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New South Wales Branch

Australian Insurance Law Association Ltd


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ASSOCIA TION

ACN 0523 7471 3

NSW AILA
Twilight Seminar Series

PROXIMATE CAUSE

Nigel Rein, Barrister at Law

15 September, 1999

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PROXIMATE CAUSE
NGRein

A paper presented to the AUSTRALIAN INSURANCE LAW ASSOCIATION On 15 September 1999

1.

"Proximate Cause" has been an important concept in insurance law. A very useful and detailed examination of the topic was provided by Professor Martin Davies in an article published in 1995 1 In the first points made by way of summary below I have drawn heavily from that article. I then deal with the issue of two proximate causes and discuss three recent cases on the subject and conclude with a brief reference to cases relating to onus of proof. The position in respect of these issues would appear to be well-settled but I shall raise for consideration several issues.

What Does Proximate Cause Mean?

2.

The proximate cause in insurance terms is the "real", "effective" or "dominant" cause2 This is sometimes more than merely one of a number of causes as a result of which the accident occurred.

3.

If the policy uses the words "caused by" the cause must be the proximate

cause3 but other words such as "arising out of' or "resulting from" do not4 .

4.

The Marine Insurance Act 1909 (Cth) (which very closely follows the Marine Insurance Act 1906 U.K) provides that the insurer is liable for a loss

proximately caused by a peril insured. It qualifies this by the words "subject

to the provisions of this Act", and "unless the policy otherwise provides" so that a marine insurance policy can expand its ambit to marine accidents that are not proximately caused by a particular risks.

5.

The onus of establishing that the loss was proximately caused by an insured peril is upon the insured6

6.

If there is an exclusion relied upon by the insurer, the insurer has the onus of establishing that the exclusion operates. If there is a proviso to the exclusion, the insured has the onus of establishing that the conditions of the proviso are

mee.

7.

The Courts have tended to eschew the philosopher's approach to causation and applied notions of common sense. Professor Davies observes that 'cause' has a mutability of meaning over time and by reason of the nature of the enquiry, which in the Court room sees common sense used to justify the conclusion of causation.

8.

Where there is no direct evidence of what caused the incident, the Court can have regard to other evidence from which an inference can be drawn. It is in the area of marine losses in which those issues have been fully canvassed. This topic of itself is of considerable interest and I shall discuss it below.

9.

Where there are two causes competing for the title "proximate cause" the Courts previously appeared to adopt the approach that only one could be "the proximate cause"s. In recent times, this has been departed from and it is now accepted that there can be two proximate causes9

Two Proximate Causes

10.

If there can be two proximate causes the next question is what happens when

one of the causes is covered under the policy and the other is not covered, or alternatively where the second cause is actually excluded. The answer, on present authority, is clear but I intend in this paper to examine the issue with reference to three recent cases. To better understand these cases I need to refer to three earlier cases.

Wayne Tank

11.

The first case is Wayne Tank and Pump Co Ltd v Employers Liability
Assurance Corporation Ltd
10.

In that case the insured were engineers who

had been held liable to the owners of a plastics factory in which the insured had installed equipment.The factory burnt down both because of the use of unsuitable and dangerous plastic material in the piping installation (and a defective thermostat) and the conduct of the insured's servant in switching on the equipment and leaving it on, unattended, overnight before the equipment had been tested. The insured's policy covered it for "damages consequent upon ..... damage to property as a result of accidents" but an exception

excluded liability caused by the nature or condition of goods sold or supplied by the insured. The claim was rejected by Lord Denning MR and Roskill LJ on the basis that the effective dominant and proximate cause was the dangerously defective nature of the installation which was within the exception. Cairns LJ also rejected the claim but held that if the excepted cause was one of two effective causes it was sufficient. He also held that if

selection was necessary the nature of the installation was the dominant cause.

"I should prefer to say that unless one cause is more decisive than the other, it should be accepted that there are two causes of the loss and no attempt should be made to give one of them the quality of dominance."

12.

Roskill LJ agreed that if there were two causes and one ofthem was within the exception clause and one not, the insured would not be covered 11. Denning MR also agreed with this view
12.

City Centre

13.

