The court case cram

Keeping abreast of implications from the latest insurance law cases is not easy. Here, Corrs Chambers Westgarth lawyers examine a few highlights from last year’s legal decisions

By Lucy Terracall, Varshini Viswanath and Bianca Barrass Borzatti

Insurance Australia (t/as CGU Insurance) v Capral

Capral supplied imported aluminium plates to 10 customers, which used them to construct marine vessels.

The plates were later recalled because they did not meet the relevant corrosion resistance standards. The customers therefore incurred rectification costs removing and replacing the plates, and claimed those costs from Capral.

Capral settled the customer claims for $2.197 million and sought indemnity from its insurer under a general and products liability insurance policy.

The relevant policy covered “compensation for … property damage”. Compensation was defined in the policy as “any amount payable … by [Capral] in respect of any claim for … property damage”.

Property damage was then defined as: damage to or physical loss of or destruction of tangible property, including loss of use at any time resulting therefrom; loss of use of tangible property that has not been physically injured, damaged or destroyed provided such loss of use is caused by or arises out of physical damage of other tangible property.

The policy excluded liability for damages arising in connection with goods withdrawn from the market.

The first-instance decision was handed down by the Federal Court on July 17 2024, in favour of the insured, Capral, with the court finding the amounts paid by Capral were in respect of claims for property damage within the scope of the insuring clause.

The insurer, CGU, appealed to the full Federal Court. The key legal issues in the case were: what is property damage? Were the customers’ claims for property damage? And did the exclusion clause preclude liability because the plates were recalled (albeit after the property damage was incurred)?

In relation to the policy definition of property damage, the court said the policy required a physical alteration to property that reduces the property’s value or usefulness. It was found that welding the defective plates into the vessels constituted physical alteration, which in turn reduced the vessels’ value.

The evidence revealed the vessels could not be sold unless the plates were removed and replaced, at significant cost. The court therefore found that the “property damage” occurred when the defective plates were affixed to the vessels.

The court then considered whether the claims in this case were “for” “property damage”.

Capral’s insurer argued the claims by the customers were founded on the provision of defective goods, not “property damage”.

The court disagreed and found it was incorrect to assess the nature of the claim against Capral by reference to the cause of the damage. Rather, the correct approach was to focus the assessment on the basis for the compensation. The customers’ claims were originally caused by defective goods, but the claims themselves were for “property damage”.

Finally, with respect to the exclusion clause, unsurprisingly, the court held that it must be interpreted through a “businesslike” lens and in the context of the entire policy wording.

It would be, the court said, a commercially absurd outcome if the policy excluded the insured’s liability to a customer in circumstances where the defective good or product was recalled after “property damage” was incurred.

For example, such an approach may incentivise insurers to delay indemnifying insured parties in case the goods/products that caused damage are later withdrawn. It follows that this exclusion clause ought only apply to goods/products recalled from the market before any property damage occurs.

The appeal by CGU was rejected and Capral was entitled to indemnity under the policy.

The case is a very helpful reference where there is withdrawal of goods or a product from the market in circumstances where there has been some impact on the value or usefulness of the goods or products.

The timing of the damage to the property and the market recall is critical to whether cover will be afforded under a liability policy.

Seymour Whyte Construction v Liberty Mutual Insurance Company (t/as Liberty Specialty Markets)

Seymour Whyte Construction held a contractor’s pollution legal liability policy, covering loss “arising from pollution conditions caused by covered operations performed by the insured. Pollution conditions included “emission, discharge, dispersal, migration, release or escape of pollutants”.

VicRoads contracted Seymour to perform highway upgrades. Asbestos was found in soil Seymour excavated. WorkSafe issued notices directing Seymour to provide a safe system of work to its employees when dealing with the asbestos.

Seymour incurred remediation costs in complying with the notices, including removing and transporting the contaminated soil. It recovered some of these costs from VicRoads’ successor, and claimed the remaining $3.456 million under its insurance. The insurer denied liability.

The key legal issues in the case were: did the excavation and/or transportation of asbestos-contaminated soil constitute a “pollution condition”? And did Seymour’s loss arise from pollution conditions?

On the first issue, the court held that excavating the soil and potentially exposing asbestos to the air does not of itself cause the “release … of pollutants” and therefore does not meet the definition of “pollution conditions”. However, it was found that the transportation of the asbestos-contaminated soil to another location was a “release … of pollutants”.

As to whether the cost of complying with WorkSafe’s notice arose from the excavation or the transportation of the contaminated soil, the court said it did not.

The notice did not refer to or relate to the release of asbestos into the air. Rather, the notice required Seymour to provide a safe system of work in future when dealing with the asbestos and did not require Seymour to clean up or remediate the soil. Therefore, the cost incurred by Seymour in response to the WorkSafe notices did not arise from pollution conditions and no cover was afforded under the policy.

