Constructive Notes ®
Introduction
It is trite law that in a property damage insurance policy the time for assessing insurance policy response is when the damage is suffered. As was said by the majority in Globe Church Incorporated v Allianz Australia Insurance Limited1:
“Absent a provision in an indemnity insurance policy that makes lodgement of a claim a condition precedent to liability, the concept of a promise to indemnify (to make good the loss or to hold harmless against loss) in the context of a property damage insurance policy is such that the promise is enlivened when the property damage is suffered. Unless it be necessary for there to be a claim on the insurer to give rise to the liability, it is at the point of property damage that the insured has not been held harmless against the loss and …. would be entitled to sue to enforce the promise to indemnify. Such a claim is recognised as a claim for unliquidated damages”.
It follows that under such a policy of insurance, the cost of repair or reinstatement of insured property due to damage which occurs after the end of the period of insurance is generally not indemnifiable.
Complications can arise however when there is damage to insured property during the policy period which is indemnified and the property sustains further damage outside of the policy period prior to its reinstatement.
Government Insurance Office of New South Wales v Atkinson-Leighton Joint Venture (1981) 146 CLR 206 (GIO v Atkinson-Leighton).
In this case the High Court (by Stephen, Mason, Murphy and Wilson JJ, with Barwick CJ dissenting), held that the damage resulting from each of several storms that caused damage to an embankment (including prior to the completion of restoration work from earlier storms) was a separate occurrence giving rise both to an entitlement to indemnity and to the application of the deductibles clause under a contractors’ all risk policy of insurance.
While the majority held that the policy should be viewed as providing continuous cover whilst at the same time imposing the continuous restriction of the amount of cover as per the deductibles clause, in his dissenting judgement the Chief Justice concluded that only one deductible was payable as there was only one occurrence in respect of which indemnity was to be provided.
In his dissenting reasons Barwick CJ made observations in relation to the scope of cover under the policy, which have relevance to the question at hand.
Barwick CJ said2:
“In the case of an insurer’s promise to indemnify for damage to property, once the circumstances call for its performance by the payment of money, the insurer will be bound to perform and cannot, in my opinion, excuse himself because the costs of his indemnity are greater as a result of some intervening event against which the insured was not insured but which in fact increased the cost of reparations of the property to the pre-damaged condition.
…
The insurers, in my opinion, cannot avoid its obligation to pay the cost of repairs because that cost is increased by intervening events not due to acts of the insured … So here, the promise to pay the cost of the repair having attached because of the occurrence of the damage to the undamaged embankment by the storms, it must be performed notwithstanding that the action of the sea increased that cost.
… But in any case, if the obligation to pay the cost of repairs has attached, it is nothing to the point that the necessary cost of repairs is increased by some event which is not an insured risk.”
The Chief Justice went on to proffer two examples, one of which is relevant to the issue herein under consideration. The Chief Justice said3:
“Suppose an insurer against damage by fire has become bound to reinstate the damaged property, a fire having damaged the property during the currency of the policy. Suppose the term of the policy expires whilst the promise to reinstate is still not fully performed. Then suppose some event to occur which renders the reinstatement more costly, i.e.to occur after the term of the policy has expired and before the reinstatement to the pre-damaged condition is complete. None the less, in my opinion, the insurer would be bound to reinstate. It would be no answer for him to say that the added cost was due to an uninsured risk. The true analysis is that the obligation to reinstate having attached during the currency of the policy, its performance is required whatever its costs and however the cost is increased by events which could not in themselves have given rise to a claim under the policy”.
The Chief Justice’s observations were of course made in the context of his dissenting decision. As has been subsequently judicially observed4, while there was no express disagreement by the majority with Barwick CJ’s articulation of the manner in which the policy operated, the majority reasoning did not rely upon the subsequent damage being referable to the original damage or the insurer’s obligation to reinstate it. Rather, the majority considered that the insurer’s obligation arose because the further occurrences all occurred in the period of insurance and within the scope of cover, such that the insurer was obliged to indemnify in respect of each of them.
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 (CIC v Bankstown)
In this case, the High Court considered the reasoning and decision in GIO v Atkinson-Leighton. The case was an appeal from the New South Wales Court of Appeal, in which Kirby P had adopted5> the reasoning of Barwick CJ in that former High Court decision.
