- Notable Unreported Decision
SUPREME COURT OF QUEENSLAND
27 May 2002
12 – 15 March 2002
Judgment for the defendant.
INSURANCE – FIRE INSURANCE – THE CONTRACT – MISREPRESENTATION AND NON-DISCLOSURE – GENERALLY– Whether s 28(3) Insurance Contracts Act 1984 allows insure to refuse indemnity – whether misrepresentation in request for quotation for cover reduced liability to nil – whether insurer would have accepted risk had misrepresentation no been made – whether insurer’s position would have altered had misrepresentation not been made.
INSURANCE – FIRE INSURANCE – THE CONTRACT – GENERALLY– Whether s 54 Insurance Contracts Act 1984 entitles insurer to refuse to pay plaintiff’s claim by reason of plaintiff’s breach of insurance policy clause – whether plaintiffs took all reasonable care to ensure that alarm was operative when premises were unoccupied – whether failure to set the alarm could reasonably be regarded as having contributed to the loss under s 54.
INSURANCE – GENERALLY – POLICIES OF INSURANCE – CONSTRUCTION – Whether clause providing indemnity for income loss to be construed as gross income or actual loss.
Insurance Contracts Act 1984, s 28(1), (3), s 54
Briginshaw v Briginshaw (1938) 60 CLR 336
British Traders’ Insurance Co. Ltd v Monson (1964) 111 CLR 86
Commercial Union v Ferrcom Pty Ltd (1991) 22 NSWLR 389
NRMA Insurance Limited v Collier & Anor (1997) 9 ANZ Insurance Cases 61-337
Tropicus Orchards v Territory Insurance Office (1999) 1 48 FLR 441.
Mr P. Hack SC and with him Mr P. Cullinane for the plaintiff
Mr D. Fraser QC for the defendant
Macrossan Amiet for the plaintiff
Minter Ellison for the defendant
 On 18 February 2001, the premises of the Oriental Hotel at Mackay were largely destroyed by arson. The plaintiffs, in partnership, operated the hotel business at those premises. They claimed under an insurance policy held with the defendant and those he represents (to whom I shall refer collectively as “the insurer”) for losses, including loss of contents and stock, and business interruption. The insurer has declined to indemnify the plaintiffs, primarily on the ground that an alarm system on the premises had not been set at the time of the fire, in breach of a condition of the policy. That failure is said to have been capable of causing or contributing to the loss, since it might have been expected that the activation of the alarm would have deterred the intruder, or that others would have been alerted to the criminal conduct under way. The insurer thus claims to be entitled, under s 54(2) of the Insurance Contracts Act 1984, to refuse to pay the plaintiffs’ claim. It raises also s 28(3) of the Insurance Contracts Act as similarly entitling it to refuse indemnity, on the basis that the plaintiffs, before the contract was entered, misrepresented the state of the alarm on the premises. Finally, the insurer also contends that claims for loss of contents and stock, and for business interruption are over-stated.
The hotel acquisition
 The three plaintiffs, in partnership, purchased, by a contract dated 5 May 2000, the hotel business run at the Oriental Hotel in Mackay. The purchase price was $275,000. It included stock-in-trade and various items of plant and equipment, among which were 6 gaming machines. At the same time they entered a five year lease of the premises and assumed the obligations of the previous proprietors under leases of various items of equipment, including three gaming machines and an “amusement device”. The plaintiffs proposed to revamp the existing hotel business, which had consisted of not much more than a couple of public bars, by adding a café/wine bar and a night club. Ms McNeill and Ms Robertson lived on the premises and devoted themselves to the business, while Mr Coupe, although not living at the hotel, worked there full-time until November 2000.
The insurance cover
 The plaintiffs commenced business on 21 July 2000. Prior to doing so, they sought insurance from the insurer through the latter’s agents, Interpacific Underwriting. The plaintiffs’ brokers made, on 19 June 2000, an urgent request for a quotation for cover of the building contents and stock and business profits. Among the information provided in the request was the following detail of security:
 Mr Ellis, the principal of Interpacific Underwriting, explained that the agency’s practice was to assess the risk in accordance with underwriting guidelines. The guidelines were, he said, designed to ensure consistency among the underwriters so that a risk was “always treated in a similar fashion”. Those guidelines included the following requirement:
“All metropolitan and regional capital hotels must have a monitored back-to-base alarm.”
A “regional capital hotel”, he said, was any major country centre. Mackay qualified as a “regional capital”. It was generally accepted by the parties that a “back-to-base” alarm was one which operated by alerting some individual or organisation away from the premises that the alarm had been triggered.
 Interpacific Underwriting provided, in response to the plaintiffs’ request, a quotation which specified, inter alia, the following conditions:
“Proposal and payment within 30 days from inception.
Implementation of any reasonable risk improvements following survey.”
 A proposal dated 18 July 2000 was duly forwarded. It contained, of course, a number of questions to which answers by the proposed insured were required, including the following:
“How are the premises protected?
Burglar Alarms (please tick the appropriate type below)
The boxes were endorsed as follows:
● Back to Base (dedicated line) Securitel
Dialler/Radio ● Audible Local Alarm?”
The proposal was signed by each of the three plaintiffs, who declared it to be correct in the following terms:
“I/We have read and understood the Important Facts on page 1 of the Proposal Form and confirm that this advice was provided to me/us prior to entering into the contract of insurance. The information I/We have provided is true and correct. I/We understand that no insurance is in force until such time as the insurer has confirmed acceptance of the proposed insurance.”
 At the time the plaintiffs took over the hotel there was no monitored or back-to-base alarm on the premises. The alarm system which was fitted operated only as a local alarm, being activated by sensors. Only one of those sensors, that in the bottle shop at the hotel, was functional.
 Ms McNeill and Mr Coupe were asked about their knowledge of the references in the quotation request and the insurance proposal to the existence of a back-to-base alarm. Ms McNeill said she did not know at the time those documents were forwarded what a back-to-base alarm was. She assumed that the hotel’s owners must have been the source of the information as it appeared on the quotation request. Although she had signed and declared the correctness of the insurance proposal she must have overlooked the reference to a back-to-base alarm. Mr Coupe did know what a back-to-base alarm was. He was uncertain where the details in the quotation request had come from. He agreed that he had read the insurance proposal before signing it, and said he was uncertain when he did so as to whether there was in fact a back-to-base line at the premises.
 The plaintiffs’ broker accepted the Interpacific quote, and a cover note effective from 21 July 2000 was issued. A policy document was forwarded in August. Section 11 of the policy contained general conditions, which included clause 8:
“8.Reasonable Care and Maintenance
You must take all reasonable care:
(g)to ensure burglar alarms and intrusion prevention systems shall be made operative whenever the premises at the Situation are not occupied or are unattended and tested daily except during non-business days. Fire protection systems shall comply with the relevant Australian standard in respect of installation and testing and be operative at all times.”
