FEDERAL COURT OF AUSTRALIA

Commonwealth of Australia v Vero Insurance Limited [2013] FCAFC 152

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant pay the costs of the appeal unless within seven days from the publication of the Court’s reasons for judgment the appellant makes application for some different order in respect of the costs of the appeal.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

DOWSETT J:

1    The facts of this case appear sufficiently from the reasons prepared by Jagot J which I have read. I have also read the reasons prepared by Logan J.

INSURANCE ARRANGEMENTS

2    The appeal concerns the liability of the respondent (“Vero”) pursuant to a policy of insurance described as the “Ultimate Net Loss Insurance Policy” dated 13 July 1999 (the “Policy”). The Policy purports to indemnify “Comcover”, which is a unit within the Commonwealth Department of Finance and Administration. The period of cover was 1 July 1999 to 30 June 2000. Comcover has no separate legal existence. In these reasons I shall refer to the appellant as the “Commonwealth”. I shall use the term “Comcover” to identify both that aspect of the Commonwealth’s operation and the agency which performs it.

3    Comcover’s role appears from the Comcover Manual. It is said to be “an innovative approach and a more cost-effective way of managing and funding Commonwealth risks which replaces the outdated policy of non-insurance”. The aim seems to have been to establish a system which would encourage and, perhaps compel government agencies to identify risks and make provision for them. In effect, some provision for risk is to be made within the relevant agency. The balance of the risk is to be assumed by Comcover. The participating agencies are described as “Fund Members”. The extent to which a Fund Member is obliged to cover its own risk is called its “excess”. Comcover collects contributions from Fund Members, with the intention that it will eventually have a substantial capital fund from which to meet claims. However in the year 1999-2000 much of its liability was covered by the Policy.

4    Comcover has issued a “Comcover Manual”, Part 1 of which informs Fund Members of the Comcover arrangements. Part 2 sets out “Policy terms and conditions”. On the first page of Part 1 it is said that:

Part 1 of this manual does not form part of the conditions of your cover.

Part 1 is not to be used to interpret Part 2 or the Schedule of Cover.

To the extent that there is any inconsistency between Part 1 and Part 2, Part 2 prevails.

5    The “Schedule of Cover” is a document issued by Comcover to each Fund Member, setting out details of the “cover” extended by Comcover to it. In the event of inconsistency with the Comcover Manual, the Schedule of Cover is to take “precedence”.

6    Part 2 of the Comcover Manual (at p 31) provides for payment by the relevant Fund Member of the “excess” to which I have referred. The amount of the excess may vary, depending upon the nature of the claim. Each Fund Member’s excesses are specified in the Schedule of Cover. Comcover’s liability is the difference between the amount of the relevant claim and that of the relevant excess.

THE POLICY

7    The Policy relates to loss incurred from 1 July 1999 to 30 June 2000, inclusive. Such indemnity is:

    for Comcover’s liability or responsibility to reimburse Fund Members for –

    any claims made by or against such Fund Members for –

    loss and/or damage and/or injury and/or consequential loss and/or legal liability in accordance with –

    the terms and conditions set forth in the Comcover Manual and the Schedule of Cover issued to Fund Members.

8    In the Policy, between the Index and a document headed “Conditions” there is a page headed “Insuring Agreements”. There are three paragraphs, each of which is apparently one of the “agreements”. The first is headed “Coverage”, the second, “In-House Retention” and the third, “Limits of Liability”. Agreement 2 provides that:

The Insurer shall be liable only for the Ultimate Net Loss in excess of the In-House Retention as stated in the Schedule, subject always to the terms of Insuring Agreement 3 – Limits of Liability.

9    Agreement 3 imposes upper limits on Vero’s liability. The limits are not presently relevant.

10    Clause 5 of the Conditions, headed “Payment of Ultimate Net Loss”, provides that:

Subject to the provision of Condition 6 of this Policy, this Policy shall not apply unless and until Comcover shall be obligated to pay, or has agreed to pay, the amount of the In-House Retention.

When the amount of Ultimate Net Loss has finally been determined, the Insurer shall promptly pay on behalf of Comcover the amount of Ultimate Net Loss falling within the terms of this Policy.

11    In the definition section, the term “Ultimate Net Loss” is defined to mean:

… the sum(s) actually paid or payable in cash in the settlement or satisfaction of claims for which Comcover is liable, either by agreement, adjudication or compromise.

The Ultimate Net Loss, as determined above, shall not include any costs, fees or expenses whatsoever which are or may be payable under Conditions 2, 3 or 4 of this Policy.

12    The term “In-House Retention” is defined to mean:

… that portion of each claim or series of claims arising out of any one event, occurrence or circumstance, which shall be borne by Comcover as stated in the Schedule.

13    Pursuant to the Schedule Comcover is to bear the first $1 million of each loss (exclusive of the Fund Member’s excess), but with an overall limit of $10 million for the year covered by the Policy. Vero is to bear the balance of the loss, subject to other limitations. Although it may seem obvious, I point out that in respect of any claim, it is necessary to calculate the extent of Comcover’s “obligation” to the relevant Fund Member pursuant to Part 2 of the Comcover Manual, which regulates the relationship between Comcover and each “Fund Member”. It is then necessary to calculate the extent of Vero’s liability to indemnify Comcover pursuant to the Policy. In the proceedings at first instance and on appeal, there may have been a tendency to construe the two documents as one. That approach may have led to a misconception concerning the relevance of certain “extrinsic” documents. I shall return to that matter.

AUSTRALIAN ANTARCTIC DIVISION

14    The Australian Government claims part of Antarctica as Australian territory. It is described as the “Australian Antarctic Territory” (the “Territory”). Parliament has legislated accordingly. Although the matter was in dispute at first instance, Vero now admits, for present purposes that the Territory is Commonwealth property. Casey Base Station (“Casey”) is a small part of the Territory.

15    The Australian Antarctic Division (the “AAD”) is an unincorporated government agency. It is also a Fund Member. In these proceedings, the Commonwealth asserts that Casey is “AAD’s real or personal property” within the definition of property in the Comcover Manual. Vero denies that assertion. It seems to be common ground that AAD personnel work and/or reside on Casey. I shall refer to the Commonwealth in its AAD “role” as “AAD”.

16    Curiously, there is little evidence as to AAD’s activities, either generally or in connection with Casey. A document headed “Statement of purpose and values” suggests that, amongst other things AAD is “responsible to the people and Parliament of Australia for … administering the Australian Antarctic Territory and the Territory of Heard and McDonald Islands”. One of its goals is said to be “remediating past work sites”. Most of its other functions seem to involve protection of the environment and/or scientific research.

17    In its insurance renewal declaration for the 1999-2000 year AAD stated that:

The [AAD] maintains an Australian presence at three stations on the Antarctic continent and one on Macquarie Island. The Division manages Australia’s activities in the Antarctic and enhances Australia’s role as an influential nation in the Antarctic Treaty System. The Division administers Australia’s territories in the Antarctic, conducts and supports scientific programs and represents Australia at international Antarctic meetings. The Division develops and administers Australian law in support of the Government’s objectives for the region, including resource management and access, maintenance of bio-diversity and environmental protection of the region.

THE CLAIM

18    In July 1999 there was a spillage of fuel at Casey. Notwithstanding attempts to limit the flow of the fuel, about 2000 tonnes of soil were contaminated. AAD has undertaken remedial work and may continue to do so. Comcover was not advised of the spillage until August 2004. It initially indicated that it would not cover any loss but, on 21 June 2005 it accepted that the event was covered pursuant to the Comcover Manual. It paid the In-House Retention and sought indemnity from Vero in the amount of the Ultimate Net Loss. Vero declined to indemnify Comcover. In these proceedings Comcover seeks to establish its claim to indemnity. By its defence, Vero:

    denies that Casey is the AAD’s real or personal property within the definition of the term “property” in the Comcover Manual;

    denies that any damage was caused to any real or personal property of the Commonwealth within the definition of “property” in the Policy; and

    pleads that any claim is statute-barred.

19    The primary Judge concluded that as a matter of construction, Vero was not liable to indemnify Comcover. Thus the Commonwealth failed. The Commonwealth appeals against his Honour’s decision. The primary Judge considered that had the claim been covered by the Policy, it would not have been statute-barred. By notice of contention, Vero challenges that conclusion and also seeks to uphold the decision as to liability under the Policy on grounds other than that which succeeded at first instance. As to the limitation point, I agree with Logan and Jagot JJ that the primary Judge’s decision was correct for the reasons which he gave.