The second is City Centre Cold Store Pty Ltd v. Preservatice Skandia

Insurance Ltd 13, a decision of Clarke J, as he then was. The case concerned a
pallet handling and racking system for a cold store which collapsed due to the impact by vehicles within the cold store and the defective construction of the rack. Clarke J held that the impacts were the dominant cause of failure (such impacts were covered under the policy). However, he indicated that even ifhe was in error in this conclusion the fact that the rack was poorly constructed (defective design was not excluded) would not preclude cover for the insured.

14.

In marine insurance there has been considerable attention to the issue of 'proximate cause' and the related question of onus of proof. The "Miss Jay
Jay"
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concerned a cruiser with a fibreglass hull that was poorly designed.

On a trip in calm weather the cruiser had no trouble but in a force 4 to 5 wind; 3 metre waves and a confused sea (Force 12 is the worst wind on the Beaufort scale) the hull was seriously damaged. The policy covered damage "which was directly caused by external accidental means" and did not exclude loss due to negligent design.

15.

The UK Court of Appeal had to consider three issues: whether the loss was caused by accidental external means, had the trial judge misdirected himself by excluding consideration of the fact that the loss would not have occurred but for the cruiser's unseaworthiness due to design defects and thirdly whether the design defects were the dominant and effective cause of the loss. The Court of Appeal rejected the appeal on each basis but it is the last issue that I wish to focus on. Lawton LJ said:

"What has to be decided in this case is whether on the evidence the unseaworthiness of the cruiser due to the design defects was such a dominant cause that a loss caused by the adverse sea could not fairly and on commonsense principles be considered a proximate cause at all. In my judgment, the evidence did not establish anything of that kind. What it did establish was that, but for a combination of unseaworthiness due to design defects and an adverse sea, the loss would not have been sustained. One without the other would not have caused the loss. In my judgment, both were proximate causes."IS

16.

Slade LJ agreed that both the condition of the sea and the defective design of the hull leading to its unseaworthiness were both a proximate cause of the damage:-

"On a commonsense view of the facts both these two causes were, in my opinion, equal or at least nearly equal, in their efficiency in bringing about the damage." and,

"the loss in the present case is to be treated as having been proximately caused by a peril insured against (the impact of adverse weather conditions) even though the faulty design and construction of the yacht may have been of equal efficiency in bringing about the damage."

17.

He did go on to say:-

"Finally, I wish to stress that the condition of the yacht in the present case was not one of debility. If at the start of a voyage a vessel is in such a state of general debility that the ordinary action of the wind and waves in any types of sea is bound to cause her damage and such action duly causes her damage, commonsense may dictate that the condition of the vessel rather than the action of the wind and waves shall be treated as the sole proximate cause of the damage."

Croom-Johnson LJ agreed with both judgments.

18.

Thus whereas in Wayne Tank and City Centre the comments on how more than one proximate cause was to be dealt with were strictly obiter, in the Miss
Jay Jay the Court accepted that there were two proximate causes of equal

effect.

Waterwell

19.

In HIH Casualty & General Insurance Ltd v. Waterwell Shipping Inc 16, the insured's vessel sank in port because its sea valves were negligently left open by the crew and the wall of the strainer box in board of the valves failed due to corrosion, allowing sea water to flood the vessel. The vessel which was

awaiting fumigation had been shut down (in nautical parlance - a 'dead ship') whilst all but one of the crew had left the vessel. The policy covered

negligence of the crew but the insurer was not liable for ordinary wear and tear. Giles J held that the leaving open of the sea valves was the proximate cause of loss and not the corrosion of the strainer box and the insurer appealed. Sheller JA (with whom Beazley JA and Stein JA concurred) rejected the appeal.

20.

The policy (adopting terms from the Institute Fishing Vessels clauses) provided cover for loss or damage "caused by" the various perils including negligence of the crew. The policy was governed by the Marine Insurance Act 1909 (Cth). The only issue contested on appeal was the fmding that the negligence in leaving the valves open was the proximate cause of the loss.

21.

Sheller JA noted that the trial judge had found that the real cause of the sinking had been the leaving open of the valves - that was how water entered the ship. Once inboard, the water would have been stopped by the wall of the sea strainer box but these boxes were not checked for corrosion and there was always a possibility that they were corroded. The trial judge had accepted the

evidence that in a dead ship, good practice requires the valves to be closed. Sheller JA described these conclusions:-

"His Honour accepted that corrosion was a known process affecting the integrity of the seawater system and that closing the sea suction valves was dictated in order to guard against the consequences of just such an event. In short, where the risk of a failure due to corrosion was known or should have been known, the failure to guard against that risk was the efficient and hence the proximate cause of the loss not the state or condition of corrosion which created the risk." (my emphasis)

22.

