Federal Court of Australia

Baralaba Coal Company Pty Ltd v AAI Ltd trading as Vero Insurance [2024] FCA 532

ORDERS

THE COURT DECLARES THAT:

1.    The applicants, Baralaba Coal Company Pty Ltd and Wonbindi Coal Pty Ltd, are entitled to be indemnified by the respondents under the Industrial Special Risks policy bearing the policy number ISA021506353 for the period 1 May 2018 to 30 April 2019 in respect of damage sustained to their radial coal stacker consequent upon its collapse on 27 October 2019.

THE COURT ORDERS THAT:

2.    The respondents pay the applicants’ costs of the proceedings to be taxed.

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

REASONS FOR JUDGMENT

DERRINGTON J:

Introduction

1    Baralaba Coal Company Pty Ltd (Baralaba) and Wonbindi Coal Pty Ltd (Wonbindi) were issued an Industrial Special Risks policy of insurance with the respondent insurers covering, inter alia, property damage at certain coal operations at Baralaba in Central Queensland (the Policy). The property covered included a radial coal stacker which was damaged in a storm in March 2019, being within the period of insurance. The insurers granted indemnity in respect of the loss and arrangements were made for its repair. Prior to the stacker being returned to its pre-damaged state, it suffered additional damage when it collapsed during the testing of the repairs. That damage, which was substantial, occurred after the expiration of the Policy cover.

2    Baralaba and Wonbindi (which will be referred to collectively as “Baralaba”) claim that the insurers are required to fulfil their obligation under the Policy to pay for the reinstatement of the stacker so that it achieves its pre-damaged state, which is said to include remediating the intervening damage resulting from the collapse. The insurers deny any obligation to do so, asserting that their obligation extends to meeting only the cost of repairing the damage caused by the initial storm incident.

The background facts

3    The agreed facts are set out verbatim as follows:

Applicants

1.    The First Applicant (Baralaba Coal) is, and has at all material times been, a company duly incorporated at law, and capable of suing in its own name.

2.    The Second Applicant (Wonbindi Coal) is, and has at all material times been, a company duly incorporated at law, and capable of suing in its own name and a subsidiary of Baralaba Coal.

Insurers & the 2018/2019 Policy

3.    The First Respondent, AAI Ltd trading as Vero Insurance (Vero):

a.    is and has at all material times been a company duly incorporated at law, and capable of being sued;

b.    is and has at all material times been the lead insurer under an Industrial Special Risks Policy (Policy No. ISA021506353) for the period 1 May 2018 to 30 April 2019 (2018/2019 ISR Policy).

4.     The Second Respondent, QBE Insurance (Australia) Limited (QBE):

a.    is and has at all material times been a company duly incorporated at law, and capable of being sued;

b.    is and has been at all material times a co-insurer under the 2018/2019 ISR Policy.

5.     The Third Respondent, Starr International Insurance (Singapore) Pte. Ltd (Starr):

a.    is and has at all material times been a company duly incorporated at law, and capable of being sued;

b.     is and has been at all material times a co-insurer under the 2018/2019 ISR Policy.

6.     The Fourth Respondent, Zurich Insurance Australia (Zurich):

a.    is and has at all material times been a company duly incorporated at law, and capable of being sued;

b.    is and has been at all material times a co-insurer under the 2018/2019 ISR Policy.

7.    Under the 2018/2019 ISR Policy, Vero, QBE, Starr and Zurich (collectively, Respondents) are responsible in the following proportions for the claim by (at least) Baralaba Coal: Vero 45%, QBE 20%, Starr 20%, and Zurich 15%.

8.     On or before 1 May 2018, Vero on behalf of the Respondents and the Applicants entered into the 2018/2019 ISR Policy.

9.     The First Applicant is the named Insured in the 2018/2019 ISR Policy and the Second Applicant as a subsidiary of the First Applicant is an insured within the meaning of the 2018/2019 ISR Policy.

10.     The 2018/2019 ISR Policy, including the Placing Schedule, is document 1 in the Agreed Bundle of Documents.

11.     In this proceeding, the Applicants seek to be indemnified pursuant to the 2018/2019 ISR policy.

Baralaba Mine & Radial Stacker

12.    Baralaba Coal and the Wonbindi Coal operate:

a.    a coal mine known as the Baralaba North Mine on Duaringa Baralaba Road, approximately 5 km north of the township of Baralaba in Central Queensland (Baralaba Mine);

b.    supporting infrastructure for the Baralaba Mine, including a train load out facility, located 60 km South of the Baralaba Mine outside the town of Moura, which receives coal from the Baralaba Mine.

13.    The train load out facility includes a Thor radial stacker (Radial Stacker) which conveys coal onto a product stockpile.

Storm Damage to Radial Stacker on 12 March 2019

14.     On 12 March 2019, the Radial Stacker sustained substantial structural damage in a storm.

15.     The 12 March 2019 storm was an event for the purposes of the 2018/2019 ISR Policy. That storm occurred during the Period of Insurance for the 2018/2019 ISR Policy.

16.     The Respondents were obliged to and granted indemnity under the 2018/2019 ISR Policy in respect of the damage caused to the Radial [Stacker] by the 12 March 2019 storm.

Partial Repairs to and collapse of the Radial Stacker

17.    The Basis of Reinstatement under the 2018/2019 ISR Policy was as set out in clause 3 (a) and Memoranda to Section 1 Item 3 of the 2018/2019 ISR Policy wording.

18.    On or about 6 September 2019, Wonbindi Coal entered into a Minor Services Contract for Radial Stacker Remediation Works with SLE Services for repair and reinstatement of the March 2019 storm damage to the Radial Stacker (the full name of SLE Services is pleaded at paragraph 22 of the statement of claim) (SLE Repair Contract).

19.    The Radial Stacker collapsed on 27 October 2019 (October 2019 Radial Stacker Failure). The October 2019 Radial Stacker Failure took place after the end of the period of insurance of the 2018/2019 ISR Policy.

20.     SLE Services purported to perform the SLE Repair Contract and the contracted for works to reinstate or repair the damage caused by the March 2019 storm event were not concluded as at the time of the October 2019 Radial Stacker Failure. The October 2019 Radial Stacker Failure occurred during a test to determine whether the repair of the damage caused by the March 2019 storm event had been completed.

Release dated 1 June 2020

21.    On 1 June 2020, Mr Lockhart for and on behalf of Baralaba Coal signed a document entitled ‘Form of Release’ (1 June 2020 Release). The 1 June 2020 Release is document 2 in the Agreed Bundle of Documents. The Respondents have paid the sum of $92,977.21 referred to in the 1 June 2020 Release.

22.     The written communications passing between the parties in and concerning the negotiation of the 1 June 2020 Release are:

a.     an email chain dated between 12 March 2019 and 15 April 2020. A copy is document 3 in the Agreed Bundle of Documents.

b.     an email chain dated between 12 March 2019 and 7 June 2020. A copy is document 4 in the Agreed Bundle of Documents.

c.     an email chain dated between 14 March 2019 and 28 March 2019. A copy is document 5 in the Agreed Bundle of Documents.

d.     an email chain dated between 18 April 2019 to 5 June 2019. A copy is document 6 in the Agreed Bundle of Documents.

e.     a release signed by Mr Lockhart on 11 June 2019. A copy is document 7 in the Agreed Bundle of Documents.

f.     an email from Mr Lockhart to McLarens dated 26 November 2019. A copy is document 8 in the Agreed Bundle of Documents.

g.     an email chain dated between 26 November 2019 and 6 March 2020. A copy is document 9 in the Agreed Bundle of Documents.

h.     a release signed by Mr Lockhart dated 9 December 2019. A copy is document 10 in the Agreed Bundle of Documents.

i.     an email from Marsh to Mr Lockhart dated between 26 March 2020. A copy is document 11 in the Agreed Bundle of Documents.

j.     an email chain dated between 7 May 2020 to 5 June 2020. A copy is document 12 in the Agreed Bundle of Documents.

23.     The parties agree that the documents referred to in the previous paragraph passed between the persons so referred to in those documents. The parties do not agree that any or all such documents are admissible to assist in the interpretation of the 1 June 2020 Release.

4    Some reference was made to additional facts arising from the bundle of agreed court documents and they are mentioned below as necessary.

5    It is appropriate at this stage to refer to the issue concerning the state of the stacker immediately prior to the damage sustained on 27 October 2019. As identified above, the parties agreed that the “SLE Repair Contract and the contracted for works to reinstate or repair the damage caused by the March 2019 storm event were not concluded as at the time of the October 2019 Radial Stacker Failure”. That statement is reflective of the issues raised in the pleadings and especially paragraphs 41 and 42 of the defence, which acknowledge that the repairs were not complete.

6    The agreed bundle of court documents contained an engineering report prepared by the firm, Aspec Engineering Pty Ltd, relating to the October damage to the stacker. Though parts of that report suggested that the repairs to the stacker had been substantially completed at the time of its collapse, it also identified that the cause of the October failure of the stacker was in part due to an omission, in the course of performing the repairs, to undertake re-torquing of the rope clamps on the machine after the initial damage in March 2019. In any event, despite any suggestions to the contrary, as the machine failed during testing following the purported repairs, it was obviously not returned to its pre-damaged state.