20    I turn to Comcover’s claim to indemnity.

COMCOVER’S LIABILITY TO AAD

21    As between Comcover and AAD, the relevant cover appears at pp 20 and 21 in Part 2 of the Comcover Manual. Under the heading “Property loss, destruction or damage”, it is said that:

If your property is lost, destroyed or damaged

Where property means the Fund Member’s real and personal property but excluding watercraft more than 15 metres in length and aircraft, which is in your possession, care, custody or control, or your responsibility

This includes watercraft up to and including 15 metres in length:

Motor vehicles are not covered under this insurance – see page 23

and

the event that caused the property to be lost, destroyed or damaged occurred during your period of cover:

and

…

then

we will pay:

• the actual replacement value of the property lost, destroyed or damaged

For the purposes of this class of cover, the replacement value is the amount equivalent to the actual replacement cost of a similar item or building, or the repair cost, such that the item or building is reinstated to a condition equal to, but not better than, its original, new condition.

• for the reasonable costs incurred in establishing, proving and quantifying the loss, destruction or damage;

• the costs of the removal, storage and disposal of debris … .

22    I shall refer to the whole of pp 20 and 21 as the “Insuring Clause”, to that part which describes the property covered as the “Property Description” and the description of the amount payable as the “Cover”.

23    The Property Description is:

    the Fund Member’s real and personal property (subject to certain exclusions) (the “first requirement”),

    which is in the Fund Member’s possession, care, custody or control, or its responsibility (the “second requirement”).

24    In the “Definitions” section of the Comcover Manual the definition of the word “property” (the “general definition”) is:

all tangible real, or tangible personal property excluding watercraft more than 15 metres in length and aircraft.

25    The Commonwealth stresses the proposition that any construction of the Property Description must reflect the general definition. However it is at least arguable that the Property Description contains its own definition of the word “property”. That definition differs from the general definition in that the former does not include the words “all” or “tangible”, perhaps suggesting that not all property is covered, but that intangible property is covered. It is difficult to conceive of intangible property being lost, destroyed or damaged. It may be unwise to take a strict approach to the construction of the Comcover Manual. Notwithstanding its evident importance, it is very informal. I am inclined to accept that the word “property” in the Property Description should be given a broad meaning, including all tangible property, subject to the express exceptions.

26    The Fund Member is, for present purposes, AAD. The Property Description may suggest that AAD’s real and personal property is covered, subject to certain exceptions. AAD has no legal personality. Hence the Commonwealth submits that Casey is AAD’s real or personal property for the purposes of the Comcover Manual because it is the Commonwealth’s property. That may sound unconvincing. Once one accepts that the Commonwealth is to be treated as a series of separate agencies, it is tempting to seek consistency in the application of that fiction, an approach which may lead one to assume that AAD may own property. One might then seek to identify such property. However one must keep in mind that the Comcover scheme is, at least as concerns AAD and other unincorporated agencies of the Australian government, simply an internal administrative arrangement, as is the use of the names “Comcover” and “Australian Antarctic Division”. I need not consider the position of incorporated agencies.

27    Vero submits that only Commonwealth property owned for the purpose of enabling AAD to fulfil its function will satisfy the Property Description. His Honour rejected that submission on the basis that the language used in the Property Description does not support it. I agree. However I am inclined to the view that Vero is correct in seeking to give some meaning to the requirement that relevant property be AAD’s property.

28    The Property Description is a device designed as part of the administrative arrangements set out in the Comcover Manual. One might have expected that, at some stage, each Fund Member would have identified at least those of its major assets which were to be “covered” by the Comcover arrangements. However the case has been conducted on the basis that the identification of Casey as AAD’s property depends upon the Property Description and the fact that Casey belongs to the Commonwealth.

29    The Property Description seems to contain two requirements, not one. The first requirement addresses the relationship between relevant property and the relevant Fund Member. The purpose of the Comcover scheme is to facilitate the management of risk in government agencies. It may follow that the Comcover Manual contemplates the identification of assets which can be identified as “belonging to” each Fund Member for internal administrative purposes. The Commonwealth’s approach deprives the first requirement of any function. Further, such an approach may result in confusion where a particular asset is used by numerous agencies.

30    There is probably no entirely satisfactory solution to this problem. Given that the problem concerns the Commonwealth’s property, there is much to be said for the proposition that property will satisfy the first requirement if the Commonwealth treats such property as being that of a particular Fund Member. Such treatment may be express identification for the purposes of Comcover or some other purpose. It may be conduct which suggests that a particular asset “belongs to” a particular Fund Member. In this context evidence as to “possession”, “care”, “custody”, “control” and “responsibility” may establish that the Commonwealth identifies an asset as “belonging to” a particular Fund Member, those concepts being frequently associated with ownership. There is only a fine distinction between that proposition and the argument that compliance with the second requirement in the Property Description is sufficient to satisfy the first requirement. However the distinction is real and potentially significant, although perhaps not in this case.

31    There has been no challenge to the AAD’s assertion that it administers the Territory. In the absence of evidence to the contrary, that claim provides a reasonable basis for inferring that the Territory is recognized by the Commonwealth as being AAD’s property for the purposes of the Comcover Manual. I do not understand Vero to raise any point concerning compliance with the second requirement.

32    The other matter in dispute concerning Comcover’s liability under the Comcover Manual is the extent of the Cover. The Cover is limited to paying “the actual replacement value of the property, lost destroyed or damaged”. The term “replacement value” is defined “(f)or the purposes of this class of cover”. The “class” is presumably “(p)roperty loss, destruction or damage”. Vero submits, and his Honour accepted that the effect of this clause is that the cover for real property is limited to buildings. The Commonwealth argues that the width of the Property Description should not be read down by reference to the apparently limited extent of the Cover. Rather, the extent of the Cover should reflect the width of the Property Description.

33    The difficulty with this approach is that nothing in the Insuring Clause suggests an intention to cover loss or destruction of, or damage to real property, save for the Cover itself, and it is limited to payment of the actual replacement value as defined. The Commonwealth takes a quite artificial approach to the construction of the Cover. It submits that the definition of “replacement value” should be read as not referring to the words which precede it in Part 2, “then we will pay the actual replacement value of the property lost, destroyed or damaged”. Rather, it submits that the definition is merely a “note”, referring to “earlier provisions in the Manual (the Basic Principle of Cover (Basic Principle) which describes the basis of indemnity which ‘in general’ was applicable to property claims.”

34    Quite apart from anything else, the so-called Basic Principle appears in Part 1 of the Comcover Manual which does not form part of the conditions of cover and is not to be used to interpreting Part 2 or the Schedule of Cover. Further, in the event of inconsistency, Part 2 is to prevail over Part 1. Despite the Commonwealth’s protestations to the contrary, this submission involves the use of Part 1 in interpreting Part 2. For that reason alone, the submission must fail.

35    In any event, the Commonwealth’s submission is difficult to follow. There is no reason to conclude that the definition or “note” relates to anything other than the words which precede it. In other words, it defines the replacement value to be paid by Comcover. The language is no doubt similar to that used in the Basic Principle in Part 1. Part 1 seems to be an even less formal description of Part 2. The use of the word “value” in Part 2 differs from the use of the word “cost” in the Basic Principle. However I see no basis for treating that variation as significant. The parties make no such submission. The Commonwealth attaches significance to font and font size, a submission which is difficult to understand, quite unpersuasive and probably again contrary to the prohibition on using Part 1 to interpret Part 2.

36    The Commonwealth’s argument seems to be that the Basic Principle describes “in general” the cover, but is not exhaustive in that description. It is said that the definition or “note” in Part 2 should be treated as reflecting this “general” test, again in a non-exhaustive way. It is then said that, so understood, the obligation is to pay the actual replacement value of the property lost, destroyed or damaged.

37    With all respect, the Commonwealth’s submission is a pointless semantic exercise. To describe, in the most general terms, the property to be insured does not necessarily say anything about the risks insured against or the extent of the Cover. In this case the risk is of loss or destruction of, or damage to property. Identification of the risk also does not identify the extent of the Cover. The Cover is said to be the “actual replacement value of the property lost, destroyed or damaged”. The term “replacement value” is then defined. It includes two limits to the extent of the Cover, namely:

    the amount equivalent to the actual replacement cost of a similar item or building; or

    the repair cost, such that the item or building is re-instated to a condition equal to, but not better than, its original, new condition.

38    There is no obligation to pay any other amount, save for the two specified cost items which are not presently relevant. In my view, the cost of remediation for damage to land will only be covered if it is within the definition of the term “replacement value”, or if there is some other, presumably implied promise to pay the cost of such remediation. As to replacement value, I doubt very much whether land can have a replacement cost. Land probably cannot really be destroyed or lost. Even accretion or dereliction does not result in loss of land, although there may be a change of ownership. Land can be damaged and can be re-instated. However the cover extends only to the repair cost of an “item” or “building”.

