Jaggar v Lyttelton Marina Holdings Ltd (In Receivership)

IN THE HIGH COURT OF NEW ZEALAND
CHRISTCHURCH REGISTRY
CP 35/01
CIV-2001-409-000783

BETWEEN DAVID VIVIAN JAGGAR AND CARMEL ANNE JAGGAR
Plaintiff

AND LYTTELTON MARINA HOLDINGS LIMITED (IN RECEIVERSHIP)
First Defendant

AND LYTTELTON MARINA MANAGEMENT LIMITED (IN RECEIVERSHIP)
Second Defendant

AND LYTTELTON MARINA LIMITED (IN RECEIVERSHIP)
Third Defendant

AND SALTWATER MARINAS (NZ) LIMITED (IN LIQUIDATION)
Fourth Defendant

AND BECA CARTER HOLLINGS & FERNER LIMITED
Fifth Defendant

AND OCEL CONSULTANTS LIMITED
Sixth Defendant

AND QBE INSURANCE (INTERNATIONAL) LIMITED
Seventh Defendant

AND OVE ARUP PTY LIMITED
First Third Party

Hearing: 18-22 April and 27 April 2005

Appearances: C R Langstone and P Barratt for Plaintiffs
D J Heaney and S H Macky for Seventh Defendant

Judgment: 17 June 2005

JUDGMENT OF PANCKHURST J

Index
Introduction [1] - [4]
The parties [5] - [14]
The background [15] - [30]
Amendment of pleadings [31] - [40]
The liability of the third and fourth defendants [41] - [44]
The insurance cover [45] - [56]
Were boats moored in the marina covered under the policy? [57] - [61]
Was the damage accidental, or the result of a deliberate recklessness? [62] - [67]
Material misstatement? [68] - [81]
Non-disclosure of storm damage in 1999 and early 2000 [82]
Principles relevant to non-disclosure [83] - [88]
Witnesses who were not called [89] - [96]
Was there non-disclosure? [97] - [103]
Non-disclosure of boats in the marina [104] - [113]
Non-disclosure : financial difficulties [114] - [121]
Non-disclosure : engineers’ advice [122] - [132]
Waiver [133] - [141]
Non-disclosure: arrangement to move boats to the inner harbour [142]-[148]
Inducement of QBE [149] - [155]
Damage to boats [156] - [158]
Affirmation of the contract [159] - [168]
Assumption of risk : contributory negligence [169] - [174]
Damages [175] - [184]
The measure of damages [185] - [188]
Were the repair costs reasonably incurred? [189] - [191]
Is the replacement cost reasonable? [192] - [193]
The interest claims [194] - [197]
Result [198] - [199]

Introduction

[1] On 12 October 2000 Lyttelton Harbour experienced a severe south-westerly storm. It was a one in 40 year event. Boats in a marina at Magazine Bay were damaged and in some cases sank. The marina itself broke up. At this time there was a 100 metre gap in the floating breakwater which was intended to protect the marina. The gap allowed the full force of the storm to enter and cause the damage to the boats and the marina itself.

[2] The group of companies who were responsible for the development and construction of the marina are insolvent. This case involves a claim by one of numerous boat owners whose vessels sustained damage in the storm. Mr and Mrs Jaggar imported a 12 metre motor launch from the United States which was moored in the marina. It was overturned in the storm. The claim is against QBE Insurance (International) Limited. It insured Lyttelton Marina Limited and Saltwater Marinas (NZ) Limited which companies were responsible for the development and construction of the marina, respectively.

[3] Hence the claim is one pursuant to s9 of the Law Reform Act 1936. Thereby, upon the happening of a defined event for which an insured has cover, a charge on insurance money payable under the contract of insurance, is created. If such insured is placed in receivership or liquidation claimants like Mr and Mrs Jaggar may proceed against the insurer (QBE) and have “the same rights and liabilities, and the Court shall have the same powers, as if the action were against the insured” : s9(4).

[4] It follows there are two aspects to the case. First, Mr and Mrs Jaggar must establish their claim against Lyttelton Marina and/or Saltwater Marinas. In the event that aspect is straight-forward. The merits of the claim were not seriously contested. Second, given that QBE gave notice of avoidance of the policy for material nondisclosure, whether insurance cover exists under the relevant policy is at issue. This is where the real battle was fought.

The parties

[5] The proceeding was issued in 2001 and has a considerable history. For present purposes it is not necessary to review that history in any detail. I shall simply note the various parties and refer to their connection to the marina development.

[6] There are 24 remaining plaintiffs (although the hearing was confined to a consideration of Mr and Mrs Jaggar’s claim alone). All claim against QBE for damage to boats which were moored in the marina as at 12 October 2000. The total of their claims is less than $3m, which is the extent of cover under the relevant public liability policy. In the fourth amended statement of claim the plaintiffs are divided into three groups, being those who held berth licences, written berth rental agreements or oral agreements to occupy berths within the marina. However, for the purposes of this case little turns on these distinctions. As it happens Mr and Mrs Jaggar moored their launch pursuant to an oral agreement.

[7] The first defendant, Lyttelton Marina Holdings Limited, was the promoter of the marina venture. It issued a prospectus which invited subscription for shares in itself which shares would entitle holders to berthage in the marina upon its completion. The float was intended to raise about $8m, required for development of the marina. This company is now in receivership.

[8] The second defendant, Lyttelton Marina Management Limited, is a wholly owned subsidiary of the first defendant. It was granted a licence by the third defendant to occupy and manage the new marina until 2031. The intention was for the Management Company to grant sub-licences to boat owners who had subscribed for shares in the first defendant. Lyttelton Marina Management Limited is also in receivership.

[9] The third defendant, Lyttelton Marina Limited, was the developer and owner of the marina assets. It held a lease of land adjacent to the marina, to be used for access and associated facilities. It was to grant the head lease to the Management Company to enable the latter to manage the facility into the future. Lyttelton Marina Limited is also in receivership.

[10] The fourth defendant, Saltwater Marinas (NZ) Limited, was contracted by Lyttelton Marina Limited to construct the new marina and floating breakwaters required for its protection. This work was undertaken by sub-contractors so the role of Saltwater Marinas was that of head contractor. This company is in liquidation.

[11] The fifth defendant, Beca Carter Hollings and Ferner Limited, are civil engineers who were engaged to design the floating breakwater needed to protect the marina. In late 1999 problems were experienced with the breakwater. It partially failed, resulting in the need for a revised design. A settlement was concluded between the engineers and Saltwater Marinas in late 1999. Nonetheless the plaintiffs claimed against Beca Carter and that aspect was resolved prior to the present trial. In the result Mr and Mrs Jaggar’s claim against QBE was subject to a reduction of $50,000, being their share of the settlement sum.

[12] The sixth defendant, Ocel Consultants Limited, is also a civil engineering company. It was retained to redesign the breakwater following its failure in 1999. The claim against Ocel was to the effect that its redesign of the breakwater required its removal in part, resulting in a foreseeable risk to boats moored in the marina at the date of the storm, 12 October 2000. This allegation was not pursued to trial.

[13] The seventh defendant is QBE. It was the only active defendant before me, although two engineers from Ocel were called as witnesses.

[14] Finally, Ove Arup Pty Limited was joined as a third party by Ocel. This Australian company was retained to peer review the structural capacity of the redesign of the floating breakwater undertaken by Ocel. Likewise, this third party claim did not remain alive at trial.

The background

[15] Magazine Bay has been used for mooring boats for an extended time. It contains a fixed pier marina of 92 berths which enjoyed the protection of a fixed breakwater constructed of old vehicle tyres. However, the need existed for an increased number of berths in Lyttelton Harbour, in part fuelled by the wish of the Lyttelton Port Company Limited to cease involvement in the provision of berthage within the inner harbour.

[16] Both the Port Company and the Banks Peninsula District Council had an early involvement in the marina project. Each provided $500,000 to promote the development of a new marina at Magazine Bay, which is some distance to the west of the inner harbour where commercial activity at Lyttelton is centred. In about December 1997 Lyttelton Marina Holdings purchased the assets of the then enterprise established to develop the marina. Such assets included resource consents required for the development, a lease of adjacent shore land and certain intellectual property.

[17] Mr Mark Truscott was closely identified with the marina project. He was a director of, and shareholder in, the first four defendant companies which were incorporated to promote, build and manage the marina. Although mentioned by several witnesses in the course of the hearing, Mr Truscott did not give evidence. Nor were the receivers and liquidator of the Lyttelton Marina companies called.

[18] In February-March 1998 Lyttelton Marina Holdings Limited issued the prospectus inviting subscription for shares which would entitle holders to obtain a licence to occupy a marina berth. The prospectus detailed the plan for development of the marina. This was to be in two phases. Phase one involved the construction of a fixed breakwater of about 160 metres constructed in rock to protect against easterly swells, and, two overlapping floating breakwaters to “ensure south-westerly storm waves (were) largely prevented from entering the marina”. In addition according to the prospectus, phase one included the construction of 239 new floating berths and the landscaping and developing of over seven hectares of land which formed the shore area for the development. Phase two was described as the removal of the existing fixed pier marina, and the construction of approximately 150 additional floating berths in their place. The timing of this phase would depend on the demand for berths in the new marina.

[19] The share offer was not successful. A chartered accountant, Mr R W Ibbotson, called by QBE with reference to its non-disclosure defence, analysed such financial records as were available for the Lyttelton Marina companies. The offer was of 812 100 shares at $10 each which, if fully subscribed, would have provided a funding base of $8,121,000. However, the last available financial statements for Lyttelton Marina Limited (the development company) 30 September 1999 showed a share capital slightly in excess of $500,000. This, Mr Ibbotson considered, provided clear proof that the share float was greatly under-subscribed. Newspaper articles published in late 1998 referred to the float as having “failed to meet minimum subscription targets” which in turn prompted a revised version of the project “on a smaller scale”. Such articles were based upon information attributed to Mr Truscott as the spokesman for the Lyttelton Marina companies. Despite the financial difficulties and the need according to Mr Truscott for “a refinancing package” work on development of the marina commenced during 1998, and substantial progress was made albeit with some interruptions.

[20] By late 1999 the rock breakwater to the eastern side of the new marina was substantially completed. The overlapping floating breakwater designed by Beca Carter was also in place. Construction of the floating marina itself was partially completed and there were a substantial number of boats moored in the marina. Moderate storms were experienced in August and September 1999. These revealed design problems with the floating breakwater.

[21] It was comprised of floating pontoons which were anchored to the seabed by a chain system. The pontoons were 4 metres long and 4.8 metres wide. They consisted of polystyrene modules coated with concrete and bound together by a system of timber waler beams on each side. The original Beca Carter design utilised pinus radiata beams which connected the two 250 and 200 metre breakwater sections continuously along their length. This design proved to be unsuitable. Failures occurred during storm events of lesser intensity than the design perameters. The problem apparently lay with the inflexibility of the breakwater construction, coupled with insufficient strength in the waler beams by which the pontoons were connected. Wave action along the extended length of the breakwaters occasioned damage to the structure itself.

[22] In the result Beca Carter withdrew as the engineering consultants for the project and, in November 1999 Ocel assumed that responsibility. Beca Carter also paid a sum to Lyttelton Marina and Saltwater Marinas in settlement for the design failure.