Clause 16 provided:
“16Due Observance and Inaccurate Information
The due observance and fulfilment of the terms and conditions of this Policy by all persons insured by this Policy, to the extent that they are capable of being construed as such, are conditions precedent to any liability of Us to make any payment under this Policy.”
The insurance survey
 The quotation had been expressed as subject to “implementation of any reasonable risk improvements following survey”. Mr Keith Day, an insurance loss adjuster, was given instructions to perform such a survey. On 7 August 2000 he went to the premises and met Katrina Robertson and Tracey McNeill. He carried out an inspection which took between an hour and an hour and a half, during part of which he was accompanied by one or other of the two women. While undertaking his survey he made notes and took photographs of certain parts of the premises. Unsurprisingly, security was among the matters he was required to address. According to Mr Day, he asked Ms McNeill about the alarm system. She responded by saying that she knew that the existing system was not good enough and that the plaintiffs intended to improve it. Ms McNeill went on, Mr Day said, to explain that the current system covered the bottle shop area and the office area and operated by notifying a security firm, ET Security. His handwritten notes contain the following:
“Video surveillance front door and rear bar – alarm monitored system to be installed. Currently office and bottle shop alarmed. ET Security Patrol”.
He told Ms McNeill, he said in evidence, that he would mention the upgrading of the alarm system in his report.
 When he came to furnish his report to Interpacific Underwriting Mr Day advised the following:
“Video surveillance operates on the front door and in the rear bar area, and the insureds are currently attending to the installation of a monitored alarm system to be installed. Currently only the office area and the bottle shop have an alarm system, which is a dial out to ET Security Patrol.
Once the new alarm system is fitted, security will in our opinion be good.”
 Ms McNeill, however, gave a substantially different version of her conversation with Mr Day. She said that she had informed him that the sensors to the alarm were faulty and worked only in the bottle shop. The sensor pad to activate and deactivate the system was in the office upstairs. She had told Mr Day that if approval were given for an automatic teller machine to be installed in the hotel, the partners would consider the attachment of a mobile phone back-up to the alarm system. At the time she spoke to Mr Day she knew nothing of ET Security Patrol, and had made no mention of that organization to him. At some point subsequently she became aware that a card from that firm had been left in the bottle shop so that the manager could alert the personnel there if there was anything untoward occurring in the adjacent car park, which the security firm did patrol.
 Ms McNeill said that she was aware at the time of speaking to Mr Day that the alarm system in the hotel was not a back-to-base system, and she had not told him anything different. In a conversation occurring during a chance meeting over a year later, in August 2001, Mr Day had asked her whether when the plaintiffs took over the hotel the alarm worked only in the bottle shop or in the bottle shop and the office. She had said, the former; and Mr Day had responded, “Yeah, I thought so.”
The agent’s response
 Mr Ellis said that the information in the survey report was adequate for his agency’s purpose. However, he said, in the context of evidence as to the acceptance of the risk, that had he become aware that there was no more than a local alarm on the premises, he would have given the prospective insured 7 to 14 days to fit an adequate back-to-base alarm system. In the interim he would have offered cover excluding malicious damage, burglary and damage by burglars. In the absence of compliance, cover would be discontinued altogether. If at the time the survey report was provided he had been made aware no back-to-base alarm system existed at all, he would have gone off-risk because, in that event, he would consider a material non-disclosure had occurred.
 The type of system Mr Ellis said he would have expected to be installed was one covering the entire ground floor, external doorways and areas of importance in the hotel; but he conceded, under cross-examination, that Mr Day’s report contained no indication of which areas were to be covered by the alarm to be installed. He relied, he said, on the surveyor’s understanding of what was required of the monitored alarm system in assuming that it would adequately protect the building. Mr Day, on the other hand, said he would have done no more than five surveys, for Interpacific in a five year period. There seemed little reason to suppose he had any clear understanding of Interpacific’s expectations.
The new alarm system
 Oddly, it was not until 10 November 2000 that Interpacific Underwriting corresponded with the plaintiffs’ brokers about the results of the survey, and in that letter no mandatory risk improvements were required. The only risk improvement suggested was the installation of a ramp in place of, or alternatively the highlighting of, a set of steps which were perceived as hazardous. By November, however, a new alarm system had been installed at the insurer’s expense. That came about as a result of a fire in the kitchen at the hotel on 25 August 2000. The plaintiffs claimed under the insurance policy for business interruption and property damage. After the fire the existing alarm system began to malfunction, activating for no apparent reason. It was replaced with a new system, costing $3595.00, at the insurer’s expense.
 According to Ms McNeill, the new alarm was installed by Business Solutions (Aust) Pty Ltd, a Mackay business, with authority from the insurer through Interpacific Underwriting. From correspondence tendered to the court it appears that at the end of 2000, Interpacific Underwriting was advised by letter from Business Solutions that it was cheaper to replace the alarm system than to repair it. It does not appear that anyone inquired as to whether the system being replaced was an upgraded one. Ms Robertson referred in her evidence to having told Mr Day of Business Solutions’ advice that it was cheaper to replace than repair “because it was such an old system”; but in cross-examination she conceded that she had difficulty recalling just what was conveyed to Mr Day on the topic.
The plaintiffs’ financial position
 For reasons which will become apparent, it is relevant to consider the plaintiffs’ financial position in connection with their capacity to install a new alarm system had the insurer not funded it. In about November 2000 the three partners ceased to take draws from the business. In the same month, the partners borrowed some $19,000 from a friend of Ms Robertson. Ms Robertson said that money was mostly spent on acquiring furniture. Between then and 29 January some of that money had been paid back, perhaps half, but at that date, another $10,000 was borrowed from the same friend. The bottle shop attached to the hotel was closed in December 2000 but some $12,000 remained owing as at February 2001 to Castlemaine Perkins which previously had supplied alcohol to it.
 The partners were unable to pay the rent owed to the hotel owners in January although they proposed to make the payment in February. By February 2001, two of the hotel suppliers, a food wholesaler owed about $4,000 and another supplier owed between $25,000 and $28,000, had declined to supply further on credit. In February 2001 Ms McNeill and Ms Robertson attended an appointment with the manager of a local bank, in the course of which they discussed increasing the amount for which a guarantee had been given by Ms Robertson’s parents. According to Ms Robertson, at that stage the partnership was seeking to find a third partner to inject some capital, but that was to enable improvements to be done, rather than to keep the business afloat.
 Ms McNeill and Ms Robertson produced a profit and loss statement when they attended the ANZ Bank in February. It showed opening stock at $36,612.52, closing stock at $112,572, and gross profit at $516,351.52. Those figures however seem to have been quite unfounded. Mr Shepherd, the plaintiffs’ accountant who gave evidence for them, described them as “laughable”. One cannot but think the figures were respectively understated and overstated so as to produce a trading result bearing no resemblance to reality, presumably in an attempt to inspire confidence in the bank manager. However that may be, it indicates, at best, a recklessness or indifference on the part of Ms McNeill and Ms Robertson as to the accuracy of the figures they produced.
