Consideration
76 It is common ground between the parties that the applicable limitation period is six years as provided in s 14 of the Limitation Act.
77 Section 14(1) of the Limitation Act relevantly provides:
An action on any of the following causes of action is not maintainable if brought after the expiration of a limitation period of six years running from the date on which the cause of action first accrues to the plaintiff or to a person through whom the plaintiff claims:
(a) a cause of action founded on contract (including quasi contract) not being a cause of action founded on a deed,
…
78 It is also common ground that: (a) the fuel oil spill occurred in the period 19 to 20 July 1999; (b) the AAD notified Comcover of its claim on 10 August 2004; (c) estimates of the cost of the remediation work were made by TA and communicated to Comcover from as early as 24 August 2004; (d) the amount of these estimates exceeded the combined excess under the Schedule of Cover ($250,000) and the In-House Retention under the UNL Policy ($1 million); (e) Comcover notified the AAD on 21 June 2005 that indemnity would be provided, after initially declining to provide indemnity; (f) Comcover commenced making payment by instalments to the AAD on 8 March 2006 for costs incurred in remediating the damage caused by the fuel oil spill; and (g) the combined excess was exceeded when Comcover made an instalment payment to the AAD on 31 January 2008.
79 The relevant limitation period under s 14 of the Limitation Act commences when the cause of action in contract first accrues. The matter in dispute between the parties is the date when the Commonwealth's cause of action against Vero under the UNL Policy first accrued.
80 Vero's submissions proceed from a characterisation of its contract of insurance with the Commonwealth as, relevantly, a contract of indemnity for property damage. As I have noted above, Vero refers to its "policy" with the Commonwealth as comprising the Schedule of Cover, the Comcover Manual and the UNL Policy. It submits that, on orthodox principles, an insured's cause of action against its insurer for property damage first accrues when the insured event (damage to property) occurs (in this case, at the latest, by 20 July 1999), subject to the contract providing otherwise.
81 Vero submits that this consequence is in accordance with the theory of liability in contract, which holds that the cause of action for breach arises upon the happening of the event constituting the breach. At common law a promise of indemnity is a promise to hold the indemnified person harmless against a specified loss or expense. Once the loss is suffered or the expense incurred, the indemnifier is in breach of contract for having failed to hold the indemnified person harmless against the relevant loss or expense: Firma C-Trade SA v Newcastle Protection and Indemnity Association [1991] 2 AC 1 at 35-36 per Lord Goff of Chieveley; see also Merkin R, Colinvaux's Law of Insurance (9th ed, Sweet & Maxwell, 2010) 9-037; Legh-Jones N, Birds J, Owen D, MacGillivray on Insurance Law (11th ed, Sweet & Maxwell, 2008) 19-053. Therefore, in the case of property insurance, the general position is that the insured can sue on the contract of insurance as soon as damage to the property occurs because the promise to indemnify is breached at that time.
82 In Callaghan v Dominion Insurance Co Ltd [1997] 2 Lloyd's Rep 541 Sir Peter Webster put the matter slightly differently (but to the same general effect) when he said at 544:
… It seems to me that the best way to define an indemnity insurance is that it is an agreement by the insurer to confer on the insured a contractual right which, prima facie, comes into existence immediately when loss is suffered by the happening of an event insured against, to be put by the insurer into the same position in which the insured would have been had the event not occurred, but in no better position.
83 In that case Sir Peter Webster also observed that the accrual of the cause of action is not dependent on the quantification of the insured's claim. He said (at 544-545):
Before considering whether there are sufficiently clear words in this case to take this policy out of the general principle, it is necessary to bear in mind the passage in the judgment of Mr Justice Megaw in the Chandris case at p 74 to the effect that the quantification of the amount of the plaintiff's claim is not a pre-requisite to a cause of action. Thus there is a primary liability, that is to say to indemnify, and a secondary liability, that is to say to put the insured in his pre-loss position, either by paying him a specific amount or it may be in some other manner. The fact that the insurer has an option as to the way in which he will put the insured into his pre-loss position does not mean that he is not liable to indemnify him, in one way or another, immediately the loss occurs.
