Thompson v NSW Land and Housing Corporation

The first cross claim - defendant v Pestkil 5In the first cross claim the defendant sought from Pestkil indemnity, contribution or damages for breach of contract including its costs of defending the plaintiff's action. As a result of the judgment for the defendant in the principal action the defendant has no liability to the plaintiff. No relevant breach by Pestkil of its contract with the defendant has been demonstrated. Clause 25.5 of the contract between Pestkil and the defendant, upon which the defendant relied in its submissions for an entitlement to an indemnity for its defence costs, has no application as it is limited to injury to a person employed by the contractor or by any subcontractor. Additionally a claim under clause 25.5 was not pleaded by the defendant. No negligent act or omission by Pestkil was established. 6The defendant has no viable claim against Pestkil. In these circumstances, Pestkil is entitled to judgment against the defendant on the first cross claim. No reason is advanced as to why the general costs rule (that costs follow the event (UCPR 42.1)) should not apply. Accordingly, there will be judgment for Pestkil on the first cross claim. The defendant is to pay Pestkil's costs on the first cross claim.

The second cross claim - Pestkil v Gerling 7Gerling issued a policy of public liability insurance ("the policy") in respect of the period 30 June 2000 to 30 June 2001. It accepted that, subject to the terms and conditions of the policy, Pestkil was insured thereunder. 8Pestkil made a claim against Gerling under the policy. It sought indemnity against Pestkil's alleged liability on the first cross claim. Gerling denied the claim. 9The provisions of the policy relied upon by Pestkil are as follows: Section C: "The Insurer hereby agrees, subject to the limitations, exclusions, terms and conditions hereinafter mentioned to:

1. Pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay for or in respect of: (a) Personal Injury (as defined) suffered or alleged to have been suffered by any person or persons; (b) ... happening anywhere in the Territorial Limits stated in the schedule during the duration of the policy in connection with the Insured operations, and caused by or contributed to by and/or arising out of an occurrence or occurrences."
2. Defend at their expense (and in addition to the limit of Liability) and in the name of and on behalf of the Insured any claim or suit against the Insured to recover damages in respect of and/or arising out of any Occurrence for which cover is provided by this Insurance... 3(b) Pay, in addition to the limit of Liability expressed in the Schedule: all expenses incurred by the Insured with the permission of the Insurer incidental to the investigation, negotiation, presentation and/or defence of claims and suits or appeals which are the subject of indemnity under this Insurance. 3(c) Pay, in addition to the Limit of Liability, expressed in the Schedule: all costs and expenses awarded against the Insured or agreed to be paid by the Insured with the Insurer's consent in connection with or arising out of any Liabilities covered by this Section." 10Pestkil submitted that by denying the claim Gerling rendered of no effect the provisions of the policy requiring Pestkil to obtain Gerling's permission pursuant to Section C3(b) or consent pursuant to Section C3(c). Gerling did not contend to the contrary. 11Pestkil submitted Gerling breached Section C cl 2 of the policy by failing to defend, at Gerling's expense, the claim made against Pestkil under the first cross claim. As a result of Gerling's breach, Pestkil has suffered loss and damage being the costs it has paid in defending the claim brought against it. The claim to relief by Pestkil was for damages for the breach of cl 2 and cl 3(b) being the value of the costs and disbursements incurred in the defence plus interest thereon, less the value of any costs order obtained by Pestkil against the defendant. 12Pestkil also claimed damages, being the costs incurred by it in prosecuting the second cross claim against the defendant and Gerling. 13Gerling relied upon Section C cl 7 to deny liability to Pestkil. Clause 7 provides: "This section shall not apply to liability:
3. for personal injury or illness, or property damage, arising out of discharge, dispersal, release or escape of smoke, vapours, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants, pollutants into or upon land, atmosphere or any water course or body of water, but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental, which takes place at a clearly identifiable point in time during the duration of the policy." 14This was the only issue raised by Gerling in opposition to the Pestkil claim. 15Gerling accepted that it had the onus of proof in relation to the application of the exclusion clause; that it must establish that the substance which was discharged or released met the description of either a toxic chemical or irritant and that, applying the contra proferentem rule, the construction least favourable to Gerling should be adopted against it. 16Pestkil and the defendant submitted that cl 7 had no application for five reasons. These are discussed hereunder:

Reason 1 (a) It was submitted that Section C cls 1, 2, 3(b) and 3(c) of the policy are enlivened if personal injury is suffered or alleged to have been suffered. By comparison, cl 7 only applies where personal injury or illness has in fact been suffered. Unlike Section C cl 1, the exclusion clause does not apply where personal injury is alleged to have been suffered. It follows that, for the exclusion clause to apply, the evidence must establish that the plaintiff in fact suffered personal injury. It must also be established that the personal injury suffered by the plaintiff arose out of the discharge or release of the termiticide. Neither of these matters was held by the Court in the principal action to have been established. Clause 7 has no application. (b) Gerling submitted the exclusion clause needed to be construed in the context of the policy as a whole, in particular the insuring clause. The concept of an allegation of personal injury as opposed to injury itself does not need to appear again in cl 7 for the exclusion to apply because it relates to 'liability' as broadly defined in cl 1. It is not a sensible or congruent interpretation of the exclusion provisions to require the insurer to prove injury when it has agreed under the insuring clause to indemnify in respect of allegations and claims. (c) It was conceded by Gerling that the contra proferentem rule applied against it. Clause 7, in its terms, applies only to the first of the alternatives of personal injury suffered or alleged to have been suffered. In my opinion the construction advanced against Gerling is correct. Clause 7 does not apply on the facts as found.

Reason 2 (a) It was submitted that cl 7, by requiring the discharge, dispersal, release or escape to be into or upon land required an escape from the land of the defendant . It must be land outside the immediate location of the escape. So, for the exclusion to operate, the termiticide must have escaped from the defendant's land and caused some harm outside that land. This was not such a case. (b) Gerling submitted the toxic product was taken by Peskil to the defendant's land and there dispersed. The proper construction of cl 7 did not require escape from the defendant's land. (c) In my opinion cl 7, fairly read, does not require an escape of the termiticide from the defendant's land. It is sufficient to enliven cl 7 that there was a discharge, dispersal, release or escape on the defendant's land.

Reason 3 (a)It was submitted in order for cl 7 to apply that the termiticide must meet the characterisation described within the clause, namely that it was a "toxic chemical" or "other irritant". The termiticide which was applied was an emulsion which contained one part Biflex to 100 parts water. The emulsion does not meet the description of either a toxic chemical or irritant. The emulsion is required to be classified in accordance with the approved criteria for classification of hazardous substances. It is this classification which gives the substance its characterisation. Dr Bisby, the expert on this aspect of the matter, said in his report: "Applying the criteria to the termiticide spray as used by the Pestkil operatives at Mr Thompson's dwelling in 2000 and 2001, then if it was diluted to having less than one litre of the Biflex product made up into (diluted with) 100 litres of emulsion spray (or pro rata), then the spray or liquid used

• did not meet the criteria for classification as toxic or very toxic or harmful;
• did not meet the criteria for classification as irritant;
• did not meet the criteria for classification as a hazardous substance

