the bottom 15 metres to bend and detach.  No loss of turnover is said to have arisen from this incident until early April 2007.  The applicant claims indemnity in respect of the first incident for the period between the week ending 12 April 2007 and the week ending 3 April 2008.  The amount of the alleged loss of turnover is $5,626,000. 

3                          The second incident occurred when the vessel “Mathamarfach” became stuck on the slipway in the course of being slipped when several bogies derailed from the slip and the cradle on the side of the Mathamarfach separated from the front bogies.  As a result (a) the bogey near the front right of the cradle separated from the cradle and was damaged (b) four bogies were damaged and left hanging off the slipway rails and (c) a number of piles on the slipway were damaged and required replacement.  The applicant claims loss of turnover for the period from the week ending 22 February 2007 to the week ending 14 February 2008.  The amount claimed is $5,281,400.

4                          The last incident was when an arm of the cradle on the slipway collapsed and bogies derailed from the slip while a Department of Primary Industries Pontoon was being slipped.  As a result the bogies and the cradle were damaged.  This incident is said to have resulted in loss of turnover for the week ending 12 April 2007. The amount of the alleged loss is $213,900.

5                          The manner in which the loss is to be calculated is the same under each policy.  It will be sufficient, therefore, to refer only to the terms of the 2005 Policy.  The insuring clause provides that “for each week we will pay an amount based upon Weekly Calculations not exceeding the Weekly Sum Insured each week in respect of loss of Turnover suffered by you during the Indemnity Period”, such payment to “be made every seven days whenever practicable”.  The Weekly Sum Insured is defined to mean “the sum insured for each week which you have selected and which appears in the Schedule.  All calculations shall be on a weekly basis”.  The amount which appears in the Schedule is $201,000.  (For the 2006 Policy it is $183,900).  The policy provides that the respondent “will pay [the applicant] … for each week … the loss of Average Weekly Turnover based upon Weekly Calculations adjusted and agreed”.  The expression Average Weekly Turnover is not defined.  But the expression Actual Average Weekly Turnover is defined to mean “the Actual Average of the Turnover for the twelve (12) months preceding the commencement date of the interruption [to be expressed as a weekly figure]”.  Turnover means the “money paid or payable by you for goods sold and for services rendered”. 

6                          There are several exclusions.  Relevantly the exclusion clause provides:  “We will not pay for … [a]ny loss or claim under this Policy after the expiration of: (a) [o]ne year from the end of the Period of Insurance; (b) [t]hree months from the date on which payment shall have been made or liability admitted by the Insurers covering the loss or damage giving rise to the said claim unless such claim shall have in the meantime been referred to Arbitration or legal action”. 

7                          Now that the policy terms have been set out, it is convenient to explain what brings the parties to court.  It will be recalled that the September 2006 incident is said to have caused loss of Turnover for the period between the week ending 12 April 2007 and the week ending 3 April 2008.  There was not, however, a loss of Turnover in each week during that period.  In some weeks the applicant’s actual Turnover for the week was greater than the Actual Average Weekly Turnover (I will refer to that difference as an “increase in Turnover”).  The applicant is not seeking indemnity in respect of those weeks.  In other weeks, the applicant’s actual Turnover for the week is alleged to be less than the Actual Average Weekly Turnover (I will refer to that difference as a “decrease in Turnover”).  It is only in respect of those weeks that the applicant seeks indemnity.  Moreover, when calculating what is said to be due under the policy, the applicant contends that an increase in Turnover in one week need not be offset against a decrease in Turnover in another week.   

8                          The issues are the same in respect of the November 2006 incident in that during the period in which loss is being claimed (the week ending 22 February 2007 to the week ending 14 February 2008) there were some weeks in which there was an increase in Turnover and other weeks in which there was a decrease in Turnover. 

9                          The first question to be determined is how loss of Turnover is to be calculated under the policies.

