Constructive Notes ®
Introduction
Two comparatively recent Australian decisions on the operation of an exclusion for ‘flood’ were the Queensland Supreme Court decisions in LMT Surgical Pty Ltd v Allianz Australia Insurance Ltd and Wiesac Pty Ltd v Insurance Australia Group Ltd.1
The first of those cases concerned the words ‘water overflowing from the normal confines‘ and the second ‘water escaping or released from the normal confines‘.
The plaintiff was successful in the first-mentioned case but unsuccessful in the second, with the judge noting that there was only one word that was different in the flood exclusion in Wiesac compared to that considered in LMT Surgical.
In 2021, Dalton J delivered judgment in the Queensland Supreme Court in Landel Pty Ltd v Insurance Australia Ltd.2
As the main part of that case, Her Honour was called upon to consider an exclusion for ‘flood’, which was in all respects identical to the exclusion that was the subject of the court’s judgment in LMT Surgical. On this occasion, however, the court upheld the operation of the exclusion, noting that it was clear that the decision in LMT Surgical did not purport to lay down any general rule.
Before considering the three cases in detail, attention is drawn to the constituent parts of a typical exclusion for ‘flood‘.3
Constituent parts of a flood exclusion
In the NSW Court of Appeal decision of Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd,4 the relevant exclusion provided:
‘The company shall not be liable in respect of:
…
3 Physical loss, destruction or damage occasioned by or happening through:
(a) Flood, which shall mean the inundation of normally dry land by water escaping or released from the normal confines of any natural watercourse or lake whether or not altered or modified or of any reservoir, canal or dam … ‘[emphasis added]5
Occasioned by or happening through
In Provincial, Mahoney, JA said:
‘It was submitted for the insured that the loss or damage in question was not ‘occasioned by’ nor did it ‘happen through’ a flood as defined.
The argument, in effect, was that the water which entered the insured’s premises and caused the loss or damage was not shown ever to have been in the relevant canal or natural watercourse and therefore it was not water ‘escaping … from the normal confines of’ the watercourse or canal. Therefore the argument suggested the exclusion did not apply.
I do not think that argument should be accepted. For the exclusion to apply, it is not necessary that the precise water which escaped from the watercourse or canal be identified as having actually entered the insured’s premises. The exclusion is of loss or damage ‘occasioned by or happening through’ the inundation of normally dry land ‘by water escaping … from … a watercourse or canal’. If by reason of the inundation of normally dry land by water so escaping, other water was forced into the insured’s premises and occasioned loss or damage that would, in my opinion, be loss or damage ‘occasioned by or happening through’ the escape caused by such a flood. In my opinion, therefore, exclusion 3 applied.’6
In the case of Eastern Suburbs Leagues Club Ltd v Royal & Sun Alliance Insurance Australia Ltd,7 Mackenzie J stated:
‘Einstein J applied the passage from Mahoney JA’s judgment with approval in Hams v CGU Insurance Ltd (2002) 12 ANZ Ins Cas 61-525 …. The concept of something being ‘occasioned through’ … was discussed in Mercantile Mutual Insurance (Aust) Ltd v Rowprint Services (Victoria) Pty Ltd [1998] VSCA 147 especially by Callaway JA at [24]. The concept implies that there is a consequential or causal relationship, not necessarily a direct or proximate cause.’8
In that latter case, Callaway JA had stated:
‘[l]oss or damage may also ‘happen through’ a cause that is not the proximate cause.’9
Ormiston JA, when considering the expression ‘occasioned by or happening through’, spoke of the circumstances of that case as a ‘chain of events’ that was ‘unbroken, leading naturally from one event to the next’.10
Normally dry land
In Elilade Pty Ltd v Nonpareil Pty Ltd,11 the definition of ‘flood’ in the policy included ‘the inundation of normally dry land’. Mansfield J rejected the insured’s contention that because the premises and surrounds were already underwater, the land was not ‘normally dry land’, stating:
‘The expression ‘normally dry land’ must be construed in its context. The context is in the definition of ‘flood’ for the purposes of the exemption and in the context of the policy as a whole …. The character of the land inundated is intended, in my view, to have a more or less constant character. That is, indicated by the use of the word ‘normally’. It suggests that the character of the land is measured not by reference to its particular (and, on the evidence, very occasional) character following very abnormal rainfall but by its usual or normal character.’12
Escape
In Hams v CGU Insurance Ltd,13 Einstein J considered a flood exclusion that contained the words ‘escape of water from the normal confines of any lake, reservoir, dam, river, creek or navigable canal’.
His Honour said:14
‘I reject the plaintiff’s submission that upon its true construction the word ‘escape’ as used in the flood exclusion, only applies where water was at one time within a lake.
To my mind, the reasoning of Mahoney JA in Provincial Insurance is persuasive and in any event arguably binding on a first instance judge. Notwithstanding the slight differences in the wording of the provision there being construed, the same approach requires to be taken in relation to the present provision …’15
His Honour went on to say:
Had the court’s decision in relation to the proper construction of the word ‘lake’ been otherwise such that the sumps fell within the meaning of the word, my view would have been that once all or some of the water which in the ordinary course of events would have fallen into the sumps vertically (or being surface water runoff from surrounding areas, would have collected in the sumps), could not be accommodated within the sumps, that water, whether or not some of it had at one time been within the sumps, in ordinary and natural language should be regarded as escaping or as overflow.16
It can be observed from what is set out above that the judge in Hams appeared to accept that ‘escape’ could mean both ‘leaving’ and ‘avoiding’ in the sense of ‘failing to enter’.17
The normal confines
Earlier,18 the court also considered the expression ‘normal confines’. The judge concluded19 that the expression operated viably to prevent a body of water that might otherwise have fallen within one of the terminological descriptions in the clause (in that case ‘lake’) from doing so or preventing its categorisation as ‘an escape of water from their normal confines’ on account of there simply being no normal confines.