In CIC v Bankstown, the insured claimed in respect of a fire at its premises which occurred during the period of insurance. The insurer declined the claim and purported to cancel the policy. The insured was unable to reinstate the premises without the benefit of the indemnity and commenced proceedings against the insurer, during which time a further fire of significance occurred to the premises outside of the period of insurance.
The Industrial Special Risks policy of insurance under consideration indemnified the insured in respect of physical loss, destruction or damage to insured property in accordance with a basis of settlement clause which provided that the cost of reinstatement, replacement or repair was to be calculated at the time of the reinstatement. The policy however provided that if such work was not carried out with “reasonable dispatch” then the insurers obligation was to be limited to indemnity value of the insured property at the time of the loss.
In noting that the reinstatement obligation could only be discharged by actual as opposed to notional reinstatement, Kirby P had held that obligation was a continuing one which extended to remedying damage from the subsequent fire which occurred outside of the period of insurance.6
In the High Court the insurer argued that the proviso meant that having failed to commence the reinstatement with “reasonable dispatch” the insurance obligation was limited to the indemnity value at the time of the loss. The High Court considered that GIO V Atkinson-Leighton was of no direct assistance due to the absence of the proviso present in the case at hand, observing7:
“CIC never came under an obligation to reinstate the premises. That being so, the authorities which suggest that, if it had come under such an obligation, CIC would have to bear the increased cost of reinstatement occasioned by the occurrence of the third fire, are not to the point”.
Baralaba Coal Company Pty Ltd v AAI trading as Vero Insurance [2024] FCA 532 (Baralaba v AAI)
This was a judgement of Derrington J (the Judge) handed down on 23 May 2024. The declaration made by the Judge, that the applicants were entitled to be indemnified by the respondent insurers in respect of damage sustained to their radial coal stacker consequent upon its collapse on 27 October 2019, was not subsequently appealed.
The applicants were insured with the respondent insurers under an Industrial Special Risks policy of insurance covering property damage at certain of their coal operations. The property covered included a radial coal stacker which was first damaged in a storm in March 2019, which was within the period of insurance.
The insurers granted indemnity in respect of the loss and arrangements were made for its repair, with one of the insureds entering into a minor services contract with a third party for repair and reinstatement works, with the insured to be paid progressively for the cost of the repair and reinstatement by the respondent insurers.
Prior to the stacker being returned to its pre-damaged state, it suffered additional damage when it collapsed during the testing of the repairs to determine whether the repair of the damage caused by the March 2019 storm event had been completed. This damage, which was substantial, occurred after the end of the relevant period of insurance.
The insureds claimed that the insurers were required to pay for the reinstatement of the stacker so that it achieved its pre-damaged state, which was said to include remediating the [out of policy period] intervening damage resulting from the collapse. The insurers denied any obligation to do so, asserting that their obligation extended to meeting only the costs of repairing the damage caused by the initial storm incident.
It was observed by the Judge8 that an engineering report relating to the October damage to the stacker suggested that repairs to the stacker had been substantially completed at the time of its collapse. It also identified that the cause of the October failure of the stacker was in part due to an omission, in the course of performing the repairs, to undertake re-torquing of the rope clamps on the machine after the initial damage in March 2019. This led the Judge to note that despite and suggestions to the contrary, as the machine failed during testing following the purported repairs, it was obviously not returned to its pre-damaged state.
The indemnity under the Policy was in respect of any physical loss, destruction or damage with the insurers promise being to indemnify the insured in accordance with the applicable Basis of Settlement. The Basis of Settlement contemplated “reinstatement”, with “reinstatement” defined to mean:
“b) Where property is damaged; the repair of the damage and the restoration of the damaged portion of the property to a condition substantially the same as, but not better or more extensive than, its condition when new”.
The Policy also contained an endorsement that read as follows:
“19. Testing and Commissioning Clause
This insurance does not extend to cover Damage to property in course of construction or erection, dismantling, revamp or undergoing testing or commissioning including mechanical performance testing or any business interruption resulting therefrom …. It is further noted and agreed that this exclusion does not apply to normal routine maintenance activities and scheduled turnarounds”.
