FEDERAL COURT OF AUSTRALIA

Australasian Correctional Services Pty Limited v AIG Australia Limited [2018] FCA 2043

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to r 30.01 of the Federal Court Rules 2011 (Cth), the following two questions arising in the proceedings be heard separately from any other questions:

(a)    Where the Respondent is obliged by the Policy to defend the Cross Claim in the name of and on behalf of the Applicants, if there are allegations in the Cross Claim which could not result in legal liability the subject of indemnity under the Policy, whether, subject to any applicable deductible and up to any applicable limit of liability, the Respondent is liable under the Policy to pay or bear:

(a)    the whole of the cost of that defence; or

(b)    only such proportion of the legal costs of or incurred in defending the Cross Claim other than as can properly be allocated to defending such allegations.

(b)    Whether the Respondent is liable under the Policy to bear any of the first $200,000 of legal costs of or incurred in defending the Cross Claim, noting paragraph 12 of the Schedule to the Policy and the terms of Exclusion (s) in the Policy.

2.    The two separate questions be answered as follows:    

(a)    The whole of the costs of the defence, being all expenses incurred by the Respondent in defence of the suit.

(b)    Yes, such legal costs are not costs of the kind contemplated by exclusion (s), they are expenses of the Respondent.

3.    The respondent pay the applicant’s costs to date.

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

REASONS FOR JUDGMENT

ALLSOP CJ:

1    The applicants are companies which contracted with the Commonwealth for the provision of services running immigration detention centres in Australia from 1998 to a time, relevantly, after May 2002.

2    For the policy period 4:00pm, 31 May 2001 to 4:00pm, 31 May 2002 American Home Assurance Company (American Home) issued a General and Products Liability Policy to the applicants which gave cover in the insuring clause for:

“… all amounts which the Insured shall become legally liable to pay by way of compensation by reason of Personal Injury or Property Damage caused by an Occurrence in connection with the business.”

3    In 2011, AIG Australia Ltd (AIGA) (the Australian subsidiary of American Home’s parent company) assumed American Home’s responsibilities under a scheme for the transfer of American Home’s business to AIGA confirmed by this Court under the Insurance Act 1973 (Cth).

4    I will turn to the balance of the terms of the policy shortly. It is first necessary to explain how the controversy has arisen. In 2013, Mr Hooshang Hosseini, a former non-citizen detainee in the Woomera Immigration Detention Centre run by the applicants on behalf of the Commonwealth, sued the Commonwealth in the District Court of New South Wales in tort relating to his detention at Woomera. In 2014, the Commonwealth cross-claimed against the applicants for contribution or indemnity.

5    The defence of the Commonwealth contained reliance upon ss 189 and 196 of the Migration Act 1958 (Cth) in answer to important paragraphs of the statement of claim and the assertions of liability of the Commonwealth therein. Thus, the whole matter (including the cross-claim against the applicants here) was in federal jurisdiction as a matter arising under a law of the Parliament (as well as a matter in which the Commonwealth is a party). The claim by the applicants against AIGA was not separate and distinct from that matter; it formed part of it, founded as it was on the same substratum of facts. There is one matter, albeit litigated in different courts: cf Re Wakim; Ex parte McNally [1999] HCA 27; 198 CLR 510 at 584–588, especially 585 [138]. Thus, these proceedings are part of a wider matter that arises under a law of the Parliament for the purposes of s 39B(1A)(c) of the Judiciary Act 1903 (Cth).

6    The personal injury proceedings (including the cross-claim) were listed for trial for five weeks in the Supreme Court of New South Wales (having been transferred there from the District Court) commencing on 12 November 2018. On 12 November 2018, the proceedings were settled on terms that there was judgment for the Commonwealth on the statement of claim and judgment for the applicants on the cross-claim, with each party bearing his and its own costs. I was not informed whether the formal orders of the settlement were accompanied by any payment of money to Mr Hosseini. The position as between the Commonwealth and the applicants, however, was as reflected in the orders.

