The case of Commonwealth of Australia v Vero Insurance Limited1 (Antarctica case) concerns insurance cover for the remediation costs (and other related costs) of damage to land caused by a fuel oil spill at Casey Base Station in the Australian Antarctic Territory on or about 20 July 1999.
Comcover, a self-managed insurance fund, provides indemnity to member organisations which are Australian government agencies, including the Australian Antarctic Division (the AAD). Comcover issued the AAD with a Schedule of Cover for the period 1 July 1999 to 20 June 2000 including cover for Fund Member’s Property.
Vero Insurance Ltd (Vero) issued an Ultimate Net Loss Insurance Policy (the UNL Policy) for the period 1 July 1999 to 30 June 2000. The UNL Policy provided cover to “The Commonwealth of Australia through its self managed fund known as Comcover” for “The Ultimate Net Loss of the Commonwealth of Australia which arises as a result of the risks underwritten by its self managed fund known as Comcover”.
Although the AAD knew of the oil spill in July 1999, Comcover was not notified of it until August 2004. On 23 December 2004, Comcover advised the AAD that it declined cover because the “land in question was not the property of AAD at the time of the loss”. However, following representations on behalf of the AAD by the Australian Government Solicitor, Comcover reconsidered its position and on 21 June 2005 advised the AAD that it accepted the oil spill as an insured event.
Vero had declined Comcover’s claim upon it prior to June 2005 and continued to do so on the basis that the applicable policy wording did not indemnify AAD for loss, destruction or damage to real property unless the real property was owned by the AAD. Vero stated that as the AAD does not own Antarctica (or any part of it), the insuring clause is not activated and Comcover was not obliged to accept the claim by the AAD and therefore Vero was not required to indemnify Comcover for the AAD claim.
Comcover made payments to the AAD for costs incurred in remediating the damage caused by the fuel oil spill and sought a declaration that it was entitled to an indemnity under the terms of the UNL Policy. Vero’s defences were:
- that the oil spill did not cause damage to any real or personal property of the Commonwealth within the meaning of “property” as used in the UNL Policy; and
- that any cause of action of the Commonwealth under the UNL Policy accrued no later than 20 July 1999 and so the Commonwealth’s proceedings, commenced on 14 June 2011, was barred under s 14 of the Limitation Act 1969 (NSW).
Whether there was damage to any real or person property of the Commonwealth
Yates J held that, having regard to the insuring agreements in the UNL Policy informed by the scope of cover provided to the AAD under the Schedule of Cover and the insuring clause in the Comcover Manual concerning property loss, destruction or damage2, cover for “real and personal property” was in the nature of an “item” or “building” and not land in and of itself. Therefore the scope of cover did not include cover for the oil spill. The Commonwealth’s application was dismissed.
Whether the claim was statute barred
Having dismissed the Commonwealth’s application based on the scope of cover, Yates J went on to consider the limitation defence in case a different view was taken on the scope of cover issue.
The applicable limitation period was six years from the time the Commonwealth’s cause of action accrued. The matter in dispute was the date when the Commonwealth’s cause of action against Vero under the UNL Policy first accrued.
As submitted by Vero3, the theory of liability in contract holds that the cause of action for breach arises upon the happening of an event constituting the breach. At common law a promise of indemnity is a promise to hold the indemnified person harmless against a specified loss or expense. Once the loss is suffered or the expense incurred, the indemnifier is in breach of contract for having failed to hold the indemnified person harmless against the relevant loss or expense.
In the case of property insurance, the general position is that the insured can sue on the contract of insurance as soon as damage to the property occurs, because the promise to indemnify is breached at that time.
For policies of liability insurance, the general rule is that the cause of action against the insurer does not accrue until the liability of the insured is established by judgment, adjudication or binding agreement, and not upon the occurrence of the event which gives rise to the insured’s liability to the third party. Yates J considered that this general rule seemed to apply to contracts of reinsurance.4
Yates J held that Vero’s characterisation of the contract between it and the Commonwealth as essentially a contract of indemnity for property damage was incorrect. Even though both parties accepted that, strictly characterised, the UNL Policy is not a contract of reinsurance, Yates J found that Vero was agreeing to indemnify the Commonwealth for the responsibilities Comcover had assumed to its Fund Members, even if those responsibilities might not be, strictly speaking, legal liabilities.
Yates J found that the fact which gave rise to the Commonwealth’s right to sue Vero under the UNL Policy was a claim for which Comcover was liable “by agreement adjudication or compromise”. That is because “Ultimate Net Loss” was defined under the UNL Policy as
“the sum actually paid or payable in cash in the settlement or satisfaction of claims for which Comcover is liable, either by agreement, adjudication or compromise.”