He not only could see no error in the reasoning of the trial judge but agreed with the conclusion. There were not therefore, in his view, two competing proximate causes of loss:-

"The qualities of reality, predominance and efficiency of a cause prevail over proximity in time in determining what causes are proximate." (p.608)

23.

The insurer argued that if there was two proximate causes there could be no recovery because s.61 (1) of the Marine Insurance Act required there to be only one proximate cause. This would appear to hark back to earlier times. Sheller JA reviewed the modem authorities and said of the approach taken inJJ Lloyd
Instruments v. Northern Star Insurance Co (The Miss Jay Jay/7 and City Centre Cold Store 18:-

" .... such an approach, in a situation where each of two or more causes may realistically be described as an efficient and, in that sense, proximate cause, prefers commonsense to the artificial exercise of attempting to decide which of two or several is the winner of what in fact may be a dead heat. In my opinion, this Court should follow and apply the decision

of the English Court of Appeal in the JJ Lloyd Instruments Ltd v Northern Star Insurance Co Ltd ("The Miss Jay Jay"). Therefore, where there are competing proximate causes and loss from one is insured against and none of the others is expressly excluded, the insured is entitled to recover."

24.

There was a further argument which was that perils caused by ordinary wear and tear were excepted by virtue ofs.61(1) of the Marine Insurance Act - that there were two causes of the sinking and since one of them was excluded the insured could not recover. Sheller JA had already rejected the notion of two proximate causes but went on to deal with this argument. He said that in the Marine Insurance Act, loss not proximately caused by a peril insured against is . one for which the insurer is not liable. S.61(2) of the Marine Insurance Act provides that, in particular, liability for ordinary wear and tear, ordinary leakages and breakage, inherent vice or nature of the subject matter insured are not covered. Sheller JA was of the opinion that the loss by reason of wear and tear was not excluded, it was just not covered. There was no clause of the policy by which, but for the exclusion, there would be cover since ordinary wear and tear was never regarded as a peril of the sea.

Petersen

25.

In Petersen & Anor v. Union Des Assurances de Paris 19 Rolfe J had to consider whether stock damage due to water was covered under the policy. There had been torrential rain and water flowing from the north had entered the premises ("the first flood"). In that first flood all of the damage to stock occurred. There then followed a second flood when water overflowing from a nearby creek came onto the property.

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26.

The policy indemnified the insured for:-

"Loss or damage caused by: 4. Wind and/or Water but excluding flooding other than from water mains pipes gutters drains water tanks or apparatus. "

27.

"Flooding" was defined as meaning:

"Inundation in any way arising from any source outside the premises insured or containing the property insured."

28.

It was held that by the time the second flood occurred the damage had been

done and Rolfe J rejected the argument that because the second flood, an excluded cause, would have caused the same damage as the damage in the first flood, the loss was excluded. Thus the question was, was the first flood

flooding from "drains", which was the only potentially relevant exception. The expert evidence established that water in the first flood included water from drains and water from overland flow. Rolfe J held that the escape of water from drains and the flow of water overland which could not be accommodated by the drains, were concurrent events and:-

"the proximate cause of the first flood must be the combination of both these events in that water from both sources intermingles to make the totality of the water which, ultimately, enters the plaintiffs premises. The evidence ....... makes it clear, in my opinion, that a substantial amount of water, being at least twenty-five percent, in the first flood came from a source, with one possible exception, other than a drain. If this be so it seems to me that there are concurrent

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causes for the flooding, one of which cause is excepted so that the plaintiffs must fail."

29.

The exception to which His Honour referred was the fact that some water travelling overland might be treated as having gone into the drain even momentarily and hence could be described as water from a drain. He held that it was not established that a reasonably significant part of the water came 'from' any drain: "There was a flood and the totality of the circumstances caused the water in it to come from the several sources I have identified."

30.

