I        Can you breach an insurance policy before being aware of a claim?

The short answer is yes.  In a split decision, the New South Wales Court of Appeal recently found a cause of action for breach of an indemnity policy accrues at the time of an insurable event, in this case property damage. In Globe Church Incorporated v Allianz Australia Insurance Ltd [2019] NSWCA 27, Bathurst CJ, Beazley P, and Ward JA found a contract for indemnity insurance imported an obligation to ‘hold harmless’ an insured from property damage and, accordingly, once damage was suffered, the contract was breached and a cause of action arose. The Majority affirmed the approach of English courts, and intermediate Australian courts, in New South Wales. In contrast, the Minority, consisting of Meagher and Leeming JJA considered the arguments of the Insurers and the approach of the Majority to be contrary to the clear terms of the contract, and based on an incorrect appreciation of insurance law jurisprudence and the history of this area of law.

II           After the flood

The Plaintiff, Globe Church, owned church property at Gateshead, near Newcastle in New South Wales. Between 8 June 2007 and 31 March 2008, Globe Church alleged rainwater and flooding caused damage to the pier footings of the church and its car park.

In 2009, Globe Church made claims against both its insurers, Allianz (insuring for 60% of the risk) and Ansvar (insuring for 40% of the risk) (together, ‘the Insurers’), for indemnification for the damage to the property, for lost income resulting from disruption to its business, and for professional fees incurred. The Insurers denied coverage of the claim in 2011.

Globe Church claimed this denial of coverage constituted a breach of its insurance (‘the 2008 Policy’) and commenced proceedings on 4 November 2016, in the Supreme Court before Davies J. This was approximately 5 years after the denials of coverage but more than 8 years from the last date of rainwater damage. The Plaintiff sought a declaration of breach of contract and specific performance of the 2008 Policy, and further or in the alterative, damages for breach. In response, the Insurers alleged the claims against them were statute barred by reason of s 14(1) of the Limitation Act 1969 (NSW), being brought six years after the cause of action initially arose.

In light of this contention, Davies J removed the following questions to the Court of Appeal for its consideration before addressing the other issues raised in the proceedings. The questions for the Court of Appeal’s consideration were:

(a)  In respect of any of the alleged damage to the Properties that occurred between 8 June 2007 and 31 March 2008, which (if any) of the plaintiff’s claims in these proceedings in respect of the 2008 Policy accrued at the time of alleged damage, for the purposes of s 14(1) of the Limitation Act 1969 (NSW)?

(b)  In light of the answer to (a), which (if any) of the plaintiff’s claims in these proceedings in respect of the 2008 Policy for that damage are maintainable?

III         The Arguments

The Insurers argued that a cause of action for breach of contract under an indemnity insurance policy for property damage accrues upon the happening of the damage, absent contrary terms in the contract. Thus a cause of action could arise before Globe Church issued a claim as such a claim was not a condition precedent under the 2008 Policy. The Insurers argued their obligation was to hold Globe Church harmless against loss, hence, at the moment the property damage occurred the Insurers had breached their obligations.

In support of this argument, the Insurers relied on a line of English cases and Australian intermediate appellate authority. Though several of the cases relied upon were not indemnity cases, the Insurers argued the principle that a cause of action arose upon the happening of damage helped give consistency across various insurance policies.

The Defendants accepted that if their argument was correct an indemnifying insurer would not be aware they were in breach of the contract at the time the limitation period began to run, but they submitted there was no general principle that knowledge of breach is essential for a cause of action. Further, they submitted that if their argument wasn’t accepted, the insurer could possibly be prejudiced as the insured would be able to determine when the limitation period began, and that there would be uncertainty regarding when the cause of action arose.

In response, Globe Church’s argument followed the dicta of Giles J in Penrith City Council v Government Insurance Office of New South Wales (1991) 24 NSWLR 564, being that there is a ‘distinction between the promise of an insurer to indemnify and the breach of that promise’,[1] and that only the failure to indemnify will result in breach. It further contended that the 2008 Policy anticipated damages being incurred over time, precluding the cause of action from arising at the moment of damage. Globe Church argued that in circumstances where there is no time limit stipulated, the law implies a term allowing insurers a ‘reasonable time’ to comply with their obligations before they are in breach of an insurance policy.[2]

More generally, Globe Church relied on policy positions to support its argument. It submitted that if the cause of action arose at the time of the damage, then losses that flowed from the initial damage occurring more than six years after the initial damage would be statute barred, causing hardship to insureds. Further, Globe Church argued the Insurers’ approach encouraged litigation, as insureds would be incentivised to commence proceedings to avoid their claims being statute barred.

IV          The Court’s Decision

The Court delivered a split opinion, with the Majority and Minority differing in their analysis of both the authority and the 2008 Policy.

