The extent of the obligation to indemnify under the insuring clause
22 Support for Baralaba's position was sought to be derived from the High Court's decision in Government Insurance Office of New South Wales v Atkinson-Leighton Joint Venture (1981) 146 CLR 206 (GIO v Atkinson-Leighton). There, a joint venture had entered into a long-term contract to construct an embankment in Botany Bay. The joint venture had taken out insurance with the Government Insurance Office of New South Wales (GIO) which, subject to the payment of deductibles, covered damage to the embankment in respect of each and every occurrence arising out of, inter alia, storm or tempest. Work commenced in 1971 and by early 1974, the embankment was partially complete and extended well into the bay. In February 1974, a storm caused substantial damage to the partially built embankment. GIO accepted liability for the loss, and repair works were commenced which were paid for pursuant to the indemnity. Subsequently, successive storms in March, April and May 1974 caused further damage to the ongoing repair works on the embankment. The basis of settlement clause contained in "Memo 2" of the policy relevantly provided:
In the event of any loss or damage the basis of any settlement under this Policy shall be
(a) in the case of any damage which can be repaired - the cost of repairs necessary to restore the property to its condition immediately before the occurrence of the damage less salvage, or
…
23 On appeal before the High Court, the relevant issue was whether, on a proper construction of the policy, the deductibles clause operated in respect of each successive storm event, or only once in respect of the original damage.
24 The majority, comprised of Stephen, Mason, Murphy and Wilson JJ, held that the additional damage caused to the embankment resulting from each storm event constituted a separate indemnified occurrence under the policy, with the consequence being that the deductibles clause was triggered on each occasion.
25 In relation to the present case, Baralaba relied upon the dissenting reasons of Barwick CJ. In particular, the Chief Justice made the following observations (at 218 - 219) in relation to the scope of coverage provided by the policy:
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 the result of some intervening event against which the insured was not insured but which in fact increased the cost of reparation of the property to the pre-damaged condition.
…
The insurer, in my opinion, cannot avoid its obligation to pay the cost of repair 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 repair has attached, it is nothing to the point that the necessary cost of repair is increased by some event which is not an insured risk.
26 The Chief Justice proceeded (at 219) to articulate two examples of how a policy should work in such circumstances:
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 it costs and however the cost is increased by events which could not in themselves have given rise to a claim under the policy.
…
Another illustration can be seen in the effect an industrial stoppage may have on the cost of repair. Suppose when the repair is part done an industrial dispute causes the work of repair to be suspended for a considerable time. Suppose that on resumption of the work of repair costs have increased dramatically. It would, in my opinion, be nothing to the point that the industrial stoppage was not an insured event. The only question would remain as it does in this case: what did it cost to restore the embankment to its pre-damaged condition: that is to say what in the prevailing circumstances did it necessarily cost to restore the embankment.
27 The Chief Justice observed (at 219 - 220) that the insurer had promised to meet the cost of restoring the embankment to its pre-damaged state and, once that obligation attached, it had to be performed; it was not to the point that the cost of restoring was increased by events which were not themselves insurable events. In that way, the subsequent storms were incidents which merely had the effect of increasing the initial obligation to meet the cost of reinstatement. In the context of the appeal, his Honour concluded that only one deductible was payable as there was only one occurrence in respect of which indemnity was to be provided.
28 It must be kept steadily in mind that the Chief Justice's observations were made in the context of his dissenting decision, and it is crucial to consider the reasons of the majority, which are found, in part, in the decision of Stephen J (with whom Wilson J agreed). His Honour emphasised the length of the policy period, being over two and a half years, the fact that the policy was especially designed to cover the construction of the embankment into Botany Bay where it was expected that severe storms might be experienced, and that the policy contemplated that the deductibles clause should apply in respect of each relevant occurrence. For those reasons, his Honour 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 in the manner contemplated by the deductibles clause. It followed that, whenever damage was sustained to the embankment works because of storm or tempest, the deductibles clause operated and, so it seemed, whether the occurrence was the foundation of a separate claim by the insured. His Honour said at 230:
It is upon the happening of every such "occurrence" that the deductibles clause operates and the plain language of the policy seems to me to require that the happening of a second damage-causing storm after an earlier such storm should bring the deductibles clause into operation for a second time.
29 The joint venture had submitted that support for its construction arose from the basis of settlement clause which prescribed the indemnity as being the cost of restoration of the embankment to its pre-damaged condition. This, it was claimed, supported the proposition that when the embankment was damaged by storm "the insurer shall pay, by progress payments, the actual cost of repairs, as and when carried out, and not their estimated cost". That obligation, so it was said, was only discharged when the cost of actual reinstatement which responded to the consequences of the original harm had been fully paid, even if rendered more expensive to complete by reason of further damage being sustained to the embankment. This was rejected by Stephen J, who held (at 231 - 233) that the references in the policy to the insurer "making good" the loss were insufficient to support the joint venturers' proposed interpretation and that the insurer's obligation was to indemnify in relation to the cost of repairs rather than to reinstate. It followed, said his Honour (at 233), that each storm event invoked the obligation of the insurer to restore the embankment to the state in which it was prior to that storm, even if that state was a damaged state consequent upon the prior storm. It followed that on each occasion the deductibles clause applied.