84 The position is otherwise in relation to policies of liability insurance, where the general rule is that the cause of action does not accrue until the liability of the insured is established by judgment, arbitration or binding agreement, and not upon the occurrence of the event which gives rise to the insured's liability to the third party: Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 at 373-374 and 377-378; The Distillers Company Bio-Chemicals (Australia) Pty Limited v Ajax Insurance Company Limited (1974) 130 CLR 1 at 25-26; Virk v Gan Life Holdings Plc [2000] Lloyd's Rep IR 159 at 162; MacGillivray at 28-002; Colinvaux at 9-039. The general rule in this regard seems to apply to contracts of reinsurance: MacGillivray at 33-072; Colinvaux at 17-017; although see the discussion in O'Neill PT, Woloniecki JW, The Law of Reinsurance in England and Bermuda (3rd ed, Sweet & Maxwell, 2010) 13-101 to 13-112.
85 The Commonwealth places particular reliance on the decision of Giles J in Penrith City Council v Government Insurance Office of New South Wales (1991) 24 NSWLR 564. The case concerned professional indemnity insurance and thus a liability policy. The plaintiff, as the insured, sought indemnity against the defendant, the insurer, in respect of a claim made by a third party referred to as Mitora. The defendant argued that the plaintiff's claim was statute-barred because its cause of action first accrued when Mitora's claim was made against the plaintiff or when the plaintiff, as the insured, made its claim against the defendant under the policy. In that case Giles J said (at 568-569):
... It is not in question that the plaintiff was entitled to indemnity when the Mitora claim was made against it, or when it gave notice of the claim to the defendant, in the sense that it was then entitled to the benefit of the defendant's promise to indemnify it against the claim. But the plaintiff's cause of action was for unliquidated damages for breach of contract: see Luckie v Bushby (1853) 13 CB 864; 138 ER 1443; E Pellas & Co v Neptune Marine Insurance Co (1879) 5 CPD 34; William Pickersgill & Sons Ltd v London and Provincial Marine and General Assurance Co Ltd [1912] 3 KB 614 at 622; Chandris v Argo Insurance Co Ltd [1963] 2 Lloyd's Rep 65 at 74 and Reynolds v Phoenix Assurance Co Ltd [1978] 2 Lloyd's Rep 440 at 462. It had to establish a contract (the policy) by which the defendant promised to do something (indemnify it against Mitora's claim), and breach of that contract (failure to indemnify it against Mitora's claim). It could then recover the loss suffered as a consequence of that breach. The plaintiff's cause of action accrued upon breach. Thus it must be asked what the defendant was required to do in performance of its promise, and when it failed to do what was required of it. Only when the defendant failed to do what was required of it could a cause of action for damages for breach of contract accrue to the plaintiff. There was no cause of action simply because Mitora made its claim or the claim was notified to the defendant - the defendant could have thereafter fully performed its promise.
As condition 2 of the policy shows, the defendant had the right but not the obligation to take over and conduct the defence of the claim, and its failure to do so was not a breach of contract: cf Distillers Co Bio-Chemicals (Australia) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 at 10, 26. Putting legal costs aside for the moment, the defendant could not have been required to perform its promise by making a payment to Mitora or to the plaintiff when the claim was made against the plaintiff, if for no other reason than that the defendant knew nothing of it at that time. Even when the plaintiff had given it notice of the claim, the defendant was not required to perform its promise by making a payment then and there to Mitora or to the plaintiff - whether there was anything against which the plaintiff was to be indemnified depended upon whether it was liable to Mitora and in what amount, which would not be known until established by agreement, arbitration or judgment. What then was the defendant required to do in performance of its promise? When taxed with this, the defendant responded that it was required to indemnify the plaintiff. That takes the matter no further.
86 This passage was quoted with approval in CGU Insurance Ltd v Watson [2007] NSWCA 301 at [59] and [61]. It was also cited with approval in Kone Elevators Pty Ltd v Popa [2006] VSCA 26 at [21].
