Timing is everything Accrual of a cause of action under an indemnity insurance policy

2. Timing is everything Accrual of a cause of action under an indemnity insurance policy Damian Clothier QC| Sam McCarthy | Sophie Gibson 23 July 2019

3. Breaches of professional duty and contingent loss – special problems of timing Sam McCarthy

4. Overview Category 1: did the breach of duty expose the client to no more than a contingent loss? Category 2: did the breach of duty expose the client to a contingent loss, the risk of which has an immediate effect on the value of existing rights? Category 3: did the breach of duty result in the acquisition of an inferior “package of rights”, or the acquisition of an asset at an overvalue?

5. Basic principles • With economic loss, as with other forms of damage, there must be actual as opposed to prospective loss: Wardley v Western Australia (1992) 175 CLR 514 at 531; Hawkins v Clayton (1988) 164 CLR 539 at 561, 587-588, 599-601. • In negligence, the cause of action accrues when measurable damage is first suffered even though further damage continues to accrue: Wardley at 531; Commonwealth v Cornell [2007] HCA 16. • It is relevant to consider the measure of damage applicable to the wrong in question: Law Society v Sephton & Co [2006] AC 543 at 562.

6. Category 1: exposure to no more than a contingent loss • Where professional negligence exposes a client to no more than a contingent loss, the cause of action does not accrue until actual loss is suffered. • A contingent loss may include a liability that is contingent in the sense that that the plaintiff may never be called upon to pay. - Wardley v Western Australia (1992) 175 CLR 514 - Law Society Co v Sephton [2006] AC 543 - Murphy v Overton Investments (2004) 216 CLR 388

7. Category 2: risks having a present effect on the value of existing rights • If, standing alone, a contingent risk is not actual damage, the position may be different where exposure to the risk causes an ascertainable (but not necessarily ascertained) diminution in the value of existing rights. - Forster v Outred & Co [1982] 1 WLR 86 - Moore & Co v Ferrier [1988] 1 WLR 267 at 280 (A- D) c.f. Bodycorp Repairers Pty Ltd v Holding Redlich [2018] VSCA 17. - Wardley at 531.

8. Category 3: “defective transactions” • Scenario 1: A solicitor advises a client in respect of a proposed transaction. Due to the solicitor’s negligence, the client acquires an inferior ‘package of rights’ under the transaction than the client would have acquired on the counterfactual whereby the solicitor did not breach his or her duty. The transaction occurs outside the limitation period but exposes the client to a contingent loss which occurs inside the limitation period. - Winnote v Page [2006] NSWCA 287 - Forster v Outred [1982] 1 WLR 86 - Gillespie v Elliot [1987] 2 Qd R 509

9. Category 3: “defective transactions” • Scenario 2: A solicitor negligently advises a client about a proposed transaction to purchase a lot in a development. The client pays more for the lot than it is worth. The transaction exposes the client to risks which materialise and cause substantial losses. The transaction occurred outside the limitation period. The subsequent losses are within time. - D'Agostino v Anderson [2012] NSWCA 443 - Scarcella v Lettice (2000) 51 NSWLR 302 - Sullivan v Teare [2011] 1 Qd R 292 c.f: - Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358 [109] – [117] - Henville v Walker (2001) 206 CLR 459

10. Infringement of distinct economic interests at different times • Economic loss may take a variety of forms. The question of accrual of the cause of action depends upon the precise economic interest infringed and the nature of the interference to which it is subjected: Wardleyat 527. • What if, as a result of a breach of professional duty, multiple economic interests are infringed at different times, both inside and outside of the limitations period? - D'Agostino v Anderson [2012] NSWCA 443 - Hutchinson v Equititour [2011] 2 Qd R 99 and see HTW Valuers(Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640, 656-658.

11. Continuing breaches • Key questions: • A question of fact: what is the scope of the professional’s obligations? • Does the negligent act or omission concern (i) a defined obligation to be performed within a stated or reasonable time or (ii) an obligation to bring about or maintain a state of affairs: Larking v Great Western (Nepean) Gravel Ltd (In liq) (1940) 64 CLR 221 at 236. • Assuming a continuing duty, does a fresh breach within time result in loss going beyond the loss resulting from the barred cause of action? • In solicitor’s negligence cases, note the distinction between the provision of negligent advice, and the continued failure to perform a step in a transaction embarked upon on instructions (e.g. the lodging of a caveat or similar). • Winnote v Page (2006) 68 NSWLR 531 at 544 – 551. • Midland Bank Trust Co Ltd v Hett, Stubbs and Kemp [1979] Ch 384.

