Newcastle Resources Pty Ltd (formerly known as SCE Resources Pty Ltd) v Certain Underwriters at Lloyd's Syndicate CVS 1919 subscribing to policies numbered LS00100XL, LS00100BU and STA0222BU

JUDGMENT

1. Between July 2006 and June 2014 the plaintiff, Newcastle Resources Pty Ltd ("Newcastle"), supplied Lake Macquarie City Council ("the Council") with a product known as "Mix 3". The Council used Mix 3 as part of the road base in various roadworks.
2. The Council alleges that the Mix 3 supplied by Newcastle: 1. contained untreated steel furnace slag, which contained unhydrated calcium oxide that was capable of uncontrolled expansion if not sufficiently weathered; 2. has expanded excessively, causing damage to: 1. property adjacent to roads constructed by the Council, giving rise to claims by affected property owners against the Council (the "Council Liabilities"); and 2. roads and related infrastructure owned by the Council, such as kerbing, drains and the like, which the Council has repaired from time to time at its own cost (the "Council Repair Costs"); and 1. was unsuitable for use by the Council in road construction and will need to be removed from the road base on many roads in the Council's local government area, involving substantial future road reconstruction estimated to cost some $124 million (the "Future Road Replacements").

The Council's claims against Newcastle

1. The Council has brought claims against Newcastle arising from these matters.
2. First, the Council brought a cross-claim ("the Council Cross Claim") against Newcastle in proceedings commenced against the Council in 2017 in the District Court of New South Wales by a property owner, Mr Robert Kanis. In those proceedings Mr Kanis contends that the Council authorised the reconstruction of road pavement adjacent to his property and that the road surface has now expanded in the direction of his property. By the Council Cross Claim, the Council seeks contribution or indemnity from Newcastle in respect of Mr Kanis' claim under s 5 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW).
3. Second, in 2018, the Council commenced further proceedings against Newcastle, also in the District Court ("the Council Primary Claim"). In the Council Primary Claim, the Council makes a claim for the Council Liabilities in relation to claims for damages made against it by other property owners, [1] and also makes claims in respect of Council Repair Costs and the cost of Future Road Replacements.
4. Both proceedings were transferred to this Court and entered in the Technology and Construction List in 2019, being proceedings 2017/295403 and 2018/77899 respectively. I will refer to these proceedings together as "the Underlying Proceedings".
5. The Underlying Proceedings are progressing together in the Technology and Construction List and are presently paused pending the outcome of these proceedings.

The Policies

1. For four 12-month periods commencing on 30 June 2011 and concluding on 30 June 2015, the defendants ("the Underwriters") provided Newcastle with liability insurance cover under policies with wording which is, materially, identical ("the Policies").
2. The "Limit of Indemnity" in each of the Policies is $10 million for "any one Claim and in the aggregate any one Period of Insurance".
3. The Policies do not impose on the Underwriters a duty to defend proceedings brought against Newcastle but, by cl 18, entitle the Underwriters to "take over the conduct in the name of [Newcastle] of the defence … of any claim". That is, the Policies provide "defence costs incurred" cover rather than "duty to defend" cover.
4. For some time, the Underwriters, exercising their right under cl 18, conducted the Underlying Proceedings on Newcastle's behalf and, in so doing, incurred costs in the order of $1 million.
5. However, since 30 November 2021, the Underwriters have ceased conduct of the proceedings and refused to pay any further costs of defending the claims made in each of the Underlying Proceedings.
6. In those circumstances, Newcastle has brought these proceedings seeking a declaration that the Underwriters are obliged, in their respective proportions, to pay the "Defence Costs", as defined in the Policies, incurred by Newcastle in defence of the claims made in the Underlying Proceedings; that is all such costs, as and when incurred.
7. The declaration sought by Newcastle is: "… that the [Underwriters] are obliged to pay, in their respective proportions, the expenses incurred by [Newcastle] in defence of: a. the cross-claim brought against [Newcastle] by [the Council] in proceedings in the Supreme Court of New South Wales with case number 2017/295403; and b. the claim brought against [Newcastle] by [the Council] in proceedings in the Supreme Court of New South Wales with case number 2018/77899."
8. It is common ground that, for the purpose of these proceedings, I should assume the truth of the allegations made by the Council in the Underlying Proceedings.

Decision

1. Newcastle is not entitled to the declaratory relief it seeks.
2. I will invite submissions as to the utility of making any alternative declaration. [2]

Construction of insurance policies

1. A policy of insurance is a commercial contract. [3] Insurance contracts are generally subject to the same rules of interpretation as any other written commercial contract. [4]
2. A court in interpreting a provision of a document has regard to its context and the purpose of the document as a whole. The leading modern statement on the importance of context and purpose is found in the reasons of French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd: [5] "The rights and liabilities of parties under a provision of a contract are determined objectively, [6] by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. [7] … Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning. [8] However, sometimes, recourse to events, circumstances and things external to the contract is necessary. …" [9]
3. Further, as has also been correctly stated, concerning contracts generally: "… the only relevant meaning is that which the text conveys. This follows from the need to ascertain the intention expressed in the document. Although … context and purpose are relevant, ultimately the court must attribute meaning to the words actually used." [10] (Emphasis in original.)

Do the Policies respond to the Council's claims?