39    The word “item”, it is submitted, may be apposite to describe land. Such a usage would be unusual. The Oxford English Dictionary (on-line) defines the word to mean:

An article or unit of any kind included in an enumeration, computation or sum total; an entry or thing entered in an account or register, a clause of a document, a detail of expenditure or income, etc.

40    The Macquarie Dictionary (on-line) defines the word as:

A separate article or particular: fifty items on the list.

41    In my view the word “item” is unlikely to denote a parcel of land or the rights held by a person in such a parcel. If there were a list of properties or assets, one of which was land, the entry in the list might be so described. But that is not the usage with which this case is concerned. It would be straining language to construe the word “item” as identifying the Australian Antarctic Territory or any part of it. This is not a case in which one part of the policy suggests that particular property is covered whilst another does not. In this case the Policy simply states that real and personal property is covered to a particular extent, and no more.

42    The Commonwealth seeks to rely on cl 18 of the Policy which provides:

If there is a dispute between Comcover and the Insurer concerning the meaning or effect of any provision of the Comcover Manual the following principles will be applied in the interpretation of those provisions.

(a)    in its relations with Fund Members, Comcover applies an interpretation to the provisions of the Comcover Manual that provides the Fund Member with the broadest possible indemnity or cover always having regard to the principle of covering Fund Members for normally insurable risks only (or as otherwise, but only by specific agreement with the insurer);

(b)    in their relations with Comcover under this policy the Insurer will indemnify Comcover to the extent that Comcover has a liability or responsibility to Fund Members under the Comcover Manual; and

(c)    differences in opinion between the insurer and Comcover as to the interpretation of the Comcover Manual under this policy will be resolved by negotiation in good faith between the parties having regard to the principle set out in Condition 18(a) above.

43    Clause 18(a) assumes an available interpretation which would provide a broader cover than that provided by an alternative interpretation. For the above reasons I conclude that there is no available interpretation of the Insuring Clause which would support the Commonwealth’s case. Further, the need to take into account the principle of providing the broadest possible indemnity for cover is limited by the words “always having regard to the principle of covering Fund Members for normally insurable risks only”. There appears to have been no evidence concerning the question of normal insurable risk. The courts may be aware of many categories of insurance business which might be so described, and as to which no evidence may be necessary. I doubt whether insurance against pollution of land in Antarctica is one of them. His Honour was concerned that there was no evidence concerning this issue, and that such absence may have deprived the Commonwealth of any capacity to rely upon cl 18(a). I am not sure whether the Commonwealth or Vero should bear the onus of showing that the risk was, or was not a normally insurable risk. I need not determine that matter. In my view cl 18(a) does not assist the Commonwealth simply because there is no available interpretation which supports its case.

44    The Commonwealth also argues, perhaps faintly, that the reference on p 21 to the exclusion of loss caused by pollution (unless it is sudden and accidental) demonstrates an intention to cover land. Whilst land may be polluted, and that risk may be insured against, it does not follow that the partial exclusion of cover for the risk of pollution leads to a different construction of the Insuring Clause. I see no other basis for inferring an implied promise to pay for the presently relevant loss.

45    In my view the primary Judge’s construction of the Policy is correct.

EXTRINSIC DOCUMENTS

46    At para 15 of its outline, Vero submits:

If, however, there is ambiguity about the meaning of “property” even when read in context, reference may be made to material extrinsic to the policy documents. That material comprises part of the background upon which the parties to the Comcover Manual would have understood its terms and, further, shows that they use the words “real property” in a particular and more limited way than the broad meaning sought to be ascribed by the Commonwealth.

47    The relevant documents are in two categories. The first category contains a number of slides which comprised a presentation concerning Comcover conducted in Sydney in May 1999 and subsequently supplied to Vero on 4 June 1999. The second category contains documents which comprised the 1999-2000 Renewal Declaration supplied by AAD to Comcover. The Commonwealth submits that the parol evidence rule prohibits the use of extrinsic documents to vary or contradict the terms of a written contract. In this regard, the Commonwealth seems to have understood Vero to rely on the documents for the purpose of interpreting the Policy. In fact Vero seeks to use them for the purpose of determining Comcover’s obligation to AAD under the Comcover Manual. In effect, Vero claims that its liability under the Policy is limited to the extent of Comcover’s obligation. It seems to be accepted that the contents of the extrinsic documents were known to both Comcover and AAD prior to the issue of the Schedule of Cover, and so it may be that Comcover’s liability is limited by their content. That content largely describes AAD’s “property” and matters relevant to risk.

48    The primary Judge disposed of the question of these documents at [71], concluding that they were of limited assistance in determining the scope of the insuring clause in the Comcover Manual and that moreover:

… there is no evidence that the AAD’s renewal declaration made to Comcover was known to Vero at the relevant time and thus formed part of the background circumstances in which the Commonwealth and Vero entered into the UNL policy.

49    For the reasons which I have given, I consider it to be irrelevant that Vero had no knowledge of the Renewal Declaration. It is the relationship between Comcover and AAD to which they may be relevant. Vero’s liability is limited by the extent of Comcover’s liability to AAD.

50    I have examined the documents. In my view the slides in the first category offer, by themselves, no clear assistance to Vero’s case. However the Renewal Declaration documents may do so. They suggest that AAD did not seek to insure land, as opposed to buildings. However, as his Honour observed, the matter is by no means clear. The documents may also offer some support for the Commonwealth’s reliance upon the provision in the Comcover Manual concerning pollution, although they may relate to the risk covered under the heading “General Liability and Professional Indemnity” rather than to the risk of loss or destruction of, or damage to property. As I accept Vero’s construction of the Insuring Clause, I need not have recourse to the extrinsic documents. The Commonwealth does not seek to rely on them.

VERO’S LIABILITY

51    In my view the primary Judge correctly concluded that Vero was not liable to indemnify Comcover in connection with the claimed loss. I agree with the orders proposed by Logan J.

Associate:

Dated:    6 December 2013

REASONS FOR JUDGMENT

LOGAN J:

52    I have had the benefit of reading in draft the reasons for judgment of Jagot J. Her Honour has comprehensively set out the background facts, the material parts of the documents which must be construed, the issues for determination on the appeal, the essence of the reasons for judgment of the learned primary judge and the submissions of the parties on the appeal. For consistency, I have adopted the same abbreviations that her Honour has adopted in her reasons for judgment.

53    I agree with Jagot J and, it follows, the learned primary judge that the submissions by Vero in respect of the issue that the property must be owned by the Commonwealth for the purpose of the Fund Member performing its functions and in respect of issue relating to limitation of actions must be rejected.

54    Where I respectfully differ from Jagot J but concur with the conclusion reached by the learned primary judge is in respect of the issue as to the cover set out in the Comcover Manual and, in turn, the extent of the indemnity provided to the Commonwealth by Vero.

55    In Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 at 69 Knox CJ stated, “experience shows that the words of many, if not of most, documents inter partes are reasonably capable of more than one meaning”. That statement was made almost a century ago. It remains enduringly apt, as her Honour’s observation that, “Questions of construction readily result in differences of opinion” and the different conclusions which we have reached attest. The language employed in the Comcover Manual was always fraught with the prospect of there being such a difference.

56    The evidence discloses that, some years ago, the Commonwealth Executive Government decided that it was in the interests of good public administration for its hitherto practice of self-insurance against particular risks to be recast in a form which mimicked arrangements between a private insurer and a client. To this end, a unit of public administration known as “Comcover” was established which, in turn, made arrangements with various departments and agencies of the Commonwealth under which funds would be paid to those departments and agencies from consolidated revenue, via Comcover, in respect of particular risks encountered by those departments and agencies in the course of the conduct of government business. For this purpose, the legal fiction was adopted that these departments and agencies and Comcover were each legal entities separate from the body politic known as the Commonwealth of Australia. The terms of that cover and the type of risks covered were set out in the Comcover Manual.

57    In turn and eschewing self-insurance, the Commonwealth sought and obtained from Vero under the UNL policy insurance cover in respect of the risks specified in the Comcover Manual. In form therefore the contract between the Commonwealth and Vero is one of insurance, not reinsurance but, as a result of the adoption by the Commonwealth of the new public administration practice and entailed legal fiction mentioned, the substance of its arrangement with Vero resembles one of reinsurance. It is necessary to recall the employment of this legal fiction when construing both the UNL policy and the Comcover Manual.

58    Jagot J advances six reasons why, in her view, there is real ambiguity in the Comcover Manual. I agree, for each of the reasons advanced by her Honour. Like her Honour and for the reasons which she gives, I do not consider that the ambiguity is to be resolved by reference to cl 18(a).

59    The subject land at the Casey Base Station is undeniably real property. So, too, is the entire Australian Antarctic Territory in which that base is located. Why then did the oil spillage incident affecting land at the base not fall within an insured risk having regard to the definition of “property”?

