FEDERAL COURT OF AUSTRALIA

Commonwealth of Australia v Vero Insurance Limited [2012] FCA 826

THE COURT ORDERS THAT:

1.    The parties are to provide draft orders giving effect to these reasons within seven days.

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

REASONS FOR JUDGMENT

1    In this proceeding the Commonwealth seeks a declaration that it is entitled to an indemnity under the terms of an Ultimate Net Loss Insurance Policy (the UNL Policy) for the period from 1 July 1999 to 30 June 2000 issued by the respondent (Vero) for the remediation costs (and other related costs) of damage to land caused by a fuel oil spill at Casey Base Station in the Australian Antarctic Territory on or about 20 July 1999 (the event). The Commonwealth also seeks an order that Vero pay such sums as shall indemnify the Commonwealth in accordance with the terms of the UNL Policy, as well as damages for breach of contract and other relief.

2    Vero has raised a number of defences to the Commonwealth’s claim. Significantly for present purposes it says that the event did not cause damage to any real or personal property of the Commonwealth within the meaning of “property” as used in the UNL Policy. In that connection it denies that the UNL Policy, including the Schedule of Cover and the Comcover Manual (to which further reference will be made), would be understood by a reasonable person in the position of the parties to provide cover for any property (in the sense of all property) damaged by the event, when read against the background circumstances known to the parties prior to the placement of the UNL Policy.

3    Vero also says that any cause of action of the Commonwealth under the UNL Policy in relation to the event accrued no later than 20 July 1999. Thus, by reason of s 14 of the Limitation Act 1969 (NSW) (the Limitation Act), any such cause of action was barred on 20 July 2005 at the latest. The present proceeding was commenced on 14 June 2011.

4    Plainly either of these defences, if made out, would be decisive. For this reason orders were made for the separate determination of three questions, reflecting the paragraphs in Vero’s defence in which the matters noted above were pleaded. The separate questions in fact raise, as a matter of substance, two matters: first, the extent of coverage of the UNL Policy in respect of damage to property; and secondly, whether the Commonwealth’s claim against Vero under the UNL Policy is barred by reason of s 14 of the Limitation Act.

5    For the following reasons I have come to the view that the first of these defences succeeds: the Commonwealth’s remediation and other costs in relation to the damage to the land at Casey Base Station are not covered by the indemnity provided by the UNL Policy. I am not satisfied, however, that, had the UNL Policy responded to its claim, the Commonwealth’s cause of action in that regard would have been barred at the time this proceeding was commenced.

BACKGROUND

Comcover

6    Comcover was established on 1 July 1998 as a self-managed insurance fund within the Department of Finance and Administration (now the Department of Finance & Deregulation) (the Department): Financial Management and Accountability Orders (Amendment) 1998 (Cth). Its functions are 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. Its establishment was to promote transparency, accountability, and the better management of the Commonwealth’s insurable risks, as part of the Government’s Public Service Reform Agenda. Its member organisations are Australian government agencies.

7    Comcover operates by collecting premiums from participating Fund Members and accumulating reserves to meet future losses from those reserves. It provides that cover in two ways. First, for most members, it provides cover using standard wording and endorsements, reflected in a manual. The relevant manual for present purposes is the Comcover Manual for 1999/2000 (the Comcover Manual). Secondly, for certain members, it provides cover on the basis of that member’s previous commercial insurance immediately before becoming a Fund Member.

8    In a presentation to underwriters in May 1999 (the presentation), Comcover identified its activities (under the heading “What Does Comcover Do?”) as follows:

•    Provides Protection for Insurable Risks for Members.

•    Professional Assistance and Advice to Members.

•    Assists Members to Identify and Quantify Risks.

•    Provides Advice and Assistance for Effective Risk Management.

•    Provides Positive Incentives for Effective Risk Management.

•    Uses Outside Service Providers.

•    Promotes Risk Management Awareness and Education.

•    Enables Systematic Quantification and Reporting of Risk.

•    Provides Claims Management Services.

•    Centrally Accumulates Risk Knowledge and Expertise.

•    Better Coordination and Uniformity of Claims Management.

9    In this presentation Comcover described itself as having adopted an in-house project management approach. In other words, while having overall responsibility for the delivery of the services listed above, Comcover engages specialist service providers to assist it in carrying out its functions. For example, Comcover has engaged a member service manager, an underwriting adviser, an actuary and a broker.

10    The member service manager in 1999 was GIO General Insurance Ltd. The presentation described its functions as follows:

•    Risk management awareness, education and advice.

•    Claims management and processing.

•    Incident notification management.

•    Collection of loss data and loss information.

•    Primary interface for fund members and Comcover.

•    Training services.

•    Interfaces with other providers.

•    Provision of reports and financial data.

11    The underwriting adviser in 1999 was Jardine Australian Insurance Broking Pty Ltd. The presentation described its functions as follows:

•    Provides pricing and premium advice.

•    Provides policy terms and conditions advice.

•    Provides reinsurance advice.

•    Provides insurance market information.

12    The actuary in 1999 was Tillinghast Towers Perrin. The presentation described its functions as follows:

•    Actuarial advice e.g.

- claims reserves

- retention levels

- funding adequacy

- global premium levels

- benchmarking

13    The broker in 1999 was Heath Group Australasia Pty Ltd. The presentation described its functions as follows:

•    Ascertain Extent of Underwriting Information.

•    Design Insurance Programme.

•    Market Programme.

•    Prepare a Marketing Report.

•    Effect Cover.

•    Arrange Policy Signature.

•    Assist in the Acquisition of Additional Underwriting Information.

•    Claims Management.

•    Provide Documentation.

•    Underwriting Advice.

14    The 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. The purpose of the presentation was 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 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.

15    The evidence shows that 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.

Comcover’s insurance arrangements with the AAD

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.

18    The Schedule of Cover also noted that the AAD, as the relevant Fund Member, owed Comcover a duty of disclosure and a duty of good faith.

19    Part 1 of the Comcover Manual dealt with general matters such as:

    Comcover’s role;

    the insurance cover that was provided;

    the calculation of members’ contributions; and

    the manner in which the fund operated.

20    The Comcover Manual identified the basic principle of cover as follows:

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.