The Policy terms and conditions

7    The following terms and conditions of the Policy, which included the “Placing Schedule” and the policy wording contained in a document entitled, “Industrial Special Risks Insurance Policy”, are relevant.

8    The named insured is Baralaba and its related entities.

9    The period of insurance was from 4:00 pm on 1 May 2018 to 4:00 pm on 30 April 2019.

10    The Policy contains relevant sub-limits of liability in relation to specified causes. Some which are relevant to the present matter are as follows:

The liability of the Insurer shall be further limited in respect of any one loss or series of losses arising out of any one event at any one Insured Premises as set out hereunder and it is understood and agreed that such Sub-Limit(s) shall not increase the liability of the Insurer beyond the Limit(s) of Liability expressed above. …

Loss or destruction of or damage by, to or in respect of:

Section 1- Material Loss or Damage

Accidental Damage                $10,000,000

…

Contract works                    $1,000,000

11    The deductibles specified in the Placing Schedule are introduced with the following words:

The Insured shall bear the following amount(s) in respect of each loss or series of losses arising out of the one event.

12    The endorsements to the Placing Schedule include the following introductory statement:

This Policy is amended by the following Endorsements, subject to the terms, conditions and exclusions of the Policy except to the extent that the Policy is expressly or necessarily amended by the Endorsements.

If any ambiguity exists between any of the Policy wording, the following Endorsements and the Insurance Contracts Act 1984 (as amended), the interpretation most beneficial to the Insured will prevail.

13    The endorsements include a section headed “Conditions Applicable to All Sections”. Clause 19 of that section reads as follows:

19. Testing And Commissioning Clause

This Insurance does not extend to cover Damage to property in course of construction or erection, dismantling, revamp or undergoing testing or commissioning including mechanical performance testing or any business interruption resulting therefrom.

Acceptance of property hereon is subject to satisfactory completion of the following procedures and otherwise to the terms and conditions of this Policy.

i.     The plant is mechanically complete.

This requires all key items to be complete and that no temporary structures (such as pipe supports) remain awaiting permanent fixture.

ii.    Plant testing and commissioning has been completed with the design/construction/erection contract performance levels having been satisfactorily achieved.

iii.     Design performance criteria maintained by the entire plant in a stable and controlled manner for a continuous ongoing period of one hundred (100) hours.

iv.     The Insured has accepted the plant without reservation or waiver of guarantee conditions.

It is further noted and agreed that this exclusion does not apply to normal routine maintenance activities and scheduled turnarounds.

14    The indemnity contained within “Section 1” of the policy wording, entitled “Material Loss or Damage”, relevantly provides:

The Indemnity

In the event of any physical loss, destruction or damage (hereinafter in Section 1 referred to as “Damage” with “Damaged” having a corresponding meaning) not otherwise excluded happening to the Property Insured described in Section 1, but subject to the Property Insured being either:

i)     at the Insured Premises at the time the Damage occurs; or

…

the Insurer(s) will, subject to the provisions of this Policy including the limitation on the Insurer(s) liability, indemnify the Insured in accordance with the applicable Basis of Settlement.

15    The “Basis of Settlement” clause relevant to the present claim provides:

Basis of Settlement

a)    On buildings, machinery, plant and all other property and contents (other than those specified below); the cost of reinstatement, replacement or repair in accordance with the provisions of the Reinstatement or Replacement and Extra Cost of Reinstatement Memoranda as set out herein.

Provided that if the Insured elects to claim the indemnity value of any Damaged property, the Insurer(s) will pay to the Insured the value of such property at the time of the happening of the Damage or at its option reinstate, replace or repair such property or any part thereof. In any event the Insurer(s) will pay costs incurred by the Insured in accordance with the provisions of the Extra Cost of Reinstatement Memorandum.

…

i)    On any property the subject of a contract to which the Insured is a party; the amount payable by the Insured under such contract to the other party to the contract, or, if the property is replaced, the replacement value at the time and place of replacement, whichever is the greater.

(Emphasis in original).

16    The definition of “reinstatement” for the purposes of the above clause is as follows:

For the purpose of the insurance under this Memorandum “reinstatement” shall mean:

…

b)     Where property is damaged; the repair of the damage and the restoration of the damaged portion of the property to a condition substantially the same as, but not better or more extensive than, its condition when new.

17    Also in the policy wording, an exclusion, applicable to all sections of the Policy, provides:

EXCLUSIONS TO ALL SECTIONS

Property Exclusions

This Policy does not cover Damage to the following property or loss under Section 2 resulting therefrom:

…

14.    damage to:

a)     property the subject of contract works, (including but not limited to construction, erection, alteration, addition and the partial dismantlement of existing structures), when the value of work is in excess of the cover as available on the Placing Schedule; or if there is no value on the Placing Schedule, $2,000,000;

Provided always that Property Exclusion 14.a)

i)     shall only apply to the portion(s) of the Insured’s Premises and/or part(s) of any property which are the subject of such works;

ii)     shall not apply to any other Property Insured hereunder; and

iii)     shall not apply to any Damage to existing Property Insured caused by a peril or Event not otherwise excluded under this Policy.

b)     empty premises undergoing demolition.

(Emphasis in original).

18    For the purposes of making payments to an insured, cl 14 of the section entitled, “Conditions – Applicable to All Sections”, provides:

14.     Progress Payments

Provided that liability has been admitted, the Insurer(s) shall make reasonable progress payments on account of any claim to the Insured at such intervals and for such amounts as may be agreed upon production of a report by any loss adjuster appointed by the Insurer(s). Any such payment shall be deducted from the amount finally determined upon adjustment of the claim.

19    Clause 18 of the same section of the policy wording provides:

18.     Headings

Headings have been included for ease of reference and it is understood and agreed that the terms and Conditions of this Policy are not to be construed or interpreted by reference to such headings.

The applicants’ claim for indemnity

The non-fulfilment of the obligation to indemnify

20    Baralaba’s primary submission was that, following the storm damage which occurred to the stacker during the Policy period, the insurers’ obligation to indemnify in accordance with the Basis of Settlement clause crystallised. The insurers, therefore, were required to pay for the cost of the reinstatement or repair of the damage so as to restore the stacker to a condition substantially the same as, but not better or more extensive than, its condition when new. This, so it was said, extended to paying the cost of repairing the damage sustained by the stacker in October 2019 which occurred in the course of the making of repairs consequent upon the storm damage sustained in March 2019. On that basis, until the cost of remediating that damage had been met, the insurers’ obligation remained extant.

21    The insurers’ primary position was that the stacker was “substantially reinstated” to the point where it was undergoing testing and commissioning on 27 October 2019, and, on that date, being after the end of the period of insurance under the Policy, it sustained different damage by the collapse. The cost of reinstatement of that damage, so it was said, was not indemnifiable under the Policy because the Policy had expired before that event and the associated damage happened.

The extent of the obligation to indemnify under the insuring clause

22    Support for Baralaba’s position was sought to be derived from the High Court’s decision in Government Insurance Office of New South Wales v Atkinson-Leighton Joint Venture (1981) 146 CLR 206 (GIO v Atkinson-Leighton). There, a joint venture had entered into a long-term contract to construct an embankment in Botany Bay. The joint venture had taken out insurance with the Government Insurance Office of New South Wales (GIO) which, subject to the payment of deductibles, covered damage to the embankment in respect of each and every occurrence arising out of, inter alia, storm or tempest. Work commenced in 1971 and by early 1974, the embankment was partially complete and extended well into the bay. In February 1974, a storm caused substantial damage to the partially built embankment. GIO accepted liability for the loss, and repair works were commenced which were paid for pursuant to the indemnity. Subsequently, successive storms in March, April and May 1974 caused further damage to the ongoing repair works on the embankment. The basis of settlement clause contained in “Memo 2” of the policy relevantly provided:

In the event of any loss or damage the basis of any settlement under this Policy shall be

(a)     in the case of any damage which can be repaired — the cost of repairs necessary to restore the property to its condition immediately before the occurrence of the damage less salvage, or

…

23    On appeal before the High Court, the relevant issue was whether, on a proper construction of the policy, the deductibles clause operated in respect of each successive storm event, or only once in respect of the original damage.

24    The majority, comprised of Stephen, Mason, Murphy and Wilson JJ, held that the additional damage caused to the embankment resulting from each storm event constituted a separate indemnified occurrence under the policy, with the consequence being that the deductibles clause was triggered on each occasion.

25    In relation to the present case, Baralaba relied upon the dissenting reasons of Barwick CJ. In particular, the Chief Justice made the following observations (at 218 – 219) in relation to the scope of coverage provided by the policy:

In the case of an insurer’s promise to indemnify for damage to property, once the circumstances call for its performance by the payment of money, the insurer will be bound to perform and cannot, in my opinion, excuse himself because the costs of his indemnity are greater as the result of some intervening event against which the insured was not insured but which in fact increased the cost of reparation of the property to the pre-damaged condition.