In reaching his conclusion on the effect of there being concurrent proximate causes, one of them within cover and one of them excluded, Rolfe J referred to Wayne Tank and Centre Cold Store and other authority and summarised the position:-

"Firstly, the plaintiffs must establish that the cause of the loss and/or damage was a result of an insured peril, in the sense that the insured peril was the dominant or effective proximate cause. Secondly, in cases where there may be several causes which meet those criteria, the Court should not strain to isolate one, if it seems that two or more operated with equal or approximately equal effect. It would seem, as a mater of reasoning, that if two or more did so operate it is difficult to say that one, rather than more than one is the relevant proximate cause. However, in most cases, the courts seem to have found a single proximate cause. Thirdly, if there are two or more proximate causes, one of which arises from an insured peril and the other of which does not, but that cause is not excepted, the insured is entitled to recover. Fourthly, if there are two or more proximate causes, one of which arises from an insured peril and the other of which arises from an excepted peril, the insured is not entitled to recover. The rationale behind these two propositions is not entirely clear to me. It cannot be based on the onus of proof, I think, because if it were there is no rationale reason why the insured should recover in the first

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situation, the scales being evenly poised between loss from an insured peril and loss from an uninsured peril, but not where the scales are evenly poised between an uninsured and an excepted peril. One reason suggested is that in the first case the agreement of the parties allows recovery because the insured peril is, at least, a proximate cause of loss, and there is no exclusion of the other cause, whereas in the second case there is a positive exclusion of another proximate cause by the agreement of the parties. So, it is put, the insurer has positively declined, by the exception, to accord indemnity in such a situation. Fifthly, proximate causes are not, or are not necessarily, determined by reference to the temporal sequence in which they occur. Sixthly, in searching for a proximate cause the Court must take a commonsense approach." (my emphasis)

31.

I shall return below to the query to which Rolfe J referred. The Court of Appeal (Mason P, Priestley JA and Powell JA) rejected the appeaeo. First they did not accept that Rolfe J had misconstrued the evidence about the source of the water nor that he ought to have found that 75% of the water did come from drains. Priestley JA then examined an argument that the Wayne
Tank principle did not apply because there was here an exception to an

exclusion not cover subject to an exclusion.

"This was said to be sufficient to distinguish the line of authority or alternatively to justify the use of the reasoning in the line of authority to give primacy to the exception from the exclusion. This line of thought has some force, and it may need to be examined more closely if an appropriate case arises; however, I do not think this is an appropriate case. This is because, in my opinion, the relevant parts of the policy ....... convey quite a clear meaning, one clear enough to preclude the application of the general reasoning the appellants could seek to rely on."

32.

In his view, the meaning conveyed by the policy was:-

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"in the case of loss or damage caused by water from flooding from drains it is loss or damage caused by water from flooding from drains and from that source only that is covered. Loss or damage caused by water from all other flooding (apart from the other specific exceptions) is explicitly excluded from cover. "On this approach, loss or damage caused by water both from general flooding and from flooding from drains cannot in any sense be within the exception from the exclusion loss or damage caused by water from excluded flooding mingled with water from flooding excepted from the excluded flooding, is not loss or damage caused by water from flooding excepted from excluded flooding." (my emphasis)

33.

There was a further reason for the rejection ofthe appeal:-

"Further, there seems to me a more general reason why the appeal should fail. It appears to be accepted in insurance law generally that when the cause for the damage in respect of which the claim is being made is being sought, the court must look for a cause formerly routinely called proximate cause, later sometimes also described as the real or effective cause, it now being accepted that proximate does not mean the closest cause in the sense of time: see Leyland Shipping Company Ltd v. Northern Star Insurance Co Ltd [1918] AC 350 at 369; Wayne Tank at 66; Wood v. Associated National Insurance Co Ltd (1984) 2 ANZ Insurance Cases ~60-614 at 78,756; [1985] 1 Qd R 297 at 306. The evidence in the present case established that certainly one cause of the damage to the appellant's goods was the first flood resulting from highly unusual torrential rain. The evidence also establishes that the water flooding from that rain in the catchment area north of Manns Road would have flooded the premises whether or not the drainage system had been in place. It seems to me that even if all the water from that flooding could be conceived as having passed through the gutter drain it would be much more realistic to say that the loss and damage had been caused by flooding from rain rather than flooding from drains when the flooding would have happened whether the drains had been there or not." (my emphasis)

34.

The real cause of the water damage he held was a 1: 100 torrential downpour causing a flood which came from higher ground overland and through drains.

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35.