60    In Charter Reinsurance Co Ltd (In liquidation) v Fagan [1996] 2 Lloyd’s Rep 217 at 219 Lord Mustill observed that the meaning of a word must be determined “in the landscape of the instrument as a whole”. That is how the present controversy must be resolved. In the Comcover Manual, the “landscape” includes the statement as to what “we” [Comcover] will pay:

10    the actual replacement value of the property lost, destroyed or damaged

For the purpose of this class of cover, the replacement value is the amount equivalent to the actual replacement

.    cost of a similar item or building, or the repair cost, such that the item or building is reinstated to a condition equal to, but not better than, its original, new condition.

61    When one takes into account the description of actual replacement value of property for the purpose of “this class of cover” under the heading “Property loss, destruction or damage”, the better view, in my respectful opinion, is that real property generally was not intended to be covered. The language employed in that description and the very use of the words “actual replacement value” make it an incongruous construction to construe the cover as extending to real property generally.

62    It is apparent from Part 2 of the Comcover Manual that all save particular excluded forms of personal property were intended to be covered, as were buildings. Reading that part of the manual as a whole, which necessarily includes reading the definition of “property” in conjunction with and in light of the description of the extent of cover in respect of property, it becomes apparent that the following property only is covered. “Item” is a reference to personal property and may embrace fixtures. Debate as to whether fixtures are covered or whether an item is a fixture or severable is eliminated by the reference to “buildings” and the mention of real property in the definition of “property”. The description of replacement value fits naturally with affording property such a meaning. Further, fixtures and buildings attached to land are real property. They are also tangible real property. It is not necessary in this case to resolve any question as to whether all improvements to land, particularly, for example, a road or an airstrip are covered. It is enough to dispose of this appeal to conclude that, reading the Comcover Manual as a whole, real property generally is not covered.

63    Like the learned primary judge, I consider that the separate exclusion for “pollution, unless it is sudden and accidental” does not tell against a conclusion that land per se is not covered but is nothing more than a neutral consideration.

64    I am reinforced in this conclusion by the consequences which might flow by the adoption of a construction that would concede cover in respect of real property generally subject, materially, only to a limitation that it fall within the clause “which is in your possession, care, custody or control, or your responsibility”. That would be apt to embrace the vast, entire area of the Australian Antarctic Territory, not just the land within the administrative demarcation of the Casey Base Station. Recalling the legal fiction employed for the purposes of the Comcover Manual, it is the AAD which is the administrative agency of the Commonwealth with which is entrusted with the possession, care, custody or control of that territory, or responsibility for it. Flood, including the action of seawater, tidal wave or high water are excluded but earthquake, extreme of temperature constituted by “freezing”, avalanche and blizzard are not. That the cover might then extend to “repair” or “reinstatement” to an “original, new condition” (whatever these might mean in respect of a wasteland affected by extremes such as freezing and blizzards) in respect of that territory as a result of such events is such a startling proposition as to give pause for thought as to whether the Comcover Manual should be so construed. Even if one were to afford “which is in your possession, care, custody or control, or your responsibility” the more modest reach of the boundaries of Casey Base Station, which I consider to be contrary to the breadth of language in that clause, the resultant reach of cover still occasions startling consequences that make affording the cover such reach unlikely.

65    None of this is dependent upon any recourse to Part 1 of the Comcover Manual, which I agree is not permissibly considered in construing the extent of the cover.

66    It follows that I would dismiss the Commonwealth’s appeal.

67    Though the Commonwealth’s appeal has failed, Vero also has failed in respect of the arguments advanced under its notice of contention. In recognition of the latter, I would order that the Commonwealth pay the costs of the appeal unless within seven days from the publication of the Court’s reasons for judgement the Commonwealth makes application for some different order in respect of the costs of the appeal.

Associate:

Dated:    6 December 2013

REASONS FOR JUDGMENT

JAGOT J:

THE ISSUES

68    There are two issues in this appeal, including the respondent’s notice of contention. The first is the proper construction of a contract of insurance between the appellant, the Commonwealth of Australia (the Commonwealth) and the respondent, Vero Insurance Limited (Vero), and the second is the application of the provisions of the Limitation Act 1969 (NSW) to the Commonwealth’s claim under the contract of insurance.

FACTS

69    The basic facts were not in dispute before the primary judge. In his reasons for judgment (Commonwealth of Australia v Vero Insurance Limited (2012) 291 ALR 563; [2012] FCA 826) the primary judge explained that the Commonwealth arranged its insurance by establishing Comcover “as a self-managed insurance fund within the Department of Finance and Administration (now the Department of Finance & Deregulation)”, Comcover’s functions being “to provide indemnity to, or to arrange indemnity for, all member organisations in respect of all insurable losses (except employers’ liability risks covered by Comcare) specified in writing by Comcover for those members” (at [6]). Comcover “operates by collecting premiums from participating Fund Members and accumulating reserves to meet future losses from those reserves”. For most members, Comcover “provides cover using standard wording and endorsements, reflected in a manual” known as the Comcover Manual (at [7]).

70    Comcover engages specialist service providers to assist it in carrying out its functions including “a member service manager, an underwriting adviser, an actuary and a broker” (at [9]). GIO General Insurance Ltd was Comcover’s member service manager in 1999 (at [10]). A presentation “outlined the nature and extent of Comcover’s operations, including its major insurable risks and the claims history of its Fund Members for the period 1 July 1998 to 30 April 1999”, its purpose being to “invite underwriters to provide insurance cover that protected Comcover for the net payments it was required to make to its Fund Members”. At that time Comcover (at [14]):

had 161 Fund Members, 78 of whom were bodies regulated by the Commonwealth Authorities and Companies Act 1997 (Cth) and 83 of whom were agencies regulated by the Financial Management and Accountability Act 1997 (Cth). The Australian Antarctic Division (the AAD) was one of the Fund Members. Antarctica was listed in the presentation as Comcover’s fifth largest insurable property risk.

71    A “copy of the presentation was sent to Vero on 4 June 1999 for the purpose of assisting it to consider whether it would provide indemnity cover to the Commonwealth” (at [15]).

72    At [16] and [17], in respect of the Australian Antarctic Division (the AAD), the primary judge recorded that:

[16] Comcover issued the AAD with a Schedule of Cover for the period 1 July 1999 to 30 June 2000 that specified various classes of cover (the Schedule of Cover). One specified class of cover was Fund Member’s Property, with a liability limit of $418,002,679 and an excess for each and every loss of $250,000.

[17] The Schedule of Cover noted that it was issued in conjunction with the general terms and conditions in the Comcover Manual, with the Schedule of Cover to take precedence to the extent of any inconsistency. It has not been suggested in the present case that there is any inconsistency between the Schedule of Cover and the terms and conditions in the Comcover Manual. Moreover, no variations were noted in the Schedule of Cover with respect to the terms and conditions in the Comcover Manual.

73    Vero issued to Comcover an Ultimate Net Loss Insurance Policy (the UNL policy) on 13 July 1999, the insured being noted as “The Commonwealth of Australia through its self managed fund known as Comcover”.

74    On 20 July 1999 there was a fuel oil spill at Casey Base Station (at [36]). Casey Base Station is within the Australian Antarctic Territory (at [56]). As the primary judge found, “the Australian Antarctic Territory must be taken to be the Commonwealth’s real property under domestic law” (at [62] and [63]). Further, “[a]lthough AAD personnel knew of the incident in July 1999, Comcover was not notified of it until August 2004, some five years later” (at [37]). The primary judge noted that:

In a communication to Comcover on 10 August 2004, the AAD advised that the cost of remediation was estimated to be in the range of $1 million to $3 million, although the cost of the incident had not been determined completely at that time. However, as events unfolded, it became apparent that the cost of remediation was significantly more than this. On 24 August 2004 the loss adjuster engaged by Comcover, Technical Assessing (Vic) Pty Limited (TA), advised that a reserve of $3 million should be provided. At that time TA expressed the opinion that “policy liability attaches in respect of whatever remediation works are agreed in the future”. The amount of the reserve was amended to $5 million (on 27 September 2004) and then to $6 million (on 12 September 2005).

75    On 23 December 2004 Comcover advised the AAD that it declined to cover the event. In early 2005 representations were made to Comcover on behalf of the AAD by the Australian Government Solicitor. Comcover reconsidered its position and agreed to indemnify the AAD (at [38]). However, by this time, Vero had declined Comcover’s claim against Vero under the UNL policy (at [39]).

THE COMCARE MANUAL

76    The Comcover Manual contains no internal referencing system other than page numbers.

77    On p 1 the following statements are made:

Relationship between part 1 and part 2

Part 1 of this manual does not form part of the conditions of your cover.

Part 1 is not to be used to Interpret Part 2 or the Schedule of Cover.