…

The insurer, in my opinion, cannot avoid its obligation to pay the cost of repair because that cost is increased by intervening events not due to acts of the insured. … So here, the promise to pay the cost of the repair having attached because of the occurrence of the damage to the undamaged embankment by the storms, it must be performed notwithstanding that the action of the sea increased that cost.

… But, in any case, if the obligation to pay the cost of repair has attached, it is nothing to the point that the necessary cost of repair is increased by some event which is not an insured risk.

26    The Chief Justice proceeded (at 219) to articulate two examples of how a policy should work in such circumstances:

Suppose an insurer against damage by fire has become bound to reinstate the damaged property, a fire having damaged the property during the currency of the policy. Suppose the term of the policy expires whilst the promise to reinstate is still not fully performed. Then suppose some event to occur which renders the reinstatement more costly, i.e. to occur after the term of the policy has expired and before the reinstatement to the pre-damaged condition is complete. None the less, in my opinion, the insurer would be bound to reinstate. It would be no answer for him to say that the added cost was due to an uninsured risk. The true analysis is that the obligation to reinstate having attached during the currency of the policy, its performance is required whatever it costs and however the cost is increased by events which could not in themselves have given rise to a claim under the policy.

…

Another illustration can be seen in the effect an industrial stoppage may have on the cost of repair. Suppose when the repair is part done an industrial dispute causes the work of repair to be suspended for a considerable time. Suppose that on resumption of the work of repair costs have increased dramatically. It would, in my opinion, be nothing to the point that the industrial stoppage was not an insured event. The only question would remain as it does in this case: what did it cost to restore the embankment to its pre-damaged condition: that is to say what in the prevailing circumstances did it necessarily cost to restore the embankment.

27    The Chief Justice observed (at 219 – 220) that the insurer had promised to meet the cost of restoring the embankment to its pre-damaged state and, once that obligation attached, it had to be performed; it was not to the point that the cost of restoring was increased by events which were not themselves insurable events. In that way, the subsequent storms were incidents which merely had the effect of increasing the initial obligation to meet the cost of reinstatement. In the context of the appeal, his Honour concluded that only one deductible was payable as there was only one occurrence in respect of which indemnity was to be provided.

28    It must be kept steadily in mind that the Chief Justice’s observations were made in the context of his dissenting decision, and it is crucial to consider the reasons of the majority, which are found, in part, in the decision of Stephen J (with whom Wilson J agreed). His Honour emphasised the length of the policy period, being over two and a half years, the fact that the policy was especially designed to cover the construction of the embankment into Botany Bay where it was expected that severe storms might be experienced, and that the policy contemplated that the deductibles clause should apply in respect of each relevant occurrence. For those reasons, his Honour held that the policy should be viewed as providing continuous cover whilst at the same time imposing the continuous restriction of the amount of cover in the manner contemplated by the deductibles clause. It followed that, whenever damage was sustained to the embankment works because of storm or tempest, the deductibles clause operated and, so it seemed, whether the occurrence was the foundation of a separate claim by the insured. His Honour said at 230:

It is upon the happening of every such “occurrence” that the deductibles clause operates and the plain language of the policy seems to me to require that the happening of a second damage-causing storm after an earlier such storm should bring the deductibles clause into operation for a second time.

29    The joint venture had submitted that support for its construction arose from the basis of settlement clause which prescribed the indemnity as being the cost of restoration of the embankment to its pre-damaged condition. This, it was claimed, supported the proposition that when the embankment was damaged by storm “the insurer shall pay, by progress payments, the actual cost of repairs, as and when carried out, and not their estimated cost”. That obligation, so it was said, was only discharged when the cost of actual reinstatement which responded to the consequences of the original harm had been fully paid, even if rendered more expensive to complete by reason of further damage being sustained to the embankment. This was rejected by Stephen J, who held (at 231 – 233) that the references in the policy to the insurer “making good” the loss were insufficient to support the joint venturers’ proposed interpretation and that the insurer’s obligation was to indemnify in relation to the cost of repairs rather than to reinstate. It followed, said his Honour (at 233), that each storm event invoked the obligation of the insurer to restore the embankment to the state in which it was prior to that storm, even if that state was a damaged state consequent upon the prior storm. It followed that on each occasion the deductibles clause applied.

30    Mason J (with whom Wilson and Murphy JJ agreed) separately observed (at 242) that the outcome of the appeal turned on the construction given to the basis of settlement clause together with the deductibles clause, and acknowledged that the joint venture’s submission would be good if it stood on the basis of settlement clause on its own. The insurer’s contrary argument was that the deductibles clause operated on each and every occasion when damage was caused by a storm which constituted an occurrence for the purposes of the policy. That was accepted by Mason J. The obligation to pay an additional deductible was not conditioned upon a further claim being made. His Honour said at 243:

When the promise to pay or make good the damage is read with par. (a) of the “Exclusions” and the “Deductibles” provision it is susceptible of a separate application to the damage caused by each single occurrence, each occurrence requiring separate treatment for the purpose of quantifying the amount of the indemnity. This interpretation is reinforced by Memo 2. It measures the extent of the appellant’s liability by reference to the cost of “repairs necessary to restore” the property and, in so doing, it assumes that there is a liability to pay or make good the damage which is physically caused by the particular occurrence arising from a non-excluded cause.

31    It should be noted that there are no analogues for the deductibles clause or the basis of settlement clause in the present case.

32    It was submitted on behalf of Baralaba that in neither of the reasons of Stephen or Mason JJ is there to be found any disagreement with Barwick CJ’s articulation of the manner in which the policy operated. That is true only to the extent that there was no express disagreement. Whilst the majority appeared to accept that the insured was entitled to be indemnified so as to put it into the position it was in prior to the initial storm damage, which included being paid the cost of the further damage caused by the subsequent storms, their reasoning did not rely upon the subsequent damage being referable to the original damage or the insurer’s obligation to reinstate it. Rather, the insurer’s obligation arose because the further occurrences all occurred in the period of insurance and within the scope of cover, such that the insurer was obliged to indemnify in respect of each of them.

33    In any event, the principle which Baralaba sought to extract from the observations of Barwick CJ is too wide, in that it purports to encapsulate an obligation to cover all damage which insured property might sustain prior to its complete reinstatement, regardless of the cause. That was something with which Mason J expressly disagreed (at 244). Certainly, where there is simply an increase in the cost of undertaking the repairs, that “event” is relevantly connected to the insurer’s obligation which attached when the obligation to restore arose. It is an aspect of the actual process of remediating the damage such that any additional cost is within the scope of the insurer’s obligation to pay for the cost of restoring the property arising from the damage within the policy’s scope. That type of instance may arise where a contractor, whilst undertaking repair work on insured property, performs some negligent act causing additional damage to the property. The insurer’s obligation would extend to the increased cost of remediating the further damage which was relevantly connected to and arose out of the performance of the insurer’s obligation to indemnify the cost of remediating the initial damage. However, the cover would not extend where the only connection between the insurer’s obligation to indemnify and the additional damage is that the further damage occurred during the process of reinstatement. For instance, where, whilst the insured property is being repaired, it sustains additional damage from an unrelated event such as fire. In those circumstances, the period during which the repairs are being undertaken is only the occasion for the occurrence of further damage, and that damage is relevantly unconnected with the insurer’s obligation to meet the cost of repair or reinstatement.

34    The decision and the reasoning in GIO v Atkinson-Leighton was considered by the New South Wales Court of Appeal in CIC Insurance Ltd v Bankstown Football Club Ltd (1995) 8 ANZ Insurance Cases ¶61-232, and subsequently by the High Court in CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384. There, the Bankstown Football Club Ltd (the Club) held an industrial special risks policy with CIC Insurance Ltd (CIC) which indemnified it in the event of physical loss, destruction or damage to the insured property, such indemnity to be in accordance with the basis of settlement clause. That latter clause provided that the insurer would pay the cost of reinstatement, replacement or repair which was to be calculated upon the cost of reinstatement of the property at the time of its reinstatement. It was a requirement of the policy that the work of restoration and repair be commenced and carried out with “reasonable despatch”, failing which the insurer was not liable to make any payment greater than the indemnity value of the damaged property at the time of the damage. The insured’s premises were damaged by fire on 8 January 1992, following which a claim was lodged. CIC declined to accept the claim and purported to cancel the policy. The insured was not able to reinstate the premises without the indemnity and proceedings were commenced seeking a declaration that CIC was liable to provide it. Whilst that litigation was pending, a further fire occurred causing further substantial damage to the premises which necessitated its demolition. The primary judge held that CIC was obliged to indemnify the Club for the total amount of the damage caused by both fires.