 On the analysis of Mr Shepherd, the business over its seven months of trading up to the fire had sustained a loss of $128,356.
Section 28 Insurance Contracts Act
 The insurer relied on s 28 of the Insurance Contracts Act 1984 to argue that the alleged misrepresentation as to the existence of a back-to-base alarm contained in the request for a quotation for cover reduced the its liability to nil. The section is in the following terms:
(1)This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into:
(a)failed to comply with the duty of disclosure; or
(b)made a misrepresentation to the insurer before the contract was entered into;
but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into.
(2)If the failure was fraudulent or the misrepresentation was made fraudulently the insurer may avoid the contract.
(3)If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made.”
 It was accepted by both parties that the only representation which could be relevant for the purposes of s 28(1) was that contained in the request for a quotation for cover, since the subsection refers to a misrepresentation made “before the contract was entered into”. There is no doubt that the indication that the premises had a back-to-base alarm was a misrepresentation.
 Mr Hack SC for the plaintiffs submitted that Mr Ellis’ evidence as to what his agency would have done if aware of the misrepresentation should not be accepted. He had taken no action, although the survey report did not meet his requirements. Certainly the report referred to a “dial-out” system in the context of a monitored system yet to be installed, with the clear inference that the system presently in place was something less than the latter, and went into little detail of what the existing system covered. It does not, however, follow from the agency’s preparedness to accept the state of affairs described in the survey report that the absence of any back-to-base system would at any point have been accepted with similar equanimity.
 While it is the case that his agency seemed remarkably uninterested in the detail of the protection afforded by the alarm system, I nonetheless accept Mr Ellis’ evidence that its practice was to require a monitored back-to-base alarm in “regional capitals”, and that a hotel in Mackay would fall into that category. While one must be careful of hindsight assertions, the existence of the guidelines provides support for his evidence. The request for a quotation would, I find, have been assessed in accordance with those guidelines. I accept Mr Ellis’ further evidence that, had he appreciated that there was in fact no such back-to-base alarm, his agency would have imposed exclusions for malicious damage or damage by burglars (that is to say, damage of the kind in fact suffered) until a back-to-base alarm was in fact fitted, and would have gone off-risk if that had not occurred.
 Mr Ellis did not address the question of his agency’s likely responses in offering cover precisely in terms of s 28(1); that is to say whether the contract would have been entered if the misrepresentation had not been made. However, that was the effect of his evidence about the application of the guidelines, and what he would have done had the facts of the misrepresentation been made known to him. It follows from his evidence that s 28(1) is applicable; the insurer would not have entered into the contract on the same terms and conditions but for the misrepresentation.
 I was not asked to find, and I do not do not consider that the evidence justifies a finding, that the misrepresentation was made fraudulently. Indeed, it may be as well at this point to set out some findings in relation to disputed areas of evidence. It seems to me impossible to determine precisely what transpired between Ms McNeill and Mr Day. For reasons to do with both observation of her in the witness box and the evidence as to the profit and loss statement produced to the bank without apparent concern for its accuracy, Ms McNeill did not strike me as a meticulous or reliable witness. However, I could not be satisfied to a Briginshaw standard that she deliberately misled Mr Day as to the proposed improvements to the alarm system or an existing system of monitoring by ET Security Patrol.
 The conversation between Ms McNeill and Mr Day seems to have been relatively casual. Mr Day’s recollection of it was not detailed. I can accept, having observed Ms McNeill in evidence, that her communication of information was unlikely to have been either methodical or clear. While I saw no reason to doubt Mr Day’s truthfulness, it is possible that when he reported that an expanded system was to be installed, he misunderstood what was being said about the prospect of a mobile phone back up to the alarm system being installed with an automatic teller machine; and that he became aware of ET Security Patrol in some other context than of that organisation monitoring any alarm system from the hotel. On the other hand, at best for the plaintiffs, it does not appear that Ms McNeill said anything to correct the existing misrepresentation that there was a back-to-base system. In short, while I am not prepared to find that anything was said in that conversation to promote the misrepresentation, neither do I find that it was remedied.
 Mr Day could not recall whether there was any mention of the alarm system in the August 2001 conversation with Ms McNeill. Whether or not the conversation took place as alleged by her does not seem to me of any moment. If Mr Day had said something to the effect that he thought the alarm worked only in the bottle shop, there is nothing to indicate when (before or after the fire) or on what information he might have reached that view.
 As to the circumstances of the upgrade of the alarm system after the damage caused by the kitchen fire, it does seem probable that the claim was paid on the insurer’s assumption that there was an upgraded system already in place. One would hardly have expected otherwise that the insurer would have been prepared to meet the cost of a new externally monitored system in exchange for a barely functioning local alarm. However, I accept that that assumption is more likely to have been the product of mutual misunderstanding than any deliberate misleading by the plaintiffs.
 Mr Ellis has, I find, established what the insurer’s position would have been for the purposes of s 28(3) if the misrepresentation as to the alarm system had not been made. In that event the specific risks of malicious damage and damage by burglars would have been excluded, and if the situation were not remedied in the time prescribed, the insurer would have gone off-risk altogether.
 Mr Hack says, however, that the onus extends further: the insurer must show that had it required the installation of an adequate back-to-base alarm system the plaintiffs would not have complied. I do not think that is so. The insurer is not, in my view, obliged to demonstrate what the prospects of a misrepresentation subsequently being made good were. If there were any onus in that respect, I would consider it to lie with the plaintiffs. At any rate, I do not think that where no direct evidence was given on the point by the plaintiffs, I should, without more, draw an inference in their favour. On this point I would respectfully adopt the approach of Handley JA in Commercial Union v Ferrcom Pty Ltd, and refrain from drawing inferences “favourable to a party whose counsel refrained from asking any question on this topic” (in that case, as to what the insured would have done by way of deregistering its crane had the insurer refused to provide cover for it while registered).
 The evidence does not support a finding that the plaintiffs would have met a demand for the installation of a back-to-base alarm system. There were a number of possible responses by them to any demand by the insurer for compliance. They might have complied; they might have done nothing; they might have sought a more limited cover. Their financial position was not strong. They did not as a matter of fact take any steps to install any adequate alarm system and it was only upon the insurer’s providing funds after the kitchen fire that the installation of a new alarm system occurred. Generally they appear to have taken an insouciant approach to the prospect of intruders, as evidenced by the lack of any perceived necessity to activate the alarm when they went out each Sunday evening. It is far from obvious that they could or would have met the expense of installing an alarm system to the insurer’s requirements; and they did not, in the course of evidence, say that they would. Even if the onus on this point is to be regarded as lying with the insurer, the reasonable inference is, in my view, that the insurer’s demand would not have been met.
