Limit (No 3) Limited v ACE Insurance Limited

Autodesk Inc v Dyason (No 2) (1993) 176 CLR 300 Cavasinni v Cavasinni (No 2) [2007] NSWSC 957 CASES CITED : McMullin v ICI Australia Operations Pty Ltd [1999] FCA 1814 OzEcom Ltd (in liq) v Hudson Investments Group Ltd [2007] NSWSC 1441 Wentworth v Rogers [2002] NSWSC 921 Wentworth v Wentworth [1999] NSWSC 638

Limit (No 3) Limited (First plaintiff) Oak Dedicated Limited (Second plaintiff) PARTIES : The Underwriter Insurance Company Limited (Third plaintiff) GE Frankona Reinsurance Limited (Fourth plaintiff) ACE Insurance Limited (Defendant)

COUNSEL : Mr S Donaldson SC, Mr J Neal (Plaintiffs) Mr J Simpkins SC, Mr T W Marskell (Defendant)

SOLICITORS : Deacons (Plaintiffs) Wotton & Kearney (Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

Date of Hearing: 8 September 2009 Date of Judgment: 30 September 2009

50191/05 Limit (No 3) Limited & 3 ors v ACE Insurance Limited JUDGMENT 1 REIN J: On 4 June 2009 I handed down my reasons for judgment ("the June reasons") in this matter. The reasons dealt with 23 issues raised by the parties. No judgment was entered because it had been agreed between the parties that certain limited issues relevant to quantum would need to be determined by a reference out to an expert. 2 On handing down the June reasons I invited the parties to give consideration to whether there was any issue which I had not resolved (other than the limited quantum issues specifically identified in the judgment). 3 I also drew attention to a concern that one item of damage, 'Deep Sewer Repair MH2 - MH4', might have been attributed wrongly to one of the four events with which the case was concerned as opposed to another. I shall refer to this as "the attribution point". 4 Within 14 days of the June reasons being handed down the plaintiffs filed a notice of motion to ventilate two matters, one of which is the attribution point. The other matter is a question relating to whether the reasonable precautions condition in the Lloyds policy (clause 7.3) applies to a claim which falls within the Difference in Conditions ("DIC") clause (clause 1.17) and within Section 2 of the Lloyds policy, which I shall refer to as "the DIC point". I shall in these reasons use the terminology used in the June reasons. 5 Mr Donaldson SC with Mr Neal appeared for Lloyds, as they did at the hearing and Mr Simpkins SC with Mr Marskell appeared for ACE as they did at the hearing.

The DIC point 6 There was considerable dispute between the parties as to how I should deal with the DIC point. Essentially Lloyds assert that they have not been heard on the question of whether the reasonable precautions condition (found only in Section 1 of the Lloyds policy) applies to a DIC claim that is characterisable as a Section 2 claim. ACE submits that the application of Lloyds amounts to an appeal and that such a course should not be permitted. ACE submits that the conditions for a reopening of the case do not exist. ACE submits that there is no flaw in the conclusion I have reached for reasons which they advance, but that if there is a flaw it arose from the manner in which Lloyds argued its case. My attention was drawn to a number of cases including Autodesk Inc v Dyason (No 2) (1993) 176 CLR 300, Wentworth v Rogers [2002] NSWSC 921, McMullin v ICI Australia Operations Pty Ltd [1999] FCA 1814, OzEcom Ltd (in liq) v Hudson Investments Group Ltd [2007] NSWSC 1441. 7 In relation to the DIC point I dealt with this as Issue 22 in the June reasons as follows: [256] This issue seems to arise in the following way. ACE relies on the PSE in the ACE policy. Lloyds counters saying that the PSE does not apply in terms and even if it does it is overridden by GC 14. ACE disputes that contention but then says that even if there is cover under the ACE policy there is no cover under the Lloyds policy because it also has a professional services exclusion. Lloyds counters that if the ACE policy is wider than the Lloyds policy for any reason then Lloyds is required to indemnify the JV on the wider basis. ACE then replies that clause 1.17 does not operate in that way and there is no cover under Section 1 of the Lloyds policy. Lloyds riposte is - if there is no cover under Section 1, there is cover under Section 2.

