Allstate Explorations (NL) & Ors -v- QBE Insurance (Australia) Ltd  VSC 380
Wotton + Kearney acts in this matter for QBE Insurance (Australia) Limited (QBE) which arose out of the closure of Beaconsfield Gold Mine (the Mine) following the roof fall on Anzac Day 2006 which caused the death of one miner and trapped two others underground for a number of weeks.
On 10 October 2007 Justice Hargrave of the Supreme Court of Victoria handed down a judgment on a threshold insurance issue in connection with a claim for business interruption (BI) losses of approximately $45 million made by Allstate Explorations (NL) and others, the owners and operators of the Mine (Allstate), against QBE pursuant to an Industrial Special Risks (ISR) insurance policy issued by QBE to Allstate.
ISR policies of insurance are property insurance policies. Subject to the terms, conditions and exclusions of the policy standard ISR policies are divided into 2 sections - Section 1 of the policy operates to provide cover for material damage to property insured and Section 2 of the policy covers BI losses in consequence of the damage to property insured.
Allstate did not advance its BI Claim under Section 2 of the ISR policy as it acknowledged that:
- the closure of the Mine had not been in consequence of damage to insured property, but rather was the result of cessation notices issued by Workplace Standards Tasmania and the Chief Inspector of Mines pursuant to the Workplace Health & Safety Act 1995 (Tas);
- its BI losses were not the result of physical loss or destruction of or damage to insured property, with the result that Section 2 of the policy was not engaged.
However the ISR policy contained the following condition (the Condition):
23. Notwithstanding anything contained herein to the contrary, the Property Insured under this Policy is also covered against the risk of loss, destruction or damages arising from the actions of any civil authority during a conflagration or other catastrophe and for the purposes of preventing, minimising or retarding same and shall also include the closure of any Premises/operations by any civil authority due to the operation of a peril insured against."
Allstate contended that the Condition provided freestanding cover operating independently of Sections 1 and 2 of the policy and that, on this basis, it was entitled to recover its BI losses under the policy despite the fact that those losses were not attributable to damage to property insured. QBE disagreed and denied indemnity.
Although on the basis of the pleadings filed in the proceedings issued by Allstate against QBE a wide variety of contentious legal and factual issues arose, the threshold issue for Allstate was its contention that the Condition should be construed in a manner which afforded it a gateway to claim BI losses where those losses had not resulted from physical loss or damage to property insured. The Court was asked to determine this issue as a preliminary question.
Allstate relied upon the fact that the Condition did not refer to or use the term "physical loss" but instead used a different form of words which Allstate contended provided a broader form of cover in respect of any "loss, destruction or damages". Allstate contended that:
- its construction was objectively reasonable because it was a natural consequence that if premises or operations were closed by the actions of a civil authority then BI loss would result;
- such closure was unlikely, as a natural consequence, to cause damage to property; and
- if the second limb of the Condition was dependant on physical damage then it would have no work to do since in those circumstances Section 2 of the policy would itself be engaged to provide cover.
QBE argued that:
- if it was the intention of the parties to provide ‘stand-alone’ cover of the type contended for by Allstate (which cover was extensive) then it would have been a simple matter for the Condition to clearly say so;
- in the context of the manner in which the whole policy was structured it was unlikely that significant cover would have been incorporated by the form of the words used in the Condition; and
- it was clearly open for the Court to determine that the Condition operated to remove doubt or to clarify cover afforded elsewhere by the Policy.
In his judgment Justice Hargrave rejected Allstate’s submissions that the Condition provided freestanding cover (operating independently of Sections 1 & 2 of the policy) and agreed with QBE that physical loss, destruction of or damage to insured property was required in order to engage the Condition. He concluded that:
- when the Condition was construed in the context of the policy as a whole it was apparent that the policy contained a clear structure – that of providing cover for losses (including BI losses) arising from or consequent upon any event causing physical loss or destruction of or damage to property insured;
- clear language would be required before additional cover could be said to be afforded outside this defined structure and such language was not present here;
- the independent work to be done by the second part of the Condition was to clarify and modify the "government order" exclusion appearing elsewhere in the policy;
- use of the plural "damages" rather than the singular "damage" should be considered to be a mistake;
- the "…risk of loss, destruction of or damage to Property Insured…" are words which should be read as qualifying both parts of the Condition;
- the text of the policy was to be given "primary significance" and "should not be displaced unless the words actually used would lead to a result which did not accord with commercial common sense"; and
- the fact that loss of business revenue might be the more obvious risk than physical loss or damage did not mean that there was no commercial common sense to adopting a construction which required physical loss or destruction of or damage to insured property before the Condition was engaged.
This decision is of considerable interest and importance to insurers. In particular the decision is a good example of the central importance applied by the Court to the overall structure of the policy when determining questions of construction.
There is clear and practical sense in adopting this approach. To construe the Condition as providing a ‘stand-alone’ form of cover would raise a host of practical complications which are likely to have been outside the consideration of the parties when entering into the insurance contract - for example the Basis of Settlement for BI losses under Section 2 of the Policy would be of no apparent application and the policy was silent as to how a claim made pursuant to the Condition was to be measured. It was also not apparent what (if any) deductibles would apply to a claim made under the alleged ‘stand-alone’ cover.
Whilst it is obvious that, where a business is closed for a period due to the actions of a civil authority BI losses will inevitably result, this judgment highlights the necessity to use clear language if cover is required for those losses in the absence of physical loss or destruction of or damage to insured property (e.g. by use of a deeming clause). Restrictions in the availability to adduce evidence of contractual intention (rather than surrounding circumstances) will result in the Court giving primary significance to the actual words used in the policy.
The case heightens the importance of ensuring that careful consideration is given at all stages of the underwriting process to matching the cover required with the words used in the insurance policy.
Finally, regardless of whether or not an appeal is pursued by Allstate, this case is a good example of the appropriateness (and cost effectiveness) of addressing a threshold issue at the earliest possible stage in the proceedings prior to the parties having to commit considerable additional resources and incur considerable associated expense to addressing all of the more general factually-intensive matters in issue in the proceedings.
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.