Australia: Spontaneous combustion: How spontaneous does it need to be - in a damages insurance claim?

In the recent case of Dalby Bio-Refinery Ltd v Allianz Australian Insurance Limited [2019] FCAFC 85, the Full Court of the Federal Court of Australia considered the meaning of the term "spontaneous" in the context of a perils exclusion clause.

The plaintiff, Dalby Bio Refinery (Dalby), was a manufacturer and distributor of ethanol.

On 2 March 2016, fire and emergency services attended Dalby's bio-refinery in South East Queensland due to smoke having been detected. Stockpiles of dry distillers' grain and solubles (product) in four bays showed signs of possible fire damage. Whilst testing of the product indicated that it was unlikely to develop into large scale flaming combustion, the contents of three of the bays were discarded due to having a "burnt smell" and being discoloured.

Dalby was insured by Allianz Australian Insurance Limited (Allianz) under an Industrial Special Risks Policy. There was no argument that the Policy would respond to the relevant physical damage to the product. However, an issue arose as to the operation of the perils exclusion.

The perils exclusion provided that,

"The Insurer(s) shall not be liable ... in respect of:-
Physical loss, destruction or damage occasioned by or happening through:

(c)

  1. Spontaneous combustion
  2. Spontaneous fermentation or heating or any process involving the direct application of heat
Provided that Perils Exclusion 6(c)(i) and 6(c)(ii) shall be limited to the item or items immediately affected and shall not extend to other property damaged as a result of such spontaneous combustion, fermentation or heating or process involving the direct application of heat."

Initially, Dalby's claim was refused by Allianz on the basis that the perils exclusion applied. Dalby applied to the Federal Court to enforce a claim for material damage under the Policy.

First Instance Decision

Expert evidence was obtained in relation to the cause of the damage to the product. The experts concluded that the damage was caused by "self-heating", but there was a difference of opinion between the experts as to whether a distinction should be drawn between "self heating" and "spontaneous combustion", and the expert reports addressed the meaning of "spontaneous".

The experts also could not be precise about a cause or mechanism that brought about the self-heating, which may have included wetting by rain.

The primary judge accepted Allianz's submission that "heating" in exclusion 6(c)(ii) was not qualified by the word "spontaneous". He went on to consider the meaning of "spontaneous heating". The primary judge concluded that the experts' inability to explain why the self-heating took place did not undermine his conclusion that, whatever the causative mechanism, Dalby was seeking to make Allianz liable for damage occasioned by or happening through self-heating and so (spontaneous) heating, within perils exclusion 6(c)(ii) of the policy.

As such, the primary judge dismissed Dalby's application. Dalby then appealed to the Full Court of the Federal Court.

Appeal

On Appeal, Dalby complained that the primary judge had failed to consider the whole of the Policy in coming to his preferred construction of the exclusion.

The Full Court found that the Policy should be understood in a context where Dalby stored large quantities of grain. The perils exclusion in 6(c) can be seen as removing certain matters from the risks that Allianz was willing to accept, and such matters were to be placed at the risk of the insured.

Dalby accepted that the meaning of "spontaneous" included the notion of self-generation or arising from internal forces or causes. It urged, however, a meaning that was more colloquial that included the notion of an event of some suddenness. The Full Court rejected that meaning, pointing to the reference in the policy to "spontaneous fermentation", which, by its very nature, is a gradual process.

The Full Court agreed with the primary judge and concluded that the perils exclusion dealt with damage occasioned by or happening through "spontaneous heating". "Spontaneous heating", that is heating generated internally, involves environmental factors providing oxygen, for a process of oxidation and heating. It does not have to be sudden.

The circumstances that provided the suitable conditions for the self-generated heating through oxidation explain why the process of spontaneous heating occurred. An inability to be precise or definite about why the process occurred is not doubt that the process occurred.

Dalby's appeal was dismissed with costs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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