On 17 November 2017 the Federal Court handed down judgment in Sheehan v Lloyds Names Munich Re Syndicate Ltd  FCA 1340.
The case concerned a pleasurecraft insurance claim following engine damage by reason of loss of lubricating oil. The decision of the Chief Justice is noteworthy for two reasons:
- First, technical matters as to the cause of the engine breakdown were referred to a Court appointed referee; and
- Second, he provides a helpful analysis of the meaning of “accidental loss or damage” in a pleasurecraft policy.
The referee’s decision is final?
We don’t often see the appointment of referee’s in insurance matters. The involvement of a referee in this case is consistent with the innovative approach to case management taken by Chief Justice Allsop in the Federal Court’s specialist insurance list.
Section 54A of the Federal Court of Australia Act 1976(Cth) provides the Federal Court with the power to refer questions to a referee. Division 28.6 of the Federal Court Rule provides rules for the conduct of a referral to a Referee.
The Chief Justice noted that “the efficient determination of complex and technical factual issues by a referee is a procedure that can have significant benefits, particularly in cases that involve issues where an expert might better be able to assess the primary evidence and make findings than a Court, owing to the technical nature of the factual matters involved. The use of a referee may well (as it did in this case) obviate the need for each side to brief experts fully (or at all) to debate the matter in that the referee embodies the expertise necessary to resolve the issue upon presentation of the relevant material by the parties.”
Having obtained a report from a referee, the Court is then entitled to deal with the report as it thinks fit by adopting it in whole or in part, varying it, rejecting it or making further orders. While the Court is not obliged to adopt the referee’s findings, the Court will generally not reconsider a disputed question of fact unless the referee does not possess appropriate expertise or the findings were such that no reasonable finder of fact could have made them.
In this case the referee was asked to consider the engine records and report on the nature and cause of the engine damage. The referee concluded that the engine damage occurred as a result of continued operation of the engine by the Insured after a loss of lube oil pressure. As to what caused the loss of lube oil pressure, the referee concluded that this was due to the faulty design or inherent defect in the oil cooler gasket. These findings were adopted by the Court.
Was this “accidental loss or damage”?
An accident has been variously described as an “unlooked-for mishap or untoward event which is not expected or described” or “any unintended and unexpected occurrence which produced hurt or loss” it is “fortuitous and unexpected“. The test is an objective one but it incorporates the specific knowledge and experience of the person involved.
The court concluded that the test in this case was whether a reasonable operator of the vessel with the knowledge of the Insured would have expected the damage to the starboard engine to have occurred in the circumstances?
The Insured failed to read or understand the engine manual, had ignored the visual and audible alarms and had failed to turn off the starboard engine before it overheated and seized. Insurers argued that the Insured “courted the risk” such that the engine damage was not a fortuity. However, the Court concluded that the act of poor seamanship by the Insured did not prevent the events being categorised as an accident. The reasonable person was to be imputed with the knowledge and experience of the insured and in this case the Insured was not aware that the engine alarm related to low oil pressure and believed the engine could be safely operated in limp mode without damage.
Therefore the damage the engine was accidental loss and damage within the meaning of the policy.
Was the loss caused by a faulty design of gasket such that it was excluded?
The court was then asked to determine whether the policy exclusion for faulty design applied to exclude Insurer’s liability for the loss.
The referee had determined that the loss of lubricating oil was due to the faulty design of the oil cooler gasket. Insurers argued that this was the only cause of the damage and as such the loss was excluded.
In response the Insured argued that it was his negligence in failing to shut down the engine that caused the damage. The Insured alleged that his actions broke the chain of causation between the faulty gasket and the loss such that the faulty design ceased to be the proximate cause of the loss.
Insurers further relied on the Wayne Tank principal to argue that the faulty design and the Insured’s negligence were both interdependent proximate causes such that if one is excluded the Insured cannot recover.
Ultimately the court found for insurers by concluding that the faulty designed gasket was the dominant, most effective and sole proximate cause of the engine damage with the result that the Policy did not respond.
This Judgment serves as a useful reminder of the scope of accidental loss policies and the technical pitfalls associated with engine failure claims. Exclusions for faulty design, latent defect and other expressly excluded causes necessitate the careful maintenance and management of the insured asset.
We anticipate that we will see an increase in the use of referees in the Federal Court for appropriate technical disputes because of the obvious costs savings associated with avoiding competing expert evidence.
This article was written by Matthew Brooks, Partner, and Chris Sacré, Special Counsel.