Insurance lessons from runaway fire
/New Zealand Fire Service Commission v Legg [2016] NZHC 1492
The Leggs lived on a lifestyle block in Canterbury from which they also ran a landscaping business. They had a burn heap on their property for the purpose of disposing of green waste and other rubbish. On 16 December 2012, Mr. Legg, mindful that fire restrictions would likely be imposed soon, decided to set the heap alight. The fire was lit in the morning, burning both waste from the Leggs’ lifestyle block and from their landscaping business. By late that afternoon, it had burned down to a heap of ash.
However, on the 10th of January 2013, by which point fire restrictions had been put in place, the fire reignited and spread to neighbours’ property. A fire investigator later found that the heap was reignited by heat that remained deep within it, along with high temperatures and strong winds, and not from any fresh material being lit or placed onto the heap.
The fire service, which incurred substantial costs in fighting the fire, brought the proceedings against Legg to recover costs under the Forest and Rural Fires Act 1977. The principle issue in the judgment, however, concerned whether the Leggs’ were indemnified under two separate insurance policies for their lifestyle property and business.
The Leggs’ landscaping business had an insurance policy with Lumley, under which they were indemnified against liability under the Forest and Rural Fires Act 1977. This was subject to a condition that they take “all reasonable precautions” to comply with the relevant regulations and ensure that any employees and agents do the same. Lumley argued that the Leggs’ business breached this condition.
On review of the relevant authorities, Nation J held that such reasonable care conditions required more than mere negligence to justify declining the claim. They must be construed with regard to the specific policy and the specific risks that policy contemplates, under which the insurer must prove “a significant or substantive failure on the part of the insured commensurate with ‘recklessness,’ ‘gross irresponsibility’ or ‘gross carelessness.’” It would defeat the commercial purpose of insurance, he said, if a threshold as low as mere negligence was required.
On the facts, he found that the Leggs’ had not acted so recklessly as to breach this condition of the policy. They had reasonably believed the fire was well and truly out, and there was no expectation that they pour water onto the heap to ensure with absolute certainty that no embers remained. The position would likely have been different had the fire been started once fire restrictions were in place. But the mere fact that the fire had been caused by the Leggs and caused damage does not itself show that they acted recklessly even if, with the benefit of hindsight, it was clear that further steps could have been taken to prevent it.
The Leggs also had an insurance policy with AMI for their residential lifestyle block. Under this policy, they were insured for any liability arising from the Forest and Rural Fires Act 1977 in connection with their farming operation. AMI accepted that burning household rubbish and green waste was the sort of event covered under the policy. However, this was subject to an exclusion of any liability arising out of “business or trade not directly connected with [their] farming operation.” The fire did include waste from the Leggs’ landscaping business, including pine tree stumps and paper waste from its office. AMI thus argued that the risk of the fire spreading was much bigger as a result of this additional material and that disposal of this business waste was in fact the main reason for setting the fire.
In support of this, AMI cited the so-called Wayne Tank principle, which provides that in cases where there are two concurrent causes of a loss, with one falling within the insuring clause and the other being expressly excluded by an exclusion clause, the entire claim will be excluded.
Nation J undertook a detailed review of the relevant case law on this principle over Australia, the UK, Canada and New Zealand. He considered the case was best approached, however, by reference to the ordinary principles of contractual interpretation. This involves an inquiry into what a reasonable person would interpret the words of the contract to mean. On this interpretation of what was meant by a loss arising “in connection with” an excluded activity, he held that liability would effectively have to have been caused by this activity for the exclusion to apply. It was not sufficient, in other words, that the burning of this additional business waste might have been a contributing factor. The judge's view was that, for the claim to have been excluded, AMI would have to have proven this business waste alone was the primary cause of the liability.
On the facts, they were unable to do so. There was no proof to suggest, on the balance of probabilities, that there would have been no re-ignition of the heap without the material from the landscape business. While the majority of the material burnt had been connected with the landscape business, the fire was still of a size and nature that could have resulted from the normal use of the lifestyle block. Thus, the risk of fire spreading was no greater than AMI would have reasonably anticipated under the terms of the policy, and the exclusion clause was held not to apply.
It may seem odd that both the Leggs' lifestyle block and landscape business were able to be covered, but such was the judge's interpretation of these respective policies on their own terms.