Having noted the approach of the Court of Appeal on this second point it will be of interest to return to Professor Davies' article. He said in criticism of Rolfe J's decision and prior to the Court of Appeal's decision:-

"With respect, this seems to be a misapplication of the wellestablished principles about concurrent proximate causes. The question should not have been whether there were concurrent causes of the flooding but whether there were concurrent causes of the damage and, furthermore, whether those concurrent causes of the damage were both "proximate". If about 75% of the water that caused the damage came from drains, was drain flooding not the sole proximate cause, because it was the dominant cause of the damage? Looking at it the other way around, could one say that the overland water was a proximate cause of the damage at all? If there had been no drain water, there would have been no damage at all, because there would have been no overland water either. (Remember that the overland water was water that could not run down the drains.) Thus, the overland water could not have caused the damage unless there had been drain water, but the drain water could and would have caused damage without the overland water. Although the damage actually caused by the intermingled water may have been greater than the damage that would have been caused by drain water alone, in causal terms the drain water was predominant." 21

36.

It will be noted that Professor Davies seemed to have regarded Rolfe J as

having found that 75% of the water came from the drains (as the appellant had submitted) but even accepting that that was a correct view of the evidence Davies' approach would be diametrically opposed to the Court of Appeal on proximate cause.

37.

That views can differ to such an extent highlights the difficulties of determining proximate cause. Professor Davies thought the proximate cause

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of the damage was the water from the drains. Rolfe J took the view that the proximate cause was both water from drains and water from overland and the Court of Appeal held that the proximate cause was the torrential rain leading to a build up water in the catchment area.

38.

It would appear that Professor Davies had thought that without the drains there

would have been no overland water either, a view that it is difficult to understand. The evidence was that water flowed overland and through drains if it could. If there had been no drains there would still have been flooding if there had been no overland water there would have been only low levels of flooding.

39.

In my view, the Court of Appeal's approach emphasises that the wider picture must be viewed in determining "proximate cause". That is consistent with the approach the majority took in National & General Insurance v. Chicf(l2. Mention should also be made in this context of Dhak v. Insurance Co ofNorth
America
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in which it was held that a woman who had consumed a bottle of

gin and died of asphyxiation had not died of accidental means because she had deliberately embarked on a course of conduct that she knew was likely to cause bodily injury. This is not inconsistent with Chick's case since, as

Samuels JA pointed out, the deceased in that case had not appreciated the true position of the bullet and that was why he was not playing "Russian roulette" but rather only pretending to do so.

McCann (The Powles' Case)

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40.

In Switzerland Insurance Australia Ltd & Drs v. McCann

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the New South

Wales Court of Appeal (Mason P, Stein JA and Giles JA) upheld an appeal from Hunter J in relation to the conduct of Adrian Powles, a partner of Allen Allen & Hemsley. The issue was whether a claim by a client against the partners of the firm in respect of the loss of $8.7million was excluded under a professional indemnity policy. The policy indemnified the solicitors for loss arising from a claim in respect of civil liability in connection with the practice but excluded indemnity for loss arising from a contract other than a contract to provide services within the definition of the Practice. indemnity in respect of any liability:It also excluded

"brought about by the dishonest or fraudulent act or omission of the Assured including any Partner or former Partner of the Assured .... "

41.

Powles had engaged in conduct which involved misappropriating money from clients of the firm, including him taking secret commissions on transactions in which his clients were involved. His modus operandi, with the assistance of Linpar the client's agent and others, was to:

"represent to an investor that an instrument could be purchased for a sum of money representing a discount to face value ie, $10million letter of credit could be bought for $8.7million. This so it was represented, could be rapidly onsold for a substantial profit on the cost price and this profit would be divided between Linpar and the investor. In fact, the instrument was sought to be acquired at substantially less than the cost price represented to the investor, thus creating a secret differential in the account controlled by Powles, which

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would then be distributed between Linpar, Powles and others without any knowledge or informed consent of the investor. To this extent Powles was to receive secret commissions out of the investor's funds." (p.16)

42.

Powles was keen to progress the transaction so that he could earn his secret commission and he did not ensure that the relevant securities were obtained in an appropriate fashion permitting money to be paid out in a most imprudent fashion. His previous experiences, so it was held, would have led him to understand the serious risk to which he was exposing the client's monies, by investing their money in a market which was uncontrolled and infiltrated with fraudsters. The balance of the funds (ie. after removal of the secret

commission) was lost to the client very rapidly. Powles not only offered no warning about the risks of the investment, but sought to induce confidence in its safety. Hunter J held that the losses did arise out of a contract in

connection with the practice. He also held that the payment and loss of the subject money was a consequence of a fraud practiced by a third party upon the client with which Powles had no part. He held that Powles' breach of duty to the client in receiving the money was dishonest but not fraudulent. He held that "brought about" were synonymous with "caused by" and hence called for the identification of the proximate cause in accordance with Wayne Tank and that the dishonest conduct was not that which 'brought about' the liability, but rather that it was brought about by the third party.