30 Mason J (with whom Wilson and Murphy JJ agreed) separately observed (at 242) that the outcome of the appeal turned on the construction given to the basis of settlement clause together with the deductibles clause, and acknowledged that the joint venture's submission would be good if it stood on the basis of settlement clause on its own. The insurer's contrary argument was that the deductibles clause operated on each and every occasion when damage was caused by a storm which constituted an occurrence for the purposes of the policy. That was accepted by Mason J. The obligation to pay an additional deductible was not conditioned upon a further claim being made. His Honour said at 243:
When the promise to pay or make good the damage is read with par. (a) of the "Exclusions" and the "Deductibles" provision it is susceptible of a separate application to the damage caused by each single occurrence, each occurrence requiring separate treatment for the purpose of quantifying the amount of the indemnity. This interpretation is reinforced by Memo 2. It measures the extent of the appellant's liability by reference to the cost of "repairs necessary to restore" the property and, in so doing, it assumes that there is a liability to pay or make good the damage which is physically caused by the particular occurrence arising from a non-excluded cause.
31 It should be noted that there are no analogues for the deductibles clause or the basis of settlement clause in the present case.
32 It was submitted on behalf of Baralaba that in neither of the reasons of Stephen or Mason JJ is there to be found any disagreement with Barwick CJ's articulation of the manner in which the policy operated. That is true only to the extent that there was no express disagreement. Whilst the majority appeared to accept that the insured was entitled to be indemnified so as to put it into the position it was in prior to the initial storm damage, which included being paid the cost of the further damage caused by the subsequent storms, their reasoning did not rely upon the subsequent damage being referable to the original damage or the insurer's obligation to reinstate it. Rather, 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.
33 In any event, the principle which Baralaba sought to extract from the observations of Barwick CJ is too wide, in that it purports to encapsulate an obligation to cover all damage which insured property might sustain prior to its complete reinstatement, regardless of the cause. That was something with which Mason J expressly disagreed (at 244). Certainly, where there is simply an increase in the cost of undertaking the repairs, that "event" is relevantly connected to the insurer's obligation which attached when the obligation to restore arose. It is an aspect of the actual process of remediating the damage such that any additional cost is within the scope of the insurer's obligation to pay for the cost of restoring the property arising from the damage within the policy's scope. That type of instance may arise where a contractor, whilst undertaking repair work on insured property, performs some negligent act causing additional damage to the property. The insurer's obligation would extend to the increased cost of remediating the further damage which was relevantly connected to and arose out of the performance of the insurer'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 is that the further damage occurred during the process of reinstatement. For instance, where, whilst the insured property is being repaired, it sustains additional damage from an unrelated event such as fire. In those circumstances, the period during which the repairs are being undertaken is only the occasion for the occurrence of further damage, and that damage is relevantly unconnected with the insurer's obligation to meet the cost of repair or reinstatement.
34 The decision and the reasoning in GIO v Atkinson-Leighton was considered by the New South Wales Court of Appeal in CIC Insurance Ltd v Bankstown Football Club Ltd (1995) 8 ANZ Insurance Cases ¶61-232, and subsequently by the High Court in CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384. There, the Bankstown Football Club Ltd (the Club) held an industrial special risks policy with CIC Insurance Ltd (CIC) which indemnified it in the event of physical loss, destruction or damage to the insured property, such indemnity to be in accordance with the basis of settlement clause. That latter clause provided that the insurer would pay the cost of reinstatement, replacement or repair which was to be calculated upon the cost of reinstatement of the property at the time of its reinstatement. It was a requirement of the policy that the work of restoration and repair be commenced and carried out with "reasonable despatch", failing which the insurer was not liable to make any payment greater than the indemnity value of the damaged property at the time of the damage. The insured's premises were damaged by fire on 8 January 1992, following which a claim was lodged. CIC declined to accept the claim and purported to cancel the policy. The insured was not able to reinstate the premises without the indemnity and proceedings were commenced seeking a declaration that CIC was liable to provide it. Whilst that litigation was pending, a further fire occurred causing further substantial damage to the premises which necessitated its demolition. The primary judge held that CIC was obliged to indemnify the Club for the total amount of the damage caused by both fires.