The Wayne Tank principle20
The dicta of Mahoney J and the decision of Einstein J (again quoting the passage from Mahoney J’s judgment in its entirety) were seemingly accepted as correctly stating the applicable principles in the Queensland Supreme Court decision of Eastern Suburbs Leagues Club Ltd v Royal & Sun Alliance Insurance Australia Ltd.21 His Honour ultimately determined that case on a different basis, however, finding that there was no basis for concluding that there was inundation by the run-off water as a discrete body of water, or ‘[l]ooked at in a different way, there was one body of water, even though intermingling may only have been partial and perhaps quite small by the time the inundation occurred’ (Wayne Tank thus having application).22
LMT Surgical — 'Water overflowing from the normal confines'
In LMT Surgical, Jackson J posed the question for his determination as follows:
‘When a back-flow not only prevents rain and surface water from draining through a stormwater pipe but also overflows from the pipe, and there is damage caused by inundation of a nearby building, is that damage that was occasioned by or happened through flood?’23
Noting that the answer to that question in the context of the insurance dispute before His Honour depended on how the insurance policy defined ‘flood’,24 Jackson J first set out the factual circumstances:
‘On 11 January 2011, the plaintiff’s business premises were situated at unit 11/97 Castlemaine Street, Milton. From about 6:00pm on that day they were inundated by a combination of water from local run-off and from a back-flow of water from the Brisbane River through two local stormwater drainage pipes (collectively ‘the pipes’). The water level rose to and above the level or levels of the relevant obverts for the pipes near the plaintiff’s premises.’25
The flood exclusion was in the following terms:
‘Physical loss, destruction or damage occasioned by or happening through:
- Flood, which shall mean the inundation of normally dry land by water overflowing from the normal confines of any natural watercourse or lake (whether or not altered or modified), reservoir, canal or dam.’
To understand the import of the finding in LMT Surgical, regard needs to be had to the wording contained in the exclusion and the questions Jackson J was considering.
The dispute in LMT Surgical effectively resolved into the following questions:
- Were the pipes an ‘altered’ or ‘modified’ natural watercourse and, if so, was the inundation ‘by water overflowing from the normal confines’ of that natural watercourse?
- Alternatively, were the pipes a ‘canal’ and, if so, was the inundation by water overflowing from the normal confines of that canal?
- Alternatively, was the river a relevant natural watercourse and, if so, was the inundation ‘by water overflowing from the normal confines’ of that natural watercourse?26
Findings on the exclusion clause
Jackson J concluded that the pipes were a functional replacement for the prior natural watercourse but were not an altered or modified natural watercourse.
His Honour further concluded that in the context of the flood exclusion, ‘canal‘ did not include the pipes;27
His Honour found that the normal confines of the river did not include the pipes.28
His Honour had earlier found that the flooding in and around the premises did not occur because of the overtopping of the riverbank resulting in overland flow.29
In light of these conclusions, there was no scope for operating the flood exclusion, which required an overflowing from one of the sources identified in the clause.
His Honour set out two possible constructions of what might have been intended by requiring that the inundation be by water overflowing from the normal confines of a natural watercourse:
‘[43] One possible example is where water inundates by overflowing but was never within a river because the flood water within the river prevents the inundating water from flowing into the normal confines. In a sense, the water may be said to be overflow from the river, being part of the swollen stream, but it could not be said to have been from within the normal confines. If this is the purpose of the requirement that the damage is by water overflowing from the normal confines, it would exempt from the operation of the flood exclusion inundation caused by water which was never within the normal confines of the river, but might not exempt inundation by water overflowing from the normal confines of the river via the pipes.
[44] An alternative and narrower view is that the requirement, that the inundation be by water overflowing from the normal confines, restricts the operation of the flood exclusion to inundation by water which has overflowed the banks where those banks are the normal confines. On this approach the phrase ‘normal confines’ may be seen as wider than ‘banks’ because of the possibility of artificial works comprising part of the normal confines such as levees or because ‘normal confines’ also qualifies the other water sources identified in the flood exclusion, namely a reservoir, dam or canal.’
Jackson J found that the ordinary meaning of the text supported the narrow view, holding that the requirement for the inundation to be by water overflowing from the normal confines restricted the operation of the flood exclusion to inundation by water that had overflowed the banks, where those banks were the normal confines.30
Given that Jackson J in LMT Surgical regarded the scope of cover or exclusion of damage caused by flood to depend on the specific language deployed in the particular policy, His Honour did not ‘essay’ the application of the cases to which reference was made in his judgment,31 some of which was considered earlier in this essay.
Inasmuch as LMT Surgical drew a conclusion about water ‘overflowing‘ and stated that ‘from the natural confines‘ modified ‘overflowing‘ and that the ordinary meaning of the words was directed at the place from where the overflowing occurred, a somewhat different approach seems to have been taken previously in both Hams32 and Sika.33 In Sika, Cooke J said:34
‘In ordinary and natural language, I think that a watercourse is said to overflow its normal banks when all the water that would otherwise drain or fall into it cannot be contained in it because it is full. All the surplus water is then overflow, no matter whether or not some of it has at one time been within the banks and then forced out.’35
Wiesac — 'Water escaping or released'
‘[9] In early January 2011, Brisbane and other parts of Queensland experienced significant flooding. At some time in either the late evening of 11 January 2011 or the early hours of 12 January 2011, water entered through the wall of the basement of the premises damaging the second plaintiff’s fit out and causing disruption to the second plaintiff’s legal practice. As a result of the damage, rental payable to the first plaintiff by the second plaintiff was abated and the lost rental forms the basis of the first plaintiff’s claim.
[10] Initially, the premises could not be accessed at all and the entire rent was abated. Later, parts of the premises were fit for occupation and use but the basement area was so badly damaged by water that the fit out was replaced.39 Rental calculated to relate to the basement was abated until repairs were completed. The first plaintiff claims against the policy for the lost rental. The second plaintiff claims against the policy for the cost of clean-up of the basement, replacement of the fit out, loss attributable to business interruption and some associated financial expenses.’