7    The original dispute between the applicants and AIGA centred upon the latter’s apparent refusal to undertake the defence of the cross-claim proceedings in the New South Wales courts, requiring the applicants to fund their own defence. This caused the applicants to seek relief in this court seeking:

A declaration that the Respondent is obliged to defend in the Applicants’ name and on their behalf the proceedings brought by the Commonwealth of Australia against the Applicants by way of cross-claim filed in proceedings commenced by Hooshang Hosseini against the Commonwealth as case number 2013/34871 in the Supreme Court of New South Wales.

8    Damages and interest (which I have taken to be claimed pursuant to s 57 of the Insurance Contracts Act 1984 (Cth)) were also claimed.

9    The proceeding in this Court was filed in late August 2018 in the Insurance List. After a case management hearing, AIGA accepted that it was responsible for undertaking the defence of the cross-claim. That acceptance came with certain conditions not accepted by the applicants, which conditions (reflected in the arguments in the matter discussed below) are better understood when the policy terms are appreciated.

10    The parties, after discussion, put forward two issues for decision, which will not resolve all disputes between them but which will govern the working out of their claims and which will govern the context of another dispute commencing early next year. Thus this judgment and these reasons have some urgency.

The policy

11    The primary indemnity was as I have set out above. The terms “Personal Injury”, “Property Damage” and “Occurrence” were defined as follows:

2. “Personal Injury” means:

(a)    bodily injury, death, sickness, disease, disability, shock, fright, mental anguish and mental health;

(b)    false arrest, false imprisonment, wrongful eviction, wrongful detention, malicious prosecution and humiliation;

(c)    libel, slander, defamation of character or invasion of right of privacy; and

(d)    assault and battery not committed by or at the direction of the Insured unless committed for the purpose of preventing or eliminating danger to persons or property,

In the event of Personal Injury claims arising from latent injury, latent disease, latent sickness, or latent disability, such injury disease, sickness or disability in respect of each claim shall be deemed to have occurred on the day such injury, disease, sickness, or disability was first medically diagnosed.

3. “Property Damage” means:

(a)    physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom; or

(b)    loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by physical injury to or destruction of other tangible property which occurs during the policy period.

4. “Occurrence” means an event, including Continuous or repeated exposure to substantially the same general conditions, which result in Personal Injury or Property Damage neither expected nor intended from the standpoint of the Insured.

12    As can be seen when one reads in these definitions into the indemnity clause, the precise relationship between occurrence, damage and indemnity is not expressly clear for personal injury. The definition of property damage appears to locate the nexus as the physical injury to or destruction of the tangible property within the policy period. As to personal injury, it would appear that the injury must occur or be manifested within the policy period: see the last paragraph of the definition of personal injury dealing with latent injury. AIGA also put the submission that the relevant occurrence was required to have occurred within the policy period also. That proposition is not self-evident. That is not a question that I have to decide at the moment.

13    Exclusion (k) was in the following terms:

Liability arising directly or indirectly out of or caused by, through or in connection with any medical treatment, nursing, examination or first aid conducted, prescribed or administered by Medical persons of the Insured or any one acting on their behalf.

14    The policy provided a separately expressed head of cover called “Supplementary Payments”. It dealt with the important issue of the conduct of the defence and the expenses thereof.

15    The primary liability in the insuring clause to indemnify for “all amounts which the Insured shall become legally liable to pay” is to be interpreted as indemnity for legal liability ascertained by judgment, award or settlement: Distillers Co Biochemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 at 25–26; Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 at 373–74 and 377–78; Vero Insurance Ltd v Baycorp Advantage Ltd [2004] NSWCA 390; 13 ANZ Insurance Cases 61-630 at [1], [48] and [89]; Allianz Australia Insurance Ltd v Bluescope Steel Ltd [2014] NSWCA 276; 87 NSWLR 332 at 349 [78], 381 [267]-[270].