35    On appeal in the New South Wales Court of Appeal, Kirby P adopted the reasoning of Barwick CJ in GIO v Atkinson-Leighton and the observations of Meagher JA in Lumley General Insurance Ltd v Vintix Pty Ltd (1991) 24 NSWLR 652 (Lumley v Vintix). That latter case concerned the obligation of an insurer of commercial premises which were damaged in an earthquake, and in respect of which damage the insurer acknowledged liability. Thereafter, the local government building regulations were amended, having the effect of substantially increasing the cost of reinstating the building. Meagher JA made the following observation regarding the insurer’s obligation (at 657), which was cited with approval by Kirby P in CIC Insurance Ltd v Bankstown Football Club Ltd at 75,560:

Since the insurer’s duty is to indemnify the insured, and since it is conceded that that duty is to pay the cost of reinstatement, the amount payable to satisfy the duty must be the amount which it costs to effect an actual, not a notional, reinstatement. If no actual reinstatement can be effected without compliance with a new statutory code, the amount payable includes whatever amount is necessitated by such compliance (subject always, of course, to the principle of betterment).

36    Thereafter, Kirby P noted that the obligation undertaken to reinstate can only be discharged by actual, as opposed to notional, reinstatement and that was applicable in the case before him where the additional cost of reinstatement was caused by an event occurring outside of the period of insurance. The insurer’s obligation included the responsibility to indemnify the Club in respect of the further damage leading up to and including the second fire which arose out of the first fire. The obligation of reinstatement included the remedying of any subsequent damage as otherwise no reinstatement will have occurred, and the obligation was considered to be a continuing one, such that it was of no moment that the damage from the subsequent fire occurred outside of the period of insurance.

37    CIC appealed to the High Court where it submitted that as the insured had not commenced the repair of the Club’s premises with reasonable despatch, its liability was subject to the proviso in the basis of settlement clause which limited indemnity to the value of the premises at the time of the first fire. The Club maintained (at 395) that CIC’s obligation to provide indemnity required it to pay the full cost of reinstating the damaged property at the time of its reinstatement, even if further damage had occurred after the period of insurance and even if the period of cover had expired. The majority (Brennan CJ, Dawson, Toohey and Gummow JJ) recognised (at 397) that the policy imposed upon CIC the obligation to pay a sum of money for the cost of reinstatement and not for reinstatement itself. After referring to the observations of Barwick CJ in GIO v Atkinson-Leighton and the result in Lumley v Vintix, it was concluded that those cases were of no direct assistance because the provisos to the basis of settlement clause on which the appeal turned were not present in either.

38    The majority then turned to a consideration of the policy terms and noted (at 401 – 402) that:

The effect of these provisions (including those set out earlier in these reasons) is that the undertaking of CIC was to indemnify the Club against physical loss, destruction or damage occurring during the period of insurance. The fundamental obligations of CIC under the Policy after the occurrence of the first fire were, within a reasonable time of the receipt of the claim (which was made promptly), to acknowledge liability and then to pay the liquidated sum, for the computation of which the Policy provided.

39    Pursuant to the basis of settlement clause, CIC was to pay the Club the cost of reinstatement, replacement or repair. The majority observed that the Club had not elected to claim the indemnity value of any damaged property; being the diminution in value of the property. Therefore, the general basis on which CIC was to pay the amount in respect of damaged property was the cost, at the time of its reinstatement, of reinstatement of the damaged property to a condition substantially the same as, but not better or more extensive than, its condition when new. However, under proviso (i) of the basis of settlement clause, the repair and restoration work was to be undertaken on behalf of or by the Club “with reasonable despatch”. Their Honours concluded that, in the events which had happened, the Club had failed to undertake repairs with reasonable despatch and, consequently, was only entitled to a declaration that CIC was obliged to pay it “a sum which represents the indemnity value of the damaged property at the time of the happening of the damage sustained in the first fire”. They observed the following at 404:

CIC never came under an obligation itself to reinstate the premises. That being so, the authorities which suggest that, if it had come under such an obligation, CIC would have had to bear the increased cost of reinstatement occasioned by the occurrence of the third fire, are not in point. The obligation to pay the cost of reinstatement had accrued or, to use the expression in some of the authorities, “attached” to CIC, in the manner and with the particular consequences we have indicated, before the expiry of the Policy. That being so, subsequent events, in particular the third fire, did not change the nature or increase the quantum of that obligation.

40    It is apparent from this that the majority recognised that, because the Club had not undertaken the repairs with “reasonable despatch”, CIC’s liability was limited to paying the amount of the indemnity value of the damaged property at the time of the happening of the damage. This was not to say that, otherwise, CIC would not have been liable to indemnify the cost of reinstating the premises entirely. It was simply indicating that no issue in that respect arose because the scope of the obligation in relation to indemnification was conditioned upon the conduct of the insured once indemnity was granted.

41    It is worth noting here that some commentators have suggested that the above cited passage from the majority’s reasons had the consequence that it was only if the insurer’s obligation was to reinstate that its obligation to cover subsequent damage arose, whereas, if the obligation was only to meet the costs of reinstatement, there no such obligation arose. However, that involves a misreading of the above passage. The reference to the obligation to pay the costs of reinstatement having accrued to CIC, “in the manner and with the particular consequences … indicated”, was a reference to the proviso having been enlivened by reason of the failure to undertake repairs with reasonable despatch. It was not based on any differentiation between whether the insurer’s obligation was to reinstate itself or to pay for the costs of reinstatement. Whilst the form of those obligations are different, their scope is substantially the same.

42    It was submitted for Baralaba that the majority’s discussion of proviso (i), and its effect of limiting the insurer’s exposure, was important in the sense that, if it were the case that the principles referred to by Barwick CJ in GIO v Atkinson-Leighton did not otherwise apply, there would have been no point in discussing the operation of the proviso. It was further submitted that the proviso was only relevant because the additional damage, which had been incurred outside of the period of insurance, was claimed to be within the scope of the cost of the repairs in respect of which CIC was required to indemnify. Had the cost of repairing the whole of the premises which had been destroyed by the fire after the period of insurance not been recoverable under the basis of settlement clause, aside from the effect of the proviso, the discussion about the proviso was irrelevant. Therefore, so it was said, as a matter of necessary inference, the majority proceeded upon the assumption that the observations of Barwick CJ in GIO v Atkinson-Leighton were correct and applicable to the operation of the Policy in this case.

43    A similar submission was made in relation to the reasons of Gaudron J. Her Honour had approached that matter by considering the operation of a different proviso, proviso (iv), which required the insured to incur the expenditure prior to receiving indemnity under the policy. As no amounts had been expended prior to the commencement of the proceedings, the cover did not extend to the costs of the additional damage. For the same reasons as have been mentioned above, it was submitted on behalf of Baralaba that the necessary implication from her Honour’s reasoning was that, absent the operation of the proviso in question, the policy would have responded to cover all the damage which had been sustained.

44    With respect to the careful and erudite submissions advanced on this topic, they should not be accepted. The issue before the Court concerned the nature of the insurer’s liability in circumstances where the insured had propounded its claim on a number of grounds and the insurer had denied liability. It is not possible to read into the reasons of the Court any implied adherence to Barwick CJ’s observations in GIO v Atkinson-Leighton. That would require acceptance of the proposition that, by a mere side-wind, the High Court overturned the majority’s decision in GIO v Atkinson-Leighton and preferred the reasoning of the dissenting minority. That is most unlikely. Rather, the observations of the majority, where it was said that Barwick CJ’s views were not relevant to the case before it, should be given full effect. In relation to this I would, with great respect, not agree with the observations of Kirby P in CIC Insurance Ltd v Bankstown Football Club Ltd, where his Honour, in reliance on Barwick CJ’s observations, stated the point too widely.

45    What the authorities actually disclose is that an insurer’s primary obligation to meet the costs of reinstatement necessarily extends to the cost of remediating any further damage to the property which is relevantly connected to that primary obligation. This principle applies regardless of whether the insurer’s obligation is to reinstate or to pay the costs of reinstatement.

46    That which is in issue here is the scope of the insurers’ crystallised or attached obligation to indemnify as found in the Basis of Settlement clause. Once it attaches, it is to pay the cost of reinstating the property by repairing it to a condition substantially the same as, but not better or more extensive than, its condition as new. That liability is not subject to the contingencies of the Policy, but is fixed because the damage is within the Policy’s scope. Here, the claim in respect of the storm damage to the stacker has been accepted and the only dispute is as to what is now the scope of the insurers’ liability.

47    The reasoning of the majority in GIO v Atkinson-Leighton does not suggest that an insurer’s liability in circumstances such as the present extends to meeting the cost of repairing additional damage to the property caused by an event which is unrelated to and independent of the obligation to reinstate. The remediation of additional damage of this nature is not part of the insurer’s obligation to indemnify, and it is irrelevant that it might further increase the cost to reinstate the damaged property.

48    On the other hand, the circumstance referred to by Barwick CJ, concerning an increase in the cost of undertaking repairs, provides an example of an event which is intimately connected to the insurer’s obligation and enlarges its scope. So much is clear from the result in Lumley v Vintix where the second event, being a change to building regulations which caused an increase to the cost of repairs, was inherently related to the insurer’s obligation.