21    The statement of the basic principle in relation to property claims continued as follows:

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.

22    In relation to how the fund was to operate, the Comcover Manual described Comcover as a “small unit” within the Department that outsources most of its work and employs “a reinsurance strategy” that provides appropriate levels of protection for the fund and for particular exposures.

23    Part 1 of the Comcover Manual set out members’ responsibilities, including their duty of disclosure, and the need for them to report immediately any event that might give rise to a claim. In referring to the possibility of members taking out other insurance, the Comcover Manual stated:

Members must advise Comcover if any risk placed with Comcover is also covered by an insurance policy issued by other insurers.

24    Part 2 of the Comcover Manual set out the general policy terms and conditions. The insuring clause in relation to property loss, destruction or damage was, relevantly, in the following terms:

If your property is lost, destroyed or damaged

    where property means the Fund Member’s real and personal property … which is in your possession, care, custody or control, or your responsibility…

and

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

then

    we will pay:

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

•    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 …

25    Property was defined in the Comcover Manual as:

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

26    However, when stating that Comcover would pay the actual replacement value of property lost, destroyed or damaged, the insuring clause was qualified in the following way:

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.

27    This qualification is consistent with the basic principle of cover concerning property claims set out in Part 1 of the Comcover Manual.

28     The statement of general terms and conditions included provisions about dispute resolution with Comcover (providing for mediation if the dispute was not resolved within 60 days) and subrogation. In that latter regard, the Comcover Manual provided:

When a claim payment is made, Comcover will be subrogated to the extent of the payment to your organisation and/or the person indemnified by your right of recovery. You must do everything necessary to secure and preserve those rights, including executing all documents necessary to enable Comcover to bring an action in your name.

The Commonwealth’s insurance arrangements with the respondent

29    Vero (then Royal & Sun Alliance Insurance Australia Ltd) issued the UNL Policy on 13 July 1999. The insured was noted as “The Commonwealth of Australia through its self managed fund known as Comcover”. The class of insurance was described as follows:

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.

30    The clauses representing the insuring agreements were as follows:

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.

3.    LIMITS OF LIABILITY

Regardless of the number of Fund Members, and regardless of the number of claims made by or against and/or suits brought against such Fund Members, the total limit of the Insurer’s liability to Comcover for Ultimate Net Loss incurred by each Fund Member, arising out of any one event, occurrence or circumstance, shall not exceed the applicable Limit(s) of Liability as specified in the Schedule.

With respect to Comcover’s liability or responsibility to indemnify each Fund Member, the Insurer’s liability shall be further limited to the amounts stated in the Schedule as the annual aggregate limits in respect of all events, occurrences or circumstances during each twelve (12) month period from the inception of this Policy arising out of Products Liability, Professional Indemnity and Directors’ & Officers’ Liability.

31    The schedule to the policy described the In-House Retention as follows:

Comcover shall bear the first A$1,000,000 of each and every loss (exclusive of the Fund Member’s Excess) subject to an aggregate In-House Retention of A$10,000,000 for all claims during each annual Period of Insurance thereafter the in-house retention shall be nil. Nonetheless, the Fund Members excesses shall continue to apply to all subsequent claims.

Claims or losses which contribute to the exhaustion of Comcover’s aggregate In-House Retention.

Each and every loss (less the Fund Member’s Excess) up to a maximum of A$1,000,000 shall contribute to the exhaustion of Comcover’s aggregate In-House Retention irrespective of whether the loss exceeds the in-house retention or not.

32    The UNL Policy conditions included the following:

1.    NOTICE OF OCCURRENCE

    Whenever Comcover has information from which it may reasonably conclude that an event, occurrence or circumstance is likely to give rise to a claim under this Policy, Comcover shall give the Insurer notice thereof in writing as soon as reasonably practicable.

    Provided, however, that failure to give notice of any event, occurrence or circumstance which, at the time of its happening, did not appear to involve this Policy, but which at a later date would appear to give rise to any claim(s) or liability hereunder, shall not prejudice such claim(s) under this Policy.

    …

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.

6.    PROGRESS PAYMENTS

Where liability or responsibility has been admitted by Comcover to any Fund Member:

(a)    for any loss, destruction, damage, injury, consequential loss or legal liability,

(b)    in accordance with the cover provided by the Comcover Manual;

progress payments on account of any claim may be made by the Insurer to Comcover at such intervals and for such amounts as may be agreed upon production of a report by Comcover or by any Loss Adjuster appointed by Comcover.

Provided always that such payment(s) shall be deducted from the amount finally determined upon adjustment of the claim.

…

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.

33    For the purposes of cl 5, the Ultimate Net Loss was defined as follows:

… 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.

34    Clause 18 of the UNL Policy conditions (dealing with the interpretation of the policy) included the following:

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.

35    Clause 24 of the UNL Policy conditions provided:

INSURANCE CONTRACTS ACT 1984

The Insurance Contracts Act 1984 (Commonwealth), as amended from time to time, applies to this policy irrespective of whether this policy is to be construed as a contract of insurance or not.

The fuel oil spill at Casey Base Station

36    The fuel oil spill occurred at Casey Base Station between 9 pm on 19 July 1999 and 8.30 am on 20 July 1999. In a report made on 11 August 1999 it was said that the spill was from a sump tank containing diesel fuel oil, to the immediate north of the main power house. Originally it was estimated that the spill was in the order of five to ten litres. Subsequent investigations revealed that the spill was somewhere between 700 and 2,330 litres. The fuel was a mixture which included 80% Bergen distillate. It was apparently discharged under the snow and was not evident until the distinctive red colour of the Bergen mix was observed as it later emerged from beneath the snowline, some 40 metres away from the power house.

37    Although AAD personnel knew of the incident in July 1999, Comcover was not notified of it until August 2004, some five years later. The reason for the delay in notification is not important for present purposes, but it has been suggested that there may have been ignorance within the AAD that the event represented a possible claim event. It has also been suggested that the initial estimate of the amount of the spill contributed to an underestimation of the magnitude of the problem and the resultant cost of remedial action. 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).

