Qbe Insurance (International) Ltd v Pegasus Group Ltd Coa

• Jurisdiction: New Zealand
• Judge: Harrison J
• Judgment Date: 13 June 2011
• Neutral Citation: [2011] NZCA 268
• Docket Number: CA830/2009
• Court: Court of Appeal
• Date: 13 June 2011

BETWEEN

Qbe Insurance (International) Limited

First Appellant

and

American Home Assurance Company

Second Appellant

and

Pegasus Group Limited

Respondent

BETWEEN

American Home Assurance Company

Appellant

and

Pegasus Group Limited

Respondent

[2011] NZCA 268

Court:

Ellen France, Randerson and Harrison JJ

CA830/2009

CA58/2010

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal against High Court (“HC”) judgment — stock take had revealed a large quantity of respondent's stock (branded sporting and leisure goods) was missing — employees of New Zealand Express Ltd (“NZE”) suspected to be responsible for thefts — NZE was in liquidation — insurance company for respondent (material damage insurance) denied liability — insurance company for NZE (crime insurance policy) denied liability — HC entered judgment for respondent — whether the HC erred in its assessment of liability.

Counsel:

M G Ring QC, M O Robertson and H P Twomey for First Appellant in CA830/2009

A Challis and K Harkess for Second Appellant in CA830/2009 and Appellant in CA58/2010

M J Tingey and B M M McKinlay for Respondent

• A Leave granted to the appellants in CA830/2009 and CA58/2010 to file amended notices of appeal.

• B The appeals in CA830/2009 and CA58/2010 are dismissed.

• C The cross-appeal in CA830/2009 is dismissed.

• D QBE and AHA must each pay Pegasus an amount equal to 85 per cent of costs for a standard appeal on a band A basis and usual disbursements.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Harrison J)

Contents

Introduction	[1]
Indemnity	[8]
(a) Approach	[8]
(b) QBE	[12]
(i) Policy	[12]
(ii) QBE's case	[16]
(iii) Analysis	[20]
(c) AHA	[45]
(d) Consequences	[51]
Stocktaking	[55]
(a) Process	[55]
(b) The August 2004 stocktake	[62]
(i) High Court	[62]
(ii) QBE's case	[65]
(iii) AHA's case	[72]
(c) The February 2005 stocktake	[75]
(i) High Court	[75]
(ii) Insurers' case	[79]
Theft	[93]
Conclusion	[118]
Set-off	[121]
Costs	[136]

Introduction

1 Pegasus Group Ltd, the respondent and cross-appellant, imports and distributes branded sporting and leisure goods. Between 2001 and 2005 the company stored its stock in warehouses operated by New Zealand Express Ltd (NZE). As a result of a stocktake in February 2005, Pegasus discovered that large quantities of its goods were missing. It claimed that the missing stock was stolen by NZE employees. But before Pegasus could take any formal steps NZE was placed in liquidation.

2 Pegasus had a policy of material damage insurance with QBE, the first appellant. The company made a claim for indemnity for its goods lost while in NZE's custody. QBE denied liability.

3 NZE had what was called a crime insurance policy with American Home Assurance Company (AHA), the second appellant. That policy indemnified NZE against liability to third parties for goods lost while in its custody. Pegasus made a claim for its loss directly under the AHA contract following NZE's liquidation. AHA denied liability.

4 Pegasus issued proceedings in the High Court at Auckland against both insurers. Following a two week trial, Winkelmann J found that Pegasus had proved its claim against each insurer. In both cases the company relied substantially on its stock records to establish the thefts and the amount of its loss. Winkelmann J entered judgment for Pegasus against QBE for these sums: 1

• (a) $354,369 for material damage less:

  • (i) $2,500 by way of policy excess;

  • (ii) any amount which Pegasus recovered from AHA pursuant to the judgment (excluding any award for interest and costs);

  • (iii) $197,637.68 to reflect a set-off;

• (b) $412,588 for loss of profit due to business interruption;

• (c) $48,747 for expenses;

• (d) compound interest calculated according to a fixed formula.

5 Winkelmann J separately entered judgment for Pegasus against AHA for:

• (a) $354,369 less:

  • (i) $25,000 by way of policy excess;

  • (ii) $197,637.68 by way of set-off;

• (b) interest on the judgment sum from December 2006.