Davis J described how the basement flooded:‘[21] The premises is situated in Mary Street between Edward Street and Albert Street. Mary Street runs parallel to Margaret Street. The premises fronts onto Mary Street. There is a storm water drain which runs along the back of the premises and there is another drain running in Mary Street in front of the premises. Water from the land (local run off) which enters the drainage system through the drain in Mary Street in front of the premises travels into Albert Street, then into Margaret Street, and then on to a point of discharge into the Brisbane River just beyond Felix Street. However, if the water levels in the Brisbane River are high enough, water in the river (river water) can impact the volume in the drains in different ways. Firstly, the river water can prevent the local run off from entering the river at the discharge point. The local run off will remain in the drains. Further, depending upon the river level, river water might leave the river and enter the drainage pipes. In that case, there will no doubt be some mixing of local run off and river water. Naturally, in these conditions, the level of the river will determine the extent to which the river water travels up the drainage pipes.
[22] The drains are old and consist of vitrified clay pipes. Inspection of the pipes utilising a device fitted with a camera showed the drains to be in fairly poor condition. Many are cracked or breaking. Pieces of the pipes are displaced from position and some joints are also displaced. Tree roots have entered the drains at some points, and at some points there is sediment present. It is common ground between the hydrologists who gave expert evidence in the case that water which was in the pipes has been forced under pressure through cracks in the pipes and into the subterranean soils between the pipes and the basement. That water, together with water already in the subterranean soils (groundwater), has been pushed into the basement.’40
After considering the evidence of the hydrologists, Davis J found:-
- The river levels began to steadily rise from just before midday on 11 January 2011, although there was a slight drop at about 8pm.
- Over the period 11 January 2011 to 15 January 2011, the groundwater table remained lower than the level of the basement of the premises.
- Some water was present in the subterranean soils between the pipes and the basement wall in the period prior to 6am on 12 January 2011 but that water was from precipitation leaching down through the soils.
- The local runoff did not fill the drainage pipes.
- There was no overflow from the river to the premises; the river level remained at all times below the level of its banks …’41
‘The Insurer(s) shall not be liable under Sections 1 and/or 2 in respect of:
…
-
- Physical loss, destruction or damage occasioned by or happening through
- flood, which shall mean the inundation of normally dry land by water escaping or released from the normal confines of any natural watercourse or lake whether or not altered or modified or of any reservoir, canal or dam;
- water from or action by the sea, tidal wave or high water: Provided that Perils Exclusions 3(a) and 3(b) shall not apply if loss, destruction or damage is caused by or arises out of an earthquake or seismological disturbance.’42
- Physical loss, destruction or damage occasioned by or happening through
‘In construing the exclusion clause, the aim is to objectively discern the parties’ intentions by reference to the words of the clause in the context of the whole document.
As the policy is a commercial contract, regard should be had to ‘the commercial circumstances which [it] addresses and the objects which it is intended to secure’.’44
Davis J noted that while the clause must be construed as a whole, it was useful to consider the constituent parts of the flood exclusion,45 which His Honour proceeded to do under the following headings.Physical loss, destruction or damage occasioned by or happening through
Davis J stated:
‘The flood exclusion identifies an event (here, relevantly, flooding) and then excludes liability for ‘physical loss, destruction or damage’ which is ‘occasioned by or happening through’ the ‘flood’ as defined. The ‘flood’ here is the ‘inundation’ of ‘normally dry land’, being the subterranean soils or the basement, by water which is ‘escaping’ from the ‘natural confines’ of [the Brisbane River].’46
In noting that Mercantile Mutual Insurance (Aust) Ltd v Rowprint Services (Victoria) Pty Ltd47 (which said the words ‘occasioned by or happening through’ have a wide meaning) has been followed consistently in Queensland, Davis J said that, therefore, much of the difference of opinion between the competing experts in the case ceased to be relevant.48 His Honour went on to say:
‘The defendant’s case is that the subterranean soils between the pipes and the wall of the basement of the premises is ‘normally dry land’ and that at least some of the water which leaked from the pipes was river water ‘escaping from the normal confines of [the river]’. If that is established, then the damage is damage ‘occasioned by or happening through’ the ‘flood’, because the river water leaking from the drainage pipes has made its way to the basement and/or has pushed groundwater into the basement. The entry of groundwater into the basement has been ‘occasioned by’ or has ‘happened through’ the river water being forced under pressure into the subterranean soils (the ‘normally dry land’). The local runoff is not water ‘escaping the normal confines of [the river]’. Damage has no doubt been occasioned by local runoff. The legal effect of that is explained later. However, as the river levels rose and the proportion of river water escaping the pipes rose, no doubt river water pushed local runoff (already expelled into the subterranean soils) into the basement.’49
Davis J then stated:
[71] River water has entered the subterranean soils. River water also entered the basement. As explained, the entry of river water into the subterranean soils has caused river water, local runoff and groundwater to enter the basement and cause damage. Therefore, if the ‘normally dry land’ is (or includes) the subterranean soils, then the damage to the basement is loss ‘occasioned by or happening through’ the escape of river water into the subterranean soils.
[72] However, local runoff has also entered the subterranean soils and contributed to the damage in the basement. Similarly, if the ‘normally dry land’ is the basement, the damage is ‘occasioned by or happening through’ the escape of river water, and also local runoff.
[73] Consequently, this is a case where there are multiple causes of the damage and only one of those causes is caught by the flood exclusion. That raises consideration of Wayne Tank and Pump Co Ltd v Employers Liability Insurance Corporation Limited.
[74] There is, in the authorities, fairly regular reference to what is called the ‘Wayne Tank principle’. That principle is said to be that where there are two proximate or substantial causes of the one loss and only one falls within an exclusion clause, the insurer may rely upon the exclusion and avoid liability. However, there must be some doubt that Wayne Tank establishes any general principle; rather, it establishes that the proper construction of most exclusion clauses will in fact lead to a result that an insurer will avoid liability under an exclusion clause where one or more proximate causes of the loss falls within the clause.