35 On appeal in the New South Wales Court of Appeal, Kirby P adopted the reasoning of Barwick CJ in GIO v Atkinson-Leighton and the observations of Meagher JA in Lumley General Insurance Ltd v Vintix Pty Ltd (1991) 24 NSWLR 652 (Lumley v Vintix). That latter case concerned the obligation of an insurer of commercial premises which were damaged in an earthquake, and in respect of which damage the insurer acknowledged liability. Thereafter, the local government building regulations were amended, having the effect of substantially increasing the cost of reinstating the building. Meagher JA made the following observation regarding the insurer's obligation (at 657), which was cited with approval by Kirby P in CIC Insurance Ltd v Bankstown Football Club Ltd at 75,560:
Since the insurer's duty is to indemnify the insured, and since it is conceded that that duty is to pay the cost of reinstatement, the amount payable to satisfy the duty must be the amount which it costs to effect an actual, not a notional, reinstatement. If no actual reinstatement can be effected without compliance with a new statutory code, the amount payable includes whatever amount is necessitated by such compliance (subject always, of course, to the principle of betterment).
36 Thereafter, Kirby P noted that the obligation undertaken to reinstate can only be discharged by actual, as opposed to notional, reinstatement and that was applicable in the case before him where the additional cost of reinstatement was caused by an event occurring outside of the period of insurance. The insurer's obligation included the responsibility to indemnify the Club in respect of the further damage leading up to and including the second fire which arose out of the first fire. The obligation of reinstatement included the remedying of any subsequent damage as otherwise no reinstatement will have occurred, and the obligation was considered to be a continuing one, such that it was of no moment that the damage from the subsequent fire occurred outside of the period of insurance.
37 CIC appealed to the High Court where it submitted that as the insured had not commenced the repair of the Club's premises with reasonable despatch, its liability was subject to the proviso in the basis of settlement clause which limited indemnity to the value of the premises at the time of the first fire. The Club maintained (at 395) that CIC's obligation to provide indemnity required it to pay the full cost of reinstating the damaged property at the time of its reinstatement, even if further damage had occurred after the period of insurance and even if the period of cover had expired. The majority (Brennan CJ, Dawson, Toohey and Gummow JJ) recognised (at 397) that the policy imposed upon CIC the obligation to pay a sum of money for the cost of reinstatement and not for reinstatement itself. After referring to the observations of Barwick CJ in GIO v Atkinson-Leighton and the result in Lumley v Vintix, it was concluded that those cases were of no direct assistance because the provisos to the basis of settlement clause on which the appeal turned were not present in either.
38 The majority then turned to a consideration of the policy terms and noted (at 401 - 402) that:
The effect of these provisions (including those set out earlier in these reasons) is that the undertaking of CIC was to indemnify the Club against physical loss, destruction or damage occurring during the period of insurance. The fundamental obligations of CIC under the Policy after the occurrence of the first fire were, within a reasonable time of the receipt of the claim (which was made promptly), to acknowledge liability and then to pay the liquidated sum, for the computation of which the Policy provided.
39 Pursuant to the basis of settlement clause, CIC was to pay the Club the cost of reinstatement, replacement or repair. The majority observed that the Club had not elected to claim the indemnity value of any damaged property; being the diminution in value of the property. Therefore, the general basis on which CIC was to pay the amount in respect of damaged property was the cost, at the time of its reinstatement, of reinstatement of the damaged property to a condition substantially the same as, but not better or more extensive than, its condition when new. However, under proviso (i) of the basis of settlement clause, the repair and restoration work was to be undertaken on behalf of or by the Club "with reasonable despatch". Their Honours concluded that, in the events which had happened, the Club had failed to undertake repairs with reasonable despatch and, consequently, was only entitled to a declaration that CIC was obliged to pay it "a sum which represents the indemnity value of the damaged property at the time of the happening of the damage sustained in the first fire". They observed the following at 404:
CIC never came under an obligation itself to reinstate the premises. That being so, the authorities which suggest that, if it had come under such an obligation, CIC would have had to bear the increased cost of reinstatement occasioned by the occurrence of the third fire, are not in point. The obligation to pay the cost of reinstatement had accrued or, to use the expression in some of the authorities, "attached" to CIC, in the manner and with the particular consequences we have indicated, before the expiry of the Policy. That being so, subsequent events, in particular the third fire, did not change the nature or increase the quantum of that obligation.
40 It is apparent from this that the majority recognised that, because the Club had not undertaken the repairs with "reasonable despatch", CIC's liability was limited to paying the amount of the indemnity value of the damaged property at the time of the happening of the damage. This was not to say that, otherwise, CIC would not have been liable to indemnify the cost of reinstating the premises entirely. It was simply indicating that no issue in that respect arose because the scope of the obligation in relation to indemnification was conditioned upon the conduct of the insured once indemnity was granted.
41 It is worth noting here that some commentators have suggested that the above 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, there no such obligation arose. However, that involves a misreading of the above 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 despatch. 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.
