A pandemic pivot to hand sanitiser has cost a pharmaceutical maker its $26.8 million fire claim.
The story starts in early 2020. Hand sanitiser was scarce and valuable, so Sphere Healthcare, which ran a factory in Moorebank, Sydney, decided to make it. The catch was ethanol. Local suppliers were "on allocation" and could not ship in bulk, so the business ordered 60,000 litres from China.
When 304 drums arrived, they were not stored in the factory's dangerous goods area. They were double-stacked in an "old dispatch area" beside the factory, next to pallets of cardboard. On July 9, 2020, a fire began near the cardboard. The court found the nearby ethanol limited firefighters' ability to tackle it; crews turned their hoses "onto exploding ethanol drums to attempt to slow a running ethanol fire in the drains." The building was lost.
Sphere held an Industrial Special Risks policy with Allianz, capped at $26.8 million. After the fire, the insurer learned of the hand-sanitiser plan and the poorly stored ethanol, and refused the claim. Sphere and its landlord, Yes Family, sued for a declaration that they were covered. Justice Rees dismissed the case with costs.
For insurers, the most useful findings are about timing and broker authority.
The court held that the duty of disclosure did not end when cover was bound on March 20, 2020. The insured soon switched brokers, and Allianz issued a fresh policy schedule and wording. The new wording differed so much - a different named insured, different sub-limits, and, on the parties' own tabulation, an endorsement present in one version but not the other on 57 occasions - that it replaced the original policy rather than merely amending it. When that happens, the court found, the duty of disclosure covers everything material to the whole contract. Justice Rees held it ran until March 31, 2020.
That window worked against the insured. By late March, the business had settled its formula, tested its equipment, modified its liquid manufacturing room "to explosion proof level," and was negotiating with a supplier in China - and Allianz was not told.
Brokers will want to note the cancellation point. When the insured changed brokers, the former broker emailed Allianz to "please cancel the policy." But the court found the broker gave that instruction before the client had authorised it, and that the insured never gave a clear instruction to cancel. A broker's usual role is to arrange cover, not to cancel a policy already in force. Lacking authority, the cancellation had no effect, and the original policy "remained on foot." Allianz did not behave as though the policy were cancelled - it pressed both brokers to work out who was actually appointed.
The insured's fallback also failed. An endorsement said the alteration-of-risk rule would not apply if the change was "neither known to nor made by an officer of the Insured who is responsible for Insurance." The insured pointed to its nominated insurance officer, who did not know about the ethanol. The court read "an officer" more broadly, finding two senior site managers also fit the description - and that both knew about and made the changes. The carve-out did not apply, so Allianz was not liable for loss caused by the alteration.
Nor had Allianz waived disclosure by running its own surveys over the years. Waiver only arises after a fair presentation of the risk, and the court found there was not one. When the underwriter asked the broker to confirm there was "no change in business activity," the broker confirmed there was none - while, the court found, the new owners had in fact decided to make hand sanitiser and bring in far more ethanol than the site could safely store.
On the claim itself, the court accepted the insurer's evidence that disclosure would have triggered escalation, a risk inspection, and either a refusal or cancellation, because the planned ethanol volume far outstripped safe storage. Justice Rees found that whatever industry code applied, it was the volume of flammable liquid exceeding safe storage that made the risk unacceptable, and that Allianz would not have taken it on. The insurer could reduce its liability to nil under section 28(3) of the Insurance Contracts Act 1984 (Cth).
The lesson for claims teams is direct: what an insured does after binding can still count, broker authority has clear limits, and a brief confirmation of "no change in business activity" is not a fair presentation of the risk.