1. As I will develop below, Mr Lloyd SC, who appeared with Mr Newton [11] for Newcastle, accepted that the only Defence Costs payable under the Policies are those referable to claims against Newcastle that, if established, are within the scope of cover of the Policies. [12]
2. Accordingly, it is necessary to consider the extent to which the Policies respond to the claims made by the Council against Newcastle.
3. There was debate before me as to whether the Council is making just one "Claim" for the purpose of the Policies or multiple "Claims". For the reasons set out below, my opinion is that there are multiple "Claims". Accordingly, I will refer to the various "claims" made by the Council.
4. The Insuring Clause in the relevant section of the Policies [13] is, relevantly, in the following terms: "Subject to the terms of this Policy, Underwriters will pay to or on behalf of the Insured all sums which the Insured shall become legally liable to pay by way of compensation … in respect of … Property Damage first happening during the Period of Insurance as a result of an Occurrence in connection with the Insured's Business."
5. There is no dispute that, assuming the correctness of the allegations made by the Council, there has been, for the purposes of the Insuring Clause, an "Occurrence in connection with [Newcastle's] Business". There is a dispute, to which I will return below, [14] as to whether it is necessary for Newcastle to nominate in which "Period of Insurance" the relevant "Property Damage" first happened.
6. The question to which I will now turn is the extent to which the claims made by the Council against Newcastle are "in respect of" Property Damage, and thus within the cover afforded by the Insuring Clause.
7. The Underwriters accept that the claims made by the Council against Newcastle for the Council Repair Costs, that is, claims for the damage allegedly done to the Council's own property by the Mix 3, are claims "in respect of" Property Damage.
8. What divides the parties is whether the claims made by the Council for the Council Liabilities and the Future Road Replacements are claims "in respect of" Property Damage.

The claim for Council Liabilities

1. These are claims made by the Council for the economic loss it has suffered or will suffer as a result of claims made against it by property owners, including Mr Kanis, whose properties have been damaged due to the expansion of the road base adjacent to their properties by reason of the inclusion of Mix 3 in the road base.
2. The question is whether these claims, themselves arising from the economic loss the Council has suffered or will suffer by reason of having to compensate property owners, should be characterised as being "in respect of" the Property Damage allegedly suffered by the property owners.
3. In that regard, Mr Lloyd emphasised that the Council's claim is for contribution under the joint tortfeasor legislation, and is thus premised on the contention that, if sued by the affected property owners, Newcastle would itself be liable to those property owners for the same damage that is the subject of their claims against the Council.
4. There are three intermediate appellate decisions that support Newcastle's contention that the phrase "in respect of" has a broad ambit and should here be understood to mean that, although the Council has not itself suffered Property Damage, the claims against it are "in respect of" Property Damage, namely the Property Damage suffered by the affected property owners.
5. First, in National Vulcan Engineering Insurance Group Ltd v Pentax Pty Limited t/as LIF-RIG & Anor [15] the New South Wales Court of Appeal considered a claim made against the insured under a contractual indemnity relating to a claim by an injured worker. The policy provided cover for claims "for or in respect of" personal injury. The Court [16] held that although the insured's claim could not be said to be "for" the worker's personal injury, it was "in respect of" that personal injury. [17] Thus, the Court did not consider that "in respect of" had, in the context of the policy under consideration, the same meaning as "for". I return to this below when considering a United Kingdom authority upon which the Underwriters relied. [18]
6. Second, in Zurich Australian Insurance Ltd v Regal Pearl Pty Ltd [19] the Court of Appeal considered whether a claim made against a supplier of prawns that had caused personal injury to restaurant patrons who had consumed the prawns was a claim "for" personal injury. The Court [20] held that, in the context of that policy, "for" should be understood as meaning "in respect of" and that, accordingly, the policy responded to the claim. [21]
7. Finally, in Siegwerk Australia Pty Ltd (In Liquidation) v Nuplex Industries (Aust) Pty Ltd [22] the Full Court of the Federal Court of Australia considered whether a claim made by a lacquer manufacturer against the seller of a faulty resin used in the lacquer supplied to a can manufacturer, was a claim "in respect of" the property damage caused to the cans themselves. The Court [23] held that it was. [24]
8. The Court concluded that, in the context of the policy under consideration, "in respect of" should not be seen as meaning "for" and that the Court of Appeal's decision in Zurich Australian Insurance v Regal Pearl was "of no present assistance other than to confirm that meaning is a creature of context". [25]
9. In R & B Directional Drilling Pty Ltd (in liq) v CGU Insurance Limited (No 2) [26] Allsop CJ, sitting at first instance, considered a claim against a pipe-jacking contractor for consequential loss said to arise from physical damage allegedly caused to a tunnel on which the contractor had done work. The Chief Justice held that in fact there had been no physical damage to the tunnel. It was therefore not necessary for his Honour to consider a contention that the consequential loss was "in respect of" the alleged physical damage. In that context, his Honour observed that "[t]here is a powerful argument that policies of this kind cover the physical consequences of the damage, not economic loss that may in some causal sense flow from the damage" but that the words "in respect of" have "a width dependent on context". [27]
10. Mr Donaldson SC, who appeared with Ms Oreb [28] for the Underwriters, drew my attention to the decision of the United Kingdom Court of Appeal in Tesco Stores Ltd v Constable. [29] The Court was considering whether an amount paid by Tesco under a contractual indemnity was loss "in respect of" damage caused by Tesco in the course of constructing a supermarket. The Court [30] held that, in the context of the policy under consideration, "in respect of" meant "for" and, accordingly, Tesco's liability under the contractual indemnity was not "for", and thus not "in respect of", physical damage.
11. I cannot see how the United Kingdom Court of Appeal's decision in Tesco can be reconciled with the New South Wales Court of Appeal's decisions in National Vulcan Engineering Insurance Group v Pentax and Zurich Australian Insurance v Regal Pearl, and the Full Federal Court's decision in Siegwerk Australia v Nuplex Industries (Aust).
12. As has been said, meaning is a "creature of context". [31] With this in mind, in light of the authorities to which I have referred at [33] to [36] and notwithstanding the obiter observations of Allsop CJ in R & B Directional Drilling Pty Ltd (in liq) v CGU Insurance Limited (No 2), [32] my conclusion is that, in these Policies, the Council's claims for Council Liabilities should be seen as claims "in respect of" Property Damage in that they arise directly from the claims made by affected property owners for their own Property Damage that, according to the Council's claim, is the same damage for which Newcastle, if sued by those property owners, would be liable. [33]
13. Finally, Mr Donaldson drew attention to the fact that the Policies provide cover in two "sections". [34] "Section 1" is headed "Personal Injury and Property Damage" and contains the Insuring Clause set out above.
14. "Section 2" is headed "Financial Loss (Professional Indemnity)" and contains the following insuring clause: "Subject to the terms of this Policy, Underwriters will pay to or on behalf of the Insured all sums which the Insured shall become legally liable to pay as a result of Claims first made against the Insured during the Period of Insurance in respect to Financial Loss arising out of any Wrongful Act committed or alleged to have been committed by or on behalf of the Insured in connection with the Insured's Business."
15. "Financial Loss" is defined in cl 10.5 to mean: "… damages and/or claimants costs payable by the Insured pursuant to any award or judgment entered against the Insured including any settlements negotiated by or with Underwriter's approval but does not include: (a) Compensation in respect of Personal Injury and/or Property Damage (b) Amounts uninsurable at law (c) Defence Costs".
16. "Wrongful Act" is defined in cl 10.7 to include any act, error or omission.
17. Mr Donaldson submitted that the existence of separate cover for Financial Loss in Section 2 of the Policies pointed to the conclusion that the parties did not intend the cover in Section 1 of the Policies to extend to a claim for Financial Loss arising from Property Damage such as the Council's claim for Council Liabilities. But, as Mr Donaldson accepted, the carve-out from the definition of Financial Loss for "compensation in respect of … Property Damage" means that if a claim is "in respect of" Property Damage it falls within Section 1 and not within Section 2 of the Policies.
18. That is, a claim covered by Section 1 could never be Financial Loss for the purposes of Section 2. For those reasons I accept Mr Lloyd's and Mr Newton's submission that the presence of Section 2 of the Policies is neutral on the question of the meaning of "in respect of" Property Damage.