[23] Messrs I W Goss and G C Teear, both civil engineers with Ocel, gave evidence as to that company’s involvement. Mr Teear explained something of the function and redesign of the breakwaters. Their function was to act as wave attenuators. Wave energy still passes under floating breakwaters. But the breakwaters reduce wave heights to a level sufficient to protect the floating marina and boats within it from harm, even in the event of a significant storm. Following the problems in late 1999, Ocel’s brief was to redesign the breakwaters reusing the existing pontoon components. Instead of a continuous design system running 200 and 250 metres in length, the breakwaters were to be reconfigured into 25 metre sections. Between each section rubber fendering was to be incorporated, to enable movement to occur without damage to the pontoons. In addition, the waler beam connecting system was to be strengthened, since Ocel concluded that the previous design achieved flexibility at the expense of strength.

[24] Importantly, Ocel’s redesign necessitated disconnection of the four metre long pontoons so that they could be reassembled as 25 metre modules of four pontoons, with a rubber buffer between each module and with a strengthened connection system. It necessarily followed that were a storm to strike while the breakwaters were dismantled, or incomplete, adequate wave attenuation would not be achieved and the marina would be vulnerable.

[25] In mid December 1999 there was another storm. Damage was occasioned to at least two or three vessels in Magazine Bay when a loose floating pontoon from the breakwater impacting against these boats in the marina. Evidence of this was contained in an article in the Christchurch Star of 15 December 1999 and in the evidence of Mr D A Daish (a witness for the plaintiff).

[26] Then, within less than a month, in early January 2000, a further storm caused one or more pontoons from the breakwater to again impact against the marina. A newspaper article which appeared in the Christchurch Press on 4 January 2000 attested to damage to the marina, but not to boats.

[27] By late July 2000 Ocel had completed its redesign of the floating breakwater system. It remained only for a peer review of the redesign to be completed. Mr Teear reported to Saltwater Marinas that a final sign-off was expected within a week, following which the completed breakwater system would have a maximum design load sufficient for a 50 year return period storm.

[28] On 1 September 2000 the assets of Lyttelton Marina Limited were sold to Thornton Estates Limited for $3.3m. However the agreement provided that in large measure the purchase price was to be satisfied by the purchaser assuming responsibility for the vendor’s liabilities to the Banks Peninsula District Council, Saltwater Marinas and to a bank. The settlement date was 30 October 2000. Thornton Estates Limited did not complete. (Some time later, proceedings were taken by the receiver of Lyttelton Marina to obtain specific performance of the purchase agreement, but without success).

[29] When the storm struck on Thursday, 12 October, instead of an overlapping system being in place to protect the marina, there was in fact a gap of approximately 100 metres in the breakwater. This was directly out from the marina leaving it totally exposed to the prevailing south-westerly storm which persisted over a considerable time. The floating marina was extensively damaged. Numerous boats moored in the marina were damaged. A number sank or were overturned.

[30] Finally, the three Marina Companies (other than Saltwater Marinas) were placed in receivership in November 2000. A receiver was appointed to manage Saltwater Marinas in November 2001 and, subsequently, that company was placed in liquidation.

Amendment of pleadings

[31] At the commencement of the trial the plaintiffs sought leave to file a fourth amended statement of claim. Mr Heaney for QBE did not object to the amendment and leave to file after setting down was accordingly granted.

[32] The plaintiffs also applied to strike out two defences which were raised in the then third amended statement of defence of QBE. These were defences of voluntary assumption of risk (volenti non fit injuria) and, alternatively contributory negligence. It was asserted that Mr and Mrs Jaggar, and other boat owners, in electing to moor boats in the marina when the breakwater was incomplete courted an obvious and known danger, such that they were the authors of their own misfortune. Alternatively, QBE maintained that such boat owners were at least contributorily negligent.

[33] The plaintiffs’ argument to strike out these defences involved two propositions. The first was that QBE was not entitled to advance defences which would have been available to the insured in circumstances where QBE’s election to avoid the policy meant that it had “expressly eschewed any rights it may have had under the policy, such as the right to assume the conduct of the defence”. In law, the avoidance was an assertion that the policy had never existed. It was incompatible, therefore, for QBE to also assert affirmative defences on the basis it could step into the shoes of the insured to do so. The second proposition was that because Lyttelton Marina and Saltwater Marinas had not raised the two particular defences, QBE should not be permitted to do so. Otherwise it would be in a better position in resisting the plaintiffs’ claim than even the insured would have been.

[34] Section 9 of the Law Reform Act 1936 is material to these contentions. It provides:

(1) If any person (hereinafter in this Part of this Act referred to as the insured) has, whether before or after the passing of this Act, entered into a contract of insurance by which he is indemnified against liability to pay any damages or compensation, the amount of his liability shall, on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance money that is or may become payable in respect of that liability.

Subsection (2) provides that on the happening of the event giving rise to a claim the charge (created by ss(1)) “shall apply notwithstanding the insolvency, bankruptcy, or winding-up of the insured”. By ss(3) it is provided that the charge created by the earlier subsection shall have priority over any other charge affecting the insurance money.

[35] The enforceability of the charge is governed by s9, subsection:

(4) Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same Court as if the action were an action to recover damages or compensation from the insured; and in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the Court shall have the same powers, as if the action were against the insured:

Provided that, except where the provisions of subsection (2) of this section apply, no such action shall be commenced in any Court except with the leave of that Court.

[36] Mr Heaney submitted that ss(4) provided a complete answer to the strike-out contentions. In short he said that QBE had “the same rights and liabilities” as its insured and that I had the same powers “as if the action were against the insured”. It followed, therefore, that QBE had the right to raise any defence which could have been asserted by Lyttelton Marina or Saltwater Marinas. It was no impediment that the insured had not raised the particular defences, so long as QBE did so, by leave if necessary. Equally the Court was empowered to adjudicate upon such defences as if the action was one between the plaintiffs and the third and fourth defendants.

[37] I agree. To my mind the result contended for by Mr Heaney follows naturally from the words used in s9(4). Assuming that there is cover under the policy, QBE is entitled to raise any defence which the third and fourth defendants could have raised (not did in fact raise). In addition, QBE may also defend on the basis that it validly avoided the policy for misrepresentation or non-disclosure. Its stance in that regard does not prevent QBE from asserting affirmative defences which would ordinarily lie in the mouth of the insured.

[38] Thereby, QBE does not have the best of both worlds, as Mrs Barratt put it. Rather, the circumstance that QBE raised both defences ordinarily available to the insured, and defences pertaining to the insurance contract, reflects the circumstance that a claim such as this involves in effect two claims running in tandem. The first is the claim by the plaintiffs against the insured. If that claim is successful, then the availability of insurance cover necessarily arises, where (as here) the insurer puts the existence of cover in issue.

[39] I note that the two affirmative defences were first raised by QBE in its second amended statement of defence filed on 18 February 2005. That being so leave is required to file such amended defence. It is granted, since there was no suggestion of prejudice arising from a belated pleading of the relevant defences.

[40] A few days before the commencement of the hearing QBE filed a third amended statement of defence in which it pleaded to the fourth amended statement of claim (no doubt in anticipation that leave to file that statement of claim after setting down would be granted). In these circumstances there was no objection to the filing of the third amended statement of defence. However, during the hearing Mr Heaney sought leave to file a fourth amended statement of defence, in which an additional particular of non-disclosure and an allegation of misrepresentation at the time of policy renewal in 2002, were added. While Mr Langstone objected to these amendments on account of their lateness, his argument was somewhat hamstrung because the new points had been explored in cross-examination of the plaintiffs’ witnesses and could be put to the plaintiffs’ prudent insurer witnesses who, by arrangement, were to be called in rebuttal. In these circumstances I was satisfied that there was no prejudice to the plaintiffs and that the fourth amendment of QBE’s defence was appropriate. Accordingly, leave was granted and the seventh defendant’s witnesses, and as it proved the plaintiffs’ one rebuttal witness, were taxed in relation to the new particular and the new allegation.

The liability of the third and fourth defendants

[41] On or about 1 September 2000 Mr David Jaggar entered into an oral agreement with Lyttelton Marina to rent berth Q 34 in the new marina. At the same time he paid the rental for three months berthage by cheque. The following day Mr Jaggar placed his boat in the berth where it remained on the date of the storm.

[42] Mr and Mrs Jaggar raised three causes of action against Lyttelton Marina. These were that the oral berth agreement included an implied term that the marina was a safe place to moor the motor launch and that the third defendant was in breach of that implied term. The second was based on the Consumer Guarantees Act 1993. Here the essential allegation was that Lyttelton Marina supplied berthage services to Mr and Mrs Jaggar, which services were subject to the statutory guarantee that the services would be reasonably fit for the particular purpose and of a nature and quality necessary to achieve the desired result of safe berthage : s29. The third claim was that Lyttelton Marina owed a duty of care in tort to the plaintiffs, namely to ensure that the marina was a safe place to berth vessels or, alternatively, to warn the plaintiffs to move their vessel from the marina while it was exposed through the gap in the breakwaters. Neither obligation was met with the result that the plaintiffs suffered loss.

[43] The consumer guarantee and negligence causes of action were likewise asserted against Saltwater Marinas as fourth defendant.

[44] In the end result counsel for QBE did not seriously contest that both defendants were liable in relation to the various causes of action asserted against them, respectively. Indeed, the observation was made that Mr Truscott as the alter ego of the two companies “acted recklessly, not merely negligently, in allowing vessels to be moored in the new marina while construction of the breakwater was incomplete”. In these circumstances I shall defer consideration of the affirmative defences, and damages, until after I have considered the more substantial issues in the case, in particular whether there was cover under the QBE policy held by the insured at the relevant date.

The insurance cover

[45] On 2 October 1997 through Garrett Insurance Brokers Limited, Saltwater Marinas (NZ) Limited completed a proposal for public liability insurance, naming Lyttelton Marina Limited as another party to be included in the cover. The business activity of the proposer was described as “design and construction of marina at Magazine Bay, Lyttelton, and at other sites yet to be decided, and marine management”.

[46] By a letter dated 23 December 1997 Mr Martin Ford, a director of Lyttelton Marina Limited, outlined the development plan by describing the details of phase one of the development which would proceed “as our share sale programme picks up momentum”. The letter also mentioned that the assets purchased included “an existing marina containing 92 fixed pier marina berths of which approximately 80 are occupied”.

[47] On 23 December Mr David Sutcliffe, an underwriter in QBE’s Auckland office, made a file note which included:

Lyttelton and Saltwater have similar shareholdings. However we are only covering Saltwater as the insured and Lyttelton as principal in contract i.e. no marina operation.

The note concluded:

Coverage under policy will need some limitation – and will not be as per the client’s letter, unless the broker asks for other changes. We should be very specific about this.

[48] On 21 May 1998 public liability cover was granted to Saltwater Marinas as the insured. Cover was pursuant to QBE’s liability protector policy, with a $3m limit of indemnity. The business of the insured was described as “marina development”. This cover was renewed in May 1999 for a further 12 months.

[49] On 8 March 2000 Saltwater Marinas, through a firm of Hong Kong insurance brokers (Lambert Bros Limited), sought professional indemnity cover in relation to the redesign of the floating breakwater system. Cover was sought for Saltwater Marinas as “the constructor” and for “their design consultants”, being Ocel and Ove Arup. A letter from Saltwater Marinas headed “Project Background” which accompanied the proposal outlined the work completed in percentage terms and described the failure of the breakwater system originally commissioned by Beca Carter. The letter included:

We experienced unusual winter storms in the period of August-November 1999 and with this severe damage to the waler system connecting the concrete floating pontoons. There was clearly a design fault with the waler system. However the concrete pontoons worked well in their capacity to dissipate the wave climate. Construction was stopped whilst a design solution was sought. This was achieved and a settlement was reached between (Saltwater Marinas) and (Beca Carter).