49    Whilst it is not sufficient that the additional damage occurs from an unrelated cause during the effecting of the repairs which are the subject of the insurer’s indemnity, the position is different where the further damage occurs from conduct involved in the undertaking of the repairs. For example, if paintwork to property is damaged in the remediation process, that too will need to be repaired as part of the initial reinstatement obligation. The same applies here, though different in degree, but not in principle.

50    In this way, the insurer’s obligation to pay for the costs of reinstatement are not dissimilar to the obligation to undertake reinstatement. If, during the course of the insurer’s reinstatement of property, additional damage is sustained to the insured property, the insurer is not entitled to a deduction for the expenses already incurred prior to the further damage. The obligation remains one to fully reinstate the property: Smith v Colonial Mutual Fire Insurance Co Ltd (1880) 6 VLR (L) 200, 203.

51    In the present case, the later damage was directly related to and connected with the insurers’ performance of their obligation to remedy the original harm and falls within the insurers’ obligation to indemnify in respect of the storm damage to the stacker. This construction substantially accords with the views expressed in Ian Enright and Robert Merkin, Sutton on Insurance Law (Thomson Reuters, 4th ed, 2014) 2-146 – 2-149 [16.410] – [16.420], though there the learned authors also state the principle somewhat more widely than is appropriate.

The October damage occurred after the Policy had expired

52    It is not to the point that the further damage sustained to the stacker occurred following the conclusion of the period of Policy cover. The insurers’ obligation to meet the cost of reinstatement attached during the relevant period, and it does not matter that the obligation became more onerous after the end of the period of cover.

53    Nor is it to the point that, if the repairs to the stacker had been complete in September 2019 and the subsequent damage occurred in October 2019, a reasonable businessperson would not have thought that the latter damage was covered. That is not the position in the present case where the stacker had not been put back into its pre-damaged state prior to the second incident, such that the insurers’ obligation had not yet been completed.

The insurers’ liability to indemnify was complete on the occasioning of the storm damage

54    Once the insurers’ liability to indemnify pursuant to the terms of the Policy has crystallised or attached, it is no longer subject to the general contingencies of the Policy to which the exclusions might apply. By the insuring clause, the insurers’ obligation arises on physical loss, not otherwise excluded, having been sustained to “Property”, and it is to provide an indemnity in respect of the costs of reinstatement. That is made clear by cl 14 which relates to the insurers’ obligation to make progress payments once liability has been accepted.

55    So, here, once liability was accepted in relation to the original harm, the insurers’ obligation was complete, and it encompassed whatever additional costs arose by reason of additional related or consequential damage being sustained to the property. In relation to this issue, it is appropriate to draw a distinction between the current circumstances and those in CIC Insurance Ltd v Bankstown Football Club Ltd. In that latter case, the insurer’s obligation under the basis of settlement clause was complete on acceptance of liability, albeit the extent of that obligation was conditional upon the insured carrying out repairs with reasonable despatch. The variation of the insurer’s obligation was built into the obligation to provide indemnity. It did not occur by reason of the contingencies in the policy such as exclusions or limitations upon which the obligation to indemnify was conditioned. Therefore, unless the terms of the relevant exclusions impact the extent of the insurers’ obligation to comply with the obligations under the Basis of Settlement clause rather than the obligation to indemnify, they cannot affect the relief which Baralaba seeks.

Exclusion 14 – contract works

56    It did not appear to be doubted that the insurers’ obligation arising from the storm damage to the stacker was to meet the cost of reinstatement, replacement or repair as provided in paragraph (a) of the Basis of Settlement clause. That would be correct and no other method of calculating the quantum of the insurers’ obligation in that respect was articulated. Despite this, on occasion the insurers suggested that paragraph (i) of the Basis of Settlement clause applied because the subsequent damage occurred whilst the stacker was subject to the contract to effect its repair. That suggestion should be rejected. This matter is concerned with the insurers’ obligation arising from the initial damage in respect of which they accepted liability. There is no foundation for altering the basis of the insurers’ obligation to reflect a claim under the Policy which was never made.

57    Exclusion 14(a) excludes cover for damage to property the subject of contract works in particular circumstances. It provides that the Policy does not cover, relevantly, damage to “property the subject of contract works, (including but not limited to construction, erection, alteration, addition and the partial dismantlement of existing structures), when the value of work is in excess of the cover as available on the Placing Schedule; or if there is no value on the Placing Schedule, $2,000,000”. As indicated above, there is a sub-limit of liability in relation to contract works in the Placing Schedule, being $1,000,000.

58    There exist both temporal and monetary conditions to the operation of this exclusion. First, the exclusion only applies in circumstances where damage occurs when the property in question is the subject of “contract works”. When the contract works have been completed, the cover attaches in the case of construction or erection, or reattaches in the case of alteration or partial dismantlement. Secondly, for the exclusion to apply, the value of the contract works must exceed the specified amount: in this case $1,000,000.

59    The expression “contract works” as used in cl 14(a) is not defined in the Policy and, as it is used, it is unclear. That lack of clarity in relation to exclusions which rely upon the expression “contract works” is not uncommon: see Prestige Form Group NSW Pty Ltd v QBE European Operations PLC [2023] FCA 749 [27] – [30].

Whether the exclusion applies to the insurers’ obligation to pay the costs of reinstatement

60    An initial question is whether exclusion 14(a) affects the insurers’ obligation to meet the cost of reinstatement in respect of damage to property which has been caused by non-excluded perils. On this, the better construction is that it does not. It is an exclusion which would prevent the Policy responding, either entirely or in part, in respect of a claim arising from the identified circumstances. There is nothing to suggest that, if the Policy responds to a claim for indemnity from a non-excluded clause, cl 14(a) was intended to cut down the insurers’ obligation if the property is further damaged whilst being repaired.

61    That is reinforced by its wording which refers to those activities which, it might be expected, would be engaged in by a coal mining company. That is, the construction or erection of substantial pieces of equipment, alterations or additions to them, or their dismantlement. These might easily be recognised as activities in which Baralaba would be engaged from time to time in its operation, and if damage was sustained to property in the course of them, the exclusion would apply. They are not the type of activities which might be expected to occur in the performance of the insurers’ obligation to pay for the reinstatement of damaged property.

62    It would be an unbusinesslike construction if cl 14 extended to operate in relation to the repairing of property which has been damaged and in respect of which the Policy has responded. A reasonable businessperson in the position of the parties would be unlikely to accept that cl 14 should defeat the insurers’ obligation to meet the costs of repairing property to the required standard, if damage occurred during the course of the very repairs in respect of which indemnity has been granted.

63    It did not appear to be disputed that exclusion clauses in contracts of insurance are construed contra proferentum in cases of ambiguity: Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500, 510 (Darlington); Kelly v The National Insurance Company of New Zealand Ltd (1995) 8 ANZ Insurance Cases ¶61-239: and harmoniously with the balance of the policy so that the insuring clause is not unduly circumscribed: Woodlawn Capital Pty Ltd v Motor Vehicles Insurance Ltd (2016) 111 ACSR 377, 403 [133]; see generally, Desmond Derrington and Ronald Ashton, The Law of Liability Insurance (LexisNexis Butterworths, 3rd ed, 2013) 1829 – 1831 [10-3]. The contra proferentum rule would provide additional support for this construction.

64    At a general level, therefore, exclusion 14(a) would appear to have no application when damage is sustained to property which is subject to the insurers’ obligation to indemnify the costs of repair, as is the position in the present case.

Whether the exclusion would otherwise be enlivened

65    Even if it is assumed that exclusion 14(a) has general application in such circumstances, it only operates where the relevant damage occurred whilst contract works, to a value in excess of $1,000,000, were being performed on the property.

66    It is not difficult to conceptualise occasions when the exclusion would operate with some certainty. For instance, if the insured engaged a contractor to erect a new stacker or other piece of machinery and the contract value exceeded $1,000,000, cover would not exist for any damage sustained to that property whilst the subject of the contract works, even if it were otherwise within the Policy’s scope. The same would apply to damage sustained during an extension to existing plant or equipment, or, where property is being dismantled, and the value of the contract works exceeds $1,000,000.

67    The insurers submitted that the exclusion was triggered in this case because the value of the works to which the stacker was subject when damaged exceeded $1,000,000. However, there is insufficient material on which to reach that conclusion.

68    The evidence before the Court included an email dated 15 April 2020 from a Mr George Bejjani of McLarens, the insurers’ loss adjuster. In it, he purported to tally the amount of money spent on the rectification of the stacker, by reference to the several contractors who had been engaged to work on it, and observed that the total of those costs was some $1,110,000. From that, he opined that exclusion 14(a) applied in relation to the damage sustained. That tallying of expenses did not indicate the date or dates on which the separate services were being applied to the repair of the stacker. Relevantly, there was no single contract for the provision of work or services in relation to the stacker which exceeded $1,000,000, and it is unclear which of the contractors was providing services at the time of its collapse.