In response to other submissions made by Seymour in support of cover, the court found that: the costs associated with complying with WorkSafe’s notices would (or should) have been incurred in any event, because the notices did not impose any obligations that did not already exist under the Occupational Health and Safety Act 2004.

These costs therefore arose from Seymour’s existing statutory obligations, not the pollution condition; the costs incurred did not arise from the operation of the OHS Act or statutory environmental laws because such loss could not be characterised as being “caused by Seymour’s operations”, as required by the policy; the legal costs incurred by Seymour in obtaining legal advice to determine what the notices required did arise from the pollution conditions caused by Seymour’s operations, and so this category of costs was covered.

This case illustrates the distinction between costs that arise from legal obligations (such as occupational health and safety duties) that existed regardless of the pollution event, and costs that actually arose from a pollution event or condition.

The policy was intended to cover loss caused by pollution conditions that were created by the insured in carrying out its business. It was not intended to cover costs of safely cleaning up pre-existing contamination.

Sayers Property Holdings v AIG Australia

Sayers Property Holdings spent $5.35 million building a gaming venue on land it leased from Di Dio Nominees. Sayers then commenced an action for specific performance of the lease and exercised an option to buy the land from Di Dio.

Di Dio resisted this and sought orders to set aside the lease agreement. It alleged its accountant breached his fiduciary duties and engaged in unconscionable conduct by failing to disclose he was a director and shareholder of Sayers.

In the alternative, Di Dio claimed compensation for equitable breach. The matter settled following court-ordered mediation. The settlement involved, among other things, Sayers purchasing the land for $11 million (instead of the previously agreed price of $8.925 million).

Sayers then sought indemnification for the about $2 million difference in purchase price under its directors and officers insurance with AIG Australia, through the corporate liability section of cover.

The key legal issues were: was a non-monetary claim, being Di Dio’s counterclaim to set aside the initial transaction with Sayers, a “claim” within the policy definition? Can an amount paid as part of a settlement constitute a “loss”?

Was Sayers under a legal obligation to pay the settlement “resulting from” the counterclaim? Was the settlement reasonable in all the circumstances?

As to the first issue, the court found in the affirmative because the policy’s definition of “claim” included the words “other legal remedy”, and a counterclaim to have a transaction set aside is a “legal remedy”.

As to the second and third issues, it was found the settlement did meet the definition of loss because “settlement” was explicitly included in the policy definition.

AIG argued Sayers had not incurred a “loss” because the settlement had no connection with the counterclaims against Sayers and the price agreed at settlement was simply renegotiated. The court said the settlement did result from the counterclaim due to the language of the policy and the mention of “mediation … proceedings” in the definition of claim.

On the reasonableness of the settlement, the court drew on existing authority and – taking into account the legal advice provided by counsel to Sayers in relation to its prospects of success and any associated risks in the absence of a settlement – found that the settlement was reasonable in all the circumstances.

This case is a reminder for both insureds and insurers that the rights and entitlements under any insurance contract are enshrined in the language of the policy itself. All interpretation must start with a careful examination of the actual language adopted.

Nuix v Berkshire Hathaway Specialty Insurance Company

Nuix held a public offering of securities insurance policy and a directors and officers liability policy. Australian Securities and Investments Commission investigations and class actions following Nuix’s initial public offering led it to seek indemnity under both policies.

The company reimbursement (side B cover for reimbursement to Nuix for claims against insured persons) retention under both policies was $2.5 million, and claims under the securities claims (side C cover for claims against Nuix) attracted a $10 million retention.

Nuix first made a claim under the policies under side B. Later, it submitted a claim under side C, arising from the same circumstances.

The policy language provided that – and the parties to the dispute agreed that – the related insurance claims were to be aggregated so they were considered a single claim under the policies. One retention would therefore apply. The parties disagreed on which retention applied, and this was the issue remitted to the court for determination.

The court held that the $10 million side C retention applied. In reaching this decision, the court made the following observations: the high retention reflects the reality that side C coverage exposes the insurer to substantially greater risk than side B coverage (because of the significant risk associated with securities class actions); applying the higher retention was more consistent with the parties’ intentions when they signed the policy; conduct that gives rise to a side C claim will often also give rise to a related side B claim.

If the court had found the lower retention applied, the higher retention would almost never apply; and making the retention dependent on which side or limb of cover was claimed first rather than the type of cover led to uncertainty and would create a situation with “no commercial logic”.

This case confirms that the retention to be applied under a D&O policy is not necessarily tethered to or determined by the retention that applies to the limb of the policy that is first triggered, relied upon or claimed upon. The intention of the language in the policy is paramount and the retention that ought to apply will be the retention that reflects the higher risk borne by the insurer.

Following the ruling, Nuix has lodged an appeal, so stand by for the next chapter.