What happened
The respondent, Bankstown Football Club Ltd, operated licensed premises at Gartmore Avenue, Bankstown, including a bar and gaming machines. With effect from 3 December 1991 CIC Insurance Ltd issued it an Industrial Special Risks Insurance Policy (policy number IS395070) expiring at 4 pm on 30 October 1992. The Schedule set a material damage limit of $1,920,000 and a consequential loss limit of $520,000. The policy was in a standard form containing Section 1 (Material Loss or Damage) which provided that in the event of physical loss, destruction or damage not otherwise excluded, CIC would indemnify the Club in accordance with the applicable Basis of Settlement. That Basis, in paragraph (a), required payment of the cost of reinstatement, replacement or repair in accordance with the Reinstatement and Replacement Memorandum and the Extra Cost of Reinstatement Memorandum. The Reinstatement and Replacement Memorandum stipulated that the basis of calculation was the cost of reinstatement at the time of reinstatement, defined to mean rebuilding or repairing to a condition equal to but not better than when new. Crucially, proviso (i) to the Memorandum provided that the work must be commenced and carried out with reasonable despatch, failing which CIC would not be liable to make any payment greater than the indemnity value of the damaged property at the time of the happening of the damage. Proviso (iv) further provided that no payment beyond the amount that would have been payable if the Memorandum had not been incorporated was to be made until the cost of reinstatement had actually been incurred.
A deliberately lit fire (the first fire) occurred shortly before midnight on 8 January 1992, causing severe damage. The cost of reinstatement after that fire was found by the primary judge to be $240,680. The Club promptly lodged a claim. CIC asserted the fire had been lit by the Club's president or a casual employee or pursuant to a conspiracy. By letter of 22 July 1992 CIC's solicitors refused the claim and stated that the policy (and three others) were cancelled pursuant to Condition 5(b)(v), which permitted cancellation where the insured had made a fraudulent claim under this or any other policy. The Club commenced proceedings in the Commercial Division on 24 September 1992 seeking a declaration of liability under the policy and damages. The primary judge (Cole J) rejected the arson defence and held the purported cancellation ineffective. The policy therefore remained on foot until its contractual expiry on 30 October 1992.
The premises were boarded up. The Club lacked funds to repair because CIC had denied liability. Vandals stole liquor stocks. On 18 December 1992 a second fire caused minor damage. On 3 March 1993 a third fire caused extensive further damage and destruction; the local authority required demolition. The cost of reinstatement after the third fire was found to be approximately $1 million. On the third day of the quantum hearing the Club obtained leave to amend to allege a statutory contract under s 58 of the Insurance Contracts Act 1984 (Cth) and claimed indemnity for the third fire. Cole J held that a statutory policy had arisen and entered judgment for $1,913,963.23 (damages plus interest under s 57). He considered that a reasonable time for investigation had expired by 9 April 1992 and that a bona fide dispute did not make continued withholding reasonable.
The Court of Appeal (Kirby P, Priestley and Powell JJA) delivered reasons on 14 December 1994 (reported at (1994) 8 ANZ Insurance Cases 61-232) and further reasons on 7 April 1995 after relisting. Kirby P and Powell JA held no statutory policy arose under s 58; Priestley JA ultimately concurred on that point. However, the Court of Appeal made declarations that CIC was liable to indemnify for the first fire, for consequential loss from 8 January 1992 to 8 January 1993, for the costs of reinstatement once actually incurred in respect of the third fire, and for general damages for breach of contract, with quantification referred back to the Commercial Division. Divergent reasoning appeared in the two sets of reasons; Priestley JA withdrew parts of his earlier reasons that conflicted with those of Kirby P.
CIC appealed to the High Court, contending that its liability under the original policy was limited to the indemnity value at the time of the first fire and that no statutory policy arose. The Club cross-appealed to restore the s 58 finding. The High Court (Brennan CJ, Dawson, Toohey, Gaudron and Gummow JJ) allowed the appeal, dismissed the cross-appeal, set aside most of the Court of Appeal orders, and made a declaration that CIC is obliged to pay a sum representing the indemnity value of the damaged property at the time of the damage sustained in the first fire. Interest under s 57 was held to run from 30 October 1992. The proceedings were remitted for quantification and costs orders. Subsequent orders on motion adjusted the costs apportionment and the form of remittal.
