SAY THE WORD ALLSTATE EXPLORATION NL v QBE INSURANCE (AUSTRALIA) LIMITED  VSC 380 On Anzac Day 2006, a rock fall caused by a seismic event trapped two miners underground and killed another at the Beaconsfield Mine in Tasmania. Mining operations at Beaconsfield and Australia stopped as the efforts to rescue the trapped miners continued for a number of weeks. In this case, the Court considered as a threshold issue, whether the owners and operators of the mine were able to claim business interruption losses under its Industrial Special Risks policy where those losses had not been the result of physical loss or damage to insured property. Facts The Beaconsfield Gold Mine (the mine) is owned and operated by a number of companies in joint venture (the joint venturers). At the time of the rock fall the joint venturers were insured by QBE under an Industrial Special Risks (ISR) policy. ISR policies are property insurance policies. Subject to the policy terms and conditions, the cover provided under standard ISR policies is divided into two sections. Section 1 covering material damage to property insured and section 2 operating to cover business interruption losses due to damage to insured property. On the day of the rock fall, an inspector under the Workplace Health & Safety Act 1995 (Tas) ordered a stop to all mining activities at the mine until further notice. The joint venturers sought indemnity under its ISR policy with QBE for losses suffered by the joint venture as a result of the interruption of its business caused by the mine closure. QBE denied any liability to indemnify the joint venturers on a number of grounds, including: That the rock fall was caused by one or more excluded perils. The joint venturers did not take reasonable precautions to prevent the loss, destruction or damage to the insured property. Non-disclosure issues. The joint venturers sought to rely on clause 23 in the policy as the basis for the indemnity. QBE argued that on its proper construction, clause 23 was not engaged. The joint venturers agreed that if QBE was correct about the construction of clause 23, then they would have no claim for indemnity under the policy. Accordingly, the Court ordered that there be a trial on the preliminary question of whether: 'on its true construction clause 23 of the policy required QBE to indemnify the joint venturers against loss resulting from interruption or interference of the business of the joint venturers caused by the closure of the Beaconsfield Gold Mine by the civil authority due to the operation of the peril insured against'. Judge Hargrave of the Victorian Supreme Court ultimately answered that question in the negative. The Issues The QBE policy provided cover in separate sections each of which specified a class of insured events. The indemnity provided in section 1 was for any physical loss, destruction or damage not otherwise excluded under the policy and happening during the period of insurance to the property insured as described in section 1. Under this section, the insurers indemnified the insured, subject to the provisions of the policy and in accordance with the applicable basis for settlement set out under section 1. Section 2 of the policy provided indemnity against loss resulting from business interruption or interference which happened due to physical loss, destruction or damage to property insured by any cause or event which was not excluded. Judge Hargrave found that there was no ambiguity in the cover provided under section 1 and section 2 of the policy. Cover under section 1 of the policy depended upon physical loss, destruction of or damage to any property insured. Under section 2, the policy required a causal link between the physical loss, destruction or damage and the interruption or interference with the business of the joint venturer. QBE argued that the policy was not engaged as there was no physical loss, destruction or damage to insured property. The joint venturers sought to rely on clause 23 of the policy which was contained in miscellaneous group of provisions at the end of the policy under the heading 'Conditions applicable to all sections'. Clause 23 provided: 'notwithstanding anything contained herein to the contrary, the property insured under this policy is also covered against the risk of loss, destruction, or damage arising from the actions of any civil authority during a conflagration or catastrophe and for the purposes of preventing, minimising or retarding same and shall include the closure of any premises/operations by any civil authority due to the operation of a peril insured against'. It was the joint venturers contention that clause 23 in the policy should be construed as providing an independent head of indemnity, separate from and additional to the indemnities provided for in sections 1 and 2 of the policy. The joint venturers argued that the language of the clause indicated that the clause was intended to provide a free standing cover and that the absence of the word 'physical' before the words 'loss, destruction or damage' meant that there was no need for physical loss to insure the property, for the clause to be engaged. The joint venturers submitted that the use of