42 It was submitted for Baralaba that the majority's discussion of proviso (i), and its effect of limiting the insurer's exposure, was important in the sense that, if it were the case that the principles referred to by Barwick CJ in GIO v Atkinson-Leighton did not otherwise apply, there would have been no point in discussing the operation of the proviso. It was further submitted that the proviso was only relevant because the additional damage, which had been incurred outside of the period of insurance, was claimed to be within the scope of the cost of the repairs in respect of which CIC was required to indemnify. Had the cost of repairing the whole of the premises which had been destroyed by the fire after the period of insurance not been recoverable under the basis of settlement clause, aside from the effect of the proviso, the discussion about the proviso was irrelevant. Therefore, so it was said, as a matter of necessary inference, the majority proceeded upon the assumption that the observations of Barwick CJ in GIO v Atkinson-Leighton were correct and applicable to the operation of the Policy in this case.
43 A similar submission was made in relation to the reasons of Gaudron J. Her Honour had approached that matter by considering the operation of a different proviso, proviso (iv), which required the insured to incur the expenditure prior to receiving indemnity under the policy. As no amounts had been expended prior to the commencement of the proceedings, the cover did not extend to the costs of the additional damage. For the same reasons as have been mentioned above, it was submitted on behalf of Baralaba that the necessary implication from her Honour's reasoning was that, absent the operation of the proviso in question, the policy would have responded to cover all the damage which had been sustained.
44 With respect to the careful and erudite submissions advanced on this topic, they should not be accepted. The issue before the Court concerned the nature of the insurer's liability in circumstances where the insured had propounded its claim on a number of grounds and the insurer had denied liability. It is not possible to read into the reasons of the Court any implied adherence to Barwick CJ's observations in GIO v Atkinson-Leighton. That would require acceptance of the proposition that, by a mere side-wind, the High Court overturned the majority's decision in GIO v Atkinson-Leighton and preferred the reasoning of the dissenting minority. That is most unlikely. Rather, the observations of the majority, where it was said that Barwick CJ's views were not relevant to the case before it, should be given full effect. In relation to this I would, with great respect, not agree with the observations of Kirby P in CIC Insurance Ltd v Bankstown Football Club Ltd, where his Honour, in reliance on Barwick CJ's observations, stated the point too widely.
45 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 insurer's obligation is to reinstate or to pay the costs of reinstatement.
46 That which is in issue here is the scope of the insurers' crystallised or attached obligation to indemnify as found in the Basis of Settlement clause. Once it attaches, it is to pay the cost of reinstating the property by repairing it to a condition substantially the same as, but not better or more extensive than, its condition as new. That liability is not subject to the contingencies of the Policy, but is fixed because the damage is within the Policy's scope. Here, the claim in respect of the storm damage to the stacker has been accepted and the only dispute is as to what is now the scope of the insurers' liability.
47 The reasoning of the majority in GIO v Atkinson-Leighton does not suggest that an insurer's liability in circumstances such as the present extends to meeting the cost of repairing additional damage to the property caused by an event which is unrelated to and independent of the obligation to reinstate. The remediation of additional damage of this nature is not part of the insurer's obligation to indemnify, and it is irrelevant that it might further increase the cost to reinstate the damaged property.
48 On the other hand, the circumstance referred to by Barwick CJ, concerning an increase in the cost of undertaking repairs, provides an example of an event which is intimately connected to the insurer's obligation and enlarges its scope. So much is clear from the result in Lumley v Vintix where the second event, being a change to building regulations which caused an increase to the cost of repairs, was inherently related to the insurer's obligation.
49 Whilst it is not sufficient that the additional damage occurs from an unrelated cause during the effecting of the repairs which are the subject of the insurer's indemnity, the position is different where the further damage occurs from conduct involved in the undertaking of the repairs. For example, if paintwork to property is damaged in the remediation process, that too will need to be repaired as part of the initial reinstatement obligation. The same applies here, though different in degree, but not in principle.
50 In this way, the insurer's obligation to pay for the costs of reinstatement are not dissimilar to the obligation to undertake reinstatement. If, during the course of the insurer's reinstatement of property, additional damage is sustained to the insured property, the insurer is not entitled to a deduction for the expenses already incurred prior to the further damage. The obligation remains one to fully reinstate the property: Smith v Colonial Mutual Fire Insurance Co Ltd (1880) 6 VLR (L) 200, 203.
51 In the present case, the later damage was directly related to and connected with the insurers' performance of their obligation to remedy the original harm and falls within the insurers' obligation to indemnify in respect of the storm damage to the stacker. This construction substantially accords with the views expressed in Ian Enright and Robert Merkin, Sutton on Insurance Law (Thomson Reuters, 4th ed, 2014) 2-146 - 2-149 [16.410] - [16.420], though there the learned authors also state the principle somewhat more widely than is appropriate.