Constructive Notes ®
Introduction
As a part of their suite of insurances, contractors conducting operations in foreign jurisdictions will often procure a Comprehensive Plant Insurance Policy for political risk, which extends cover to, amongst other things, expropriation, export license cancellation, embargo, forced abandonment and political violence. Such insurance can form a critical component of risk management, particularly for mining services contractors operating abroad.
These policies typically provide an indemnity to the insured for the insured’s own loss during the policy period, and hence are in the nature of first party cover1.
The indemnity which provides payment by way of compensation to the insured for its loss above any relevant deductible (which may be time based or have a dollar value), is commonly dependent upon the insured demonstrating that the claimed loss was “solely and directly” caused by a political risk event for which cover is available.
Generally uncontroversial are entitlements which might arise due to “expropriation“ (where the government of a host country deprives the insured of insured equipment in violation of international law), “export license cancellation” (where the insured’s license to export insured equipment from the host country is improperly cancelled), or “embargo” (where the imposition of a law prevents or restricts the insured’s ability to export the insured equipment from the host country).
The cover to which an insured is entitled in respect of “forced abandonment” (typically defined to mean the loss of insured equipment as a result of a notice to evacuate issued by the government of a host country or sometimes an independent risk consultant, as a result of war or insurrection), also appears to be relatively straightforward, as might be inferred from the lack of any reported jurisprudence (a position which also pertains to the aforementioned covers).
The Indemnity afforded in relation to “political violence” might however lend itself to greater scope for disputation between insurers and an insured. This is particularly so where an insured has suffered loss in the form of deprivation of plant and equipment from an inability to retrieve it from site due to location specific2 access and/or safety issues arising from acts of insurgency, insurrection or civil commotion. This issue is considered below.
Cover for Political Violence
“A violent act or series of acts in the Host Country undertaken with the intent of achieving a political objective, in the form of declared or undeclared war, hostile action by national or international armed forces, civil war, revolution, insurrection, civil commotion, terrorism or sabotage, which solely and directly causes the damage, destruction or permanent loss of the property insured”.
The cover provided is generally in respect of the insured’s loss [in excess of any deductible] caused “solely and directly” by Political Violence, with a requirement that the date of loss falls within the period of cover. There is sometimes a temporal limitation imposed on the period of time within which the insured equipment must be repaired or replaced, failing which the entitlement under the policy is reduced to the lesser of the fair book value or fair market value of the insured equipment at the time immediately preceding the loss. Assuming that Underwriters accept that the act complained of meets the requirement of the Political Violence definition in which the terms are undefined4, Underwriters will likely give consideration as to whether (a) the relevant act “solely and directly” caused the damage or permanent loss of the insured equipment and (b) there has been “damage, destruction or permanent loss” of the insured equipment. In this regard, it should be noted that there is generally no requirement that the act constituting “Political Violence” is directed at the plant or equipment itself, or even necessarily at the site at which the plant and equipment is located. Provided the causal requirements are able to be satisfied, the indemnity should be triggered.Solely and Directly
In the Queensland Case of PMB Australia Ltd v MMI General Insurances Ltd5, which was upheld on appeal6, the wording of an ISR policy extension was considered, which indemnified PMB for loss directly resulting from interruption of or interference with the business in consequence of one of three triggers. Mullins J proceeded on the basis that, subject to the terms of the policy, it is a fundamental rule of insurance law that the insurer is liable only for losses proximately caused by an insured event and that the loss must result “directly” from the interruption to business.
In insurance cases the phrase “directly caused by” has been equated with the proximate cause7. The question that arises is whether the use of the word “solely” operates to rule out concurrent proximate causes that are non-excluded causes of the loss, so as to reverse the default position that where there are two proximate interdependent causes of loss, the insured can generally recover8. Conversely if there are two causes of the loss operating at the same time and one is wholly and expressly excluded, the insurance policy will not indemnify9.
The meaning of the word “solely” has been considered in the content of accidental death policies10 and while other causes of death may have been noted they were considered an irrelevant event for the purpose of the insurance cover.
