Commonwealth of Australia v Vero Insurance Limited [2014] HCATrans 136 (20 June 2014)

Last Updated: 24 June 2014

[2014] HCATrans 136

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S309 of 2013

B e t w e e n -

COMMONWEALTH OF AUSTRALIA

Applicant

and

VERO INSURANCE LIMITED ACN 004 297 807

Respondent

HAYNE J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 20 JUNE 2014, AT 9.48 AM

Copyright in the High Court of Australia

MR A.S. BELL, SC: If it please the Court, I appear with my learned friend, MR R. MANSTED, for the applicant. (instructed by Ashurst Australia)

MR D.F. JACKSON, QC: If the Court pleases, I appear with my learned friends, MR G.G. McARTHUR, QC, and MR P.D. HERZFELD for the respondent. (instructed by Hunt & Hunt Lawyers)

HAYNE J: Yes, Mr Bell.

MR BELL: Your Honours, any insured, whether the insured be the Commonwealth, a company or an individual, should be able to ascertain with clarity and ease what is covered under a policy of insurance and what is excluded. Now, your Honours, the terms of the relevant policy - your Honours have been provided with some loose extracts, but it is also relevantly set out in Justice Jagot’s decision from page 63, but if your Honours have the loose extracts, here the relevant part of the policy, turning to the second page, page 20, is:

Property loss, destruction or damage –

“Property”, your Honours will see, was expressly defined as meaning:

the Fund Member’s real and personal property but excluding watercraft –

of a particular size and aircraft. Those two exclusions there are said expressly. The term “property” is also defined on the last page of the extract, page 34, your Honours, as:

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

Now, in addition to those express exceptions from cover, or exclusions from cover, there were stated expressly on page 29 of the policy a raft of general exclusions and your Honours will see them set out there under a prominent heading “General exclusions”, and a subheading, “Excluded events”. So a reader of the policy would know thus far that is has cover for damage to real and personal property except watercraft and aircraft, but not cover with respect to the raft of excluded matters set out on page 29.

One would also see an express statement on page 21, the third page of the extract, an express and emboldened statement as to what the insurer will not pay for. Now, nowhere in those statements to which I have drawn your Honours’ attention is there any exclusion mentioned expressly or by implication of coverage for damage to land.

One would have expected such an exclusion to be referred to, but rather, as the majority has found, a major qualification on carve out, major in the context of the definition of “property”, all real and personal property, an exclusion has been found derived by implication from the word “item” in what is typically referred to, if your Honours go back to page 20, the second page of the extract, as, in insurance jargon, the measure of indemnity clause or the basis of settlement clause, that is to say the clause beginning after the word “then”, so one has the subject of the coverage, “Property loss, destruction or damage” on the first half of that page, and then one has the measure of indemnity or basis of settlement clause.

KIEFEL J: I do not know why you refer to it as an exclusion. It identifies, does it not, the property which is to be the subject of cover?

MR BELL: Well, in our submission, no, the property which is to be the subject of cover, your Honour, is identified in the opening terms of the clause. What the measure of indemnity clause is designed to indicate is that there will be in this policy indemnity to replace but not to improve the damaged property. In other words, one always has in insurance a question, is this a replacement value policy or is it a policy which may leave the insured in a better position by the replacement of new for old, and that is what the measure of indemnity clause is directed to doing. There has been spelt out on the word “item”, there has been spelt out the word “item”, what is in substance a major exclusion.

HAYNE J: Well, you describe it thus, no doubt for forensic purposes. Do you accept that you cannot salami slice the policy, you have to read it as a whole?

MR BELL: Your Honour, we accept that, but we point to two important principles of interpretation which we say were not given proper attention by the majority. Can I identify those two principles? The first is that any derogation or exclusion from cover needs to be clearly and unambiguously expressed and, your Honours, we would respectfully submit that that statement of principle is a variation or a corollary of a statement made by Sir Owen Dixon which is set out in the application book, if I could take your Honours to page 190, in the decision in Halford v Price (1960) 105 CLR 23, and set out relevantly in paragraph 2 of our reply submissions. Now, there his Honour the Chief Justice said this in the context of an insurance policy. It is:

contrary to principle to attempt to work out a restrictive implication unless the context and the subject matter supplied convincing evidence of intention.

Now, we submit we are in the territory of the majority in the Full Court having derived by implication a restriction on the prima facie scope of cover denoted by the words “all real and personal property except aircraft - - -

KIEFEL J: You say “by implication” but they are actually giving effect to the words of the policy, are they not?

MR BELL: Well, they are - - -

KIEFEL J: It is just that they are putting a focus on one part of it to derive a meaning to reflect upon other parts of the policy.

MR BELL: Yes, but the functional effect, your Honour, is to exclude cover for land and when one is in the territory of insurance policies exclusions fall very - - -

KIEFEL J: It is not an exclusion. It is defining the ambit of the cover. It is quite a different thing.