43.

The Court of Appeal emphasised the importance of the dishonest conduct of Powles in obtaining the deposit of funds from the client (which they also characterised as fraudulent):-

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"It seems crystal clear that Powles' dishonest conduct exposed Allens to a liability to the Nauruan Trust for any loss that it suffered in consequence of that conduct. It matters not that a further act by another party or parties may have been necessary to convert the risk of loss into actual loss. The loss would not have occurred if there had been no breach by Powles, but more, the breach by Powles, in circumstances of dishonesty, was causally related to the loss because it exposed AlIens to liability to the Trust and the risk of loss all but inevitably became an actual loss. In our view, returning to the words of the policy, AlIens' liability was brought about by Powles' dishonesty.

The approach of His Honour appears, with respect, to have converted the dishonesty exclusion into one which applies only if the solicitor intended that the money would be lost. We do not think that is correct. If it is, then many situations of gross breach of fiduciary duty, where ultimate loss was not intended, may go unremedied."

44.

The Court focused on the need to consider whether the liability arose because of dishonesty or fraud of the partner not whether the loss to the client was caused by dishonesty or fraud of the partner:-

"The exclusion is not focused on the loss caused by the dishonest or fraudulent acts or omissions of the partner, but on the liability for loss caused by those acts or omissions. In allowing the funds to leave the English banking system on or about 15 January 1992, in the circumstances that Powles did, he was in breach of his fiduciary duty and in breach of his trust to the N auruan Trust. That created the liability, and one which was immediate in that it produced a liability in equity for Allens to restore the funds then and there ........ . Further, it was an act by Powles which, in the circumstances we have described, was so tainted by dishonesty as to engage the exclusion."

45.

The Court rejected the notion that the words "brought about" reflect the concept of proximate cause but held that if it did, there was another answer to

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the insureds' claim: there could be more than one proximate cause and the fact that the second fraud occurred did not alter the proximate nature of the earlier dishonest act. The Court referred to Waterwell and The Miss Jay Jay and said:-

"The evidence . . .. . .. .... overwhelmingly establishes that Powles' dishonest conduct was one of the proximate causes of the loss."

46.

I think the Court of Appeal's decision was clearly correct on the question of whether the exclusion operated. If Powles had not entered upon his dishonest scheme he would not have had the client's funds available to him and placed them in a very vulnerable "investment". The firm's liability arose by reason of a breach of trust and the breach of trust amounted to dishonesty.

47.

There was a very obvious and close connection between the dishonest procuring of the funds and their loss even though the loss of the $8.5million was not deliberate.

Further Issues

48.

Let me return to the two questions concerning the Wayne Tank principle that were raised in Petersen. If an insured is told that he is covered for damage caused by negligence but not negligent design and an accident occurs because a workman negligently leaves a machine on and the design is faulty so that the machine explodes, why should he not be covered, but if negligent design was not excluded he would be covered?

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49.

The problem may have arisen because in the past the view was taken that there was only one proximate cause to be selected from a number of possible causes. If the Court was forced to select one cause it would either be covered or it would not. When there are two (or even more) proximate causes there is room for doubt. I think there is much force in Rolfe J's questioning of the rationale and I suggest that there is a way of dealing with the problem which develops a thread of the Court of Appeal's approach in Petersen. It will be recalled that Priestley JA highlighted that the exception was to be viewed as excepting flooding from drains and only drains. A similar approach could be taken to the construction of exclusion clauses (ignoring exceptions for the moment) ie, if the exclusion is that this policy does not cover loss arising from negligent design it should be construed as excluding loss where the proximate cause is only negligent design and not including loss caused by another covered peril as well. Another way of putting it is
0

say that when the policy simply notes

an exclusion (for say negligent design) it does not expressly provide for what is to happen when the excluded cause together with a covered peril causes the loss or damage.

50.

On this basis, if insurers wish to exclude loss by a peril whether it is the sole cause or one of two or more causes the policy should expressly say so. A clause of this sort might be read:-

"This policy does not cover loss resulting from negligent design whether or not the loss also results from other perils which but for this exclusion would be covered by this policy."

