An insured cannot recover under cover for accidental loss or damage where the insured has ‘courted the risk’. The test for whether an insured has ‘courted the risk’ is a high standard and requires an insured to be aware of the risk and make a conscious decision to choose to take it.
Brendan Sheehan (the applicant) sought indemnity under his policy underwritten by Lloyds Names Munich Re Syndicate (the respondent) for the cost of replacing an engine in his yacht. The claim related to an incident on 17 September 2015 when the yacht, after five minutes of operation, sounded an alarm and the speed of the engines were slowed to limp mode. The applicant navigated the vessel back to the marina, but after about eight minutes the starboard engine shutdown. He continued to operate the port engine as he returned to the marina. On returning the yacht to the marina, he observed that the starboard side fuel tank was covered in oil.
The matter was referred to a referee who concluded that:
- The applicant did not comply with the operating manual which required him to switch off the engine on the activation of the alarm.
- The loss of oil was due to a faulty design of the gasket which led to the evacuation of oil and ultimate damage to the engine.
- The damage to the engine would have been avoided if the engine had been stopped immediately when the alarm activated.
The applicant’s policy provided cover for accidental loss or damage to the yacht. Accidental was described in the policy as “an event that he did not expect or intend to happen”. The policy also contained a number of exclusions, including loss or damage caused by or resulting from “inherent defects, structural faults, faulty workmanship or faulty design”.
The respondent denied indemnity on the basis that the damage was not as a result of ‘accidental loss’ or alternatively would be excluded pursuant to the above exclusion.
To assess whether the damage was within the cover for accidental loss provided by the policy, the Federal Court of Australia (the Court) considered whether the damage was unintended. The test used was an objective test, however incorporated the specific knowledge and experience of the person involved.
The respondent argued that a reasonable person would have read the yacht’s manual, known about the operation of alarms, recognised their significance and acted reasonably when the alarm was activated. On the basis that the applicant did not do this, the damage was not objectively unexpected. Alternatively, the damage was not accidental as the applicant knew of the risk of damage and deliberately chose to take it. An insured cannot recover under cover for accidental loss or damage when the insured has deliberately courted the risk.
The Court acknowledged that the applicant’s conduct amounted to poor seamanship however concluded that this did not prevent the events being characterised as within the definition of accidental or necessitate a conclusion that the applicant courted the risk of the damage. The Court accepted that the damage to the engine was unexpected.
To assess whether the claim was excluded the Court looked at the proximate cause or causes of the damage. The Court noted that there does not need to be a single proximate cause. Pursuant to the Wayne Tank principle where there are multiple concurrent and independent proximate causes and one is an excluded event under the policy, then an insured will not be entitled to cover. The applicant submitted that the proximate cause was his failure to turn off the engine once the alarm sounded. The respondent argued that it was the failure of the gasket due to faulty design.
The Court accepted the respondents’ argument and considered that the damage to the engine was directly attributable to the gasket that was defective due to its faulty design. The Court held that this was the sole proximate cause and therefore the Wayne Tank principle did not apply. The exclusion therefore applied and the applicant was not entitled to indemnity.
The applicant’s actions, in the circumstances, were obviously wrong and bad seamanship. However, the Court’s decision has confirmed that this does not mean the damage was not accidental or that the applicant had deliberately ‘courted the risk’. The decision confirms a conclusion that an insured ‘courted the risk’ and requires an insured to be aware of the risk and make a conscious decision to choose to take it. This is a high standard.
The Court has taken a sensible approach to considering the exclusions in the policy and assessing the proximate cause of damage.
 Allsop CJ.
 Wayne Tank and Pump Co Ltd v Employers’ Liability Assurance Corporation  QB 57.