38    On 23 December 2004 Comcover provided written advice to the AAD that it declined to cover the event. The reason for the declinature was that “the land in question was not the property of AAD at the time of the loss”. Earlier, on 3 December 2004, Comcover informed Vero that it was in the “process of denying indemnity”. In early 2005 representations were made to Comcover on behalf of the AAD by the Australian Government Solicitor. Following those representations, Comcover reconsidered its position and, on 21 June 2005, advised the AGS as follows:

Comcover now advises that it accepts the Casey oil spill as an insured event, subject to policy terms and conditions.

As an aside, Comcover is liaising with its reinsurer over the reinsurer’s declinature of Comcover’s claim upon it. In considering AAD’s claim, Comcover has been mindful of the need to ensure due diligence in investigating and reporting the claim to its reinsurer.

To this end, Comcover needs to clarify the facts, circumstances and quantum of the spill event and I have arranged a meeting in Canberra with [TA] on 21 July to further this process.

39    This communication plainly discloses that, by this time, Vero had declined Comcover’s claim upon it.

40    On 5 August 2005 Vero sent an email to Comcover which included the following:

We must confirm our previous advice that we do not accept the Casey claim as reinsurers. We believe that the legal opinion originally sort [sic] clearly shows no claim as such. The issue of late notification [five years] also becomes a major issue from a reinsurance perspective particularly with renewal terms over the following years.

We would be very disappointed given our previous advices if you have admitted the claim with expectation of reinsurance recovery without further discussion with ourselves.

41    On 17 July 2006 Vero wrote to Comcover in the following terms:

I refer to the meeting … on Friday 2nd June 2006 … wherein we confirmed to you the position we have adopted on this Australian Antarctic Division (AAD) matter. Our position has always been and remains, that this incident is not covered by the issued contract, notwithstanding that Comcover has taken a totally different approach.

Comcover has made a claim on Vero Global and Risk Managed (‘Vero’) under re-insurance policy 8745001 Ultimate Net Loss Insurance Policy (‘the Policy’) relating to Comcover’s acceptance of a claim by Australian Antarctic Division (‘AAD’).

The AAD claim relates to the discharge of oil from a header tank at Casey Station in Antarctica into the storm water system, and ultimately into the ice-laden surface of Antarctica. The claim is for the costs associated with cleaning up the fuel spill.

Vero declines Comcover’s claim on the basis that the applicable wording (for the policy year July 1999 – June 2000) did not indemnify AAD for loss, destruction or damage to real property, unless the real property was owned by AAD. So much is clear from page 20 of the wording in the Comcover Manual 1999/2000 which states “…property means the Fund Member’s real and personal property …”.

It is our view that the wording is clear and unambiguous; the real property must be owned by AAD in order for it to be covered. As AAD does not own Antarctica (or any part of it), the insuring clause is not activated and Comcover was not obliged to accept the claim by AAD. In those circumstances, Vero is not required to indemnify Comcover for the AAD claim.

Incidentally, a review of the AAD Website reveals that they acknowledge that “no one actually owns Antarctica at the moment” and most certainly did not at the time the incident occurred.

Finally, we now regard this matter as concluded and our file has been closed off.

42    Comcover has made the following payments to the AAD for costs incurred in remediating the damage caused by the fuel oil spill. These payments are net of the $250,000 excess provided for in the Schedule of Cover.

COVERAGE UNDER THE UNL POLICY

The parties’ respective cases

43    Vero’s case on the question of coverage under the UNL Policy can be summarised as follows. It insured the Commonwealth pursuant to a policy comprising the Schedule of Cover, the Comcover Manual, and the UNL Policy. This was not a contract of reinsurance but a direct contract of insurance with the Commonwealth. Relevantly, the cover was for property owned by Fund Members. Here the Fund Member was the AAD. The AAD is not a legal entity separate from the Commonwealth. This means that the insured property must be property owned by the Commonwealth for the purpose of carrying out the AAD’s functions. The contaminated land was not property that was covered by the policy. The real and personal property covered by the policy were items and buildings, but not land itself. In any event, the contaminated land was not the Commonwealth’s property. Even if the contaminated land was the Commonwealth’s property, it was not owned for the purpose of carrying out the AAD’s functions.

44    The Commonwealth’s case on this question can be summarised as follows. The fuel oil spill contaminated land forming part of a territory of the Commonwealth under the control of the AAD. Under cl 1 of the insuring clauses in the UNL Policy, Vero agreed to indemnify Comcover for its liability or responsibility to reimburse Fund Members for claims falling within the Comcover Manual. The Comcover Manual provided cover for loss or damage to property “where property means the Fund Member’s real and personal property … which is in your possession, care, custody or control, or your responsibility …”. The contaminated land is property within the scope of the Comcover Manual and the UNL Policy because Casey Base Station is Commonwealth land administered and controlled by the AAD. It is land within the custody and possession of the AAD or land for which it has responsibility.

Consideration

45    In my view this question is not determined by reference to whether the contract of insurance between the Commonwealth and Vero can be characterised strictly as a contract of reinsurance or as a direct contract of insurance. Indeed, the Commonwealth accepts that the UNL Policy is not a contract of reinsurance. Rather, the question of coverage is determined by the content of the insuring agreements in the UNL Policy informed by the scope of cover provided to the AAD under the Schedule of Cover and the insuring clause in the Comcover Manual concerning property loss, destruction or damage.

46    Clause 1 of the insuring agreements in the UNL Policy provides that Vero’s indemnity is for Comcover’s liability or responsibility to reimburse, relevantly, the AAD for any claim made by it for loss, damage or injury “in accordance with the terms and conditions set forth in the Comcover Manual” and its Schedule of Cover. The Schedule of Cover provides for various classes of cover including “Fund Member’s Property”. This class of cover is described in the Comcover Manual. The focus of attention is the proper construction of the term “property” as it is used in the Comcover Manual.

47    The starting point is that part of the insuring clause which states:

… property means the Fund Member’s real and personal property … which is in your possession, care, custody or control, or your responsibility …

48    It is common ground between the parties that the AAD is an agency of the Commonwealth and that the definition of Fund Member in the UNL Policy includes administrative agencies. It is also common ground that, as such, the AAD cannot own property in its own right. Thus the reference to property in the insuring clause of the Comcover Manual must include a reference to property that is owned by the Commonwealth.