To the extent that there is any inconsistency between Part 1 and Part 2, Part 2 prevails.

Definitions        ( go to page 33)

78    Page 3, which is in Part 1 of the Comcare Manual, contains the following:

Basic principle of cover

Comcover provides broad cover for all classes of general insurance normally available in the commercial insurance market. It covers all risks for which it has been able to make a proper provision by way of, for example, levying a fund member, setting excesses, and arranging reinsurance protection.

For all property claims

In general, the amount payable by Comcover will be equivalent to the actual replacement cost of a similar item or building, or the repair cost, such that the item or building is reinstated to a condition equal to, but not better than, its original, new condition.

79    Pages 20-21, which is in Part 2 of the Comcare Manual, appear in these terms:

Property loss, destruction or damage

If your property is lost, destroyed or damaged

where property means the Fund Member’s real and personal property but excluding watercraft more than 15 metres in length and aircraft, which is in your possession, care, custody or control, or your responsibility

    This includes watercraft up to and including 15 metres in length

Motor vehicles are not covered under this Insurance > see page 23

and

    the event that caused the property to be lost, destroyed or damaged occurred during your period of cover;

and

    Special terms and conditions, to be specified in your Schdedule of Cover, apply to watercraft over 15 metres in length and to aircraft, in your possession, care, custody or control.

    Comcover will not cover any claim arising from the use of watercraft that is greater than 15 metres in length or aircraft unless:

•    You have provided Comcover with full details of that watercraft or aircraft; and

•    Comcover has annotated those details on the terms and conditions to your Schedule of Cover

then

    we will pay:

o    the actual replacement value of the property lost, destroyed or damaged

For the purposes of this class of cover, the replacement value is the amount equivalent to the actual replacement cost of a similar item or building, or the repair cost, such that the item or building is reinstated to a condition equal to, but not better than, its original, new condition.

o    for the reasonable costs incurred in establishing, proving and quantifying the loss, destruction or damage;

o    the costs of the removal, storage and disposal of debris; and

Property, loss, destruction or damage continued…

o    If the property is in the course of transit then we will only pay for losses, including losses arising from loading and uploading or transhipment wherever incurred, in accordance with the following clauses published by the London Institute of Underwriters:

.    Institute Cargo Clauses[A] 1/1/82

.    Institute Cargo Clauses [Air] (excluding sendings by Post] 1/1/82

.    Institute War Clauses [Cargo] 1/1/82

.    Institute War Clauses [sendings by Post] 1/1/82

.    Institute Strikes Clauses [Cargo] 1/1/82

.    Institute Strikes Clauses [Air Cargo] 1/1/82

.    Institute Radioactive Contamination Exclusion Clause 1/10/90

.    Institute Classification Clause 1/8/97

.    Institute Replacement Clause 1/1/34

.    Institute War Clauses [Air Cargo] [excluding sendings by Post] 1/1/82

less any excess

but

we will not pay for

o    wear and tear, rust, inherent vice, latent defect, gradual deterioration, moths, vermin, dampness or dryness of atmosphere, extremes or changes of temperature [other than freezing], or faulty workmanship, faulty material, faulty construction or faulty design

o    pollution unless it is sudden and accidental

o    your illegal acts

o    unexplained inventory shortages, disappearances resulting from clerical or accounting errors, shortage in supply or delivery of items to or from your organisation; or

o    flood—including the action of sea water, tidal wave, or high water

o    unless specified in the Schedule of Cover, use of watercraft that is greater than 15 metres in length or aircraft that are in your possession, care, custody or control.

80    Page 29, also in Part 2, includes this information:

General exclusions

    Excluded events

    We will not pay for loss, destruction, damage or liability arising from

o    the deliberate disregard by you, or of your employees or officers, of the need to take all reasonable steps to prevent losses.

o    Ionising, radiation, or contamination by radioactivity, from any nuclear fuel waste or weapon—whether from a direct or indirect effect;

o    asbestos resulting from mining, handling, processing, manufacture, sale, distribution, storage, presence, use or removal of asbestos products and/or products containing asbestos;

o    Illegal acts

We will not pay for any claim resulting from

o    war, invasion, act of a foreign enemy, hostilities (whether war is declared or not], civil war, rebellion, revolution, insurrection, military or usurper power, acts of terrorism—whether from a direct or indirect effect; or

o    confiscation, nationalisation, requisition, or damage to property ordered by a government or public or local authority except where such action was in the process of the defence of human life and or third party property.

81    Pages 33-34 set out definitions including:

claim

o    any writ, statement of claim, summons, application or legal notice served on the fund member

o    any written or verbal notice of demand for compensation received by the fund member, or

o    any claim made by you on Comcover

…

fund

the fund established by the Commonwealth as part of the Special Account in accordance with the Financial Management and Accountability Act 1997

fund member

the organisation named on the Schedule of Cover

…

loss

o    all damages or judgments, legal costs awarded against a fund member, or if applicable an officer, any reasonable fees or expenses incurred in relation to a claim with the written consent of Comcover or the Member Services Manager, and settlements negotiated with the written consent of Comcover or the Member Services Manager

but, it excludes

o    any amount up to the excess, fines and penalties, and aggravated or exemplary damages

…

property

    all tangible real, or tangible personal property excluding watercraft more than 15 metres in length and aircraft

schedule of cover

the terms and conditions of cover issued to the fund member which include details of the type of cover, maximum limits of cover, applicable excesses, and special endorsements or other conditions.

you

    is the organisation, which is the fund member

…

THE UNL POLICY

82    The UNL policy contains cll 1 and 2 in these terms:

1    COVERAGE

    In consideration of the Insured (hereinafter called ‘Comcover’) having paid or agreed to pay to the Insurer named below the premium mentioned in the Schedule, the Insurer agrees (subject to the terms, Conditions and Limits of Liability set out in this Policy, endorsed or attached thereto), to indemnify Comcover for its liability or responsibility to reimburse Fund Members for any claims, made by or against such Fund Members, for loss and/or damage and/or injury and/or consequential loss and/or legal liability, in accordance with the terms and conditions set forth in the Comcover Manual and the Schedules of Cover issued to the Fund Members or as detailed in Condition 14 of this Policy.

2    IN-HOUSE RETENTION

    The Insurer shall be liable only for the Ultimate Net Loss in excess of the In-House Retention as stated in the Schedule, subject always to the terms of Insuring Agreement 3 – Limits of Liability.

83    Clause 5 appears as follows:

5    PAYMENT OF ULTIMATE NET LOSS

    Subject to the provision of Condition 6 of this policy, this Policy shall not apply unless and until Comcover shall be obligated to pay, or has agreed to pay, the amount of the In-House Retention.

    When the amount of Ultimate Net Loss has finally been determined, the Insurer shall promptly pay on behalf of Comcover the amount of Ultimate Net Loss falling within the terms of this Policy.

84    Clauses 7 and 9 provide that:

7.    REVIEW OF COMCOVER MANUAL

    By the signing of this Policy, the Insurer declares that it has reviewed and agreed the terms, conditions and coverage provided to Fund Members by the Comcover Manual insofar as such terms and conditions may affect the coverage hereby provided.

…

9.    INADVERTENT ERRORS AND OMISSIONS

Comcover and its Fund Members shall not be prejudiced by any unintentional and/or inadvertent:

(a)    non-disclosure or misrepresentation of facts, and/or

(b)    incorrect particulars and/or statements; and or

(c)    non-disclosure of an intention to make a claim; and/or

(d)    non-disclosure of a claim; and/or

(e)    non-disclosure of information which is likely to give rise to a claim; and/or

(f)    failure to report any property and/or entity and/or insurable exposure in which any Fund Member has an interest; and/or\

    (g)    error in the name or title of any Fund Member;

    provided always that such information shall be duly disclosed to the Insurer as soon as practicable after Comcover becomes aware thereof.

    To the extent that this clause 9 may be inconsistent with the Insurance Contracts Act 1984 (Commonwealth) and that Act applies to this policy solely because of Clause 2 then this Clause 9 prevails to the extent of any inconsistency.

85    Clause 18 includes these provisions:

If there is a dispute between Comcover and the Insurer concerning the meaning or effect of any provision of the Comcover Manual the following principles will be applied in the interpretation of those provisions.

(a)    in its relations with Fund Members, Comcover applies an interpretation to the provisions of the Comcover Manual that provides the Fund Member with the broadest possible indemnity or cover always having regard to the principle of covering Fund Members for normally insurable risks only (or as otherwise, but only by specific agreement with the insurer);

(b)    in their relations with Comcover under this policy the Insurer will indemnify Comcover to the extent that Comcover has a liability or responsibility to Fund Members under the Comcover Manual; and

(c)    differences in opinion between the insurer and Comcover as to the interpretation of the Comcover Manual under this policy will be resolved by negotiation in good faith between the parties having regard to the principle set out in Condition 18 (a) above.