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51.

On the question of whether an exception to an exclusion should be treated differently to an exclusion to cover, the approach which I have suggested might resolve that difficulty too. The clause in Petersen would be amended to read:-

"This policy (1) covers:Loss or damage caused by:(a) Wind or Water; (b) Flooding caused solely by water from mams pipes, gutters, drains, water tanks or apparatus (2) but does not otherwise cover loss or damage caused by flooding, whether or not damage is also caused by an event which, apart from this exclusion, would be covered under the policy."

52.

In the McCann case, Hunter J's judgment could be seen as consistent with the approach I have suggested because he held that although there was dishonesty, the loss of the $8.5million was caused by negligence. The Court of Appeal however held that if there was dishonesty, it did not matter that there was also negligence. On that basis McCann is likely to be seen as inconsistent with the argument I have outlined. There are three points which could be emphasised however, to keep the argument alive. First, whether the policy is to be read as saying that "loss caused solely by cause x is excluded" is a matter of construction of the policy and since dishonesty is a deliberate act, it is more difficult to construe the clause in such a way. Secondly, the Court (as was said in McCann itself) is much more likely to regard the consequences of dishonest or fraudulent conduct and breach of a fiduciary duty as broadly as possible, consistent with its approach in relation to fraud and deceit generally. Thirdly,

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the focus was upon what caused the insured to incur a liability for the loss which flowed - and that liability to repay monies to the client was incurred immediately because of dishonesty.

53.

The possibility that exceptions to exclusion clauses ought be treated differently to exclusion clauses (raised in Petersen) tends to underscore the need to revisit the rationale and appropriateness of the rule generally. The willingness of Sheller JA in Waterwell to hold that the excluded cause (ordinary wear and tear) was not really an excluded cause because taken alone there would not be cover for it might also be seen as encouraging to those who view the Wayne
Tank rule as harsh in its operation. The point taken by Sheller JA is one of

much subtlety.

Onus

54.

I referred earlier to the onus issue. An interesting question arises when the evidence as to what occurred is unclear. In The Popi M 25 it was held that where there is no clear evidence of the cause of a vessel sinking, and the Court is not persuaded that it is more likely that the event occurred because of a peril insured against, the Court must reject the claim. In The Popi M the possibility that the vessel had been hit by a passing submarine was ventilated and accepted by the trial judge even though it was improbable. Lord Brandon in rejecting the approach of the trial judge and the Court of Appeal and with whose speech the other law lords concurred, said:-

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"It is always open to a Court even after the kind of prolonged

inquiry with a mass of expert evidence which took place in this case, to conclude at the end of the day, that the proximate cause of the ship's loss, even on a balance of probabilities, remains in doubt, with the consequences that the shipowners have failed to discharge the burden of proof which lay upon them"

55.

A similar issue arose in The MareP6. In that case a bulk carrier was flooded and sank off the Spanish Coast. The Insured claimed that the vessel was lost due to the perils of the sea, most probably as a result of breach of shell plating caused by collision with an unidentified object, probably a partly submerged container. It was held on a detailed review of the evidence that the submerged container theory was very near to impossible, that the plating was not detective, that the quality of water which entered the vessel was inconsistent with any single seawater pipe having been the cause. Flooding in another hold must have been due to some unseaworthiness of the vessel existing at the commencement of the voyage whether of the bulkhead or of some other part of the vessel. The trial judge held that the burden of proving that, on the balance of probabilities, a vessel was lost by perils of the sea was and remained throughout on the owners. The incursion of sea water had to be shown to be accidental or fortuitous to constitute a peril of the sea. He discounted scuttling of the vessel. The Court of Appeal (Dillon Mann & Hirst JJ) agreed and rej ected the appeal.

56.

The insured sought to rely on a presumption that when a ship which is seaworthy when it leaves port and sinks it must be treated as having been lost due to perils of the sea. Dillon LJ said:

24

"As I see it, the presumption is really founded on the balance of probabilities. If it is known that a ship was seaworthy when she set out, and she has never been seen since and nothing has been heard of her crew, then on the balance of probabilities she must have sunk and, on the balance of probabilities, the sinking must have been due to "perils of the sea" because she was seaworthy when she set out. The only alternative would be that she was scuttled, but members of a ship's company who scuttle their ship do not normally intend to commit suicide. They expect to be rescued. But if it was not shown that the ship was seaworthy when she left on her last voyage, the presumption does not apply since it cannot be held on the balance of probabilities that her presumed sinking was due to perils of the sea rather than to her unseaworthy condition.