49    The Commonwealth’s case treats that part of the insuring clause quoted above as a composite expression. It submits that where, as here, the Fund Member is not legally or technically capable of “owning” the property in question, the insuring clause, where it speaks of “Fund Member’s real and personal property”, should be construed as referring to the Commonwealth’s real or personal property which is in the “possession, care, custody or control” of the Fund Member, or otherwise its “responsibility”. It submits that the non-technical word “responsibility” is particularly apt to pick up and refer to property administered by a division or department of government without separate legal personality. The breadth of the words “possession, care, custody or control, or your responsibility” are sufficient to capture the contaminated land as real property within the insuring clause of the Comcover Manual as it applied to the AAD at the time.

50    Vero disputes this construction. Its case is that the words of the insuring clause quoted above impose cumulative requirements. Thus the real and personal property must not only be owned by the Commonwealth but must be within its possession, care, custody or control, or be its responsibility. Vero submits that the construction advanced by the Commonwealth is not open on the plain words of the insuring clause because that construction ignores the question of property ownership and treats the Fund Member’s real and personal property as being whatever property is in its possession, care, custody or control, or its responsibility. The property must be the Commonwealth’s property. It submits, however, 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.

51    I do not accept that Vero’s submission correctly characterises the Commonwealth’s approach to the question of construction of the insuring claim. It seems to me that the Commonwealth’s proffered construction necessarily carries with it an acceptance that, in the case of a Commonwealth agency that is not capable of owning property in its own right, the real and personal property referred to in the clause must be the Commonwealth’s real and personal property. It is for this reason that I have said that it is common ground between the parties that the reference to property in the insuring clause of the Comcover Manual must include a reference to property that is owned by the Commonwealth.

52    Furthermore, I do not accept Vero’s submission that the insuring clause in the Comcover Manual should be construed to mean property owned by the Commonwealth for the purpose of performing the functions of the AAD. In my view this construction imports a functional limitation into the insuring clause that is not supported by the words of the clause itself.

53    In my view 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.

54    There remains, however, the question of whether the land on which the spill occurred was the Commonwealth’s real property. Vero submits that it was not.

55    The starting point for the consideration of this question is the Australian Antarctic Territory Acceptance Act 1933 (Cth). Section 2 of that Act provides:

That part of the territory in the Antarctic seas which comprises all the islands and territories, other than Adelie Land, situated south of the 60th degree south latitude and lying between the 160th degree east longitude and the 45th degree east longitude, is hereby declared to be accepted by the Commonwealth as a Territory under the authority of the Commonwealth, by the name of the Australian Antarctic Territory.

56    Vero does not dispute that Casey Base Station falls within the Australian Antarctic Territory. It submits however that any claim to sovereignty over that territory by the Commonwealth has been in suspension since 1959. In that connection it relies on Art IV(2) of the Antarctic Treaty, opened for signature 1 December 1959, 402 UNTS 71 (entered into force 23 June 1961), which provides:

No acts or activities taking place while the present Treaty is in force shall constitute a basis for asserting, supporting or denying a claim to territorial sovereignty in Antarctica or create any rights of sovereignty in Antarctica. No new claim, or enlargement of an existing claim, to territorial sovereignty in Antarctica shall be asserted while the present Treaty is in force.

57    This reliance, however, ignores Art IV(1) which provides:

Nothing contained in the present Treaty shall be interpreted as:

(a)    a renunciation by any Contracting Party of previously asserted rights of or claims to territorial sovereignty in Antarctica;

(b)    a renunciation or diminution by any Contracting Party of any basis of claim to territorial sovereignty in Antarctica which it may have whether as a result of its activities or those of its nationals in Antarctica, or otherwise;

(c)    prejudicing the position of any Contracting Party as regards its recognition or non-recognition of any other State’s right of or claim or basis of claim to territorial sovereignty in Antarctica.

58    The Commonwealth’s case put simply is that, whatever the position might be under international law, the Commonwealth’s assertion of sovereignty over the Australian Antarctic Territory in 1933, prior to entering into the Antarctic Treaty, means that, for the purposes of domestic law, that territory must be taken to be its property.

59    In The State of New South Wales v The Commonwealth of Australia (1975) 135 CLR 337 (The Seas and Submerged Lands Case), Gibbs J (at 388) accepted the correctness of the following statement by Diplock LJ in Post Office v Estuary Radio Ltd [1968] 2 QB 740 at 753:

It still lies within the prerogative power of the Crown to extend its sovereignty and jurisdiction to areas of land or sea over which it has not previously claimed or exercised sovereignty or jurisdiction. For such extension the authority of Parliament is not required. …

60    His Honour said (at 388):

… The acquisition of territory by a sovereign state for the first time is an act of state which cannot be challenged, controlled or interfered with by the courts of that state. For statements and illustrations of this principle it is enough to refer to Salaman v Secretary of State in Council of India [[1906] 1 KB 613, esp at pp 639-640]; Sobhuza II v Miller [[1926] AC 518], and Secretary of State for India v Sardar Rustam Khan [[1941] AC 356, esp at pp 370-371]. Those cases were concerned with the acquisition of territory on land but the same principle applies where the Crown, in the course of its relations with other nations, asserts sovereignty over an area of sea, or sovereign rights over the continental shelf, either pursuant to international treaty or even by unilateral action. The prerogatives of the Crown to acquire new territory or extend its sovereignty or jurisdiction are, in my opinion, available to the Crown in right of the Commonwealth.

61    In Mabo v The State of Queensland (No 2) (1992) 175 CLR 1 Brennan J (at 48) observed that the common law attributed a radical title (or ultimate or final title) to all land within the territory over which the Crown had assumed sovereignty. His Honour continued (at 48):

By attributing to the Crown a radical title to all land within a territory over which the Crown has assumed sovereignty, the common law enabled the Crown, in exercise of its sovereign power, to grant an interest in land to be held of the Crown or to acquire land for the Crown’s demesne. The notion of radical title enabled the Crown to become Paramount Lord of all who hold a tenure granted by the Crown and to become absolute beneficial owner of unalienated land required for the Crown’s purposes. But it is not a corollary of the Crown’s acquisition of a radical title to land in an occupied territory that the Crown acquired absolute beneficial ownership of that land to the exclusion of the indigenous inhabitants. If the land were desert and uninhabited, truly a terra nullius, the Crown would take an absolute beneficial title (an allodial title) to the land for the reason given by Stephen CJ in Attorney-General (NSW) v Brown [… (1847) 1 Legge, at pp 317-318]: there would be no other proprietor. …

62    Here the Commonwealth submits that, at the time of the assertion of sovereignty by the Commonwealth in 1933 over the Australian Antarctic Territory, the land was terra nullius and was not subject to any existing claims to native title which burdened the Commonwealth’s radical title to the land. The Commonwealth submits that, by reason of these matters, the Australian Antarctic Territory must be taken to be the Commonwealth’s real property under domestic law.