Why the court decided this way
The joint judgment (Brennan CJ, Dawson, Toohey and Gummow JJ, with Gaudron J agreeing subject to a qualification that did not affect the outcome) turned on two independent questions of construction. First, the proper construction of the Policy. The Court emphasised that the Policy is a contract of indemnity, not a contract under which CIC itself undertook to reinstate. The obligation after the first fire was to acknowledge liability within a reasonable time and then pay a liquidated sum calculated in accordance with the Basis of Settlement and the Memoranda. The Club never elected to claim the indemnity value; therefore CIC's obligation remained the cost of reinstatement calculated at the time of reinstatement. However, the Reinstatement and Replacement Memorandum contained proviso (i), which the Court held was decisive. Because the Club had not commenced and carried out the work of repair "with reasonable despatch", CIC was not liable to pay more than the indemnity value at the time of the first fire. The Court noted that the Club's case was not put on the basis that CIC had repudiated and that the repudiation had been accepted, so as to found a claim in damages. The passage of the period of reasonable despatch therefore engaged the limitation in proviso (i). Proviso (iv), which defers payment beyond ordinary indemnity value until actual expenditure, had no work to do once proviso (i) was engaged.
The Court carefully distinguished earlier authorities. In Smith v Colonial Mutual Fire Insurance Co Ltd (1880) 6 VLR 200 the insurer had elected to reinstate; a second fire during reinstatement did not relieve it. Barwick CJ's remarks in Government Insurance Office of NSW v Atkinson-Leighton Joint Venture (1981) 146 CLR 206 at 219 were directed to a policy in which the obligation to pay the cost of repair had attached during the currency of the policy; they were not applicable to the present wording. Lumley General Insurance Ltd v Vintix Pty Ltd (1991) 24 NSWLR 652 was also distinguished because the quantification there proceeded on the footing that actual (not notional) reinstatement was required to comply with a new building code; the present policy contained an express temporal limitation in proviso (i). Because CIC never came under an obligation to reinstate the premises itself, the line of cases concerning an insurer's election to reinstate had no application. Subsequent events, including the third fire, therefore did not increase the quantum of the accrued obligation.
Second, the Court construed s 58 of the Insurance Contracts Act 1984 (Cth) in its statutory context. The section is designed to prevent an insurer from simply withholding a renewal notice to an unwanted insured, thereby leaving the insured unwittingly uninsured (a mischief identified in paragraph 264 of Law Reform Commission Report No 20). The Court applied the modern approach to construction: context is considered in the first instance, and the mischief the statute was intended to remedy is relevant. Once CIC had given notice of proposed cancellation under s 59 in July 1992 (well before the 14-day period prior to 30 October 1992), the policy was not one "set to expire" within the meaning of s 58. Requiring a further notice would produce incongruous results: the insurer would have to notify expiry of cover it contended had already been cancelled, and any statutory policy that arose could be immediately cancelled under s 60(4). The Club's receipt of a refund of the unexpired premium and its conduct in litigation further underscored that the mischief had not arisen. Accordingly no statutory contract came into existence. Gaudron J preferred to rest the policy construction on proviso (iv) rather than proviso (i), but reached the same conclusion that only the indemnity value was recoverable because no reinstatement cost had been incurred.
The Court also addressed s 57. Cole J's view that a bona fide dispute does not necessarily make withholding reasonable was not challenged on appeal. Interest therefore ran from 30 October 1992, by which date the Club had not elected to claim indemnity value and the period for reasonable despatch had passed.
Before and after state of the law
Before the decision, the law on reinstatement policies was that a policy of fire insurance is a contract of indemnity, but parties may agree that the measure of indemnity will be the cost of reinstatement at the time of reinstatement rather than market-value difference. Cases such as Smith v Colonial Mutual Fire Insurance Co Ltd showed that if an insurer elects to reinstate and a second casualty occurs during reinstatement, the insurer must complete the work at its own cost. Barwick CJ in Government Insurance Office of NSW v Atkinson-Leighton Joint Venture had observed that once an obligation to pay the cost of repair attaches during the policy period, subsequent events increasing that cost do not discharge it. Standard-form policies containing reinstatment memoranda with provisos requiring "reasonable despatch" were in widespread use, but the precise interaction of those provisos with later uninsured damage had not been authoritatively determined at High Court level. The operation of s 58 was also unclear where an insurer had already given notice of cancellation; some lower-court divergence existed on whether literal compliance with the 14-day notice requirement was always necessary.
After the decision, it is settled that in a policy containing the standard Reinstatement and Replacement Memorandum, failure to commence and carry out work with reasonable despatch caps recovery at indemnity value even if later uninsured events increase the cost. The obligation is to pay money, not to reinstate. On the statutory side, s 58 does not require a renewal notice, and does not generate a statutory policy, where a s 59 cancellation notice has already been given before the 14-day window. The purposive, mischief-based approach to Pt VII of the Insurance Contracts Act is confirmed by reference to the 1982 Law Reform Commission Report. The decision also reinforces that s 57 interest begins when it becomes unreasonable to withhold payment, but a bona fide dispute is not automatically reasonable. The judgment leaves open whether s 57 is a code excluding Hungerfords v Walker interest.
Key passages with plain-English translation
Paragraph containing the holding on the policy: "the relief to which it is entitled is a declaration that, upon the proper construction of the Policy and in the events that have happened, CIC is 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."