MR BELL: Well, with respect, your Honour, there is a very important concern of public policy underpinning this submission which is this, that in a socially vital area of insurance an insured, whether it be the Commonwealth or an individual, ought be able to see the scope of cover by looking at (a) what is expressly stated to be covered, and (b) what is expressly stated to be excluded.

Now, one can say this is just construction of the word “item” in a basis for settlement clause, but as her Honour Justice Jagot said, in our respectful submission, with great potency in paragraph 112, which your Honours will see in the application book at 78 to 79, (a):

First, the exclusion of land from the scope of the property the subject of the indemnity gives the text below “the actual replacement . . . an extraordinary amount of work to do. It seems to achieve by a most indirect and obscure means that which was done directly for two items of personal property in the definition of property itself.

Then at the end of (b), referring to the express exclusions and the fact that the drafter of the policy had expressly, in a number of places, expressly excluded or accepted cover, her Honour said:

it is an undoubtedly strange way for the drafter to have achieved that result.

Now, the tension here is between, on the one hand, the policy which I do not attack, namely that one reads a contract as a whole. I do not attack that, but I do say that there is another principle of interpretation which was not given proper notice or attention by the Full Court and that is what is put by Sir Owen Dixon in the context of insurance, namely that one needs to point to convincing evidence from context - - -

KIEFEL J: Mr Bell, can you point to any aspect of the policy which indicates that land is contemplated as property?

MR BELL: Absolutely, your Honour.

KIEFEL J: Apart from the word “real property”, which has various connotations?

MR BELL: Well, your Honour says apart from the words “real property”. As her Honour Justice Jagot said in paragraph 103 the policy encompasses all real property of which the most obvious and common kind is land. Now, that is the first answer.

KIEFEL J: That is in real property law, but it is not in insurance law. There would not be too many policies in the world which relate to land that are not specifically drawn.

MR BELL: Your Honour should not make that assumption at all.

KIEFEL J: This is a sui generis policy, though, is it not?

MR BELL: But, your Honour, this is a policy which covers, for example, as her Honour Justice Jagot pointed out, contamination, contamination by - - -

KIEFEL J: As an exclusion.

MR BELL: No, but only certain types of contamination. That was the point.

KIEFEL J: Asbestos.

MR BELL: Yes.

KIEFEL J: Which would be attributable to a structure.

MR BELL: No, but it is much more than asbestos, your Honour. It covers pollution. One sees that on page 21. It covers sudden and accidental pollution, so one sees - - -

KIEFEL J: As an exclusion.

MR BELL: No, no:

but

we will not pay for

. . .

pollution, unless it is sudden and accidental -

So, by implication, by clear implication, sudden and accidental pollution is covered and her Honour pointed out one would expect ordinarily that to apply to land.

KIEFEL J: But then it immediately brings to mind, pollution of what?

MR BELL: Pardon?

KIEFEL J: Pollution of what.

MR BELL: Yes, quite, but it is perfectly natural, in our submission, to speak of pollution affecting land. It is the most obvious target of the effect of pollution. So, too, in our respectful submission, if one goes to – there is an exclusion for radiation and contamination by radioactivity, but by implication no exclusion for other forms of contamination. It is only certain types of contamination. Now, what is pre-eminently the subject of contamination, in our respectful submission, it is land. So there are strong textual indications.

The nub of it is this, your Honour. The majority found that there was some ambiguity and they resolved the ambiguity in a particular way, but in our submission, applying the dictum of Sir Owen Dixon and, in a sense, the spirit of that statement of principle and statutory interpretation, one would need rather more than ambiguity. One needs very clear evidence of an intention to cut down the scope of cover by matter of implication or, here, by matter of interpretation, in other words, by recourse other than to express exceptions and express exclusions and one just does not have this here.

KIEFEL J: Now, regardless of the text and construction of the policy, this policy is not one available generally in the marketplace, is it, so what is the question of public interest apart from Sir Owen Dixon’s statement which you keep referring to?

MR BELL: Well, and, with respect, for good reason.

KIEFEL J: Well, that is your view.

MR BELL: Well, it is a very important proposition applicable to insurance law. But, your Honour, the answer to your Honour’s question is this. There are four reasons. That statement of principle is one which has obviously fallen from a tension and needs to be, in our respectful submission, firmly reasserted by this Court. Similarly, there is an allied principle that measure of indemnity clauses are generously construed, and we have referred to that in our written submissions, and the decision of the majority’s intention with that principle.

Now, those are two matters which are of importance beyond this particular policy. They do not turn on this particular policy, but this case provides a vehicle for the important re-emphasis of that, just as, may I say, the decision in Toll v Alphafarm, which - - -

KIEFEL J: But these are well-established principles and that is part of your submission. You say they have fallen by the wayside. You mean in this one case and with respect to this one policy.