[257] The logic of the argument is also relevant to the question of the reasonable precautions exception because it is found in the Lloyds policy and not the ACE policy and it is an exception relevant only to Section 1 of the Lloyds policy. For Lloyds to be able to recover from ACE it must establish that it was required to indemnify the JV. It was only required to indemnify the JV by virtue of clause 1.17 and it must bring itself within one of the sub-clauses of clause 1.17. I have expressed the view that sub-clause 1.17(c) is the applicable clause and that it is qualified by all exceptions in the Lloyds policy.

[258] The only extension of the Lloyds policy cover available to support Lloyds' argument must be in the framework of sub-clause 1.17(b) and it applies only to Section 1 of the Lloyds policy. If Lloyds is liable under Section 2 that liability was not the subject of any expansion of cover which Lloyds could rely upon to claim against ACE. I do not therefore need to consider the question of what further factual matters would need to be established to determine whether the claim did in fact fall within Section 2: see T1380, where Mr Simpkins outlines the difficulties in relation to this point. 8 The arguments found at T1380 to which I made reference in [258] were to the following effect: (1) There was no explanation by Lloyds as to why there was Section 2 cover.

(2) Was there a demand for compensation made against the insured?

(4) Was the payment made by Lloyds made for a claimed loss under clause 1.1 of Section 2 or for the insured's costs for mitigation loss not yet the subject of a claim - clause 3.8 of Section 2?

(5) If payment was made under clause 3.8 of Section 2:

(a) would the loss otherwise have been the subject of an indemnifiable claim for compensation; and

(b) did the insured obtain the prior approval of Lloyds for the mitigation work?

(6) If part of what was paid was payment under clause 3.8, that was not cover which ACE agreed to give under its policy so no contribution is available.

9 The context in which the DIC issue arises is that if Lloyds established that ACE was liable to indemnify the JV in respect of liability to third party claimants, including PowerGrid (the JV's client) - as I found it had - Lloyds had to establish that it was also liable to indemnify the JV in respect of the same liability to those third party claimants. Some of the issues were the same as those as were relevant to the ACE policy: (1) Whether the JV was liable to the third parties in respect of the damage.

(2) Whether it was necessary for liability to be imposed that there be judgment, award or settlement of proceedings commenced.

(3) Whether the professional services exclusion (" PSE ") in clause 5.11 of Section 1 of the Lloyds policy applied.

(4) Whether the reasonable precautions condition in clause 7.3 of Section 1 of the Lloyds policy had been breached.

(5) How the provisions of the DIC clause operated and in particular whether the JV's claim fell within sub-clause 1.17(b) or sub-clause 1.17(c) of the Lloyds policy.

10 Issues (1), (2) and (3) were resolved in the same way that they had been in relation to the ACE policy, namely that the PSE did not operate in respect of third party claims, except for the claim by PowerGrid. In relation to the ACE policy I had held that a special endorsement (General Condition 14) operated to ameliorate the effect of the ACE PSE which removed the effect of the exclusion. The Lloyds policy had no such special endorsement. 11 Considerable attention was given to the meaning of the DIC clause (clause 1.17), discussed at [207], [208] - [215] of the June reasons. Lloyds argued that sub-clause 1.17(b) extended cover to give the JV indemnity wherever the cover in the underlying policy was more generous than the Lloyds policy (referred to as "the Master Policy" in the DIC clause). 12 In broad terms, as I explained in the June reasons, I see the DIC clause as having these elements: (1) An excess policy for claims above $15 million falling with the Lloyds policy but only up to $15 million (sub-clause 1.17(a)).

