In brief - Federal Court determines that applicant not entitled to indemnity

The decision of Chief Justice Allsop in Sheehan v Lloyds Names Munich Re Syndicate [2017] FCA 1340 handed down on 17 November 2017 involved analysis of issues of causation and interpretation of the meaning of "accidental loss or damage" in a marine insurance policy. 

Expert referee finds applicant failed to comply with operating manual and design of oil cooler gasket faulty

In September 2015, significant damage was sustained to the starboard engine of a Sunseeker Manhattan 60 with the amount of loss being agreed at approximately $96,000. Prior to the failure of the starboard engine the alarm system had activated causing the speed of both engines to be automatically slowed, before the starboard engine shut down completely. 

The Court appointed expert referee concluded that the applicant had failed to comply with the operating manual by switching off the engine when the alarm sounded and had he done so no damage would have been done to the engine. He also found the oil cooler gasket suffered from a faulty design and that the damage was "a direct result" of overheating and seizure of the engine due to loss of lube oil pressure. 

Nautilus Marine Insurance policy cover and exclusions

The vessel was insured under a Nautilus Marine Insurance policy which covered "accidental loss or damage to your boat and contents", with "accident/accidental" being defined in the policy to mean "an event that you did not expect or intend to happen". 

The policy excluded cover for "inherent defects, structural faults, faulty workmanship or faulty design" but also for costs incurred "from or of a motor caused by or resulting from seizure and/or overheating unless caused by an accident which is otherwise an accepted claim under the policy". 

Accidental loss or damage to engine found to be within meaning of the policy 

The applicant maintained the damage was unexpected as the vessel had been serviced in the days before the engine failure. He also believed that the engine would shut down automatically if there was a possibility of serious engine damage. 

The contrary argument was that it was not unexpected from the perspective of a reasonable person, as a reasonable person would have familiarised himself with the vessel's manual and alarm system and would have acted appropriately when the alarm operated. It was asserted in these circumstances that the applicant had "courted the risk". Case law, such as Gray v Barr (1971) [2 QB 544] where it had been held that an insured cannot recover for accidental loss or damage where the insured was aware of the risk of loss or damage but decided to take it, was relied upon. 

The Court found that the insured's conduct demonstrated poor seamanship but that this did not mean the damage was not accidental. As the applicant did not know the alarm related to a loss of lube oil pressure, he had not courted the risk and the damage to the engine was found to be accidental loss or damage within the meaning of the policy. 

Causation and determination of proximate cause 

Chief Justice Allsop noted that causal inquiry involved determining the proximate cause being that which was proximate in efficiency rather than that which was last in time. (Leyland Shipping Co v Norwich Union Fire Insurance Society Limited [1918] AC 350 and Global Process Systems Inc. v Syarikat Takaful Malaysia Berhad [2011] 1 Lloyd's Rep 560). 

The Court found that the proximate cause of damage to the engine was the rapid and massive evacuation of lube oil which was referrable directly to a defective gasket due to its faulty design. As this was the dominant and most efficient cause of the engine damage, underwriters were entitled to rely upon the exclusion in the policy and the applicant was not entitled to indemnity.

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal or financial advice. Please seek your own legal or financial advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.​

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