10                        The method proposed by the applicant involves the following steps.  First, Actual Average Weekly Turnover is calculated by reference to total invoiced sales in the 12 month period preceding the interruption.  Second, the applicant’s actual weekly Turnover is calculated by reference to the sales invoiced in each week.  There is an alternative for the second step which is to calculate actual weekly Turnover as the sum of sales invoiced in each week and any movement of work-in-progress.  Third, for each week during the indemnity period, the applicant’s actual weekly Turnover is subtracted from Actual Average Weekly Turnover.  If that calculation produces a positive amount, that amount is said to be the loss covered by the 2005 Policy (capped to the amount of the Weekly Sum Insured).  If the calculation produces a negative amount, no insurable loss is suffered. 

11                        Although this approach properly reflects the policy’s focus, which is on loss of Turnover looked at on a weekly basis, it has the potential to produce a windfall gain. For example, if calculated on an annual basis the loss of Turnover from the September 2006 incident is $1,776,772, whereas the loss of Turnover using the applicant’s method of calculation is $11,678,735.  Moreover, there was no loss of Turnover on an annual basis flowing from the November 2006 incident.  In fact, there was an increase in Turnover of $591,227.  Nonetheless, the loss of Turnover said to result from the November 2006 incident according to the applicant’s method is $11,088,176. 

12                        The respondent, by several means, seeks to avoid a construction that will result in what may be seen as a windfall gain.  Its principal argument is that the policy ought be given a businesslike interpretation taking into account the commercial circumstances it was intended to address:  McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579.  It calls in aid of this construction the obligation of good faith and the provision of the policy which requires claims to be “adjusted and agreed”.  On this basis, the respondent says that the appropriate method for determining the amount of cover is as follows.  First, in each week during the indemnity period weekly loss of Turnover is calculated by subtracting the applicant’s actual weekly Turnover from Actual Average Weekly Turnover.  Second, the amount so calculated (which can be a positive amount or a negative amount) is “placed” in a nominal running account.  Third, if the balance of the nominal running account is positive, that amount (up to the Weekly Sum Insured), is the loss which is covered and the amount when paid must be deducted from the nominal running account. 

13                        By way of example, assume that (a) the Weekly Sum Insured is $183,900 (b) as the result of an insurable event the applicant’s actual weekly Turnover for three weeks is respectively $60,577, $18,157 and $1,121,363 and (c) the Actual Average Weekly Turnover is $361,840, the calculations are as follows:

14                        It is not possible to accept the respondent’s construction.  The cover provided by the policy makes clear that “for each week [the respondent] will pay [the applicant] … in respect of loss of Turnover” (emphasis added).  This means the calculations are to be made on a weekly basis.  This position is reinforced by the introduction to the policy, which speaks of indemnity “in respect of weekly loss of Turnover”.  In addition where a loss arises, it must be paid within “seven days whenever practicable”.  In other words the policy terms provide for indemnity for losses incurred on a week by week basis.  Those losses must be calculated by reference to weekly figures not on an annual, or some other, basis.  In the calculation of weekly loss of Turnover, there is nothing to support the introduction of a “running account”.  It is true that the result may be seen as a windfall gain.  But it is only a windfall if the applicant’s position is considered on an annual basis.  It is not when analysed with the words of the policy in mind, which, as I have said, looks at the applicant’s position on a weekly basis. 

15                        The issues that remain to be resolved at trial are: (a) whether there is a causal connection between the incidents and the loss claimed and (b) whether Turnover, and therefore Actual Average Weekly Turnover, ought be calculated by reference to total invoiced sales or cash receipts, or a combination of both, plus work-in-progress. 

16                        The second construction question concerns the period of indemnity under the 2005 Policy in respect of the September 2006 incident.  It will be recalled that (a) the period of insurance is 31 October 2005 to 31 October 2006 (b) a claim in respect of the September 2006 incident was made in April 2007 (c) loss of Turnover from the September 2006 incident is said to have been suffered in the period between the week ending 12 April 2007 and the week ending 3 April 2008 and (d) the respondent is not liable to pay for any “loss or claim under this Policy after the expiration of … (a) [o]ne year from the end of the Period of Insurance” (i.e. 31 October 2007).  The question is whether the applicant is entitled to indemnity for any loss suffered after 31 October 2007. 