87 The Commonwealth relies on this passage as authority for the submission that there is no breach of a contract of insurance until the insurer has been required to pay and has failed or refused to do so. I do not read the quoted passage in that way. In that passage his Honour was dealing with a submission that time begins to run under a liability policy when an insured is either notified of a claim against it or makes its own claim under the policy against the insurer, whether or not the claim, in each case, is justified. His Honour rejected that submission. As the quoted passage makes clear, whether there was anything against which the insured was to be indemnified depended on whether liability of the insured to the claimant was established by agreement, arbitration or judgment. This, in my view, is entirely in accord with the general principle I have noted above concerning liability insurance and contracts of reinsurance. No doubt a refusal to pay under a contract of insurance, when liability to pay is established, constitutes, in its own right, a breach of the contract of insurance. But the date of that refusal does not necessarily coincide with the date when a cause of action under the contract of insurance first accrues.
88 It is true that in later passages of his reasons his Honour seems to suggest that there will be no breach by the insurer until the insurer has been required to pay under the policy and has refused to do so: see at 571F-G. This part of his Honour's reasons was not quoted in CGU or cited in Kone. It seems to me that his Honour's observations in this regard were made purely by way of obiter dicta in the context of his Honour discussing other possible accrual dates in respect of which it was not necessary for his Honour to choose because none resulted in any violation of the limitation period.
89 In Cigna Insurance Asia Pacific Ltd v Packer (2000) 23 WAR 159 Pidgeon J, as a member of the Full Court of the Supreme Court of Western Australia, gave consideration to whether, before a cause of action accrued on a personal accidents policy, it was necessary to show that the defendant insurer was not going to perform its promise. His Honour did so by reference to the decision in Penrith City Council. In that case his Honour concluded that the decision in Penrith City Council should not be followed because it was contrary to earlier Western Australian authority, in particular Tillotson v ANZ Life Assurance Co Ltd (1997) 9 ANZ Insurance Cases ¶61-378. His Honour's analysis at [67]-[89] proceeded from a consideration, by reference to first principles, of when it can be said that a cause of action comes into existence. In that connection his Honour noted the statement by Wilson J in Do Carmo v Ford Excavations Proprietary Limited (1984) 154 CLR 234 at 245 that a cause of action is the fact or combination of facts which gives rise to a right to sue. His Honour also referred to what was said by Lord Guest in Central Electricity Board v Halifax Corporation [1963] AC 785 at 806:
The date when a cause of action accrues may be said to be the date on which the plaintiff would be able to issue a statement of claim capable of stating every existing fact which, if traversed, it would be necessary for the plaintiff to prove in order to support his right to judgment. …
90 In my respectful view Pidgeon J's analysis of the relevant principles is persuasive and is capable of being applied in the present case. Nevertheless, the Commonwealth submits that I am bound to follow the approach in Penrith City Council unless satisfied that the decision is plainly wrong: BHP Billiton Iron Ore Pty Ltd v National Competition Council (2007) 162 FCR 234 at [86]-[89]. The Commonwealth submits that Penrith City Council is a decision in relation to the Limitation Act that has been endorsed by the New South Wales Court of Appeal in CGU and is to be applied by this Court as surrogate federal law. I have, however, noted the limited extent of that endorsement. It does not cover that part of the reasoning of Giles J on which the Commonwealth seems to rely to advance the proposition for which it contends.
91 In any event, it is not necessary for me to dwell on the correctness of Penrith City Council in so far as it is sought to be relied on to sustain the Commonwealth's submission. This is because only three dates have been postulated in the present case as being relevant to when the Commonwealth's cause of action under the UNL Policy first accrued, namely:
(a) 20 July 1999, the latest possible date of the fuel oil spill (for which Vero contends);
(b) 21 June 2005, the date on which Comcover notified the AAD that indemnity would be provided (for which the Commonwealth contends); or
(c) 31 January 2008, being the date when Comcover made a payment to the AAD which exceeded the sum of $1.25 million (for which the Commonwealth alternatively contends).
None of these dates depends on Vero refusing to provide indemnity.
92 It is, of course, for Vero to establish that the Commonwealth's claim is statute-barred: Hawkins v Clayton (1986) 5 NSWLR 109 at 142. If it cannot establish that time runs from its nominated date of 20 July 1999 then its defence based on the Limitation Act cannot succeed.
93 I am not persuaded that time commences to run from 20 July 1999 and that, as a result, the Commonwealth's claim under the UNL Policy is statute-barred.