86    Definitions at the end of the UNL policy include:

1.    ‘Claim’ means:

(a)    any writ, statement of claim, summons, application or legal notice served on the Fund Member; or

(b)    any written or verbal notice of demand for compensation received by the Fund Member, or

(c)    any claim made by the Fund member on Comcover.

2.    ‘Comcover’ means the administrative unit within the Commonwealth Department of Finance and Administration responsible for implementing and coordinating self-insurance arrangements for the Fund Members.

3.    ‘Comcover Manual’ means the Comcover Manual and the Schedules of Cover issued by Comcover to each of the Fund Members.

4.    ‘Fund’ means the fund established and managed by the Commonwealth Department of Finance and Administration for the purpose of managing the Commonwealth’s risks and liability.

5.    ‘Fund Member’ means the Commonwealth administrative agencies, statutory bodies and companies and other parties, which agree with Comcover to pay contributions to the Fund.

…

9.    ‘Ultimate Net Loss’ means the sum(s) actually paid or payable in cash in the settlement or satisfaction of claims for which Comcover is liable, either by agreement, adjudication or compromise.

87    A schedule attached to and forming part of the UNL policy states these terms:

CLASS OF

INSURANCE:    The Ultimate Net Loss of the Commonwealth of Australia which arises as a result of the risks underwritten by its self managed fund known as Comcover

…

INSURED:    The Commonwealth of Australia through its self managed fund known as Comcover.

BUSINESS:    Principally the Commonwealth’s self-managed fund known as Comcover including all activities incidental thereto.

INTERESTS

INSURED/LIMITS OF

LIABILITY:    The following Limits of Liability (the meaning and extent of which are as they appear in the Comcover Manual) apply with respect to Comcover’s liability to indemnify each Fund Member for Ultimate Net Loss sustained in excess of the In-House Retention:

(a)    General Liability

    A$10,000,000 in respect of each claim or series of claims arising out of any one event, occurrence or circumstance.

(b)    Products Liability

    A$10,000,000 in respect of each claim or series of claims arising out of any one event, occurrence or circumstance, and A$30,000,000 in the aggregate.

…

(e)    Fund Members Property

    A$10,000,000 in respect of each claim or series of claims arising out of any one event, occurrence or circumstance at any one situation.

PRIMARY JUDGE’S REASONS

Cover by Vero

88    The primary judge rejected Vero’s submission that “as the insuring clause cannot apply to all property owned by the Commonwealth, unconnected in any way with the AAD, it must be construed to refer to property owned by the Commonwealth for the purpose of performing the functions of the AAD” (at [50]). According to the primary judge “this construction imports a functional limitation into the insuring clause that is not supported by the words of the clause itself” (at [52]). The primary judge thus held (at [53]) that:

the construction proffered by the Commonwealth, in this particular respect, is correct, having regard to the context in which coverage to Fund Members was provided at the time. That context includes the fact that many Fund Members were emanations of the Commonwealth that could not own property in their own right. In this setting, the words “possession, care, custody or control, or your responsibility” serve to identify that part of the Commonwealth’s real and personal property that was to be treated as if it was the Fund Member’s own property, for the purposes of the Commonwealth’s internal arrangements in relation to the carrying of risk.

89    Vero contends that the primary judge was in error in this regard.

90    The primary judge accepted the Commonwealth’s submission that the land within the Casey Base Station affected by the spill was “property” the subject of cover. The primary judge, at [63]-[68] said:

[63] …However, it does not follow from this that the Commonwealth is correct to submit that the insuring clause in the Comcover Manual covers damage to the land at Casey Base Station caused by the fuel oil spill. This is because the insuring clause must be construed having regard to all its provisions and in the context of the Comcover Manual as a whole. The liability or responsibility created by that clause is directed to the actual replacement value of the property that is lost, destroyed or damaged. In this connection the clause is explicit: the replacement value, for this class of cover, is “the amount equivalent to the actual replacement cost of a similar item or building, or the repair cost, such that the item or building is reinstated to a condition equal to, but not better than, its original, new condition”.

[64] The characterisation of Comcover’s liability or responsibility in this way itself serves to characterise the nature of the real and personal property in respect of which the liability or responsibility arises. It reveals that “this class of cover” is in respect of items or buildings that can be replaced, or reinstated by repair. This is reinforced by the expression in the Comcover Manual of the basic principle of cover for all property claims, which I have quoted above: see [21]. This description of Comcover’s liability or responsibility to reimburse is not apposite to describe a liability or responsibility to reimburse the remediation costs of land that has been damaged.

[65] The Commonwealth stresses the width of the expression “real and personal property” used in the insuring clause. It also places reliance on cl 18(a) of the UNL Policy conditions which stipulates, as a rule of interpretation, that the Comcover Manual is to be construed so as to provide the Fund Member with the broadest possible indemnity or cover. In doing so, however, the Commonwealth fails to heed the balance of the insuring clause in the Comcover Manual which, in my view, makes plain that the words “real and personal property” are not used in an unconstrained sense but are directed to “real and personal property” in the nature of an “item” or “building”, and not land in and of itself.

[66] The same consideration applies when considering the definition of “property” in the definitions section of the Comcover Manual. Although that definition speaks of “all tangible real property” the qualifying words of the insuring clause cannot be ignored. Nor, in my view, can they be explained away as merely referring to a subset of particular loss, destruction or damage otherwise covered by the insuring clause. The qualifying words encapsulate the extent of the cover provided by the insuring clause; they do not merely describe an example of it.

[67] The Commonwealth also seeks to call in aid the fact that there is no express exclusion of land from the reach of the insuring clause. It points out that the Comcover Manual does contain an exclusion for “pollution, unless it is sudden and accidental”. The Commonwealth submits that the most serious consequence of pollution is often contamination to land. It submits that the fact that sudden and accidental pollution is apparently covered supports the conclusion that damage to land is covered.

[68] In my view these considerations are really neutral matters that do not advance the Commonwealth’s case. The fact that land is not expressly excluded from the insuring clause does not readily lead to the conclusion that land must, therefore, be covered. The Commonwealth’s submission simply begs the question of the proper construction of the insuring clause and posits, as its starting point, the construction for which the Commonwealth contends. The question is whether that construction is correct. In my view it is not. As to the second matter, the fact that damage by sudden and accidental pollution is apparently covered by the insuring clause speaks only of the proximate cause of the damage. It does not characterise the nature of the property that is so damaged. It is apposite to speak of sudden and accidental pollution as a cause of damage to real and personal property that are items and buildings.

91    The Commonwealth contends that the primary judge was in error in this regard

92    At [70] - [72] the primary judge declined Vero’s invitation to consider extrinsic material as supporting Vero’s argument about the scope of the insuring clause, concluding that his “conclusion on the scope of the insuring clause rests primarily on the wording of the clause itself, considered as a whole, in the context of the Comcover Manual” (at [71]). In so concluding his Honour noted that “there is no evidence that the AAD’s renewal declaration made to Comcover was known to Vero at the relevant time and thus formed part of the background circumstances in which the Commonwealth and Vero entered into the UNL Policy” (at [72]). Vero contends that the extrinsic material could and should have been considered by the primary judge and, if considered, provided support to the conclusion the primary judge reached (and which should be reached on appeal) that the primary judge was correct to reject the Commonwealth’s submission that the cover extended to land, as opposed to real property in the form of buildings or structures capable of replacement and personal property.

Limitation period

93    At [76] the primary judge said that it “is common ground between the parties that the applicable limitation period is six years as provided in s 14 of the Limitation Act”. At [81] –[92] the primary judge set out a detailed analysis of the accrual of causes of action in respect of, on the one hand, property damage and, on the other hand, claims under policies of liability insurance.

94    At [98] – [100] the primary judge concluded in these terms:

[98] What fact or combination of facts gave rise to the Commonwealth’s right to sue Vero under the UNL Policy? It seems to me that, as a minimum, the Commonwealth would need to establish that there was a claim for which Comcover was liable “by agreement, adjudication or compromise”. Certainly there had been no “agreement, adjudication or compromise” in relation to the AAD’s claim prior to 21 June 2005. On the facts of the present case the earliest point in time at which it could be argued that there was an agreement or compromise in respect of the AAD’s claim was when Comcover informed the AAD (through the AGS) on 21 June 2005 that it accepted the fuel oil spill as an insured event. It follows from this conclusion that the present proceeding, which was filed on 14 June 2011, was commenced within the applicable limitation period and is not barred.