The Judge noted9 the insured and insurers primary submission as follows:
“The insured’s primary submission was that following the storm damage which occurred to the stacker during the policy period, the insurers obligation to indemnify in accordance with the Basis of Settlement clause crystallised. The insurers therefore were required to pay the cost of the reinstatement or repair of the damage so as to restore the stacker to a condition substantially the same, but not better or more extensive than, its condition when new. This, so it was said, extended to the cost of repairing the damage sustained by the stacker in October 2019 which occurred in the course of making the repairs consequent upon the storm damage sustained in March 2019 and on that basis, until the costs of remediating that damage had been met, the insurers obligation remained extant.
The insurers primary position was that the stacker was “substantially reinstated” to the point where it was undergoing testing and commissioning on 27 October 2019, and, on that date, being after the end of the period of insurance under the Policy, it sustained different damage by the collapse. The cost of reinstatement of that damage, so it was said, was not indemnifiable under the Policy because the Policy had expired before that event and the associated damage happened.”
The insureds sought to rely upon the observations of Barwick CJ in GIO v Atkinson-Leighton in support of their contention, but the Judge said10 that the principle sought to be extracted was too wide, in that it purported to encapsulate an obligation to cover all damage which insured property might sustain prior to its complete reinstatement, regardless of the cause (noting that this was something with which Mason J expressly disagreed).
The Judge considered11 that the insurers obligation would extend to increased costs of remediating further damage which was relevantly connected to and arose out of the performance of the insured’s obligation to indemnify the cost of remediating the initial damage. However, the cover would not extend where the only connection between the insurer’s obligation to indemnify and the additional damage was that the damage occurred during the process of reinstatement.
The Judge gave the example12 of where while insured property was being repaired it sustained additional damage from an unrelated event such as a fire. In those circumstances the judge viewed the period during which repairs were being undertaken to be only the occasion for the occurrence of further damage, and that the damage was relevantly unconnected with the insurer’s obligation to meet the cost of repairs of reinstatement.
In going on to consider CIC v Bankstown, the Judge noted that the issue of whether, but for the finding on “reasonable dispatch”, CIC would have been otherwise liable to indemnify the cost of reinstating the premises entirely, did not arise because the scope of the obligation in relation to indemnification was conditioned upon the conduct of the insured once indemnity was granted.
The Judge went on to say13:
“It is worth noting here that some commentators have suggested that the … [cited passage from the majority’s reasons] … had the consequence that it was only if the insurer’s obligation was to reinstate that its obligation to cover subsequent damage arose, whereas, if the obligation was only to meet the costs of reinstatement, then no such obligation arose. However that involves a misreading … [of the relevant passage]. The reference to the obligation to pay the costs of reinstatement having accrued to CIC, “in the manner and with the particular consequences …indicated”, was a reference to the proviso having been enlivened by reason of the failure to undertake repairs with reasonable dispatch. It was not based on any differentiation between whether the insurer’s obligation was to reinstate itself or to pay for the costs of reinstatement. Whilst the form of those obligations are different, their scope is substantially the same”.
In stating14 that it was not possible to read into the reasons of the Court in CIC V Bankstown any implied adherence to Barwick CJ’s observations in GIO v Atkinson-Leighton, and in respectfully disagreeing with the observations of Kirby P in CIC V Bankstown, where the Judge thought his Honour, in reliance on Barwick CJ’s observations, stated the point too widely, the Judge went on to say15:
“What the authorities actually disclose is that an insurer’s primary obligation to meet the costs of reinstatement necessarily extends to the cost of remediating any further damage to the property which is relevantly connected to that primary obligation. This principle applies regardless of whether the insurers obligation is to reinstate or pay the costs of reinstatement”.
And then16:
“Whilst it is not sufficient that the additional damage occurs from an unrelated cause during the effecting of repairs which are subject of the insurer’s indemnity, the position is different where the further damage occurs from conduct involved in the undertaking of repairs…”.
