The Supreme Court of NSW found the defendant insurers were entitled to decline indemnity to the plaintiff hotel owners on the basis the fires that caused the subject damage were deliberately lit by one of them, a former police officer.
- Whether the defendant insurers could rely on an exclusion in an indemnity policy on the basis the loss and damage claimed was directly or indirectly occasioned by a wilful act of the insured
- The quantum of the loss
The plaintiffs, Mr & Mrs Cook, applied to the Court for a declaration the defendant insurers had breached the relevant policy of insurance for declining indemnity to them in respect of loss suffered from 2 fires at a hotel/motel (the Hotel) in Cowra on 7 September 2010. The defendants denied indemnity on the basis they believed Mr Cook deliberately lit the fires.
The plaintiffs purchased the Hotel (through a company since liquidated and of which they were directors) for about $3.5million in October 2007. The majority of the purchase price was borrowed and secured with personal guarantees from the plaintiffs over their family home. Mr Cook was a former police officer whose sole other income came from his police pension.
It was not disputed that prior to the fires the Hotel business was generally unsuccessful financially. The Hotel was listed for sale for $3.5million in August 2009 and the price was reduced to $3.3 million in May 2010. The Hotel had been on the market for 13 months prior to the fire with no offers received. It was the defendants’ position that by 2009, the Hotel was probably worth less than half the purchase price. On 23 April 2012 the receiver sold the Hotel for $1.025 million in a fire-damaged state.
The Hotel had 3 split levels and comprised a bar, attached restaurant, upstairs function room, gaming room and a separate adjacent 35 room motel. The reception office was at street level near the front entry and near a staircase leading up to the function room. Through the reception office was a private room with a bathroom where Mr Cook spent most nights as the Hotel manager. Three quarters of the way up the staircase was a window, through which access to the Hotel would have been possible. Below the level of the office was a maintenance room with an external door. The Hotel was fitted with a number of passive infrared sensors (PIR detectors), which detected movement, and smoke alarms. There were however no PIR detectors in the function area or the upper part of the stairwell.
In the early hours of 7 September 2010, two fires were lit at the Hotel, one in the maintenance room and the other in the function room. It was not disputed the fires were deliberately lit. Records confirmed the alarm was set after closing on 6 September 2020. At 2:23am on 7 September 2010, a PIR detector detected movement on or near the stairwell. Custom Security Services (CSS) made an unanswered call to the landline of the Hotel at 2:23am, followed by a call to Mr Cook’s mobile phone, which was answered. Mr Cook said that after he received the call he went to the office and turned off the alarm. He then checked all of the doors and they were locked. He then went back to bed but realised he had forgotten to reset the alarm, so he went to the office and re-set it. The CSS records confirm the alarm was not re-activated for 16 minutes.
At 2:48am multiple PIR sensors detected movement on the ground floor of the Hotel and CSS again called Mr Cook. It appeared the multiple alarms were due to the fire in the maintenance room burning through alarm cables. Mr Cook’s evidence was he got out of bed and went to the reception foyer where he could see a large amount of smoke. He called 000 and then went to the motel rooms to get the guests to evacuate. When he inspected the Hotel for the first time on 8 September 2010, he noticed a window on the stairs was open. The Hotel re-opened on 11 September 2010 without a functioning kitchen and restaurant.
The relevant insurance policy insured against properly damage and contained an exclusion for loss or damage directly or indirectly occasioned by a wilful act of the insured.
The defendants accepted they bore the onus of establishing that Mr Cook deliberately lit the fires. The standard of proof to be applied was the standard prescribed by section 140 of the Evidence Act 1995 (NSW) and regard was to be had to the nature of the cause of action or the defence, the nature of the subject matter of the proceedings and the gravity of the matters alleged. The defendants accepted their case was circumstantial but submitted there were compelling inferences to be drawn from the facts and circumstances surrounding the fires to find that Mr Cook lit them.
The decision at trial
The Court accepted the defendants’ submission that it was not incumbent on them to negate, beyond reasonable doubt, all possibilities other than fraud by the plaintiffs. They instead needed to only persuade the Court, on the balance of probabilities having regard to all the circumstances, including the seriousness of the allegation, that Mr Cook lit the fires. The defendants made reference to 4 principles described in Palmer v Dolman  NSWCA, as well established in determining, in a civil case, whether circumstantial evidence leads to an inference of fraud. Firstly, the fact finder must consider the weight that is to be given to the united force of all the circumstances put together. Secondly, the onus of poof is only to be applied at the final stage of the reasoning process. Thirdly, the inference drawn from the proved facts must be weighed against realistic possibilities as distinct from possibilities that might be regarded as fanciful. Finally, where the competing possibilities are of equal likelihood or the choice between them can only be resolved by conjecture, the allegation is not proved.
With the above principles in mind, the Court made no adverse credibility finding against Mr Cook in relation to his evidence. It reached a conclusion however that, on the balance of probabilities and conscious of the need for an actual persuasion having regard to the serious nature of the allegations, it was Mr Cook who deliberately lit the fires. This was principally because of the weight it placed on the evidence of the PIR activations, the lack of any evidence of forced entry to the main part of the Hotel and the evidence there had been no disturbance of the staircase windowsill.
The Court found Mr Cook could have moved around the Hotel without triggering the motion sensors and set both fires in the 16 minute period between the time the first PIR alarm was activated and when it was re-activated. The possibility a person could have entered the Hotel through the window located above the stairwell was not consistent with the evidence the window was opened by the fire brigade in order to allow air into the building or that dust and debris on the windowsill was undisturbed. It was also implausible that someone entering the Hotel by the window would have triggered the single PIR detector but could then have moved around the premises and escaped without setting off other PIR detectors. The Court accepted the submission of the defendants that the complexity of the two fires on 2 different levels told against an outsider being the perpetrator. It was inherently improbable an intruder would have waited about 20 minutes after the first alarm (and after the alarm cabling had been burnt) before escaping the Hotel.
The Court observed it was not necessary to speculate as to Mr Cook’s motivation to have acted as he did, but noted the plaintiffs’ quantification of loss at more than $1million seemed to demonstrate a possible motivation for lighting the fires and making an insurance claim.
The Court went on to determine quantum in the event it was wrong on liability. It said it would have accepted the correct measure of damage was rectification costs in the amount of $740,535.51, with an allowance for the contents destroyed. It did not consider the loss of capital value on sale of the Hotel was the appropriate measure of damage.
The Court dismissed the plaintiffs’ claim with costs.
Implications for you
This case provides guidance for insurers as to the burden they will need to meet and what they will need to show to establish a wilful act of an insured to defraud an insurance policy.