The letter then detailed the involvement of Ocel as the engineers to review and redesign the system, with peer review to be provided by Ove Arup.

[50] On 20 March 2000 QBE provided a quotation for professional indemnity insurance cover. Saltwater Marinas was to be the insured, with Ocel and Ove Arup included in the cover, which was to an indemnity limit of $10m.

[51] On 12 May 2000 QBE in anticipation of the anniversary of the public liability policy sent a certificate of currency to Saltwater Marinas then brokers, Aon Risk Services NZ Limited. A renewal declaration accompanied the certificate which began with the explanatory note:

Cover under this policy ceases on the expiry date shown. To ensure continuation of cover please complete and return this declaration prior to expiry.

The declaration form asked five questions, two of which concerned whether Saltwater Marinas’ business activities had changed and whether there were any claims pending, or circumstances likely to produce a claim, the answers to which I will discuss shortly. The declaration was completed on behalf of the insured on 18 May 2000 and returned to Aon Risk Services the next day.

[52] On 15 June 2000 QBE renewed cover, but in terms of its Eclipse Broadform policy. Both Saltwater Marinas and Lyttelton Marina were shown as the insured, and their business as “marina developer”. The essential terms of cover, including the indemnity limit, were unchanged, albeit in a new policy format.

[53] On 19 October 2000 Aon Risk Services notified QBE that “liability exposure” may result from the 12 October storm in relation to both the public liability and professional indemnity risks. The letter included this:

The marina berths had broken up and a number of pleasure craft moored in the marina have suffered extensive damage.

[54] Perchance, on 12 October 2000 an internal QBE memorandum recorded that a quote had been sought by Aon Risk Services for an increase in the cover under Saltwater Marinas public liability policy from $3m to $10m. The matter was still under consideration when the storm struck. However, on 20 October 2000 QBE provided a quotation for increased cover, but on terms which were not taken up.

[55] Following a request to Aon Risk Services in March 2002 for further information, and receipt of a report from an assessor during that month, QBE on 7 May 2002 gave notice of avoidance of the public liability policy. This was in response to notification from Lyttelton Marina of claims by boat owners whose vessels had been damaged in the storm. The avoidance letter said that several matters of importance were not disclosed to QBE when the policy was renewed in May 2000. These were that the marina and vessels had been damaged during storms in August and November 1999, that the design of the marina was defective, that in December 1999 there had been a financial settlement with Beca Carter, that boats were still moored in the marina while the breakwaters were being reinstated and, finally, that Lyttelton Marina was in serious financial difficulty as at May 2000. The letter ended on the note that QBE reserved the right to rely on further or other grounds of avoidance.

[56] This then is the insurance background. It will be necessary to return to various aspects of it as I consider the individual grounds raised by QBE in support of its case that there is not cover for the plaintiffs’ loss.

Were boats moored in the marina covered under the policy?

[57] The liability clause in the Eclipse Broad Form policy provided:

QBE will indemnify the insured for all sums which the insured shall become legally liable to pay by way of compensation in respect of Personal Injury or Property Damage happening during the Period of Insurance caused by an Occurrence in connection with the Business of the Insured.

The definitions section of the policy defined the “Business of the Insured” as:

The Business specified in the Schedule and any other activity which the Insured now undertakes or may undertake in accordance with their Memorandum of Association or Constitution.

The schedule to the 2000-2001 policy named Saltwater Marinas and Lyttelton Marina as the insured and defined their business as “marina developer”. Building on this description, and placing reliance on the file note of Mr Sutcliffe prepared at the inception of the policy in 1997 (refer para 47), Ms Macky argued that it was readily apparent QBE insured only the business of the insured as marina developers, not the business of marina management. The file note indicated a clear distinction between the two. The business of mooring vessels within the marina for reward was an activity outside, or beyond, that of marina development. As a different and separate business activity it was excluded from cover.

[58] Counsel also placed reliance upon the evidence of Mr G J Ade, a consulting engineer specialising in marine works, who was called by the plaintiffs to establish the cause of the damage to their motor launch. Mr Ade, unsurprisingly, was not challenged as to his expert opinion that the gap in the breakwater was the effective cause of the boats overturning. In cross-examination by Mr Heaney, Mr Ade said that he had been involved in the development of several new marinas in the South Pacific area. With reference to the process of development he said:

… in all the projects I have been involved in we had a constructional contract for a developer, we would never allow any boats into the marina until such time as the construction contract was complete. We had a completion certificate issued and ownership and liability transferred back to the developer and then (to) the marina operator company. That’s been the normal route I have been exposed to in my experience.

This evidence, Ms Macky submitted, afforded direct support for the construction of the policy for which she contended.

[59] In closing submissions Mrs Barratt resisted this argument. She pointed to the definition of the business of an insured contained in the policy, and noted that the business specified in the schedule was not exclusive, since “any other activity” which the insured may undertake in terms of its memorandum of association, or constitution, was also covered. It followed, counsel submitted, that in order to exclude boats moored in the marina from cover during the development period, an express exclusion clause was required. Indeed, the file note of Mr Sutcliffe dated 23 December 1997 said as much (“coverage under the policy will need some limitation … we should be very specific about this …”). Absent an exclusion clause, damage to boats moored in the marina was property damage sustained by third parties to which the public liability policy naturally responded.

[60] It was also significant that when the cover was obtained in 1997, Lyttelton Marina provided to its insurance broker a letter dated 23 December 1997 which recorded that the purchase of the marina assets included “an existing marina containing 92 fixed pier marina berths of which approximately 80 are occupied”, followed by advice that one area of risk for which cover was sought was in relation to a failure of the existing tyre breakwater resulting in damage to a yacht in the old marina. Significantly, there was no exclusion clause directed to this risk.

[61] I accept Mrs Barratt’s argument on this aspect. The description marina developer contained in the schedule does not have the limiting effect for which QBE contends. Absent an express exemption clause pertaining to boats moored in the marina during the construction period, I am satisfied that cover was available under the policy. I doubt that this conclusion requires further elaboration.

Was the damage accidental, or the result of a deliberate recklessness?

[62] The indemnity or insuring clause in the public liability policy referred to damage caused by an “Occurrence” which was defined in the definition section of the policy as:

An event, including continuous or repeated exposure to substantially the same general conditions, which results in Personal Injury or Property Damage, that is neither expected nor intended from the standpoint of the Insured.

Focusing on the concluding words of the definition Ms Macky in closing submissions contended that the risk of damage to boats moored in the marina when there was a 100 metre gap in the breakwaters was so obvious as to mean this occurrence was not an accident. In terms of the definition the damage was properly to be viewed as “expected” from the standpoint of Lyttelton Marina and Saltwater Marinas. Put another way the loss reflected an election to court an obvious risk, such that the insured were guilty of deliberate recklessness. Cover should, therefore, be denied.

[63] To my mind the principles applicable in the context of an argument of this kind emerge sufficiently from a reading of the decision of the Court of Appeal in Mt Albert City Council v NZ Municipalities Co-Operative Insurance Co Ltd [1983] NZLR 190. The case concerned a public liability policy, in relation to which the insurer contended the damage was not accidental. Cooke J in rejecting this argument observed at 193:

It was common ground in argument that results deliberately brought about by an insured are not accidents. No doubt that is right, except possibly in some unusual circumstances (such as some agony-of-the-moment choices). In Gray v Barr [1971] 2 QB 544, 566, 579, there are observations by Lord Denning MR and Salmon LJ to the effect that even injuries caused by gross negligence or knowing recklessness may be “accidents” for the purposes of a public liability policy. But there are other cases in which the Courts have probably been influenced by the consideration that an insured should not be allowed to take extravagant risks at the cost of his insurance company.

[64] Then, after reference to Australian and Canadian authorities, the Judge continued at 194:

I would accept that there is a category of cases falling short of a deliberate causing of the damage by the insured where his conduct is nevertheless so hazardous and culpable that the event cannot fairly be called an accident. It can only be a question of fact whether a case falls within this category. The insured’s knowledge of the risk must be important, in that unless the evidence justifies the inference that he deliberately incurred the risk one would be very slow to find that the event was other than an accident. On the other hand it seems to me not decisive that the risk may have been deliberately run or calculated. For instance, if the risk was reasonably seen by the insured as not a high one, the occurrence might still be found to be an accident.

[65] I am not persuaded that the storm occurrence in this case was something which was expected (much less intended) from the standpoint of the insured. In the first place for the present loss to fall outside the definition of an occurrence in the policy would require me to be satisfied that a responsible officer of the insured, presumably Mr Truscott, was wilfully reckless. That would require both actual knowledge or recognition that the danger existed and “not caring whether or not it (was) averted”: Fraser v B N Furman (Productions) Ltd (1967) WLR 898, Diplock LJ at 906. Proof of actual recklessness, absent evidence and particularly crossexamination of the person accused of it, impresses me as problematic, at least in a case of the present kind where the loss occurred in the context of a storm entering a marina which was both under construction and under repair. It was not a simple situation.

[66] This, I think, was illustrated in the evidence of Mr Goss who said that he raised with Mr Truscott the potential exposure of boats in the marina when the breakwaters were inadequate, to which he reported (without objection) Mr Truscott’s response:

… he accepted that there was some risk, but he was confident in that the marina had survived a series of storms in its current configuration with the limited protection provided by the damaged breakwater, and also that he retained the contingency of removing boats to the inner harbour if conditions dictated.

I accept that this evidence, and the evidence of other witnesses, supports the inference that Mr Truscott was at least aware of a level of risk and elected to run it.

[67] On the other hand there is a body of evidence which indicates that this was calculated risk-taking in the face of economic imperatives, rather than culpable recklessness at a level which took the occurrence out of the category of an accident. There is ample evidence of initiatives taken in an endeavour to reinstate and improve the quality of the breakwaters so as to safeguard the marina. This does not smack of recklessness. Admittedly and undoubtedly, it would have been prudent to remove all boats from the marina until reinstatement of the improved breakwaters was completed. Whether that remained a feasible option, I do not know. It is also important to bear in mind that the storm was a one in 40 year event. That circumstance strongly militates against a finding that the insured is to be taken as having “expected” the losses which are now in question. For these reasons and by a considerable margin I am not persuaded this was a case of deliberate recklessness rather than accident.

Material misstatement?

[68] The renewal declaration completed on behalf of Saltwater Marinas on 18 May 2000 included as question 5:

Could you please determine whether there are any claims pending, or any circumstances likely to produce a claim, against the insured under this policy?

This question was answered “No” by virtue of a tick in the negative box. QBE alleged that the answer was incorrect, and materially so, as those concepts are defined in s6 of the Insurance Law Reform Act 1977. A statement in an insurance proposal is “substantially incorrect only if the difference between what is stated and what is actually correct would have been considered material by a prudent insurer” : s6(1). As to materiality, “a statement is material only if that statement would have influenced the judgment of a prudent insurer in fixing the premium or in determining whether he would have taken or continued the risk upon substantially the same terms” : s6(2).

[69] By its fourth amended statement of defence QBE alleged that there having been damage to vessels in the marina during storms in 1999 and early 2000, the answer that there were no circumstances likely to produce a claim was materially incorrect.