63    I accept that submission. 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.

69    I should record that, in submissions, Vero has made clear that it does not contend that there was no real or personal property at Casey Base Station falling within the insuring clause of the Comcover Manual. Its submission is simply that the land damaged by the fuel oil spill was not covered. This basis for declining indemnity was not advanced by Vero when it wrote to Comcover on 17 July 2006: see [41] above. Nevertheless it is a construction of the insuring clause on which Vero relies in this proceeding.

70    It submits that this construction of the insuring clause is supported by:

(a)    the presentation, which shows that property cover was intended to be for buildings and contents only; and

(b)    the AAD’s renewal declaration made to Comcover for the 1999/2000 year, which shows that the limit of liability stated in the Schedule of Cover is comprised of amounts referable to buildings (excluding land values); contents (excluding computers) and, separately, computers; intangible assets; consequential loss; and increased cost of working after a loss.

71    In my view these documents are of limited assistance in determining the scope of the insuring clause in the Comcover Manual. The most that can be said is that neither document refers explicitly to cover for damage to land in and of itself. In this sense these documents are consistent with the construction that Vero has proffered. However, my 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. 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.

72    My conclusion on the scope of the cover provided under the Schedule of Cover (as informed by the Comcover Manual) is fatal to the Commonwealth’s claim. It leads to the consequence that the application must be dismissed. It follows that, strictly speaking, it is unnecessary for me to consider whether the Commonwealth’s claim is, in any event, statute-barred. Nevertheless, given that a different view might be taken of the scope of the relevant insuring clause in the Comcover Manual, I propose to consider the limitation question and to state my conclusion on it, on the assumption that the UNL Policy responds to the Commonwealth’s claim for indemnity through Comcover.

the limitation act

The parties’ respective cases

73    Vero’s case on whether the Commonwealth’s claim is statute-barred can be summarised as follows. The applicable limitation period is six years from the time the Commonwealth’s cause of action accrued. In accordance with orthodox principle, subject to any contrary policy terms, the cause of action on a property damage policy accrues at the time of damage to the property.

74    Vero submits that nothing in the policy displaces that principle. Clause 2 of the insuring agreements in the UNL Policy relates only to the quantification of the indemnity, and does not qualify the primary obligation to indemnify. Furthermore, the definition of Ultimate Net Loss in the UNL Policy conditions – which speaks of the sum or sums actually paid or payable in the settlement or satisfaction of claims for which Comcover is liable, either by agreement, adjudication or compromise – does not fix the date of accrual of the cause of action. These words of the definition cannot be construed literally because, in the present case, Comcover could not have a legal liability to the AAD. The reference to “claims” in the definition must be understood to mean claims that are covered by the policy (as described by Vero). The definition of Ultimate Net Loss includes sums that are payable in the future, whether or not the amount can be ascertained at the time of the loss. Here the policy was always going to respond (if the contaminated land is real property for the purposes of the Comcover Manual) because the amount of the claim exceeded the In-House Retention. In this case the property damage occurred at the latest on 20 July 1999. The Commonwealth’s cause of action therefore became statute-barred on 20 July 2005, over six years before it commenced the present proceeding.

75    The Commonwealth’s case on this question can be summarised as follows. Time begins to run from either the date on which Comcover notified the AAD that indemnity would be provided (21 June 2005) or from the date on which Comcover’s payments to the AAD exceeded the sum of $1.25 million (31 January 2008). The sum of $1.25 million is the total of the excess of $250,000 under the Schedule of Cover and the In-House Retention of $1 million under the UNL Policy. In either case, the proceeding was commenced within the relevant limitation period.

Consideration

76    It is common ground between the parties that the applicable limitation period is six years as provided in s 14 of the Limitation Act.

77    Section 14(1) of the Limitation Act relevantly provides:

An action on any of the following causes of action is not maintainable if brought after the expiration of a limitation period of six years running from the date on which the cause of action first accrues to the plaintiff or to a person through whom the plaintiff claims:

(a)     a cause of action founded on contract (including quasi contract) not being a cause of action founded on a deed,

…

78    It is also common ground that: (a) the fuel oil spill occurred in the period 19 to 20 July 1999; (b) the AAD notified Comcover of its claim on 10 August 2004; (c) estimates of the cost of the remediation work were made by TA and communicated to Comcover from as early as 24 August 2004; (d) the amount of these estimates exceeded the combined excess under the Schedule of Cover ($250,000) and the In-House Retention under the UNL Policy ($1 million); (e) Comcover notified the AAD on 21 June 2005 that indemnity would be provided, after initially declining to provide indemnity; (f) Comcover commenced making payment by instalments to the AAD on 8 March 2006 for costs incurred in remediating the damage caused by the fuel oil spill; and (g) the combined excess was exceeded when Comcover made an instalment payment to the AAD on 31 January 2008.

79    The relevant limitation period under s 14 of the Limitation Act commences when the cause of action in contract first accrues. The matter in dispute between the parties is the date when the Commonwealth’s cause of action against Vero under the UNL Policy first accrued.

80    Vero’s submissions proceed from a characterisation of its contract of insurance with the Commonwealth as, relevantly, a contract of indemnity for property damage. As I have noted above, Vero refers to its “policy” with the Commonwealth as comprising the Schedule of Cover, the Comcover Manual and the UNL Policy. It submits that, on orthodox principles, an insured’s cause of action against its insurer for property damage first accrues when the insured event (damage to property) occurs (in this case, at the latest, by 20 July 1999), subject to the contract providing otherwise.

