What is insurance and why do we still not agree about that?

Globe Church Incorporated v Allianz Australia Insurance Ltd [2019] NSWCA 27 the NSW Court of Appeal determines this issue in Australia

It seems surprising that there is still disagreement about what insurance policies do.  After all, insurance in one form or another has been around since 2 BC.  However, there is still controversy about what insurance contracts are contracts for.  Globe Church answers for Australia the fundamental question of what insurance does.  But, it does little to dampen the controversy.

Globe Church operated the Eastlake’s Christian Life Centre from two properties in Gateshead, New South Wales. There was some complexity and around the ownership structure of the properties, but it was accepted that Globe Church was the rightful plaintiff entitled to sue under the insurance policy for physical damage to the church, church hall, and car park on the properties.

Globe Church had taken out insurance under an Industrial Special Risks insurance policy (2008 Policy) with Allianz Australia Insurance Ltd and Ansvar Insurance Ltd. Allianz had agreed to 60% risk and Ansvar to 40% risk. Other insurance policies are relevant to the dispute, but in this decision the Court was only required to deal with the 2008 Policy.

Globe Church’s claim alleged that insured property was damaged by flooding during the period of the 2008 Policy between 8 June 2007 and 31 March 2008. On 29 September 2009 Globe Church made a claim under the 2008 Policy. On 5 April 2011 Ansvar denied liability and on 30 September 2011 Allianz denied liability. The Church commenced proceedings on 4 November 2016.

The insurers applied for a separate question to be determined as to whether the proceeding was filed out of time in accordance with s 14(1) of the Limitation Act 1969 (NSW) (LA 1969). Section 14 of LA 1969 enacts:¹

14(1) An action on any of the following causes of action is not maintainable if brought after the expiration of a limitation period of six years running from the date on which the cause of action first accrues to the plaintiff or to a person through whom the plaintiff claims: (a) a cause of action founded on contract (including quasi contract) not being a cause of action founded on a deed

Time starts to run under s 14(1) LA 1969, when a “cause of action accrues”. A cause of action accrues when each fact required to be proved by the plaintiff to obtain a remedy has come into existence. The facts required are:

1. The formation of a valid contract;
2. The fulfilment of each condition precedent;
3. The non-performance of an obligation;
4. The competency of the insured to sue and the insurer to be sued.

It is settled case law that a contract may be breached without knowledge that the event has occurred (unless giving notice is a precondition).

The insurers argued that if an insured suffers an insured event, the insured automatically has a “cause of action” against the insurer. The insured has a valid contract, the insurer is required under that contract to indemnify (hold harmless) the insured and has failed to do so. Therefore, the time starts to run for limitation purposes when, for example, the flood, earthquake or fire happens. In contrast, Globe argued that time did not begin to run until the insurer denied the claim or a reasonable time for the insurer to assess the claim had expired, both alleged to be a breach of the insurer’s promise to indemnify.

It was accepted that if the insurers were correct, the cause of action under the 2008 policy was out of time and would be struck out. But, if Globe was right, it was in time.

The questions for the Court were:

1. 1. In respect of any of the alleged property damage 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)?
   2. 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?

To answer these questions, the Court had to grapple with the question of what an insurance policy is an agreement to do.

The decision considered three types of insurance.

Liability policies are where the insurer promises to pay money in place of the insured such that the insured is never out of pocket. These policies are typically professional indemnity policies whereby the insurer will pay any judgment and/or settlement in place of the insured such that the insured is not out of pocket except for the excess.

Indemnity policies are typically “pay you when you have paid” policies. For example, material damage policies usually require the insured to pay out to repair damage before being reimbursed by the insurer. Earthquake, flood or fire policies are indemnity policies.

Contingency policies, such as life insurance policies, are where the insurer agrees to pay a fixed amount or an amount calculable by reference to a mechanism, to the insured if an insured event comes about. They will not necessarily require loss before the insurer is liable to make payment.

The policy at issue here was an indemnity policy.

This case was about what the fundamental purpose of an insurance contract was. There were two competing conceptions.

On one conception, the (for example in the UK (UK Conception)) Courts have held that in agreeing to an indemnity policy, the insurer agrees to “hold harmless” the insured. This is taken to mean that the insurer will prevent the insured from suffering the insured event. The insurer is conceptualised as promising to prevent the fire, flood or earthquake. A failure to prevent that event is a breach of the insurance contract. So, breach happens when the event happens, the cause of action accrues, and time for limitation purposes starts running immediately.

