Insurer to indemnify property damage and business interruption loss after failing to prove arson

21 September 2021

The New South Wales Court of Appeal considered the appellant home owner’s entitlement to relief for property damage and consequential loss where the respondent insurer declined indemnity having already made conditional payments under a Deed of Release.

In Issue

  • Whether the primary judge erred in finding the appellant deliberately lit the fire which destroyed her home/business. If so, the measure of relief the appellant was entitled to for property damage and business interruption loss under the policy and/or a Deed of Release.

The background

The appellant’s 2 storey home in Tweed Heads, from which she also operated a childcare business, was destroyed by fire on 1 September 2015. The appellant made a claim on her Home Based Business Property Insurance Policy, which was rejected by the respondent insurer on the basis the appellant had deliberately lit the fire.

By a Deed of Release (the Deed), the respondent initially granted conditional indemnity to the appellant and preliminary payments were made. The respondent however later denied indemnity on the basis the fire had been deliberately lit. The appellant commenced proceedings challenging the denial and sought the cost of reinstating her home, lost contents, and business interruption losses under the Deed. She also alleged breach of the insurer’s obligation to act with the utmost good faith and to indemnify within a reasonable time.

The case against the appellant was circumstantial. She had been home on the morning of the incident for just under 30 minutes, during which time she turned on a hotplate in the kitchen to boil an egg but then decided not to. Eight minutes after she left her home, a passing driver reported the fire to police. Several electrical sources were investigated as the cause of the fire and the expert evidence was held to establish there were 2 points of origin. One was in the living area where there was no electrical source, and a second was on the cooktop in the kitchen, as a result of the leftmost element, which had been left on, burning the underside of a ‘Lego Marvel Superheroes’ game guide lying directly on it. The living room fire was responsible for the damage to the house.

The decision at trial

The primary judge found the appellant had lit the fire and entered judgment for the respondent for $194,505 plus interest, including payments made to the appellant under the Deed.

The primary judge held there was no credible explanation for the kitchen fire apart from human intervention, and it was impossible to see how the game guide could have innocently ended upon the cooktop element. Although the cooktop fire did not cause the fire in the living room, which spread throughout the house, the primary judge held the appellant deliberately started the fire in the living room.

The issues on appeal

The appellant challenged the finding she deliberately lit the fire.

In respect of the relief claimed, there were 3 issues for determination, being whether the property damage was to be assessed on an indemnity basis or a reinstatement basis; whether the appellant was entitled to business interruption losses after 12 months from the date of loss; and whether she was entitled to damages for inconvenience and distress for the respondent’s refusal to grant indemnity, being a breach of the Deed.

The Decision on appeal

By a 2:1 majority, the Court of Appeal held the primary judge erred in finding the fire had been deliberately lit. The primary judge failed to exclude the hypothesis identified by the appellant’s expert as to how the kitchen fire may have started without human intervention as a reasonable possibility. The primary judge also erred in rejecting as fanciful the possibility that an electrical fire originating in an electronic “Tahiti picture” screen caused the living room fire.

The Court of Appeal was unanimous in determining the issue of relief sought by the appellant.

Reinstatement of the home had not yet commenced. The policy provided that for claims in respect of property damage, the basis of settlement was reinstatement or replacement subject to the replacement or rebuilding work being commenced or carried out with reasonable despatch, failing which the respondent would not pay more than the costs of replacement or rebuilding on an indemnity basis.

The appellant argued the Deed superseded the policy and required the respondent to pay the reinstatement value of the house. The Court of Appeal rejected the argument on the basis the promise in the Deed was to make payments in accordance with the policy. The appellant further argued the respondent’s reliance on the Deed was inconsistent with its duty of utmost good faith. The Court of Appeal held the insurer’s non-payment alone did not prevent it relying on the proviso in the policy. There was nothing to suggest the respondent’s delay in granting indemnity was to prevent the appellant from commencing reinstatement so as to enliven the proviso, or that the refusal to indemnify was so unreasonable to be a breach of the respondent’s obligation of utmost good faith. The amount payable to the appellant for property damage was to be calculated on an indemnity basis rather than a reinstatement basis.

The appellant’s claim for business interruption loss from 12 months after the fire to 9 months after the delivery of the judgment (when her house would be rebuilt) was for damages for breach of the Deed, specifically the respondent’s obligation to make payment in accordance with the terms of the policy. The Court of Appeal held such claim was not maintainable under the policy as, in accordance with the decision in Globe Church Incorporated v Allianz Australia Insurance Ltd (2019) 99 NSWLR 470, it was a claim for damages for late payment of damages. The terms of the Deed also did not extinguish or supersede the respondent’s obligation under the policy. The appellant was also not entitled to damages for inconvenience and distress for a failure to pay damages.

Implications for you

This decision provides some guidance as to how a court will analyse evidence in a circumstantial case, although fact specific. The decision is more relevant for the approach the Court took in assessing the appellant’s damages for property damage and business interruption loss.

Worth v HDI Global Specialty SE [2021] NSWCA 185

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