And then:
[78] Here, all the damage to the basement is loss ‘occasioned by or happening through’ the escape of water from the river. This is because it was the back up of water from the river which caused the pressure in the pipes to rise to a point where water was forced into the subterranean soils. However, it is not the escape of river water into the pipes which activates the exclusion. It is the escape of water into ‘normally dry land’, here the subterranean soils or the basement.
[79] The majority of the water that entered the basement was river water. It follows then that the majority of the water which entered the subterranean soils was river water. Certainly then, the dominant cause of the loss is the ‘inundation of normally dry land by water escaping from the normal confines of [the river]’. There is only one loss, being the damage caused by the body of water which entered the basement.
[80] The loss, then, has concurrent causes, namely the damage by the river water, and that by other water. Policies containing such flood exclusion clauses have been construed to exclude liability of the insurer in those circumstances. Here, on a proper construction of the exclusion clause, as the river water was a cause, and indeed the dominant cause of the loss occasioned by the damage to the basement, then assuming that the clause otherwise applies, the exclusion clause is engaged and will defeat the plaintiffs’ claim.
Inundation of normally dry land
Davis J had noted that there was a dispute as to what was ‘normally dry land’ for the purpose of the flood exclusion, the basement itself, or the subterranean soils between the pipes and the basement, with the plaintiff submitting that neither the basement nor the subterranean soils were, relevantly to the policy, ‘normally dry land’.50
Davis J stated:
‘It is necessary to consider the purpose of the clause viewed against its presence in a commercial contract. It would be a very curious result if the relevant loss is damage caused to the ‘Property Insured’, but the ‘Property Insured’ is not ‘normally dry land’ for the purposes of the flood exclusion. What is intended is to exclude liability in circumstances of ‘flood’. The flood exclusion does this by excluding liability where the loss is occasioned by or happens through the inundation of normally dry land which may include the premises insured. This conclusion is consistent with Eliade Pty Ltd v Nonpariel Pty Ltd and LMT Surgical Pty Ltd v Allianz Australia Insurance Ltd. Therefore, the entry of river water into the basement was entry of water into ‘normally dry land’.’51
His Honour then went on to consider whether the leakage into the subterranean soils was not relevantly ‘inundation’ and, secondly, whether the subterranean soils were not, in any event, ‘normally dry’.
As to the first issue, Davis J concluded:
‘The purpose of the exclusion is to exclude liability for damage caused by flooding, namely the damage caused by water escaping from, relevantly here, the river. There is no room to limit the meaning of the term the ‘inundation’ of ‘normally dry land’ to mean ‘the inundation of the surface or normally dry land’.’52
As to the second issue, Davis J said:
‘I reject the submission that the subterranean soils were not ‘normally dry’. There was certainly groundwater at some level in the subterranean soils. The groundwater level in the vicinity of the basement was usually between 1.5 and 2.7 AHD. While the experts agreed that the heavy rainfall may have raised the level, that level was impossible to ascertain. Any significant leakage of water from the pipes would only occur when the pipes were under pressure; that is when there was significant rainfall or other events to fill them. There was therefore generally not water present in the soils at the level of the pipe of the basement.’53
After considering what had been said by Mansfield J in Elilade Pty Ltd v Nonpariel Pty Ltd,54 Davis J went on to state:
‘In one sense, once it is accepted that rainfall is ‘normal’, no land other than that in completely arid areas would be ‘normally dry land’ as the land would not be dry during periods of rainfall.
His Honour’s approach to the construction of the term ‘normally dry land’ must, with respect, be correct. The usual character of the subterranean soils between the pipes and the basement wall, at least at the relevant time level is usually dry. It is ‘normally dry land’.’55
His Honour concluded:
‘In any event, for the reasons already explained …56 the insured premises may be the ‘normally dry land’ for the purpose of the exclusion. The basement of the premises is ‘land’, it being a fixture on land, and clearly, the basement is ‘normally dry’.’57
Escaping or released from the normal confines of any natural watercourse, whether altered or not, or any reservoir, canal or dam
In noting that the Brisbane River was obviously a natural watercourse and that there was no submission that the pipes themselves were part of the natural watercourse or were a canal, Davis J first considered whether runoff that was unable to drain into the river because of the back-up of river water in the pipes was water ‘escaping [the river]’.58
After considering Hams v CGU Insurance Ltd,59 Davis J noted that the passage quoted in that case by Einstein J from Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd was on a different point, and further that both K Sika Plastics Ltd v Cornhill Insurance Co Ltd and Oakleaf v Home Insurance Ltd concerned flood exclusions that focused on ‘overflow’.60 His Honour went on to say:
‘Here the flood exclusion applies to water ‘escaping from or released from [the river]’. In context, both ‘escaping’ and ‘released from’ the river assumes that the water has at one time been in the river. Therefore it is the river water, and not the local runoff, which is caught by the flood exclusion. The exclusion does not apply to damage done by water that could not reach the river unless the damage caused by that water was damage ‘occasioned by or happening through’ the ‘inundation of normally dry land by [the river water]’. I reject … [the submission] … that water that could not reach the river was water escaping the river.’61
In then noting62 that the submission that water escaping from the pipes was not water escaping from the river relied heavily on the decision of Jackson J in LMT Surgical,63 Davis J stated:
‘There is only one word which is different in the present flood exclusion to that considered in LMT. In LMT, the flood exclusion applied to water that is ‘overflowing from the normal confines of [the river]’. The flood exclusion here applies to ‘water escaping from the normal confines of [the river]’. Water may escape ‘the normal confines of [the river]’ through drainage pipes. The flood exclusion in LMT only applied to water escaping the normal confines of the river in a particular way, i.e. by overflowing the banks.’64
Finally, in rejecting the submission that water was not ‘escaping’ but had ‘escaped’ once it left the confines of the river,65 His Honour went on to state:
‘Only water which has actually left the confines of the river can do damage and cause loss, relevantly by ‘inundating normally dry land’. Therefore, for the exclusion clause to have any operation to exclude loss caused by escaping water, the water must be, for the purpose of the clause, still in the act of escaping after leaving the confines of the river. The point at which water ceases to be ‘escaping’ and has ‘escaped’ obviously is a matter of fact. However, here all the experts say that river water entered the subterranean soils between the pipes and the basement wall and entered the basement. That water was therefore ‘escaping from the confines of [the river]’ and inundated ‘normally dry land’, namely the subterranean soils and the basement of the premises.’
