Rainfall Cover – Risk for Insurer – Windfall for Insured if Fortuity Ignored

There can be situations where when the insurer/s go the extra mile to give wide coverage, but abusing the terms of the wording in the clause, there can be a tussle on what is covered or not. The insured can push the limit of interpretation, to get benefit of losses that are not fortuitous. The recent (2023) case Acciona Infrastructure Australia Pty Ltd v Zurich Australian Insurance Limited [2023], FCAFC 47, decided by the Federal Court of Australia illustrates this.

The insured was constructing a 19.5 kilometre stretch of road in New South Wales, Australia. In June 2016, there was extensive rainfall and flooding along the east coast of Australia. The Contractors claimed that the weather event as covered caused damage to the Project Works. The relevant exclusion clause read: “the Insurers will not indemnify the Insured for loss or damage due to rain on earthwork materials and or pavement materials, except where such loss or damage is due to an event with a minimum return period of 20 years for the location insured on the basis of the 24 hours statistics prepared by the Bureau of Meteorology for the nearest station to the location insured, or such independently operated weather station situation near or adjacent to the location insured.”

It has to be recorded with appreciation that the insurers (3 of them) had provided a very wide cover for rainfall risk for the road project. There were multiple weather stations around the Project, including at the southernmost and northernmost ends of it. The rain event occurred that allegedly caused damage to insured property across the entirety of the Project (19.5km). However, while the southernmost weather station recorded a 1:20 event, the northernmost weather station did not. The insured argued that as long as they could show a 1:20 event anywhere across the entirety of the Project, the clause applied, and the entire loss should be paid.

The term “Location insured” (as used in the exclusion) was not a defined term. So, a question arose before the court as to whether the “location insured” mentioned in the Policy referred to the “Project Site” (as defined), or to the location within the Project Site, or lost or damaged “Insured Property” (as defined). The insured wished to interpret the term “location insured” as “Project Site”. In view of this they wanted that the data recorded by the southern weather station should apply to the entire Project to bring the alleged damage that occurred in the northern section of the Project within the claim. Insurers, however, argued that the exclusion must be read to identify the relationship between the rain event and its causal impact on the area of loss.

The court agreed with the insurers and held that the term “location insured” extended only to the area in which the relevant damage occurred, and should not be read to cover the entire “Project Site”. The court said: “It is much more logical to fashion the description of the degree of relevant rainfall intensity by reference to rainfall which had been experienced at, or at least relatively near to, the location of the resulting loss or damage.” It found that the interpretation of the insured would lead to unbusinesslike outcomes, and was unlikely to have been intended by the parties.

The court noted the liberal approach of the insurer: “24. It can be observed that the policy assists the insureds in discharging their obligation of showing that the damage is within the scope of the policy by not requiring exact proof that the rainfall event at the location where the damage was sustained met the identified characteristic, and instead making it sufficient to show that the rainfall received at a proximate weather station did.”

As is usual, courts tend to follow an interpretation that is supported by logic and business efficacy. “23. As a matter of common sense, it might be thought that, in an exclusion dealing with cover for damage to certain materials by unusually heavy rain, the chosen area for ascertaining what is unusual as to its heaviness would be that area at or about which the damage occurred.?It is common ground that the Project, being road construction, extended over a lengthy geographical area within which the intensity of a single rainfall event might vary considerably from place to place.?In these circumstances, it is difficult to see the logic in ascertaining the intensity of the event causing the damage, to which the insurance would apply, by reference to the intensity of the same event obtaining at some distant part of the Project Site.?That, however, would be the effect of the Contractors’ submissions.?It is much more logical to fashion the description of the degree of the relevant rainfall intensity by reference to rainfall which had been experienced at, or at least relatively near to, the location of the resulting loss or damage.”

Normal rainfall is not considered a fortuity. However, cyclonic or torrential rain would be considered a fortuity. Here the insurer liberally considered that where a rainfall is a one in twenty year event as recorded in a nearby location to the location of loss (not necessarily at the exact location of the loss) they were allowing the insured an easier way to prove their loss. However, the lack of clarity in the terminology was found useful to claim loss or damage all across the length of the highway being constructed. As experienced insurers know, routine rainfall losses in risks like canal or highway work, is fairly common and it is customary to treat routine losses from normal rain as excluded or make them fall within the deductible in the policy to avoid disputes and legal issues.