The claim for Future Road Replacements

1. In monetary terms, this appears to be the largest of the claims made by the Council. As I have set out above, the Council estimates the cost of Future Road Replacements to be in the order of $124 million. This claim, if made out, will be well in excess of the Limit of Indemnity in each of the Policies; $10 million in the aggregate in any one Period of Insurance.
2. In the Second Amended Technology and Construction List Statement filed in the Council Primary Claim, the Council alleges that it: "… will also incur the cost of removal and replacement of all parts of the Council Roads that were constructed with the Mix [3] … to rectify the Council Roads Damage and prevent further damage." [35]
3. "Property Damage" is defined in cl 10.4 of the Policies to mean: "… physical damage to, loss of or destruction of tangible property including resulting loss of use of property. All such loss of use shall be deemed to happen at the time of the physical damage that caused such loss of use."
4. In Ranicar v Frigmobile Pty Ltd [36] Green CJ said: "In my view, the ordinary meaning, and therefore the meaning which I should prima facie give to the phrase 'damage to' when used in relation to goods, is a physical alteration or change, not necessarily permanent or irreparable, which impairs the value or usefulness of the thing said to have been damaged. It follows that not every physical change to goods would amount to damage. What amounts to damage will depend upon the nature of the goods." [37]
5. Mr Donaldson accepted that, if the Council makes out its allegations in the Underlying Proceedings, it will demonstrate that the use by Newcastle of Mix 3 in the road base has, to some extent, caused a "physical alteration or change" which "impairs the value or usefulness" of the road base and is thus "damage" within the meaning of the Chief Justice's observations in Ranicar v Frigmobile.
6. Thus, Mr Donaldson accepted: "Where the road has an excessive hump that affects its utility or usefulness, then it is fair to say the road is damaged." [38]
7. However, as I have set out above, the Council contends it will incur the cost of removing and replacing "all parts of the Council Roads that were constructed with [Mix 3]"; that is, those parts of the roads that have thus far had their usefulness damaged by reason of a "physical alteration or change" in the road and also those roads not so physically altered but that the Council considers are susceptible to the possibility of such "physical alteration or change".
8. To that extent, the Council's claim against Newcastle is that, although the road base is not yet physically damaged, it is defective by reason of the propensity of Mix 3 to excessively expand, and must be replaced.
9. As Mr Donaldson and Ms Oreb put in their written submissions: "Property is not damaged simply because it is defective. As is noted above, indemnity is provided for liability arising from 'physical damage'. That requires a physical alteration or change which impairs the value or usefulness of the thing that is said to have been damaged. [39] … Roads that are to be replaced because of the inevitability of future damage are defective, but they have not been damaged." (Emphasis in original.)
10. I agree.
11. To this extent, the Council's claims against Newcastle are not "in respect of" Property Damage.
12. These claims may be for Financial Loss. However, indemnity under Section 2 of the Policies is for liability for Financial Loss arising from claims first made against Newcastle during the Periods of Insurance. The Council's claims against Newcastle were made after the expiration of the latest Period of Insurance. Thus, Newcastle makes no claim for indemnity under Section 2.
13. Alternatively, Mr Donaldson and Ms Oreb submitted that the Council's claim for Future Road Replacements is excluded by "Exclusion 13.3" of the Policies, which is in the following terms: "13. This Policy does not cover liability directly or indirectly caused by, arising out of or in any way connected with: … 13.3 Loss of or damage to or the costs of recall, removal, repair, alteration, reconditioning, replacement or reinstatement of any of the Insured's Products caused or necessitated by the defective condition or unsuitability of any such Products or part of such Products."
14. Mr Lloyd submitted that as Exclusion 13.3 does not, in terms, refer to the cost of proceedings, it was not effective to exclude Newcastle's claim for "Defence Costs". Mr Lloyd referred to an observation made to that effect, in obiter, by Hedigan J in Karenlee Nominees Pty Ltd v ACN 004 312 234 Ltd. [40] I do not accept that submission and respectfully disagree with the views expressed by Hedigan J. Exclusion 13.3 provides that the Policies do not "cover liability" for the excluded matters. I accept Mr Donaldson's submission that the parties cannot have intended to provide for defence costs for an excluded claim.
15. Exclusion 13.3 operates in relation to any liability Newcastle incurs arising from or connected with the cost of removing any of its Products, defined to include any product it manufactures, and thus to include Mix 3, caused by its defective condition. The Council's claim for Future Road Replacement asserts such a liability.
16. The costs that the Council asserts it will incur for Future Road Replacements may not relate to the isolated act of removing the Mix 3 from the road base of Council's roads. But they will necessarily involve removing the whole road base into which the Mix 3 has been mixed. The Council's claim is for the "cost of removal and replacement of all parts of the Council Roads that were constructed with [Mix 3]" to rectify the roads "and prevent further damage". [41] Mr Lloyd did not suggest there were some means by which the Council could otherwise remove the Mix 3 from the road base.
17. For these reasons I think it clear that one part, perhaps a significant part, of the Council's claim for Future Road Replacements will be excluded by cl 13.3 of the Policies.

