Australia: Insurer’s arguments fail on policy construction and insured’s obligation to mitigate loss

Legal Directions - April 2011
Last Updated: 13 April 2011
Article by Oszkar Denes and Geoffrey Flint Esq

Orica Australia Pty Limited v Limit (No. 2) Limited [2011] VSC 65

The Victorian Supreme Court has reminded insurers that, if insurers wish to draft an exhaustive definition of coverage, there are simple means to do so. As to an insured's obligation to mitigate loss, the Court has held an insured is not required to sacrifice its own commercial interests in favour of the insurer.


In late 2004, Orica Australia Pty Limited ('Orica') chartered a vessel for the purposes of shipping bagged ammonium nitrate from Canada to Australia. As between itself and the owner of the vessel, Orica was liable to the owner for the manner in which the cargo was loaded and stowed on the vessel. The cargo shifted during the voyage, causing the vessel to list to port. The United States' coast guard ordered the vessel to anchor at Jamestown and to remain at anchor until a suitable re-stowage plan was devised.

The owner of the vessel claimed compensation from Orica and was paid nearly US$2.5 million. Orica then claimed indemnity from its insurer in respect of its liability to the owner. The insurer paid just under $800,000 but disputed that it was obliged to pay more. Orica sued the insurer in the Victorian Supreme Court.

The policy

The contract of insurance contained the following wording (underlining added):

'This policy is to pay such may be necessary, required or deemed appropriate in the settlement of amounts of compensation to third parties following an ... occurrence involving a vessel chartered by the insured...

For the purpose of this policy the Compensation referred to in the immediately preceding paragraph shall include:


Policy interpretation

The insurer contended that its liability to indemnify was limited to the terms following the word 'include'. Alternatively, it contended that the paragraph above the word 'include' did not provide independent coverage beyond the coverage provided in the paragraphs after the word 'include'. One of those subsequent paragraphs in turn referred to cover of the United Kingdom Mutual Assurance Association (Bermuda) Limited ('UKMAA'), and limited the scope of cover under the policy to that afforded under the UKMAA coverage. Orica submitted that its claim fell within the scope of the first paragraph, and there was no need to consider the subsequent paragraphs.

The court referred to Dilworth v The Commissioner of Stamps where it was held that the word 'include' may sometimes be used to enlarge the meaning of words, but other times it may be used as an equivalent to 'mean and include', in which case it provides an exhaustive explanation of the meaning of a given term.

The Court noted that because the present case was concerned with the construction of an insurance policy, words are thus to be given their ordinary meaning, and are to be given a business like interpretation. The Court could see no reason to construe the word 'include' so that the words that follow 'include' provide an exhaustive definition of policy coverage.

Moreover, the Court held, if it had been intended to limit the circumstances of coverage to the scenarios mentioned in the paragraphs following the word 'include', then this could have been achieved by a number of drafting devices, such as by continuing the first paragraph with the words 'being', 'namely' or 'meaning'.

Obligation to mitigate loss

By 15 January 2005, the owner attempted to place pressure on Orica to find a solution to the cargo problem. It made an offer to Orica, in effect to discharge the entire cargo at Providence, USA, where Orica would take delivery of the cargo, and otherwise deal with the coast guard.

The insurer submitted that Orica's failure to accept the offer resulted in Orica incurring more liabilities than it would have, had the offer been accepted.

Orica submitted that it had considered a number of solutions, namely to re-stow completely the cargo on the vessel, to restow part of the cargo on the vessel and deal otherwise with the cargo not re-stowed, or to discharge the entire shipment for subsequent transportation. The first option was considered physically impossible. Further, Orica's evidence was that the Coast Guard would not have allowed the complete discharge of the cargo on US soil, and that a complete discharge would have been very expensive in any event. It could have involved the complete shutdown of a mill in Australia, because of Orica's inability to meet orders. Thus, Orica elected to re-stow part of the cargo on the vessel and continue the journey.

The Court accepted Orica's evidence. Moreover, the Court was satisfied that the course adopted by Orica was a reasonable solution to the problem, because it enabled as much of the cargo as possible to be restowed on the vessel, and the journey could thus be continued.

The Court considered Orica's obligations under the policy of insurance, and found that it was not required to sacrifice its commercial interests in favour of the insurer. Even if there is an obligation to mitigate, an insured facing an incident is entitled to have regard to its own interests, at least to some extent.


Words in a contract of insurance will be interpreted according to their ordinary meaning. Courts are likely to adopt a common sense approach. Thus, if a particular purpose can be achieved by straightforward drafting techniques, but such techniques are not utilised, then a Court could conclude that the particular purpose was not intended by the parties.

In respect of the obligation to mitigate loss, a Court will identify those steps which would be reasonable for an insured to take as a matter of self-help, which its own self interest would dictate. It is not suggested that an insured can completely disregard the insurer's interests, but it is not required to sacrifice its own interests in favour of those of the insurer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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