81    Vero submits that this consequence is in accordance with the theory of liability in contract, which holds that the cause of action for breach arises upon the happening of the event constituting the breach. At common law a promise of indemnity is a promise to hold the indemnified person harmless against a specified loss or expense. Once the loss is suffered or the expense incurred, the indemnifier is in breach of contract for having failed to hold the indemnified person harmless against the relevant loss or expense: Firma C-Trade SA v Newcastle Protection and Indemnity Association [1991] 2 AC 1 at 35-36 per Lord Goff of Chieveley; see also Merkin R, Colinvaux’s Law of Insurance (9th ed, Sweet & Maxwell, 2010) 9-037; Legh-Jones N, Birds J, Owen D, MacGillivray on Insurance Law (11th ed, Sweet & Maxwell, 2008) 19-053. Therefore, in the case of property insurance, the general position is that the insured can sue on the contract of insurance as soon as damage to the property occurs because the promise to indemnify is breached at that time.

82    In Callaghan v Dominion Insurance Co Ltd [1997] 2 Lloyd’s Rep 541 Sir Peter Webster put the matter slightly differently (but to the same general effect) when he said at 544:

… It seems to me that the best way to define an indemnity insurance is that it is an agreement by the insurer to confer on the insured a contractual right which, prima facie, comes into existence immediately when loss is suffered by the happening of an event insured against, to be put by the insurer into the same position in which the insured would have been had the event not occurred, but in no better position.

83    In that case Sir Peter Webster also observed that the accrual of the cause of action is not dependent on the quantification of the insured’s claim. He said (at 544-545):

Before considering whether there are sufficiently clear words in this case to take this policy out of the general principle, it is necessary to bear in mind the passage in the judgment of Mr Justice Megaw in the Chandris case at p 74 to the effect that the quantification of the amount of the plaintiff’s claim is not a pre-requisite to a cause of action. Thus there is a primary liability, that is to say to indemnify, and a secondary liability, that is to say to put the insured in his pre-loss position, either by paying him a specific amount or it may be in some other manner. The fact that the insurer has an option as to the way in which he will put the insured into his pre-loss position does not mean that he is not liable to indemnify him, in one way or another, immediately the loss occurs.

84    The position is otherwise in relation to policies of liability insurance, where the general rule is that the cause of action does not accrue until the liability of the insured is established by judgment, arbitration or binding agreement, and not upon the occurrence of the event which gives rise to the insured’s liability to the third party: Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 at 373-374 and 377-378; The Distillers Company Bio-Chemicals (Australia) Pty Limited v Ajax Insurance Company Limited (1974) 130 CLR 1 at 25-26; Virk v Gan Life Holdings Plc [2000] Lloyd’s Rep IR 159 at 162; MacGillivray at 28-002; Colinvaux at 9-039. The general rule in this regard seems to apply to contracts of reinsurance: MacGillivray at 33-072; Colinvaux at 17-017; although see the discussion in O’Neill PT, Woloniecki JW, The Law of Reinsurance in England and Bermuda (3rd ed, Sweet & Maxwell, 2010) 13-101 to 13-112.

85    The Commonwealth places particular reliance on the decision of Giles J in Penrith City Council v Government Insurance Office of New South Wales (1991) 24 NSWLR 564. The case concerned professional indemnity insurance and thus a liability policy. The plaintiff, as the insured, sought indemnity against the defendant, the insurer, in respect of a claim made by a third party referred to as Mitora. The defendant argued that the plaintiff’s claim was statute-barred because its cause of action first accrued when Mitora’s claim was made against the plaintiff or when the plaintiff, as the insured, made its claim against the defendant under the policy. In that case Giles J said (at 568-569):

... It is not in question that the plaintiff was entitled to indemnity when the Mitora claim was made against it, or when it gave notice of the claim to the defendant, in the sense that it was then entitled to the benefit of the defendant's promise to indemnify it against the claim. But the plaintiff's cause of action was for unliquidated damages for breach of contract: see Luckie v Bushby (1853) 13 CB 864; 138 ER 1443; E Pellas & Co v Neptune Marine Insurance Co (1879) 5 CPD 34; William Pickersgill & Sons Ltd v London and Provincial Marine and General Assurance Co Ltd [1912] 3 KB 614 at 622; Chandris v Argo Insurance Co Ltd [1963] 2 Lloyd's Rep 65 at 74 and Reynolds v Phoenix Assurance Co Ltd [1978] 2 Lloyd's Rep 440 at 462. It had to establish a contract (the policy) by which the defendant promised to do something (indemnify it against Mitora's claim), and breach of that contract (failure to indemnify it against Mitora's claim). It could then recover the loss suffered as a consequence of that breach. The plaintiff's cause of action accrued upon breach. Thus it must be asked what the defendant was required to do in performance of its promise, and when it failed to do what was required of it. Only when the defendant failed to do what was required of it could a cause of action for damages for breach of contract accrue to the plaintiff. There was no cause of action simply because Mitora made its claim or the claim was notified to the defendant – the defendant could have thereafter fully performed its promise.

As condition 2 of the policy shows, the defendant had the right but not the obligation to take over and conduct the defence of the claim, and its failure to do so was not a breach of contract: cf Distillers Co Bio-Chemicals (Australia) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 at 10, 26. Putting legal costs aside for the moment, the defendant could not have been required to perform its promise by making a payment to Mitora or to the plaintiff when the claim was made against the plaintiff, if for no other reason than that the defendant knew nothing of it at that time. Even when the plaintiff had given it notice of the claim, the defendant was not required to perform its promise by making a payment then and there to Mitora or to the plaintiff – whether there was anything against which the plaintiff was to be indemnified depended upon whether it was liable to Mitora and in what amount, which would not be known until established by agreement, arbitration or judgment. What then was the defendant required to do in performance of its promise? When taxed with this, the defendant responded that it was required to indemnify the plaintiff. That takes the matter no further.

86    This passage was quoted with approval in CGU Insurance Ltd v Watson [2007] NSWCA 301 at [59] and [61]. It was also cited with approval in Kone Elevators Pty Ltd v Popa [2006] VSCA 26 at [21].