69    For example, included in Mr Bejjani’s summary of the total value of “repair works”, which he also categorised as “contract works”, is the sum of approximately $37,300, which is attributed to the “vendor”, Aspec Engineering Pty Ltd. As mentioned, that company had provided a report dated 7 April 2020 which analysed the cause of the stacker’s initial collapse. On the assumption that the production of that report was the last work undertaken by Aspec Engineering, it could not be said that the stacker was subject to contract works by that company at the time of the damage in October 2019. Indeed, it is difficult to ascertain how a piece of machinery is the subject of contract works by reason of an inspection being made of it and a report being produced.

70    It is also far from clear that any of the “vendors” listed in Mr Bejjani’s email, save for SLE Services which had been engaged to repair the stacker, were providing contract works at the time of the collapse. If SLE Services was the only entity providing contract works at the time, the total value of payments to it, being approximately $997,000, falls short of the amount required to trigger the exclusion.

71    There may also be a question of whether the contract works exclusion is triggered where the value of the work in question is the total of the contract work then being performed on the property, or whether it requires the existence of a single contract to a value of more than $1,000,000. It is probably the former, with the result being that if, when the relevant damage occurred, two contractors were simultaneously providing services to the same piece of equipment and the value of their concurrent contracts exceeded $1,000,000, the exclusion would be triggered. The position would be different if the services were provided sequentially, with the result that there was no time when the value of the contract works being provided exceeded the prescribed amount. For example, if after the stacker had been repaired at a cost of $975,000, it was being painted by a contractor at a contract price of $50,000 at which time further damage occurred, it could not be said that the value of the contract work to which it was subject at the time of the occurrence was in excess of $1,000,000.

72    That construction is consonant with the nature of the exclusion, being one which removes all entitlement to indemnity when the insured property is made the subject of very substantial contract works. It might be assumed that the insurers perceive that the greater the value of contract works being applied to property, the greater is the risk that substantial damage might occur. In that way, exclusion 14(a) accommodates that increased risk by excluding indemnity if damage occurs when the value of work to which the property is subject exceeds the identified amount. Conversely, even if over a period of time the total value of the contract works to which the property is subject exceeds $1,000,000, where the damage is sustained when it is subject to contract works to a value of less than that amount, the exclusion does not apply.

73    Though the alternative construction might be open, it would be far more difficult in application and would require an analysis over time of the sequential value of contract works and would result in the insured not being able to ascertain whether the property is covered until the completion of all works. That is not a businesslike construction which the parties are likely to have intended. To the extent to which the insurers’ proposed construction can be said to have equivalence to the preferred construction such that true ambiguity exists, the clause should be construed against them.

74    The necessary conclusion is that there is no evidence that, at the time of the October 2019 incident, the stacker was subject to contract works to a value of greater than $1,000,000. As a result, even if exclusion 14(a) was applicable in the present circumstances, it would not have excluded cover.

Proviso (iii) to exclusion 14

75    Proviso (iii) to exclusion 14 specifies that the exclusion does not apply “to any Damage to existing Property Insured caused by a peril or Event not otherwise excluded under this Policy”. Baralaba submitted that the damage to the stacker falls within this description, providing a further reason for the non-application of exclusion 14(a).

76    In contradistinction to exclusion clauses, provisos to exclusions are construed liberally: Quantum Processing Services Co v Axa Insurance UK Plc [2008] All ER (D) 152. So, to the extent that the provisos to cl 14(a) are ambiguous, they should be given the more liberal of the available constructions and that inures to the insured’s benefit.

77    Taken together, the provisos to exclusion 14(a) limit its operation in several ways. The first acknowledges that the insured’s property may be only partially subject to contract works and, in those circumstances, only damage to those parts which are subject to such works is excluded. If other parts of the property are not subject to the contract works and are damaged by an occurrence covered by the Policy, the exclusion in cl 14(a) has no relevance.

78    Proviso (ii) avoids the exclusion’s application to “any other Property Insured” which suggests that where the one event or occurrence causes damage to property which is the subject of the contract works as well as other property, the exclusion does not extend to the damage to that other property. For instance, if the insured’s stacker, which was in the course of being constructed, collapsed and fell onto and damaged other property of the insured which was covered by the Policy, proviso (ii) would operate to prevent exclusion 14(a) denying cover in respect of that other property. In this sense, proviso (ii) appears to be merely confirmatory of the limits of the exclusion. By its terms, cl 14(a) applies only to damage to property of the insured which is subject to contract works of the specific value and, prima facie, would not deny cover to property which was not the subject of contract works. Nevertheless, disputation may arise where property which is the subject of contract works and other property are damaged by the same occurrence, and proviso (ii) puts it beyond doubt that the indemnity extends to that other property.

79    It is proviso (iii) that became the subject of most debate and, particularly, the reference in it to “existing Property Insured”. The insurers submitted that it referred to property of the insured “other” than that which was the subject of the contract works and, conversely, Baralaba submitted that it referred to property of the insured which has been damaged by a covered peril and was, at the time of sustaining further damage, subject to contract works. On the latter’s construction, if cl 14 applied to the stacker, thereby excluding indemnity in respect of the damage sustained by the October 2019 incident, cover was restored by the proviso.

80    The essential difficulty with the insurers’ preferred construction is that it would render proviso (iii) redundant because it would have the same operation as proviso (ii) by also being confirmatory of the apparent scope of cl 14(a). To construe it in that manner would be contrary to the canon of construction that, if possible, all parts of a contract ought to be given work to do.

81    Whilst the wording of proviso (iii) is unclear, it would appear that it is intended to carve out from the scope of the exclusion, damage to the insured’s existing property sustained from a non-excluded cause at a time when that property is subject to relevant contract works. As a proviso, it is axiomatic that it applies to circumstances where the exclusion is otherwise operative, being where the property sustained damage when subject to contract works in excess of $1,000,000.

82    It is reasonable to assume that the word “existing” is used in contradistinction to that property referred to in the exclusion, being property which is under construction, in the course of being erected, or even the subject of work by way of addition or alteration. This accords a coherent usage of the word “existing” where it also appears in cl 14(a) in the expression, “dismantlement of existing structures”. That part of the exclusion contemplates that there is an existing structure, being one which has been constructed, erected, or had work done to it, which is to be dismantled. It would seem to follow that the proviso’s concern is with the insured’s property which is complete and covered by the Policy as opposed to property which is in the course of construction or erection.

83    The final element of proviso (iii) is that the damage be caused by “a peril or Event not otherwise excluded under this Policy”. The use of the word, “otherwise”, here is problematic as it suggests that cl 14(a) also excludes damage caused by certain perils or events, whereas that is not the case. The exclusion is not of loss or damage caused by a particular event. It excludes cover for damage to property while it is the subject of contract works in excess of the stated value. That is so regardless of the cause of the damage.

84    From the foregoing it appears that the effect of proviso (iii) is that, even if the existing property is the subject of contract works in excess of the prescribed amount, cover will be extended where the damage is caused by a peril or event which is not excluded by the Policy. Here, the stacker collapsed consequent upon its negligent repair or as a result of the wire ropes being of insufficient torque and it was not said that its collapse is not within the Policy’s scope. In this way it may be that the clause operates where damage occurs to existing property when the subject of a relevant contract, being for maintenance, repair or the like, and it is damaged by a non-excluded cause. In such circumstances, the general exclusion in cl 14 will not apply.

85    There is a possible, albeit somewhat difficult, argument that proviso (iii) was intended to except from the operation of exclusion 14 those circumstances where the insured’s property is damaged when subject to contract works in excess of $1,000,000, but the damage is caused by a peril or event other than something arising from the performance of the contract works. That would give weight to the expression, “peril or Event not otherwise excluded”. Moreover, a clause to this operative effect has some commercial soundness. There would be a lack of common sense in an exclusion which precludes cover in relation to damage being sustained in relation to a particular activity, but which also precludes cover when the activity in question was not causative of the loss. So here, the concern is with damage sustained to property when subject to contract works in excess of a particular value and, it might be assumed, it was intended to exclude loss resulting from the performance of the contract works. If that is so, a proviso which permits cover in respect of damage caused by other events or perils even though the property was subject to the contract works, makes commercial sense.

86    Whilst that may be a logical proviso to the exclusion, the words used in proviso (iii) do not permit of that construction. Importantly, the exclusion does not operate to exclude damage from an Event or peril. It does not only exclude cover of damage caused to property when the subject of contract works which is occasioned by the performance of the works. It is much wider and excludes damage to property that is the subject of contract works. For that reason the construction referred to is not open.

87    It follows that the import of the proviso is directed to maintaining cover to existing property as opposed to property which is yet to be constructed or erected. In that way, exclusion 14(a) and proviso (iii) operate such that where the insured’s property is existing property (in the sense that it is not being constructed or erected) and is damaged whilst subject to contract works in excess of the prescribed amount, the exclusion does not apply where the damage is caused by a peril or event not otherwise excluded. Here, the stacker was existing property and, even if it was damaged whilst the subject of contract works in excess of $1,000,000, proviso (iii) prevents the operation of exclusion 14(a) in circumstances where the damage was not otherwise excluded by the Policy.