The Judge considered17 that in the case before him, the later damage was directly related to and connected with the insurer’s performance of their obligation to remedy the original harm and fell within the insurers’ obligation to indemnify in respect of the storm damage to the stacker. The Judge thought18 it was not to the point that the further damage sustained to the stacker occurred following the conclusion of the period of Policy cover and that the insurers’ obligation to meet the cost of reinstatement attached during the relevant period, and it did not matter that the obligation became more onerous after the end of the period of cover.
The Judge noted19 that once the insurer’s obligation to indemnify pursuant to the terms of the Policy had crystallised or attached, it was no longer subject to the general contingencies of the Policy to which the exclusions might apply, such that once liability was accepted in relation to the original loss, the insurer’s obligation was complete and it encompassed whatever additional costs arose by reason of additional related or consequential damage being sustained to the property.
In that regard, the Judge drew a distinction20 between the case before him and that of CIC v Bankstown in which the extent of the obligation itself was conditional upon the insured carrying out the repairs with reasonable dispatch. It was only if the relevant exclusions under the Policy in the case before him impacted the extent of the insurer’s obligation to comply with the obligations under the basis of Basis of Settlement clause rather than the obligation to indemnify, that the Judge considered that could they affect the relief being sought by the insureds.
The Judge’s comments were made in the context of giving consideration to the potential operation of an exclusion in relation to damage to property the subject of contract works in certain circumstances (exclusion 14 (a)) and the exclusion in relation to testing and commissioning (exclusion 19 set our earlier in this article).
Suffice it to say that the Judge concluded21 that there was nothing to suggest that if the Policy responded to a claim for indemnity from a non-excluded cause, that these exclusions were intended to cut down the insurers’ obligation if the property was further damaged whilst it was being repaired. That is, exclusion 19 in particular was concerned with excluding claims by the insured in respect of damage of the identified type and had no general applicability to the extent of the insurers’ liability once that liability was accepted in respect of non-excluded damage.22
Considering23 that it was however appropriate to consider the operation of clause 19 as if it did apply, the Judge noted the issue was whether the clause applied when damage occurred in the course of testing plant and equipment as part of reinstatement or repair following damage to which the Policy has responded.
The Judge held24 that references to testing and commissioning should be confined to the performance of those activities as part of the construction, erection, dismantling or revamping of property and that the clause did not operate to exclude cover where damage occurred where property had been damaged and was being tested so as to bring it back to working order as part of its repair.
Sky UK Ltd and Mace v Riverstone Managing Agency and others [2024] EWCA Civ 1987 (Sky UK)
This December 2024 English and Wales Court of Appeal judgement was an appeal against the Order of HHJ (Pelling KC (the Judge) dated 24 August 2023 in respect of claims made by Sky UK Limited and Mace Limited under a construction all risks policy (the Policy) underwritten by the defendant insurers (the Insurers).
The Judge had been called upon to consider the scope and effect of the Policy in respect of loss and damage allegedly suffered as a result of the widespread failure of the roof of Sky UK’s global headquartered building, known as “Sky Central” in Hounslow, West London. It had become apparent from an early stage in construction that rainwater was entering roof cassettes after they had been installed on the roof leading to loss and damage.
In the appeal, one of the issues was the extent of damage at the conclusion of the period of insurance and the quantification of recoverable loss in respect of any such damage.
The ingress of water into the roof cassettes during construction had led to wetting of internal timbers and alleged irreversible swelling and structural decay by the end of the period of insurance.
It was common ground in the appeal, that there was damage or further damage which occurred after the period of insurance as a result of the wetting which occurred during the period of insurance, and that the condition of the timbers worsened and moisture spread after the expiration of the Policy. The parties referred to this as deterioration or developmental damage. Lord Justice Popplewell noted for the sake of precision and clarity that he would use “deterioration” as a reference to additional damage to parts of the timbers already wet or damaged and “developmental” as reference to damage to additional parts of the timber by way of spread.
The insurers argument which had been accepted by the Judge was that insurers had agreed to provide the contractual measure of indemnity, no more and no less and that cover was identified in the Insuring Clause as limited to “damage to Property Insured occurring during the Period of Insurance” (POI). Damage occurring after the POI was not covered and was not within the contractual indemnity which Insurers had agreed to provide. The authorities had repeatedly emphasised the importance of the period of cover in “time policies” and that cover was in respect of damage occurring within the period of cover, not that occurring before or after.
