An explosive coverage decision – Insurer required to indemnify insured under industrial special risks policy

11 January 2024

An insured sought indemnity for consequential loss associated with an electrical arcing event under its industrial special risks policy, pursuant to two endorsements. The applicable insurers denied indemnity.

Ultimately, the Court found that one of those endorsements applied based on its interpretation of the ordinary meaning of words contained within that endorsement.

In issue

  • Whether the insured, Rheem Australia Pty Ltd (Rheem), was entitled to indemnity pursuant to two endorsements to its industrial special risks insurance policy.

The background

Rheem manufactures/supplies commercial and residential hot water systems, as well as some solar products. It performed manufacturing activities at its premises at 55 Brodie Street, Rydalmere, NSW (the Premises), and an upper level of the Premises housed two main switchboards. Rheem held an industrial special risks insurance policy (the Policy) that was underwritten by Mitsui Sumitomo Insurance Company Ltd and Tokio Marine & Nichido Fire Insurance Co Ltd (collectively referred to as the Insurers).

On 4 October 2018, an electrical arcing event occurred, causing significant damage to one of the main switchboards and an extended power outage at the Premises. Expert evidence identified that the event originated in one of the protective devices within that switchboard (known as a combination fuse switch unit (CFS)). Rheem sought indemnity from the Insurers for the costs of a temporary switchboard and repairs, costs of a replacement switchboard and other associated costs pursuant to a consequential loss section within the Policy. Two endorsements applied:

  1. a Machinery Breakdown endorsement, which provided that indemnity was available for damage to 'Property Insured', defined as 'Plant, Machinery or Equipment', including individual switchgear for starting and controlling motors and interconnecting wires and/or cables. However, damage to electric wiring was excluded from that endorsement; and
  2. a Fusion endorsement, which provided that the property damage exclusion within the policy did not apply to 'the actual burning out' of machines, installations or apparatus other than 'rectifiers, radio, television amplifying or electronic equipment of any description, lighting or heating elements, fuses or protective devices or electrical contacts at which sparking or arcing occurs in ordinary working'.

In relation to the Machinery Breakdown endorsement, Rheem submitted that 'electric wiring' meant cables or wires in an electrical system or installation, but not a component (such as the CFS) which does not have cables or wires within it and is not cabling or wiring itself. Insurers adopted a broad interpretation and argued that 'electric wiring' meant the complete electrical installation/system within the Premises, with the CFS being part of that installation/system. Moreover, they argued that there was no evident commercial purpose in excluding wires/cables, but not components of the system or installation altogether.

As to the Fusion endorsement, Rheem argued that the concluding words 'at which sparking or arcing occurs in ordinary working' qualified the three concepts of 'fuses or protective devices or electrical contacts'. In contrast, the Insurers argued that the concluding words qualified the concept of electrical contacts only. Both parties accepted that the CFS was a protective device.

The decision at trial

Before making a decision, the Court articulated the applicable principles regarding construction of an insurance policy. Namely, words are to be given their ordinary meaning and insurance policies are a kind of commercial contract which should be construed according to the principles of businesslike interpretation that are applicable to commercial contracts generally. Moreover, the insuring clause and any exclusion clauses must be read together in a harmonious way so that due effect is given to both.

In relation to the Machinery Breakdown endorsement, the Court held that a harmonious construction of the words 'electrical wiring' favoured Rheem’s interpretation of the Policy when considered in conjunction with other words contained in that endorsement. In particular, the Court said that when considering an insurance policy’s commercial purpose, an insured’s interest is to have as wide a cover as possible (at a reasonable premium), whilst an insurer’s interest may involve provision of narrower cover than the insured would wish to have. Ultimately, the parties will reach an agreement and seek to express that agreement with as much precision as possible, which was done here by clearly defining what was to be excluded from the endorsement, and there is no need to identify the commercial rationale behind those exclusions. The Insurers also did not submit that Rheem’s construction of the endorsement would be commercial nonsense or produce inconvenience. For those reasons, the Insured was entitled to indemnity under that endorsement.

In relation to the Fusion endorsement, the Court accepted the Insurers’ interpretation, as Rheem conceded that it was unaware of any protective devices at which sparking/arcing occurs in ordinary working. Additionally, the use of the word 'or' (rather than a comma) between 'fuses' and 'protective devices' supported the Insurers’ interpretation. The Court therefore found that the carve out for 'protective devices' applied.

Implications for you

This case is demonstrative of policy interpretation principles applied by Courts. Despite the Insurers’ apparent businesslike approach to policy interpretation, in this instance, the Court ultimately favoured an interpretation focusing on the clear and ordinary meaning of the words contained within that policy. Whilst there is not always an exact science to policy interpretation principles, one must remember that where the meaning of a word is clear, a Court will be reluctant to ascribe any other meaning to it.

Rheem Australia Pty Ltd v Mitsui Sumitomo Insurance Company Ltd [2023] FCA 1570

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