 The insurer’s liability should, pursuant to s 28(3) of the Insurance Contracts Act, be reduced to nil, since the insurer would not have accepted risk in respect of the type of damage suffered if the plaintiffs’ misrepresentation had not been made.
 However, in the event I am wrong in my construction of s 28 or its application to the facts of this case, I shall go on to consider the remaining issues in the case.
The new alarm system
 Mr Ashby, the technician from Business Solutions who installed the new system, said that it had five or six sensors. It was a back-to-base system, connecting through a telephone line to the offices of Halyon Limited, a security monitoring company in Sydney. With the assistance of the information contained on the invoice for the system, Mr Ashby was able to say that the system incorporated both an internal and an external siren, the latter housed on the exterior of the building. Once triggered, the external alarm would sound for ten minutes, but the internal siren would continue to sound until turned off. Sergeant Wijtenburg, a Mackay police officer who was involved in the later arson investigation, recalled that there was a blue strobe light fitted with the external alarm, although he had not seen or heard the alarm in operation. According to Mr Ashby, a back-up connection through a mobile telephone unit was added in November 2000, when an automatic teller machine was installed.
 The new alarm system was operational from 18 October 2000. Its sensors were located in the bottle shop, in the café at the front of the hotel, at the site of the automatic teller machine which was also to the front of the hotel, adjacent to a door at the rear of the hotel, and in the upstairs office. The alarm was set on a 90 second delay; that is, before beginning to sound, it allowed 90 seconds from the triggering of a sensor to deactivation by means of the sensor pad in the office. The internal siren sounded at a point close to the automatic teller machine. In general, Ms Robertson and Ms McNeill set the alarm when they were ready to retire to bed in the evening, and it was turned off by the cleaner at approximately six am.
 The new alarm was triggered on at least one occasion in early 2001. Ms McNeill described an incident in which she was woken by the alarm. She and Ms Robertson got up and turned it off before going through the premises and finding nothing untoward. She left the hotel by the front door and went to the taxi rank nearby. The alarm did not appear to have caused any unusual activity among the taxi drivers. She enlisted the assistance of one of the taxi drivers she knew to take her around to the back of the premises where the bottle shop was. There was no sign of an intruder there. Ms Robertson described what seemed to be the same incident explaining that she had not initially heard the alarm and had been woken by Ms McNeill rather than it. Under cross-examination Ms Robertson spoke of what seemed to be another incident in which the alarm had gone off in the early hours of the morning, and she and Ms McNeill had gone out through the back of the hotel checking for intruders. They encountered two police officers climbing into the premises over the beer garden roof. One of the two officers was a former part-owner of the hotel and was familiar with the premises, a fact which may account for the unusual means of entrance.
 Mr Rijk from Halyon Limited, the security monitoring company, explained a document called a “run report” which set out entries made by his organisation’s operators in relation to the alarm service at the hotel. It showed that on 8 February 2001, one of the sensors in the back bar at the hotel had been activated. Attempts had been made to contact the proprietors, both by telephoning the premises themselves and by telephoning a mobile telephone. (According to Ms McNeill the number of Ms Robertson’s mobile telephone had been provided to the monitoring company.) They were ultimately successful. The record also showed that police had attended the premises. Mr Rijk thought that that might be an error, but on Ms Robertson’s account it seems it probably was correct. It was, Mr Rijk said, the practice of Halyon Limited, if the proprietors could not be contacted, to despatch a security patrol service; or if a service could not be contacted, to ask the police to send a patrol.
 Varying evidence was given about the effectiveness of the alarm. Mr Ashby said that it emitted 110 decibels of noise at one metre, on what was described as an “interruption” tone; that is working on two different frequencies simultaneously. Ms Robertson said she had slept through it. Ms McNeill said that it seemed to her not be as loud as some of the bands which played at the hotel.
The fire of 18.2.01
 The hotel opened for business on Sundays, usually closing for business at about 6.00 p.m. In early 2001 Ms McNeill and Ms Robertson adopted a practice of going to Ms McNeill’s parents’ house for dinner on Sundays. On their return they would enter the hotel through its back door and spend some time restocking the bars before going upstairs to bed. On Sunday, 18 February 2001 they left the hotel at about 6.30 p.m. Ms Robertson said that they did not set the alarm, partly because they saw no cause for concern that events like the arson which did take place were at all probable. The second reason was one of practicality. Usually when they left the hotel on Sunday evenings, they departed from the rear of the hotel and returned, again, through the back entrance. That created some difficulty in terms of getting to the office to disarm the alarm on return. There were a number of locked doors which would have to be opened. Ms Robertson said that it was possible for her to run through the hotel and upstairs to deactivate the alarm. Ms McNeill said it was not possible to get from the back entry to the office in order to deactivate the alarm, although her belief at the relevant time was that the delay period was 30 seconds. At any rate, they did not wish to enter the hotel from the front in order to deactivate the alarm, because it would still be necessary to return to the car and move it around to the back where it was usually parked; and rather than attempt deactivation of it on entering from the back they left it off altogether.
 At three minutes past ten on the evening of the 18th of February, the Mackay Fire Station received a call, and a fire crew attended the hotel, arriving about four minutes later. Smoke and flames were issuing from the front of the hotel and smoke was billowing from the rear. Ms Robertson received a telephone call at Ms McNeill’s parents’ house, from Mr Coupe to tell her that the hotel was on fire. The time of that call was not in evidence.
 A report by Ms Hitchens, the holder of a degree in applied science with studies in chemistry and forensic science, was tendered by consent. Ms Hitchens had examined the premises. They had been extensively damaged by fire. She noted five 20 litre fuel cans which had been found at various points through the ground floor of the premises. Four of the five cans had blankets or towels near them. Some of those were found to contain volatile fluid residue. It seems probable that they were soaked with an accelerant and lit.
 Ms Robertson said that she had seen the site of the fire some days later, and inspected the safe, which had been opened and the takings in it removed. (The insurer admitted a loss in this respect in an amount of $15,000.) The safe was, Ms Robertson said, an old fashioned heavyweight type, and had been kept in the locked office on the first floor. Ms Robertson held one set of keys to the safe; the other was kept under some files in a cupboard in the office, their existence there known only to Ms Robertson, Ms McNeill, and the office administrator. In the course of the fire, it seemed, the safe had fallen from the first floor to the ground floor.
 The fuel cans must, Ms Robertson said, have been brought from outside the premises, since nothing of that kind was kept on them. If the towels and blankets used in setting the fire were from the hotel, they were likely to have been taken from a locked linen cupboard on the first floor or, in the case of blankets, from beds on the first floor.
 There were two tenants who resided on the upper floor of the hotel. Ms McNeill raised for the first time in cross-examination the possibility that one of them may have been on the premises when she and Ms Robertson left. She said that with the tenants’ permission she had fumigated their rooms on the evening in question, but it was possible that one of them had returned later. That was the first and last time that the possibility of there being anyone else on the premises on the evening in question was aired. It was not otherwise part of the plaintiff’s case that the premises were not in fact left unattended. If any reliance were to be placed on that suggestion one might have expected the calling of one or both of the tenants in question.