In that case, it could be held that the spray liquid is non toxic and non irritant." In the result the evidence establishes that the emulsion, being the substance dispersed or released, did not meet the characterisation of either a toxic chemical or an irritant. Alternatively, Gerling having the onus of proof, has not established that the emulsion did meet the characterisation of a toxic chemical or an irritant. (b) Gerling submitted the product used was Biflex. The manufacturer's data sheet listed Biflex as a S6 poison which was harmful if swallowed or inhaled and may be irritating to the eyes and skin; that Biflex should not be harmful to humans, used properly and with the recommended precautions taken, does not determine the question raised by the clause, that is whether a toxic chemical or an irritant were dispersed; they plainly were. On the proper construction of the policy Peskil is not entitled to indemnity, and its cross claim fails. (c) The active ingredient in Biflex is bifenthrin, which constitutes less than 100% of Biflex and probably less than 50%. It may be that Biflex or bifenthrin, considered by itself, is a toxic chemical or an irritant. However, this is beside the point as Biflex was used in a diluted form, being mixed with water in the ratio one part Biflex to 100 parts water. It is the toxicity of the diluted solution in the circumstances of exposure which must be considered. It is the emulsion in this case which has to be classified, not the individual components of the emulsion. I accept the evidence of Dr Bisby and find that the emulsion, as used, and as intended to be used by Pestkil, was properly categorised as non toxic and non irritant with the consequence that cl 7 was inapplicable.

Reason 4 (a) An accident "is something which happens without intention or design. When used with reference to something which causes injury, it means an unexpected and unintended mishap" - Australian Casualty Co Limited v Federico [1986] HCA 2; (1986) 160 CLR 513. It was submitted that if, contrary to the submissions of Pestkil and the approach and opinion of Dr Bisby, the appropriate focus was the individual ingredients of the emulsion as claimed by Gerling, then the escape of those ingredients was sudden and accidental. In these circumstances exclusion cl 7 has no application by reason of the write back clause which was contained in cl 7 in the following terms: "but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental, which takes place at a clearly identifiable point in time during the duration of the policy." (b) Gerling submitted the operative words in the write-back clause are "sudden" and "accidental". There is no place for that concept in this case as on each occasion Pestkil attended the property and dispersed the relevant chemical for its intended purpose over a period of time. Unlike Australia Paper Manufacturers Limited v American International Underwriters [1994] 1 VR 685 where the Victorian Court of Appeal found that the adjectives accidental, unexpected and unintended qualified only the particular "happening" in relation to the subject policy, the words "sudden" and "accidental" qualified the words "discharge", "dispersal", "release" or "escape". There is no relevant analogy with the APM decision. Nothing in the conduct of the Pestkil operations was thus characterised; the toxic chemical was dispersed intentionally and deliberately in a controlled manner. (c) The evidence of Pestkil, which I accept, established that it took considerable care in its application of the emulsion so as to prevent any escape of it. If escape of the ingredients occurred, it was both sudden and accidental in the sense described in Federico. In that event, the write-back clause has application so as to preclude the application of exclusion cl 7.

Reason 5 (a) It was submitted the intent in obtaining the policy was to obtain insurance against public risk for the defendant and its contractors and subcontractors. To construe the exclusion clause as submitted by Gerling would be to exclude contractors and subcontractors from cover where they were legitimately performing their work in a normal manner. The exclusion must be read having regard to the commercial purpose of the policy (see Gleeson CJ in McCann v Switzerland Insurance Australia Limited [2000] HCA 65, (2000) 203 CLR 579 at [22]) and the Law of Liability Insurance by Derrington and Ashton (2nd ed, 2005) at 3-43 and its history - Carlingford Australia General Insurance Limited v EZ Industrial Limited [1988] VR 349 at 352. The court may decline to give effect to the apparent literal meaning of words used in the contract where to do so would result in an absurd construction which the parties cannot have intended. An exclusion in virtually identical form was the statutory requirement of policies in New York. As noted in Autotronic Systems Inc. v Aetna Life and Casualty 456 9 NYS 2d 504 (1983): "The clear purpose of the statutorily required exclusion is to strengthen New York's environmental protection standards by imposing the full risk of loss due to personal injury or property damage from pollution upon the commercial or industrial enterprise that does the polluting and by eliminating the enterprise's option of spreading that risk through insurance coverage...This purpose would not be served by applying the exclusion to insureds who are not engaged in the industrial or commercial activity that produce the pollution." (b) Gerling submitted that cl 7 was not described as a pollution clause. The origins of the clause can be of no more than historical interest and it is not legitimate to act on any assumption as to the purpose of the clause. That a clause is relevantly the same or similar to a clause which had some identified purpose in another country long ago could hardly be relevant. The clause should be given its ordinary literal meaning and should not be read down on the basis that in Australia in recent years it was only intended to cover pollutants. (c) In my opinion, a literal construction of exclusion cl 7 would produce a result which would be contrary to the commercial expectations of the parties, contrary to common sense and would have the effect of virtually depriving the policy of the primary cover for contractors such as Pestkil. Accordingly, in my opinion, cl 7 should be read down having regard to its history so as not to apply to the present situation. 17In my opinion, cl 7 did not exclude Gerling's liability to indemnify Pestkil in respect of the costs incurred by it in defending the cross claim brought against it by the defendant, or in prosecuting the second cross claim against the defendant and Gerling. 18Pestkil is also entitled to an order for its costs of the cross claim against Gerling, such costs following the event.