[70] The main evidence relied upon by the insurer was given by Mr Daish, the loss adjustor called by the plaintiffs. In his evidence-in-chief Mr Daish detailed a survey he had made of Mr and Mrs Jaggar’s motor launch in order to determine its salvage value, the cost of repairing it and whether reinstatement was an economic proposition. However, in cross-examination the witness was referred to a newspaper article dated 15 December 1999 which indicated that there had been damage to boats in the marina, and to the marina itself, in a recent southerly storm which occurred a few days previously. In cross-examination Mr Daish was asked and confirmed that there was “real damage” to two or three boats in the marina, which he believed was caused by a pontoon from the breakwater system coming adrift and being washed into the marina. This evidence, coupled with what could be gleaned from the Christchurch Star newspaper article, was the extent of the evidence bearing upon whether there was boat damage in the December storm likely to produce a claim against QBE.

[71] With reference to earlier storms in 1999, the evidence of damage caused was similarly limited. A Christchurch Star article dated 30 July 1999 reported that the marina breakwater was damaged “in this week’s storm”, and that Mr Truscott said “no boats or moorings were damaged”.

[72] The Christchurch Press of 4 January 2000 reported that five pontoons from the breakwater were afloat in “this week’s storm” and that “it was only sheer good luck … that no boats were damaged”.

[73] With particular emphasis given to the evidence of Mr Daish, Ms Macky submitted that because there had been damage to at least three vessels in the December storm there were circumstances likely to produce a claim and the negative answer to question 5 was, therefore, materially incorrect. Attention was drawn to the evidence of Mr G K Thomas, a liability manager with another insurer, who gave prudent underwriter evidence to the effect that had the relevant circumstances been revealed to him, he would not have renewed the policy in May 2000, or if cover was written it would not have been on standard terms. Mr Marcus Oxenham, an experienced underwriter variously employed by QBE both in New Zealand and overseas, agreed with this assessment. It was also pointed out that the prudent underwriter called in rebuttal for the plaintiffs, Mr G N Simpson, accepted that it would be material to him in renewing the policy to know there had been damage to vessels in the marina in December 1999.

[74] In reply Mrs Barratt analysed question 5 and the available evidence which concerned circumstances indicating the likelihood of a claim in close detail. At the outset she made the point that, with the benefit of hindsight, it was known that claims had not in fact resulted from damage to boats sustained in the December 1999 storms. Had there been, QBE would have revealed them. But the focus of the argument for QBE was not upon “claims pending” but rather on “circumstances likely to produce a claim”.

[75] As to this Mrs Barratt stressed the terms of question 5. It began “Could you please determine whether …” and required the insured to decide whether there were circumstances “likely” to produce a claim. The form of the question in itself emphasised the two stage nature of the inquiry. In deciding whether an insured had breached its obligation of disclosure it must first be determined what the subjective knowledge of that insured was at the relevant time. What circumstances were known to the officers of the insured companies as at May 2000? Second, in light of those circumstances, assessed objectively were they likely to give rise to a claim. Likely in this context means that the relevant circumstance must give rise to a “real risk” of a claim against the insured : Sinclair & Co v National Insurance [1992] 2 NZLR 706, Tipping J at 715, which case is also authority for the proposition that the inquiry involves both subjective and objective elements.

[76] I doubt that much turns on the use of the words “Could you please determine …” at the commencement of question 5. They simply convey the request to the insured to consider its position. The issues are whether there were circumstances having the potential to produce a claim against Lyttelton Marina or Saltwater Marinas, and, whether that potential represented a real risk?

[77] What circumstances were established in evidence? The highpoint of the evidence was a file note headed “Storm Damage 14 December 1999” of which authorship is unclear, but the contents indicate was prepared by someone in the employ of the Lyttelton Marina companies. It referred to two pontoons from the marina being damaged beyond repair. It also recorded that “two sets of two number breakwater pontoons and a single pontoon broke loose” and floated into “the existing marina” (whether the old or new marina is not clear). The note continued that the single pontoon caused damage to two boats and, in the next sentence, that “we are waiting estimates for repairs from independent insurance assessors”.

[78] Mr Heaney’s cross-examination of Mr Daish adduced evidence consistent with the content of the file note, in that he said that he had assessed damage to one boat in the marina following the December storm. That, however, was the extent of his evidence. He was not asked and did not comment upon the extent of any damage or otherwise explain matters. Nor did he say when he assessed the boat in question.

[79] In the result I am required to determine what circumstances were known to the insured, as at 18 May 2000, without direct evidence concerning those matters. As at mid December 1999, when the file note was prepared by someone, I accept there were circumstances which indicated the risk of a claim against the insured.

[80] But was that still the case in May 2000? Particularly when it is now known that claims did not eventuate, I am effectively asked to speculate as to the reality of the risk which existed fully five months after the event. The onus is upon QBE to establish that the insured had actual or presumed knowledge of circumstances which actually made it likely boat owners would make a claim against them: Halsbury’s Laws of England vol 25 on Insurance at para 46. While I am suspicious that there may have been circumstances indicating the likelihood of a claim, and therefore a duty of disclosure, I do not consider that such state of affairs has been established by QBE to the required standard.

[81] In reaching this conclusion I have not overlooked the evidence of the prudent insurer witnesses. I accept that damage to boats moored in the marina, being damage to the property of third parties, was material to the decision to continue to underwrite the risk. However, the evidence of such witnesses was necessarily based upon assumptions concerning what the insured knew, or were presumed to know, as at May 2000. In the event it is the evidence supportive of those assumptions which is at the heart of the finding, rather than the materiality of the information to the mind of a prudent insurer.

Non-disclosure of storm damage in 1999 and early 2000

[82] In the last section of the judgment I discussed whether the answer to question 5 in the renewal declaration constituted a material misstatement. This allegation of non-disclosure was similar, being: There had been damage to vessels moored in the marina as well as damage to the marina during storms in 1999 and early 2000.

Principles relevant to non-disclosure

[83] State Insurance v McHale [1992] 2 NZLR 399 (CA) is the leading New Zealand authority in relation to an insured’s duty of disclosure. Such duty is one expression of the fundamental principle that a contract of insurance is one of utmost good faith on both sides. Hence, an insured is bound to make full disclosure of all material facts. This is because the facts or circumstances relevant to assessment of the risk lie most commonly in the knowledge of the insured alone. But the duty is not absolute. The insured must disclose known facts, including those presumed to be known being facts which in the ordinary course would be known to a person in the insured’s position. Where non-disclosure is asserted the onus of proof is upon the insurer.

[84] In this case I think it is important to define at the outset the nature of the complaint. Mr Heaney accepted that QBE was on notice concerning storm damage to the breakwaters culminating in a settlement with Beca Carter. This information was provided by Saltwater Marinas in March 2000 in support of its proposal for professional indemnity cover. This to my mind was a realistic concession, regardless of the circumstance that different officers at QBE dealt with the professional indemnity proposal.

[85] That said, it should also be noted that the problems with the Lyttelton Marina companies were very much in the public domain in any event. Following a storm in September 1999 the Christchurch Star published a brief article which mentioned that pontoons in the breakwater were damaged by winds gusting to more than 40 knots. After the storm in mid December 1999 the Christchurch Star published the article of 15 December under the heading “Marina Damage Fuels Concern Over Protection”. A photograph which accompanied the article depicted a large pontoon from the breakwater under tow after threatening boats in the new marina. The article referred to several boats being damaged by the drifting pontoons and to some “yachties” being “angry at the damage to their yachts”.

[86] And, following a further storm in early January 2000 both the Christchurch Press and the Christchurch Star published articles which referred to damage to the marina in general terms, without distinguishing between the breakwater and the marina proper.

[87] With reference to these articles the plaintiffs called Ms Joanne Taylor who until 2003 was an accounts executive with QBE at its Christchurch office. Ms Taylor enjoyed underwriting authority, as a result of which she had been to the marina in relation to a proposal for contractors all risks cover, although she was unsure of the date of that visit. Ms Taylor confirmed that she had read some of the newspaper articles at the time of their publication, and also an article which appeared in the Christchurch Press on 18 February 2000. This included photographs of Mr Truscott and of the Lyttelton marina with about 20 boats moored in it. The article included comments from Mr Truscott that 41 berths had been sold so far, and that the uptake of berths in the new marina was both surprising and positive.

[88] Not surprisingly, this evidence produced a submission in closing on behalf of the plaintiffs to the effect that the issue of damage to the marina and to boats from storms in 1999-early 2000 was a matter of common knowledge, or notoriety. The implicit suggestion was that it was hardly open for QBE to maintain it was not aware of the problems, but rather reliant upon disclosure from the insured.

Witnesses who were not called

[89] This argument shaded into another which centred upon the witnesses called by QBE, or more accurately upon the witnesses whom the seventh defendant did not call. This, to my mind, is a central consideration with reference to assessment of the defence case. The file note of Mr David Sutcliffe referred to earlier (para 47), confirmed that he and Mr Glen Carlisle dealt with the public liability proposal at inception in 1997. In May 2000 when the policy was renewed Mr Warren Tucker was the QBE underwriter involved. These matters were evident from correspondence and documents on the QBE file. None of the three were called as witnesses.

[90] Instead, the sole defence witness from QBE was Mr Marcus Oxenham, who came from the Hong Kong office in order to give evidence. He had no involvement with the public liability policy until just after the 12 October 2000 storm. His evidence was based upon an evaluation of the QBE file, rather than personal knowledge of events as they occurred. Mr Oxenham’s involvement began on 13 October 2000 when he was the recipient of a memorandum from Mr Tucker which concerned Saltwater Marinas brokers’ request to increase the public liability cover to $10m. This was an amount beyond the authority of Mr Tucker. He therefore briefed Mr Oxenham.

[91] The memorandum confirmed that Messrs Sutcliffe and Carlisle “underwrote the account” and that “terms were offered in December 1997 and reviewed/amended in January 1998”. Yet, there was nothing on the file which revealed the terms of the original offer or the reasons behind the review or amendment of those terms. The memorandum ended on the note that the marina had been sold “effective end of October” to a local Christchurch company which, Mr Tucker said, was well known to QBE. These references, and indeed the memorandum generally, suggested that Mr Tucker had a good working knowledge of matters pertaining the risk. It was evident that he had had dealings with brokers who represented the insured and with persons in the Christchurch office of QBE.

[92] To my mind it is inescapable that Mr Tucker was best placed to speak for QBE with reference to what was known as at May 2000 when the policy was renewed. Ordinarily the knowledge of an insurer may depend upon what is disclosed by the insured in a handful of documents which surround the proposal and, perhaps, renewals of the policy. But this case was rather different. Not only was there extensive information concerning the affairs of the insured companies in the public domain, but also a history of dealings between the insurer and the insured’s brokers in which Mr Tucker played a lead role.

[93] Perhaps most revealing of all was an email sent by Mr Tucker to Mr Oxenham on 19 October 2000. The former said that he had received a call from the brokers, Aon Risk Services, concerning the recent storm and that there was no indication of a claim under the professional indemnity or public liability policies to that point. With reference to the request to increase the public liability cover limit to $10m, Mr Tucker commented that this was on Mr Oxenham’s desk and his thoughts were “to say no as there is now nothing to insure”, or, to agree but exclude liability for damage resulting from the storm. Significantly, there was nothing in the email to suggest that Mr Tucker was surprised to have learnt that numerous boats had been moored in the marina and were damaged during the storm. Of course by then there had been national media coverage concerning the damage to the marina. Yet, in my view it is still significant that the email contained nothing to suggest Mr Tucker was taken aback when news of the damage to boats broke.