The prospective effect of the alarm
 A considerable amount of evidence was directed towards establishing what was likely to have occurred had the alarm been set. I have already mentioned the evidence as to the alarms located inside and outside the premises. There was evidence that there were some businesses open on Sunday night as at February 2001 in the vicinity of the hotel.
 The Oriental Hotel was located in Wood Street. The closest cross street to the south was Gordon Street, and to the north, Victoria Street, about 150 metres from the hotel. Further down Wood Street, about 80 to 90 metres away from the hotel, the Coffee Club was open, as was Sam’s Bar, which was on the first floor above it. Gordie’s, a bar/café around the corner in Victoria Street, and Doors, which was above Gordie’s, were likely to have been open also. Those establishments were between 150 and 200 metres away from the hotel. Main Street, a venue another block away in the same direction would have been open. Mackay City Cinema, which was around the corner heading north from the hotel, about 250 metres away, also was probably open. The cab rank outside the hotel was about 50 metres from the front door. In Gregory Street, to the rear of the hotel, on the corner of Victoria Street, there were an Eagle Boys pizza outlet and a Subway which were likely to have been open.
 Sergeant Wijtenburg, whom I accepted as generally reliable, gave evidence from his recollection of the position of the light attached to the alarm external to the hotel that it might have been seen from 100 to 200 metres away in the street. At certain points, he conceded, palm trees in the street might obstruct the line of sight, and the alarm was positioned just above an awning. The bulb itself might not be visible from further down the street, but he thought that the light transmitted by it, reflecting off surrounding buildings would be. Sergeant Wijtenburg’s evidence as to the effect of the light suffered from the limitation that he had not seen the alarm in operation, and that he was doing his best to recall and describe its likely visibility, without having previously had any real reason to give it much thought. Although he was clearly doing his best to respond to what he was asked, I do not, therefore, afford much weight to his evidence as to the light’s effectiveness.
 The Mackay Police Station was located in Sydney Street, in roughly the same position as the hotel in Wood Street, but a block to the east. Sergeant Wijtenburg said that there were seven police officers on duty on 18 February. Of those, one was a communications room officer, and another was in charge of the watchhouse. If police had become aware of the alarm at the hotel they would have checked the premises for signs of break and enter while endeavouring to contact the owner in order to get in to them. He would not have left with an internal alarm sounding until he was satisfied there was no one inside.
 I permitted very limited evidence to be given by Mrs Emma Cadzow, a security advisor, concerning a study which had found that in 75 percent of incidents where burglaries were committed on residences and an alarm sounded, no goods were in fact stolen. This compared with a figure of 30 percent where residences without an alarm were burgled. Having admitted the evidence, however, I found it of no real value, since Mrs Cadzow was unable as to assist as to the size of the study. Nor, indeed, did she seem to be familiar with the research beyond having seen a reference to it in a text.
S 54 Insurance Contracts Act
 The insurer contended that it was entitled to refuse to pay the plaintiffs’ claims by reason of what it claimed was the plaintiffs’ breach of clause 8(g) of the insurance policy; that is the failure to set the alarm. Section 54 of the Insurance Contracts Act is in the following terms:
“54Insurer may not refuse to pay claims in certain circumstances
(1)Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act.
(2)Subject to the succeeding provisions of this section, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim.
(3)Where the insured proves that no part of the loss that gave rise to the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of that act.
(4)Where the insured proves that some part of the loss that gave rise to the claim was not caused by the act, the insurer may not refuse to pay the claim, so far as it concerns that part of the loss, by reason only of the act.
(a)the act was necessary to protect the safety of a person or to preserve property; or
(b)it was not reasonably possible for the insured or other person not to do the act;
the insurer may not refuse to pay the claim by reason only of the act.
(6)A reference in this section to an act includes a reference to:
(a)an omission; and
(b)an act or omission that has the effect of altering the state or condition of the subject-matter of the contract or of allowing the state or condition of that subject-matter to alter.”
Was there a breach of the contract of insurance?
 Clause 8(g) of the policy required the plaintiffs to take all reasonable care to ensure that the alarm was made operative whenever the premises were not occupied or not attended. The issue for the purposes of that clause was not whether it was reasonable for the plaintiffs to consider activation of the alarm unnecessary, but whether they took reasonable care to ensure the system’s operation.
 I find that the hotel was left unattended on 18 February and that no steps at all were taken to ensure that the alarm was made operative, quite the contrary: a conscious decision was made to leave it inoperative. That was, I find, a breach of cl8(g).
 Clause 16 made the observance of the policy’s condition a condition precedent to liability, so that its effect was, but for the application of s 54, to entitle the insurer to refuse indemnity.
“Causing or contributing to” the loss
 The next issue is whether subsection 54(2) applies so as to entitle the insurer to refuse to pay the claim subject to the succeeding provisions of the section. The question to be asked for the purpose of this subsection is not whether the failure to set the alarm did cause or contribute to the loss by arson, but whether it could be reasonably regarded as being capable of doing so. The inescapable conclusion in this case is that the failure to set the alarm was capable of having contributed to the loss.
 It is likely that the intruder or intruders were on the premises for some time. The setting of the fire was not a random lighting of some flammable item but the organised arrangement of accelerants and materials designed to act as wicks at different parts of the premises. It is reasonable to suppose that the intruders were responsible for the opening of the safe, and that gaining access to it took more than a moment. Firstly, the locked office had to be broken into, and then either the keys found and used, or safe-breaking expertise of an unknown kind applied. It seems probable that had the alarm been set the intruders would have triggered it, either in gaining entry (if they did so from the rear of the premises) or in carrying out these activities.
 It was suggested by Mr Hack that entry might have been gained on the upper floor of the premises, thus avoiding any alarm sensors until the office was entered. There was, however, no suggestion of how an intruder might reach the upper floor, or where access might thus have been gained to the interior of the hotel. There remained also the difficulty that access to the office for the purpose of reaching the safe was likely to activate a sensor. In any event, the alarm was extremely likely to have been triggered when the intruders set about distributing the fuel cans and wicks on the lower floor.
 It would have required, in my view, an extraordinary degree of imperturbability for the intruders to persist in their relatively extensive activities with an alarm blaring. As a matter of common sense I consider it more likely than not that had the siren started to sound the offenders would have desisted. Instead, the failure to set the alarm gave them an uninterrupted opportunity to carry out all the steps preliminary to the setting of the fire.
 There also seems to me a reasonable, though not as strong prospect, that if the alarm had been triggered the police would have arrived on the scene in sufficient time to prevent the firing of the premises. It is likely that police would have been alerted to the activation of the alarm by the security service, Halyon; by Ms Robertson on being contacted by the service on her mobile phone; or by someone in the vicinity of the hotel. As to the last, the existence of the taxi rank and the number of venues operating in the locality make it likely that there would have been passers-by. The question is whether a patrol would have been able to arrive before the fire was actually lit; and that, no doubt, would have depended on the availability of officers and the promptness with which the message was transmitted. It was, however, at least possible that police intervention would have prevented the fire.