16    In policies of this character the nature of that primary liability can give rise to practical difficulties for insureds. Given that the legal liability of the insurer is not engaged until there is an event of liability by judgment, award or settlement, the insured may be left, in the meantime, to fund a defence or to settle the case, without the involvement of the insurer. Different policies deal with this difficulty, and related problems, differently. Some solutions are more favourable to insured, some more favourable to insurer. Such, no doubt, is reflected in the premium.

17    The terms of a policy can be structured by the parties; benefits of terms are paid for. Thus, statements of commerciality or not of a construction of a policy in a debate about its terms and reach of cover must be carefully assessed. A lack of commerciality, so-called, may simply be the extent of the possible operation of the policy in respect of a claim that has in fact been paid for, by a higher or lower premium.

18    One solution of the above difficulties has been to give the insurer the right, but not the duty, to take over the defence of a claim. Another has been to have a clause requiring the insurer to pay defence costs expended by the insured with its consent, which clause may be linked to the claims for which indemnity is provided, or it may be linked to the suit in which such claims are made. Another solution has been to require the insurer to undertake the defence of the suit in which the relevant claims are made.

19    In the instant policy the solution was the last of these. The “Supplementary Payments” clauses were as follows:

With respect to the indemnity afforded by this policy the Company will:

(a)    Defend in their name and on their behalf any suit against the Insured alleging such Personal Injury or Property Damage and seeking damages on account thereof, even if such suit is groundless, false or fraudulent; and the Company may make such investigation, negotiation, and settlement of any claim or suit as it deems expedient; but the Company shall not be obligated to pay any claim or judgement or to defend any suit after the applicable limit of the Company’s liability has been exhausted by payment of judgements or settlements.

(b)    Pay all expenses incurred by the Company, all costs taxed against the Insured in any such suit and all interest accruing after entry of judgement until the Company has paid, tendered or deposited in court such part of such judgement as does not exceed the limit of the Company’s liability thereon;

Provided that if a payment exceeding the Company’s Limits of Liability has to be made to dispose of a claim, the Company’s liability to pay Supplementary Payments in connection therewith shall be limited to such proportion of the paid Supplementary Payments as the Limits of Liability bear to the amount paid to dispose of the claim.

Provided further that the amounts thus incurred, except payments in settlement of claims and suits, are payable by the Company in addition to the applicable limit of liability of this Policy but in no event shall the Company’s liability in respect of these payments exceed 50% of the Limits of Liability Stated in the Schedule.

20    The limit of liability of the policy was $5 million (any one occurrence). The limits of liability were affected by an aggregate clause relevantly in the following terms:

The limit of the Company’s liability in respect of any one occurrence shall not exceed the limit of liability stated in the Schedule. All Personal Injury and Property Damage arising out of Continuous or repeated exposure to substantially the same general conditions shall be construed as arising out of one occurrence.

21    The deductible was said in the policy schedule to be:

$200,000 Each and Every Claim

22    This was elaborated upon in exclusion (s) as follows:

The Insured shall bear the first $200,000 of each and every claim inclusive of costs associated with the settlement of such claims.

The two questions

23    The two questions posed were as follows:

1.    Where the Respondent is obliged by the Policy to defend the Cross Claim in the name of and on behalf of the Applicants, if there are allegations in the Cross Claim which could not result in legal liability the subject of indemnity under the Policy, whether, subject to any applicable deductible and up to any applicable limit of liability, the Respondent is liable under the Policy to pay or bear:

(a)    the whole of the cost of that defence; or

(b)    only such proportion of the legal costs of or incurred in defending the Cross Claim other than as can properly be allocated to defending such allegations.

2.    Whether the Respondent is liable under the Policy to bear any of the first $200,000 of legal costs of or incurred in defending the Cross Claim, noting paragraph 12 of the Schedule to the Policy and the terms of Exclusion (s) in the Policy.