different words in clause 23 was a deliberate choice, which indicated a broader form of cover to that provided under sections 1 and 2. QBE contended that clause 23 should be construed as forming part of the scheme of insurance provided for in sections 1 and 2, and was intended to do no more than provide that the specified actions of the civil authority were not excluded perils. In particular excluded peril 1(b) which relevantly provided: 'Insurer(s) shall not be liable under section 1 and/or section 2 in respect of: 1 Physical loss, destruction of or damage to the property insured. (b) resulting from confiscation, nationalisation, requisition or damage to property by or under the order of any Government or Public or Local authority.' It was common ground between the parties that the consequential losses claimed by the joint venturers as a result of the closure of the mine were not from any physical loss, destruction or damage to the insured property and accordingly section 2 of the policy was not invoked. The issue for the court was whether clause 23 in its proper construction provided an additional indemnity to the joint venturers. The Decision In considering this issue, Justice Hargrave said that the Court was: 'required to consider what reasonable persons in the position of the parties would have understood the words to mean by reference to the text of the agreement, the surrounding circumstances known to the parties and the purpose or the object of the transaction. In interpreting the words and resolving any ambiguity, the court should proceed in a common sense and non technical way to give the agreement a commercially sensible construction'. No evidence of surrounding circumstances was given other than that clause 23 of the policy was inserted at the request of the insurance broker. In the absence of this information, Judge Hargrave said that the text of the policy should be given primary significance and the policy wording should not be displaced unless the words used would lead to a result which did not accord with commercial common sense. In his judgment, Justice Hargrave rejected the joint venturers submissions that clause 23 provided an independent head of indemnity. Justice Hargrave concluded that having regard to the overall structure of the policy, the proper construction of clause 23 was to read the clause in a way as providing cover for loss, destruction of or damage to property insured, and that those words should be construed in a manner consistent with sections 1 and 2 of the policy. Justice Hargrave accepted that the wording of clause 23 was not entirely consistent with the language used in the policy, and that it would have been an easy matter to have included similar language as used in the indemnity provisions in sections 1 and 2, each of which required 'physical' loss, destruction of or damage to insured property. However, Justice Hargrave also observed that there were other places in the policy where the policy was obviously referring to physical loss, destruction of or damage to property insured but where the word 'physical' did not appear. In interpreting this clause, Justice Hargrave found persuasive the fact that clause 23 contained no basis for settlement provisions and the absence of such provision supported a construction that the parties did not intend to provide cover, except within the structure of sections 1 and 2 of the ISR policy. Clear language would be required before additional cover outside the defined structure of the policy (ie sections 1 and 2) could be afforded and this was not the case here. On its proper construction, clause 23 was to be construed in the context of the policy as a whole, and it was to be treated as a further qualification to peril exclusion 1(b) of the policy. Justice Hargrave concluded that clause 23 was not engaged, as the mine closure was not caused by physical loss, destruction of or damage to the property insured. Implications This decision restates the importance a court will place to the overall structure of the policy when interpreting clauses within the policy and the principles applied by courts to questions of construction. Underwriters, brokers and their clients should heed the caution to review wordings carefully to ensure that the wording reflects the cover required. The judgment highlights the need to use clear and precise language if cover is required for losses incurred where there has been no physical loss, destruction or damage to insured property. A BROKER'S DUTY TO A PREMIUM FUNDER BMW AUSTRALIA FINANCE LIMITED v MILLER & ASSOCIATES INSURANCE BROKING PTY LTD  VSC 379 A broker's duty to disclose the inadequacies to a lender of the securities offered in support of a proposed premium funding loan was the issue at the centre of a recent case before the Victorian Supreme Court, BMW Australia Finance Limited v Miller & Associates Insurance Broking Pty Ltd  VSC 379. The case also serves as a reminder of how a series of missteps can result in one major problem. The Issue This case involved a premium loan contract that went into default. The premium loan lender, BMW Australia Finance Limited (BMW Finance) took legal proceedings against the insurance brokers who