 On the whole I conclude that the failure to set the alarm can reasonably be regarded as being capable of causing or contributing to the loss in respect of which the cover was provided. The plaintiffs have not established that no part of the loss was caused by that failure, and the insurer is therefore entitled to refuse to pay their claim.
Quantum issues – the disputed claims
 Notwithstanding my conclusion that the insurer is not liable to meet the plaintiffs’ claim, it is appropriate that I make findings as to those items of claim which were in dispute between the parties on the pleadings. At the commencement of the trial I was informed that agreement had been reached in respect of some of those items: the cost of preparation of a lost income claim was admitted in the amount of $10,000; a claim for the money in the safe was admitted at $15,000; money in poker machines at $1,840 and removal of debris at $20,000 were agreed. The quantum of another claim, for destruction of illuminated signs, was admitted at $5,000; and it was established during the course of the trial that title in the signs had passed to the plaintiffs. What remained in issue were the plaintiffs’ claims in respect of contents, stock and business interruption.
 The plaintiffs claimed indemnity in respect of the destruction of contents of the hotel to a value of $494,252. Schedules were tendered listing the contents, together with a report from Mr Jeffrey Dodds , a registered valuer, setting out values for each item, which, he said, represented their market values. The first schedule was a list of contents acquired in the purchase of the business and consisted of the normal items of furnishings, linen, kitchen utensils and so on, with which one would expect a hotel to be equipped. Mr Dodds valued these in total at $119,100, but it was conceded that items worth $20,000 had been incorrectly included, and the claim was adjusted accordingly. The second schedule contained leased items purchased with the business and consisted of one “amusement device” (which I take to be akin to a gaming machine), three gaming machines, some computer equipment and a cash register, a total value of $48,000 being attributed to those items.
 The third schedule showed plant and equipment said to have been acquired by the plaintiffs while trading. It included items such as linen, furniture, office equipment, cutlery, glasses, kitchenware, cleaning equipment, music equipment, tools and, in particular, 11 gaming machines collectively ascribed a value of $138,600. The total claim on this schedule was $298,662. A fourth schedule was titled “Additional Plant and Equipment Used in Business”. It set out a miscellany of items, including a number of pieces of furniture and sporting memorabilia which were identified as being privately owned by Ms Robertson or Ms McNeill. The same items were listed in Annexure D to Mr Dodds report as “personal chattels of the lessees”. They were, Ms Robertson said, chattels that she and Ms McNeill had brought with them to the hotel. The value Mr Dodds attributed to the items on this schedule was $48,490.
 Ms Robertson identified the schedules as showing the property which was in the premises when acquired, what had been acquired for the purposes of the hotel and what else had been brought into the premises. She did not in so many words identify items owned by the partnership, but she did indicate that Schedule D set out those items brought by Ms McNeill and her when they moved into the hotel, with the possible exception of some Olympic memorabilia. I am prepared to infer from the distinction implicit in that evidence that the items shown on the other schedules were acquired as partnership property.
 Plainly enough, Mr Dodds had to undertake his valuing in something of a vacuum, since none of the items any longer existed. He was cross-examined about his valuation of the gaming machines. According to his report, the value ($11,000 per machine) he had attributed to the four gaming machines in Schedule B was the residual value under the leases, as advised to him by the plaintiffs. He explained that he considered the matter since, and concluded that the figure was appropriate. He had assumed, however, that these machines had been leased in recent years, and were modern note accepting machines.
 In respect of the eleven machines on Schedule C, Mr Dodds had based his valuation on what he was told was the cost of acquisition, and had allowed for depreciation at 15 percent, on the assumption that all of the items had been acquired during the plaintiffs’ operation of the hotel. Again, he had taken the machines to be modern note acceptors, as opposed to coin-operated machines which would have “very little nominal value”. A note accepting machine three years old might sell for $5,000 to $6,000 at auction, but in situ was likely to be worth more.
 The evidence as to the gaming machines’ origins shows, however, that ten of them were acquired from the previous proprietors when the business was bought, either by outright purchase or by assumption of lease obligations. (The lease entered by the hotel’s previous proprietors in respect of the four machines on Schedule B had commenced in November 1999.) Ms Robertson said that those machines were some years old but that another five machines were acquired in October 2000. The new machines had note accepters. Some number of the older machines (she was not specific as to how many) were coin-operated only. The residual values advised to Mr Dodd had, she said, been obtained from the lessor companies. It was thus purest hearsay; and, as Mr Fraser QC for the insurer pointed out, it was difficult to reconcile the notion of a $14,000 residual for each machine with the total residual figure of $3,294.47 shown on the lease document for the four machines the leases of which were taken over. It seems clear that Mr Dodds’ valuation proceeded on incorrect assumptions as to the age and nature of the machines.
 The evidence is thus unsatisfactory, because it is not known how many of the machines were coin-operated and how many were note accepters. It is clear that the five acquired during the currency of the plaintiffs’ operation of the business were note accepter, and I think it is reasonable to assume that they were new; so that a value of $12,600 each may properly be attributed to them, giving a total of $63,000. Again, it seems probable that the machines under lease were new in November 1999 when the lease was entered, and that they were, therefore, probably note accepters. On the basis that they were not of as recent origin as Mr Dodds supposed, I would attribute a figure of $8,000 to each (somewhat higher than the $6,000 that Mr Dodds estimated they might receive at auction).
 On the basis that the remaining six machines were of unknown age but were likely to have been owned outright by the previous proprietors simply because any leases had been paid out, I would assume they were older coin-operated machines of the “very little nominal value” suggested by Mr Dodds and would attribute to them a value of only $600. The result is that the figure to be attributed to the four machines on Schedule B should be reduced to $32,000 while that on Schedule C should be reduced to $63,600.
Personally owned items
 Mr Fraser also argued that Ms McNeill and Ms Robertson had no entitlement to indemnity in respect of items personally owned by them, as opposed to by the partnership. He pointed to the definition of “contents” in s 1(1) of the policy:
“Contents means contents of the Buildings which are used in the Business and owned by You or for which You are legally responsible, including but not limited to machinery, plant, fixtures, fitting and tools of trade, customers goods, personal effects of directors, officers and employees limited to $1,000 for any one director, officer or employee …”.
There was nothing, he said, to show that Ms McNeill and Ms Robertson were employees; and the expression “You” was defined in the policy as the “persons named in the schedule as the insured”. The schedule, in turn, described the insured as “T.L. McNeill, K.M. Robertson and A.J. Coupe t/as The Front Row & Oriental Hotel Mackay”. Thus, he submitted, it was clear that only partnership property was covered by the policy.
