The Sartorial Phoenix - Rising from the Ashes & Soot

The Queensland Supreme Court considered the appropriate measure of damages following a fire which damaged a high-end menswear store.

In Issue

• Whether the plaintiff’s proposed measure of property damage was appropriate, principally the diminution in value of the stock; and
• Whether interest should accrue from the incident date or commencement of proceedings.

The Background

The plaintiff operated a high-end men’s wear business in Brisbane. On 29 September 2010, fire emanating from a vacuum cleaner in the basement of a neighbouring tenancy caused soot and smoke to enter the plaintiff’s store. The soot and smoke caused resulting damage to the plaintiff’s store, including the plaintiff’s clothing stock on display.

The plaintiff held a Commercial Special Risks policy of Insurance with Allianz Australia Insurance Limited (Allianz). The plaintiff made a claim under the Allianz policy. Allianz engaged a loss adjuster and an industrial restoration company to undertake investigations. It was determined that the clothing stock could not be returned to its previously new condition and the loss adjuster recommended that the clothing stock affected should be a total loss.

Pursuant to the terms of the policy, Allianz had a right to retain the damaged stock upon payment of the policy, in order to recoup the salvage value of that damaged stock. The plaintiff expressed concern regarding the reputational impact of a public auction of its damaged stock. Consequently, the plaintiff proposed to pay an amount in consideration for the damaged stock.

A specialist auctioneer was obtained to provide an evaluation report concerning the salvage value of the damaged stock. The specialist auctioneer concluded that an auction might recoup approximately 5-10% of the retail value, equating to a range of $225,000 – $450,000, and offered Allianz a guaranteed return net of costs of $195,000. The plaintiff offered $225,000 for the purchase of the damaged stock.

The plaintiff subsequently held a special ‘fire sale’ for the damaged goods.

The Decision at Trial

Liability was not in dispute. The Court was tasked with determining the appropriate measure of damages.

The plaintiff submitted to the Court a conventional measure of damage to its good - the diminution in value of the goods (i.e. the difference in value of the suits had they not been damaged, subtracting the salvage value of $225,000).

The defendant, in essence, argued that the plaintiff sold the damaged stock at a higher value than the $225,000 which the plaintiff paid. As such, the $225,000 salvage value did not reflect the market value. The defendant submitted that the damaged value of the clothing should be calculated by working backwards from the sale price of the damaged stock from the fire sale. The defendant led expert forensic accounting evidence to the effect that in the years following the fire, there was no discernible difference in the store’s bottom line and therefore, the damaged suits were worth more than the $225,000 paid by the plaintiff.

The Court preferred the measure of damage proposed by the plaintiff. The Court reasoned that the plaintiff’s ‘arm’s length transaction’ with its insurer, which was founded on the evidence of the specialist auctioneer, a loss adjuster and the insured, was the best evidence available concerning the value of the salvaged stock. The Court was not persuaded by the defendant’s expert accounting evidence, reasoning that such an approach was based on incomplete data and did not account for the risk the plaintiff was taking on a novel venture.

The Court found that the plaintiff had established the components of its calculation of the loss were:

In addition to the clothing stock, the Court also found that the following expenses were recoverable:

• The costs of carrying out the decontamination and cleaning;
• The cost of engagement of a forensic examiner was recoverable as the cause of the fire needed to be investigated; and
• The costs of the loss adjuster.

Interest

The defendant sought to argue that interest ought to be awarded from when the proceedings were commenced, as opposed to the incident date, as claimed by the plaintiff. The defendant reasoned that there had been a delay in the commencement of proceedings (three and a half years after the fire incident occurred).

The Court found that interest ought to be awarded from the date of the incident as the investigations were complex, the proceeding was brought within the limitation period and there had not been an inordinate delay by the plaintiff. The interest awarded was $795,799.

Implications for you

The decision was a common sense approach to the assessment of damages. The Court considered that there was no reason to depart from the conventional measure of damages – that is, assessing the difference in valuation immediately before and after an event.

In this case, there was a considerable award of interest. We note that this decision is a timely reminder that significant interest awards can and do accrue in large claims and efforts should be made to progress investigations in a timely fashion, and litigate expeditiously.

Mitchell Ogilvie Menswear Pty Ltd v Rapid Edge Pty Ltd