NSW Court of Appeal provides guidance on common law test for rectification
Mobis Parts Australia Pty Ltd v XL Insurance Company SE  NSWCA 342
The New South Wales Supreme Court of Appeal has handed down its decision in the matter of Mobis Parts Australia Pty Ltd v XL Insurance Company SE  NSWCA 342. The decision provides authority in relation to the equitable remedy of rectification, the common-law test for loss and costs.
Background and primary decision
On 25 April 2015, a hailstorm in Sydney resulted in the collapse of a warehouse owned by the Appellant, Mobis Parts Australia Pty Ltd (Mobis). The collapse resulted in damage to the building itself and stock contained within the warehouse. During demolition works on the warehouse and retrieval of stock, a fire broke out causing further damage. Mobis claimed indemnity under its insurance policy with XL Insurance Company SE (XL), the lead insurer in an international insurance programme with co-insurers AIG Europe Limited and UNIQA Verisicherungs AG. The Insurance scheme consisted of a Local Policy issued by XL as the lead insurer, and a Master policy issued by the XL and its co-insurers, providing difference in limits cover.
Mobis made a claim to recover its losses resulting from the collapse of the warehouse, and not the fire which was outside the policy period. The presiding judge, Justice Stevenson J, rejected a claim for policy rectification by XL attempting to import a hail limit from the Master Policy into the Local Policy. Justice Stevenson also made several findings in relation to quantum and ordered XL to pay Mobis’ and the co-insurers’ costs of the proceedings.
Findings on Rectification
The Court of Appeal upheld the primary judge’s decision and struck out XL’s grounds on appeal with regards to rectification. The elements XL were required to prove, under the equitable doctrine of rectification, that:
- The 2014/2015 Local Policy did not conform to the “true agreements” that it was intended to record, by its omission of the Hail Limit; and
- This omission was attributable to common mistake rather than deliberate choice.
XL’s main submission was that the true terms of the ‘informal agreement’ between the parties, was for the Local Policies, when issued, to reflect coverage in line with and not in excess of the Master Policy. One of the key factors that undermined this submission was evidence of variations between previous Master Policies and Local Policies working in favour of either Mobis or XL. This was based on evidence of differences in premiums and deductibles between Local Policies and Master Policies in other markets (e.g Sweden and Czech republic), and clauses in the Master Policy which anticipated disconformities between the Master Policy and Local Policy.
The Court of Appeal also found that XL’s underwriters did not rely on a “common mistake” when issuing the Local Policies where they had direct access to the relevant Master Policies at the time, which contained the ‘correct’ hail limit. Evidence of a clear and operative mistake from the relevant parties, in this case the underwriters, is crucial in establishing disconformity to a ‘true agreement’. The Court will likely not provide equitable relief through rectification where parties have not sufficiently relied on an ‘operative mistake’ and have the freedom to deviate from an agreement.
Was the physical loss of stock permanent?
The Court of Appeal provides further guidance on common-law test for loss strictly maintaining the requirement to establish ‘permanence in deprivation’. As the policy had expired when the fire at the warehouse occurred, which destroyed the remaining stock, Mobis were only able to claim indemnity for losses resulting from the collapse. Mobis’ grounds of appeal therefore argued that all undamaged stock in the warehouse, as a result of the buildings collapse, was physically lost as the possibility of salvage was uncertain. This submission relied on the common-law test of uncertainty in constructive total loss, applicable to marine insurance policies.
The Court of Appeal upheld the primary judge’s decision that Mobis was required to establish that a permanent depravation of the stock had occurred following the collapse, being the relevant test of loss in property insurance. Citing Moore v Evans  1 KB 458 the Court of Appeal confirms that principles of loss under marine insurance policies cannot be applied to non-marine insurance risks. Leeming JA provides that while in some cases, assimilation of doctrines can occur, marine risks and losses are distinct from other forms of insurance with the context of a ship, chattel and journey along with having an entirely different statutory regime to non-marine insurance.
As Mobis were required to establish permanence in depravation, their submission that the recovery of stock was ‘uncertain’, and evidence of some stock being actually retrieved prior to the fire, suggested that there was a probability that stock would be recovered, defeating any argument that the loss was permanent. When determining the relevant degree and likelihood of permanence, the Courts will consider all circumstances occurring during and after an incident consistent with the “wait and see approach”. The surrounding circumstances will need to prove that there is, more probable than not chance of no recovery.
Whilst Mobis was unsuccessful with regard to the physical loss of stock, they were successful in other aspects in relation to quantum, one of which being a claim for the value of stock not actually replaced. As a result the judgment sum ordered against XL increased significantly.
During the appeal proceedings, XL also sought to overturn the Sanderson Order issued by the primary judge requiring them to pay the costs of the co-insurers in the proceedings. The court of Appeal dismissed XL’s submissions, based on XL’s representations made during the trial in assuring that no privity issues would arise should Mobis bring a claim under the Master Policy, effectively joining the co-insurers. Insurers should be mindful when looking to join co-insurers to proceedings, where they leave themselves exposed to the possibility of wearing their costs in the proceedings.
The decision confirms the necessary elements towards establishing the equitable remedy of rectification and the relevant common-law test for loss. Insurers running recovery actions under an international insurance program should consider whether equitable relief is available and whether they will be able to satisfy the evidentiary burden.
Kennedys Australia represented AIG Europe Limited in the initial proceedings.