 Mr Hack contended that the issue of ownership should have been raised in the defendant’s pleadings so that it could have been dealt with by evidence from the plaintiffs’ accountant “as to the accounting entries necessary to take account that individual partners have brought property into the partnership”. In any event if the partnership were not the owner of particular chattels, he submitted, it was “legally responsible” for them as bailee to the owner.
 I do not think that these submissions are well-founded. The onus lay on the plaintiffs to establish their entitlement to indemnity under the policy in respect of the items in question, there being no admission on the point by the defendant. The further amended statement of claim did not particularise the contents claim, and it is not surprising that no more than a general non-admission was pleaded in response.
 The mere fact that items were used by the partnership does not mean that they became partnership property, or that the partnership assumed responsibility for them in any capacity. There was simply no evidence on the point. However, Mr Fraser was prepared to accept that there was evidence of acquisition of the Olympic sporting memorabilia by the partnership to a value of $13,880. That was not obvious to me on the evidence, but on the basis of that concession I would accept an entitlement to indemnity in this respect of $13,880.
 The plaintiffs claimed indemnity in an amount of $75,711.56 for stock lost. Mr Shepherd, the plaintiffs’ accountant, had prepared some financial statements which were essentially an extrapolation from the relatively limited information available. He worked on an opening stock figure of $51,984.46, taken from the stock-take of alcohol performed at the time of purchase of the hotel. (A statement for stamp duty purposes had valued stock in trade as purchased with the business at $64,984.46, but Ms McNeill said that money on hand, for example in the form of floats, comprised $13,000 of that figure, alcohol constituting the balance.)
 A stock-take performed in October 2000 had established stock on hand at that time of $69,711.56. Ms McNeill asserted that the value of the stock held in the hotel as at the date of the fire would be equal to, if not higher, than that at the time of the October 2000 stock-take. In addition to the alcohol, dry stock in the kitchen area and cold room stock – meats, dairy, fish and poultry – was worth between $6,000 and $8,000. Accordingly, a further $6,000, to allow for dry stock and cold room stock, was added to the October stock-take figure to arrive at the claimed amount.
 Mr Coupe was asked to offer a comparison between the stock of alcohol at the time of the stock take in October 2000 and the stock at the time of the fire in February 2001, and expressed a view that levels were similar. However, it was apparent from his evidence that he could speak only from figures he had seem in the course of trial preparation, having had no active involvement in the hotel business since November 2000. I do not, therefore, think that his evidence can assist on the point.
 The hotel bottle shop was closed in November 2000, and there were, around that time, two sales of bottle shop product realising, Ms McNeill said, only a couple of thousand dollars. But, according to Ms McNeill, stocks of alcohol were not reduced after the bottle shop closure, although the types of items stocked changed from cheaper wine and beer to more wines, spirits and imported beers. A good deal of the bottle shop stock had been moved into the hotel for sale there.
 Mr Shepherd used bank records to reconstruct the income and outgoings of the business from its commencement to the time of the fire in February 2001. Having calculated a total income figure of $799,426 and a cost of stock of $480,688, he arrived at a gross income figure of $318,738 and from that calculated a gross profit margin of 39.9 per cent. Projecting those figures for 365 days he arrived at a gross income of $537,800. The gross profit margin could further be broken down into that attributable to the poker machine income (32.3per cent), as opposed to that from the general hotel business of accommodation and food and alcohol sales (41.45 per cent) There was some circularity in Mr Shepherd’s methodology: he calculated the gross profit margins relying, inter alia, on the contended-for closing stock figure of $75,711.56 in order to calculate the cost of goods sold, but also pointed to the gross profit margins to support the closing stock figure.
 For the defence, a schedule was prepared showing the value of the liquor supplied to the hotel. Those figures, based on invoices and statements, were accepted by Ms McNeill as correct. They showed that between July and October, alcohol to the value of $269,866.43 had been supplied to the hotel. Between November and February, the value of the alcohol supplied was $80,362.52. Ms McNeill was unable to give a figure for food purchases between the beginning of November and the time of the fire.
 Mr Makin, a loss adjuster called for the defence, had examined the plaintiffs’ claim and prepared some calculations of his own. He used the opening stock figure of $51,984.46 as advanced by the plaintiffs, and subtracted from it $269,866.43, being the total figure for liquor purchased between July and October, based on the invoices accepted by Ms McNeill as correct. (He did not however make the necessary adjustment for GST on the latter amount.) He adopted an amount for revenue to 31 October 2000 of $338,777.29, taken from Mr Shepherd’s break down of monthly hotel revenue. Applying Mr Shepherd’s gross profit margin of 39.9 percent to that figure to determine the cost of sales, he arrived at a closing stock figure as at 31 October of $118,245.74. Working on a further figure for purchases between the end of October and 18 February 2001 of $80,362.52, (similarly from the receipts accepted by Ms McNeill as correct, but again not net of GST), and a sales figure of $321,878.10, again from the revenue figures set out by Mr Shepherd, he once more applied Mr Shepherd’s gross profit margin of 39.9 percent to arrive at the cost of sales and, ultimately, at a closing stock figure of $5,159.52 as at 18 February 2001.
 That approach was, as Mr Shepherd pointed out, incorrect in that the gross margin on 39.9 percent applied to poker machine revenue as well as general hotel sales. The gross margin for the latter, as calculated by Mr Shepherd, was 41.25 percent. Ms McNeill also denounced as absurd the proposition that the closing stock of the hotel was $5,000. There were 40 kegs of beer in the hotel at $150 per keg, thus alone reflecting a cost of $6,000. In addition there were multiple wines and spirits. Mr Makin’s calculation thus did not find favour either on an arithmetical or a practical level. Mr Hack also pointed out that if the October stock-take figure of $69,711.56 were correct, on Mr Makin’s calculations for the period between the end of October and the fire, a negative closing stock would be reached as at 18 February 2001.
 However, what that result demonstrates, in my view, is that the problem lies not with Mr Makin’s method, but with the figures relied on. Given that the sales figures used by Mr Makin were taken from Mr Shepherd’s analysis of the partnership records, and that the figure for alcohol purchases were derived from suppliers information and accepted by Ms McNeill as correct, there seems little room for argument with those aspects of the calculation. Mr Shepherd’s evidence was that the stock-take figure of October 2000 was contemporaneously supplied to his firm, and it seems probable that it is correct. The conclusion, then is that the error lies in the gross profit margin of 41.25 percent advanced by Mr Shepherd, with that error then being reflected in an inaccurately high allowance for closing stock.
 Mr Makin’s omissions to allow for GST and to adopt the specific gross margin assigned by Mr Shepherd to hotel revenue other than from poker machines do not significantly affect the result. The point is best demonstrated by considering the period between the end of October 2001 and the February 2001 fire. If one accepts the October stock-take figure, and adds purchases of $73,056.83 ($80,362.52 less GST), to arrive at the same closing figure for alcohol stock as the opening stock figure ($69,711.56), would require the application to the revenue figure for the same period ($321,878.10) of an extraordinary profit margin: 77.3 percent.