introduced the borrower to BMW Finance. In the proceedings it was alleged that the insurance broker engaged in misleading and deceptive conduct and breached various duties it owed to BMW Finance in the provision of insurance information to BMW Finance in support of the loan application. A premium funding loan is a loan typically obtained through a proposal for insurance which also seeks funds for the payment of the premium for the proposed insurance. Typically the insurance policy itself provides the security for repayment to the lender. This means that if the borrower defaults, the lender may exercise the borrower's grant to cancel the policy and to recover the premium unused. Since the value of the security lies in the right to cancel the policy, it follows that where the underlying policy is non cancellable, it provides no security. BMW Australia is a finance provider. In December 2000, BMW Finance advanced the amount of $3.975 million to Consolidated Timber Holdings Limited (Consolidated Timber) under an insurance premium agreement. Consolidated Timber paid only three instalments before the loan fell in default in March 2001. The loan was brokered by Miller & Associates Insurance Broking Pty Ltd (Miller & Associates) working in conjunction with another broker Insurance Finance Australia Pty Ltd (IFA) who were both retained by Consolidated Timber as its brokers. BMW Finance obtained a default judgment against Consolidated Timber in the amount of approximately $3.3 million. BMW Finance was unable to recover that judgment from Consolidated Timber or two of the directors who provided guarantees for the loan. In this case, the security of the underlying insurance policy was also unavailable to BMW Finance because the underlying policy was potentially non cancellable and further because the insurance company which issued the policy, HIH Casualty & General Insurance Limited (HIH), was unable to meet its commitments in March 2001 when the loan went into default. BMW Finance then turned its attention to the brokers. The issue for the Court to decide was whether the broker had an obligation to disclose to BMW Finance, the inadequacies of the security (ie the policy of insurance) offered for the loan and what, if any, duties a broker owed to a lender in these circumstances. Facts In late September 2000, Mr Merton, Managing Director of broker IFA contacted the National Insurance Manager of BMW Finance, James Reynolds (Reynolds) seeking a quotation for a premium funding loan of $3.975 million for his client, Consolidated Timber. Mr Reynolds and Mr Merton were well known to each other and were friends. At all times the brokers were retained to act as agents for Consolidated Timber in the arranging of the loan. The broker was however also to be paid a commission by BMW Finance. In addition Miller & Associates were also paid a 'success fee' by its clients in securing the loan. In response to this enquiry, Mr Reynolds prepared a quotation for the proposed loan. The quotation provided the terms of the loan and also included a proviso that the quotation was subject to the approval and receipt of a completed contract and full policy information. Consolidated Timber accepted the quote and BMW Finance sent to the broker a standard letter signed by Mr Jones, the Manager of Insurance Products at BMW Finance (Jones). The letter set out the details of the proposal form of the loan application and a direct debit authority for execution and return. There was no request for policy details in the letter. Subsequently, the proposed loan changed and BMW Finance prepared a second quotation for the loan. The second quotation was accepted by Consolidated Timber and BMW Finance again sent out a standard form letter. Again no details about policy were requested. Thereafter Consolidated Timber directly faxed BMW Finance a copy of the completed loan application. The application form did not provide insurance details and referred to an attached schedule which in fact was not attached. In what was termed the first of a series of disasters that beset the transaction, a junior employee in BMW Finance sent to Consolidated Timber a welcome letter, which was another BMW Finance standard form letter setting out the details of the approved loan. The letter confirmed that the loan had been accepted by BMW Finance on 30 September 2000, under the agreed payment schedule in the amount of $3.9 million. This employee had no authority to accept the application and no person with the requisite authority within BMW Finance had considered the loan application or approved it. Within a few days of the letter being sent, Reynolds and Jones became aware that the confirmation letter had been sent out. BMW Finance's internal processes required that any application for a loan of more than $500,000 required them to sign an internal approval form and then obtain the signature of the directors of the company and the credit risk insurer where the policy was non cancellable. Despite the fact that none of these processes has been followed, Reynolds and Jones decided to press on with the loan and immediately set in train enquiries that they would normally have undertaken before acceptance. In early