87    The Commonwealth relies on this passage as authority for the submission that there is no breach of a contract of insurance until the insurer has been required to pay and has failed or refused to do so. I do not read the quoted passage in that way. In that passage his Honour was dealing with a submission that time begins to run under a liability policy when an insured is either notified of a claim against it or makes its own claim under the policy against the insurer, whether or not the claim, in each case, is justified. His Honour rejected that submission. As the quoted passage makes clear, whether there was anything against which the insured was to be indemnified depended on whether liability of the insured to the claimant was established by agreement, arbitration or judgment. This, in my view, is entirely in accord with the general principle I have noted above concerning liability insurance and contracts of reinsurance. No doubt a refusal to pay under a contract of insurance, when liability to pay is established, constitutes, in its own right, a breach of the contract of insurance. But the date of that refusal does not necessarily coincide with the date when a cause of action under the contract of insurance first accrues.

88    It is true that in later passages of his reasons his Honour seems to suggest that there will be no breach by the insurer until the insurer has been required to pay under the policy and has refused to do so: see at 571F-G. This part of his Honour’s reasons was not quoted in CGU or cited in Kone. It seems to me that his Honour’s observations in this regard were made purely by way of obiter dicta in the context of his Honour discussing other possible accrual dates in respect of which it was not necessary for his Honour to choose because none resulted in any violation of the limitation period.

89    In Cigna Insurance Asia Pacific Ltd v Packer (2000) 23 WAR 159 Pidgeon J, as a member of the Full Court of the Supreme Court of Western Australia, gave consideration to whether, before a cause of action accrued on a personal accidents policy, it was necessary to show that the defendant insurer was not going to perform its promise. His Honour did so by reference to the decision in Penrith City Council. In that case his Honour concluded that the decision in Penrith City Council should not be followed because it was contrary to earlier Western Australian authority, in particular Tillotson v ANZ Life Assurance Co Ltd (1997) 9 ANZ Insurance Cases ¶61-378. His Honour’s analysis at [67]-[89] proceeded from a consideration, by reference to first principles, of when it can be said that a cause of action comes into existence. In that connection his Honour noted the statement by Wilson J in Do Carmo v Ford Excavations Proprietary Limited (1984) 154 CLR 234 at 245 that a cause of action is the fact or combination of facts which gives rise to a right to sue. His Honour also referred to what was said by Lord Guest in Central Electricity Board v Halifax Corporation [1963] AC 785 at 806:

The date when a cause of action accrues may be said to be the date on which the plaintiff would be able to issue a statement of claim capable of stating every existing fact which, if traversed, it would be necessary for the plaintiff to prove in order to support his right to judgment. …

90    In my respectful view Pidgeon J’s analysis of the relevant principles is persuasive and is capable of being applied in the present case. Nevertheless, the Commonwealth submits that I am bound to follow the approach in Penrith City Council unless satisfied that the decision is plainly wrong: BHP Billiton Iron Ore Pty Ltd v National Competition Council (2007) 162 FCR 234 at [86]-[89]. The Commonwealth submits that Penrith City Council is a decision in relation to the Limitation Act that has been endorsed by the New South Wales Court of Appeal in CGU and is to be applied by this Court as surrogate federal law. I have, however, noted the limited extent of that endorsement. It does not cover that part of the reasoning of Giles J on which the Commonwealth seems to rely to advance the proposition for which it contends.

91    In any event, it is not necessary for me to dwell on the correctness of Penrith City Council in so far as it is sought to be relied on to sustain the Commonwealth’s submission. This is because only three dates have been postulated in the present case as being relevant to when the Commonwealth’s cause of action under the UNL Policy first accrued, namely:

(a)    20 July 1999, the latest possible date of the fuel oil spill (for which Vero contends);

(b)    21 June 2005, the date on which Comcover notified the AAD that indemnity would be provided (for which the Commonwealth contends); or

(c)    31 January 2008, being the date when Comcover made a payment to the AAD which exceeded the sum of $1.25 million (for which the Commonwealth alternatively contends).

None of these dates depends on Vero refusing to provide indemnity.

92    It is, of course, for Vero to establish that the Commonwealth’s claim is statute-barred: Hawkins v Clayton (1986) 5 NSWLR 109 at 142. If it cannot establish that time runs from its nominated date of 20 July 1999 then its defence based on the Limitation Act cannot succeed.

93    I am not persuaded that time commences to run from 20 July 1999 and that, as a result, the Commonwealth’s claim under the UNL Policy is statute-barred.

94     In my view Vero’s characterisation of its contract of insurance with the Commonwealth – as essentially a contract of indemnity for property damage – ignores both the context in which the UNL Policy was entered into and cl 1 of the insuring agreements.

95    It may be accepted that, as between Comcover and the AAD, no contractual relations existed. The Commonwealth did not seek to contend otherwise. Nevertheless the arrangements which the Commonwealth brought into being between Comcover and the AAD resembled in form, if not in legal substance, a contract of insurance providing for the various classes of cover in the Schedule of Cover that were more particularly described in the Comcover Manual. For all intents and purposes Comcover and the AAD were acting as if they were at arms-length as insurer and insured, respectively.

96    This was the known background against which the Commonwealth and Vero entered into the UNL Policy. The Commonwealth treated Vero as a reinsurer and Vero saw itself acting in that role, even though both parties accept that, strictly characterised, the UNL Policy is not a contract of reinsurance. Nevertheless I am satisfied that under the UNL Policy Vero was agreeing to indemnify the Commonwealth for the responsibilities Comcover had assumed to its Fund Members, even if those responsibilities might not be, strictly speaking, legal liabilities. That this is so is reflected in cl 1 of the insuring agreements which refers to Vero’s agreement to indemnify Comcover “for its liability or responsibility to reimburse Fund Members for any claims …”. It can be accepted that there are difficulties in the present case in attributing to the word “liability” a strict legal meaning. But I have no doubt that, for the purposes of the UNL Policy, the Commonwealth and Vero proceeded as if Comcover’s responsibilities to Fund Members, as described in the Comcover Manual, were to be treated as if they were legal liabilities enforceable by Fund Members against Comcover. Thus I am unable to accept that, in presently relevant respects, Vero was acting simply as the Commonwealth’s insurer for loss, destruction or damage to the Commonwealth’s property. Rather, Vero was agreeing to indemnify Comcover for its notional liability, and its stated responsibility, to indemnify its Fund Members on the assumption that Comcover was itself to be treated as an insurer of each of its Fund Members. This, therefore, is the setting in which the UNL Policy falls to be considered and construed.

