Two Causes - One Covered and One Excluded. Which Prevails?
/AMI Insurance Limited v Legg [2017] NZCA 321
What happens when there are two concurrent causes of loss- one falling within the insuring clause and the other expressly outside it? The appeal has confirmed that where two causes of loss are effective and interdependent, the Wayne Tank principle applies, and the entire claim is excluded.
Background
The Leggs lived on a lifestyle block in Selwyn, Canterbury from which they ran a landscaping business. It was common practice for the Leggs to burn green waste and rubbish generated by the lifestyle block and the landscaping business.
In December 2012, the Leggs lit a fire heap on their property which burned without incident. However, several weeks after the fire appeared to have gone out, the remains of the heap unexpectedly reignited and caused extensive damage to neighbouring properties. Under rural fire legislation the Leggs were strictly liable to the fire service and district council for the costs of putting out the fire.
The Exclusion Clause
The Leggs’ lifestyle block was insured with AMI and their landscaping business insured with Lumley. The AMI policy had an exclusion clause which excluded cover for legal liability arising out of or “in connection with” business activities not directly connected with the Leggs’ farming. The re-ignited fire heap had included pine stumps and paper waste from the the Leggs’ landscaping business.
High Court Decision
Both Lumley and AMI denied cover under their respective policies. As noted in a previous InBrief article, in the High Court, Lumley unsuccessfully argued that the Leggs had failed to take “all reasonable precautions” to comply with the relevant regulations, which was a condition of the policy.
AMI argued that the above exclusion clause applied because the fire heap contained waste from the landscaping business. Therefore the liability was “in connection with” the excluded business activity. The judge was of the view that AMI had to establish the landscaping business as the proximate cause of the liability in order for the exclusion to apply. The judge considered that it wasn’t possible to identify which material set the fire alight, and that causation hadn’t been proved.
Both insurers were held liable to indemnify the insured, but only AMI appealed the High Court’s decision.
Court of Appeal Decision- What Does “In Connection With” Mean?
On Appeal, the Court rejected AMI’s argument that “in connection with” only meant “having to do with”, a phrase which required a somewhat loose connection. It was of the view that the words “in connection with” required a real and substantial connection between the legal liability and the excluded business activity. However, it didn’t think it necessary to go as far as to require that the liability was ‘caused by’ the excluded business activity, either. From the wording of the policy, proximate cause was clearly not the policy standard.
It was sufficient that the material from the landscaping business had contributed to the re-ignition by increasing the size of the fire, and adding stumps capable of forming large embers that could smoulder for a long time. The Court concluded that on the evidence the landscaping material was an effective cause of the fire.
The Effect of Having Two Concurrent Causes
The Court next considered the effect of having two concurrent causes of loss; one covered by the policy (the lifestyle block materials) and one expressly excluded (the landscaping business materials).
The case turned on whether the Wayne Tank principle applied. The principle is an aid to contractual interpretation and states that were a loss has two effective and interdependent causes, one within the policy and one excluded, the exclusion will prevail.
The rationale is that where an insuring clause and an exclusion clause are found together, one arrives at the parties’ intent by subtracting the latter from the former.
The High Court had declined to apply the Wayne Tank principle. However, the Court of Appeal disagreed and said that applying the principle was appropriate in this case. It considered that the causes were interdependent, as neither could be isolated as the sole cause of the fire. AMI had also proven on the balance of probabilities that the excluded business activity was an effective cause.
The effect of the decision was to reverse the High Court ruling. Consequently cover for the costs of putting out the fire was not available under the Leggs’ AMI policy.
Comment
Virginia Wethey, Senior Associate at Fee Langstone says that the decision affirms the supremacy of an excluded cause where it is one of two concurrent causes. This has the potential to lead to hard outcomes for insureds and highlights the importance of ensuring that insureds (and their brokers) put in place cover for all activities, personal and business, the insured carries on.