Conclusion as to whether the Policies respond to the Council's claims

1. It follows that although the Policies will respond to the Council's claims for Council Liabilities and for Council Repair Costs, they will not respond to the entirety of the Council's claim for Future Road Replacements. That claim may well turn out to be the most significant of the claims.

The provisions of the Policies concerning costs

1. The Policies contain the following provisions concerning Defence Costs: "3.1 Underwriters will pay, in addition to the Limit of Indemnity, Defence Costs. 3.2 Underwriter's monetary liability in respect to Defence Costs shall be in the same proportion as the monetary amount available in the Limit of Indemnity under this Policy, at the time of disposal of any Claim, bears to the amount paid to dispose of the Claim."
2. Defence Costs are defined in cl 10.11 to mean: "… expenses (including legal, investigative and expert (medical and non-medical) costs, fees, disbursements and expenses) incurred with the prior written consent of Underwriters by or on behalf of the Insured or Underwriters in the investigation of an Occurrence or settlement or defence of a Claim."
3. A "Claim" is defined in cl 10.10 to mean: "… a written demand for compensation made by a third party against the Insured, but does not include Defence Costs."
4. The "written demand" here comprises the Council Cross Claim and Council Primary Claim. As I have mentioned, the latter incorporates the former as the claim in the Council Cross Claim in respect of such liability as it has to Mr Kanis is also incorporated into the Council Primary Claim. [42]
5. Thus, in one sense, there is one "Claim", in the sense of a "written demand", made by the Council against Newcastle for the purposes of the definition of "Claim" in the Policies.
6. It has been held that a claim "must be defined in relation to the object claimed". [43] In one sense in both the Council Cross Claim and Council Primary Claim there is only one object claimed: compensation for the loss allegedly caused to it by Newcastle's use of the Mix 3.
7. However, the Court may look at the "real nature" of the claim. [44] In my opinion, a fair reading of the Council's Second Amended Technology and Construction List Statement in the Council Primary Claim is that it is making multiple "claims" against Newcastle. It is, at least, making each of the claims for Council Liabilities, Council Repair Costs and Future Road Replacements.
8. Indeed, it is necessarily implicit in Mr Lloyd's concession as to the scope of the cost indemnity that there is a multiplicity of claims arising from the Underlying Proceedings.
9. Clause 3.1 of the Policies provides that the Underwriters "will pay" Defence Costs, which costs are defined to mean costs "incurred" by Newcastle with the Underwriters' prior consent.
10. Mr Donaldson did not suggest that the requirement of the Underwriters' "prior written consent" to the incurring of costs by Newcastle was relevant to the question of whether I should make the declaration sought by Newcastle. Mr Donaldson accepted that as Mr Lloyd had made the concession that cl 3.1 only applied to costs referable to claims that, if established, would be within cover, no point was taken by the Underwriters concerning consent to the incurring of costs. [45]

