The recent decision of Rail Corporation v Vero Insurance Ltd [2012] NSWSC 632 is a useful reminder of the importance of ordinary principles of contractual interpretation in determining third parties’ rights of recovery against an insurer.

On 4 May 2004, in a small town in northwest NSW, there was a collision between a motor vehicle and a CountryLink Xplorer train at a level crossing where the street crossed the railway line. The driver of the vehicle was killed on impact. The train’s carriages were derailed and there was damage to rail infrastructure. The driver of the vehicle held a third party property damage policy issued by Vero.

Rail Corp made a claim directly against the driver’s insurer, Vero, for the driver’s liability in damages to Rail Corp. The claim was made under section 51 of the Insurance Contracts Act 1984 (Cth) (ICA), which allows third parties to make a direct claim against insurers in certain, limited circumstances.

The relevant issue was whether the third party policy provided insurance cover in respect of the driver’s liability in damages to Rail Corp.

In determining the extent of any insurance cover, the Court considered two questions; first, whether the contract provided insurance cover; and, second, whether any of the exclusions applied so as to exclude cover.

The third party property policy provided insurance cover for an ‘accident’ giving rise to a liability to pay compensation for damage to property. The word ‘accident’, however, was not defined in the policy. In the absence of such a definition, the Court applied the ordinary and natural meaning of the word – an unintended mishap or an untoward event.

Vero argued that the collision was not an accident, but an intentional act by which the driver intended to commit suicide. The Court did not accept Vero’s argument, in light of all of the evidence in the case. It found that the collision occurred without any intent on the driver’s part – that it was an unintended mishap – and therefore, an ‘accident’ within the meaning of the policy.

The next question, therefore, was whether any exclusion applied. There were two exclusions under the policy that Vero argued applied: first, that the vehicle was being used for an unlawful purpose; and, second, that the vehicle was being used for an illegal activity. The Court did not accept either argument, on the basis of its finding that the collision was inadvertent and therefore not capable of being characterised as unlawful or illegal.

The Court held that the third party policy responded to the claim made and, pursuant to section 51 of the ICA, that Vero was liable to indemnify Rail Corp for an amount equal to Vero’s liability to the driver under the policy.

However, that liability did not extend to pure economic loss. Vero was successful in arguing that RailCorp was not entitled to recover the costs incurred in providing alternative transport while the railway line was inoperative. The Court concluded that the reference in the policy to “loss or damage to other people’s property” did not extend to these costs, which amounted to consequential economic loss. As the Court noted, alternative transport costs related in a real sense to the running of RailCorp’s passenger services and not to damage to the property, distinguishing these costs from, for example, the cost of a tow truck or crane to remove damaged property.