In respect of the Political Violence clause, the Political Violence must “solely and directly” cause the “damage, destruction or permanent loss” of the Insured Equipment. For Political Violence to “solely and directly” cause the loss, can this condition be satisfied if the loss is concurrently caused by a combination of causes?
For example, if plant and equipment is left abandoned at Site after an act of terrorism, due to security reports of the likelihood of future violence at a site or access routes to site, Underwriters may consider the insured’s risk appetite to be a concurrent cause and contend that the Political Violence is not the sole proximate cause.
The argument for the insured would be that the Political Violence is the sole proximate cause of the loss and that its risk appetite associated with demobilisation is itself a result of the Political Violence such that there is a sufficient causal link to the loss, an unbroken causal chain as it were11.
In this regard, it seems possible that the use of the word “solely” will not remove from covers loss which arises from an uninterrupted sequence of events originating from a cause which falls within the Political Violence definition. In the decision of Lasermax Engineering Pty Limited v QBE Insurance (Australia) Limited & Ors12, McCollum JA said13:
“In my view, applying Lord Shaw’s approach in Leyland Shipping (at 369) and the common sense standards to which I have already referred, the real and effective cause of the damage to the laser was the fire. It was the “active, efficient cause” (Lynn Gas & Electrical Meriden Insurance Co) which set in motion the train of events which brought about the damage to the Laser. There was no intervening force which started from a new and independent source. The effective agency which brought about the result was the fire. It was the fire which triggered the sequence of events which led to the power surge and hence (on the assumed facts) the damage to the Laser”.
To the extent that the words “solely and directly caused by” might be thought to limit the operation of the policy, in the recent UK decision of the Financial Conduct authority v Arch Insurance (UK) Ltd and others14, the Supreme Court, having noted that those words formed only part of the description of loss, stated15:
“…In so far, therefore as [the insurer] seeks to rely on the words “solely and directly” to argue that the extent of indemnity provided is only in respect of losses proximately caused by the insured peril alone and nothing else, its argument is misplaced”.
Earlier in that case it was said16:
“…there is nothing in principle or in the concept of causation which precludes an insured peril that in combination with many other similar uninsured events brings about a loss with a sufficient degree of inevitability from being regarded as a cause – indeed as a proximate cause – of the loss, even if the occurrence of the insured peril is neither necessary nor sufficient to bring about the loss by itself….”.
In Swiss Re International SE v LCA Marrickville Pty Limited17, Jagot J at [49] quoted from the Arch case:
“The question whether the Occurrence of such a peril was … the proximate (or efficient) cause of the loss involves making a judgment as to whether it made the loss inevitable – if not, which could seldom if ever be said, in all conceivable circumstances – then in the ordinary course of events. For this purpose human actions are not generally regarded as negativing causal connection, provided at least the actions taken were not wholly unreasonable or erratic.”
Permanent Loss
“The word “loss” implies that the insured subject matter has disappeared or is otherwise unavailable for use by the insured”.18
The term “physical loss” has been judicially considered and has been described as “…physical loss of possession of property; that is, to circumstances where it cannot be said that the property has been destroyed or damaged, but only that physical possession once had of the property has been lost”19
In the matter of Re Mining Technologies Australia Pty Ltd20the court considered whether there had been physical loss of contract works or physical damage to contract works. In that case mining equipment had become trapped following a mine collapse. The discussion of loss in the judgment of McPherson J.A. provides guidance as to what will be considered a loss. In providing his judgment McPherson J.A referred to the decision of Kuwait Airways Corporation v. Kuwait Insurance Co.21 and considered that it was not essential that there should be no prospect at all of the goods ever being recovered to be a loss and that the relevant test outside marine insurance that there is uncertainty and a not unlikelihood of recovery.
The word “permanent” should be given its natural and ordinary meaning, which is “lasting or intended to last indefinitely; remaining unchanged; not temporary; enduring; abiding”22.
It is arguable however that the reference to “permanent loss” does not really add anything to the threshold requirement, as courts already give consideration to the degree of permanency when considering if there has been a loss. The reference to permanent loss may simply be used in contra distinction to something which is temporary.