Defence Costs not available for claims outside cover

1. Read literally, the Policies provide cover for Defence Costs in respect of any Claim, that is any written demand for compensation made by a third party against the insured; that is, defence costs cover in respect of any demand for compensation of any kind.
2. Both Newcastle and the Underwriters agree that the Policies should not be read this way.
3. As I have said, Newcastle accepts that the Underwriters' obligation to pay Defence Costs is limited to such costs as are incurred in connection with claims that, if established, would fall within cover.
4. Thus, Mr Lloyd and Mr Newton said in opening written submissions: "[The language in the definition of Defence Costs when read incorporating the definition of Claim] does not explicitly link the obligation with the liability cover under insuring clause 1. However, it is accepted that the engagement of clause 3.1 is implicitly limited by the nature of the liability cover."
5. In oral submissions Mr Lloyd put it this way: "… we made a concession that cl 3.1 only operates on claims which, if established, would fall within cover." [46]
6. In effect, this involves reading cl 3.1 as follows, incorporating defined terms (thus "[ ]" and "{ }"), and adding the implicit limitation to which Mr Lloyd referred (in italics): "Underwriters will pay, in addition to the Limit of Indemnity [expenses incurred by the Insured in defence of a {written demand for compensation made by a third party against the insured} that, if established would fall within the cover in the Insuring Clause]."
7. I have found that a part, very likely a large part, of the claim made by the Council for Future Road Replacements will not fall within cover.
8. The question is whether, nonetheless, it follows from the fact that a part of the Council's Future Road Replacements claim will fall within cover, that the Underwriters are obliged to pay all of the expenses incurred by Newcastle in defending the Underlying Claims. Mr Donaldson referred to this as the "one in, all in" point.
9. In opening written submissions, Mr Lloyd and Mr Newton put the argument this way: "In circumstances where a material part of the liability asserted by the Council Claim would fall within insuring clause 1 of the Policies, the insurers are obliged under clause 3.1 to pay Defence Costs for the Council Claim… The obligation is simply to pay the Defence Costs of a Claim; it is not to pay only for the defence of what may or may not be indemnified liabilities. The Council Claim satisfies the implicit requirement of the cover … The fact that part of the compensation liability asserted by the Council Claim may fall outside liability cover does not deprive Defence Costs of their character as such or relieve the insurers of their unqualified promise under clause 3.1". (Underlined emphasis in original; italicised emphasis added.)
10. In oral submissions, Mr Lloyd put the matter this way: "[W]e've satisfied the evidentiary onus of establishing that at least some of the claim against us plainly is property damage, and not a de minimis proportion of it is plainly property damage that falls within the four years of cover." [47] (Emphasis added.)
11. Thus, the submission put on behalf of Newcastle was that provided a "material part" or a "not a de minimis proportion" of the claims made by the Council was within cover, then notwithstanding the fact that the Policies "may" not respond, or as I have found, do not respond to all of the claims, the Underwriters are obliged to pay all of the costs incurred by Newcastle in defending those claims.
12. The manner in which Mr Lloyd and Mr Newton contended that the Policies could be read so as to have this result was as follows: "Although the engagement of clause 3.1 is implicitly limited by the nature of the liability cover, that qualifies the circumstances in which the obligation to pay Defence Costs can arise. It does not qualify the content of the obligation once engaged".
13. Although elegantly expressed, I cannot see by what process of construction the Policies could be read this way. Nor can I see how such a reading could be reconciled with Mr Lloyd's concession that the Policies only provide cover for costs incurred in defending claims which are themselves within cover.
14. As one of the claims made against Newcastle, or at least a significant part of one of the claims made against Newcastle, is outside the cover provided by the Policies, I cannot see how it could be concluded that Newcastle has established an entitlement to the declaration sought.
15. It follows from Mr Lloyd's concession as to the manner in which the Policies should be construed that, in due course, an exercise of apportionment will be necessary to distinguish between costs incurred in defence of covered, and uncovered, claims. But that is a separate and subsequent question to the antecedent question of which defence costs fall within the scope of cover. Newcastle does not seek a declaration that the Underwriters are obliged to pay a proportion of its costs, no doubt because it would be difficult, to say the least, to determine such a proportion at this stage of the Underlying Proceedings.
16. In that regard I do not think Newcastle's position is supported by two authorities on which it relied, and on which Mr Lloyd placed particular emphasis: New Zealand Forest Products Ltd v New Zealand Insurance Co Ltd [48] and Vero Insurance Ltd v Baycorp Advantage Ltd. [49]
17. Both decisions concerned a claim by an insurer for an apportionment of defence costs where the costs incurred defending an insured defendant also benefitted the defence of an uninsured defendant. The decisions establish that where an insurer has covenanted to pay defence costs, absent an express provision to the contrary, its liability is not reduced by reason of the fact that such costs as relate to the defence of an insured defendant also serve to provide a defence for an uninsured defendant. However, unlike here, no question arose in these cases as to the insured's own entitlement to indemnity for defence costs.
18. It may follow from these decisions, as Mr Donaldson and Ms Oreb accepted, that in the circumstances of this case, indemnity for costs incurred in defending a claim within the scope of cover will be available notwithstanding that the relevant legal services also served to answer a claim beyond the scope of cover. But that is a different question to the one before me.
19. Mr Lloyd and Mr Newton also referred to Capel-Cure Myers Capital Management Ltd v McCarthy and Others [50] in which Potter J granted relief to the same effect as Newcastle seeks in these proceedings. However, as one of his reasons for doing so, his Lordship stated that he was of the opinion that, on the proper construction of the policy in that case "the obligation to indemnify the plaintiffs exists whether or not certain of the causes of action pleaded may not be covered by the policy". In this case, as I have said, Mr Lloyd accepted that the Underwriters' obligations under cl 3.1 extended only to claims that, if established, would fall within cover. In any event, his Lordship was satisfied that all costs incurred were in defending claims within cover. [51]
20. In reply submissions, Mr Lloyd and Mr Newton submitted that "if the Court finds that an apportionment of defence costs is appropriate" then this could be "reflected through declaratory relief that does not exactly conform" with the relief sought by Newcastle. Mr Lloyd and Mr Newton did not suggest what that alternative declaration might be. A declaration conforming with Mr Lloyd's concession as to how the Policies operate, namely, to impose upon the Underwriters an obligation to pay costs in respect of claims that, if established, would fall within cover, would not quell any dispute between the parties and would thus have no utility.
21. For these reasons, my conclusion is that Newcastle is not entitled to the declaration it seeks.
22. It is therefore not necessary for me to deal with the other issues debated before me. However, in deference to the careful submissions advanced by counsel, and lest I be wrong in coming to the conclusion just expressed, I will deal with those issues.

