Allstate Exploration NL v QBE Insurance

Court of Appeal (Vic)|2008-08-21|Before: BUCHANAN and DODDS-STREETON JJA and PAGONE AJA

INSURANCE - Industrial Special Risks Insurance Policy - Interpretation of policy - Whether insurer liable for consequential loss in absence of physical damage to property.

2 I have had the benefit of reading in draft the reasons prepared by Pagone AJA. I agree with his Honour's proposed disposition for the reasons he gives.

4 The facts relevant to this appeal are not in dispute. They are set out in the reasons for judgment of the trial judge and need not be repeated except to give context or explanation for these reasons. The legal principles relevant to the issues in this appeal are also not in dispute and are also found in his Honour's reasons for judgment. What is in dispute is how those principles are to be applied to the interpretation of clause 23 of the policy.

5 A seismic disturbance caused a rock fall at the Beaconsfield Mine on Anzac Day 2006. 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, and QBE denies, that the inspector's order was made by reason of the rock fall.

6 The joint venturers contend that the mine closure engaged the operation of clause 23 of the policy. They contend that the mine closure was an insured event

which was 'due to the operation of a peril insured against' within the meaning of the policy. Accordingly, they claim an entitlement to indemnity under the policy for the losses suffered by them as a result of the interruption to their business caused by the mine closure. QBE, in contrast, contends that clause 23 has not been engaged by the mine closure on what it contends to be the proper construction of clause 23. QBE maintains that the order for the mine closure was not due to any loss, destruction of or damage to 'property insured' within the meaning of the policy which, it contends, was required to engage the business interruption cover provided in section 2 of the policy. QBE contends that clause 23 of the policy was not engaged because there was no property damage and that the meaning and extent of clause 23 is to be read in the context of a policy which provides indemnity for property damage (section 1) and the consequences of damage to property (section 2). The learned trial judge held in favour of QBE.

7 Neither of the two competing constructions of clause 23 is, as the trial judge showed, either free from difficulty or manifestly correct. The construction urged by the joint venturers has support on a literal reading of the words of clause 23 but gives rise to some anomalies in application. The construction urged by QBE finds support in the structure of the policy but requires that the clause not be given its literal application. The parties agree that the policy should be given a business-like interpretation[1]. In that task the Court is to consider what reasonable people in the position of the parties would have understood the words to mean by reference to the text of the agreement, the surrounding circumstances known to the parties and the purpose or object of the transaction[2]. The interpretation of the words and the resolution of any ambiguity should be undertaken in a common sense and non-technical way to give the agreement a commercially sensible construction[3]. In that task, as the learned trial judge correctly held, the Court should have regard to all the words used in the agreement 'so as to render them all harmonious with one another'[4] and to ensure the 'congruent operation to the various components as a whole'[5].

8 The learned trial judge concluded that clause 23 of the policy was not engaged unless there was 'physical loss, destruction of or damage to Property Insured'[6] (emphasis added). His Honour gave several reasons for this conclusion of which the first was a consideration of the terms of the policy as a whole and what he described as the 'clear structure' evident from the policy. The preamble to the policy provides that QBE agreed 'to indemnify the Insured as specified' in the policy against 'loss arising from any insured events which occur during the Period of Insurance stated in the schedule or any renewal thereof'. What then follows is a schedule and the operative terms of the policy. A striking feature of the policy is its division into two sections which provide the foundation and structure of the policy. Section 1 is concerned with property damage while section 2 is concerned with loss or damage arising from the interruption or interference with the business arising from property damage. Each section begins with a description of the indemnity provided for. Each section has specific provisions which apply to that section. Some exclusions are identified as applying to both sections, some definitions apply to both sections, some memoranda apply to all sections and, finally, some conditions are said to be applicable to all sections.