Lord Justice Popplewell (with whom the other Lord Justices agreed) in reversing this aspect of the first instance judgement, found that Sky and Mace were correct as a matter of principle and authority.
The Lord Justice observed25 that a contract of insurance against damage to property is a contract of indemnity and that the nature of the insurers’ promise is to hold the insured harmless in the sense that the insurer promises that the insured will not suffer the insured damage. It is in the nature of a warranty that the insured damage will not occur, such that the insurer is in breach of the promise the moment the damage occurs. This represents the insurers primary obligation, which if not performed exposes the insurer to a secondary obligation to pay damages for breach of the primary obligation, not as a common law claim to enforce a promise to pay, but as a claim for unliquidated damages.26
The Lord Justice noted27 that the consequence of this is that the measure of recovery in a property insurance claim is that provided for by the common law principles governing damages for breach of contract, the general objective of which is to put the innocent party in the same position, so far as money can do it, as if the breach had not occurred, subject to the express terms in the policy.
While noting28 that it is open to the parties to a contract of insurance to modify the measure of damages for which the general law provides (and policies often contain such express provisions; limits and deductibles or exclusions of losses resulting from certain causes such as defective design, being common examples), such modification must be achieved by clear wording, and this is not achieved merely by the insuring clause identifying the temporal limit of insured damage.
The Lord Justice noted29 that the Insuring Clause defines the damage to which the insurer’s primary obligation attaches (which it promises will not occur) and it does not purport to define or confine the loss for which the insurer is liable in damages when in breach of promise, which is for the sum necessary to hold the assured harmless from having suffered the insured damage in the first place. The Lord Justice said that if the insured damage causes further damage, then subject to the usual principles of mitigation and remoteness etc, the insurer is liable for the loss resultant upon suffering that further damage and nothing in the Insuring Clause defines the measure of recovery i.e. it is not addressed to the secondary obligation to pay unliquidated damages for its breach.
The Lord Justice said30:
“This points inexorably to the conclusion that the costs of remedying the foreseeable deterioration and development damage occurring after the POI which resulted from insured damage occurring during the POI is within the measure of recovery under the Policy. That is simply an application of the contractual principles governing the assessment of damages”.
And then31:
“Against this background I would also accept that the Basis of Settlement clause is to be construed as recognising an entitlement to the cost of remedying development and deterioration damage. This must be what is meant by “full cost of repairing reinstating or replacing property lost or damaged” in a clause which, unlike the Insuring Clause is concerned with the measure of recovery. What is meant by “full cost of repairing [etc]” is the cost of repairs etc which are made necessary by the suffering of the insured damage, including any subsequent damage which occurs during what’s may be described as a reasonable mitigation period. This is reinforced by the use of the word “reinstating” in the clause”.
The Lord Justice noted32 that his conclusion was supported by the main authorities upon which the parties relied, none of which were inconsistent with it. It also appeared to the Lord Justice33 that his conclusion accorded with business common sense, noting that if damage occurred during a major construction project it would often be necessary to take some time to investigate and remedy it, which may very likely last well beyond the expiry of the POI.
The Lord Justice went on to observe that it would be readily foreseeable that in some circumstances the passage of time would increase the scope of the damage, whether to some already damaged part of the building (deterioration) or to some other part (development) without any fault on the part of the assured.
In noting that absent a contractual term excluding such recovery, a business person’s reasonable expectation of cover in such circumstances would be confounded if the insured not insurer had to bear the financial consequences which inevitably follow from the insured damage which occurred during the policy period (regarding that as ‘the antithesis” of what property insurance is for), the Lord Justice went on to say34:
“Moreover, it would have serious and unacceptable adverse consequences, because it would make deterioration and development damage occurring after the expiry of the period of insurance uninsurable under any separate and subsequent property insurance cover. If cover for the subsequent period were sought after the damage was in progress, no doubt insurers would seek to exclude it or at the least charge a prohibitively high premium. Even if the assured were already to have taken out a policy for the subsequent period, prior to any damage occurring, it would not respond to continuing damage, because the deterioration and developmental damage would not be a fortuity”.