Clause 3.2 point

1. Clause 3.1 provides that the Underwriters "will pay" Defence Costs, that is the costs "incurred" by Newcastle in defending a Claim. Those words, taken alone, suggest an obligation to pay such "incurred" costs as and when they are incurred. [52]
2. Clause 3.2 provides a limit to the amount for which the Underwriters will be liable for Defence Costs, being an amount calculated by reference to the Limit of Indemnity under the Policies ($10 million in aggregate in any one Period of Insurance) and the amount paid to dispose of the claim against Newcastle. In this case, depending on what level of success the Council achieves in the Underlying Proceedings, the Underwriters might ultimately be shown to be liable for only a small proportion of the costs Newcastle actually incurs defending the Council's claim.
3. Clause 3.2 proceeds on the implicit assumption that all claims are within cover and provides for a limit on the Underwriters' "monetary liability" in respect of Defence Costs.
4. It is common ground that the calculation called for by cl 3.2 cannot be performed until the "disposal" of the Council's claims against Newcastle.
5. The question thus arises as to whether this, alone, is a reason to deny Newcastle the declaratory relief it seeks, bearing in mind that this aspect of the debate, unlike the one considered earlier, assumes all claims are within cover.
6. A constructional choice arises. Does "will pay … Defence Costs" mean "will pay such costs as and when they arise"? Or does that expression mean "will pay once the calculation required by cl 3.2 of the final amount payable can be performed" or something to that effect?
7. If the former, there must be implied into the Policies an entitlement of the Underwriters to recoup, and an obligation on Newcastle to pay, any amount paid by the Underwriters for Defence Costs which exceeds the amount calculated by reference to cl 3.2.
8. If the latter, there must be implied into cl 3.1 limitations reflecting those imposed by cl 3.2.
9. I discuss both these matters further below.
10. The larger question is whether, so far as concerns Defence Costs, the parties intended that the Policies provide a contemporaneous indemnity (as Newcastle contends) or merely an "after the event" indemnity (as the Underwriters contend).
11. If the Policies only provided such "after the event" cover for costs, their benefit would be significantly limited.
12. Newcastle is named in the Policies as one of some 30 insured companies. The businesses conducted by those companies were described in the Policies as follows: "Principally on-site industrial and mining services; quarry operators; quarry and concrete batch plan products and services; building material re-cycling; slag material processing and industrial refuse; bulk earthworks and contractors; removal and waste contracting; repairers of heavy equipment; building, construction and maintenance contractors; pressure washing contractors; constructors and installers of pumps, valves and Poly Piping, suppliers of aggregate, slag, sand and concrete; plant hirers and operators; carriers; management of scrap metal; self storage facility providers; stevedoring, property and office owners and occupiers and all other occupations incidental to the business including all associated activities."
13. As Mr Lloyd submitted, the parties must have contemplated, from the nature of these activities, and from the fact that the insuring clause would respond to claims for personal injury and property damage arising from that large range of activities, including mining, heavy building and construction work, that the Defence Costs incurred in defending a Claim arising from the nature of Newcastle's business might be significant.
14. If, as the Underwriters contend, the Policies are to be construed so that where, as here, the claims are of such a magnitude that cl 3.2 is likely to be engaged, the cost of defending the claims were to be borne entirely by Newcastle until the outcome of the claims is known, then the value to Newcastle of the provision in the Policies for payment of Defence Costs would be severely diminished.
15. It seems unlikely that this is what the parties intended. For what it is worth, it does not appear to be the view the Underwriters shared until November of last year, to which time they did provide cover for Defence Costs as and when incurred.
16. For these reasons, and those developed below, my conclusion is that Newcastle's position on this issue is to be preferred.
17. As I have said, cl 3.2 proceeds on the basis that all claims made against the Council are within cover but provides for a limit on the Underwriters' "monetary liability" for Defence Costs to be calculated by reference to the proportion of cover available under the Policies compared to the amount paid to dispose of the claim.
18. The question is whether the agreed fact that this calculation cannot be performed until the claim is disposed of means that the Underwriters' obligation to fund Defence Costs is deferred until that calculation can be performed. That is whether, as Mr Donaldson put it, the effect of cl 3.2 was: "[W]e will indemnify you for the costs that you have incurred in defending yourself and we'll pay them at the end of the day and we'll pay this proportion of them." [53]
19. This involves reading words into cl 3.1 at least to the following effect: "When the amount of Underwriter's monetary liability in respect to Defence Costs is determined under cl 3.2, Underwriters will pay, in addition to the Limit of Indemnity, Defence Costs."
20. The Underwriters' construction would also give cl 3.2 a variable operation so far as concerns funding the defence of claims made against the Insured.
21. As Mr Lloyd submitted, cl 3.2 only has work to do if the amount for which the claim disposed of exceeds the $10 million limit under the Policies. That is because if the claim is disposed of at the Limit of Indemnity, or for a lesser amount, then, as a matter of arithmetic, the Underwriters' liability for costs as calculated in accordance with cl 3.2 would be for all costs incurred.
22. If it was clear that a particular claim was within the Limit of Indemnity under the Policies, cl 3.2 would not provide a reason for the Underwriters not to pay costs as and when they were incurred.
23. But if there was doubt as to whether a claim was within the Limit of Indemnity or where, as here, it seems likely that the amount required to dispose of the claim against Newcastle will not be within the Limit of Indemnity, then the operation of cl 3.2 for which the Underwriters contend would mean that they were not obliged to pay costs as and when incurred. A claim may appear, at the outset, to be well within the policy limit, then develop into a claim beyond the limit.
24. Thus, as Mr Lloyd and Mr Newton submitted, the Underwriters' contentions really involve reading into cl 3.1 further words, thus: "If a Claim is such that its disposal might cause an amount of Underwriters' monetary liability in respect of Defence Costs to be determined under clause 3.2, then if and when such amount is determined, Underwriters will pay, in addition to the Limit of Indemnity, Defence Costs."
25. It appears unlikely that the parties intended the clause to have such variable and uncertain operation.
26. Rather, the better view is that the parties intended for the Underwriters to pay Newcastle's costs as and when arising, subject to a right of recoupment should the Underwriters pay an Amount exceeding their "monetary liability" as calculated in accordance with cl 3.2.
27. Newcastle accepts that it would have this obligation and pointed to Rein J's summary in Limit (No 3) Limited v ACE Insurance Limited [54] of the circumstances necessary to impose an obligation of recoupment as set out in R Goff and G Jones, The Law of Restitution. [55] Those circumstances are that the paying party (here, the Underwriters) be compelled by law to make the payment; that the paying party did not "officiously expose" itself to the liability to make the payment; and the payment discharged a liability of the payee. Those requirements appear to be satisfied in this case.
28. In Cultural Foundation (doing business as American School of Dubai) and another v Beazley Furlonge Ltd (as managing agent for Syndicate AFB 2623/623 at Lloyd's) and others, [56] Henshaw QC, sitting as a Judge of the High Court, considered defence costs clauses to the same effect as cll 3.1 and 3.2 and concluded that the insurer was entitled to recover defence costs exceeding the limited indemnity, either as a term to be implied into the policy [57] or alternatively under principles of restitution. [58] Henshaw QC concluded: "In circumstances where both parties should (based on the policy wording) have appreciated at the outset that (a) the insurer is undertaking only a limited costs exposure in circumstances where a claim might exceed the limit of indemnity and (b) the size of the claim … may well not be known until long after substantial defence costs have been incurred, it is in my view necessary and obvious that any excess should be recoverable from the insured … ." [59]
29. In this case, there is one circumstance where the parties must have contemplated an entitlement on the Underwriters' part to recoupment, and that is if, as happened in this case until November 2021, the Underwriters exercised their right of subrogation under cl 18 of the Policies and assumed conduct of the proceedings. In those circumstances, the Underwriters would, obviously, have to pay their own lawyers' costs as and when incurred. In that event, and if the claim was ultimately disposed of for an amount in excess of the Limit of Indemnity under the Policy, whether by settlement or judgment, it appears obvious to me that the Underwriters would have a right to recoup from Newcastle the proportion of costs incurred which, by reference to cl 3.2, was beyond the cover provided by the Policy.
30. The same must apply were the Underwriters to pay Newcastle's costs as and when incurred, and ultimately pay an amount that exceeded their obligations as calculated in accordance with cl 3.2.
31. For these reasons, I do not see cl 3.2 as itself being a reason to deny Newcastle the declaration it seeks.