6 All three parties are dissatisfied with the judgment. QBE and AHA appeal against the Judge's findings on liability. Each says that the effect of an inventory exclusion clause in its policy was to bar Pegasus from using stock records to prove its loss or the amount; and that, in any event, while there was evidence that NZE's employees stole Pegasus' stock frequently and over an extended period, the Judge had no proper factual foundation for inferring that it was on a large scale. However, the insurers do not challenge other significant findings by the Judge including the assessment of Pegasus' business interruption claim and consequential losses. It is common ground that the fate of these two awards depends on QBE's primary challenge to the material damage award. Both will be set aside if that appeal succeeds. In this respect, without opposition from Pegasus, we grant QBE and AHA leave to file amended notices of appeal. Mr Tingey for Pegasus expressed concerns about his ability to respond to one aspect of the proposed amendments but as the hearing progressed he did not seek leave to file further submissions on the point.

7 Pegasus cross-appeals against the allowance of a set-off against QBE's liability but does not challenge the dismissal of its claim of bad faith against that insurer.

Indemnity

(a)Approach

8 Both Mr Ring QC and Ms Challis for QBE and AHA respectively criticise Winkelmann J's approach to determining Pegasus' claim. The primary stage in her analysis was to determine whether Pegasus had suffered loss and if so to what extent. The Judge acknowledged that the company had no direct evidence of actual thefts of the scale alleged but based its case on what she described as two threads or strands of circumstantial evidence. 2 One thread was proof of the accuracy and reliability of Pegasus' stock records in disclosing the level and value of the lost goods. The other was the nature and scale of NZE's lack of security and its ingrained culture of employee defalcations.

9 Winkelmann J was satisfied that there was a sufficient factual foundation from which to infer that sustained staff thefts were the likely cause of the goods' disappearance and that Pegasus' claim was properly quantified. After making these findings, she proceeded to the next stage of determining the company's rights of indemnity under each policy. Mr Ring and Ms Challis say the Judge should have started by construing the policy documents, in particular the inventory exclusion provisions, to settle Pegasus' rights to indemnity from the outset.

10 We are not satisfied that Winkelmann J's approach was in error. Pegasus had to prove both the cause and amount of its loss to bring its claim within the operative clause of either policy. While the relevant provisions under both policies had similarities, there were also differences. The Judge was entitled to conclude that issues of indemnity, and in particular the application of the inventory exclusion clauses, were best determined once primary factual findings were made. 3

11 We accept, nevertheless, that on appeal Mr Ring and Ms Challis have given priority to the insurers' defences based on the inventory exclusions. Accepting their arguments will result in Pegasus' inability to rely on its stock records to prove either

the cause or amount of its loss, with a decisively adverse effect on its claim. Instead, as both counsel submit, the company will be restricted to other evidence. Given the way the insurers' case has been presented on appeal, we shall approach it in the order submitted by Mr Ring and Ms Challis. However, Winkelmann J's brief references to the exclusion provisions suggest that this line of defence did not enjoy the same degree of prominence at trial

(b)QBE

(i)Policy

12 Pegasus was insured with QBE for material damage. The contract was described as a “Combined Corppak” policy, noting Pegasus' business as importing, assembling and distributing sporting goods and toys at NZE's premises. Stock to a maximum value of $2 million was the largest component of the company's insured property. An excess of $2,500 was to apply for losses due to theft. The annual premium was $17,555.

13 By cl 21.1.1 of the policy, QBE agreed that:

If, during the Period of Insurance, physical loss or damage — unintended or unforeseen by the Insured — happens to any of the Insured Property, then, subject to the terms, conditions and exclusions of this section of this Policy and the General Policy Exclusions and General Policy Conditions and Clauses, the Company will indemnify the Insured for the loss or damage and expenses. The Insured will be indemnified by payment or, at the Company's option, by repair or by replacement of the lost or damaged property.

(Emphasis added.)

14 QBE accepts that Pegasus' claim fell within this insuring or operative clause. However, the insurer relies upon an inventory exclusion provision, cl 21.3.5, which, Mr Ring says, modifies the insuring promise. The clause provided:

This section does not insure unexplained disappearance, loss, or shortages revealed at any stocktaking or shortages due to accounting or clerical errors.

15 Mr Ring challenges Winkelmann J's conclusion that QBE's inventory exclusion did not apply for this reason:

[156] Pegasus has proved that stock has been lost by reason of staff theft at NZE. It has brought itself within the terms of clause 21.1.1. I am also satisfied that exclusion clause 21.3.5 has no application, as this is not an unexplained disappearance, nor is it a shortage due to accounting or clerical errors. QBE suggested an interpretation of the exclusion clause whereby the obligation to indemnify is also excluded if the shortage is revealed at any stocktaking. But I am satisfied that the only coherent reading...