88    This construction is coherent with the context of the Policy. It is to be remembered that the insured’s business is described in the Placing Schedule as follows:

Principally, Above ground coal mine using blasting and truck & shovel (excavator) mining operations, office occupiers and any other occupation incidental thereto.

As such it can be expected that the insured will acquire and dispose of substantial heavy machinery from time-to-time as is appropriate to coal mining operations. This is likely to involve the construction, modification or dismantling of that equipment by, or with the assistance of, the necessary contractors. By cl 14(a), the risk involved in the performance of those contract works is excluded and the reasons for that are self-evident. However, if the property meets the meaning of “existing property”, it is covered by the Policy and that remains so even when it is the subject of contract works in excess of the prescribed amount, provided that the damage is caused by an event which is not excluded. Therefore, if a piece of the insured’s existing equipment was being repaired or undergoing maintenance pursuant to a contract which exceeded $1,000,000 and was damaged, proviso (iii) would exempt the operation of exclusion 14(a) where the damage was caused by a non-excluded event.

89    Not only does this construction give effect and meaning to the word “existing” and provide some coherency with proviso (ii), it is a businesslike construction. It would be unusual for the Policy to operate such that the insured’s property was covered from loss or damage, but that cover did not extend to further damage caused by an insured risk whilst the property was subject to contract works because it was being repaired consequent upon having sustained the initial damage.

90    Contrary to the insurers’ submission, the above construction does not unduly limit the scope of cl 14(a). It continues to apply in respect of equipment which is subject to contract works, including where it is being built or erected for the insured. It is true that some difficulty arises in relation to the activities of alteration, addition to or partial dismantlement which will ordinarily be activities applied to existing property. However, the alternative construction gives the proviso no work to do at all. Ultimately, the choice is between two constructions, one which is workable and favours the insured and another which renders the proviso irrelevant and which favours the insurer. Principle dictates that the former must be adopted.

91    The consequence is that even if, contrary to what has been found, exclusion 14(a) does operate in the present circumstances, proviso (iii) applies where the cause of the collapse is not otherwise excluded. In this matter, it was not suggested that the cause of the collapse was excluded otherwise in the Policy.

Exclusion 19 – testing and commissioning

92    Clause 19 is contained in the endorsements to the Policy and for ease of reference, the substantive part of it is replicated as follows:

This Insurance does not extend to cover Damage to property in course of construction or erection, dismantling, revamp or undergoing testing or commissioning including mechanical performance testing or any business interruption resulting therefrom.

93    Immediately, it can be seen that it excludes from the insurance “Damage … in [the] course of construction or erection, dismantling, revamp”, which overlaps with the exclusionary effect of cl 14(a). On the other hand, the exclusion in cl 19 is wider, there being no requirement that the work, pursuant to which those activities are undertaken, is valued at over $1,000,000. In general terms, the substantive difference is that cl 14 excludes cover in respect of property which is the subject of contract works, whereas cl 19 excludes damage to property “in the course of” the performance of the identified activities.

94    Here, the additional damage was sustained on 27 October 2019, in the course of the testing of the stacker as part of the finalisation of the repairs being undertaken on it. Unsurprisingly, the insurers claim that cl 19 excludes indemnity for that damage. However, as has been discerned above, by reason of the storm damage suffered by the stacker in March 2019, the insurers were already subject to the obligation to indemnify Baralaba in relation to the costs of reinstatement. They had accepted liability and their obligation to indemnify was then regulated by the Basis of Settlement clause. The question, then, is whether cl 19 displaces that primary obligation of the insurers.

95    The better view is that cl 19 is concerned with excluding claims by the insured in respect of damage of the identified type. The reference to “cover” is to the Policy’s response to a claim by an insured in respect of damage. This can be compared to a clause which expressly limits the extent of the insurers’ liability to pay particular amounts which might otherwise flow from its primary liability. Such clauses may appear in the “Reinstatement or Replacement” section of the Basis of Settlement part of the Policy. On this view, which is the preferable one, cl 19 has no general applicability to the extent of the insurers’ liability once that liability is accepted in respect of non-excluded damage.

96    Nevertheless, it is appropriate to address its operation on the assumption that it does apply.

97    The endorsement self-acknowledges that it is an exclusion, and it ought to be interpreted in that manner in accordance with the principle in Darlington. It also needs to be read as a whole and in the context of the Policy overall.

98    It has two distinct parts. The first, which is constituted by the opening paragraph set out above, is broad and excludes damage occurring in the identified circumstances including in the course of the property undergoing testing or commissioning. The second part is contained in the following paragraphs which make provision as to when the insured’s property, which is in the course of being constructed or erected, comes within the Policy’s cover. For ease of reference, that part commences as follows:

Acceptance of property hereon is subject to satisfactory completion of the following procedures and otherwise to the terms and conditions of this Policy.

i.    The plant is mechanically complete.

…

99    It can be hypothesised that cl 19 is an amalgam of what are effectively two clauses which have some overlapping operation. For instance, the first part excludes cover for the insured’s property in the course of construction, erection or undergoing testing or commissioning. The second, which refers to “plant”, as in machinery or equipment, prevents cover attaching unless and until the construction or erection of the plant, including all testing and commissioning, is complete. This part is concerned with plant which, at the time of the Policy’s commencement, is not complete, or with plant acquired during the course of the Policy. It imposes strict conditions to be met before such plant is taken on risk.

100    In the present context, the question is whether the expression, “undergoing testing or commissioning”, which is referred to in the first part of the clause, is confined to those activities occurring as part of “construction or erection, dismantling, revamp”, or applies to any occasion when damage occurs when property is being tested or commissioned. In particular, an issue arises as to whether cl 19 applies when damage occurs in the course of testing plant or equipment as part of its reinstatement or repair following damage to which the Policy has responded.

101    On the insurers’ case, even though the stacker was in the course of being reinstated under the Policy, as the subsequent damage occurred in the course of testing, cover was excluded. Whilst that might appear to be unusual, it might merely be a recognition of the enhanced risks which exist when large pieces of equipment are being tested, whether upon their initial construction, revamping or repair. On that interpretation, in the present circumstances, the Policy would cover the stacker at the time of its sustaining the initial damage, whilst it was being repaired, and once it was put back into operation. However, the only period when it would not be covered would be during testing for the purposes of ensuring the repairs were complete. Baralaba submitted that this created an unusual operation of the Policy and it should be accepted that it does.

102    It can separately be accepted that there is some undeniable logic in excluding cover to newly constructed, erected or revamped plant or property until the point where the construction work, including testing and commissioning, has been fully completed. So much appears from the second part of cl 19. Indeed, testing and commissioning, including mechanical performance testing, is a concomitant part of the activities of construction, erection or revamping of machinery. In fact, the commissioning of plant or machinery will only occur at the final stages of construction, erection or revamp. With that in mind, Baralaba submitted that the concepts of testing and commissioning in cl 19 should be read as being associated with those activities.

103    Legitimate techniques of construction support that conclusion. The words “testing and commissioning” could be controlled by and confined to the specific activities of construction, erection or revamp and, not in the least because they are essential parts of those activities. As such, any damage occurring during testing or commissioning will occur “in the course of” construction, erection or revamp. This is not some strained construction but merely understanding the meaning of words by reference to the other words with which they are associated. It is an approach supported by the canon of construction, noscitur a sociis, which was described by Spigelman CJ (with whom McColl and Basten JJA agreed) in Lend Lease Real Estate Investments Ltd v GPT RE Ltd [2006] NSWCA 207 [30] – [31] as follows:

The general principle of the law of interpretation that the meaning of a word can be gathered from its associated words — noscitur a sociis — has a number of specific sub-principles with respect to the immediate textual context. The most frequently cited such sub-principle is the ejusdem generis rule. The relevant sub-principle for the present case is the maxim propounded by Lord Bacon: copulatio verborum indicat acceptationem in eodem sensu — the linking of words indicates that they should be understood in the same sense. As Lord Kenyon CJ once put it, where a word “stands with” other words it “must mean something analogous to them”. (Evans v Stevens (1791) 4 TR 224; 100 ER 986 at 987. See also W J Byrne (ed) Broomes Legal Maxim (9th ed) Sweet and Maxwell, London (1924) pp373-374.)

However, as Lord Diplock put it in Letang v Cooper [1965] 1 QB 232 at 247:

“The maxim noscitur a sociis is always a treacherous one unless you know the sosietas to which the socii belong.”

See also Derrington and Ashton, The Law of Liability Insurance (LexisNexis Butterworths, 3rd ed, 2013) 485 – 486 [3-129].

104    Support for the above interpretation can also be derived from the second part of cl 19 which excludes cover in relation to property, specifically plant, until it is fully complete. As that part makes clear, the construction, erection or revamp of plant is not regarded as being complete until all commissioning and testing has occurred and, moreover, the commissioning and testing is an essential part of the completion of the newly constructed plant.