Multiple policies

1. The four Policies provided continuous cover for the four year period from 30 June 2011 to 30 June 2015.
2. Mr Donaldson submitted that, from the Underwriters' point of view, it may be important to know which of the four Policies responds to the Council's claims, as reinsurance arrangements in relation to the Policies may have been different from year to year. There is, however, no evidence before me about such matters.
3. Each of the Policies responds only to Property Damage first happening during the relevant Period of Insurance.
4. In its Second Amended Technology and Construction List Statement in the Council Primary Claim, the Council claims: 1. amounts it has paid named individuals and "Other Owners" in respect of Council Liabilities; 2. amounts it has paid for "investigation, trial and mitigation work" for Council Repair work in identified locations, being roads and streets in the relevant Local Government Area; and 3. the amount it estimates it will incur for Future Road Replacements in those identified locations.
5. Necessarily, Newcastle can only articulate its claims under the Policies by reference to the allegations made against it by the Council in the Underlying Proceedings. In those proceedings, the Council does not make any allegations as to when the damage of which it complains occurred. Rather, the Council, in the Council Cross Claim and Council Primary Claim, and in supporting evidence, makes allegations as to when the relevant roadwork was completed, when damage was observed "and/or" when mitigation work to repair the damage occurred.
6. The question of the Underwriters' obligation to fund Defence Costs can only be assessed on the basis of what the Council alleges.
7. In these proceedings, and based on the allegations made by the Council in the Underlying Proceedings, Newcastle alleges that the claims made in the: 1. Council Cross Claim are for Property Damage occurring during either the 2011/2012 Policy or the 2012/2013 Policy; [60] and 2. Council Primary Claim are for Property Damage occurring "during at least one of the Periods of Insurance of the Policies". [61]
8. This is the best Newcastle can do.
9. By reference to the allegations made by the Council in the Underlying Proceedings, and evidence adduced by the Council, Mr Donaldson and Ms Oreb produced a schedule summarising the allegations made by the Council as to the dates of work, observed damage and mitigation work performed at 28 identified "sites". It is true that the Council alleges that at 12 of those sites, the roadwork was completed prior to the inception date of the first of the Policies, being 30 June 2011. However, in two of those cases it alleged the roadwork was done only a month or so prior to that date and in each case it is alleged that damage was observed "and/or" mitigation work completed in one or other of the policy periods. Thus, while there is a possibility that some of the Council's claims for Council Repair Costs and for Future Road Replacements [62] might fall outside the periods of insurance, it seems a remote one.
10. In John Wyeth and Brothers Ltd v Cigna Insurance Co of Europe SA-NV [63] the United Kingdom Court of Appeal was dealing with a policy that contained defence costs provisions similar to those in the Policies. Waller LJ said: "… In my view there are significant pointers to the proper construction of the clause under these policies being to oblige the insurers to pay the costs of the litigation as those costs were incurred, and to pay such costs in relation to any claims which might fall within the policies, or which could not be confined to a period outside the policies". [64] (Emphasis added.)
11. The claims made by the Council against Newcastle that are "referable to Property Damage" and thus within cover, [65] "might", and indeed are likely to, "fall within the policies". They certainly cannot be "confined to a period outside the policies".
12. Accordingly, I do not see the fact that Newcastle cannot, now, point precisely to which of the Policies will respond, is itself a reason to deny it the declaratory relief it seeks.
13. As Mr Lloyd pointed out, the Underwriters, until November 2021, conducted the proceedings on behalf of Newcastle and incurred costs in the order of $1 million without, evidently, knowing or being concerned about which of the Policies responded to the claims made by the Council.

The "we have already paid $1 million" point

1. Mr Donaldson also submitted, albeit without much enthusiasm, that: "… one of the problems associated that arises in the event that the one-in all-in argument is not accepted is that there has been no attempt [by Newcastle] to demonstrate that [the Underwriters] are not well and truly in credit having regard to the $1 million [the Underwriters] have already paid towards the defence of the proceedings." [66]
2. I cannot see how, assuming it had the onus to do so, Newcastle could possibly show, now, whether its ultimate entitlement to Defence Costs under the Policies will exceed the $1 million that the Underwriters have evidently expended to date. That will depend on which of the claims made against it by the Council succeed and the basis on which any such success is achieved. This is unknowable at the moment.
3. I do not see this as a basis to deny Newcastle the declaratory relief it seeks.

Conclusion

1. Newcastle is not entitled to a declaration that the Underwriters are, now, obliged to pay all the costs of both of the Underlying Proceedings. This is because the Policies do not provide cover for Defence Costs in respect of claims not within cover, and because that part of the claim made by the Council for Future Road Replacement as is not referable to Property Damage is not within cover.
2. Accordingly, Newcastle is not entitled to the declaration it seeks.
3. As I have found that the Council's claim for Council Liabilities is within cover, and as that is the only claim made against Newcastle in the Council Cross Claim (as opposed to the Council Primary Claim), it may be possible to make a declaration as to the Underwriters' obligation to fund Newcastle's costs in those proceedings. [67] I will invite submissions from the parties as to the utility of making such a declaration, and as to the orders necessary to give effect to these reasons.