 Clearly the set of figures advanced by the plaintiffs through Mr Shepherd, while superficially attractive, is not sustainable. (It is to be noted that Mr Shepherd did not have the benefit of the alcohol purchase figures.) That leaves, then, the question of whether Ms McNeill’s evidence as to the level of stock having remained constant as between mid-October and the date of the fire should be accepted notwithstanding these difficulties. Because of the doubt I have already expressed as to her reliability, I am not prepared to accept her bald assertion to that effect in the absence of any supporting record. That leaves me in a position of complete uncertainty. Mr Fraser suggested a figure of $25,000 should be adopted on the strength of Ms McNeill’s evidence as to what was required to open the hotel in the way keg beer, wines and spirits. I adopt that figure.
 Mr Shepherd arrived at a projected gross income figure for the period of 12 months after the fire of $537,800.34, and the plaintiffs claimed indemnity in that amount for loss due to business interruption. If in fact the figure for closing stock were overstated by $50,000, the gross income figure would be similarly overstated. But the real issue in this regard was the proper construction of those provisions of the policy providing indemnity in respect of income loss. Section 2 of the policy deals with business interruption claims. Part 1 contains the following definitions of relevance:
“Annual Income means the Gross Income during the twelve (12) months immediately before the date of the damage to which adjustment shall be made to reflect the trend in the Business and any other variables in order to arrive at the same result that would have been attained had the damage not occurred.
Gross Income means the money paid or payable to you for goods sold and/or services rendered or for rental income received or payable in the course of Your business less the purchase cost of stock.
Indemnity Period means the period beginning with the occurrence of the damage and ending not later than the number of months thereafter stated in the Schedule, during which the results of Your Business are affected as a result of the damage.
(The schedule stated an indemnity period of twelve months.)
Standard Income means the Gross Income during the period corresponding with the Indemnity Period in the twelve (12) months immediately before the date of damage, to which adjustments shall be made to reflect the trend in the Business and any other variables in order to arrive at the same result that would have been attained had the damage not occurred.”
 Part 2 details the cover provided:
“2.1We will pay to You (up to the Business Interruption Sums Insured stated in the Schedule) the amount of loss resulting from interference or interruption to the Business caused by loss or damage to property insured under Section 1 or Section 3 for which a claim is accepted under the Policy or any other policy insuring the same events and for which liability is admitted unless liability is not admitted solely due to the operation of a provision in any such Section excluding liability for loss below a specified amount, or caused by an explosion of a boiler or economiser on the premises provided that the loss or damage occurs during the Period of Insurance.
2.1.1The amount payable as indemnity will be:
(i)Gross Income the amount by which Your Gross Income earned during the Indemnity Period shall in consequence of the damage fall short of the Standard Income.
(ii)the additional expenditure necessarily and reasonably incurred with Our approval for the sole purpose of avoiding or diminishing the reduction in the Gross Income of the Business caused by the loss or damage. The amount expended shall not exceed the reduction in Gross Income thereby avoided (less expenses saved as a result of the damage).”
 Mr Fraser argued that these provisions should be construed as requiring indemnity only for actual loss; so that if the plaintiff’s outgoings in the course of operating the business over the ensuing 12 months would have exceeded gross income, there was no loss. Mr Makin’s evidence was that, extrapolating the partnership’s revenue in the period of operation up to the fire (a gross income of $345,317.21) and its expenses for the corresponding period ($473,673.73), it was clear that the partnership would continue to operate with a disproportionately high ratio of expense to income. He projected a loss of income, net of expenses, of $6,225 over the ensuing year.
 Plainly the plaintiffs would have been in no position to argue a claim for loss of gross income had the phrase in parentheses, “(less expenses saved as a result of the damage)” appeared distinct from sub-paragraph 2.1.1 (i), and as qualifying the whole of the clause. Mr Fraser referred to the policy under consideration in Tropicus Orchards v Territory Insurance Office as containing similar wording, apart from the crucial distinction that the reference to deduction of expenses was plainly expressed as applicable to both the shortfall between gross income and standard income, and approved additional expenditure.
 Taking cl 2.1.1 in isolation, an ordinary grammatical reading clearly confines the application of the phrase as to expenses saved to the second sub-paragraph. However, the clause must be read in context. Clause 2.1 states the liability accepted: that is, “the amount of loss resulting from interference or interruption to the business causes by loss or damage to property insured …”.. It is expressed in terms of indemnity for loss, and is plainly intended as such. The opening phrase in cl 2.1.1 which is the formula for calculation of the amount payable equally refers to indemnity.
 In British Traders’ Insurance Co. Ltd v Monson the High Court considered the effect in a policy of fire insurance of words of obligation which appeared on their face to entitle an insured to recover more than the value of his insurable interest:
“Bu the all-important fact is that they are words in a document possessing unmistakably and on its face a character which flatly contradicts the notion that the obligation of the company is to pay more than the amount of the respondents’ loss. It is issued by an insurance company. It is headed “Fire Insurance Policy”. All its provisions, even the very words that are relied upon for their literal meaning, are characteristic of fire insurance policies. It is far too late to doubt that by the common understanding of business men and lawyers alike the nature of such a policy controls its obligation implying conclusively that its statement of the amount which the insurer promises to pay merely fixes the maximum amount which in any event he may have to pay, and having as its sole purpose, and therefore imposing as its only obligation, the indemnification of the insured, up to the amount of the insurance, against loss from the accepted risk. Brett L.J. in Castallain v Preston (1) said that the contract “means” that the assured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified.”
That “common understanding” was expressed by Sheller JA in NRMA Insurance Limited v Collier & Anor to remain applicable to modern forms of policy.
 It would be absurd and uncommercial to read the formula in cl 2.1.1 as indicating an intention that the amount payable be determined by reference only to income, when there is no rational connection between income and loss without the taking into account of expenses. To construe the clause in such a way would mean that a loss-making concern could enjoy the windfall of the equivalent of a year’s gross income. The only reasonable construction of this part of the policy, taken in context, requires the phrase “(less expenses saved as a result of the damage)” to be read as applicable to cl 2.1.1 as a whole.
 Accordingly, I conclude that Mr Makin’s calculations reflect the correct approach, and that the plaintiffs’ claim under this head should be limited to $6,225.
Summary of claims
 The amounts payable under the policy, were the insurer liable, are, on my reasoning and findings, as follows:
Removal of debris
Money in safe
Money in poker machines
 However, for the reasons I have given, I consider that the defendant is entitled to refuse to pay the plaintiffs’ claim. I give judgment for the defendant.
- Published Case Name:
McNeill & Ors t/a The Front Row & Anor v O'Kane for himself and on behalf of Ors
- Shortened Case Name:
The Front Row v O'Kane
 QSC 144
27 May 2002
- White Star Case:
No Litigation History