9 Clause 23 appears under the heading 'conditions applicable to all sections' although it is fundamental to the claim by the joint venturers that clause 23 has an independent operation. In part that contention relies upon clause 15 (also found in that part of the policy and headed 'conditions applicable to all sections') which provides that headings are included for ease of reference and that the parties both 'understood and agreed that the terms and Conditions of [the] Policy are not to be construed or interpreted by reference to such headings'. Putting aside the headings as an impermissible basis upon which to construe the policy, the fact of the matter is that its structure is fundamentally that of providing indemnity for two kinds of losses both of which depend upon physical loss, destruction of or damage to any Property Insured. Section 1 provides an indemnity in the 'event of any physical loss, destruction or damage' not otherwise excluded and otherwise coming within the terms of the policy. Section 2 insures against the amount of loss resulting from the business carried on by the joint venturers being interrupted or interfered with in the event that any Property Insured (as described in section 1 and section 1(a) of the policy) being 'physically lost, destroyed or damaged' by any cause or event not otherwise excluded. There are many detailed and complex provisions referrable to each of the insured events either exclusively or jointly. Some clauses are specifically in aid of calculation of the amounts to be paid under one or other of these two sections of the policy. One example of this is the basis of settlement provisions in each section. Indeed, the basis of settlement agreed between the parties differs as between the claims that may be brought under sections 1 and 2 of the policy but none is provided for under clause 23 if clause 23 is to be regarded as a separate and independent basis of insurance.

10 In my view the conclusion of the trial judge is correct for the reasons he gave. The overwhelming structure of the policy provides for cover for losses arising from (section 1), or consequent upon (section 2), any event causing physical loss, destruction of or damage to any Property Insured subject to specific exclusions. There are lengthy and detailed provisions in aid of the cover provided which cannot readily apply to clause 23 without either a modification or adaptation of the terms under section 1 or section 2, or an application of the common law. Counsel for the appellant contended that the absence of express terms providing for a basis of settlement of claims under clause 23 should not defeat the construction he urged because it was possible to supply a basis of settlement either by application of the common law or by adapting the provisions found elsewhere in the policy to the extent that they might be made to apply to a claim under clause 23. However, it is difficult to conclude that the parties intended that the basis for settlement under clause 23 should be left either to the common law at large or to some unidentified modification or adaptation of the otherwise specific provisions they had made in respect of claims for property damage (section 1) or business interruption loss (section 2). The absence of a basis for settlement of claims under clauses 23 more readily supports an inference that the clause was not intended by the parties to be a third and independent basis of claim than an inference that they intended to leave the basis of claim either to the common law or to a modified or adapted application of other provisions.

11 Clause 23 is headed 'Civil authority' and provides:

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.

This clause undoubtedly extends the cover provided for in the Policy. A fair reading of the clause, however, is that its primary focus is to identify additional causes of coverage rather than to enlarge the indemnity beyond the loss, destruction or damages elsewhere provided for in the policy. On that view the burden of the provision is to be found in the words appearing after 'arising from' which add first, 'the actions' of any civil authority (as specified) and, secondly, 'the closure' of the Premises/operations by any civil authority (as specified). There seems little doubt that the words 'arising from' identify the causal connection between the risk identified and both 'the actions' and 'the closure' referred to in the clause. The critical question in the appeal is, therefore, whether the clause also intended to enlarge the risk insured against as well as to identify the additional events which might give rise to loss, destruction or damage[s] [sic].

12 There is, as the learned trial judge observed, some force in the submission that loss of business revenue is the most obvious risk to the joint venturers arising from closure of the mine[7], but the view that clause 23 sought to cover against the risk of all such 'loss, destruction or damages' is so great a departure from the structure and other provisions of the policy that its construction as urged by the joint venturers seems unlikely to have been intended. The loss, destruction or damage otherwise provided for in the policy is always dependent upon physical loss, destruction or damage. Section 1 of the policy provides indemnity against physical loss, destruction or damage in terms. The interruption coverage provided for in section 2 extends coverage beyond physical damage but only in the event of the Property Insured being 'physically lost, destroyed or damaged'. The policy (putting clause 23 to one side) does extend coverage but in all cases does so in the context of a careful structure. Section 1 covers damage to property and section 2 provides cover in consequence of damage to property. The specific extensions found in section 2 are all within that framework and consequent upon it.