17                        The resolution of this dispute is not difficult.  It will be recalled that the particular exclusion clause has two limbs.  First, in subparagraph (a) there is the general 12 month time limitation.  Second there is the limitation in respect of “[a]ny loss or claim after the expiration of … (b) [t]hree months from the date on which payment shall have been made or liability admitted by the Insurers covering the loss or damage giving rise to the said claim unless such claim shall have in the meantime been referred to Arbitration or legal action”.  The applicant contends that in order to avoid a nonsensical reading of the second limb, the preamble to the exceptions, which refers to “loss or claim”, should be read so that the word “loss” describes the subject matter of the second limb and the word “claim” describes the subject matter of the first limb.  The result of this construction is that the losses flowing from the applicant’s claim for indemnity would not be subject to the time limit in the first limb.

18                        There is, however, nothing in the policy to support such a construction.  Moreover, it is contrary to a plain reading of the exclusion clause.  In any event the poorly drafted second limb will not have its problems addressed by the construction proposed by the applicant.  

19                        In my view the expression any “loss or claim” in the preamble covers both limbs of the exclusion.  This construction will preclude any liability for loss occurring after 31 October 2007 whenever the claim is made.  It follows that the applicant’s entitlement to indemnity under the 2005 Policy came to an end on 31 October 2007.  

20                        The next problem arises in the following way.  There is an overlapping period (in the circumstances, the period is the week ending 12 April 2007 to the week ending 25 October 2007) in which the applicant make a claim in respect of the same loss under both the 2005 Policy (for the September 2006 incident) and the 2006 Policy (for the November 2006 incident).  This is best understood by way of example.  In the week ending 12 April 2007 the applicant allegedly suffered a loss of Turnover of $352,676.  The Weekly Sum Insured under the 2005 policy limits the amount the applicant can recover to $201,000.  The applicant seeks indemnity for the balance of its weekly loss under the 2006 Policy, up to the Weekly Sum Insured of $183,900.  The question is whether this accords with the terms of the 2006 policy.

21                        The insured event to which the 2006 policy responds is loss of Turnover caused by interruption of or interference with the applicant’s business.  In other words, to be indemnified under the 2006 policy an event must cause a loss of Turnover.  As currently pleaded, the applicant seeks to maintain a claim under each policy in respect of the same loss.  By way of example, for the week ending 12 April 2007, the applicant’s actual weekly Turnover is identical with respect to its claims under both policies ($9,164).  That amount is then subtracted from the Actual Average Weekly Turnover (separately calculated under each policy) to produce the applicant’s weekly loss of Turnover for each claim.  But no attempt is made to tie the loss to either incident.  Further, as pleaded, the entire loss of Turnover for each week during the overlapping period is referable to the September 2005 incident.  It follows that no separate or additional loss is referable to the November 2006 incident.  Accordingly, the applicant has no compensable claim under the 2006 Policy in respect of the November 2006 incident as that incident did not cause a loss of Turnover. 

22                        The final question comes about in the following way.  Recall that in respect of the April 2007 incident the applicant claims a loss of Turnover for the week ending 12 April 2007.  As currently pleaded, the loss claimed in respect of the April 2007 incident is the same loss as is being claimed for the September 2006 incident and the November 2006 incident.  Further, the week ending 12 April 2007 falls within the overlapping period (being the week ending 12 April 2007 to the week ending 25 October 2007).  The question is whether, as currently pleaded, the claim is sustainable.  In virtue of the answers already given it is not.  

23                        It is not necessary to deal with the interesting argument concerning double insurance because this is not a case of double insurance.  However, if it were such a case then, according to old authority, it is possible for the insured to recover his entire loss from several insurers:  Bruce v Jones (1863) 1 H & C 769.

24                        The applicant should bring in short minutes of proposed orders to give effect to these reasons.  It will be necessary to give directions as regards the further conduct of the case.  On this, the parties should file what they regard as appropriate proposed directions within three days.

Associate:

Dated:         25 September 2009