Focus on compensation: the meaning of “control”

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Penfold v The Hollard Insurance Co Pty Ltd [2021] NSWSC 1322

Insurers and brokers are often faced with a difficult question: are assets under the physical and legal control of an insured? An insured’s legal liability will often depend on this, as will their coverage position. In this article, we look at a recent Australian ruling that landowners can have “control» goods on their property even if they have not charged for storage and exercised no authority over the goods.

Facts

On December 18, 2016, Mr Penfold was welding on his farm when a spark ignited a grass fire. The fire spread and destroyed many wooden railway sleepers stored on his farm. The railroad ties were owned by Cutting Edge Services. The Penfolds had allowed Cutting Edge Services to store the sleepers on the farm free of charge.

The Penfolds held a liability insurance policy, the relevant terms of which were as follows:

  • The policy provided liability coverage to pay compensation for property damage caused by a farm-related event.

  • There was an exclusion for property damage”not owned by you but under your physical and legal control”.

  • The policy included an additional guarantee of recovery of guarantee for damage to the goods “of which you have physical or legal care, custody or control”, but subject to a limit of $100,000.

The Court accepted that the exclusion and the additional benefit must be read “back to back” in harmony with each other.

The insurer accepted the indemnity up to the $100,000 limit under the additional coverage. But this limit was significantly lower than the claimed quantum. In an attempt to avoid the sub-limit, the Penfolds argued that the railway ties were not under their physical and legal control even though the ties were stored on their property. The Penfolds said they never moved the sleepers or exercised control over them. The ties had been stored on the farm free of charge and allegedly under a “simple licence”.

Review of previous cases

The Court has reviewed previous cases involving control exclusions. This included the following instances where equivalent exclusions applied:

  • A forklift driver who was hired to move a gondola (Collin vs. Botany Fork). The basket was damaged while the forklift driver was moving it. There was an exclusion for damage to property in the custody or control of the insured. The basket was under the control of the forklift driver while he was moving it. The exclusion applied.

  • The owners who allowed a friend to store a dragster in their basement garage for free so that it would be safe from vandals (New Hampshire Ins Co vs. Abellera). The dragster was destroyed in a fire believed to have been caused by the negligence of the owners. There was an exclusion for damage to property in the care, custody or control of the insured. The owners kept the dragster safe and so it was in their care, custody or control. The exclusion applied.

The Court also noted other instances where equivalent exclusions were found not to apply:

  • A repair contractor hired to repair a boom attached to an excavator (Gray Brothers Engineering Ltd v The New Zealand Insurance Co Ltd). The shovel was damaged during repair work. There was an exclusion for damage to property in the charge or control of the insured. The insured had no power to move the excavator, modify it structurally or make decisions about its future. It was found that the repair contractor was only controlling part of the boom. He had no control over the other parts of the excavator. The exclusion did not apply.

  • A maid hired to clean a carpet nailed to the floor (Indemnity Insurance Co v Excel Cleaning Service). The carpet was damaged during cleaning. There was an exclusion for damage to property in the care, custody or control of the insured. The obligation of the cleaner was to work on the carpet on site. The rug remained in the care and control of its owner. The exclusion did not apply. A similar conclusion was reached in a case involving a cleaner who damaged an oil storage tank while cleaning it (Interprovincial Pipe Line Co v Seller’s Oil Field Service Ltd).

Did the Penfolds have “control” of the Railway Sleepers?

The Court ruled that the Penfolds had physical and legal control of the sleepers. It didn’t matter that the Penfolds hadn’t exercised their right to move the railway ties. The ties had been placed on the farm for safekeeping. This was to avoid storing sleepers in the rail corridor where there was a known risk of theft. In addition, the Penfolds controlled access to the farm. If anyone other than Cutting Edge Services wanted access to the sleepers, they would have needed permission from the Penfolds.

The Court held that the exclusion for damage to property under the physical and legal control of the insured applied and therefore the claim against the insurer was dismissed.

Commentary (Andrew Durrant)

This case illustrates that landlords may wish to think twice, or check the adequacy of their insurance cover, before agreeing to store someone else’s goods on their property, even if they are stored free of charge. A homeowner’s liability insurance may have an exclusion for damage to property in the care, custody or control of the insured (or a lower sub-limit for such property). This could leave such an owner facing uninsured liability if the stored goods are damaged.

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