Conclusion
It seems likely that the “Barwick CJ formulation”35 as it was construed by Kirby P in CIC v Bankstown, is, with respect, too broad in as much as it suggested that an insurer remains liable for any loss occurring after expiry of the period of insurance, if the completion of the repair and reinstatement has not occurred at the time an unrelated fortuity causes further damage.
More vexed is the question of precisely what might be thought to be a loss arising out of the original covered damage.
Does further fire damage to a property first damaged by fire during the period of insurance remain at insurer’s risk simply on the basis that its damaged state or the circumstances surrounding its repair and reinstatement leave it more susceptible to a further fire, or would such further fire damage only be covered if for example it was caused by workers attending to the repair and reinstatement of the original loss?
Derrington J, in Baralaba v AAI, when summarising36 P’s treatment of the issue in CIC v Bankstown, referred to “the second fire which arose out of the first fire”, but it is arguably unclear how close the causal link between the two losses may have to be, before cover is extended on the basis of the indemnity provided in respect of the first loss.
Certainly, the identified errors in the steps undertaken in relation to testing of the substantially repaired stacker in Baralaba v AAI would be a sufficient nexus, with the Judge regarding the consequences flowing from that as simply leading to an increase in the cost of undertaking the repairs. It is also clear from Derrington J’s judgement, that the Judge considered that the outcome will not be impacted by whether the original repairs and reinstatement were being undertaken by the insurer (via contractors engaged on its behalf) or by the insured (or through its contractors), where the obligation by the insurer under the policy is to meet the costs of reinstatement.
The outcome of the Sky UK appeal, which seems unexceptional in as much as it treats all loss flowing from damage which first occurred during the POI as being indemnified in accordance with the Basis of Settlement, addresses a somewhat different scenario.
It does however provide a further illustration of the scope for operation of a so called “time” policy, in the context of property losses on a construction project, where the full extent and cost of repair of the damage arising from the covered casualty, has not crystallised until some time after the expiry of the Policy.
1 (2019) 99 NSWLR 470 at [209]
2 At [218-219]
3 At [219]
4 Baralaba Coal Company Pty Ltd v AAI Ltd trading as Vero Insurance [2024] FCA 532, per Derrington J at [30]
5 Amongst another authority
6 Kirby P also adopted the observations of Meagher JA in Lumley General Insurance Ltd v Vintix Pty Ltd (1991) 24 NSWLR 652. That case however concerned increased cost due to amendment to local government building regulations, with the issue falling to be determined upon the express provisions of the contract of insurance, which required actual rather than notional reinstatement. Kirby P emphasised the “reinstatement” obligation in the matter before him, noting that in GIO v Atkinson-Leighton, the policy was one of indemnity only and not reinstatement.
7 At [404]
8 At [6]
9 At [21 and 22]
10 At [33]
11 At [33]
12 At [33]
13 At [41]
14 At [44]
15 At [45]
16 At [49]
17 At [51]
18 At [53]
19 At [54]
20 At [55]
21 At [60]
22 In GIO v Atkinson-Leighton, Barwick CJ [at 220] thought that until the embankment had been restored to its pre-storm position, no new claim under the policy in respect of the repair of the embankment arose. The Chief Justice viewed the episodes which occurred (which would have formed the basis of separate claims had they occurred when the embankment was undamaged), as merely incidents which increased the costs of reinstatement or in other words, the cost of the performance by the applicant of a promise which was already called for. That being the case, it makes eminent sense that there would be no scope for the operation of policy exclusions in respect of the cost of repair and reinstatement of the further damage. For similar reasons, there should not ordinarily be scope for imposition of a further deductible or excess.
23 At [96]
24 At [106]
25 At [43]
26 As was observed in the Introduction, the NSW Court of appeal in Globe Church Incorporated v Allianz Australia Insurance Limited (2019) 99 NSWLR 470 at [209] adopted a similar view.
27 At [45]
28 At [46]
29 At [48]
30 At [49]
31 At [50]
32 At [51]
33 At [80]
34 At [81]
35 The author’s terminology
36 At [36]
This article may provide CPD/CLE/CIP points through your relevant industry organisation.
The material contained in this publication is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.