Findings on the exclusion clause
In the context of the present case, Davis J found that the exclusion clause operated as follows:
[108] The damage to the basement was caused by water from various sources:
- River water in the pipes;
- Local runoff in the pipes; and
- Groundwater in the subterranean soils between the pipes and the basement.
[109] The river water entered the subterranean soils (‘normally dry land’), and the basement (‘normally dry land’), and in the process pushed groundwater into the basement. The river water was water ‘escaping the confines of [the river]’. The entry of the river water into subterranean soils and the basement was an inundation of the two places.
[110] Damage done by the river water and the groundwater pushed into the basement by the river water was damage occasioned by or happening through: the escaping river water.
[111] Damage done by local runoff entering the basement is not damage caused by ‘flood’, but on a proper construction of the flood exclusion, the exclusion is available to the defendant.
[112] The plaintiffs’ claims are excluded by the flood exclusion.
Landel — 'Water overflowing from the normal confines'
Facts
The background facts giving rise to the claim as relevant to the operation of the exclusion for ‘flood’ are set out in the following paragraphs of the judgment:
[1] The plaintiffs owned land in Townsville which was the site of a shopping centre. The defendant insured the plaintiffs under an industrial special risks policy. There was monsoonal rain and consequent flooding in Townsville in late January and early February 2019.
…
[3] Between 6:20pm on 3 February 2019, and about 12:20am on 4 February 2019, water flowing over the ground entered the shopping centre and rose to the height of around half a metre.
[4] The insurer accepted a limited liability for the flooding damage on 3 and 4 February 2019; it stated that its liability was limited to $250,000 because the losses were caused by flood as defined.
[5] The plaintiffs sued claiming indemnity under the policy contending that the physical circumstances of the inundation were not within the definition of flood in the policy, and that therefore the $250,000 limit on the insurer’s liability was inapplicable.
Terms of the policy
[14] The policy provided that, ‘In the event of any physical loss, destruction or damage … not otherwise excluded happening at the Situation to the Property Insured … the Insurer will, subject to the provisions of this Policy, including the limitation on the Insurer’s liability, indemnify the Insured in accordance with the applicable Basis of Settlement’.
[15] There was also consequential loss insurance. The insurer promised that ‘In the event of any building or any other property or part thereof used by the Insured at the Premises for the purpose of the Business being physically lost, destroyed or damaged by any cause or event not hereinafter exclude … and the Business carried on by the Insured being in consequence thereof interrupted or interfered with, the Insurer will, subject to the provisions of this Policy including the limitation on the Insurer’s liability, pay to the Insured the amount of loss resulting from such interruption or interference in accordance with the applicable Basis of Settlement’.
[16] The placement slip accepted by the insurer added ‘perils exclusions’ to the policy. They included:
…
- physical loss, destruction or damage occasioned by or happening through:
- flood, which shall mean the inundation of normally dry land by water overflowing from the normal confines of any natural watercourse or lake (whether or not altered or modified), reservoir, canal or dam.
[17] Although this clause was worded as an exclusion, it was accepted that, having regard to the documents which comprised the policy, in fact it operated to define flood for the purpose of the policy, and that the policy operated to limit the insurer’s liability for flood to $250,000, rather than exclude it altogether. It was also accepted that clause 3(a) had to be treated as an exclusion in construing the clauses in the policy which contained the insurer’s promise of indemnity.
Expert evidence
Uncontroversial background to inundation of 3 and 4 February 2019
[38] The shopping centre was located in the middle of what was once the floodplain of Gordon Creek. In 2014/2015 the Townsville City Council commissioned a flood study of the area and, acting on the study, undertook earthworks to divert the flow of Gordon Creek to the north of its original course. After that, it allowed the shopping centre (and quite a number of houses) to be built on the old floodplain.
[42] There had been days of monsoonal rain before 3 February 2019. From about 4.00 pm on 3 February there were two rainfall events after which water entered the shopping centre. Storm Burst 1 began at about 4.00 pm after a period of about six hours during which no rain fell. Storm Burst 1 lasted 130 minutes and was followed immediately by Storm Burst 2 which lasted 140 minutes. During each of Storm Burst 1 and Storm Burst 2, around 70 millimetres of rain fell.
[43] No expert was of the view that inundation of the shopping centre was caused by rain falling over the immediate environs of the centre. It was common ground that the inundation was caused by the flow of water into the centre from some other area.
Area of expert controversy
[44] In broad terms the difference between the experts was that the plaintiff’s expert swore he believed that as the result of Storm Bursts 1 and 2, runoff from Catchment A1 on Mt Stuart travelled north across both carriageways of Racecourse Road, across the table drain and into the shopping centre, causing the inundation. A later variation of this might have been that this runoff travelled at least to the table drain, where it mixed with the water already in the table drain and caused this mixture of water to inundate the shopping centre. The defendants’ experts were of the view that water inundating the centre came from overflows from the Ross River and Gordon Creek, which formed a large sheet of water travelling west across the floodplain on which the shopping centre was located.
Conclusion as to the plaintiff's expert evidence
Dalton J stated that she would not rely on the views of the plaintiff’s expert in deciding issues relevant to the case unless they were adopted or agreed by the defendants’ experts.67 Her Honour also rejected the his views so far as they were based on the modelling evidence. Her Honour put the opinions of the plaintiff’s expert to one side and turned to whether the defendants had proved by their expert evidence a basis for the flood exclusion. Dalton J made clear that the case was not to be resolved through a competition between expert reports — that is, the plaintiffs did not automatically fail because she rejected the views of the plaintiff’s expert. Her Honour noted that it was the insurer who bore the legal and evidentiary onus of proving that the exclusion applied.68
Conclusions as to the modelling
Dalton J accepted that although modelling had its limitations and was, in effect, a secondary source of scientific proof, the modelling performed by the defendants’ experts was of assistance in understanding the inundation of the shopping centre.69 Even if allowance was made in the model for the many criticisms made by the plaintiff’s expert, it still showed that water did not cross Racecourse Road from south to north and that almost all the water that inundated the shopping centre came from Drain A2, Gordon Creek and the Gordon Creek diversion.