A            The Majority

The Majority read the 2008 Policy as requiring the Insurers to hold Globe Church ‘harmless against loss’ or ‘make good a loss’ immediately upon the occurrence of the loss. It was not accepted by the Majority that there was any obligation within the 2008 Policy for the Insurers to pay the reimbursement within a reasonable time. This was because there were no express terms in the 2008 Policy that required payment within a reasonable time. Further, although some terms did anticipate a sequence of events before the insured was paid, such as Globe Church reporting damage, this did not mean that the cause of action for a failure to hold Globe Church harmless did not arise immediately upon the happening of the harm. The mere fact the full amount to be indemnified could not necessarily be ascertained at the time of the damage did not mean a cause of action arose at that moment. Also important to the Majority’s reasoning was business efficacy, which the Majority judges did not consider was served by the implication of a term requiring payment within a reasonable period.

On the Majority’s reasoning, as the 2008 Policy required Globe Church to be held harmless, immediately upon harm occurring this term had not been fulfilled, the Insurers were in breach of the 2008 Policy and a cause of action arose.

The Majority then turned to the authorities the Insurers and Globe Church relied upon. In particular was the question of whether the Court of Appeal in CGU Insurance v Watson [2007] NSWCA 301 had endorsed Giles J’s dicta in Penrith City Council regarding when a cause of action arose under an indemnity insurance policy. Specifically, Giles J’s judgment in Penrith City Council considered that in professional liability cases a cause of action does not accrue until an insured’s liability to a third party is established. The Majority cautioned that any comments made in that judgment that liability only arose upon notification by the insured were obiter. They also held that CGU v Watson did not endorse the obiter comments in Penrith City Council, as the Court of Appeal, had that wished to adopt the position of that obiter, would have made such intention clear.

A broader consideration of the intermediate appellate authority across Australia and in the United Kingdom convinced the court of its position. These judgments were those of Cigna Insurance Asia Pacific Ltd v Packer (2000) 23 WAR 159 decided in the Full Court of the Supreme Court of Western Australia, and the decision of the Full Court of the Supreme Court of Tasmania in Associated Forest Holdings Pty Ltd v Gordian Runoff Ltd [2015] TASFC 6. While neither of these were property indemnity policies, both decisions indicated a cause of action for breach of an insurance policy arose prior to the date of notification under those policies. Hence, while they did not directly support the finding that a cause of action for breach under a property indemnity policy arose upon the happening of damage, they were consistent with such a finding.

The Majority also considered the position in the United Kingdom and several United Kingdom cases. English law has followed the proposition that a cause of action for breach of an indemnity policy arises immediately upon the happening of damage. Primarily, in Firma C-Trade SA v Newcastle Protection and Indemnity Association (The Fanti) [1991] 2 AC 1, Lord Goff held that an indemnity policy is ‘a promise to hold the indemnified person harmless against a specified loss or expense … once the loss is suffered or the expense incurred, the indemnifier is in breach of contract’.[3]

While the Majority acknowledged the English position and the doctrine of holding an insured ‘harmless’ have been criticised by academics, on their reading of the authorities and the policy, the approach was the correct one. Hence, the Majority held that breach of the contract occurred immediately upon the happening of damage, unless the terms of the contract indicated otherwise, something the parties could negotiate at its inception.

B            The Minority

The Minority, consisting of Meagher JA and Leeming JA, delivered separate judgments though Leeming JA largely concurred with Meagher JA’s reasons. In summary, Meagher JA rejected the Insurers’ arguments because they did not reflect the language of the 2008 Policy and did not give effect to the ‘sensible commercial expectation of the parties to such a contract’. Meagher JA also considered the authorities to be against the Insurers, specifically the High Court’s judgment in CIC Insurance v Bankstown Football Club Ltd (1997) 187 CLR 384, and that none of the intermediate appellate court authorities dealt with property indemnity insurance. As a final point, Meagher JA considered the English authorities relied upon by the Insurers did not support their arguments either.

Meagher JA first addressed the construction of the insurance contract, holding that it must be given an objective, business-like interpretation. His Honour began with the construction of the insuring clause and Basis of Settlement clause. His Honour considered these clauses in the 2008 Policy to be no different to those in the contract considered in CIC Insurance v Bankstown Football Club. Guided by the findings in that case, His Honour held that the plain language of the 2008 Policy was to ‘indemnify by paying a sum of money’ and that there was no obligation to ‘hold harmless’. Citing Dixon J in York Air Conditioning and Refrigeration v The Commonwealth (1980) 80 CLR 11 as authority for the proposition that in the absence of an express provision as to performance the law implies a term requiring reasonable time for performance, Meagher JA held that the 2008 Policy did not require payment of the indemnification moneys immediately upon the happening of damage. This finding was bolstered by the fact the 2008 Policy’s terms implied there would be a period of time between the damage being sustained and any payment of money. This could be seen in provisions requiring notice to be given to the Insurers and a Basis of Settlement clause that outlined steps to be taken before a final payment, other clauses also allowed the payment amount to be varied over a course of time as works were conducted and the extent of losses were uncovered. Hence, on Meagher JA’s reading of the 2008 Policy, the terms of the contract were inconsistent with the arguments of the Insurers and the conclusion of the Majority.