A Court will however consider the relevant degree and likelihood of permanency when considering if there has been a loss.23
Stevenson J in the New South Wales Supreme Court decision of Mobis Parts Australia Pty Ltd v XL Insurance Company SE (No 7)24 set out the authorities concerning the establishment of loss and said25:
- Those authorities (and, indeed, common sense) establish the following propositions concerning establishment of loss for these purposes:
- each case must be determined on it owns facts: Webster v General Accident Fire & Life Assurance Corporation Ltd [1953] 1 QB 520 at 531 (Parker J);
- it is impossible to lay down an accurate test that will fit all circumstances: Webster v General Accident, Fire & Life Assurance Corporation Ltd at 529 and Holmes v Payne [1930] 2 KB 301 at 310 (Roche J);
- mere temporary deprivation, even if for an extended period, will not under ordinary circumstances constitute loss: Moore v Evans [1917] 1 KB 458 at 471 (Bankes LJ);
- it is not necessary to demonstrate complete deprivation amounting to a certainty that the goods will never be recovered: Moore v Evans at 471 (Bankes LJ)
- loss of physical possession of property may amount to loss of the property: Harris Paper Pty Ltd v FAI General Insurance Co Ltd (1995) 8 ANZ Ins Cas 61-276 at 76,061 (Ashley J);
- an item can be physically lost even if it remains on the insured’s premises: Holmes v Payne at 605 to 307 (Roche J); Harris Paper v FAI at 76,063; Re Mining Technologies Australia Pty Ltd [1999] 1 Qd R 60 at 86 (McPherson J);
- it is necessary to demonstrate that recovery is uncertain after all reasonable steps have been taken: General Accident Fire & Life Assurance Corporation Ltd at 532 (Parker J), cited with approval in Balent v National Insurance Co of New Zealand Ltd (1959) 59 SR (NSW) 275 at 279 (Else-Mitchell J); in Re Mining Technologies Australia Pty Ltd at 76; in Kuwait Airways Corporation v Kuwait Insurance Co SAK (No 1) [1996] 1 Lloyds Rep 664 (Rix J); and in Scott v Copenhagen Reinsurance Co (UK) Ltd [2002] EWHC 1348 Comm at [67] (Langley J); and (this is perhaps saying the same thing) after a reasonable time has elapsed to allow a diligent search and attempt of recovery to be made: (Holmes v Payne at 310 (Roche J).
The New South Wales Court of Appeal in Mobis Parts Australia Pty Ltd v XL Insurance Company SE26 considered the decision of Moore v Evans27 and the application of concepts in marine insurance to policies of property insurance. It cited with approval the following passage28:
The case as advanced may be rejected at three levels. The first proceeds from statements by the Court of Appeal in Moore v Evans [1917] 1 KB 458, rejecting a claim under a non-marine policy for the “loss” of jewellery consigned to Belgium and not returned because of the Great War. In his leading judgment, Bankes LJ at 471 described “the first and natural meaning of the word ‘loss’” in such a policy as “the being deprived of” the object. His Lordship continued:
It is manifest, however, that it is not every kind of deprivation which was within the contemplation of the parties. Mere temporary deprivation would not under ordinary circumstances constitute a loss. On the other hand complete deprivation amounting to a certainty that the goods could never be recovered is not necessary to constitute a loss. It is between these two extremes that the difficult cases lie, and no assistance can be derived from putting cases which are clearly on the one side or the other of the dividing line between the two.
Meagher JA, in finding that the notion of “constructive loss” applied only to policies of marine insurance, went on to say that he considered the principles in Moore v Evans to be “… for the insured to prove not only that a deprivation has occurred but also that the deprivation will, more probably than not, be of sufficient permanence to constitute “a loss””29.
Conclusion
If the above analysis leads to a conclusion that in the circumstances described, there could potentially be scope for cover, myriad further issues are then likely to arise.
If “permanent loss” is the trigger, at what point in time does the obligation to indemnify arise?
In Globe Church Incorporated v Allianz Australia Insurance Limited30, the NSW Court of Appeal’s joint majority judgment said31:
“… Unless it be necessary for there to be a claim made 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 …”.