[94] Finally, counsel drew my attention to a further email which Mr Tucker sent to another QBE officer on 26 January 2001. It concerned statutory liability and employers’ liability policies which Saltwater Marinas had with QBE. Mr Tucker commented:

I was wanting to re-underwrite the risk (SL) even before the storm as a result of information that had to come to hand after the renewal in December 1999 and after we had received closings etc in March. This is not a good example of how to handle a renewal or to underwrite a risk. I believe that both the PL and SL need to be re-underwritten as the premium does not necessarily reflect the risk that we are exposed to.

Whatever the information was that came to hand after December 1999-March 2000, it was of a nature to affect Mr Tucker’s assessment of the public liability risk. There was no file note relevant to it. Mr Oxenham, when cross-examined about the new information, could shed no light.

[95] Because so much was made of the failure to call Messrs Carlisle, Sutcliffe and Tucker in the course of the plaintiffs’ closing, I permitted Mr Heaney a short submission in reply on the point. He did not accept it was inappropriate to call only Mr Oxenham. He pointed out that when an increase in the public liability cover to $10m was sought, it was Mr Oxenham who had the underwriting authority to consider that request. Hence, the suggestion was it was appropriate he be called.

[96] That may be so, but in my view it is very material that the QBE officers who had a hands-on involvement with the marina public liability risk from 1997 to 2000 were not called as well. The QBE file was not replete with file notes. Indeed the reverse was the case. It contained documents which confirmed material discussions had occurred, and which were not documented. In these circumstances I was left to wonder why Mr Tucker, in particular, was not called as a defence witness.

Was there non-disclosure?

[97] There are two aspects. The first is disclosure of storm damage in 1999-early 2000 to the marina itself. The second is disclosure of damage to boats, of which there is only evidence pertaining to the mid December 1999 storm.

[98] I did not understand that the allegation there was non-disclosure of damage to the marina itself, to be seriously pursued. Clearly there was disclosure of damage to the marina, in particular damage to the breakwater. This was detailed in the materials which accompanied the professional indemnity proposal in March 2000 (refer para [49]). But in addition there was also the newspaper coverage which referred to damage sustained to the marina at various times (refer paras [85]-[87]). In relation to this aspect the failure to call the QBE underwriters who actually handled the risk was, I think, pertinent. Ms Taylor of the Christchurch office was aware of some at least of the newspaper publicity and it would be strange indeed if other underwriters were not as well. But in any event I am satisfied that damage to the marina was sufficiently disclosed by March 2000.

[99] With reference to boat damage the issue is whether the fact of such damage had to be disclosed, not whether such damage was likely to produce a claim (being the gist of the alleged misstatement). There is of course a difference.

[100] By reference to the prudent insurer evidence given by Messrs Thomas and Oxenham, Ms Macky submitted that non-disclosure of damage to third party property, boats moored in the marina, was plainly material and therefore had to be disclosed. Damage of the very kind covered under the policy must have the potential to affect continued acceptance of the risk, or the terms of renewal at least. It followed that material non-disclosure was established.

[101] Mrs Barratt, however, sought to draw a distinction between damage to boats in the old marina as compared to damage to boats moored in the new marina. Counsel submitted that the evidence was inconclusive as to whether the damage referred to in the file note and by Mr Daish was to boats in the new marina. Because the independent prudent insurer witness called by QBE, Mr Thomas, accepted in cross-examination that the risk of damage to boats in the old marina was disclosed at inception, counsel suggested that damage to such boats could be put to one side. Generally, the prudent insurer witnesses were not questioned about disclosure of damage to boats in the old marina. Counsel concluded on the basis that the allegation failed as a matter of evidence, since any doubts must be resolved in favour of the plaintiffs.

[102] I do not accept this argument. There is a clear distinction between the risk of damage, and actual damage. The risk to boats in the old marina was disclosed in 1997. However, I cannot accept that actual damage to boats in the old marina in December 1999 (assuming they were moored there and not in the new marina) absolved the insured of the duty of disclosure. Nor do I accept that because the prudent insurer witnesses gave evidence as to materiality on the assumption the boats were in the new marina, thereby their evidence was undermined. So long as the boats were in a place covered in terms of the policy, disclosure was required.

[103] It follows I am satisfied there was no express disclosure of the material fact of damage to these boats. It remains to consider whether this circumstance was known or presumed to be known to the insurer on account of the newspaper publicity, which in the circumstances of this case I shall consider in the context of the need (or not) for proof of inducement.

Non-disclosure of boats in the marina

[104] The fourth statement of defence particularised the alleged non-disclosure in these terms:

The marina had not been fully reinstated following the storms and in spite of this was used to moor vessels as at the renewal date of 21 May 2000.

The gist of the complaint was that the fact boats were being moored in the marina when the breakwaters were incomplete was not disclosed to QBE at the time of the renewal. Had it been, such information would have been material to the fact, or terms, of renewal.

[105] The closing submissions of counsel on this aspect were divergent in terms of approach. On the one hand Ms Macky almost took the fact of non-disclosure as read. The focus of counsel’s argument was upon the evidence of Messrs Thomas, Oxenham and Simpson as to the relevance of the non-disclosed circumstance to a prudent underwriter. By contrast Mrs Barratt resisted the allegation that there was non-disclosure of continued mooring in the marina. Her argument was developed with principal reference to what had been disclosed to QBE at inception, and subsequently, which counsel suggested was more than sufficient to put the insurer on notice, or, at the very least to require it to make further inquiry.

[106] The matters relied upon by the plaintiffs were these:

[a] By letter to its then broker dated 23 December 1997 Lyttelton Marina in support of the public liability proposal advised that the assets purchased by the marina group included “an existing marina containing 92 fixed pier marina berths of which approximately 80 are occupied”. Moreover, at page 3 of the letter, damage to yachts in the old marina was identified as an area of risk for which cover was required.

[b] The same letter also detailed the plan for development of the new marina. Phase one envisaged the development of 218 new docks which would be substantially complete by January 1999. The letter on page 2, after reference to a loan facility which would enable construction to proceed in the early stages, advised that the balance of necessary funds would be derived from licence fees following the sale of shares for occupancy licences. Again, counsel submitted this was a clear indication of an intention to proceed with a staged development, whereby boats would be moored in the marina in 1999.

[c] Moreover, Mr Sutcliffe seemingly appreciated what the insured’s intentions were, since his file note of 23 December 1997 referred to marina operation and the need to limit coverage under the policy, rather than proceed as per the client’s letter. Yet, there was no exemption imposed, save for the description of the insured’s business as “marina developer” (which did not limit the cover for the reasons given in paragraphs [57] to [61]).

[d] The proposal seeking professional indemnity cover dated 7 March 2000 disclosed in an annexed resume that stages one and two of the project were 85% complete including 120 berths. The document also disclosed the failure of the breakwater system in storms during 1999, resulting in the substitution of Ocel in an engineering capacity with Ove Arup to peer review the redesign. This further material indicated that work on reinstating the breakwaters was to proceed in 2000, at a time when berths in the marina were well-established.

[107] Mrs Barratt submitted it was idle to suggest that against this background the insured companies were required, at the time of renewal of the public liability policy in May 2000, to expressly disclose the circumstance of boats being moored in the marina. Alternatively, if there had not been direct disclosure of the relevant fact, there was disclosure of circumstances sufficient to place QBE on inquiry.

[108] In this context counsel referred to various cases decided with reference to the duty of disclosure. I was reminded by Ms Macky that upon renewal, a fresh duty of disclosure exists. Material matters which have arisen since inception of the policy, or its last renewal, must be disclosed. Further, it is not for the insurer to specifically ask questions designed to unearth circumstances which are plainly material to the risk. Rather, there is a positive duty upon the insured to do so. These matters are discussed in State Insurance v McHale, particularly in the joint judgment delivered by Hardie Boys J at 406-409.

[109] Mrs Barratt, however, referred to authority which exemplify that the duty of disclosure is not absolute. Although my attention was drawn to a number of recent cases decided both in Australia and England, I think the underlying relevant principles were established a considerable time ago. In Asfar & Co v Blundell (1896) 1 QB 123 at 129 Lord Asher MR said:

I now come to the point that there was a concealment of a material fact by the plaintiffs when they effected the insurance. The rule as to this is well known, and as to it I feel no doubt. The assured is bound to disclose every material fact which is within his knowledge, and which is not to be taken as being within the knowledge of the underwriters. If he fails to do so, he is guilty of what is called in insurance law concealment, which may in fact be either innocent or fraudulent. But it is not necessary to disclose minutely every material fact; assuming that there is a material fact which he is bound to disclose, the rule is satisfied if he discloses sufficient to call the attention of the underwriters in such a manner that they can see that if they require further information they ought to ask for it.

[110] But the need to ask for further information should not be taken too far. As Scrutton LJ observed in Greenhill v Federal Insurance (1927) 1 KB 65 at 87:

He is seeking to put upon the insurers the duty of asking questions when in fact the duty is the other way around: the duty is on the insured to disclose any material information which he has, and it is only if, as the cases indicate, the insurers are put on inquiry about some particular matter that it can be said that they can waive the obligation, the requirement, as to disclosure.

[111] To my mind these passages sufficiently indicate the balance which must be struck. On the one hand, it is not every detail which an insured must disclose, but on the other there is no duty upon an insurer to ask questions, unless the insurer is fairly put on notice. All of this confirms that in the end the facts of an individual case are determinative. A careful assessment is required of all the circumstances pertaining to the risk, what was disclosed and what was not disclosed, and whether the information which was disclosed was genuinely sufficient to inform the insurer of all material matters, or to at least put the insurer on notice of the need for further inquiry.

[112] In the present case there was a process of disclosure over a period of time. QBE was told a good deal about the plans of Lyttelton Marina and Saltwater Marinas in relation to development of the new marina at inception. The details of this are already set out with reference to the different phases of the intended development. Then, in 2000 and in relation to the professional indemnity proposal, further information was disclosed with reference to the failure of the breakwater, the retirement of Beca Carter from the project (with a sum paid in settlement) and the substitution of Ocel to advise in relation to the redesign of the breakwater. In light of the disclosure of these matters was the insured duty bound to expressly point out that boats would continue to be moored in the marina while the breakwaters were reinstated? Or, was the fact of boats being in the marina something which Lyttelton Marinas and Saltwater Marinas could assume was known to QBE in light of the disclosures made over time from late 1997 to May 2000?

[113] In my view it was a natural assumption on the part of the insured companies that QBE was well aware boats would be moored in the marina while reinstatement occurred. The matters which were disclosed in support of the public liability proposal in 1997, coupled with the further information provided in March 2000 in relation to the professional indemnity proposal, viewed cumulatively, conveyed clearly that boats would continue to be moored in the marina. If there was any room for doubt about that, I am satisfied that in all the circumstances there was an onus on a prudent insurer to seek confirmation about the point before making the renewal decision.

Non-disclosure : financial difficulties

[114] The allegation of material non-disclosure was that:

At the date of renewal of 21 May 2000, the first to fourth defendants were in serious financial difficulties.

With reference to this aspect counsels’ focus was again disparate. Counsel for QBE stressed the evidence of Mr R W Ibbotson which was said to establish categorically that as at May 2000 the insured companies were in “a dire financial position”, together with the prudent underwriter evidence which was to the effect that financial pressures may lead to corner cutting and hence an increased exposure to third party property liability. By contrast Mrs Barratt focused upon whether in the context of a public liability policy financial circumstances were material, so as to give rise to a duty to disclose them. By way of alternative the evidence pertaining to Lyttelton Marina’s financial position in particular and the evidence as to materiality, was questioned.