Meagher JA continued his judgment with an analysis of various authorities relied on by the parties, starting with CIC v Bankstown Football Club. This case involved the liability of CIC to pay an indemnity after several fires damaged a building owned by the Bankstown Football Club. The High Court held that under that contract an election to make good the loss had to be made within a reasonable time. It was only after this reasonable time had passed that CIC had breached its obligations by not paying and a cause of action arose. Turning his attention to the intermediate authorities of Cigna v Packer and Associated Forest Holdings v Gordian the Insurers had relied on, His Honour found them to be irrelevant as they did not deal with property indemnity insurance. Cigna dealt with a personal accident policy and not indemnity, while Associated Forest Holdings effectively dealt with an excess of loss reinsurance policy.

Finally, Meagher JA considered the British authorities. His Honour dismissed many of these also, as being based on inconsistent reasoning. On His Honour’s findings, at their highest, the British cases were at best authority for the proposition that the fundamental issue was the construction of the policy. Having found the 2008 Policy did not require the Insurers to immediately indemnify Globe Church, the British authorities did not support the Insurers’ arguments.

Ultimately, His Honour concluded none of Globe Church’s claims accrued at the time of the damage in 2007 and 2008, but that on the evidence before him he was unable to reach a concluded view as to when exactly those claims arose.

Leeming JA penned a short concurrence to Meagher JA’s judgment. Leeming JA also started with the construction of the contract, holding it required a business-like interpretation, a consideration of the language used, and the commercial circumstances of the parties. His Honour considered the wording of the 2008 Policy clearly precluded the arguments of the Insurers, as the contract contemplated a notification would be given to the Insurers before they paid an indemnity. In Leeming JA’s opinion, ‘it may fairly be said to flout business commonsense to conclude that an insurer breaches a promise which it cannot perform’. [4] Leeming JA also considered the Australian authorities of Penrith City Council, CGU v Watson, and CIC v Bankstown Football Club to support his position, and none of the principles that supported the arguments of the Insurers to be binding upon the Court of Appeal.

Leeming JA conducted an analysis of the process of law reform, and the evolution of statute, equity, and common law that had occurred to give rise to the apparent requirement of indemnity contracts to ‘hold harmless’ the insured. In doing so, he concluded the term described the capacity for the law to require an insurer to pay indemnity without the insured first having to pay, rather than a stipulation that an insurance contract would be breached immediately following damage.

V            Conclusion

The decision of Globe Church v Allianz is a finely balanced one that deals an important area of insurance law. By a finding of three to two, the Court of Appeal found that property indemnity insurance contracts import a requirement that insurers hold their insureds ‘harmless’ against loss, with the result that damage suffered to their insureds is a breach of the contract and a cause of action arises. The decision seemingly brings Australian jurisprudence in this area in line with the much-criticised position in England, a potentially desirable outcome given the size of the insurance market in London. Harmonisation of the insurance regime between England and Australia is seemingly positive.

This decision is something of a mixed bag for insurers. On the one hand, the Court’s judgment results in a genuine liability for insurers, leaving them open to a curial finding of breach of duty immediately upon the happening of damage under an insurance policy. The potential for insurers to be immediately sued under their policies should not be ignored, however one questions how common this will be in reality. On the other hand, the decision benefits insurers by allowing the cause of action to flow from an earlier date, ultimately reducing their exposure to delayed claims.

However, it may be questioned whether the decision is the correct one in light of the thorough and forceful dissents of the Minority judges. In particular, the doctrine of an indemnity insurer holding their insured ‘harmless’ has attracted substantial opposition and criticism, being called a ‘legal fiction’ as the Minority points out. The Majority found an obligation to hold ‘harmless’ in the 2008 Policy, despite this language not being used in the contract, while simultaneously ruling out a ‘reasonable period’ for payment, something the Minority had no trouble finding on the terms of the policy.

In light of this decisions it is possible we will see changes to policy wordings to give both insurers and insureds greater clarity around when a cause of action will arise.  This will give both parties greater confidence regarding their obligations should an indemnified event occur.

[1] At [74]

[2] Relying on Foran v Wight (1998) 168 CLR 385.

[3] At [35]–[36].

[4] At [287].