Authors
Simon Lusk – Director
Sanjay Selvakumaran – Special Counsel
Newcastle Resources Pty Ltd (formerly known as SCE Resources Pty Ltd) v Certain Underwriters at Lloyd’s Syndicate CVS 1919 [2022] NSWSC 1485
The NSW Supreme Court has been called upon to construe a commonly used property damage insuring clause and, in so doing, considered the meaning of oft-used terms such as “in respect of”, “property damage” and “will pay”.
Background
Between July 2006 and June 2014, the Plaintiff, Newcastle Resources Pty Ltd (Newcastle) supplied to the Lake Macquarie City Council (Council) a product known as ‘Mix 3’ which was used as part of the road base in various Council roadworks.
In 2017, a property owner commenced proceedings against the Council alleging that the road surface adjacent to his property had expanded excessively causing damage. In a cross-claim joining Newcastle the Council alleged that the expansion of the road surface was caused by defects in ‘Mix 3’.
In 2018, the Council commenced separate proceedings against Newcastle claiming damages for:
- the Council’s liability for claims made by property owners for property damage caused by the expansion of the road surface;
- the costs of repairs to Council infrastructure damaged by the expansion of the road surface; and
- the cost of the removal of ‘Mix 3’ road surfaces and future road reconstruction (in the sum of $124 million).
Between 2011 and 2015, Newcastle held liability insurance which included cover for:
“…all sums which [Newcastle] 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”.
In 2022, Newcastle commenced proceedings against Insurers seeking declarations that the Insurers were obliged, in their respective proportions, to pay defence costs as and when incurred.
Decision
In considering whether to make the declarations sought, it was accepted that the Court first needed to determine whether the claims made against Newcastle by the Council would, if established, fall within the scope of cover.
Thus, the issues before the Court were:
- whether the Council’s claim against Newcastle for economic loss suffered (or to be suffered) by the Council by reason of having to compensate property owners should be characterised as being “in respect of” property damage;
- whether the Council’s $124m claim against Newcastle for the cost of repairs and future road replacements should be characterised as being in respect of “property damage”;
- whether, if part of the Council’s claim against Newcastle falls within cover and part falls without, Insurers are nevertheless obliged to pay all defence costs and expenses incurred;
The first question required the Court to consider the meaning of “in respect of”. In the context of the policies under consideration, Stevenson J concluded that the Council’s claim against Newcastle for the Council’s liabilities to property owners was a claim “in respect of” property damage. His Honour reasoned that it was so because the claim “arose directly from” the claims made by property owners for their own property damage which, according to the Council’s claims, is the same damage for which Newcastle, if sued by those property owners, would be liable.
The second question required the Court to consider the meaning of “property damage”. The policy defined “property damage” in a manner often used in liability policies: i.e. “physical damage to, loss of or destruction of tangible property including resulting loss of use of property”. Insurers accepted that where ‘Mix 3’ had caused a “physical alteration or change” which “impairs the value or usefulness” of the road base, then there had been “physical damage” and thus “property damage” for the purposes of the policies. However, there was argument as to whether the Council’s claim against Newcastle for the cost of removing and replacing roads constructed with ‘Mix 3’ which had not yet been physically altered or changed but were susceptible to such physical alteration or change in the future were claims in respect of property damage. The Court found that whilst the roads might be defective due to the presence of ‘Mix 3’, they had not been physically altered or changed so as to engage cover.
With respect to the third question, Newcastle’s argument – that so long as a “material part” or “not a de minimis proportion” of the claims made by the Council was within cover Insurers are obliged to pay all defence costs – was rejected. Insurers were only obliged to indemnify for costs incurred in defending covered claims. The Court acknowledged that an exercise of apportionment would be necessary.
Although not dispositive, the Court also considered an additional argument advanced by Insurers concerning the obligation imposed by the defence costs indemnity clause. The policy provided that Insurers “will pay, in addition to the Limit of Indemnity, Defence Costs…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”.
The question of construction was whether “will pay” obliges Insurers to pay such costs as and when they arise or whether the expression obliges Insurers to pay only once the calculation as to proportion can be performed. That is, did the policy provide for contemporaneous indemnity or merely after the event indemnity? The Court concluded that the defence costs indemnity obliged Insurers to pay costs as and when they arise. That construction required the implication of a right of recoupment should Insurers pay an amount which exceeds their monetary liability once the relevant calculation is performed.
Comment
For Insurers, the decision (based as it was on the context of the policies at issue) might be seen to run contrary to the intention of policies of the kind; Stevenson J noted (but did not follow) the obiter remarks of Allsop CJ in the Federal Court suggesting that “there 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 flowing from the damage”.
The proposition that identical words in insurance contracts can have different meanings in different contexts is of utmost importance even if trite. For example, in considering the meaning of “in respect of”, his Honour analysed competing meanings found in other intermediate appellate court decisions. Some of those cases equated “in respect of” with “for” while others expressly rejected such an equivalency.
As Stevenson J cited, meaning is a “creature of context”.
The decision is also of some interest in the context of defects. The liability policy considered in this case contained a commonly used defects exclusion. Had the Council’s costs of future road repairs been found to engage the insuring clause, his Honour would have found that those costs were excluded by a defects exclusion. Where safety concerns or regulatory requirements mandate remediation of defects before the manifestation of physical damage, an insured might be left with a potentially significant gap in cover for repair, removal and replacement costs unless additional cover is obtained.