In Globe Church Incorporated v Allianz Australia Insurance Ltd & Anr  NSWCA 27 the majority of the New South Wales Court of Appeal determined that a claim arising from an insurers’ refusal to indemnify the insured in respect of property damage accrued when the damage was sustained and not upon declinature. In doing so, it followed both other Australian intermediate appellate authorities and the established, if not greatly admired, English position. However, the dissenting minority mounted a powerful attack on the ‘legal fiction’ underpinning this approach.
For the year ending on 31 March 2008 two insurers covered the claimant under an Industrial Special Risks Insurance Policy, splitting the risk between them 60% /40% (“the 2008 Policy”). The claimant’s premises suffered (what was claimed to be insured) water damage. This damage was first sustained during the 2008 Policy period. The claimant also alleged that, as a result of this damage it had incurred additional (allegedly insured) costs, suffered business interruption losses and incurred professional fees for the preparation of its claim against insurers.
Slow going from 2008 to 2016
A claim in respect of this damage was made under the 2008 Policy on 29 September 2009. Liability was denied by one insurer on 5 April 2011 and by the other on 30 September 2011. The claimant did not, however, commence proceedings until on 4 November 2016. The insurer defendants both maintained that the claims were barred pursuant to the 6-year simple contract limitation period of s.14(1) of the Limitation Act 1969 (NSW), so the question was whether the causes of action had accrued earlier than November 2010. Insurers said they accrued when the heads of damage were suffered; the claimant said its causes for action for damages for breach of contract arose when the respective insurers denied indemnity or alternatively on the lapse of a reasonable time to perform the contractual promise of indemnity, and so no cause of action arose before 5 April 2011. It was accepted by insurers that if they were obliged to make payment within a reasonable time of a claim being made then the claims against them would not be statute barred.
The two policies were actually separate but relevantly identical.
Clause 2 of Section 1 of the 2008 Policy provided that:
“…Provided the Insured has paid or agreed to pay the premium, the Insurer will indemnify the Insured against Damage occurring to Property Insured during the Period of Insurance and shall provide the additional cover referred to in Clause 3 but subject to:
…2.3 the amount of the indemnity being calculated in accordance with the Basis of Settlement Clause 4;…and
2.7 the Conditions set out in Clause…14.”
Clause 3 obliged insurers also to pay for professional and other fees necessarily and reasonably incurred if “Damage to Property Insured occurs in circumstances giving rise to Indemnity under Section 1 of this Policy”
Clause 4, the “Basis of Settlement”
- Defined “Reinstatement Value” as “the cost necessary to replace, repair or rebuild the Property Insured to a condition substantially the same as but not better or more extensive than its condition when new.”
- Specified that Reinstatement Value was the Basis of Settlement on buildings and contained various reinstatement provisions of a familiar kind including:
“…4.4.1 The replacement, repair or rebuilding may be carried out upon any other site(s) and in any manner suitable to the requirements of the Insured…
4.4.2 Such work must be commenced and carried out with reasonable despatch, failing which the Insurer shall not be liable to make any payment greater than the INDEMNITY VALUE…”
Clause 14 provided that on the discovery of any damage giving rise to a claim, the Insured should forthwith give notice to the Insurer and as soon as reasonably practicable deliver a statement of claim with details of the property damaged, its value and the amount of any claim.
As to consequential loss cover, clause 9 of Section 3 of the 2008 Policy provided that insurers would indemnify the insured in accordance with the Basis of Settlement clause of that section, against loss resulting from the interruption of or interference with the business. The applicable basis of settlement clause, clause 10, obliged insurers to indemnify the insured in respect of such reasonable professional fees and other reasonable expenses as were necessarily incurred by the Insured.
THE MAJORITY’S DECISION – Accrual of cause of action on loss
The majority (Bathurst CJ, Beazley P and Ward JA) held that the cause of action in respect of property damage accrued at the time of the damage, no later than 31 March 2008, and that the claim in relation to additional costs, business interruption and professional fees accrued no later than the end of September 2009. Therefore the claims were barred.
The importance of indemnity
In construing the 2008 Policy, the majority started by observing that it was plainly a policy of indemnity insurance. Absent a provision that made lodgement of a claim a condition precedent to liability, the concept of a promise to indemnify (to make good the loss or to hold harmless against loss) in the context of a property damage insurance policy is such that the promise is enlivened when the property damage is suffered. Unless it is necessary for there to be a claim made on the insurer to give rise to the liability, it is at the point of property damage that the insured has not been held harmless against the loss and (leaving aside any defences that might be raised on such a claim) would be entitled to sue to enforce the promise to indemnify.
It might seem “unfair” (to either party) for the insurer to be in breach of contract at a time when it may have no notice of the occurrence of the insured event (especially for any period during which a reporting obligation by the insured has not arisen). Similarly, the analysis and outcome might seem a “surprising” result or commercially inconceivable. However, it was open to the parties to a contract of insurance to negotiate for clauses to protect against concerns of that kind.
The critical obligation was not that of payment
In reaching this conclusion, the majority rejected the claimant’s argument that the key obligation was one to pay money within a reasonable time of demand. There was no express provision to that effect and in their view business efficacy did not require the imposition of such a term – the relevant promise was a promise to indemnify (not, in terms, to pay a fixed sum of money; though the means of indemnification is by payment of money either by reinstatement or payment of the indemnity value). Indeed, in their view one only needed to imply a term requiring a reasonable time for performance of the promise to indemnify if the promise to indemnify was assumed to be a promise to pay money (with no time stipulated therefor), since otherwise as soon as the damage arises there is something against which the insured is to be held harmless.