12. Drawing the threads together • Time may run where the breach of duty exposes the client to a risk, the very existence of which causes an ascertainable loss notwithstanding that substantial losses occur later in time. • Time may run when the breach of duty causes the client to purchase an asset at an overvalue, or acquire an inferior package of rights than it would have acquired but for the professional’s negligence. • Time will not run where the plaintiff enters into a transaction in which the prospect of loss is inherent, but contingent. • Where a single breach of duty infringes distinct economic interests, the subsequent infringements are likely to be considered further manifestations of the same loss, and will not result in fresh causes of action. The issue is when the loss was first suffered. • Where issues of continuing breach are in issue, consider the scope of the professional’s obligations and whether the character of the obligation is to perform a definite act within a defined period of time, or to achieve or maintain a state of affairs.

13. Sophie Gibson Globe Church Incorporated v Allianz Australia Insurance Ltd [2019] NSWCA 27

14. Roadmap Discussion of Globe Church Incorporated v Allianz Australia Insurance Ltd [2019] NSWCA 27; (2019) 365 ALR 750 Was Globe Church correctly decided? Implications of the decision Key takeaways

15. Globe Church Incorporated v Allianz Australia Insurance Ltd [2019] NSWCA 27; (2019) 365 ALR 750

16. Position prior to Globe Church • Cause of action under indemnity policy arises when all facts to a found cause of action have occurred • Cause of action for property damage: - When damage occurred - Only after claim submitted - Only after reasonable time has elapsed for insurer to consider - Only when claim is rejected

17. The Policy- Industrial Special Risks Policy • Coverage for Property Damage set out at cl 2, which relevantly provides: “Provided the Insured has paid or agreed to pay the premium, the Insurer will indemnify the Insured against Damage occurring to the Property Insured during the Period of Insurance … but subject to: … 2.3 the amount of the indemnity being calculated in accordance with the Basis of Settlement Clause 4; … and 2.7 the Conditions set out in Clauses 7 and 14.”

18. Basis of Settlement- Clause 4 • Globe Church could elect to claim indemnity value of any damaged property; if so • Insurers required to pay value of property at time of damage or reinstate, replace or repair it

19. Clause 14 • Sets out the claims procedures. • Provides that on the discovery of any property damage, the insured must give notice in writing to the insurer as soon as “reasonably practicable”.

20. Chronology • 4 November Globe Church files statement of claim alleging the denials were breach of 2008 Policy and Globe Church suffered loss and damage as a result • Insurers allege claim outside of limitation period

21. Limitation Act 1969 (NSW) 14 General Action on any the following causes of action not maintainable if brought after the expiration of a limitation period of 6 years running from date on which the cause of action first accrues: Action found on contract (including quasi contract) not being a cause of action founded on a deed, Action founded on tort, including a cause of action for damages for breach of statutory duty, Action to enforce a recognizance, Action to recover money recoverable by virtue of an enactment, other than a penalty for forfeiture or sum by way of penalty or forfeiture. • Relevant date for the purposes of s 14(1) was 4 November 2010, 6 years prior to date Globe Church commenced proceedings

22. Referral to the Court of Appeal

23. The Arguments

24. Globe Church - alternative argument • Policy required performance of the indemnity within reasonable time of the demand. • Cause of action for breach of contract arose on lapse of reasonable time to perform contractual promise of indemnity.

25. Court of Appeal - decision • Held, by a 3:2 majority, that in a property damage indemnity policy time runs from date of the damage in respect of which indemnity sought

26. The decision of the majority [209] Absent a provision in an indemnity 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. … [210] Thus, unless the making of a demand is a condition precedent to liability, all the essential facts required to be established by the insured to enforce the indemnity will by then have occurred and accordingly the cause of action for unliquidated damages will be complete. It follows that the cause of action accrues on the happening of the property damage (the insured event).”

27. Reasoning of the majority • Contract of indemnity is a promise to hold harmless against loss of the identified kind, which promise is breached when the loss is suffered • See [127], [133], [175], [203], [209].