105    In the construction of cl 19 it must be recalled that cover is provided in the Policy for “contract works” up to $1,000,000. A broad construction of cl 19 may effectively negate that cover. To a not insignificant degree, contract works will usually involve the construction, erection, dismantling or revamping of the insured’s property and, therefore, on a broad construction cl 19 would substantially reduce that cover. It removes cover in relation to those activities even where the value of the contract works is less than $1,000,000. To the extent that it would also remove cover for damage to property during its repair which also involved testing, the cover for contract works would be further diminished. A construction of an exclusion which does not obliterate cover provided by a policy is to be preferred to one that does.

106    In this way, the references to testing and commissioning should be confined to the performance of those activities as part of the construction, erection, dismantling or revamping of property. The clause does not specifically refer to damage in the course of repairing or maintaining property and it would be surprising if it did. Indeed, it would be an unusual construction if the Policy excluded damage to property in the course of testing property when it is done in the course of either of repair or maintenance. Were it to operate otherwise it would follow that where property had been damages by an insured peril and would be covered whilst being repaired, it would lose cover during the final testing phase. Again, that is not a likely construction. It follows that cl 19 does not exclude cover where the damage occurs when the property has been damaged and is being tested so as to bring it back to working order as part of its repair. That construction also accords primacy to the insurers’ obligation to reinstate following damage caused to the insured’s property by a non-excluded peril or event. If the expressions were not so limited, the insured’s right to have the cost of reinstating its damaged property met could be negated.

107    This conclusion may also arise from an application of the contra proferentem principle which would resolve the ambiguities above. Whilst the answer to the question of interpretation is not clear, the weight of the arguments favour the conclusion that there is sufficient want of clarity as to justify the uncertainty that would invoke the principle.

108    As is the case in relation to cl 14, the exclusion in cl 19 does not apply in the present case. Neither apply to the circumstances of this case where the insurers have accepted liability to meet the costs of reinstatement and the secondary damage was related to and connected with that obligation. In any event, the reference to “testing” in cl 19 is to testing in the course of construction, erection or revamping. It has no application to testing being undertaken as part of the repairing of insured damage.

The alleged release

109    Following the storm damage in March 2019, Baralaba made a claim on the insurers and discussions followed as to the amount payable in respect of the damage. The insurers appointed McLarens as its adjusters to assist in relation to that, and Baralaba acted through its brokers, Marsh. Correspondence passed between the parties and payments were made by the insurers from time to time in relation to the repair work as it proceeded. The subsequent damage to the stacker was sustained in October 2019 and Baralaba claimed that it too was covered by the Policy.

110    More correspondence passed between the parties and on 1 June 2020, the insurers made the final payment in relation to the costs of repairing the damage caused by the storm and, at the insurers’ insistence, Baralaba executed a release in relation to that payment.

111    The release is contained in a document headed, “Form of Release”. It relevantly provided:

FORM OF RELEASE

Subject to the approval of AAI Limited t/a Vero Insurance AND Concerned Co-Insurers and to the terms and conditions of the Policy I/we hereby agree to accept payment of the sum of $92,977.21 (Ninety Two thousand, Nine hundred and Seventy Seven dollars and Twenty One cents) with acknowledgement of receipt of previous payments totalling $625,000 (Six Hundred and Twenty Five thousand dollars), bringing total funds to $717,977.21 (Seven hundred and Seventeen thousand, Nine hundred and Seventy Seven dollars and twenty one cents) in final satisfaction and discharge of all claims, except for the below specified costs, arising from storm damage which occurred at the Baralaba North Mine, Train Load Out Facility, Moura 4718 on or around 12 March 2019.

It is further agreed that this document excludes costs related to invoices BCC 1005 ($136,374.13), BCC 1006 ($8,973.80) and BCC 1008 ($19,914.38), the said items pending further assessment/review, and altogether totalling $165,262.31.

(Emphasis in original).

112    That release was similar to other releases which had been executed by Baralaba in the course of the repairs being undertaken. The correspondence between the parties indicated that, when a payment was made by the insurers, Baralaba was required to execute a release of the insurers in respect of a partial satisfaction of the insurers’ obligations.

113    At the hearing, the insurers alleged that the release executed on 1 June 2020 released them from all liability relating to the storm damage which, so it was said, included the damage arising from the collapse of the stacker in October 2019. They submitted that the expression, “arising from storm damage which occurred … on around 12 March 2019”, included the later damage sustained on 27 October 2019. In particular, it was submitted that Baralaba’s claim to be covered in relation to that later event exists only because it arose in the course of the finalisation of the repairs from the first event of storm damage.

114    Prima facie, there is some force in that submission and the expression “arising from” might be sufficiently wide to cover the subsequent loss. However, those words of connection depend upon the context and purpose for which they are used: R v Khazaal (2012) 246 CLR 601, 613 – 614 [31]. Here, the surrounding circumstances in which the document was produced and executed indicate that its purpose was to bring an end to the issue of the amount which the insurers were required to pay in respect of the damage to the stacker, to the extent to which it occurred as a result of the storm on 12 March 2019.

115    Following the second occurrence in October 2019, throughout correspondence between the insured and the insurers, the two incidents were separately identified. In an email of 26 November 2019 from Baralaba to Mr Bejjani of McLarens, reference was made to the costs “attributed to the original rectification of the stacker”. That was clearly a reference to the costs of repairs directly associated with the storm damage.

116    In an email in response from Mr Bejjani of McLarens to Baralaba on 3 December 2019, reference was made to his having approved a “further payment on the first claim of $250,000”. In the context of the initial email, the words, “first claim”, were a reference to the damage which flowed directly from the storm as opposed to any subsequent damage.

117    In a further email from Mr Bejjani to Baralaba on 25 February 2020, reference was made to the parties attempting to reach agreement on the final figures on “claim 1”. This was also clearly a reference to the damage to the stacker arising from the 12 March 2019 storm incident, exclusive of the subsequent damage arising from the incident in October 2019.

118    On 7 May 2020, a Ms Gabrielle Morris of Marsh sent an email to Baralaba, copied to Mr Bejjani, which distinguished between the payments which had been made to SLE Services and “Claim 2”, which was still being negotiated with SLE Services. It is apparent that “claim 2” related to the damage from the collapse in October 2019.

119    That same day, Ms Morris sent a further email to Baralaba, which was also copied to McLarens, and which discussed the proposed settlement in relation to the claim concerning the storm damage. In part, the email provided:

George [being Mr Bejjani] has now sent me the email trail and based on the information I have requested that George do the Release based on the figures but subject to Baralaba being able to claim the balance of the monies should negotiations with SLE fail and you are obliged to pay the balance of monies that are being withheld at this time.

If you are agreeable to this please let me know urgently so that I can get George to send the revise[d] Form of Release in relation to the first claim.

120    It is not possible to regard this context as indicating other than that the release was in regard to the payments to be made to the repairer of the stacker in relation to the storm damage. There is nothing in the context to suggest it was also applicable to the claim in relation to the damage which the stacker sustained when it collapsed on 27 October 2019. In light of this, the suggestion that the release was intended to cover the second claim for damage is untenable.

121    In an email of 7 June 2019, from a representative of Vero Insurance to Ms Morris, the following statement was made:

I am pleased to advise following receipt of McLarens Final Report, and signed Release – please find excerpt of the former below, and copy of the latter attached, for ease of reference, I have requisitioned final payment of Vero share, $41,839.75 in full & final settlement of the claim following the 1st incident, Date of Loss 12/3/19.

(Emphasis in original).

122    Though post contractual conduct is not available as an aid to interpret the release, the statement reflects the manner in which the parties had, prior to the release’s execution, identified the two events which had caused damage to the stacker. In the context in which Baralaba signed the release and Vero Insurance’s subsequent acknowledgment of its effect, it is disconcerting that the insurers would now assert that the release was to have a wider scope than it had led its insured to believe.

Conclusion on the scope of the release

123    Any ambiguity around the scope of the words “in final satisfaction and discharge of all claims” is easily resolved by reference to the context in which the release was entered into. It is clear that the words refer to any claim in relation to the storm damage alone and not to any subsequent damage. The suggestion to the contrary is somewhat opportunistic.

124    That conclusion might be supported by the fact that the release signed was expressed to be “subject … to the terms and conditions of the policy”. In this respect, Baralaba submitted that, if it had a further entitlement to recover under the Policy, the release would present no bar. At the very least, that would give the words used some work to do. It is true, however, that making a release of a contractual claim subject to the terms of the agreement from which the claim arose is both unusual and creates uncertainty.

125    In any event, the above conclusion is further supported by the use of the words “arising from storm damage”. The words “arising from” in that context tend to suggest a relatively close connection between the claims and the storm damage, such that a claim in respect of the damage from the stacker’s collapse was not intended to be released.

126    The consequence of the above is that the release signed on 1 June 2020 did not apply to Baralaba’s claim in relation to the damage sustained to the stacker on 27 October 2019.

Conclusion

127    In the result, Baralaba is entitled to the declaratory relief set out in the orders accompanying these reasons.

128    The parties are to be heard further on the question of costs and interest if the claim in that respect is persisted with.

Associate:    

Dated:    23 May 2024

SCHEDULE OF PARTIES