Plain-English translation: Because the club never started repairs promptly, the insurance company only has to pay what the building was worth at the moment of the first fire, not the much larger bill that arose after the later fire.
On statutory construction: "if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance." (citing Isherwood v Butler Pollnow Pty Ltd (1986) 6 NSWLR 363 at 388).
Plain-English translation: Even if s 58 looks as though it always requires a notice 14 days before expiry, when you read it against the problem the law was trying to fix (insurers silently dropping unwanted customers), it does not apply once a cancellation notice has already been sent.
On the mischief: "The practice of general insurers is to send a renewal notice shortly before the expiry of a policy... In some cases, however, in order to save the insurer the embarrassment of telling an unwanted insured that it is not inviting renewal, the relevant renewal notice may simply be withheld." (quoting Law Reform Commission Report No 20, p 160).
Plain-English translation: The law was aimed at insurers who simply stop sending renewal notices to risky customers. That problem does not exist when the insurer has already told the customer it is cancelling.
On the distinction from earlier cases: "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."
Plain-English translation: The old cases about insurers who choose to do the rebuilding themselves do not apply here, because this policy only ever required the insurer to write a cheque, not to act as builder.
What fact patterns trigger this precedent
This precedent is triggered where (1) a policy in the standard Industrial Special Risks form (or materially identical wording) contains the Reinstatement and Replacement Memorandum with provisos (i) and (iv); (2) insured damage occurs during the policy period; (3) the insured does not commence and carry out reinstatement work with reasonable despatch (taking into account all circumstances, including an insurer's denial of liability); (4) a subsequent uninsured event increases the cost of repair or reinstatement; and (5) the insured sues on the original policy rather than on an accepted repudiation. In those circumstances the insurer's liability is limited to the indemnity value at the time of the original damage.
The s 58 limb is triggered where an insurer has given written notice of proposed cancellation under s 59 (or a contractual term reflecting s 60(1)) before the 14-day period prior to contractual expiry, the insured has not obtained replacement cover, and a loss occurs after the original expiry date. No statutory policy then arises, even if the insured disputes the cancellation and commences proceedings asserting the policy remains on foot. The precedent also applies where the insured has accepted a refund of the unexpired premium, reinforcing that the mischief at which s 58 is aimed has not materialised.
The decision does not apply where the insured has framed its claim as damages for repudiation accepted by the insured, where the insurer has elected to reinstate under the policy, or where no cancellation notice was given before the 14-day period.
How later courts have treated it
The judgment itself treats Smith v Colonial Mutual Fire Insurance Co Ltd (1880) 6 VLR 200 and the remarks of Barwick CJ in Government Insurance Office of NSW v Atkinson-Leighton Joint Venture (1981) 146 CLR 206 as confined to situations in which the insurer has elected to reinstate or the obligation to pay repair costs has attached during the policy period; it distinguishes rather than overrules them. The Court of Appeal decisions in Lumley General Insurance Ltd v Vintix Pty Ltd (1991) 24 NSWLR 652 and the divergent reasons in the Court of Appeal below are likewise treated as turning on different policy wordings or different factual footings. The High Court endorses the Law Reform Commission Report No 20 as a legitimate aid to ascertaining the mischief to which s 58 is directed, consistent with Black-Clawson International Ltd v Papierwerke Waldhof-Aschaffenburg Aktiengesellschaft [1975] AC 591 and Wacando v The Commonwealth (1981) 148 CLR 1. The purposive approach articulated by reference to Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297 and Attorney-General v Prince Ernest Augustus of Hanover [1957] AC 436 is affirmed as the correct method for Pt VII of the Insurance Contracts Act. Cole J's construction of s 57 is left undisturbed, confirming that a bona fide dispute is not necessarily reasonable cause to withhold payment.
Still-open questions
The judgment expressly leaves open whether s 57 of the Insurance Contracts Act 1984 (Cth) provides a code that excludes recovery of additional common-law damages for late payment of insurance moneys, including damages assessed on a Hungerfords v Walker (1989) 171 CLR 125 basis for the lost use of the money. It notes conflicting first-instance views but states that the point was not argued. The precise content of "reasonable despatch" in proviso (i) is left to the facts of each case; Gaudron J observed that it is not reasonable to require an insured to commence rebuilding while the insurer is wrongfully denying liability, but the joint judgment did not need to decide that because the Club had not put its case on a repudiation footing. Whether an insured who has received a refund of premium can later assert that the policy remained on foot until contractual expiry for the purpose of engaging s 58 is not finally determined, although the judgment describes such a stance as unattractive. The interaction between the statutory cancellation regime in ss 59-60 and the contractual cancellation conditions in standard policies also remains to be worked out in future litigation where the timing or form of notice is disputed. Finally, the circumstances in which general damages for breach of an insurance contract (as distinct from s 57 interest) may be recovered were referred to the Supreme Court on remittal and were not authoritatively settled by the High Court.