[99] In reaching this conclusion I do not accept Vero’s submission that cl 2 of the insuring agreements, informed by the definition of Ultimate Net Loss, relates only to the quantification of the indemnity provided by the UNL Policy. In my view Vero’s obligation to indemnify Comcover under cl 1 of the insuring agreements cannot be read in isolation from cl 2 and the definition of Ultimate Net Loss. The contract was to indemnify Comcover for its Ultimate Net Loss. Comcover’s Ultimate Net Loss could only be referable to claims for which it was liable “either by agreement, adjudication or compromise”.

[100] Having arrived at the conclusion that the earliest possible accrual date falls within the limitation period, it is unnecessary for me to consider the Commonwealth’s alternative, and preferred, position that its cause of action against Vero under the UNL Policy first accrued at a later time when Comcover’s payments to the AAD exceeded the total of the excess under the Schedule of Cover and the In-House Retention under the UNL Policy itself.

95    Vero contends that the primary judge was in error in this regard.

CONSIDERATION

Cover by Vero

96    Vero’s contention depends on the construction of that part of the Comcare Manual which provides cover in the following terms:

Property loss, destruction or damage

If your property is lost, destroyed or damaged

    where property means the Fund Member’s real and personal property but excluding watercraft more than 15 metres in length and aircraft, which is in your possession, care, custody or control, or your responsibility

…

then

    we will pay:

o    the actual replacement value of the property lost, destroyed or damaged

    For the purpose of this class of cover, the replacement value is the amount equivalent to the actual replacement

    cost of a similar item or building, or the repair cost, such that the item or building is reinstated to a condition equal to, but not better than, its original, new condition.

97    Vero’s submission is as follows:

20.    The insuring clause expressly provides for cumulative requirements. In order for property to be insured by the policy it must be: (a) the Fund Member’s real or personal property and (b) “which is in” its possession, care, custody or control, or its responsibility. The second requirement alone is not sufficient.

21.    The construction adopted by the primary judge ignores, in the case of a Fund Member which is not a legal entity separate from the Commonwealth, the actual wording: “which is in” necessarily imposes cumulative requirements rather than equating the concepts. Further, the reference to “Fund Member” and “your” must be a reference to the same “entity”. If one substitutes “the Commonwealth” for “the Fund Member” as the primary judge did (J [53]), the reference to “your” must similarly be a reference to the Commonwealth. Then the insuring the clause would cover “the Commonwealth’s real and personal property … which is in the Commonwealth’s possession, care, custody or control, or the Commonwealth’s responsibility:”. That would insure all of the Commonwealth’s property, not that which is attributable to the Fund Member.

22.    Contrary to the primary judge’s approach, the first part of the clause must be given some work to do in the case of a Fund Member which is not a legal entity separate from the Commonwealth. The agencies of the Commonwealth, such as the AAD, are defined by reference to their functions. Accordingly, the identification of property which is the “Fund Member’s” must also be by way of function. The words “the Fund Member’s” property should be understood to mean “the Commonwealth’s property which is owned by the Commonwealth for the purpose of performance of the Fund Member’s functions”. That is not a “gloss” (cf AWS [23]) but rather seeks to give work to the words actually used. It is to enable one to identify that which can properly be described as the AAD’s property for the purpose of insuring clause.

23.    It is no part of the AAD’s functions to own land in Antarctica, that is merely where it performs many of its functions. The AAD’s charter [Tab 14.A52] says no more than it “administers” the Australian Antarctic Territory. It also conducts scientific research there under its charter, including at Casey Base Station. Thus, the buildings, plant and equipment at the Station, which the Commonwealth presumably buys out of the AAD departmental budget and ships to Antarctica for use at Casey Base Station, would be regarded as the AAD’s property and insured by the policy because they are owned by the Commonwealth for the purpose of performance of the AAD’s functions. However, in light of the AAD’s functions, no part of the land in Antarctica is to be treated as “the AAD’s real and personal property” for the purpose of the insuring clause; Antarctica is merely where it performs functions.

24.    The evidence at trial does not alter this position. The actual evidence in relation to the boundaries of Casey Base Station was contained in the affidavit of Mr Wilkins. The actual evidence (as opposed to the assertion at paragraph 22 of his affidavit) was no more than there is a “Casey Station Management Area”, considered an area of operation for all station personnel. Travel outside this zone is controlled and requires additional permissions and safety procedures. The plans prepared for this litigation and put in evidence by the Commonwealth show administrative boundaries imposed at some time for the purposes of regulating people’s movements at the station, which could be altered at will by the Commonwealth. The Commonwealth has not shown that the area within those administrative boundaries is owned for the purpose of the performance of the functions of the AAD, any more than the area immediately outside those boundaries. Nor for that matter has it shown that the AAD has some custody, control or responsibility for the land inside the boundary that distinguishes it from that outside. Thus, it is not to be accepted that “the insuring clause is satisfied by the administrative control exercised over Case Base Station by the AAD” (cf AWS [26]). Having some form of administrative control over a thing does not make that thing the functionary’s property.

98    Despite Vero’s submission it is impossible to characterise its construction as something other than an impermissible gloss on the words of the cover identified by the Comcare Manual. The gloss “which is owned by the Commonwealth for the purpose of the performance of the Fund Member’s functions” finds no support in the language of the provision in question. It may be accepted that there are two requirements in that provision. First, “the Fund Member’s real and personal property” and, secondly, “which is in your possession, care, custody or control, or your responsibility”. The provision pre-supposes the acceptance of the fiction that various emanations of the Commonwealth, which in fact have no legal existence separate from the Commonwealth, are legal persons with legal capacity. Hence, the only way in which “the Fund Member’s real and personal property” can be read is as a reference to the Commonwealth’s property, as the primary judge, Vero and the Commonwealth all accepted to be so. Vero also accepted that the Casey Base Station is the Commonwealth’s property so that the first of the two cumulative requirements is satisfied.

99    Once it is accepted that the fiction must also continue for the second requirement it is apparent that the words “which is in your possession, care, custody or control, or your responsibility” cannot mean the Fund Member; it must also mean the Commonwealth, albeit acting through the Fund Member as its particular emanation for that purpose. Vero’s argument that the property must be owned by the Commonwealth for the purpose of the Fund Member performing its functions does not reflect the terms of the second requirement, which is simply that the property be in your (for which read the Commonwealth, acting through the Fund Member) “possession, care, custody or control, or your responsibility”. Even if it be accepted that the Casey Base Station is not in the possession of the Commonwealth acting through the AAD there cannot be much doubt that the station is in the care, custody or control of the Commonwealth acting through the AAD and there is even less doubt that the Commonwealth acting through the AAD is responsible for the station. It could hardly be otherwise given that the Casey Base Station is where the AAD is located, where it houses its personnel in Antarctica, and where it conducts much of its scientific research. The fact that the boundaries of the so-called “Casey management area” are fixed by the Commonwealth for the purpose of regulating the movement of personnel and may be changed by the Commonwealth at any time is beside the point. On the facts of this case the oil spill occurred directly outside one of the AAD’s buildings and migrated through the ice towards a lake relatively close the building. Vero’s submissions about an occurrence anywhere throughout the entire Australian Antarctic Territory do not engage with the facts of the present case. How can it be the case that the Commonwealth, through the AAD, is not responsible for land immediately adjacent to one of its building within the Casey Base Station on which it placed oil tanks which leaked?

100    For these reasons the primary judge’s rejection of this argument by Vero for the denial of liability was not in error. The requirements of the Comcover Manual, in this regard, were satisfied.

101    The more difficult question, in my view, is the argument raised by the Commonwealth. The primary judge’s conclusion was that the Comcover Manual, properly construed, did not provide cover for damage to land in and of itself.

102    Questions of construction readily result in differences of opinion. In the present case it is apparent that the Comcover Manual, which does not descend to such useful matters as section references, is a relatively informal document. Nevertheless, it is the document by which Vero accepted its liability to the Commonwealth under the UNL policy.

103    First, the definitions must be relevant. They are referred to on the first page of the Comcover Manual. The reference to the definitions indicates that the reader is expected to refer to the definitions at the end of the document to understand which terms are defined and the meaning those terms take. Hence, “property” means all tangible real or tangible personal property excluding watercraft more than 15 metres in length and aircraft. As the Commonwealth submitted there cannot be any real question that this definition, on its own terms at least, encompasses all real property of which the most obvious and common kind is land. It follows that if land is to be treated as not being “property” for the purpose of any other provision of the Comcover Manual that exclusion must be apparent from that other provision. This, in effect, is what the primary judge found by reference to p 20.

104    Second, to the extent that the primary judge relied on the statement on p 3, as to the basic principle of cover, to interpret p 20, the primary judge was in error. This is because, as the Commonwealth said, p 1 directs that Part 1 is not to be used to interpret Part 2. Given, however, that the references to replacement cost and repair also appear on p 20, which is in Part 2 itself, it does not seem to me that this error could be material. In particular, the Commonwealth’s submission that the absence of the words “in general” from p 20 compared to their presence on p 3 is significant cannot stand in the face of the fact that p 1 directs that Part 1 (which includes p 3) is not to be used to interpret Part 2 (which includes p 20).