13 The construction preferred by his Honour is capable of reasonable and sensible application. It extends the cover provided by the policy to those events arising from 'the actions' and 'the closure' specified in clause 23. In that way it fits harmoniously with Peril Exclusions clauses 1(b) and 7(b). The former excludes liability in respect of physical loss, destruction of or damage to the Property Insured resulting from certain action 'by or under the order of any Government or Public or Local Authority' unless it is the result of actions taken by or under Government order for the purpose of 'preventing or diminishing imminent damage by, or inhibiting the spread of, fire or any other peril insured against under' the policy. The construction adopted by his Honour has the effect of limiting this exclusion by extending cover to include physical loss, destruction of or damage to the Property Insured as a result of any action taken by a civil authority whether or not by or under a government order[8]. The second part of clause 23 similarly extends the qualification of the peril exclusion 1(b) to include closure of the mine by a civil authority whether or not that closure is by or under a government order, and whether or not that closure is for the purposes specified in the qualification contained in the exclusion. The only limit to this extension is, as his Honour observed, that closure must be 'due to the operation of a peril insured against'[9].

14 Peril exclusion 7(b) contemplates that physical loss, destruction or damage to the Property Insured may result from the cessation of mining operations caused by strikes and other labour disturbances. The provision excludes that peril from insurance cover. In doing so, the parties had contemplated that physical loss may result from the cessation of mining operations. It is therefore reasonable to assume that clause 23 might likewise contemplate physical loss, destruction or damage in the case of the mine closures contemplated by that clause.

15 Several other arguments were advanced on behalf of the joint venturers, each with some force but none determinative of the issue in their favour. Their reliance upon the absence of the word 'physical' before the words 'loss, destruction of or damage[s]' [sic] places the burden of the language in clause 23 upon the description of the risk rather than upon the two additional causes which clause 23 unquestionably adds. The argument also minimises the significance of the structure as providing for two classes of coverage which are both dependent upon physical damage. It also gives rise to the anomaly of there being no express provision for a basis of settlement for claims under clause 23 in circumstances where specific provisions were expressly found under sections 1 and 2.

16 The joint venturers also placed some weight upon the opening words of clause 23 which they said imply that the condition provided 'a freestanding additional component of cover' addressing the particular losses which may be caused by the actions of a civil authority. This, they said, was also confirmed by the words 'also covered against'. However neither the words 'notwithstanding anything contained herein to the contrary' nor the words 'also covered against' are inconsistent with the construction preferred by his Honour. The question concerning the words '[n]otwithstanding anything contained herein to the contrary' simply indicates that the operative terms of clause 23 are to have an operation notwithstanding that its terms, once properly construed, might be thought to have an inconsistent operation with some other provision in the policy. The words do little more than indicate that clause 23 is to have effect as against any other provision in the policy which might otherwise have denied the effect. The words do not indicate that clause 23 was intended to operate independently of the other sections in the policy or to extend the policy so much beyond the operation of the indemnity beyond damage to property or the consequence of damage to property. Similarly the words 'is also covered against' are of themselves as apt to refer to 'the risk of loss, destruction or damage[s]' as the two additional causing events, namely, the actions or the closure referred to in the clause. To contend that these words 'give a strong indication that the clause was intended to provide 'freestanding' cover which is additional to, and separate from, the cover provided for in Sections 1 and 2 of the policy' is not correct.

17 It was contended on behalf of the joint venturers that clause 23 should be read as providing two distinct parts and that those parts could be set out as follows:

Notwithstanding anything contained herein to the contrary,

(1) 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

(2) [the cover] shall also include the closure of any Premises/operations by any civil authority due to the operation of a peril insured against.