October 2000, Jones contacted the broker asking for policy details. The broker responded by sending a fax enclosing a copy of a HIH certificate of insurance. The certificate was issued in the name of Plantation Management Corporation Limited. It was this certificate which was central to the case against the brokers. The terms of the fax from the broker to BMW Finance referred to the attached certificate of insurance. As the certificate had a different named insured, the broker explained in the fax that Plantation Management Corporation Limited was in the course of being acquired by Consolidated Timber. The broker offered to provide copies of the Heads of Agreement and indicated that the contracts were currently being finalised. The broker also invited BMW Finance to let them know if they needed any further information. The HIH certificate provided was in a form appropriate to the professional indemnity policy. It disclosed that the insured was Plantation Management and that the policy was issued on 30 September 1999 providing cover from 16 September 1999 to 15 September 2004, a period of 60 months. The amount payable for that cover was $4,458,750 including $3,750,000 for the premium. The balance being made up of stamp duty and GST. The HIH certificate also included reference to endorsement details and under this heading referred to a number of properties insured and their limits. BMW Finance alleged that they understood that the policy was one of property insurance and that it was therefore cancellable. They alleged that they relied on the representations of the insurance broker in providing the certificate and that this provided good security for the loan of $3.95 million which had already been approved. They also argued that it covered, the later loan in the same amount made in December 2000 which was in substitution of the original September 2000 loan. BMW Finance then sought to obtain credit risk insurance for the loan but was unable to do so. In late October 2000, BMW Finance decided to decline or withdraw from the loan agreement. This decision was conveyed to the broker. BMW Finance informed the broker that they were not proceeding with the matter and that the broker must try to place the loan elsewhere. The reasons given for the decision was that BMW Finance was not happy with the term of the loan, that there had been changes from the original quotation, and that Consolidated Timber was a new company. It appears that this termination of the loan agreement was accepted by Consolidated Timber and the brokers sought to place the loan elsewhere in the interim. Some time later in early December 2000, the broker once again approached BMW Finance with an enquiry whether there was any basis for renegotiating the transaction. BMW Finance agreed on the basis of a 10 month loan and provided that more information about the borrower was provided. After this conversation a bundle of documents was delivered by mail to BMW Finance. There was no covering letter by way of explanation as to its contents. The information was sent by the brokers in order to provide some detailed support for the proposal which was under discussion. At around the same time Consolidated Timber had consulted lawyers as to its rights under the first accepted loan application by BMW Finance and this information was known to the BMW Finance officers. Justice Byrne found that this provided a powerful motive for them to attempt to achieve a successful renegotiation of the loan. The bundle of documents included two insurance documents. The first was a copy of a cost of production insurance policy issued by HIH to St George Bank Limited and Plantation Management. This was not on any view a policy over property. The policy was not cancellable, at least not without the consent of the Bank. Notwithstanding that the policy had a different number there was no issue at trial that the policy referred to in the HIH certificate was the same as the one provided in the documents provided in December 2000. Also included in the bundle was an uncompleted broker quotation slip in respect of the cost of production policy. Justice Byrne observed that when each of the BMW Finance managers received a bundle of documents or read the contents that they paid little regard to the policy and none at all to its detailed terms. Justice Byrne commented that their lack of careful attention to the policy was consistent with their conduct in many aspects of the transaction and presented a further disaster on the road to BMW Finance's ultimate loss. After receipt of this information Jones prepared a fresh quotation for the loan. Consolidated Timber accepted the quote and submitted a loan application supported by director's guarantees. At the time this was submitted the broker advised Reynolds that one of the properties shown on the HIH certificate had been sold, but Reynolds did not appear to consider the significance of this on the loan security. On 12 December 2000, Reynolds and Jones approved the loan application notwithstanding that they had no authority to do so. Consolidated Timber only made three repayments under the loan agreement. At the same time Consolidated Timber fell into default it also became