105    Third, coming to p 20, there is nothing in the first paragraph on that page which is inapt for land. Land may be “lost, destroyed or damaged”. Even if the concept of “lost” is more readily applicable to personal property than to land, the same is true of buildings which are accepted by Vero to be within the scope of the cover.

106    Fourth, it cannot be the case, as Vero submitted, that the opening paragraph on p 20 somehow excludes the definition of “property”. It is true that reading the first paragraph in light of the definition makes the paragraph repetitious. Despite this, if Vero were correct the express limitation in the definition to “tangible” real and personal property would be lost. Given the informal nature of the Comcover Manual it is preferable to read the references to “property” on p 20 as references to “property” as defined despite the fact that this involves repetition of elements of the definition in the text of p 20. At worst, this is an example of redundancy rather than a different meaning being given to “property” on p 20 than the meaning ascribed by the definition.

107    Fifth, and contrary to the Commonwealth’s submissions, I do not think too much weight, if any, can be placed on the different fonts and text sizes apparent on p 20 of the Comcover Manual. If the different fonts and text sizes are a code to construction, the meaning escapes me.

108    Fifth, the part of p 20 on which the primary judge relied and which Vero emphasises (commencing with the word “then”) is performing a particular function, being identification of the measure or scope of the indemnity. But this does not mean that the words are necessarily irrelevant to the scope of the cover itself. The measure of the indemnity (that is, what Comcover said it will pay) may well cast light on the scope of the cover itself. In the present case there is tension between the measure of the indemnity (the actual replacement cost of the property lost, destroyed or damaged which is further defined as the “the amount equivalent to the actual replacement cost of a similar item or building, or the repair cost, such that the item or building is reinstated to a condition equal to, but not better than, its original, new condition”) and the notion that the indemnity was intended to apply to land. Despite the Commonwealth’s submissions it is apparent that the measure of the indemnity refers to replacement cost and repair cost by reference to words, “item” and “building”, which are not apt to include land. Yet land is plainly “tangible real property” which may be, at the least “damaged”, if not “lost” or “destroyed”. The fact that “item” might mean nothing more than “thing” does not make the word apt to describe land. Nor are the concepts of “replacement cost” or “repair cost”, at least in the context of an item or building, readily applicable to land.

109    It follows that there is real ambiguity in the Comcover Manual. Land is real property. The promise of indemnity relates to all tangible real property. The drafter of the Manual went to the trouble of excluding from the definition of property two classes of tangible personal property, watercraft more than 15 metres in length and aircraft, yet did not expressly exclude perhaps the most obvious class of real property, being land. Land is patently capable of suffering damage by any one of a number of means, oil and other spills being one of the most obvious examples. Yet the measure of the indemnity is expressed in terms not readily applicable to land.

110    The Commonwealth submitted that any ambiguity had to be resolved in its favour given cl 18(a) of the UNL Policy. The problem with recourse to cl 18(a) is that there was no evidence to the effect that cover for the cost of remediating one’s own land from the effects of a spill would constitute a “normally insurable risk”. If the Commonwealth wished to rely on cl 18(a) then ultimately it was for the Commonwealth to prove that the conditions of engagement of that clause are satisfied, which it did not do. It seems to me to be wrong to attempt to apply the first part of the clause (providing the Fund Member with the broadest possible indemnity or cover) without regard to the second part (that is, always having regard to the principle of covering Fund Members for normally insurable risks only).

111    The resolution to the ambiguity, accordingly, is not to be found in cl 18(a), at least not in this case.

112    What then is the answer? A number of considerations lead me to prefer a different construction from that which the primary judge adopted.

(1)    The drafter of the Comcover Manual turned his or her mind to exclusions from the definition of “property”. Hence, two items are expressly excluded. Land is not one of the excluded items.

(2)    Land is an obvious form of tangible real property.

(3)    Land can be damaged. It can also be repaired in the sense of reinstated or remediated to its original or a pre-existing condition.

(4)    The measure of indemnity on p 20, being the replacement value of the property lost, destroyed or damaged, does not include replacement cost only. It also includes “repair cost”.

(5)    To read the measure of indemnity provision as impliedly excluding land means reading “item” in the description of repair cost as tangible real or personal property other than land or, perhaps, tangible personal property. While there is some warrant for this reading, particularly given the reference to “similar item” immediately above in the description of replacement value, there are other indicators to the contrary.

(a)    First, the exclusion of land from the scope of the property the subject of the indemnity gives the text below “the actual replacement value of the property lost, destroyed or damaged” an extraordinary amount of work to do. It seems to achieve by a most indirect and obscure means that which was done directly for two items of personal property in the definition of property itself.

(b)    Second, on p 21, a fairly detailed list of other exclusions from this class of cover appears. These exclusions include “pollution, unless it is sudden and accidental”. In other words, sudden and accidental pollution is covered. It is difficult to conceive of a drafter thinking that sudden and accidental pollution might damage buildings and items of personal property but not land. Sudden and accidental pollution, if anything, is more likely to damage land than buildings and items of personal property. It is also notable that flood, including the action of seawater, tidal wave or high water is excluded. Damage to land by reason of flood is just as readily conceivable as damage to personal property and buildings. Having turned his or her mind to these exclusions, and made express provision for them, if land had been intended to be excluded altogether from the scope of cover for damage to property, then the text below “the actual replacement value of the property lost, destroyed or damaged” it is an undoubtedly strange way for the drafter to have achieved that result.

(c)    Third, the general exclusions on p 29 lead to similar conclusions. The drafter turned his or her mind to excluding cover for damage from ionising radiation or contamination by radioactivity. While buildings and items of personal property can be so damaged, so too can land. Loss caused by confiscation, nationalisation or requisition is also excluded. In terms of real property, land is the obvious class of real property most likely to be confiscated or nationalised.

113    I agree with the primary judge’s analysis of the extrinsic material. Given that it is not apparent that Vero received that material, it cannot be said that it was relevant to the scope of cover Vero provided. To the extent that Comcover’s agent received that material from the AAD it is impossible to conclude that Comcover somehow thought it was not covering land in the scope of cover. That is not apparent from the documents which are ambiguous at best.

114    For these reasons I am unable to agree with the primary judge. I accept the Commonwealth’s argument on the appeal.

Limitation period

115    Vero submitted that:

For any claim in contract a limitation period must exist between the applicant (Commonwealth) and respondent (Vero) in a proceeding; one cannot interpose non-existent entities in the characterisation. The Commonwealth’s risk, or the event that is insured, under the UNL Policy is damage to insured property. On the facts the Commonwealth (AAD) could have notified itself (Comcover) in July 1999, remediated in 1999 (in fact it did commence remediation in 1999/2000), notified Vero in 1999/2000 and, after doing those things, or even without doing any of them, sued Vero on the UNL Policy in 1999 for the remediation cost incurred, or, if not then incurred, for an estimated remediation cost. The Commonwealth had a complete cause of action in 1999.

…

The primary judge erred because his Honour considered the accrual of the cause of action was postponed by clauses of the UNL Policy which related only to the quantification of the liability of Vero when, in fact, the damage, and the notional liability of Comcover being indemnified, both came into existence in July 1999.

116    These submissions cannot be accepted. The primary judge’s analysis of this issue discloses no error. As the Commonwealth submitted:

Vero entered into the UNL Policy in the knowledge and understanding that Comcover and the Fund Members would deal with each other as if they were separate entities in order to promote the Commonwealth’s objectives of transparency, accountability and better management of the Commonwealth’s insurable risks (J [6]). Vero entered into a policy which treated Vero as a reinsurer and Comcover as reinsured J ([96]).

In that context, it is entirely unremarkable that the policy should adopt contractual terms that link Vero’s liability to indemnify Comcover to the establishment by agreement or adjudication of Comcover’s obligation to pay the Fund Member’s claim (see AS [30], clauses 2 and 5 and the definition of “Ultimate Net Loss”). This simply mirrors the arrangements commonly put in place between a reinsured and a reinsurer.

CONCLUSIONS

117    For the reasons given I consider that the Commonwealth’s appeal should be allowed and Vero’s notice of contention dismissed and I would make orders, accordingly, as follows:

(1)    The appeal be allowed.

(2)    Orders (1) and (2) made on 14 August 2012 be set aside and in lieu thereof the questions ordered to be determined separately from the determination of all other questions in the proceeding each be answered “Yes”.

(3)    The respondent pay the applicant’s costs of the hearing of the separate questions and of this appeal as agreed or taxed.

(4)    The proceeding be remitted to the primary judge.

Associate:

Dated:    6 December 2013