On the facts of the case, the earliest point in time at which it could be argued that there was an agreement or compromise in respect of the AAD’s claim was when Comcover informed the AAD on 21 June 2005 that it accepted the fuel oil spill as an insured event. This was when the Commonwealth’s cause of action under its contract with Vero accrued. Therefore, the present proceeding, which was filed on 14 June 2011, was commenced within the applicable limitation period and was not barred.
Although a charge under s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (s 6) (or analogous provisions in other jurisdictions) was not considered in this case, the conclusion reached by Yates J on the accrual of the cause of action (though dicta) raises an interesting question. This article considers what may be extrapolated from the conclusions reached by Yates J.
Under s 6(1):
“If any person…has…entered into a contract of insurance by which the person is indemnified against liability to pay any damages or compensation, the amount of the person’s liability shall on the happening of the event giving rise to the claim for damages or compensation…be a charge on all insurance moneys that are or may become payable in respect of that liability.”
As discussed in this issue’s case note on Perpetual Trustees Victoria Ltd v Malouf  NSWSC 1119 (Malouf), the Supreme Court of NSW recently confirmed that:
- “the event” in s 6 is what causes the charge on the insurance moneys to arise and bring about the liability to pay under the policy of insurance;
- so the event is whatever completes the cause of action against the insured.5
In Ruscoe v Canterbury Policy Holders6 the New Zealand High Court held that a charge could also attach under the equivalent of s 6 in New Zealand to payments under a reinsurance contract (see our alert on this case here).
Applying Malouf, the “event” which may give rise to a charge under s 6 is what causes the charge on the reinsurance moneys to arise and bring about the liability to pay under the policy of reinsurance. Accordingly, the “event” is whatever completes the cause of action against the reinsured (i.e. Comcover).
In the case of property insurance, as held by Yates J in considering the timing of when a cause of action accrues for the purpose of limitation periods, the damage to the insured property is when the cause of action against the insurer accrues. Therefore, applying this reasoning to a statutory charge upon reinsurance for property insurance, what completes the cause of action against the reinsured (i.e. the “event”) and causes the statutory charge to arise is the damage to the insured property as it is at this point that the original insured can sue on the reinsured policy for indemnity (because the promise of indemnity is breached at that time).
In the case of liability insurance, as held by Yates J in considering the timing of when a cause of action accrues for the purpose of limitation periods, the establishment of the liability of the original insured by judgment, adjudication or binding agreement is when the cause of action against the insurer accrues. Therefore, applying this reasoning to a statutory charge upon reinsurance for liability insurance, what complete the cause of action against the reinsured (i.e. the “event”) and causes the statutory charge to arise is the judgment, adjudication or binding agreement which establishes the liability of the original insured as it is at this point that the original insured can sue on the reinsured policy for indemnity (because the promise of indemnity is breached at that time).
Following on from Genworth7 and confirmed in Malouf8, for a statutory charge to attach to insurance proceeds, the relevant contract of insurance must be in place when “the event” occurs. Accordingly, where it is a reinsurance contract for property insurance, the relevant reinsurance contract must be in place when the damage to the property occurs. Where it is a reinsurance contract for liability insurance, the relevant reinsurance contract must be in place when the establishment of the liability of the originally insured occurs.
Therefore it is conceptually possible for a statutory charge to descend upon the reinsurance contract. However, the anomaly is that the statutory charge may have descended upon the reinsurance contract before the reinsured’s cause of action against the reinsurer accrues following the Antarctica Case.
In that case, the “event” under s 6 was damage to the insured property i.e. occurring in July 1999. At that time the statutory charge arises over the reinsurance proceeds. However, the Commonwealth’s (reinsured’s) cause of action against Vero did not accrue until June 2005. This appears to be an anomalous outcome. However as s 6 was not considered in the Antarctica Case, it may be a matter for further judicial consideration.
The anomaly could be considered analogous with how a statutory charge attaches upon the proceeds of a claims made policy. As confirmed by Malouf, the statutory charge arises when the cause of action against the insured is complete, not when the insured makes a claim upon the policy (so long as a claim is ultimately made so that there is a responsive policy at the time the statutory charge arises). Similarly, a statutory charge upon the reinsurance proceeds could arguably arise prior to the reinsured claiming upon the reinsurance contract, so long as there was a reinsurance contract in place when the relevant “event” occurred.