The second cross claim - Pestkil v the defendant 19The cross claim by Pestkil against the defendant was made in the alternative to Peskil's cross claim against Gerling. As the cross claim by Pestkil against Gerling has succeeded the cross claim against the defendant must fail and there will be judgment for the defendant on the second cross claim. Pestkil is to pay the defendant's costs of the second cross claim. 20Pestkil seeks a Bullock or Sanderson order against Gerling in respect of Pestkil's liability to pay the defendant's costs of defending the second cross claim. Even before the issue of the second cross claim the defendant had adopted a position affirmatively asserting that the Gerling policy applied and Gerling adopted the position affirmatively stating that the policy did not apply. Neither the defendant nor Gerling was prepared to concede its position and both asserted the correctness of that position (as distinct from simply a non-admission), it was thus necessary for Pestkil to sue both in order to answer the controversy created by them. In the circumstances it is appropriate that a Bullock order be made and Gerling pay Peskil by way of reimbursement any costs Peskil has incurred to the defendant in respect of the second cross claim.

Interest 21Pestkil asserts that it has paid its costs and disbursements incurred in defence of the first cross claim and in the prosecution of the second cross claim as such costs and disbursements were incurred. Pestkil claims interest on the costs awarded. Interest is also claimed in respect of any damages. 22The Court has a discretion to award interest on costs as well as damages - Lahoud v Lahoud [2006] NSWSC 126. Pestkil contends it is appropriate that orders for interest be made in this case. 23In its written submissions Pestkil wrote: "Pestkil is yet to serve its evidence establishing the value of the costs and disbursements paid to its defence of the first cross claim. At the conclusion of the hearing of the evidence in the proceedings, there was agreement that the presentation of this evidence would be deferred until after the determination of liability underpinning the claim. In other words, if that part of the claim was not successful, then the presentation of the evidence will be abandoned, and if the claim is successful then steps will be taken to adduce the relevant evidence. In the first instance, it is proposed that the evidence be contained in an affidavit of the solicitor for Pestkil identifying the costs and disbursements paid. This agreement continues to apply." Accordingly, I defer making any order in relation to interest pending receipt of the necessary evidential materials.

Other insurance 24Pestkil sought to tender, as part of its submissions, certain documents including a policy of insurance issued by XL Insurance Company Limited to the defendant. The tender of those documents was opposed. It is unnecessary to resolve that dispute as Pestkil's claim against Gerling has succeeded.

Orders 25The Court makes the following orders:

1. Judgment for the cross defendant on the first cross claim.
2. The cross claimant to pay the cross defendant's costs of the first cross claim.
3. Judgment for the first cross defendant on the second cross claim.
4. The cross claimant on the second cross claim to pay the first cross defendant's costs of the second cross claim. 5.Judgment for the cross claimant on the second cross claim against the second cross defendant on the second cross claim for: (a) its costs of defending the first cross claim less credit for such of those costs as are recovered from the cross claimant on the first cross claim; (b) the costs payable by it to the first cross defendant on the second cross claim; (c) its costs of prosecuting the second cross claim.
5. The claims for interest made by Pestkil are deferred.

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: 02 August 2012