24    The two questions focus on two distinct, but related, issues. The first issue arises from the otherwise unqualified language of the Supplementary Payments clauses, and their relationship with the underlying facts. Whilst AIGA has agreed that it was liable to undertake the defence of the suit in the names of the applicants, it does not accept that it is liable for all the costs of doing so. The facts that gave rise to the asserted liability of the Commonwealth (and so, the “passed-on” claims by the Commonwealth against the applicants) related to events, breaches of duty of care and personal and mental injury during and after the period of insurance; also some (but by no means all) are said to engage exclusion (k). AIGA thus asserts that some occurrences and some injury fell outside and after the policy period and some fell within exclusion (k); but it accepts that some occurrences and some injury fell within the policy period.

25    Thus, AIGA asserts that there should be some allocation of the costs of defending the cross-claim.

26    There is a practical relationship of this first issue with the second issue. If the $200,000 deductible includes defence costs spent by AIGA (or for which AIGA would otherwise be liable), AIGA asserts (though it is not for me to decide presently) that its properly allocated share of costs are below $200,000 and thus are costs for the applicants to bear under exclusion (s) and the deductible.

The submissions of the parties

27    The applicants’ claims rely upon the unqualified words of the policy. Supplementary Payments clause (a) requires AIGA to defend the suit; clause (b) requires all expenses to be paid. The limit of 50% of the Limit of Liability is provided by the second proviso clause. As to the deductible the costs associated with the settlement of such claims were said to be the amount of the claim itself.

28    AIGA submitted that the simply expressed Supplementary Payments clauses should be subject to the proportional allocation of defence costs. The primary hinge for this argument was the phraseology of the chapeau:

“[w]ith respect to the indemnity afforded by this policy…”

Thus the indemnity or protection given by the supplementary payments should be viewed as limited to costs that related to the cover. It was accepted by AIGA that costs that related to both indemnified claims and non-indemnified claims would be covered. But, it submitted, costs solely related to parts of the cross-claim that were not covered would not be covered.

29    As AIGA recognised, allocation or apportionment provisions are sometimes express in the policy: see for example CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Pty Ltd [2008] FCAFC 173.

30    AIGA submitted that in other circumstances courts have, without the presence of express words providing for apportionment, apportioned costs between claims that were covered and not covered. It accepted that all these cases were based on the specific wording involved; see, for example: McCarthy v St Paul International Insurance Co Ltd [2007] FCAFC 28; 157 FCR 402; Major Engineering Pty Ltd v CGU Insurance Limited [2011] VSCA 226; 35 VR 458; Bank of Queensland Limited v Chartis Australia Insurance Limited [2012] QSC 319; Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2018] NSWCA 100; (and, though not referred to in submissions, Alpine Florist & Food Market Ltd v AXA Pacific Insurance Co 2004 BCSC 1731 at [46]). The proposition underlying this submission is that the insurer should not pay for defence costs of claims that are not covered, and to construe a policy thus to do so is uncommercial.

31    As to the deductible clause, AIGA submitted that costs associated with the claim included its expenses of defending it.

32    In addition to the parties’ submissions, as summarised above, I have had regard, in coming to my conclusions on the two questions posed, to the following helpful paragraphs of the third edition of Derrington and Ashton’s ‘The Law of Liability Insurance’: [8-565]–[8-575], and [9-155]–[9-160].

Resolution of the first issue

33    As to the first issue, the words of the policy should be read in their commercial context. The approach in other policy wordings is not determinative. That said, a policy of this well-known character can be seen to have a certain commercial structure.

34    The nature and extent of the indemnity and of any valuable promises are to be taken from the words. The requirement on AIGA by the Supplementary Payments clauses is not to pay defence costs, but to defend any suit against the Insured. It can be readily accepted that this requires the suit to contain some indemnified claim. If the obligation were to pay reasonably incurred defence costs, it might by words be limited to those costs relating to claims for which indemnity will be provided; or it could be similarly impliedly limited.

