In June 2014, a sharp object pierced a section of pipe which connected an underground fuel tank to six of BLG’s forecourt fuel pumps. The resulting fuel leak caused such extensive damage to BLG’s premises that it was at risk of catching fire or exploding and the business had to be closed.
Allianz insured BLG under a Motor Trade policy. Allianz declined cover on the basis that the policy excluded damage “caused by pollution or contamination”. Allianz sought to have the question of cover determined via summary judgment. The High Court agreed that the damage was excluded. BLG appealed, arguing that, while the effect of the leak was pollution or contamination, the cause of the damage was the sharp object which punctured the pipe.
The policy
The policy wording covered Damage to Property Insured by any cause not excluded. Damage was defined as “accidental loss, destruction or damage to Property Insured”. It was common ground that Property Insured was damaged by the leak.
The policy excluded:
“Damage caused by pollution or contamination, but we will pay for Damage to the Property Insured not otherwise excluded, caused by:
a) pollution or contamination which itself results from a Specified Event
b) any Specified Event which itself results from pollution or contamination.”
The definition of Specified Event included fire, explosion, flood and the escape of water from a tank or pipe.
The Court of Appeal’s decision
The key issue was whether the words “caused by”, as used in the exclusion, should be taken to refer to a proximate cause test. By a 2-1 majority, the Court found that they did. The exclusion only operated where the pollution or contamination was the proximate cause of the damage.
BCL submitted that the exclusion ought to be narrowly interpreted, such that it would not bite where something other than the pollution or contamination was the proximate cause of the damage. Allianz argued that “caused by” meant something looser than proximate cause so that any claim where pollution or contamination formed part of the causative chain would be excluded, regardless of the immediacy or remoteness of the cause. Allianz contended that a wider interpretation was consistent with the write back in the exclusion’s sub-clauses a. and b., which it said operated to provide cover for fuel leaks arising from Specified Events, but not otherwise.
The key issue was whether the words “caused by”, as used in the exclusion, should be taken to refer to a proximate cause test.
A majority of the Court of Appeal agreed with BCL, finding that the exclusion’s application turned on whether or not pollution or contamination was the proximate cause of the damage. The Court noted that the usual requirement to establish proximate cause is based on the parties’ presumed intentions, which could be displaced if the policy provided otherwise. This would typically be achieved by using words such as “directly or indirectly” in policy wordings.
The Court found that this was not the case here – the parties’ presumed common intention was that the exclusion applied to pollution or contamination where it was the proximate cause of the damage. The exclusion was not triggered where the pollution or contamination was merely the result of some other insured cause.
The dissent
Males LJ dissented from the majority and found that the wording of the exclusion, when read as a whole, displaced the presumption that the words “caused by” referred to damage proximately caused by pollution or contamination. In reaching this view, the Hon. Lord Justice focussed on the effect of the write back of cover in subclauses a. and b., as they formed part of the exclusion as a whole. He did not agree that the write back clauses were themselves concerned with proximate cause – rather they were there to ensure that any Specified Event which is caused by or causes pollution or contamination would be covered, regardless of whether the pollution or contamination or the Specified Event was the proximate cause of the damage.
Other observations
Across the three judgments, the Court made some other relevant findings and observations, including:
- The parties’ intentions in entering the contract – in determining the question of indemnity, the Court had regard to the fact that a fuel leak from pipes would be “amongst the most obvious risks” for a business of BLG’s size and kind to require and seek cover for.
- The meaning of proximate cause – the Court confirmed that the proximate cause of a loss is not necessarily the most recent or least remote cause, but rather that which is proximate to efficiency, being the dominant, effective, or efficient cause. The Court also affirmed the long-established principle applying to concurrent proximate causes that was established in Wayne Tank, whereby if one proximate cause is covered and the other is excluded, the exclusion prevails.
- Brokers’ understanding of insurance terms – the Court held that brokers are to be taken to be familiar with the basic insurance principle of proximate cause, and the language used in policies which reflects or modifies it. The fact that many policies contained ‘terms of art’, shaped by consistent judicial authority, did not deter the Court from finding that the words “caused by” had “historically and uniformly been interpreted in this context as importing the concept of proximate cause”, and that this was the meaning that ought to be given to the words in this case.
- Reconciling exclusions and write backs of cover – Popplewell LJ held that the presumption that “caused by” denotes proximate cause would survive in this case, unless the wording of the write back could not be reconciled with it. However, Males LJ (dissenting) and Nugee LJ (majority) disagreed and found that the relevant question was whether the exclusion, when read as a whole “would demonstrate to the reasonable reader to whom it is addressed an intention to displace the general rule. That intention may be demonstrated, even if it is possible to give some meaning to the write-back provisions which does not render them redundant”. Males LJ considered that, as a matter of ordinary language, and despite a ‘pedantic lawyer’ reaching the view that the pollution or contamination was not the proximate cause of damage, the relevant damage was caused by pollution or contamination.
- Using wording from other, optional, sections of the policy as an interpretative aid – two of the three judges expressly warned against reading into the use of different wording, such as “directly or indirectly caused by”, elsewhere in the policy wording. While it is orthodox to have regard to contrasting wording to determine the meaning of that wording within the same contract, no reliance should be placed on wording used in other sections of the policy that are optional, and which may not have been reviewed by the relevant insured.
- The application of the contra proferentem rule – there was no room for an argument that the exclusion ought to be construed narrowly against the insurer. This was because the wording of the insuring clause as “any cause not excluded” meant that the exclusions defined part of the scope of cover and ought not to be interpreted as an exemption from liability for cover which would otherwise exist.
Our view
This case provides helpful guidance on the doctrine of proximate cause. Like the UK, the use of “caused by” in insurance policies governed by New Zealand law is generally held to require the identification of a single proximate cause of the relevant loss. The principle of proximate cause is also codified in marine insurance by section 55 of the Marine Insurance Act 1908 which provides “an insurer is liable for any loss proximately caused by a peril insured against.”
However, the doctrine of proximate cause may be displaced or varied in New Zealand insurance contracts using clear wording to the contrary. It is critical that both insurers and brokers pay careful regard to the use of the precise wording of exclusions in determining the applicable standard of causation. As was the case here, imposing a proximate cause test could have the effect of introducing uncertainty and complexity in relation to exclusions.
Brokers should also be mindful of the risk of a court finding, as the majority did in this case, that they ought to be aware of the precise meaning of terms commonly used in insurance contracts that have had judicial consideration. The Court found that this would extend to language that both reflects, and modifies, the basic insurance principle of proximate causation.
This article was co-authored by Sam Nicholson and Isabella Denholm.