apparent that HIH would be unable to meet its commitment. BMW Finance was therefore not in a position to seek to recover their losses by cancelling the policy and recovering the unused premium as such a course was not available to them. The Decision The claim against the broker was based on misleading and deceptive conduct. In essence, BMW Finance allege that they entered into the loan agreement in reliance upon the conduct of the broker. The conduct relied upon was the conduct of the broker in providing details of the underlying policy. It was alleged that the broker's response to BMW Finance's request for policy information contained a number misrepresentations that were misleadingly incomplete. BMW Finance also alleged against the broker that it had represented that the underlying policy was cancellable, and therefore good security for the loan, and that it did not tell BMW Finance that it was in fact a non cancellable policy and not good security. Justice Byrne found in favour of the broker on this issue and said in short that BMW Finance was the author of its own misfortune. Had BMW Finance's managers properly considered the certificate they would have understood that it did not convey the represented fact. The fact that BMW Finance drew this conclusion was a product of its own carelessness. In any event, by the time the second loan was made in December 2000, BMW Finance had a copy of the policy which it could have read and understood or sought advice upon. Justice Byrne found that BMW Finance's insurance manager, Jones, was not a careful man and that he did not have a good understanding of insurance policies. Justice Byrne did not accept that either Jones or Reynolds understood the policy to be non cancellable at the time it was provided. In any event neither requested further information from the broker. In relation to the question of whether or not the failure to provide information amounted to misleading or deceptive conduct, Justice Byrne said this must be determined upon the circumstances concerning the non disclosure. Justice Byrne found that both the brokers and BMW Australia were experienced in their respective fields and were known by the other to be so. Justice Byrne accepted that the brokers' position might have had an aspect of ambiguity to it but said that the broker had a commercial interest which was adverse to BMW Finance and acted on behalf of its client, the borrower. In these circumstances, it was for BMW Finance to determine the adequacy of the material submitted or to ask for more information. Justice Byrne said that in a case such as the present where BMW Finance asked for details of the underlying policy, it cannot be heard to complain where the broker provides a copy of the policy presumably on the basis that BMW Australia will read it and make its own assessment. Justice Byrne found that at the time the December loan was approved, BMW Finance had in its possession a correct statement of the nature of the policy upon which it made the loan. The other claims against the broker also failed for similar reasons. Justice Byrne found that the relationship to BMW Finance and the broker was not one which gave rise to a duty to exercise due care and skill in its dealings as a broker. There was no breach of duty made out against the broker by BMW Finance and it was not for the broker to advise BMW Finance about the adequacy of the proffered securities. Justice Byrne also found that there was no fiduciary duty owed by the broker to BMW Finance. At all times the broker acted as the agent of the borrower. Finally, in respect to the claim in contract which was based upon the fact that the brokers' commission was agreed to be paid by BMW Finance, Justice Byrne found that such an agreement had to be seen in light of the fact that the broker was retained by the borrower and that this was the fundamental relationship affecting the conduct of the broker. If there was a contract between the broker and BMW Australia as well, then it could not prevail over the other. It must be to introduce BMW Australia, a borrower, with whom the contract of loans subsequently entered into. In any event, Justice Byrne found that suggested breaches of contract were merely repetitions of the allegations of non disclosure which Justice Byrne had already rejected. Implications The case demonstrates the snowball effect an 'administrative' error coupled with the failure to deal with the error in the first place can have in a transaction. Much of the conduct of the lender can be explained by the failure of its managers attempts to 'fix' a potentially embarrassing problem. In this case, Justice Byrne considered that a powerful motivator for BMW Finance's Managers was a desire to cover up their previous errors. The case should not however be taken as support for the principal that a broker's only duty is to its client. Brokers must take care not to engage in conduct which is misleading or deceptive when arranging insurance or acting on behalf of its client in any transaction. It is submitted that the broker may have come in for greater criticism for its conduct had it not been for the overwhelming failure of the lender to conduct itself competently.