35    The contractual responsibility is, however, to defend the suit, reinforced by the contractual obligation to pay all expenses incurred by the insurer in undertaking defence of the suit. This obligation to defend the suit will arise if a claim in the suit could come within the cover and, on the plain words, must extend to the whole suit.

36    The policy does contain express limitations on the amount of expenses: the averaging provision in the first proviso; and the limit of 50% of the liability limit in the second proviso.

37    It is a not unusual feature of liability litigation that claims against the insured in a suit may contain claims that are covered and claims that are not covered by relevant liability policy. One response to the difficulties that can arise from such circumstances can be to place the contractual responsibility on the insurer to defend the suit and pay all expenses of that defence of the whole suit. That is what occurred here. In such a clause, the duty to defend is broader, and differently expressed, to the obligation to indemnify. The duty to defend arises and attaches until there is no basis for considering that the cover responds to any claim. The duty to defend is the provision of a service, not the granting of indemnification of third party liability. For that reason it is not necessarily logically connected with, or limited by, the structure of the indemnity for liability. It is controlled by the words of the contractual responsibility to defend. The responsibility is to defend a suit; that some allegations forming part of the suit may not be covered by the policy must often be a real possibility. There is no apparent reason to lessen or qualify the unambiguous operation of the obligation to defend the suit and pay all expenses in so doing, unless the words of the policy require it. See the discussion by Langley J and the Court of Appeal in John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV [2001] Lloyd’s Rep IR 420, especially at 451–452; and also see Ace European Group v Standard Life Assurance Ltd [2012] EWCA Civ 1713 at [21]–[49]. There is certainly no evident reason why an implied limitation of the words should be accepted.

38    In the Court of Appeal in Ace European, Tomlinson LJ, on behalf of the Court, dealt with and rejected an underlying argument similar to AIGA’s here. The context was somewhat different: a mitigation costs claim in a civil liability policy. The argument was explained at [21] in the second sentence:

Mr Alistair Schaff QC for the Insurers submits that unless the policy otherwise provides, there is a rule of law which requires in cases such as the present an apportionment of the mitigation costs by reference to the respective insured and uninsured interests at risk and sought to be preserved by that expenditure.

39    At [24], his Lordship referred to the contrary argument of counsel:

Mr Leggatt also drew to our attention a series of cases concerned with the undertaking, common in liability policies, to pay costs and expenses incurred in the investigation and defence or settlement of claims made against the insured. The cases were Capel-Cure Myers Capital Management v McCarthy [1995] LRLR 498; New Zealand Products v New Zealand Insurance [1997] 1 WLR 1237; Thornton Springer v NEM Insurance [2000] Lloyd’s Rep IR 590 and John Wyeth v Cigna [2001] Lloyd’s Rep IR 420. In each of those cases, albeit in different contexts, there arose the question whether costs which had been incurred to defend both insured and uninsured claims were recoverable in full or fell to be apportioned. In each case the court rejected the principle of apportionment. It is right to say, as Mr Schaff points out, that defence costs, where recoverable, are dealt with by a specific term in the policy and that the question in each case turned upon the construction of that clause, as Lord Clyde emphasised in giving the advice of the Judicial Committee of the Privy Council in the New Zealand Products case at page 1242. There is however an obvious analogy between acceptance of a liability for costs incurred in defending claims and acceptance of a liability for the cost of avoiding or reducing claims. I also acknowledge that in none of those cases was it suggested, as it is here by Mr Schaff, that apportionment should be introduced by analogy with the rule which prevails in relation to sue and labour clauses in marine property insurance. That argument was not addressed. Nonetheless, the approach to the construction of these clauses does in my view again afford a useful analogy which is supportive of the view I have expressed above.

40    The case was dealt with as a matter of construction at [25]:

For my part I would be content to dispose of this appeal on the short ground that as a matter of construction of the insuring clause apportionment is simply unavailable because it would result in insurers paying less than they have by unambiguous language promised to pay. It is inconsistent with the clear language of the policy.