(2) An excess policy for claims for legal liability in respect of damage to property or personal injury to third parties or employees, above $15 million, following the form of the underlying policy where the terms of the underlying policy are more favourable to the JV than the Lloyds policy (sub-clause 1.17(b)). (3) A policy giving primary cover up to $15 million where the claim is for legal liability in respect of damage to property or personal injury to third parties or employees and the underlying policy does not indemnify the JV (first paragraph of sub-clause 1.17(c)).

(4) A policy giving primary cover where the claim is for legal liability in respect of damage to property or personal injury to third parties or employees and the JV cannot obtain an admission of liability or the underlying insurer "fails or is reasonably likely not to indemnify the insured" (First Addendum to sub-clause 1.17(c)).

13 I expressed the view that both (3) and (4) are subject to the "terms, Conditions and Exceptions" of the policy (see the Second Addendum). The reasonable precautions condition is one of those conditions. 14 The case for Lloyds was put as principally based on the claim falling within Section 1 of the Lloyds policy and not as falling within Section 2 of the Lloyds policy - Section 2 being of a form commonly described as professional liability cover. That the claim not be categorised as a professional liability claim was important to Lloyds because the ACE policy did not contain a professional liability section and had (like Section 1 of the Lloyds policy) a professional services exclusion, although Lloyds had an argument that General Condition 14 of the ACE policy overcame the effect of the ACE PSE. Lloyds argued that the PSE in both ACE and Lloyds policies did not apply in the circumstances of this case. Mr Donaldson did make clear that Lloyds maintained that should the Court hold that the Lloyds PSE did operate to exclude the claim under Section 1 then the claim would fall within Section 2 of the Lloyds policy: see T158.26 - .31. 15 The pleading appears to make Section 2 cover dependent on the non-applicability of clause 7.3 (the reasonable precautions condition), but unlike the PSE argument it is not apparent why this should be so. If a claim falls within Section 2 is does so independently of whether it is excluded under Section 1. It may be that the contention that Section 2 responds to the JV's claim should have been pleaded in the Statement of Claim but no pleading point was taken by ACE. In any event, what the Reply asserts is that if clause 7.3 applies, cover is available under Section 2. A similar point is made, although in a confusing way, at paragraph 115 of the Plaintiffs' Further Written Submissions of 16 March 2009, and see also paragraph 116. At T1212.16 - T1214.19 Mr Donaldson did explain the significance of the Section 2 cover and he made the point at T1213.3 that the reasonable precautions condition was not relevant to Section 2 cover. 16 Secondly, in an endeavour to avoid the consequence of ACE's argument that the reasonable precautions condition had been breached, Lloyds argued that only sub-clause 1.17(b) was relevant to the claims by the JV against ACE, and that the First Addendum was to be read as applying to sub-clause 1.17(b). 17 Looking at [257] and [258] of the June reasons, it occurs to me that the combined effect of the matters referred to in [14] - [16] above and the considerable time spent on the factual matters relevant to the reasonable precautions condition led me to consider that the argument concerning sub-clause 1.17(b) was intended to avoid a concern that sub-clause 1.17(c) brought into play the reasonable precautions condition for both Section 1 and Section 2 claims and that my conclusion that sub-clause 1.17(b) was not available for that purpose disposed of that argument. 18 The June reasons do not proceed to offer any analysis as to which of the terms, conditions and exceptions are to be applied to a claim made under sub-clause 1.17(c), nor do the June reasons expressly refer to the applicability of the reasonable precautions condition to a Section 2 claim, but implicitly the reasons proceed upon the basis that the TBM/G4 damage is excluded because of the breach of the reasonable precautions condition even if the claim is a Section 2 claim. 19 No argument was addressed to me at the hearing by either side as to how sub-clause 1.17(c), and particularly the Second Addendum, was to operate where the claim fell within the First Addendum. Mr Donaldson says he had no need to do so because it was ACE's contention that the claim fell within Section 2 of the Lloyds policy and hence that he did not perceive there to be an issue that the claim fell within Section 2. Lloyds' position, as I understand it, is that when a claim is made under sub-clause 1.17(c) the claim has to be assessed as either a Section 1 claim or a Section 2 claim. He submits that if it is a Section 1 claim the general conditions applicable to both sections apply, as do conditions expressed to have application to Section 1, and that if it is a Section 2 claim, the general conditions apply together with the conditions particular to Section 2. Section 1 conditions and exceptions are not, he submitted, to be read as applying to Section 2 claims. He argued that there is no warrant for reading down the effect of the DIC clause by applying Section 1 conditions or exceptions to a claim that is only a Section 2 claim. 20 Mr Simpkins has now put forward a number of arguments to support the proposition that the drop down cover provided in sub-clause 1.17(c) is not available to a Section 2 claim, being arguments not previously advanced. These arguments, using consecutive numbering following on from [8] above, are: (7) Sub-clauses 1.17(b) and (c) do not operate in relation to Section 2 of the policy:

(a) As a matter of construction the DIC clause was not intended to give drop down cover for Section 2. It is asserted that the second paragraph of sub-clause 1.17(a) is clearly intended to relate to Section 2 cover because of the use of the words "Claim or Claims" with a capital "C" and that the paragraph is otiose if it did not have this purpose and that conclusion in relation to sub-clause 1.17(a) means that only sub-clauses 1.17(b) and 1.17(c) apply to Section 1 of the Lloyds policy. ACE asserts that sub-clauses 1.17(b) and (c) which use the phrase "legal liability costs and expenses" are directed to Section 1 cover and not Section 2 cover.

(b) That the correspondence passing between Lloyds' agent and the JV's agent establishes that it was not intended that Section 2 cover be the subject of the drop down provisions. The correspondence relied on is identified and I have had it marked 'Exhibit S'. Exhibit S was by agreement admitted subject to relevance.

(c) That the statement of deductibles in the Lloyds policy (Exhibit S vol 2 at p 1.6) points to Section 1 as the only section having deductibles for the DIC clause because the only reference to clause 1.17 of the policy is under the heading 'Section 1'.

(8) Lloyds has not proven that Section 2 responds (this is really the same as (1)).

21 In Wentworth v Rogers (supra) Barrett J said in dealing with the question of permitting a party to reopen the case: "[9] It seems to me that the relevant principles, as they apply in a case such as the present, can be summarised in one basic proposition, namely, that a single judge whose decision is susceptible to appeal through readily available channels (with or without any preliminary need for leave to appeal) should allow re-opening after judgment where it is obvious to that judge that the decision has miscarried and that the miscarriage may be rectified and the situation retrieved by attention to the matter by that judge rather than by an appeal court. What is highly undesirable is that the first instance judge should be cast in the role of hearing what amounts to an appeal against his or her own decision." 22 Reference should also be made to a passage in Wentworth v Wentworth [1999] NSWSC 638 per Santow J, as he then was, (a passage cited by Barrett J in Wentworth v Rogers at [8]): "While illustrations of where the courts have or have not re-opened a judgment not yet entered are of value, they can be subsumed more generally in what Mason CJ said in Autodesk (at 301-2). He delimited the scope of the discretion by explaining that "the exceptional step" of reviewing an issue might occur where a court has good reason to consider that it had proceeded on a misapprehension as to the facts or the law and where the misapprehension cannot be attributed solely to the applicant's neglect or default." 23 Lloyds draws attention to the comments of Young CJ in Eq (as his Honour then was) in Cavasinni v Cavasinni (No 2) [2007] NSWSC 957 at [8]: "that it is far better where there is a problem seen about a judgment and where the order has not been entered, for the trial judge to deal with the matter ranter than let either or both parties appeal the case." 24 I do not think that Lloyds' application fits within the category of an attempt to reargue its case. The position is quite complicated, because the construction issues at the heart of the dispute are themselves complicated, and because of the way in which the DIC issue was dealt with by the parties, but also because of an assumption made by me about Lloyds' argument which I recognise as erroneous. 25 The absence of any express consideration of the way in which the Second Addendum was to operate when the First Addendum was enlivened confirms my view that I have not dealt with the point or adequately dealt with the point. I accept that the conclusion that the reasonable precautions condition applies to a claim that is characterised as a Section 2 claim is not one on which Lloyds has, until now, been heard and that it is appropriate to allow Lloyds to put its argument on this point and for ACE to have an opportunity to respond. Both have now done so.