[115] The joint judgment of Richardson and Hardie Boys JJ in State v McHale contains at 409 a useful analysis of when a fact is material so that it must be disclosed:

In our view, the law is that, given that a fact is within the knowledge, actual or presumed, of the assured, it must be disclosed if the prudent insurer would regard it as material. But materiality being a question of fact, the reasonableness or otherwise of what is claimed to be material will be a relevant consideration in determining whether indeed it is.

It need only be added that the duty of disclosure exists independently of any that may be spelt out in the policy documents. And it is a positive duty, so that it is no answer to an allegation of non-disclosure in a proposal that there was no question specifically directed to the particular point. The fact that both parties are subject to the same duty is emphasised by ss 5 and 6 of the Insurance Law Reform Act 1977, which preclude an insurer from relying on a misstatement in a proposal unless it was both substantially incorrect, and material.

I note that materiality is not to be judged subjectively (what the insured genuinely thought was material), but rather on an objective basis.

[116] Counsel referred to a number of cases where a failure to disclose financial difficulties fell for consideration. Most involved a so-called “moral risk”. That is where the insurance cover pertained to the insured’s own property (eg fire cover) so that it was material to a prudent insurer to know of financial difficulties in order to assess the risk of owner arson. Often these cases concerned businesses where the allegation of non-disclosure was referable to an unprofitable trading history. By contrast, as Mrs Barratt pointed out, there appear to be no cases where disclosure of financial circumstances has been held to be necessary in the context of public liability insurance.

[117] Even in the context of conventional fire cover, whether there is a duty of disclosure may be doubtful, at least in the case of a house policy. McHale is an example. The joint judgment at 413 contained this:

Particularly in the absence of any questions on the proposal form or other inquiry concerning the financial circumstances of the proponent, the Judge expressed some surprise at the contention that there was nonetheless an obligation to disclose what Mr O’Donnell described as “high financial stress”. The obvious difficulty with such an obligation, if there be one, is its inherent lack of precision; which is illustrated by the difference between the words Mr O’Donnell used and those pleaded by State; high financial stress in the one instance and strained financial circumstances in the other.

In the event both the trial Judge and the Court of Appeal accepted that the evidence of financial difficulties was lacking. Whether an obligation of disclosure existed did not, therefore, arise.

[118] Another case which I have found of assistance is Alliance Insurance Company of Philadelphia v Laurentian Colonies and Hotels Limited [1953] ILR 445. The case concerned fire insurance. An issue raised was whether the insured was required to disclose financial information absent any question from the insurer indicating an interest in that topic. Hyde J in discussing this issue said at 287:

It is freely admitted that there are moral as well as physical hazards which must be taken into account by an insurer. The financial circumstances are certainly not in the physical category unless it could be suggested that one of the results of stringent finances would be a building more susceptible to destruction by fire. That is too indirect. The implication is that the Company’s precarious financial position made the possibility of a fire attractive to one or more of the interested parties as a means of recovering an ill-considered investment.…

Later on the same page the Judge added:

The appellants (insurers) insist that the Company should have disclosed the existence of all its mortgages and the state of its finances. They contend that they were under no obligation to make any inquiries in this field. Every business venture has its financial aspect and the fact that all applicants for insurance on commercial property are not required to submit financial statements implies that the insurer is not interested in obtaining such information unless the financial position of the applicant for insurance is such that the likelihood of a fire is increased. That surely is the only test of materiality. The appreciation of the financial position of the applicant is a matter which can hardly be left to the applicant himself…”

Another Judge in the same case, McDougall J, also with reference to the duty of disclosure drew a distinction between materiality on the one hand, and what “may be of great interest to the insurers” on the other. The Judge also distinguished what was “collaterally relevant” but nonetheless “not material information” (p 259).

[119] Were financial circumstances material in this instance? I do not think so. In order for financial circumstances to be of any relevance to the assessment of the risk by QBE, it would have to be demonstrated that straitened financial circumstances increased the possibility of third party claims. It would need to be the case that financial difficulties would be likely to impact upon the marina development in such a way as to accentuate the risk. Perhaps it was possible that cost-cutting measures may have had this result, but there was no evidence to sustain this thesis and I regard it as speculative.

[120] It follows that I regard the present situation as one where, absent a question in the renewal declaration or inquiries of some kind by the insurer, there was no obligation of disclosure. It is asking too much of the insured to expect them to disclose their financial circumstances, absent inquiry from QBE, and in the context of a public liability policy. Using the language employed in McHale materiality is a question of fact and, therefore, reasonableness is relevant to determining whether a circumstance was disclosable. Here, I consider it unreasonable to suggest a duty of disclosure with reference to financial circumstances. Accordingly, this allegation fails.

[121] For completeness I record that despite the trenchant criticisms made of Mr Ibbotson’s evidence, I consider there was evidence of significant financial difficulties affecting the insured as at May 2000, which would have necessitated disclosure if inquiry had been made by QBE.

Non-disclosure : engineers’ advice

[122] The particulars of the alleged non-disclosure were:

Construction work was being undertaken other than in accordance with the engineer’s advice.

To understand the allegation it is necessary to refer to the involvement and role of Ocel in a little more detail.

[123] Following the failure of the breakwater in late 1999, Beca Carter ceased involvement in the project and in December of that year paid a sum by way of compensation for negligence. In early November 1999 Ocel was approached to review, redesign and oversee the reinstatement of the breakwater, using existing materials were possible. On 8 November Ocel agreed to undertake the work provided it could obtain insurance cover in relation to third party claims. Mr Truscott requested Ocel to begin work in the knowledge that the redesign would take some time, during which insurance cover could be obtained.

[124] Preliminary design work was commenced and at the same time Ocel continued in its endeavour to obtain insurance cover. One likely requirement of its prospective insurers was that the redesign work be peer reviewed by another suitably qualified engineer. By letter dated 8 February 2000 insurance brokers, Aon Risk Services, advised Ocel of the detailed terms upon which professional indemnity insurance would be available. One such term was the peer review requirement.

[125] At about this stage Messrs Goss and Teear met with Mr Truscott and showed him preliminary designs which had been prepared by Ocel. Mr Truscott was anxious to proceed with reinstatement work as soon as possible. The Ocel engineers became concerned that work may commence on the basis of the preliminary design details and before the peer review process was completed. The engineers warned Mr Truscott both verbally and in writing against proceeding further. A letter from Ocel dated 11 February concluded:

You should not attempt to have any work done either using these drawings or the proposed design of work they contain. Our suggested remedial design has not been fully analysed and tested. As noted above the whole issue of whether the breakwater can be repaired is the subject of a peer review. That peer review may result in us advising you that we do not consider that a repair of the existing breakwater should be undertaken. We accept no liability for any use you make of the drawings which have not been approved for construction.

[126] By then, difficulties had surfaced in relation to obtaining suitable insurance cover with Ocel’s usual indemnifiers. To overcome this Mr Truscott approached Ove Arup in Brisbane and requested that company to undertake the peer review role. Ove Arup, which had some involvement with the breakwater during Beca Carter’s time, agreed. In addition Saltwater Marinas submitted the professional indemnity proposal to QBE on 8 March 2000. A cover of $10m was sought, which was to include Ocel and Ove Arup. Later that month a quotation for professional indemnity insurance was provided, and subsequently a policy was issued.

[127] At the time of the storm on 12 October 2000 Ocel had still not obtained a final peer review sign-off in relation to the construction drawings. The preliminary design work was approved in mid June and the final design details were submitted to Ove Arup in late July. After the storm there was no point in issuing final construction drawings, given the destruction of the marina. In the meantime, however, Saltwater Marinas had proceeded with the reinstatement work. Mr Teear estimated that by the day of the storm completion of the reinstatement work was about two weeks away. That part of the breakwater which had been reinstated in accordance with the Ocel redesign survived the storm well. It was the 100 metre gap in the breakwater which proved to be disastrous.

[128] Mrs Barratt defended this admitted non-disclosure at renewal date on the basis there was no duty to disclose a circumstance which diminished the risk. By reference to the evidence of Mr Ade and the evidence of Messrs Goss and Teear counsel developed the argument that following the failure of the breakwater the insured were in a difficult situation. Boats moored in the new marina were vulnerable to further storms, so long as the breakwater remained in disarray. Hence, attention was drawn to acknowledgements from these three witnesses that it was better to proceed with immediate reinstatement of the breakwater, than to do nothing. Regardless of the circumstance that the insured acted in the face of the warning contained in the Ocel letter, the fact was that thereby the risk of damage to boats in the marina was diminished.

[129] QBE’s case was put on the footing that Mr Thomas said the letter from Ocel dated 11 February would have influenced his decision whether to write the risk on standard terms. The possibility that reinstatement work was taking place on the basis of drawings which may prove not to be soundly based was directly material to assessment of the risk. Even the plaintiffs’ expert, Mr Simpson, accepted that the letter was material in the sense that Ocel’s disclaimer of liability had the potential to impact upon subrogated recovery prospects against the engineers, in the event of claims being made by boat owners.

[130] It seems to me that the rival contentions as to materiality involved an interesting difference of emphasis. For the plaintiffs the focus was upon the fact or circumstance that reinstatement work was being undertaken, which was calculated to improve the safety of the marina generally. Hence, it was submitted, because the work would diminish the risk, disclosure was not required.

[131] But the argument for QBE was much narrower. Its focus was not upon the reinstatement work itself, but rather on the circumstance that it was being undertaken against Ocel’s advice. The complaint was that Ocel’s advice (not to act on preliminary design drawings until there was a peer review sign-off of them) was not disclosed.

[132] In my view the warning contained in Ocel’s letter of 11 February 2000 was a material fact or circumstance. A deliberate election to proceed with reinstatement of the breakwater on the basis of preliminary drawings, when there was an express warning issued by Ocel that such drawings may not gain approval on peer review, had the potential to influence the judgment of a prudent insurer in assessing the risk or in fixing the premium. Mr Thomas’s evidence confirmed as much. Even Mr Simpson, although dismissive of the risk entailed in acting on what were merely preliminary drawings, accepted that Ocel’s disclaimer of liability was material with reference to subrogation rights and therefore to assessment of the risk. That must be so. Had the breakwater been fully reinstated and failed on account of design deficiencies, causing third party loss, QBE could not have called Ocel to account. I am satisfied, therefore, that this fact or circumstance was not disclosed and as to its materiality.

Waiver

[133] However, it remains to consider a further argument, which was advanced with reference to the duty of disclosure generally, but which may be of greatest relevance to the present matter. That is whether QBE waived the need for disclosure because the form and substance of the questions asked at the renewal date indicated that QBE’s interest was confined to the subject-matter of those questions.

[134] That an insurer may ask questions limited in scope and thereby, by implication, waive the need for disclosure outside the scope of such questions, was recognised, for example, in Schoolman v Hall [1951] 1 Lloyd’s Rep. 139 (CA). Asquith LJ said:

Questions in a proposal form may be so framed as necessarily to imply that the underwriter only wants information on certain subject matters, or that within a particular subject matter their desire for information is restricted within the narrow limits indicated by the terms of the question, and, in such a case, they may pro tanto dispense the proposer from what otherwise at common law would have been a duty to disclose everything material.

State Insurance Ltd v Fry (1991) 6 ANZ Insurance Cases 61-075 is an instance where this general principle was applied in New Zealand. Most often the cases concern issues of non-disclosure at inception of the policy.

[135] Here, there was no complaint concerning the information provided by the insured at inception. Rather, of course, QBE relied upon non-disclosure at the second renewal date of May 2000. In this situation I think it is important to view that renewal documentation in a broader context.