MR BELL: But, your Honour, let me take you to the history of Toll v Alphafarm, a very important contract decision of this Court, on what one may have thought was an extremely well-established principle, L’Estrange v Graucob, and yet it was not faithfully applied and the Court saw it as appropriate in that case, a one-off contract case, to say this is wrong, there is a departure from established principle and it is important that the Court make it clear what the relevant principles are.

KIEFEL J: But the interests of justice in that case required it. Why do the interests of justice require it in relation to something that occurred, what, 15 years ago?

MR BELL: Your Honour, the timing point is, with respect, a completely illegitimate furphy because this case is brought within limitation. It is not open to our friends to, in a sense make an ad hominem style attack on this application. It has been brought in time and that is the end of the matter. The fact that it was brought late in the limitation period should not bear otherwise on the merits of the application. But Toll v Alphafarm, in terms of the interests of justice, it was a one-off contract involving an exclusion clause.

But the points of principle arose and were important, just as in the Court’s recent decision in Electricity Generation Corporation v Woodside. That was a one-off bespoke contract, but the Court took that on on the meaning of reasonable endeavours on the basis that it is important for the High Court from time to time to deal with basic contract law and principle, and here, insurance law.

Now, other aspects of public importance arise in this way, your Honour. It is not good for insureds - it is not going to encourage the giving of insurance and the faithful honouring of insurance policies if what are functional exclusions, and I use that word in the way I have used it before, what in fact operate to have the effect of excluding cover, are found embedded in words used in a policy in unfamiliar locations, not in the exclusion section, not in the express exception in the coverage clause, but embedded and by implication or construction from a word in a clause, a basis of settlement clause, which the authorities say ought be liberally construed.

HAYNE J: It is very much to be doubted I would have thought, Mr Bell, that if this Court granted leave that it would be offering general advice to the insurance industry about the form in which its policies are to be drafted.

MR BELL: We do not seek that, your Honour, but just as the Court, by its very clear and decisive judgment in Toll v Alphafarm reaffirmed what one might have thought was well-established principle, and did so in a clear way in a joint judgment as I recall, that has an effect, because, your Honour, this Court does not need to spell out how insurance policies are to be drawn but the market takes notice obviously and correctly of what this Court says about insurance and policies.

Now, insurance policies are peculiar in this sense. Although they all differ in their terms they typically follow a structure. The structure is subject matter of cover. Here we had property, all real and personal property, with two exceptions for aircraft and watercraft. Then one has a basis of settlement and then one has express exclusions and, for an insured, whether the Commonwealth or an individual, wanting to know if they are insured, either before they enter into the policy or when a catastrophe has occurred, they ought to be able to look to the scope of cover to say, well, I have got cover for property, but not aircraft, so that is good. I have got damage to land; that is real property. That is good. Aircraft is excluded, I understand that, this is not aircraft, and there is a whole section with bold headings saying “exclusions”. I look at that and land is not excluded there.

Now, an insured ought to be able to proceed on that basis that, well, if real property is covered and is not excluded that is my cover. Your Honour, it does not meant that this Court will need to spell out a pro

forma precedent of insurance policy, but your Honours should, in my respectful submission, grant special leave and in the judgment make a clear statement to the effect that I have articulated that in insurance policies any derogation or exclusion from cover needs to be clearly and unambiguously expressed.

That is not a frightening proposition. That is a sensible – that is a sound and sensible statement of principle which should inform insurers, should inform the market. The message should be given by the articulation by reference to Halford v Price and other decisions, a statement should be made to insurers that if you want to exclude cover you must do so clearly.

Now, this is a case where there was no such clear exclusion of cover. That statement of principle does not do damage to the need which we accept to interpret a policy as a whole. It does not do damage to that, and I do not assault that principle. But I do say that the principle of the kind I articulated is a sound one, can be clearly expressed and, your Honours, is socially important because otherwise one has a decision of the Full Court which says to the market, exclusions can be embedded in surprising places.

HAYNE J: I see that the time is gone, Mr Bell.

MR BELL: If it please the Court.

HAYNE J: Is there anything you need to add?

MR BELL: No, they are our submissions, your Honour.

HAYNE J: Thank you.

MR BELL: It is a short point, I would add, to the extent that is relevant, your Honour, even with the notice of contention.

HAYNE J: We will not trouble you, Mr Jackson.

No disputed question of principle would fall for consideration if special leave to appeal were to be granted in this matter. The policy of insurance underpinning the issues was a bespoke policy and its proper construction was to be decided by reference to its particular terms. It is not shown to be in the interests of justice generally or in this particular case that there be a grant of special leave. Nor are we persuaded that the applicant would enjoy sufficient prospects of success in an appeal to warrant a grant of special leave. Special leave to appeal is refused with costs.

AT 10.10 AM THE MATTER WAS CONCLUDED