41    It appears clear in the United States (at least in Illinois, and so Chicago) that, if the insurer has a contractual obligation to defend a suit, it must undertake that duty to defend if conduct covered by the policy is alleged: Health Care Industry Liability Insurance Program v Momence Meadows Nursing Center, Inc. 566 F.3d 689 at 696–699 (7 CCA 2009); Connecticut Indemnity Company v DER Travel Service, Inc. 328 F.3d 347 at 349 (7 CCA 2003); Hurst-Rosche Engineers v Commercial Union Insurance Company 51 F.3d 1336 at 1342 (7 CCA 1995). This obligation to defend comes with the obligation to pay for the defence.

42    Looking at the whole of the policy and the words used by the parties, I see no justification to read into the operation of the Supplementary Payments cover a limitation of apportionment. It is entirely unclear as to when and how such a limitation would work. The protection afforded by the provision is to protect against the cost of litigation. Any suit in which a claim covered by the indemnity coverage clause can be found triggers a liability to defend and pay all expenses incurred by the insurer in the defence (bona fide and in good faith) of the suit, with a limit of 50% of the liability for indemnity.

43    No case cited requires a contrary conclusion. In McCarthy v St Paul, Major Engineering and Bank of Queensland, the question was the operation of exclusions and the limitation on the relevant indemnity provisions. Likewise in Weir Services, the costs and expenses were to be paid in relation to a claim covered under the policy. In Wesfarmers Federation Insurance Limited v Stephen Wells t/as Wells Plumbing [2008] NSWCA 186, the contested costs could on one view not be seen, in substance, to be defence costs at all. All these cases relied on by AIGA had very different operative clauses. None assists in supporting a proposition that the clear and unambiguous words of the policy should be qualified by some rule of apportionment, taken from a source other than the text of the policy. The approach of the Privy Council in New Zealand Forest Products Ltd v New Zealand Insurance Co Ltd [1997] 3 NZLR 1 is also contrary to such an implication.

Resolution of the second issue

44    As to the second issue, the insurer’s own expenses are not to be construed as costs covered by exclusion (s). The usual meaning of the phrase “costs included” is the costs ordered to be paid to the claimant as falling within the indemnity. The words in Supplementary Payments clause (b) are “expenses incurred by the Company”, they do not create any liability in the insured, unlike the costs of the claimant against the insured (in the subrogated claim). The usual meaning of the phrase “inclusive of all costs incurred” is the costs of the claimant against the insured: Allen v London Guarantee & Accident Co Ltd (1912) 28 TLR 254; National Insurance Company of New Zealand Ltd v Wilson [1941] NZLR 639; Dodds v Ferguson [1960] Tas SR 160; Government Insurance Office (NSW) v Crowley [1975] 2 NSWLR 78; Commercial & General Insurance Co v Government Insurance Office (NSW) [1973] HCA 51; 129 CLR 374.

45    Here the payments to defend the suit are called “expenses incurred by the Company” (and not costs), and thereafter there is a reference to “all costs taxed against the Insured in any such suit”.

46    Further, there is an anomaly if expenses (with a separate limit of $2.5 million by the Supplementary Payments clauses) can be used to fill the deductible and so eat away at the separate limit of $5 million cover. The words and structure of the policy appear to keep broadly distinct liability (including liability for costs to the third party) and the expense of funding the defence of the suit.

Orders

47    The applicants have funded the defence of the suit which was AIGA’s responsibility to fund. I am not asked to express a view about breach of the policy. I am asked to answer two questions.

As to question 1:    The whole of the costs of the defence, being all expenses incurred by the Respondent in defence of the suit.    

As to question 2:    Yes, such legal costs are not costs of the kind contemplated by exclusion (s), they are expenses of the Respondent.

Associate:

Dated:    21 December 2018