Endnotes

1. But, curiously, also Mr Kanis.
2. See [146] below.
3. MLC Nominees Pty Ltd v Daffy [2017] VSCA 110 at [66] (Beach and McLeish JJA and Keogh AJA).
4. Australian Casualty Co v Federico (1986) 160 CLR 513; [1986] HCA 32 at [6] (Gibbs CJ); Swashplate Pty Ltd v Liberty Mutual Insurance Company trading as Liberty International Underwriters [2020] FCAFC 137 at [58] (Besanko, McKerracher and Colvin JJ); Onley v Catlin Syndicate Ltd as the Underwriting Member of Lloyd's Syndicate 2003 [2018] FCAFC 119 at [33] (Allsop CJ, Lee and Derrington JJ).
5. (2015) 256 CLR 104; [2015] HCA 37.
6. Citing Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656; [2014] HCA 7.
7. Citing Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 350, 352; [1982] HCA 24; and Reardon Smith Line Ltd v Hansen-Tangen; Hansen-Tangen v Sanko Steamship Co [1976] 3 All ER 570 at 574; [1976] 1 WLR 989 at 995-996.
8. Citing Codelfa Construction Pty Ltd v State Rail Authority of New South Wales at 352.
9. At [46] and [48]-[49].
10. P Herzfeld and T Prince, Interpretation (2nd ed, 2020, Thomson Reuters) at [19.60].
11. For convenience, and without intending any disrespect to Mr Newton, I will henceforth refer only to Mr Lloyd, unless the context otherwise requires.
12. Tcpt, 23 September 2022, p 38(15).
13. "Section 1 - Personal Injury and Property Damage"; there is also a "Section 2 - Financial Loss (Professional Indemnity)"; Newcastle makes no claim under that section: see [58] below.
14. See [128]-[140] below.
15. [2004] NSWCA 218.
16. Hodgson JA and M W Campbell AJA, Handley JA agreeing.
17. Hodgson JA at [11]; M W Campbell AJA placing emphasis on the width of the words "in respect of" at [123]-[127].
18. See [38] below.
19. [2006] NSWCA 328.
20. Spigelman CJ, with whom Beazley and Hodgson JJA agreed.
21. At [75].
22. [2013] FCAFC 130.
23. Robertson J, Perram and Dodds-Streeton JJ agreeing.
24. At [160] and [161].
25. At [159].
26. [2019] FCA 458.
27. At [142], citing Rodan International Ltd v Commercial Union Assurance Company PLC [1999] Lloyd's Rep IR 495 at 500; Pilkington United Kingdom Ltd v CGU Insurance PLC [2004] EWCA Civ 23; and James Budgett Sugars Ltd v Norwich Union Insurance Ltd [2002] EWHC 968 (Comm).
28. As with Messrs Lloyd and Newton, for convenience, and without intending any disrespect to Ms Oreb, I will henceforth refer only to Mr Donaldson, unless the context otherwise requires.
29. [2008] EWCA Civ 362.
30. Tuckey LJ, Thomas and Hughes LLJ agreeing.
31. See [36] above.
32. Which must be seen in the particular context before his Honour.
33. See [31] above.
34. See fn 10 above.
35. Second Further Amended Technology and Construction List Statement at par C25(ii).
36. [1983] Tas R 113.
37. At 116.
38. Tcpt, 23 September 2022, p 49(27).
39. Citing Ranicar v Frigmobile and AXA Global Risks (UK) Ltd v Haskins Contractors Pty Ltd [2004] NSWCA 138.
40. (1995) 8 ANZ Insurance Cases 61-236 at 75, 667.
41. Second Amended Technology and Construction List Statement at par C25(ii).
42. See fn 1 above.
43. West Wake Price & Co v Ching [1956] 2 Lloyd's Rep 618; [1957] 1 WLR 45 at [55] and [57] (Devlin J).
44. Ibid at [57].
45. Tcpt, 23 September 2022, p 38(30).
46. Tcpt, 23 September 2022, p 38(16).
47. Tcpt, 23 September 2022, p 17(48).
48. [1997] 3 NZLR 1.
49. [2004] NSWCA 390.
50. [1995] LRLR 498.
51. At 504.
52. See, for example, Wesfarmers Federation Insurance Ltd v Stephen Wells trading as Wells Plumbing [2008] NSWCA 186 at [92] (Basten JA, Hodgson JA and Handley AJA agreeing).
53. Tcpt, 23 September 2022, p 41(14).
54. [2009] NSWSC 514; cited with approval in QBE Insurance (Australia) Ltd v CGU Workers Compensation (NSW) Ltd (2012) 83 NSWLR 589; [2012] NSWSC 377 at [135] (Beech-Jones J, as his Honour then was).
55. (6th ed, 2002, Sweet & Maxwell) at [15.001].
56. [2018] EWHC 1083 (Comm); [2019] Lloyd's Rep IR 12.
57. At [357]-[366].
58. At [367]-[380].
59. At [365]; Henshaw QC was evidently considering an argument that, in those circumstances, the insurer should be liable for all the costs actually incurred, which is not an argument maintained in this case by Newcastle. Nonetheless, the acting judge's comments are apposite to the circumstances here.
60. Amended Technology and Construction List Statement at par C38.
61. Amended Technology and Construction List Statement at par C41.
62. Bearing in mind that the part of this claim which does not involve Property Damage is not covered, or excluded, in any event: see above.
63. [2001] EWCA Civ 175; [2001] Lloyd's Rep IR 420.
64. At [44].
65. That is, excluding the claims for Future Road Replacements not in cover and is excluded.
66. Tcpt, 23 September 2022, p 56(32).
67. Although, as I have said at fn 1 and at [68], the claim in the Council Cross Claim, arising from Mr Kanis' claim, is repeated in the Council Primary Claim.

Amendments 22 November 2022 - Citations on coversheet corrected DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 22 November 2022