Indemnity focus: the meaning of ‘control’

Penfold v The Hollard Insurance Co Pty Ltd [2021] NSWSC 1322

Insurers and brokers are often presented with a difficult fact-specific question to resolve – is property within the physical and legal control of an insured?  An insured’s legal responsibility will often turn on this, and so too may its coverage position.  In this article we look at a recent Australian decision which held that property owners may have “control” of goods on their property even if they have not charged for storage and have not exercised any power over the goods.  

Facts

On 18 December 2016, Mr Penfold was welding on his farm when a spark started a grass fire.  The fire spread and destroyed many timber railway sleepers stored on his farm.  The railway sleepers belonged to Cutting Edge Services. The Penfolds had allowed Cutting Edge Services to store the sleepers on the farm free of charge.

The Penfolds held a liability insurance policy the relevant terms of which were:

• The policy provided cover for legal liability to pay compensation for property damage caused by an occurrence in connection with the farm business. 

• There was an exclusion for damage to property “not belonging to you but in your physical and legal control”.

• The policy had an additional benefit writing-back cover for damage to property “in your physical or legal care, custody or control”, but subject to a $100,000 limit.  

The Court accepted that the exclusion and additional benefit should be read ‘back-to-back’ in harmony with each other. 

The insurer accepted indemnity up to the $100,000 limit under the additional benefit.  But this limit was significantly less than the claimed quantum.  In an attempt to avoid the sublimit, the Penfolds argued that the railway sleepers were not in their physical and legal control even though the sleepers were stored on their property.  The Penfolds said they had never moved the sleepers nor exercised control over them.  The sleepers had been stored on the farm without charge and allegedly pursuant to a ‘bare licence’.

Review of Previous Cases

The Court reviewed previous cases involving control exclusions.  This included the following cases where equivalent exclusions were found to apply:

• A forklift driver who was hired to move a gondola (Collin v Botany Fork).  The gondola was damaged while the forklift driver was moving it.  There was an exclusion for damage to property in the insured’s custody or control.  The gondola was under the forklift driver’s control while he was moving it.  The exclusion applied. 

• Property owners who allowed a friend to store a dragster in their basement garage without charge so it would be safe from vandals (New Hampshire Ins Co v Abellera).  The dragster was destroyed in a house fire allegedly caused by the property owners’ negligence.  There was an exclusion for damage to property in the insured’s care, custody or control.  The property owners were keeping the dragster safe, and therefore it was within their care, custody or control.  The exclusion applied.

The Court also noted other cases where equivalent exclusions were found not to apply:

• A repair contractor who was engaged to repair a boom attached to an excavator (Gray Brothers Engineering Ltd v The New Zealand Insurance Co Ltd).  The excavator was damaged during the repair work.  There was an exclusion for damage to property in the charge or under the control of the insured.  The insured had no authority to move the excavator, or to alter it structurally, or to make any decisions in relation to its future.  The repair contractor was found to have control of only part of the boom.  He did not have control over other parts of the excavator.  The exclusion did not apply.  

• A cleaner who was engaged to clean a rug tacked to the floor (Indemnity Insurance Co v Excel Cleaning Service).  The rug was ruined during cleaning.  There was an exclusion for damage to property in the insured’s care, custody or control.  The cleaner’s obligation was to work on the rug while in situ.  The rug remained in the care and control of its owner.  The exclusion did not apply.  A similar conclusion was reached in a case involving a cleaner who damaged an oil storage tank while cleaning it (Interprovincial Pipe Line Co v Seller’s Oil Field Service Ltd). 

Did the Penfolds have ‘control’ of the Railway Sleepers?

The Court held that the Penfolds had physical and legal control of the sleepers.  It did not matter that the Penfolds had not exercised their right to move the railway sleepers.  The sleepers had been placed on the farm for safekeeping.  This was to avoid storing the sleepers in the railway corridor where there was known risk of theft.  In addition, the Penfolds controlled access to the farm.  If anyone other than Cutting Edge Services wanted to access the sleepers, they would have needed permission from the Penfolds. 

The Court held that the exclusion for damage to property in the insured’s physical and legal control applied, and as a result, the claim against the insurer was dismissed.

Comment (Andrew Durrant)

This case illustrates that property owners may wish to think twice, or check the adequacy of their insurance cover, before agreeing to store a third party’s goods on their property, even if stored without charge.  A property owner’s liability insurance may have an exclusion for damage to property in the insured’s care, custody or control (or a low sub-limit for such property).  This could leave such a property owner facing an uninsured liability exposure if the stored goods are damaged.

Andrew Durrant is a Senior Associate at Fee Langstone