28. The majority’s reasoning - UK authority • Insurers’ contention supported by English authority (see [230]). • Position in the UK was summarised by Sir Peter Webster in Callaghan v Dominion Insurance Co Ltd [1997] 2 Lloyd’s Rep 541. “a contract of indemnity gives rise to an action for unliquidated damages arising from the failure of the indemnifier to prevent the indemnified person from suffering a loss, and that once the loss is suffered the indemnifier is in breach of contract having failed to hold the indemnified person harmless against the relevant loss or expense” Such that in the case of property insurance the cause of action arises at the date of loss “and not at some later date”. (at 542)

29. Luckie v Bushby (1853) 13 CB Rep 864; 138 ER 1443; • William Pickersgill & Sons Ltd v London and Provincial Marine and General Insurance Company Ltd [1912] 3 KB 614; • Chandris v Argo; Castle Insurance Co Ltd v Hong Kong Islands Shipping Co Ltd [1984] AC 226; [1983] 3 All ER 706 (Castle Insurance); The Fanti; and • Apostolos KonstantineVentouris v Trevor R Mountain (Italia Express) (No 2) [1992] 2 Lloyd’s Rep 281 (Italia Express)

30. The majority’s reasoning- intermediate appellate court authority • Penrith City Council v Government Insurance Office of New South Wales (1991) 24 NSWLR 564 • Liability insurance policy which required the insurer to indemnify the insured Council against a claim for breach of professional duty. • Claim made September 1983 • Council notified insurer October 1983 • Insurer declined indemnity December 1983 • Council settled claim April 1990 • Proceedings commenced against insurer 21 December 1990 • Insurer - any obligation to indemnify arose when either claim made against the Council or when claim was notified

31. Giles J held that obligation to indemnify did not arise until Council’s liability to third party was established (568G-9C): “The plaintiff’s cause of action accrued upon breach. Thus it must be asked what the defendant was required to do in performance of its promise, and when it failed to do what was required of it. Only when the defendant failed to do what was required of it could a cause of action for damages for breach of contract accrue to the plaintiff. There was no cause of action simply because Mitora [the third party] made its claim or the claim was notified to the defendant — the defendant could have thereafter fully performed its promise. Even when the plaintiff had given it notice of the claim, the defendant was not required to perform its promise by making payment then and there to Mitora or to the plaintiff—whether there was anything against which the plaintiff was to be indemnified depended upon whether it was liable to Mitora and in what amount, which would not be known until established by agreement, arbitration or judgment.”

32. The majority held that the ratio of Penrith was that, under a liability insurance policy, the cause of action does not accrue until the insured’s liability to the third party is established. • Majority held (at [154]) that Giles J’s comments that before liability accrues there must be notification to the insurer and failure to indemnify were obiter dicta and were not endorsed by the Court of Appeal in CGU v Watson.

33. The majority’s reasoning- intermediate appellate court authority • The majority held that other intermediate appellate court authority supported the insurer’s position: • Cigna Insurance Asia Pacific Ltd v Packer (2000) 23 WAR 159 • Associated Forest Holdings Pty Ltd v Giordian Runoff Ltd [2015] TASFC 6

34. Argument - cause of action arose after reasonable time had elapsed for the insurer to consider claim • The majority rejected contention, at [133]: “On the proper construction of the 2008 Policy, we have concluded that it does not require the performance of the indemnity within a reasonable time of demand; it requires the insured to be held harmless against loss as soon as the property damage arises (and to provide the additional cover and indemnify against consequential loss once such loss arises).”

35. Argument - cause of action arose upon rejection of claim • The majority, at [167]-[168], [170] rejected that contention, relying on the decision of Cigna Insurance Asia Pacific Limited v Packer (2000) 23 WAR 159and distinguishing Penrith City Council.

36. Argument - notification of claim was condition precedent to liability • Held (at [125] and [213]) 2008 Policy did not make notification of claim a pre-condition to liability arising on the happening of the insured event • That even though indemnities “subject to” the conditions in the notification clause and Clause 14 proceeds on the assumption that the insurer will be given notice of a claim: “… that does not mean that the making of a claim is required before there is a breach of the promise to make good the loss. What it does mean … is that if the insured does not comply with the requisite claims procedure then this may have an impact on its ultimate recovery under the indemnity provisions.”

37. Dissenting judgments – Meagher JA Insurers’ argument should be rejected for 4 reasons: 1. Language of the Policy • Does not account for nature of the policy as one insuring against property damage and the sensible commercial expectations of the parties to such a contract. • Referred to comments by Hirst J in The Italia Express (No 2) [1992] 2 Lloyd’s Rep 281 - “it is commercially inconceivable that in a large total loss case like the present, or in a complex claim for partial loss or damage, the underwriter would pay up in full by return post without any investigation”.

