The limitation period for a claim under an ‘indemnity’ property insurance policy has been held by the NSW Court of Appeal to commence from the date when the damage or loss occurred, rather than from when the insurer refuses or fails within a reasonable time to indemnify for the claim (as other authorities have held).

Background

Globe Church Incorporated made a claim against Allianz Australia Insurance Ltd and Ansvar Insurance Ltd (the Insurers) under an Industrial Special Risks insurance policy for property damage to a church building in Gateshead, NSW and its contents.

The policy provided cover for property damage occurring in the period 31 March 2007 to 31 March 2008. The damage was alleged to have occurred between 8 June 2007 and 31 March 2008 and to comprise structural damage to the church building resulting from rainwater and flooding. Globe Church also alleged that it incurred additional costs and consequent business interruption losses from no later than September 2009.

The insuring clause of the policy relevantly provided:

… the Insurer will indemnify the Insured against Damage occurring to Property Insured during the Period of Insurance and shall provide the additional cover referred to in Clause 3 up to the value of the Limit(s) and Sub-Limit(s) of Liability referred to in the Schedule …

The policy also provided cover for additional costs and business interruption losses which resulted from the damage.

Globe Church first made its claim under the policy on 29 September 2009. Liability was denied by Ansvar on 5 April 2011 and by Allianz on 30 September 2011.

Globe Church commenced proceedings against the Insurers on 4 November 2016 and claimed damages for breach of contract on the grounds that the Insurers’ denials of indemnity (or failures to indemnify) were in breach of the policy.

Under s 14(1) Limitation Act 1969 (NSW), the limitation period for proceedings for breach of contract is six years from the date on which the cause of action first accrues, namely six years from the date of breach.

The Insurers contended that Globe Church’s causes of action for breach of the policy for its property damage claim accrued at the time the damage occurred and, for its claims for business interruption and professional fees, at the time when those losses first occurred. The Insurers therefore contended that all of Globe Church’s claims were statute-barred, as the proceedings were commenced more than six years after the damage (and losses for business interruption and professional fees) first occurred.

Globe Church contended that its causes of action for breach of the policy only accrued once the Insurers denied indemnity (i.e. refused to pay in breach of their obligation) or, alternatively, after a reasonable time to indemnify had lapsed.

Decision

The majority of NSW Court of Appeal (Bathurst CJ, Beazley P and Ward JA; Meagher and Leeming JJA dissenting) held that:

1. the Insurers’ obligation under the policy was to indemnify Globe Church against the loss as soon as the property damage arose (and to provide the additional cover and indemnity against consequential loss once those losses arose). Consequently, Globe Church’s cause of action for breach of the policy arose at the time the property damage occurred;
2. the making of a claim by Globe Church was not a pre-condition to the Insurers’ liability arising under the policy and there was no implied term for the Insurers to indemnify or pay money within a reasonable time of demand.

The majority stated that:

Absent a provision in an insurance policy that makes lodgement of a claim a condition precedent to liability, the concept of a promise to indemnify (to make good the loss or to hold harmless against loss) in the context of a property damage insurance policy is such that the promise is enlivened when the property damage is suffered. … it is at the point of property damage that the insured has not been held harmless against the loss and (leaving aside any defences that might be raised on such a claim) would be entitled to sue to enforce the promise to indemnify.

The majority therefore found that all of Globe Church’s claims for damages under the policy were statute-barred and could not be maintained. In making these findings, the majority observed that:

1. as an insurer’s obligation to indemnify arose immediately upon the property damage occurring, this could be before it was even notified of the damage or the claim and therefore it could be in breach of the policy without knowing it. The majority did not however consider this detracted from their conclusion as to when the obligation, and cause of action, arose;
2. a claim for breach of the policy could accrue before the final quantum of damages is or could be determined. The fact that the amount payable cannot be calculated at the time the obligation to indemnify arises did not mean the cause of action has not accrued;
3. their decision was consistent with the position in the UK (referring to authorities including Callaghan and The Fanti in which UK Courts similarly characterised an insurer’s obligation under an indemnity policy) and Australian intermediate appellate authorities of Cigna Insurance Asia Pacific Ltd v Packer (a claim under a personal accident policy for permanent total disablement) and Associated Forest Holdings Pty Ltd v Gordian Runoff (an employer’s claim under a workers compensation policy for payments made to an injured employee). In Cigna and Gordian, it was held that the causes of action accrued upon the relevant event occurring, being permanent total disablement and the incurring of carer expenses respectively. The majority distinguished other Australian authorities which came to a different conclusion, including CGU v Watson, Penrith City Council v Government Insurance Office of NSW and CIC Insurance Limited v Bankstown Football Club Limited.

Meagher and Leeming JJA delivered strong dissenting judgments on the Insurers’ contentions (and the majority decision) that they:

1. did ‘not give effect to the language of the insuring clause, or take account of the nature of the policy as one insuring against property damage and the sensible commercial expectations of the parties to such a contract’. Leeming JA remarked that ‘it may fairly be said to flout business commonsense to include that an insurer breaches a promise which it cannot perform [i.e. to indemnify immediately upon the damage or loss occurring], to the certain knowledge of both insurer and the insured’;
2. were contrary to the conclusion in CIC Insurance v Bankstown Football Club which involved a property damage indemnity policy on substantially the same terms and in which the High Court of Australia stated that the fundamental obligations of the insurer under the policy were to acknowledge liability and pay the Club within reasonable time of the receipt of the Club’s claim; and
3. the authorities of Cigna and Gordian (as followed by the majority) should not be followed as they did not involve similar property damage indemnity policies.

Comment

The NSW Court of Appeal’s judgment will likely come as some surprise to both insurers and insureds, given the earlier Australian authorities supporting that the cause of action under an insurance policy did not arise until the claim was refused (or not paid within a reasonable time). Further, it has the somewhat unusual consequence that an insurer under a property damage indemnity policy could be in breach of that policy if it fails to indemnify immediately upon an insured event, even if it has not been notified of a claim.

The judgment has the further consequence that claimants under property insurance policies providing ‘indemnity’ will have a shorter timeframe in which to commence court proceedings for a claim under the policy, being six years from the date of damage (or losses) occurring.

Although the NSW Court of Appeal appears to have limited the application of the judgment to indemnity insurance policies for property damage, the judgment might impact upon the interpretation and operation of other ‘indemnity’ policies. Given the narrow margin, strong dissents and importance of this issue, there would seem to be prospects that the High Court will be considering this issue shortly.