Australia: No Liability For Consequential Loss In The Absence Of Physical Damage To Property Under ISR Wording

Allstate Exploration NL and ORS v QBE Insurance (Australia) Limited [2008] VSCA 148 –

Buchanan and Dodds–Streeton JJA and Pagone AJA

In Brief

• The Victorian Court of Appeal was asked to interpret an Industrial Special Risks insurance policy. The court considered whether the insurer was liable for consequential loss in the absence of any physical damage to property.

• The court considered an addition to the standard policy wording, clause 23 which provided:

"Civil Authority

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."

Facts

• On Anzac Day 2006 there was a rock fall at the Beaconsfield Goldmine, with tragic and dramatic consequences. The rock fall also had adverse financial consequences for the mine owners and operators, who suffered losses as a result of the rock fall.

• By an industrial special risks insurance policy ("the policy") in force at the time of the rock fall, QBE agreed to indemnify the joint venturers against loss arising from any "insured events" which occurred during the period of insurance.

• On Anzac Day 2006, a seismic disturbance caused the rock fall at the mine. On that day, an inspector under the Workplace Health and Safety Act 1995 (Tas) ordered, pursuant to s 38 of that Act, that all mining activities at the mine cease until further notice.

• The joint venturers allege that the inspector's order was made by reason of the rock fall. This was denied by QBE.

• The insuring clause contained in the policy provided:

"Whereas the Insured named in the Schedule has paid or agreed to pay to the Insurer(s) specified below the premium shown in the Schedule, now the Insurer(s) agree(s), subject to the terms, conditions, exclusions, memoranda, warrantees, limitations and other provisions, contained herein or endorsed hereon, to indemnify the Insured as specified herein against loss arising from any insured events which occurred during the Period of Insurance stated in the Schedule or any renewal thereof."

• Section 1 provided indemnity in respect of "any physical loss, destruction or damage, ...not otherwise excluded...to the property insured".

• The indemnity was in the following terms

"In the event of any physical loss, destruction or damage...not otherwise excluded happening at the situation occurring during the Period of Insurance to the Property Insured described in Section 1, the Insurer(s) will, subject to the provisions of the policy including the limitation of the insurers' liability, indemnify the insured in accordance with the applicable basis of settlement."

• The Property Insured is defined in very broad terms as "all real and personal property of every kind and description belonging to the insured or for which the insured is responsible...".

• The indemnity provided by section 1 of the policy is limited to loss arising from "physical" damage to property. This is also made plain from the "basis of settlement" provisions contained in section 1 and from the express exclusion of consequential loss from the indemnity except as expressly provided for in section 2 of the policy.

• Section 2 of the policy provided indemnity against loss resulting from business interruption or interference which happens as a consequence of "physical loss, destruction of or damage to property insured by any cause or event which is not excluded."

Decision of Hargrave J

• It was common ground in the court below that the consequential losses claimed by the joint venturers were not the result of any physical loss, destruction of or damage to Property Insured and that, accordingly, section 2 of the policy was not engaged. Nonetheless it was submitted on behalf of the joint venturers that clause 23 should be construed as providing an independent head of indemnity which was separate from and additional to the indemnities provided for in sections 1 and 2 of the policy.

• Hargrave J did not accept the submissions made on behalf of the joint venturers. He was of the view that "physical" loss, destruction of or damage to Property Insured was required in order to engage clause 23 of the policy.

Court of Appeal Decision

• Pagone AJA wrote the leading judgment with which Buchanan JA and Dodds-Streeton JA agreed.

• QBE contended that clause 23 of the policy was not engaged because there was no property damage and that the meaning and extent of clause 23 was to be read in the context of a policy which provided indemnity for physical property damage (section 1) and the consequences of physical damage to property (section 2).

• The parties agreed that the policy should be given a businesslike interpretation. The interpretation of the words and the resolution of any ambiguity should be undertaken in a commonsense and non technical way to give the policy a commercially sensible construction.

• Notwithstanding that clause 23 of the policy did not include the word "physical" when describing "loss, destruction of or damage to Property Insured" the learned trial judge concluded that clause 23 of the policy was not engaged unless there was such physical loss, destruction of or damage to property.

• There was a clear structure to the policy which provided cover for property damage in section 1 and loss or damage arising from the interruption or interference with the business arising from property damage in section 2.

• Clause 23 appeared under the heading "Conditions Applicable to all Sections" although it was fundamental to the claim by the joint venturers that clause 23 had an independent operation.

• There was no "basis of settlement" clause which applied under clause 23. The absence of a basis for settlement of claims under clause 23 more readily supported an inference that the clause was not intended by the parties to be a third and independent basis of claim separate from Sections 1 and 2.

• The structure of the policy pointed in favour of an interpretation of clause 23 that it was adding to the categories of causes which might result in loss to the risk covered by the policy, rather than in seeking to enlarge the category of risk beyond the physical loss, destruction or damage provided for. The use of the plural "damages" rather than the singular "damage" was treated by the court to be a mistake. The policy was not entirely free from typographical errors. The court considered it unlikely that so large an addition as that contended for by the joint venturers was intended by the addition of an "s" without clearer and express mention. The use of the plural was more likely to be a simply typographical error than so great an addition to the breadth of cover as contended for by the joint venturers.

• Clause 23 was inserted at the request of an insurance broker acting as agent of the joint venturers, however this evidence was not relied upon in submissions before the court. His honour found that nothing turned upon this fact although it may explain why the language of clause 23 did not sit comfortably with the rest of the policy. The circumstances that clause 23 may have been written by a person different from the author of the rest of the document, in this case, assisted neither party.

• Consequently the Court of Appeal confirmed the findings of the trial judge and dismissed the appeal. Notwithstanding the omission of the word "physical" from clause 23 and the use of the word "damages" not "damage" the court held that clause 23 did not stand alone as a separate and independent basis of insurance but rather was to be read in accordance with section 1 and section 2 cover which required "physical" loss, destruction or damage to the Property Insured.

Implications

• The decision confirmed the long held view that for cover to be available under an industrial special risks insurance policy there must be "physical" loss, destruction or damage to the property insured.

• Unless an Industrial Special Risks policy clearly says otherwise an insurer will not be liable for consequential loss in absence of physical damage to property.

• Great caution should be exercised by those adding clauses to pre existing insurance contracts to ensure that their intentions take account of the structure in to which the additions are made to ensure, as much as possible, that ambiguities and uncertainties are avoided.

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