[136] The history of the public liability insurance cover is detailed at paragraphs [45] - [56]. To my mind a number of features are relevant. The proposal documentation provided in late 1997 early 1998 disclosed that public liability cover was sought throughout the period of the development of the marina. The development was to be staged over a considerable period of time. Then, in March 2000 Saltwater Marinas sought professional indemnity cover, at which time extensive disclosure was made concerning issues pertaining to the failure of the breakwater, indeed it was those issues which gave rise to the need for cover which extended to Ocel and Ove Arup.

[137] With reference to the public liability renewal in May 2000 Aon Risk Services provided the renewal form to the insured. It was returned under cover of a memorandum completed by an employee of the insured and which included “please let me know if there is anything further you require”. The form itself was headed “Public Liability Declaration for Renewal”. Under that heading appeared the words “Important: Cover under this policy ceases on the expiry date shown. To ensure continuation of cover please complete and return this declaration prior to expiry”. The one page form asked only five questions. These required Saltwater Marinas to estimate its turnover for the forthcoming year, to specify its staff numbers and the number of buildings it owned, to advise whether its business activities had changed in the last 12 months or were expected to change “in the preceding 12 months” (presumably intended to be the next 12 months), and finally asked whether there were claims pending or circumstances likely to produce a claim under the policy.

[138] Mr Simpson expressed the opinion that he would have expected a prudent underwriter to have made more extensive inquiries, given the significant developments disclosed in relation to the professional indemnity proposal a few weeks earlier. I accept that evidence.

[139] The issue for present purposes is whether the insured on being requested to complete the renewal declaration (which, incidentally, was not actually a declaration, although headed as such), absent any further inquiry, was nevertheless required to disclose Ocel’s advice contained in the February 2000 letter? More accurately did QBE by virtue of the contents of the renewal form so limit the scope of the information which needed to be provided at that point, as to waive the need for disclosure of Ocel’s advice?

[140] In my view a waiver is established. Against the particular background or history to which I have referred I do not see that an insured could think otherwise than that the renewal form expressly identified the scope of the matters to be disclosed. Extensive information had just been disclosed in a professional indemnity context. A short and routine form was provided to ensure continuity of cover. An offer to provide further information was also conveyed.

[141] For these reasons I reject this allegation of non-disclosure on the basis that in all the circumstances QBE waived the need for disclosure of information of the present kind.

Non-disclosure : arrangement to move boats to the inner harbour

[142] The final allegation of non-disclosure was that QBE was not advised that:

an arrangement had been made before 21 May 2000 by Mark Truscott on behalf of the first to fourth defendants with the Lyttelton Port Company for boats to be shifted into the inner harbour if bad weather was forecast.

Evidence of this arrangement was given by Messrs Goss and Teear.

[143] Both said that, in the context of the discussions they had with Mr Truscott in February 2000 concerning reinstatement of the breakwater proceeding before final redesign drawings were available, he spoke of a contingency plan to move boats to the inner harbour in the event of a storm warning. Neither could be specific as to exactly when this was mentioned, but both recalled it was said soon after the letter dated 11 February 2000 in which Ocel counselled against proceeding with reinstatement on the basis of the preliminary drawings.

[144] Mrs Barratt submitted that the evidence concerning when this arrangement was disclosed to the two witnesses as vague. She contended there was insufficient evidence to show the disclosure was before 21 May 2000, the date of renewal. Hence, the allegation was said to fail on the evidence for uncertainty. I disagree. While the evidence was not precise in terms of timing, I am satisfied on the basis of what Messrs Goss and Teear said that the arrangement was disclosed to them at about the time of the February letter. The suggestion that the disclosure may have been as late as the end of May does not reflect the tenor of that evidence.

[145] A more substantial argument raised on behalf of the plaintiffs was to the effect that this being a circumstance which diminished the risk there was no duty of disclosure. Reflective of the long-standing position at common law, s18(3) of the Marine Insurance Act 1908 succinctly captures the relevant principle in these terms:

In the absence of inquiry the following circumstances need not be disclosed, namely:

(a) any circumstance which diminishes the risk,…

I accept that Mr Truscott’s arrangement was arguably one which fell within the common law principle. However, Mr Thomas expressed the opinion that a prudent underwriter would consider the inner harbour arrangement as material, because the practicalities of moving boats out of the marina when a storm was imminent would influence assessment of the risk. The terms of cover, in particular, may be affected.

[146] To my mind this allegation of non-disclosure is necessarily aligned to the earlier allegation that the fact of boats being moored in the marina when the breakwater had not been fully reinstated was not disclosed. With reference to it I have concluded that the process of disclosure from inception in 1997, to the renewal in 2000, was quite sufficient to put QBE on notice. In light of that finding can it be said there was still a duty to draw to QBE’s attention the arrangement for transferring boats to the inner harbour? I do not think so. Two matters influence me.

[147] As Lord Asher MR said in Asfar & Co v Blundell (see para [107]) disclosure of every detail is not required. Put in more concrete terms, while there was a duty to disclose that boats were moored in the marina, the existence of a contingency plan to move boats out of the marina is not, I think, a circumstance which required disclosure. It is in the nature of a detail relevant to the material fact which was disclosed.

[148] Second, the above analysis affords considerable support for the contention that the arrangement should be characterised as one which diminished the risk. The finding that mooring of boats in the marina during reinstatement of the breakwater was disclosed is important. It effectively disposes of the present allegation whether because the further circumstance was no more than a relevant detail, because it diminished the risk anyway, or a combination of the two. For these reasons I am satisfied that this allegation is not established.

Inducement of QBE

[149] With reference to the allegations of non-disclosure, I have found that there was no express disclosure of damage to boats in the marina in mid December 1999, unless newspaper publicity made that fact one of public notoriety. Mrs Barratt argued in closing that it was not appropriate for QBE to call only prudent underwriter evidence directed to the materiality of particular facts and circumstances, since there was also an obligation to call the actual underwriter who made the renewal decision in May 2000. The effect of the argument was that inducement of QBE could not be presumed, or inferred. Evidence to that end was necessary.

[150] Counsel relied upon the decision of the House of Lords in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Ltd [1994] 3 All ER 581. The case concerned reinsurance, where one insurer reinsured its risk with another insurer. The issue was whether a broker had disclosed the “long record” of the first insurer to the reinsurer, that is the loss record for several years previously as opposed to the more immediate loss record. By the time the case reached the House of Lords two matters of general principle were at stake. These were whether the test of materiality required it to be shown that a prudent underwriter would have reached a different decision on accepting or rating the risk (ie that the fact or circumstance had a decisive effect), or merely an effect on a prudent insurer’s mind. The latter test was preferred, although in a split three to two decision. The second question was whether a material misrepresentation or non-disclosure had in addition to have induced the making of the policy on its relevant terms. As to this and without dissent it was held that unless the misrepresentation or non-disclosure did in fact induce the making of the contract, in the sense in which that expression is used in the general law of misrepresentation, the underwriter was not entitled to avoid the contract.

[151] The opinions of Lord Mustill and Lord Lloyd contain intricate discussions on prior cases, the leading insurance texts and academic writings relevant to these two issues. My concern is only with the second matter, inducement, since it was upon it that Mrs Barratt placed reliance. For present purposes Lord Lloyd’s conclusion at 638 represents a convenient summary:

Whenever an insurer seeks to avoid a contract of insurance or re-insurance on the ground of misrepresentation or non-disclosure, there will be two separate but closely related questions. (1) Did the misrepresentation or nondisclosure induce the actual insurer to enter into the contract on those terms? (2) Would the prudent insurer have entered into the contract on the same terms if he had known of the misrepresentation or non-disclosure immediately before the contract was concluded? If both questions are answered in favour of the insurer, he will be entitled to avoid the contract, but not otherwise. The evidence of the insurer himself will normally be required to satisfy the court on the first question.

The evidence of an independent broker or underwriter will normally be required to satisfy the court on the second question. This produces a uniform and workable solution, which has the further advantage, as I see it, of according with good commercial common sense. It follows that the CTI (Container Transport International v Oceanus Mutual Underwriting Assocation (Bermuda) Ltd [1984] 1 Lloyd’s Rep 476) case was wrongly decided, and should be overruled.

[152] Particular emphasis was placed upon the observation that evidence from the actual underwriter will “normally be required” in order for the insurer to establish reliance, that the insurer was induced by the particular non-disclosure. Here, of course, it is central to the plaintiffs’ argument that QBE did not call either Messrs Sutcliffe and Carlyle who underwrote the risk at inception, nor Mr Tucker who wrote the renewal. Hence, it was said, evidence of inducement was absent.

[153] The opinions of Lord Mustill and Lord Lloyd indicate some difference of opinion concerning whether in some circumstances a presumption of inducement may arise, or whether at most inducement might be inferred in an obvious case. As to this Mrs Barratt cited the recent case of Assucurazioni Generali v Arab Insurance Group [2003] Lloyd’s Rep. IR 131. At 149 Clarke LJ said:

62. In all the circumstances I would summarise the relevant principles of inducement in this context in this way:

1. In order to be entitled to avoid a contract of insurance or reinsurance, an insurer or reinsurer must prove on the balance of probabilities that he was induced to enter into the contract by a material non-disclosure or by a material misrepresentation.

2. There is no presumption of law that an insurer or reinsurer is induced to enter in the contract by a material non-disclosure or misrepresentation.

3. The facts may, however, be such that it is to be inferred that the particular insurer or reinsurer was so induced even in the absence from evidence from him.

4. In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant nondisclosure or misrepresentation, he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of his doing so.

[154] Pan Atlantic has not been adopted in New Zealand. It was considered in Benjamin v State Insurance Ltd (1999) 10 ANZ Insurance Cases 74,654 (CA). That appeal was heard before a Full Court which upheld a decision in favour of State that its avoidance of house and contents policies for non-disclosure was justified. In delivering the judgment of the Court Blanchard J left open whether the approach in Pan Atlantic represented the law in New Zealand. There was no need to confront that issue, since the non-disclosure of dishonesty convictions had been the subject of both prudent underwriter evidence and evidence from the actual underwriter in the High Court. Inducement, therefore, was demonstrated.

[155] I propose to follow the approach indicated in Pan Atlantic, as further explained and developed in the passage I have quoted from Assucurazioni Generali in relation to the evidential aspects. In my view the reasoning in the principal House of Lords’ opinions, that insurance law should follow the example of contract with reference to the need for inducement, is compelling. Although the relevant provisions in the Insurance Law Reform Act 1977 are not identical to their English counterparts, such differences as there are do not suggest the need for a difference of approach in relation to either question of principle in this country.

Damage to boats

[156] I have found that there was no express disclosure by the insured of the fact that boats in the marina were damaged in the December 1999 storm. But, I left open whether this matter was of such common notoriety or knowledge as to be known, or presumed to be known, to QBE. It strikes me as highly unlikely that the fact of damage to some boats in the storm was not known to officers of the insurer. I referred earlier to the newspaper coverage (paras [85]-[87]) and to the evidence of Ms Taylor of QBE’s Christchurch office, who said she was aware of at least some of that coverage. Then, in March 2000 the professional indemnity proposal was presented, through which was disclosed the failure of the breakwater and the circumstance that Ocel had been retained to replace Beca Carter. All of this material, in combination, points strongly to the conclusion that officers of QBE must have been aware that there had been some damage to a small number of boats.