94 In my view Vero's characterisation of its contract of insurance with the Commonwealth - as essentially a contract of indemnity for property damage - ignores both the context in which the UNL Policy was entered into and cl 1 of the insuring agreements.
95 It may be accepted that, as between Comcover and the AAD, no contractual relations existed. The Commonwealth did not seek to contend otherwise. Nevertheless the arrangements which the Commonwealth brought into being between Comcover and the AAD resembled in form, if not in legal substance, a contract of insurance providing for the various classes of cover in the Schedule of Cover that were more particularly described in the Comcover Manual. For all intents and purposes Comcover and the AAD were acting as if they were at arms-length as insurer and insured, respectively.
96 This was the known background against which the Commonwealth and Vero entered into the UNL Policy. The Commonwealth treated Vero as a reinsurer and Vero saw itself acting in that role, even though both parties accept that, strictly characterised, the UNL Policy is not a contract of reinsurance. Nevertheless I am satisfied that under the UNL Policy Vero was agreeing to indemnify the Commonwealth for the responsibilities Comcover had assumed to its Fund Members, even if those responsibilities might not be, strictly speaking, legal liabilities. That this is so is reflected in cl 1 of the insuring agreements which refers to Vero's agreement to indemnify Comcover "for its liability or responsibility to reimburse Fund Members for any claims …". It can be accepted that there are difficulties in the present case in attributing to the word "liability" a strict legal meaning. But I have no doubt that, for the purposes of the UNL Policy, the Commonwealth and Vero proceeded as if Comcover's responsibilities to Fund Members, as described in the Comcover Manual, were to be treated as if they were legal liabilities enforceable by Fund Members against Comcover. Thus I am unable to accept that, in presently relevant respects, Vero was acting simply as the Commonwealth's insurer for loss, destruction or damage to the Commonwealth's property. Rather, Vero was agreeing to indemnify Comcover for its notional liability, and its stated responsibility, to indemnify its Fund Members on the assumption that Comcover was itself to be treated as an insurer of each of its Fund Members. This, therefore, is the setting in which the UNL Policy falls to be considered and construed.
97 Relevantly, Vero's contractual obligation to the Commonwealth under cl 1 of the insuring agreements was to indemnify Comcover for its liability or responsibility to reimburse the AAD, subject to the terms and conditions in the UNL Policy. Importantly, cl 2 of the insuring agreements makes clear that Vero's liability was to indemnify for the Ultimate Net Loss in excess of the In-House Retention, subject to the limits of liability identified in the policy. The Ultimate Net Loss was defined as the sum actually paid or payable in cash in the settlement or satisfaction of claims for which Comcover was liable "by agreement, adjudication or compromise".
98 What fact or combination of facts gave rise to the Commonwealth's right to sue Vero under the UNL Policy? It seems to me that, as a minimum, the Commonwealth would need to establish that there was a claim for which Comcover was liable "by agreement, adjudication or compromise". Certainly there had been no "agreement, adjudication or compromise" in relation to the AAD's claim prior to 21 June 2005. On the facts of the present case the earliest point in time at which it could be argued that there was an agreement or compromise in respect of the AAD's claim was when Comcover informed the AAD (through the AGS) on 21 June 2005 that it accepted the fuel oil spill as an insured event. It follows from this conclusion that the present proceeding, which was filed on 14 June 2011, was commenced within the applicable limitation period and is not barred.
99 In reaching this conclusion I do not accept Vero's submission that cl 2 of the insuring agreements, informed by the definition of Ultimate Net Loss, relates only to the quantification of the indemnity provided by the UNL Policy. In my view Vero's obligation to indemnify Comcover under cl 1 of the insuring agreements cannot be read in isolation from cl 2 and the definition of Ultimate Net Loss. The contract was to indemnify Comcover for its Ultimate Net Loss. Comcover's Ultimate Net Loss could only be referable to claims for which it was liable "either by agreement, adjudication or compromise".
100 Having arrived at the conclusion that the earliest possible accrual date falls within the limitation period, it is unnecessary for me to consider the Commonwealth's alternative, and preferred, position that its cause of action against Vero under the UNL Policy first accrued at a later time when Comcover's payments to the AAD exceeded the total of the excess under the Schedule of Cover and the In-House Retention under the UNL Policy itself.