Conclusions as to the cause of the inundation
Further factual matters
Dalton J dealt with four further factual matters before proceeding to discuss the application of the insurance policy definition of flood to the circumstances of 3 and 4 February 2019.
Pile of fill
A pile of fill on the vacant land to the west of the shopping centre was of sufficient height to mostly stand proud of the floodwaters during the inundation of 3 and 4 February 2019. The plaintiff’s counsel argued that this pile of fill provided a significant impediment to water flowing across the Gordon Creek floodplain and into the shopping centre.
However, Her Honour rejected this argument, finding that it did not present any significant impediment to water flow from Gordon Creek and Gordon Creek diversion into the shopping centre.71
Location of Gordon Creek Diversion and concession as to Gordon Creek Diversion and Lake 3
Having accepted the evidence of the defendants’ experts as to the location of the Gordon Creek diversion, Dalton J noted that the plaintiff’s counsel accepted that water overflowing from the Gordon Creek diversion was water that fell within the scope of the exclusion clause.72 The concession extended to saying that Lake 3 was properly regarded as part of the natural watercourse of Gordon Creek as altered or modified. Her Honour concluded it to be correct to act in accordance with the concession made.73
Drain A2
A question arose as to whether Drain A2 was a natural watercourse, although altered and modified.74
Dalton J was of the view that Drain A2 was a natural watercourse that had been altered and modified within the meaning of the exclusion clause.75 Her Honour considered it comparable to the stormwater channel in Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd,76 finding that like the channel in that case, Drain A2 had been slightly modified to convey water more efficiently. In Provincial, the channel was concreted and given brick walls. The modifications to Drain A2 were less than that. However, like the altered channel in Provincial, the modified part of Drain A2 performed the same function as it did before the alteration.
Water overflowing from the normal confines
Dalton J observed that it was argued on behalf of the plaintiffs that Drain A2 could not be regarded as an altered or modified natural watercourse because it flowed through culverts.77 It was said that culverts were analogous to pipes and that the judgment in LMT Surgical stood for the proposition that if water flowed through pipes, it could no longer be regarded as being from a modified or altered natural watercourse.
Her Honour said:
‘It is abundantly clear that the decision in LMT does not purport to lay down any general rule as suggested by the plaintiffs. That case concerned pipes which were over 200 metres long and designed to allow water to drain from Milton into the Brisbane River. In a time of flood, the river rose so high that water surcharged through the pipes, ending up in Milton. In these circumstances Jackson J held that water did not overflow from the normal confines of the Brisbane River and therefore loss was not within the exclusion clause. The factual circumstance of Drain A2 passing through culverts under Racecourse Road and Stuart Drive is not analogous to this at all. The culverts simply allow water to pass along Drain A2 in much the same position as it always has. The culverts are more analogous to the brick and concrete channel constructed in Provincial. While the pipes in LMT were a functional replacement for an earlier natural drain into the Brisbane River, they did not follow the path of the natural watercourse, or arrive at the same destination as the prior natural watercourse. In any case, the pipes in LMT were a functional replacement, rather than a formalisation or alteration of the original natural watercourse: that contrasts with the situation here, and that in Provincial.’78
Her Honour went on to say:
‘In fact the water from Gordon Creek and Drain A3 passes through the unlettered culverts before it reaches the broad blue band which marks the start of the Gordon Creek diversion, yet it was conceded by the plaintiff that all this area was a natural watercourse as altered or modified. I think the plaintiff’s point about culverts in relation to Drain A2 can be seen to be opportunistic. In the same vein, the concession as to Gordon Creek and the Gordon Creek diversion being a natural watercourse, altered or modified, involved accepting much greater alterations and modifications as falling within the exclusion clause than were made to Drain A2.’79
Plaintiff's damage arguments
Dalton J stated that she found it difficult to understand the plaintiff’s argument that the insurer had never identified the particular damage to the plaintiff’s property that the exclusion ‘operated on’.80 In elaborating this point, Her Honour said that the insurer had led no evidence to show when the damage claimed by the insured occurred — it might have occurred in the first hour after 6:30pm on 3 February 2019, or it might not have occurred until as late as 12:20am the next day. There was no evidence as to whether all the damage to the centre had been done by the time the water reached a height of 30 cm or whether more damage was done between then and when the waters reached their peak.
Her Honour found that on the facts of the case, water flowed into the shopping centre during one event, which started around 6:20pm on 3 February.81 Sometime after 12:20am the next day, water ceased to rise in the centre, and the floodwaters began to subside. Damage to the centre resulted from the inundation. Dalton J noted that an insurance policy is a commercial contract and should be given a businesslike interpretation. She said that it would accordingly be unrealistic to interpret either the insuring clause or the exclusion clause 3(a) as requiring an inundating event such as this one to be broken down into stages or that the insurer had to prove what parts of the physical damage suffered at the shopping centre could be attributed to which of those stages. Her Honour noted that no authority had been suggested in support of the plaintiff’s approach in a case like this. She rejected the plaintiff’s argument.
Inundation of normally dry land
Dalton J found there was no doubt in this case that the shopping centre was built on normally dry land.82
Plaintiff's sources of water arguments
Dalton J observed that the plaintiff made submissions that amounted to identifying water that could not be characterised as ‘water overflowing from the normal confines of any natural watercourse or lake (whether or not altered or modified)’.83
The plaintiff then contended that some of that water must have contributed to the inundation of the shopping centre.