[157] I am also influenced in this conclusion on account of the failure to call the underwriters who wrote the public liability risk, Mr Tucker in particular. Pan Atlantic was decided over ten years ago and was considered by the Court of Appeal in 1998. It must have been apparent that an argument based on the need for an insurer to establish inducement would be raised, particularly in the circumstances of this case where the affairs of the insured companies were so much in the public domain and where there was such scope, therefore, for the actual underwriters to possess knowledge relevant to the assessment of the risk derived over time and in part from publicity. Yet, such witnesses were not called. I can only conclude that they probably possessed knowledge of this aspect and that such knowledge did not influence their assessment of the risk. After all, the evidence suggests that only a few boats were damaged and, moreover, as I noted in relation to the alleged misrepresentation, no third party claims were in fact made by boat owners arising from the December 1999 storm. That absence of claims renders the finding more understandable.

[158] For these reasons I also reject this allegation of non-disclosure.

Affirmation of the contract

[159] Strictly, in light of my conclusion that neither misrepresentation nor nondisclosure have been established, the issue of affirmation by QBE does not arise. However, counsel made submissions on this aspect and I shall make some brief observations with reference to it.

[160] For present purposes the principles which govern affirmation are sufficiently summarised in the judgment of Mance J in Insurance Corporation of the Channel Islands v Royal Hotels Ltd [1998] Lloyd’s Rep. IR151. The two major elements are that the insurer must have actual knowledge of the facts affording grounds for avoidance and must unequivocally by words or conduct communicate to the insured an informed choice to affirm the contract of insurance. In closing submissions Ms Macky submitted these requirements were not met and that in any event affirmation was a positive defence which had not been pleaded by the plaintiffs.

[161] Mrs Barratt, while seemingly accepting that affirmation should have been pleaded, submitted that such failure was not necessarily fatal. My attention was drawn to the decision of Chilwell J in Gibbs v NZI, Auckland A172/80, 6 December 1983, at 99-101, where it was held that a plaintiff’s failure to plead waiver in relation to an allegation of non-disclosure did not prevent consideration of the point. I must say that the same point was available in relation to the finding of waiver I have made with reference to the non-disclosure of Ocel’s engineering advice. For my part I doubt the need to plead waiver in that context. It seems to me that it is necessarily implicit in an allegation of non-disclosure that there was a duty to disclose, and hence that an insured can respond to that allegation by disputing both the fact of non-disclosure and whether disclosure was required. By contrast, affirmation is, I think, an affirmative defence in terms of r130(4). By its very nature it assumes the fact of breach, but raises in answer to it the separate event of affirmation. In my view such a defence must be pleaded.

[162] In case I am wrong in that, and also wrong in relation to any of the nondisclosure findings, I shall briefly consider the basis of the plaintiffs’ affirmation argument. Coincidentally, on the day of the storm Mr Tucker requested by memorandum that Mr Oxenham provide terms for an increase to $10m in the public liability cover. On 19 October 2000 Mr Martin of Aon Risk Services sent a facsimile to Mr Tucker confirming an earlier telephone discussion that there had been severe damage to the Lyttelton marina in the storm, including extensive damage to a number of pleasure craft moored in the marina. In light of the national publicity which the storm had attracted I very much doubt this was new information.

[163] The same day Mr Tucker sent an email to Mr Oxenham which included reference to the storm and an observation that there had been no indication of claims under the public liability or professional indemnity policies at that point. With reference to the request for increased cover to $10m Mr Tucker said:

My thoughts are:

1. To say no as there is now nothing to insure!

2. Agree to it but exclude any further damage resulting from the storm or clean up associated with the storm damage.

We would need to pick our words carefully on this option. Please call me to discuss this.

Later that day, no doubt after hearing back from Mr Oxenham, Mr Tucker advised Aon Risk Services that increased cover was available on the same terms, limits and conditions as applied to the current policy.

[164] Public liability cover continued until at least 26 January 2001, at which time there was an exchange of emails between Mr Tucker and Mr Craig Anderson (also of QBE) concerning the risk. This meant that the receiver of Lyttelton Marina enjoyed cover from 13 November 2000, being the date when that company was placed in receivership.

[165] The avoidance decision was communicated by a letter dated 7 May 2002 from QBE to Aon Risk Services Limited. The letter particularised non-disclosure of damage to the marina and vessels during storms in August and November 1999, the defective design of the marina, the financial settlement with Beca Carter, the mooring of vessels before the marina had been fully reinstated and serious financial difficulties as the grounds of avoidance. Such grounds, the letter asserted, would have prompted a decision not to renew and accordingly QBE avoided the policy from 21 May 2000.

[166] With reference to the timing of the avoidance the submission was made for QBE that the various grounds relied upon only became known over time. In particular, it was in March 2002 that a loss adjustor, Mr J D Watson, provided a report which extended to several of the matters relevant to the avoidance.

[167] I doubt that I can sensibly discuss the actual knowledge of officers of QBE as at 20 October 2000 when the cover was increased to $10m and over the subsequent months while cover under the policy was maintained. Certainly I accept this period was very soon after the storm event and well before the final reports relied upon for avoidance were to hand. Likewise, in light of my essential conclusion that there was no relevant non-disclosure of facts and circumstances, I cannot usefully assess whether there was an informed affirmation of the contract.

[168] That said, however, I do think it is striking that eight days after the storm Mr Oxenham approved a $7m increase to the cover. By then it was obvious that boats had been moored in the marina when the storm struck and that the insured companies were in financial strife, which prompted the sale of the marina development to a third party. Yet, the increase was offered and none of the QBE documents evinced any element of surprise concerning information which came to light in the immediate aftermath of the storm. The absence of such documents heightened my concern about the failure to call the underwriters who managed the risk from 1997 to 2000, and also influenced the conclusions I have reached concerning non-disclosure.

Assumption of risk : contributory negligence

[169] QBE raised both these defences and resisted the plaintiff’s application at the commencement of the trial to strike them out. But in the end result it did not pursue the defence of volenti non fit injuria.

[170] With reference to contributory negligence the gist of the argument was that Mr Jaggar moored his launch in the marina in early September 2000, visited it on about six occasions before the storm and on two of those occasions took the launch out of the marina. Hence the contention was that Mr Jaggar had ample opportunity to observe the gap in the breakwater and that he was negligent in electing to continue to moor the motor launch in the marina with that knowledge. A 25% contributory negligence finding was sought.

[171] However, in cross-examination Mr Jaggar maintained that he did not appreciate there was a gap in the marina. He explained the manoeuvre which was required in order to remove the launch from berth Q34 and sail out of the marina. He also said that on each of the two occasions he was testing the launch following mechanical work on one of its engines. The engine was the focus of his attention. Mr Jaggar did, however, acknowledge that had he been aware of the 100 metre gap and that it exposed the marina to the prevailing wind, he would have held concerns for his boat. But because he did not notice the gap he did not turn his mind to the possibility of risk.

[172] I am not persuaded that the evidence does indicate negligence on Mr Jaggar’s part. Upon returning from the United States he secured a berth and moored his launch in the marina. About 30 to 40 boats were similarly moored. It was reasonable, I think, for a person in Mr Jaggar’s position to assume that the marina was fit for the purpose of boat berthage, since that was the service for which he made payment to a commercial entity. He was not told of the gap in the breakwater or of the earlier storm events.

[173] From this beginning is there a basis for finding that Mr Jaggar should have been put on notice of the risk following the two trips he made in the launch? Having heard him cross-examined as to that aspect, I do not find that he failed to exercise reasonable care. In cross-examination he spoke of the fixed breakwater, natural rocks and that even with the benefit of hindsight it was not obvious to a layman where a breakwater needed to be positioned. I can see no basis upon which to reject his assessment. In light of this evidence I accept it is understandable that he did not appreciate there was a gap which spelt danger to boats in the marina.

[174] For these reasons the partial defence of contributory negligence is not established.

Damages

[175] The total amount claimed by the plaintiffs is:

(a) Repair costs $192,450.81

(b) Replacement cost of substitute launch $571,781.25

(c) Interest:

- for non use, on basis of current replacement cost at 7.5% per annum $192,976.17

- on mitigation costs at 7.5% p.a. $42,776.73

__________
$999,984.96

(d) Less:

- salvage value of unrepaired launch $35,000

- share of Carter Beca settlement $50,000

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$914,984.96
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Various parts of the claim were not accepted by QBE. To appreciate the disputed aspects it is necessary to refer to the evidence supportive of the claim.

[176] While he and his family were living in Texas, Mr Jaggar purchased the 12 metre Thunderbird Formula 400 SS power launch new, in 1999 and for NZ$640,084.99. In June 2000 the family returned to New Zealand, deciding to live in Christchurch. The following month the launch was imported to New Zealand and transported to Christchurch via Auckland. With the addition of freight, GST and duty the landed cost of the launch increased to $835,467.03.

[177] Whether this figure represented its actual market value in New Zealand is another matter. Some time after the storm Mr Jaggar retained a marine loss adjustor, Mr D A Daish, to survey the launch in its damaged state and to confirm whether it was economic to repair the boat or whether replacement was a better option. In cross-examination Mr Daish was asked by Mr Heaney whether he had endeavoured to establish the market value of the launch in New Zealand in an undamaged condition. In this regard it was highly relevant that the boat was petrol powered, which is most uncommon in New Zealand and likely to significantly diminish the market value. While Mr Daish agreed that this is the case, he was not able to express a view as to the likely market value in October 2000, since he had not been asked to undertake that exercise. I shall return to the significance of this shortly.

[178] During the storm the launch was overturned at berth. Mr Jaggar subsequently arranged for it to be lifted out of the water and for Mr Peter Rae of Raeline Boats Limited to estimate the cost of repairing the boat. Mr Rae, who has over 25 years experience in the boat building industry, did not consider that it was possible to provide a firm quote for the repair work. The engines had been flooded. The interior had suffered extensive water damage. There were a substantial number of holes in the hull. Replacement parts would have to be sourced from the United States. The best estimate which Mr Rae could provide was that repairs might cost of the order of $400,000. This figure was broken down into $100,000 for the repair of the engines, drive units and generator; $100,000 for replacement fittings and $200,000 for the repair of the hull. However, this estimate was provided on the basis that until the work was commenced it was unclear what the final cost might be. Given the characteristics of the vessel, the need for additional repairs and expenditure could arise. It was agreed, therefore, that work would commence and be billed on a monthly basis, so that the viability of continuing with reinstatement could be reviewed from time to time.

[179] Between November 2000 and December 2003 Mr Rae carried out repair work. The hull was lined with a moulded fibreglass liner. The liner was affixed to the hull proper, in order to form the main structural element of the boat. In order to repair damage to the hull itself, parts of the liner had to be removed. When this was done Mr Rae found that delamination of the hull was more extensive in certain areas than could be ascertained from an external inspection. In the result, he advised Mr Jaggar that the final repair cost would greatly exceed his original estimate of $400,000. He thought the final figure might be as much as $600,000. Mr Jaggar instructed that work cease.

[180] A further factor was instrumental in that decision. Between late 2000 and late 2003 the exchange rate had moved considerably in favour of the New Zealand dollar. Whereas at the earlier date a New Zealand dollar would purchase about 46 US cents, by late 2003 the comparative figure was 72 US cents. This meant, of course, that the cost of a new second-hand replacement boat in the United States was much more attractive or, put another way, that continuing with the repair exercise was as Mr Jaggar described it “no longer economically sensible”.

[181] Finally, I note that Mr Daish gave evidence that in his opinion the salvage value of the engines, stern drives and generators was $25,000 and the salvage value of the hull $10,000, a total of $35,000.

[182] It was not until Nove