The “wait and see” approach32 suggests that while the nature of the loss may not be able to be ascertained for a period of time, the loss may ultimately be found to date back to the time of the act of Political Violence.
What of the ability of an insured to realise some value from the equipment of which it has been deprived? Would this operate in derogation of this being a [permanent] loss, or would this go more to an act of mitigation, potentially simply lessening an insurer’s exposure in monetary terms?
What would that exposure be in circumstances where the “lost” equipment has not been repaired or replaced, and it is necessary to calculate the fair market value of the insured equipment at the time immediately preceding the loss? Assuming that “loss” dates back to the time of the act of Political Violence, can the specific circumstances pertaining at the time of the loss itself be brought to account in calculation of that fair market value?
It was said in a reported case in relation to certain mine equipment:
“The location of the equipment is a matter as to which I cannot & do not speculate.”33
This observation perhaps highlights that there may be not just legal and policy issues encountered in relation to losses of this nature, but factual & evidentiary ones as well.
1 In Farriss v Axford (No 2) [2021] NSWSC 1055 [21], Cavanagh J discussed the distinction between a liability policy, in which the indemnity sought would be in respect of a liability to pay damages to a third party, and a first party insurance policy under which an insured person makes a claim in respect of damage to their goods. In Hronopoulos v Building Appeals Board [2022] VSC 376 [52], Mukhtar ASJ adopted the explanation contained in Sutton on Insurance Law (Lawbook, 4th ed. 2015), that the peril in first party insurance destroys or diminishes the insured’s person, property or interest or deprives the insured of its use.
2 as opposed to country or region specific
3 With due attribution.
4 It should be noted that an act or series of acts may well satisfy more than one of the “triggers”, for eg. something which might be classified as an act of “terrorism” might also be classified as an “insurrection” or “civil commotion”.
5 [2000] QSC 329
6 [2002] QCA 361
7 Lasermax Engineering Pty Ltd v QBE Insurance (Aust) Ltd (2005) 13 ANZ Ins Cas 61-643. In Commens t/as Subsonic Music v Certain Lloyds Underwriters subscribing to Policy No ALTCNX 1900332 [2024] FCA 434 Jackman J accepted at [19] that “direct” means “proximate” in terms of efficiency, and does not mean immediate, citing Lasermax.
8 J.J Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The “Miss Jay Jay”) [1987] 1 Lloyd’s Rep 32, 40.
9 Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corporation Ltd [1973] 2 Lloyds Rep 237
10 MBF Life Limited v Marchant (2007) 14 ANZ Insurance Cases ¶ 90-128
11 Ibid .
12 [2005] NSWCA 66
13 At [115].
14 [2021] UKSC 1
15 At [221]
16 At [191]
17 [2021] FCA 1206
18 Enright and Merkin, Sutton on Insurance Law (Thomson Reuters (Professional) Australia Limited 4th Edition, 2015) Vol 2, 105. Further, “Loss to me implies possession of property followed by loss of possession…” Dowsett J, Graham Evans & Co (QLD) v Vanguard Insurance Co Limited QSC No. 1610 of 1986; “Loss of physical possession of property may amount to loss of the property” Harris Paper Pty Ltd v FAI General Insurance Co Ltd (1985) 8 ANZ Ins CAS 61-276 per Ashley J at 76,061.
19 Harris v Paper Pty Ltd v FAI General Insurance Co Limited (1995) 8 ANZ Insurance Cases ¶61-267 at 76,063
20 (1997) 10 ANZ Ins Cas 61-389
21 [1996] 1 Ll.R.664,686
22 Macquarie Dictionary
23 Moore v Evans [1917] 1 KB 458
24 [2017] NSWSC 1312
25 At [901]
26 [2018] NSWCA 342
27 ibid
28 At [98].
29 Meagher JA also thought at [28] it was permissible to adopt the “wait and see” approach, which describes the use of evidence of subsequent events to support an inference as to the likely permanence of any deprivation at the earlier time.
30 [2019] NSWCA 27
31 At [209]
32 Ibid 29
33 McConnell Dowell Middle East LLC v Royal & Sun Alliance Insurance Plc [2008] VSC 501 at [80].
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.
