The Queensland District Court recently considered the effect of a ‘flood exclusion clause’ arising out of the 2011 Brisbane floods.
The insured argued that when strictly interpreted, a number of the words and phrases used in a flood exclusion rendered it ineffective to exclude the claim.
The Court considered the individual components of the exclusion, and in doing so sought to give effect to the purpose of the exclusion as a whole.
The Queensland District Court recently considered the effect of a flood exclusion on a claim arising out of the 2011 Queensland floods. The case demonstrates the task of the Courts in undertaking such an exercise, and highlights the consideration given by the Courts to the purpose of an exclusion clause as a whole.
During the floods, water entered through the wall of a basement owned by Wiesac Pty Ltd (the insured).
The insured held an ‘Industrial Special Risks’ policy with Insurance Australia Limited (the insurer), which contained the following ‘flood exclusion’:
“The Insurer(s) shall not be liable…in respect of… damage occasioned by or happening through…
flood, which shall mean the inundation of normally dry land by water escaping or released from the natural confines of any natural water course or lake whether or not altered or modified or of any reservoir, canal or dam…”.
The insurer rejected the claim on the basis of the flood exclusion.
The Court undertook an analysis of the respective components of the flood exclusion to determine its application, primarily being the phrases and words “occasioned by or happening through”
, “normally dry land”
and “escaping or released”
. Relevantly, the expert evidence in the matter established that the ingress of water into the basement had occurred by way of a mixture of river water, local run-off and groundwater in the pipes surrounding the basement leaking under pressure into the subterranean soil and then into the basement.
As regards the phrase “occasioned by or happening through”
, the Court noted that this expression has historically been given a wide meaning by the Courts. By way of an explanation of its effect, the Court adopted the analogy of a car being stolen from a shop during a riot: the cause of the loss in that case would be “theft”, however the “occasion” of the loss would nevertheless be “riot”. Similarly, while the ingress of water into the basement from the surrounding soils through cracks in the relevant pipes may be considered the cause of the loss, it was nevertheless “occasioned” through flooding from the Brisbane River.
Next, the Court considered the word “inundation”
. The insured argued, amongst other things, that the word “inundation” only referred to the flooding of a surface and therefore the basement or subterranean soils could not be considered to have been “inundated”. However, the Court sought to give effect to the word having regard to the purpose of the exclusion to exclude liability for damage occasioned by flooding, and accordingly held that there is no room to limit the word “inundation” to that effect.
In respect of the phrase “normally dry land”
, the insured argued that if, for the purpose of the exclusion, the “normally dry land” was the basement, then the exclusion cannot apply because the “normally dry land” cannot be one and the same as the property insured otherwise this phrase would be redundant. It argued that if the insurer intended that the inundation of an insured building was the trigger of the exclusion, the flood exclusion should simply read “the inundation of the insured property by water…”
. This argument was rejected by the Court on the basis that it is necessary to consider the purpose of the exclusion, which is to exclude liability where loss is occasioned through the inundation of normally dry land which, for that purpose, ought to include the insured property.
As regards the word “escaping”
, the Court rejected the insured’s argument that the water that entered the basement was not “escaping” but had “escaped” and therefore the flood exclusion did not apply. The Court reasoned that only water which has actually left the confines of a river can do damage and cause loss, and therefore, for the exclusion to have any operation, the water must be still in the act of escaping after leaving the confines of the river and at the point that it entered the basement.
Ultimately, the Court found that the flood exclusion effectively operated to exclude the claim, and in doing so balanced a strict interpretation of the words used with a desire to give effect to the exclusion’s purpose as a whole.
Post by Patrick Hodgetts