Flood Claims Pour In

In Brief

Does the ingress of water constitute damage to an open cut mine?

ISR Policy Coverage

Standard ISR (Mark IV) material damage cover is in the following terms:

"In the event of any physical loss, destruction or damage (hereinafter in section 1 referred to as 'damage' with 'damaged' having a corresponding meaning) not otherwise excluded happening at the Situation to the Property Insured described in section 1 the Insurers will subject to the provisions of this Policy...indemnify the Insured in accordance with the applicable Basis of Settlement."

"Property Insured" is defined as:

"All real and personal property of every kind and description (except as hereinafter excluded)."

It is not unusual for insured's to negotiate mining and contract works policies to delete or modify flood exclusions, however not all such claims will always fall within the cover provided. Furthermore, overseas insurers may have very different wordings to those common in the Australian market.

"Physical Loss, Destruction or Damage to the Property Insured"?

The phrase "damage to property" was considered by the Australian High Court in Guardian Insurance Co Limited v Underwood Constructions Pty Limited (1974) 48 ALJR 307. In that case, during the course of excavation works, part of an existing concrete wall was demolished, resulting in a fall of earth and rock which imperilled an existing building and necessitated its underpinning. The insured held a "contractors all risk insurance" policy.

The insured was covered in respect of accidental loss of or damage to property occurring in connection with the performance of the contract and happening on the contract site. The property insured included the permanent and temporary works erected in performance of the contract. Remedial work was required as a result of the collapse of the building and the contractor sought to recover the costs of such work.

Justice Mason referred to damaged property in the sense of "the physical integrity" of the subject property. The building which required underpinning was not physically damaged, however the evidence established that the damage to the installations and office block disturbed the physical integrity and the enduring quality of the excavation itself. Unless and until the damage to the building and the installations was remedied, the excavation was susceptible to further collapse.

In Ranicar v Royal Insurance Pty Limited (1983) 2 ANZ Insurance Cases 60-525 Chief Justice Green of the Tasmanian Supreme Court considered whether scallops had suffered damage due to being stored at a higher temperature than that prescribed by export regulations. The scallops could not be exported to Canada. They were sold on the Australian market for less than they would have been sold to a Canadian company.

Green CJ held that the ordinary meaning of the word should be considered:

"In my view, the ordinary meaning, and therefore the meaning which I should...give to the phrase 'damage to' when used in relation to goods, is a physical alteration or change, not necessarily permanent or irreparable, which impairs the value or usefulness of the thing said to have been damaged."

His Honour found that the change in temperature undeniably involved a physical change to a substance and in this case that change had the effect of removing one of the primary qualities of the scallops – their exportability. As a result, their usefulness was impaired and their value reduced.

The above ISR wording requires "physical loss, destruction or damage" before cover is enlivened. In the case of Lewis Emanuel and Son Limited and Anor v Hepburn [1960] 1 Lloyd's Rep 304 Justice Pearson considered the interpretation of the phrase "physical loss or damage or deterioration". He concluded that it was necessary to apply the natural and ordinary meaning to those words and he concluded that the word "physical" qualified not only "loss" but also "damage" and "deterioration".

The issue of what constitutes "physical damage" was considered by the New South Wales Court of Appeal in Transfield Constructions Pty Limited v GIO Australia Holdings Pty Limited (1997) 9 ANZ Insurance Cases 61-336. Transfield was engaged under contract to construct grain silos and GIO insured the work. The silos were found to have a defective fumigation system which resulted in grain blocking the fumigation pipes rendering them ineffective. The insured was required to remove the grain to carry out repairs.

The question was whether the blockage of the fumigation pipes by grain constituted physical loss or damage. Although the defect rendered the fumigation system useless, on a superficial reading of the contract of insurance, useless did not amount to physical loss or damage, including destruction. Meagher JA with whom Clark and Sheller JJA agreed noted:

"No pipes were lost, no pipes were destroyed, no pipes were damaged. It is not contested that to remove the pipes and reinstall them would have caused a financial loss to the appellant. That again is beside the point. Mr Maconachie, learned senior counsel for the appellant said 'the fact that the pipes were rendered useless constituted physical damage within the meaning of a policy'. I do not think so. Loss of usefulness might in some context amount to damage, though even that is not beyond dispute, but in my view it cannot amount to physical damage. Functional utility is different from physical damage. For these reasons which were substantially the reasons given by his Honour below, I think the appeal should be dismissed with costs."

Does Flood Water in an Open Cut Mine Constitute Damage?

The existence of water in an open cut mine is not uncommon. Water as a consequence of rain, seepage, drainage or due to the height of the water table may be expected in an open cut mine. The existence and operation of pumps to remove water from an open cut mine may not be unusual; however their ability to cope with and remove water as a consequence of flood may take many many months and cause significant delay.

Nonetheless, query whether water by itself constitutes damage to the open cut pit or the minerals within it.

The application of the above principles to each case may yield different results. Has the physical integrity of the open cut mine been affected? Has there been any collapse in the pit? Is the pit susceptible to further collapse?

The existence of flood waters will prevent access to the mining tenements but it is possible that the physical integrity of the pit remains intact, albeit beneath a pool of water. The structure of the mining tenements or the earth within the pit may not have changed in a physical sense. The economic usefulness of the pit is of course affected but does the consequent delay in mining the pit constitute the sort of damage which enlivens cover under the policy.

It is possible that flood waters or rain can cause damage to the physical integrity of an open cut mine, however the above authorities suggest that close consideration must be given to the facts and expert evidence may be required when assessing whether there has been any "damage" to an open cut mine. Mere impairment of the economic usefulness of the open cut pit or mine, of itself, may not be sufficient to trigger material damage cover under an ISR wording.

It may be prudent for insureds and ISR underwriters to closely consider the facts of each and every case in order to ascertain whether there has been "damage to property". The cost of dewatering the site may not be covered.

Furthermore, Section 2 cover under an ISR policy (business interruption losses) is not ordinarily covered unless there is some underlying damage to property within the material damage cover afforded by Section 1 of the policy. Consequently, it is possible that very large losses may fall outside the cover provided.

Conclusion

The effect of flood waters and water ingress into mining tenements may in many cases cause property damage, however the authorities are clear, in that, the impairment of the economic usefulness of the mine does not constitute damage to property. There must be some physical alteration or change in the mine or the physical integrity of the mine must be affected.

While the courts may be quick to find, wherever possible, some physical alteration or structural change when considering policy coverage, the mere existence of water in an open cut pit, for instance, may not be sufficient to enliven cover.

No doubt both insureds and insurers would be well advised to closely consider the relevant ISR policy wording and the facts of each case when confronted by the recent impact of flood.

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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.