In the present case what we do know of the circumstances of the sinking of the Marel eliminates a number of possible perils of the sea. Thus, she was not overwhelmed by exceptionally bad weather. She did not hit an uncharted reef. She was not run down and sunk by another vessel. As for the possibility that she sank as a result of collision with an unidentified object, it is shown that it is wholly improbable, and very nearly impossible, that the casualty could have been caused by the only form of unidentified object which was suggested as a possibility, that is a derelict container.
Therefore, on those facts, there was no room for the presumption. It was for the plaintiffs to prove their case."

57.

In Skandia Insurance Company Limited v. Skoljarev27 a fishing boat sank in


calm water soon after leaving port. Seaworthiness was put in issue by the insurer but the trial judge found that unseaworthiness was not established and the insurer had the burden of proof on that issue. Mason J (with whom Gibbs and Aickin JJ expressly concurred) said:-

"If the insured has no direct evidence of loss due to a fortuitous event, it may seek to establish by inference a case of loss due to an unascertained peril of the sea. To justify this inference he will seek to exclude the possibility of loss caused by unseaworthiness by calling evidence as to the condition of the ship. In such a case once evidence is given

,"
;'
\

25

of seaworthiness, the issue of causation must be decided as a . 0 fCo t,,28 question lac.

Summary

58.

Where cover is available only when the loss insured has been proximately caused by a particular peril, the search is for the "real" "effective" or

"dominant" cause of the loss. There can be two causes operating at once. On the state of present authority, if one of the causes is excluded there will be no cover even if the other is covered. If one of the causes is covered and the other is not covered but not excluded, there will be indemnity for the loss. I have suggested that there may be room for an alternative approach which requires the excluded cause to be the sole cause unless the policy makes it clear that it need not be the sole cause. On this alternative approach, exclusions only apply when the excluded peril is the only cause of loss or damage. Exceptions or provisos to the exclusion could be treated in the same way.

Davies, Proximate Cause in Insurance Law, 7 (1995) Ins Law J. 135 Wayne Tank and Pump Co Ltd v. Employers' Liability Assurance Corp [1974] 1 QB 57,66 3 GIG (NSW) v. R. J. Green Lloyd Pty Ltd (1966) 114 CLR 437 and Australian Casualty Co Ltd v. Frederico (1986) 160 CLR 513 4 GIG (NSW) v. R. J. Green Lloyd Pty Ltd (1966) 114 CLR 437; Kooragang Cement v. Bates (1994) 35 NSWLR 452, but see Sand Y Investments (No.2) Pty Ltd (in liquidation) v. Commercial Union Assurance ofAustralia Ltd (1986) 44 NTR 14 ("occurring as a result of') 5 Davies (supra); p.137 6 Skandia Insurance Co Ltd v. Skoljarev (1979) 142 CLR 375,391 7 Petersen v. Union des Assurances de Paris lARD (1997) 9 ANZ Ins Cas 61-366
2

1 M.

,I

26

8 Davies, supra, p.146, Leyland Shipping Co Ltd v. Norwich Union Fire Insurance Society Ltd [1918] AC 350,369 9 The Miss Jay Jay [1987] 1 LL Rep 32 and see below 10[1974] QB 57 II Ibid, at page 74 12 Ibid, at page 64 13 (1985) 3 NSWLR 739 14[1987] 1 LL Rep 32 15 Ibid at p.37 16 (1997-1998) 43 NSWLR 601 17[1987] 1 LL Rep 32 18 (1985) 3 NSWLR 739 19(1995) 8 ANZ Ins Cas 61-244 20 (1997) 9 ANZ Ins Cas 61-366 21 Davies; supra, p.150 22 [1984] 2 NSWLR 86 23 [1996] 2 All ER 609 24 [1999] NSWCA 310 (27 August 1999) 25 Rhesa Shipping Co (SA) v. Edmunds (The Popi M) [1985] 2 LL Rep 1 26 Lamb Head Shipping Co v. Jennings [1994J 1 LL R 624 27 (1979) 142 CLR 375 28 see for more on this topic K Carruthers, Some Observations on the Standard of Proof in Marine Insurance Cases, with Special Reference to The Popi M (1988) 62 ALJ 199.

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