97    Relevantly, Vero’s contractual obligation to the Commonwealth under cl 1 of the insuring agreements was to indemnify Comcover for its liability or responsibility to reimburse the AAD, subject to the terms and conditions in the UNL Policy. Importantly, cl 2 of the insuring agreements makes clear that Vero’s liability was to indemnify for the Ultimate Net Loss in excess of the In-House Retention, subject to the limits of liability identified in the policy. The Ultimate Net Loss was defined as the sum actually paid or payable in cash in the settlement or satisfaction of claims for which Comcover was liable “by agreement, adjudication or compromise”.

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.

OTHER MATTERS

101    As part of the hearing before me, the Commonwealth also sought an order pursuant to r 16.21(1)(e) of the Federal Court Rules 2011 (Cth) that paragraphs 32C, 32D and 34A of Vero’s defence be struck out on the basis that these paragraphs fail to disclose a reasonable defence or other case appropriate to the nature of the pleading.

102    In light of my conclusion that the Commonwealth’s claim cannot succeed, it is unnecessary for me to determine that application. Nevertheless, I propose to indicate, in a summary way, my views on the arguments that have been raised.

103    Paragraphs 32C and 32D of the defence purport “not to admit” certain matters which form no part of the Commonwealth’s pleaded claim. These paragraphs in fact relate to certain exclusions in respect of the cover provided by Comcover to the AAD. As I have said, these exclusions are not part of the Commonwealth’s claim.

104    The Commonwealth’s argument is that if Vero wishes to allege that any exclusions apply, it must do so in terms providing full particulars of all the matters relied on in support of that allegation. In my view that submission should be accepted. For this reason I would have been disposed to strike out these paragraphs of the defence.

105    Paragraph 34A of the defence raises the application of s 54 of the Insurance Contracts Act 1984 (Cth). Section 54 provides:

(1)    Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act.

(2)    Subject to the succeeding provisions of this section, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim.

(3)    Where the insured proves that no part of the loss that gave rise to the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of the act.

(4)    Where the insured proves that some part of the loss that gave rise to the claim was not caused by the act, the insurer may not refuse to pay the claim, so far as it concerns that part of the loss, by reason only of the act.

(5)    Where:

    (a)    the act was necessary to protect the safety of a person or to preserve property; or

    (b)    it was not reasonably possible for the insured or other person not to do the act;

the insurer may not refuse to pay the claim by reason only of the act.

(6)    A reference in this section to an act includes a reference to:

    (a)    an omission; and

    (b)    an act or omission that has the effect of altering the state or condition of the subject-matter of the contract or of allowing the state or condition of that subject-matter to alter.

106    The gravamen of Vero’s defence in this regard is that, by reason of the late notification of the damage to the land at Casey Base Station, Vero has been prejudiced. It pleads that the amount of its liability to the Commonwealth under the UNL Policy should be reduced to nil. In this regard it pleads that had it been notified of the claimed loss in the 1999/2000 year, it would not have renewed the UNL Policy for any subsequent period and, consequently, would not have suffered losses on underwriting subsequent periods of cover. It pleads that these losses exceed the value of the claim made in this proceeding.

107    The Commonwealth’s argument is essentially two-fold. First, it submits that Vero has not, as a matter of pleading, identified the basis on which it alleges that the effect of the UNL Policy was that Vero may refuse to pay the claim. Secondly, it submits that s 54 does not permit an insurer to reduce its liability by reference to claims made on subsequent contracts of insurance into which it may not have entered had there been a proper disclosure of the claim. The Commonwealth submits that the relevant prejudice to which s 54 refers must be related to the particular contract of insurance the subject of the claim.

108    In answer, Vero submits that cl 1 of the UNL Policy conditions gives it a right to refuse to pay the Commonwealth’s claim. It submits that this condition must be read as requiring the Commonwealth to give timely notice to Vero of information it had that would engage cl 1. It says that, as Comcover is not a legal entity separate from the Commonwealth, and as its contract of insurance with the Commonwealth is one of direct insurance, the Commonwealth had notice of an insurable claim on 20 July 1999 and did not give notice to Vero of that claim until 29 March 2005. This did not satisfy the requirement of cl 1 of the UNL Policy conditions to give notice “as soon as reasonably practicable”. Secondly, Vero submits that the notion of prejudice under s 54(1) is not confined in the way in which the Commonwealth contends.

109    One difficulty facing Vero is that paragraph 34A of the defence does not plead all the material allegations of fact for the operation of s 54(1) on which it relies. A second difficulty is that its contention that its contract of insurance with the Commonwealth is to be viewed as essentially one of property insurance is not one which I have accepted. Thus Vero’s pleading of paragraph 34A proceeds upon a misapprehension of the nature of the contract of insurance between itself and the Commonwealth as I have found it to be and, as a result, would require some reformulation for that reason alone.

110    It seems to me that any reliance that Vero wishes to place on s 54(1) should be fully pleaded taking into account the findings and conclusions I have made concerning the nature of the contract of insurance between it and the Commonwealth. But for the conclusion to which I have come in relation to the fate of the Commonwealth’s claim, I would have been disposed to strike out paragraph 34A of the defence, with leave to re-plead.

111    For completeness I should indicate that I would not have been disposed to strike out paragraph 34A of the defence solely on the basis that there is a dispute between the parties about the scope of the prejudice that s 54(1) addresses. That, it seems to me, is a significant question that, in the normal course, should await full argument against the background of all facts to be put forward by the parties on that question.

disposition

112    In light of the conclusion to which I have come concerning the scope of Comcover’s liability or responsibility under the Schedule of Cover, it seems to me that the Commonwealth’s claim must be dismissed. My provisional view is that costs should follow the event. Nevertheless, I am prepared to hear the parties on the question of costs if there is disagreement about that matter.

113    The parties are to provide draft orders giving effect to these reasons within seven days.

Associate:

Dated:    7 August 2012