The contention for the joint venturers was that a demarcation of this kind should reasonably be supposed to have been intended by the parties. On this view the two parts of the clause were said to address different actions by a civil authority. The first were those actions of a civil authority during a conflagration or other catastrophe for the specified purposes. The second was the action of a civil authority in closing the mine or its operations due to the operation of a peril insured against. This construction places the relevant breaks of the clause in the wrong places as the need for the words '[the cover]' shows. The more natural way to demarcate the clause is to identify the two categories added to the cover as appearing, first, after the words 'arising from' and, secondly, after the words 'shall also include'. The clause would thus read:

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:

(1) 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

(2) the closure of any Premises/operations by any civil authority due to the operation of a peril insured against.

His Honour correctly considered this to be the appropriate demarcation of the clause and noted that, read in this way, it was consistent with the overall structure of the policy[10].

18 It was submitted that the use of the words 'loss, destruction or damages' in clause 23 weighs in favour of the construction urged by the joint venturers. Section 1 of the policy identifies the class of risk indemnified against as any 'physical loss, destruction or damage'. The condition precedent to the operation of the indemnity in section 2 was the event of any Property Insured being 'physically lost, destroyed or damaged' as provided for. In this context the joint venturers noted the absence in clause 23 of the word 'physical' and the presence of the word 'damages' rather than 'damage' or 'damaged'. The absence of the word 'physical' is less significant if the purpose of clause 23 is seen to be the addition of events or causes to a risk already identified. The structure of the policy points in favour of a construction for clause 23 that what it was adding was to the categories of causes which might result in loss to the risk 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 his Honour to be a mistake[11]. The policy is not entirely free from typographical errors although typographical errors are rare in the document. One clear example is in sub-clause (c) of 'output replacement' in section 1 of the policy where the word 'damages' should obviously have been 'damaged'. In any event, it seems 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 is more likely to be a simple typographical error than so great an addition to the breadth of coverage as now contended for by the joint venturers.

19 The only evidence of surrounding circumstances concerning the drafting of the policy was that clause 23 was inserted at the request of an insurance broker acting as agent of the joint venturers at the material time[12]. This evidence was not relied upon in submissions before his Honour or on the appeal. Nothing turns upon this fact although it may explain why the language of clause 23 might not sit comfortably with the rest of the policy. The circumstance that clause 23 may have been written by a person different from the author of the rest of the document, in this case, assists neither for nor against the construction urged by either party. It does, however, provide an occasion to sound a caution to those adding clauses to pre-existing documents to ensure that their intentions take account of the structure into which additions are made to ensure, as much as possible, that ambiguities and uncertainties are avoided.

20 In the end, of the two competing constructions advanced for the interpretation of clause 23, it seems to me that that adopted by the trial judge is both preferable and correct. I would, accordingly, dismiss the appeal with costs.

[1] McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579, 589 (Gleeson CJ); Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522, 528-9 (Gleeson CJ, McHugh, Gummow and Kirby JJ).

[2] Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451, 462 (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ); Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd and Ors [2004] HCA 52; (2004) 219 CLR 165, 179 (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ); Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522, 528-9 (Gleeson CJ, McHugh, Gummow and Kirby JJ).

[3] Hillas & Co Ltd v Arcos Ltd [1932] UKHL 2; [1932] All ER 494, 499, 503-4; The Council of the Upper Hunter County District v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429, 437 (Barwick CJ); Di Dio Nominees Pty Ltd, v Brian Mark Real Estate Pty Ltd [1992] VicRp 99; [1992] 2 VR 732, 740 (Marks J); MLW Technology Pty Ltd v May [2005] VSCA 29, [76]-[81] (Gillard AJA); Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19; [1997] AC 749, 770-1 (Lord Steyn).

[4] ABC v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99, 109 (Gibbs J).

[5] Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522, 529 (Gleeson CJ, McHugh, Gummow and Kirby JJ).

[9] Clause 23; [2007] VSC 380 [53].

Health and Safety Act 1995

At a glance

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Judgment (44 paragraphs)

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Legislation Cited (2)

Cases Cited (6)