The claims provisions at clause 14 and the two basis of settlement clauses did not, it was held, compel a different conclusion.
The majority acknowledged the established principle that insurance contracts should be given a businesslike interpretation. However, in their view the fact that liability might arise without the insurer becoming aware of it did not compel a contrary conclusion. There were also difficulties with all the alternative times on which it had been suggested in argument that the cause of action might otherwise arise, i.e. at the time of notification of damage or when the insured first incurred expense in reinstating the property or alternatively, when it elected to receive the indemnity value.
The claimant’s argument that its case was supported by the previous NSW Court of Appeal decision of CGU v Watson  NSWCA 301 was rejected. Moreover, in the view of the majority other intermediate appellate authority from Western Australia (Cigna Insurance Asia Pacific Ltd v Packer  WASCA 415) and Tasmania (in Associated Forest Holdings Pty Ltd v Gordian Runoff Ltd  TASFC 6), supported insurers’ position, was not plainly wrong and so should be followed. It was important that there be consistency in the construction of indemnity policies of insurance throughout Australia: a departure from that settled position was for the High Court of Australia.
In the course of their judgment, the majority surveyed the relevant English authorities culminating in Sprung v Real Insurance (UK) Ltd  1 Lloyd’s IR 111. In doing so they noted academic criticism of the position that had been reach in England as ‘shaky’ and based on a ‘bizarre fiction’. Nevertheless, they took the view that while there may be incongruity in the proposition that the cause of action arose on the damage occurring on the basis that the obligation of the insurer is to hold the insured harmless from liability rather than indemnifying the insured in meeting that liability, it was now so firmly accepted that it was rarely recognised as a fiction, even by the Supreme Court in in Versloot Dredging BV v HDI Gerling Industrie Versicherung AG  AC 1 at 18, per Lord Sumption.
THE MINORITY’S DISSENT – Accrual of cause of action on failure to pay
Meagher JA and Leeming JA considered that the claims were not statute barred. They strongly criticised what they saw as the illogicality of the English position and felt that the majority’s conclusion did not give effect to the language of the insuring clause, nor take account of either the nature of the policy as one insuring against property damage or the sensible commercial expectations of the parties to such a contract.
The critical obligation was that of payment
A central part of their decisions was their interpretation of the proper meaning of a promise to ‘indemnify’ an insured, having regard both to commercial common sense and the historic treatment of such a promise by the common law and equity. The express promise by insurers to indemnify the insured obliged them to pay a sum of money ascertained in accordance with the Basis of Settlement provisions. They rejected the notion of an obligation to, in some unstated other way, hold the insured harmless against an event which had in fact occurred and caused harm. The undertaking was to make good the insured loss by payment, that being a well-accepted sense in which “indemnify” is used, and the only sense in which such a promise to indemnify could in practice be performed by the insurer. The real issue in their view was when the obligation to make payment was to be performed. In that regard the ordinary prima-facie rule was that when the contract provides for the doing of an act and there is no express provision as to time the law implies that it must be done within a reasonable time (York Air Conditioning and Refrigeration (A/sia) Pty Ltd v The Commonwealth (1949) 80 CLR 11 at 62 (Dixon J)). What is a reasonable time is a question of fact to be determined in the light of all of the circumstances, whereas the existence of the term is to be determined at the time of formation of the contract.
Reviewing the historic approach to contracts of indemnity, both Meagher JA and Leeming JA stated that at common law, a contract of indemnity was understood to involve a promise which was broken only when the beneficiary had been damnified by actually paying: Collinge v Heywood (1839) 9 A & E 633; 112 ER 1352; Zaccardi v Caunt  NSWCA 202 at . Only at that point did an entitlement to sue at law arise. Equity and statute had intervened so the Court could compel the indemnifier to pay the third party directly, or to pay the beneficiary so as to enable the third party to be paid or order damages in lieu of specific performance. One way of describing the net effect of this development was that the beneficiary was “held harmless”. But it did not follow that the contract was breached immediately upon the occurrence which caused damage to the insured. Nor did it follow that a court was ordering contractual damages that would create a conceptual difficulty in awarding damages for late payment.
The minority also took the view that:
- In CIC Insurance v Bankstown Football Club Ltd  HCA 2 the High Court of Australia had held that substantially the same contractual language as the 2008 Policy obliged insurers to pay a sum of money computed in accordance with the provisions of the policy, and to do so within a reasonable time of receipt of the insured’s claim;
- Neither of the intermediate appellate court decisions followed by the majority addressed the construction of an indemnity in a policy of property insurance.
- Properly analysed, the English authorities, and in particular the decision in Callaghan v Dominion Insurance  2 Lloyd’s Rep 541, also did not support insurers. They showed that it was necessary to have regard to the terms of the policy and that it was possible for there to be a primary obligation on insurers to hold an insured harmless and a secondary, distinctly actionable, obligation to put the insured back into the position he was before the loss, either by paying a sum of money or reinstatement.
When an issue of this kind sees 101 authorities cited and a Court dividing 3-2, lawyers may wonder how well the draftsman and the law are serving both insurers and insureds, but when the legal rule is clear, so is the moral: start proceedings within 6 years of the damage.
The decision of the majority will be unsurprising to English insurance lawyers, given the apparently unremarkable terms of the 2008 Policy and the extensive authority on when claims based on insurance contracts accrue. However, the powerful criticism of the minority is impressive and makes more business of sense, provided insureds are compelled to give notice promptly. We consider that the English authorities do support the position taken by insurers, but if the High Court of Australia is asked to take the point the insurance world will be watching.