Her Honour stated:
‘These arguments do not assist the plaintiff. There are two major reasons. The first is that clause 3(a) does not operate by reference to the source of the water which causes an inundation. It excludes loss for damage which is occasioned by, or happens through, particular types of inundations. The second is the factual difficulty that the vast majority of water which inundated the shopping centre came from Gordon Creek, the diversion, and Drain A2, and this was water which was overflowing from the normal confines of natural watercourses, as modified or altered.’84
Her Honour then gave her reasons for each of these conclusions in turn.
Occasioned by or happening through
Dalton J observed that the plaintiff contended that the table drain and the associated low-lying areas south of the shopping centre and north of the eastbound carriageway of Racecourse Road were not part of a natural watercourse (altered or modified).85
The plaintiff’s counsel had conceded that water overflowing Gordon Creek and the diversion and then flowing overland and into the shopping centre was within clause 3(a); however, counsel argued that the defendants’ experts had not distinguished between, on the one hand, water that came into the shopping centre from Gordon Creek and the Gordon Creek diversion as direct overland flow, and on the other, water that had overflowed from these sources but had then:
‘… either backed up in the northern table drain, or which was once within the northern table drain, or which is properly characterised as water overflowing the normal confines of the table drain, rather than overflowing the normal confines of a natural watercourse.’86
Dalton J opined that essentially the plaintiff’s submission was that once water encountered the table drain as part of its overland flow from Gordon Creek or the Gordon Creek diversion,87 it should no longer be regarded as water that was overflowing Gordon Creek or the diversion and begin to be regarded as water that was overflowing the table drain. Her Honour concluded that having regard to:
- the size of the body of water moving across the floodplain compared to the relatively small amount of water in the table drain;
- the fact that the table drain was not flowing independently of the body of water moving across the flood plain; and
- the fact that the table drain was completely submerged by about 17:35 hrs; she could not see that it was realistic to characterise the water that inundated the shopping centre as water overflowing the table drain.
Her Honour went on to note that even if it were so, the flaw in the argument remained that clause 3(a) was simply not concerned with identifying the source of inundating water.88 The damage excluded by clause 3(a) was ‘damage occasioned by or happening through … water overflowing from the normal confines of any natural watercourse‘.
Having set out a series of cases confirming that the phrase ‘occasioned by or happening through‘ had a wide meaning and noting its application in cases concerning exclusions for ‘flood’,89 such as in Provincial, LMT Surgical and Wiesac, Dalton J concluded:
‘Inundation damage to the shopping centre was occasioned by, or happened through, water escaping from Drain A2, Gordon Creek and the Gordon Creek diversion. That some water from those sources might at some time have lain in the table drain, or more likely, travelled across a flooded area beneath which was submerged the table drain, before flowing onto the shopping centre does not change that’.90
Dalton J could not see that damage to the shopping centre was ‘occasioned by or happened through’91 the small amount of surcharging water from grates in the car park, nor from local rainfall (some 12.8 cm of which had accumulated on the surface of the shopping centre car park).
The plaintiff had submitted that water from the swale between the two carriageways of Racecourse Road rose and flowed to the north, ultimately ending up in the shopping centre. Dalton J could not see an evidentiary basis for that idea other than in the views of the plaintiff’s expert, which she rejected.92 In the circumstances, Her Honour would not infer that water from the swale flowed over the eastbound carriageway of Racecourse Road to join the table drain — or that it did so in any significant amount. Or that any amount of it entered the shopping centre.
Wayne Tank principle
Dalton J observed93 that the case of Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corporation Ltd94 is famous for the principle, ‘if the loss is caused by two causes effectively operating at the same time and one is wholly expressly excluded from the policy, the policy does not pay’.
Her Honour noted95 that in Sheehan v Lloyds Names Munich Re Syndicate Ltd,96 Allsop J gave a modern re-statement of the applicable principle:
‘Thus, the Court should first seek to identify a single proximate cause of the loss or damage. If a conclusion is reached that there are instead multiple proximate causes, and one is an insured event but the other is not, then the insured will be able to recover. However, where there are two proximate causes and these are concurrent and interdependent, and where one is an insured event and one is an excluded event, then as a matter of construction of the policy the insured will not be able to recover. The causes are inseparable, and as one is excluded under the policy recovery will not be possible.’
After further setting out the evidence as to the source of the water and accepting that the figures generated by the flood model of the defendants’ experts were accurate enough (in summary, demonstrating that Ross River inflows dominated the floodwater inputs at the site), Her Honour concluded:
‘In these circumstances, I think the defendant has proved that there was a single proximate, effective or real, cause of the loss and damage caused by inundation of the shopping centre within the principles in Wayne Tank. That cause was water overflowing from the natural confines of Gordon Creek as altered or modified. That being so, clause 3(a) of the policy applied and the insurer’s liability to the plaintiffs was limited to $250,000. That amount has been paid.’97
Conclusion
In LMT Surgical, Jackson J regarded the scope of the cover or exclusion of damage caused by flood to depend on the specific language deployed in the policy.
The subsequent decision of Davis J in Wiesac might be thought to illustrate this for, as His Honour observed, there was only one word that was different in the flood exclusion under consideration in the case from that considered by Jackson J in LMT Surgical, which led to that case being distinguished on the facts.98
In Landel, when determining the insured’s claim for indemnity under the policy in the face of an exclusion in identical terms to that considered in LMT Surgical, Dalton J said that it was ‘abundantly clear that the decision in LMT does not purport to lay down any general rule as suggested by the plaintiffs’,99 noting in any case that the pipes in LMT Surgical were a functional replacement, rather than a formalisation or alteration of the original natural watercourse, which contrasted with the situation in the case before Her Honour. Accordingly, LMT Surgical seems likely to be seen as the high-water mark in the operation of flood exclusions utilising the ‘water overflowing’ nomenclature, with two subsequent Supreme Court of Queensland decisions having now distinguished it on its facts.
1 [2014] 2 Qd R 118 (‘LMT Surgical‘); [2019] 1 Qd R 198 (‘Wiesac‘). Disclosure: the author acted for the insurer in Wiesac.
2 [2021] QSC 247 (‘Landel‘). Disclosure, the author acted for the insurer in Landel.