26 It is clear that the Court must exercise the discretion to permit a matter to be reopened sparingly and conscious of the need to avoid effectively admitting appeals. Lloyds' application to reopen on the DIC point is a very narrow application (although in dollar terms the consequences are significant) and it is based upon the contention that the argument upon which I decided the Section 2 point is not one which was argued by ACE. ACE seeks to attribute that consequence to Lloyds' conduct of the case but I do not think that is a fair categorisation of what has occurred and I am persuaded that the decision on this point has miscarried and that leave must be granted.

The attribution point 27 Both parties agree that the June reasons contain an error in respect of the attribution of damage. Lloyds, however, asserts that the error is in the conclusion at the paragraph formerly numbered [308] in that I incorrectly excluded the Deep Sewer Repair MH2 - MH4 claim and ACE submits that the error is really to be found in paragraph [60] where I have summarised Dr Redman's position. Lloyds contends that the summary of Dr Redman's position in that paragraph is a correct summary. 28 At [60] of the June reasons I referred to the document summarising Lloyds' claims as to damage. ACE says that it did not receive a copy of that document which was handed up in Court by Mr Donaldson. Lloyds' solicitors assert that a copy was provided to the ACE representatives but this is disputed. Part of the problem is that having heard no complaint of criticism by counsel for ACE I assumed that the table fairly represented Dr Redman's evidence as to the attribution and apportionment between the four incidents. 29 There are in respect of the PUB deep sewer two separate claims, for damage which occurred in two separate geographical areas: (1) both temporary and permanent repairs to the deep sewer in the vicinity of the tunnel collapse which was due to the TBM/G4 problem; and

(2) repairs to the deep sewer between manholes MH2 and MH4. 30 ACE relies on paragraph 14 of Dr Redman's report (Exhibit E) and Schedule 4 to the report. The Schedule refers to the Deep Sewer Repair MH2 - MH4 claim as being 50% attributable to the TBM/G4 problem and 50% to the TBM/dyke problem, in contrast to [60] which attributes 50% of the claim to Woodlands shaft and 50% to the TBM/dyke problem. 31 There are five reasons why I think it appropriate to accept that the Schedule contained an erroneous entry: (1) the body of the report (see paragraphs 203 - 208 and 246 - 252) clearly differentiates between the repairs to the deep sewer near the tunnel collapse and the repairs to the deep sewer between MH2 and MH4;

(2) there was no cross examination of Dr Redman to the effect that the report was inconsistent with the Schedule;

(3) no positive case was mounted by ACE that the repairs to the deep sewer between MH2 and MH4 were a result of the TBM/G4 problem;

(4) no submissions were made to that effect by ACE;

(5) the experts agreed that the outer limit of the TBM/G4 damage was "not much" beyond chainage 1170 and the damage to the deep sewer between MH2 and MH4 is from chainage 1180 to chainage 1350.

32 It follows that [60] of the June reasons is an accurate reflection of Dr Redman's allocations and the error is found in [308]. I propose to alter [308] of the June reasons to reflect this conclusion.

Exclusion 5 of the ACE policy 33 A further matter which was drawn to my attention was that the formulation of the issues as set out in [9] of the June reasons contained an incorrectly truncated version of exclusion 5 of the ACE policy (see 19 of the June reasons where it is set out in full). This had the consequential effect that [186] of the June reasons was based on the incorrect version.

Conclusion 34 It follows that the plaintiffs succeed on their notice of motion and the defendant should pay the plaintiffs' costs. 35 I will have handed down separately pages containing amendments to the relevant paragraphs of the June reasons which require alteration in relation to the matters identified and the changes will be incorporated into the existing judgment with a copy provided to the parties' solicitors in electronic form.

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