38. The language of the policy (Cont) • Does not give effect to language of the insuring clause. • Terms of the 2008 Policy provide that the Insurer’s obligation is to indemnify by paying a sum of money ascertained in accordance with the Basis of Settlement provisions. • When, then, was the obligation was to be performed? “The ordinary prima facie rule is that when the contract provides for the doing of an act and there is no express provision as to the time the l aw implied that it must be done within a reasonable time”. Cape York Air Conditioning and Refrigeration v The Commonwealth (1949) 80 CLR 11 at 62 per Dixon J

39. 2. Insurer’s fundamental obligation contrary to meaning substantially same language in CIC Insurance v Bankstown Football Club (1997) 187 CLR 397

40. 3. Neither intermediate appellate court decisions relied upon by Insurers address construction of indemnity in a policy of property insurance. • Cigna Insurance Asia Pacific Ltd v Packer (2000) 23 WAR 159 - personal accident policy - insurer’s promise not to indemnify but pay agreed amount upon a specified event • Associated Forest Holdings Pty Ltd v Giordian Runoff Ltd [2015] TASFC 6 - excess of loss reinsurance - “reinsurer hereby agrees to indemnify the reinsured for that part of its ultimate loss” for $1M

41. 4. English authorities relied upon by Insurers do not support conclusion contended for • English authorities emphasize that the construction of the individual policy is the starting point • Critical of the application of Lord Goff’s reasoning in The Fanti to subsequent cases where the the distinction between “indemnity insurance” and “contingency insurance” has not been recognised (See [276]-[282]).

42. Dissenting judgments – Leeming JA • History of obligation to hold harmless: • Common law - contract of indemnity involved a promise which was broken only when beneficiary damnified by actually paying. : Collinge v Heywood (1939) 9 A & E 633; 112 ER 1352 • Equity recognised inadequacy of position and intervened to compel indemnifiers to pay third party directly, or pay beneficiary to enable third party to be paid. see Firma C-Trade SA v Newcastle Protection and Indemnity Association [1991] 2 AC 1 at 16G-17G. • Following enactment of Lord Cairns’ Act, chancery could order statutory damages in lieu of specific performance. • The result achieved was that the defect of the common law was ameliorated so that the beneficiary did not first have to pay. One way of describing that effect was that the beneficiary was “held harmless”. • However, it does not follow that the contract was breached immediately upon the occurrence of the damage. Nor does it follow that a court was ordering contractual damages (as opposed to an equitable or statutory remedy) prior to any actual payment by the indemnified party.

43. It is “wrong to proceed from the premise that an insurer is liable in “damages” for breach of its obligation to hold its insured harmless, to the conclusion that the insurer is in breach of its promise before it has even been notified of a claim” (at [300]). • 2008 Policy - starting point in construing Insurers’ obligations.

45. Absent clear policy wording within a policy to different result • Globe Church determinative of when a cause of action arises under indemnity policies of property insurance.

46. Was Globe Church correctly decided?

47. Academic criticism • Clarke, The Law of Insurance Contracts(6th ed, 2009, Informa) at 30-7A1. “that the insurer is obliged to indemnify the insured as soon as the loss occurs … is shaky. It is out of line not only with the reasonable expectations of commerce but also with other rules of insurance law”. • Convalix’s Law of Insurance(11th ed, 2016) at pp 662-663: “The notion that the insurer’s duty is to hold the assured harmless … has been widely criticized.” • Professor Rose, Marine Insurance Law and Practice (Informa, 2004) at p 487: “It is a generally accepted but bizarre fiction – indeed, so firmly accepted that it is rarely recognized as a fiction – that the insurer’s undertaking in a contract of marine insurance is to hold the assured unharmed by the insured perils.” • McGilvray on Insurance Law (14th ed, 2018, Sweet & Maxwell) at page 667: Refers to the “illogicality of the present law of deeming the insurer to be in breach of an obligation to indemnify before he had an opportunity to perform it”.

48. CIC Insurance v Bankstown Football Club (1997) 187 CLR 384

49. High Court’s decision • Plurality characterised CIC’s liability to make good the loss as one discharged by the payment of money to the Club (at 396):  ”…the liability of the insurer to make good the loss under the policy is one discharged by payment of money to the insured…” • Their Honours reviewed the terms of the policy noted that “the essential obligation specified therein is one to ‘indemnify’ the Club “in accordance with the applicable Basis of Settlement”. • Plurality held (at 401-402): “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.”

50. High Court did not express: • Obligation as being one to “hold the Club harmless” Or • to “immediately upon the occurring of the event to make good the Club’s loss”.