3 Ibid 545. It should be noted that on 18 June 2012, regulations (subject to transitional arrangements) that introduced a standard definition of ‘flood‘ to insurance contracts for home building and contents, small business and strata title were enacted. That definition of ‘flood‘ is: ‘the covering of normally dry land by water that has escaped or been released from the normal confines of any … lake … [or any] river … creek … [or] another natural watercourse (whether or not altered or modified); [or any] reservoir … canal … [or] dam’. Insurance Contracts Regulations 1985 (Cth) reg 29C.
4 (1991) 25 NSWLR 541
5 Ibid 545.
6 Ibid 564.
7 (2004) 13 ANZ Ins Cas 61-599.
8 Ibid 77,185 [41].
9 Mercantile Mutual Insurance (Aust) v Rowprint Services (Victoria) Pty Ltd [1998] VSCA 147 [24].
10 Ibid [17]. See also Wiesac (n 1) [66] & [69].
11 (2002) 124 FCR 1.
12 Ibid 12 [50], 20 [86], [88] & 21 [93].
13 (2002) 12 ANZ Ins Cas 61-525 (‘Hams‘).
14 Ibid 76,183 [160].
15 The passage by Mahoney JA in Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541, 564 was then cited in full.
16 In obiter, Hams (2002) 12 ANZ Ins Cas 61-525, 76,183 [161].
17 Provincial (1991) 25 NSWLR 541, 564; K Sika Plastics Ltd v Cornhill Insurance Co Ltd [1982] 2 NZLR 50. But contra Wiesac [2019] 1 Qd R 198, [100]–[101].
18 Hams (2002) 12 ANZ Ins Cas 61-525, 76,183 [158].
19 Ibid 76,183 [159].
20 The Wayne Tank principle derives from the decision in Wayne Tank & Pump Co Ltd v Employers’ Liability Assurance Corporation Ltd [1974] QB 57 (‘Wayne Tank‘) and operates such that if there are two or more proximate causes of loss, one of which is expressly excluded from cover and the other within the ambit of cover, the loss will be excluded.
21 (2004) 13 ANZ Ins Cas 61-599, 77,185 [37]–[41].
22 For a discussion of the Wayne Tank principle, see Wiesac (n 1 [71]–[74] & [78]–[80].
23 LMT Surgical (n 1) 119 [1].
24 Ibid.
25 Ibid 119 [3].
26 Ibid 120 [8].
27 Ibid 124 [32].
28 Ibid 125 [42].
29 Ibid 124 [37].
30 Ibid 125 [45].
31 Ibid 126 [47]. Provincial (1991) 25 NSWLR 541; K Sika Plastics Ltd v Cornhill Insurance Co Ltd [1982] 2 NZLR 50; Hams (2002) 12 ANZ Ins Cas 61-525; Peterson v Union des Assurances de Paris IARD (1997) 9 ANZ Ins Cas 61–366; Elilade Pty Ltd v Nonpareil Pty Ltd (2002) 124 FCR 1.
32 Hams v CGU Insurance Ltd (2002) 12 ANZ Ins Cas 61-525.
33 K Sika Plastics Ltd v Cornhill Insurance Co Ltd [1982] 2 NZLR 50. This decision was approved in ibid 76,183 [161].
34 K Sika Plastics (n 33) 53.
35 I observe that ‘overflow’ might well be thought to have connotations of a flow over something — in LMT Surgical Pty Ltd v Allianz Australia Insurance Ltd [2014] 2 Qd R 118, this something was the banks, which were found to constitute the normal confines: see Oakleaf v Home Insurance Ltd [1958] OR 565 (Porter CJ) in which the judge thought the expression obviously applied to water ‘flowing over’ the window sill.
36 Wiesac (n 1).
37 Steadfast Mark V (the ‘policy’).
38 Ibid 203 [12].
39 Ibid 203 [9]–[10].
40 Ibid 205–6 [21]–[22].
41 Ibid 214 [49].
42 Ibid 219 [62].
43 Ibid 219 [63].
44 Wiesac (n 1) 219 [64], citing McCann Switzerland Insurance Australia Ltd (2000) 203 CLR 579, 589 [22].
45 Wiesac (n 1) 219 [65].
46 Ibid 219 [66].
47 [1998] VSCA 147.
48 Wiesac (n 1) 220 [69].
49 Ibid.
50 Ibid 220 [70].
51 Ibid 224 [84].
52 Ibid 226 [92].
53 Ibid 224 [86].
54 (2002) 124 FCR 1, 12 [50].
55 Wiesac (n 1) 225 [88].
56 Ibid 224 [83]. His Honour found that the term ‘normally dry land’ included in this case the land occupied by the buildings and other land that was ‘normally dry’.
57 Ibid 226 [93].
58 Ibid 226 [94].
59 [2002] NSWSC 273.
60 Wiesac (n 1) 228 [100].
61 Ibid 228 [101].
62 Ibid 229 [102].
63 LMT Surgical (n 1).
64 Wiesac (n 1) 229 [105].
65 Ibid 230 [106].
66 Landel (n 2) [37].
67 Ibid [114].
68 Wallaby Grip (n 1).
69 Landel (n 2) [162].
70 Ibid [163].
71 Ibid [165].
72 Ibid [168].
73 Ibid [170].
74 Ibid [171].
75 Ibid [173].
76 (1991) 25 NSWLR 541 (‘Provincial‘).
77 Landel (n 2) [174].
78 Ibid [175].
79 Ibid [176].
80 Ibid [178].
81 Ibid [180].
82 Ibid [181].
83 Ibid [182].
84 Ibid.
85 Ibid [183].
86 Ibid [184].
87 Ibid [190].
88 Ibid [191].
89 Ibid [191]–[194].
90 Ibid [196].
91 Ibid.
92 Ibid [200].
93 Ibid [201].
94 [1974] 1 QB 57
95 Landel (n 2) [202].
96 [2017] FCA 1340, [81].
97 Landel (n 2) [211].
98 Wiesac (n 1) 229–30 [105].
99 Landel (n 2) [175].
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