Exceptions and qualifications - whose burden is it anyway?

Introduction

It is an often repeated doctrine in insurance disputes that the insured bears the burden of proving that the coverage clause is triggered, while insurers must prove that an exclusion clause applies. In relation to the latter, the High Court in Wallaby Grip Ltd v QBE Insurance (Aust) Ltd¹ stated that it is ‘well accepted’ that ‘the insurer must prove that a loss falls within an exception’.

While in practice it is typically not difficult to apply the doctrine, disputes may arise (and the burden may be reversed) if the exclusion can be treated as wholly qualifying the insuring promise. One such dispute was recently considered by the New South Wales Court of Appeal in McLennan v Insurance Australia Ltd.²

Background

The appellant insured held a home and contents insurance policy with the respondent insurer. The insuring clause for fire damage was in the following terms:

Policy what you are covered for:

During the term of the policy the insured’s home and contents were damaged by fire.  While it was not disputed that the property and its contents suffered fire damage, the insurer denied indemnity on the basis that the insured had not proved that the fire was not started with the intention of causing damage by the insured or someone who had entered the property with her consent.

At first instance, Neilson DCJ considered that in order to succeed, the insured had to prove, on the balance of probabilities, that the loss or damage for which she sought to recover fell within the terms of the policy. Consistent with this interpretation of the policy, the judge considered that the insured had to prove that:

• her home (the property) was damaged by fire, and
• the fire was not started by someone who entered the property with her consent with the intention of causing damage.

Neilson DCJ was not satisfied that the insured discharged that burden.  The insured appealed.

Decision

The only issue in the appeal was whether the insured had the onus of proving that the fire was not deliberately started and therefore not within the qualification to the fire cover.  The Court of Appeal concluded that the primary judge had erred in finding that the insured had the burden of proving that the fire was not deliberately lit by her or someone who had entered her home with her consent. 

In reaching its conclusion, the Court of Appeal recognised the following established principles from the legal authorities:

• An insurer must prove that a loss falls within an exception.³
• The parties to a contract of insurance may specify who bears the onus of proving a particular fact, even if that involves reversing the onus of proof.⁴
• Absent a specific provision to the contrary, the question of who must establish that an exclusion applies depends on whether the exclusion qualifies the whole insuring promise, or whether it merely excludes particular matters which but for the exclusion would fall within the insuring promise.⁵
• If the exclusion qualifies the entire insuring promise, the insured bears the onus of proving that the qualification does not apply, whereas if the promise is merely subject to various exclusions, the insurer must establish that the exclusion applies.⁶

The Court of Appeal also recognised whether the policy is one of a qualified promise or a promise with exceptions may turn on the drafting of the policy. It concluded that where the burden of proof lies depends on the content and scope of the insurer’s promise and what must be established to bring a claim within that promise.  In doing so, the Court of Appeal cited the following passage from The Law Relating to Fire Insurance:⁷

‘If the insurers wish to exclude liability for incendiary fire, they may do so by either method. If the method of using an exception is adopted, their undertaking will be expressed in general terms as a contract to insure against “loss by fire, except incendiary fire.” By the second method the undertaking will be qualified: it will be an insurance against “loss by non-incendiary fire.” Though both methods accomplish the same result, namely, the exclusion of liability for incendiary fire, the distinction between them is not merely one of expression, it is a distinction of substance having an important bearing upon the onus of proof, since, by the second method, the onus is placed upon the assured to prove that the loss falls within the undertaking as qualified.’

Having discussed the relevant principles, the Court of Appeal turned its attention to the provisions of the policy.  In addressing the principles formulated in Munro, Brice & Co,⁸ the Court of Appeal identified the insurer’s promise as ‘repairing or replacing or rebuilding any loss or damage to her home or contents caused by fire.’  In those circumstances, to establish an entitlement to that indemnity, all the insured was required to prove was that she suffered loss or damage and that it was caused by fire. The Court of Appeal stated that:

‘The [relevant exceptions] do not describe circumstances necessary to be established by the appellant before [the insurer] could be said to be obliged to indemnify. They describe limited circumstances in which the insurer’s promise is not to apply. Those limited circumstances are not all of the circumstances in which the promise applies and the qualifications do not apply in all of those circumstances … the exceptions do not qualify the whole of the general promise.’

Ultimately the Court of Appeal determined that:

• the peril insured against was loss or damage caused by fire;
• the subject matter of the cover was the building and contents;
• the insuring clause was one subject to various exceptions and not a qualified promise; and
• the insurer had the burden of proving that the exception applied.

The Court of Appeal provided a useful contrasting illustration by reference to the policy coverage for explosion.  The explosion insuring clause provided:

Policy what you are covered for:

The explosion insuring clause requires physical evidence of the explosion. The need for physical evidence of the explosion applies whenever the peril occurs and must therefore be satisfied in all cases. This can be contrasted with the exception to the fire cover which only excludes losses resulting from certain circumstances.

Comments

This case is a reminder that while insurers typically have the burden of proving that an exclusion applies, it is ultimately a matter of construction of the insurer’s promise and the policy as a whole.  Determining whether an insuring clause is a qualified promise or a promise with certain exceptions will not always be easy and will require careful examination of the words used.

It should be recognised that a policy with a qualified insuring promise does not reverse the onus.  Rather, where the insuring promise is qualified, such that it can not apply in any circumstance unless the qualification is satisfied, shouldering the insured with the relevant burden follows the recognised principle that the insured must establish the insuring clause is triggered.

When assessing the burden, parties should consider the following checklist:

• What is the scope of the insurer’s promise / cover?
• Does the exception qualify all cases where the insuring promise applies (such that unless the qualification is satisfied, there can be no cover) or only apply to a subset of circumstances for which cover may be available?
• In the former case, it is a qualified insuring promise and the insured must establish that the qualification does not apply. In the latter, it is a promise subject to certain exceptions and the insurer bears the onus of establishing that an exception applies.

¹ (2010) 240 CLR 444.
² [2014] NSWCA 300.
³ Wallaby Grip Ltd v QBE Insurance (Aust) Ltd (2010) 240 CLR 444.
⁴ Levy v Assicurazione Generali [1940] AC 791.
⁵ Kodak (A/asia) Pty Ltd v Retail Traders Mutual Indemnity Insurance Assn (1942) 42 SR (NSW) 231.
⁶ Munro, Brice & Co v War Risks Association Ltd [1918] 2 KB 78.
⁷ 3rd ed 1932, Butterworth & Co, 124–125.
⁸ [1918] 2 KB 78.

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