On the other conception, (for example in Canada (Alternative Conception)) Courts have held that an indemnity policy is a promise to pay the insured money to compensate the insured for losses brought about as a result of an insured event happening. Under that conception, the event happens, but the insurer is not obliged to pay money to indemnify the insured until the insured makes a claim. If the insured makes a claim for indemnity and the insurer wrongly refuses to pay, or fails to decide indemnity within a reasonable time, then at that time the insurer is in breach of the policy. Time does not start to run for limitation purposes until much later under this Alternative Conception.

At paragraphs 62-64 of the decision the Court set out the various reasons why the insurers argued that the hold harmless conception of insurance is the correct conception. The insurers argued that the cause of action accrued when the insured event happened. They argued that if the Alternative Conception were accepted, the limitation period under the Limitation Act would start to run subject to the whims of each party to the contract. The damage from the event may not be discovered for years before the insured made a claim, or the insured may delay making a claim, and the insurer may not be able to assess the claim given the delay. This would result in prejudice to the insurer and under s 54 of the Insurance Contracts Act 1984 (Commonwealth)² it would be difficult for the insurer to demonstrate that the resulting prejudice was equal to or greater than the claim. This would be unjust.

The insurers also argued that if failure to decide within a reasonable time were the event that gave rise to the cause of action, and started time for limitation purposes, then it would be difficult to determine when the cause of action accrued. Most insurance policies, like the one in this case, do not have clauses requiring a decision on indemnity within a certain period. The Court would have to read into the policy a requirement to make a decision within a reasonable time. Determining what a reasonable time would be is a fact specific enquiry. This would make determination of when the policy was breached, and the limitation period began to run uncertain.

The insured argued that the UK Conception is a nonsensical fiction that does not make commercial sense. Globe argued that the reality is that an insurer will never be able to prevent the event coming about and “hold harmless” the insured. In liability policies, the insured will always suffer loss, make a claim, prove that its loss is of the sort which the insurance will respond to, and prove the quantum of that loss.

Globe argued that the idea that the insurance policy is an agreement for the insurer to hold the insured harmless makes no sense. It would mean that the insurer would be in breach of its contractual obligations to hold the insured harmless without even knowing that it had failed to do so. Its performance of the contract would always start with a breach of contract.

Under the UK Conception the insured would not be able to sue for losses that occurred more than six years after the event. This would be a problem if losses were not determined more than six years after the event. This result would encourage litigation, it argued. The insured would be encouraged to sue the insurer to protect itself against the possibility that its losses would become time barred.

It argued that the insurer would be in breach of its policy from the date of the event. That would encourage insureds to sue the insurer for loss of use of money during the period between the event and payment.

There would also be a risk, it argued, that insurers would delay determining whether indemnity would be granted so that claims would be time barred. This would encourage insureds to commence litigation rather than wait for a determination on indemnity by the insurer.

The Court issued a split decision. Three Justices held that the UK Conception was the proper approach to conceptualisation of an insurance policy. The majority held:

[133] … finely balanced as the argument was, 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).

…

[139] We accept that insurance contracts should be given a businesslike interpretation (McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at [22]). However, we do not think the fact that liability might arise without the insurer becoming aware of it compels a contrary conclusion. There remains the obligation in cl 14 of the policy for the insured forthwith to provide notice of the claim and a failure to conduct reinstatement work with reasonable despatch limits the insurer’s liability to indemnity value.

The minority gave two separate judgments, Meagher JA giving the leading judgment with Leeming JA concurring. The minority held that the UK Conception was a UK legal fiction that the Courts ought not to continue. It held:

[249] Accordingly under the express terms of the policy, the insurer’s obligation is to indemnify by paying a sum of money ascertained in accordance with the Basis of Settlement provisions. There is no obligation to in some unstated way “hold the insured harmless”. The undertaking is to make good the insured loss after it has occurred and by payment, that being a well accepted sense in which “indemnify” is used, and the only sense in which such a promise to indemnify could be performed by the insurer.

[250] The question then arises as to when that obligation is 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 time the law implies that it must be done within a reasonable time”: York Air Conditioning and Refrigeration (A/sia) Pty Ltd v The Commonwealth (1949) 80 CLR 11 at 62 (Dixon J); [1949] HCA 23. What is a reasonable time is a question of fact to be determined in the light of all of the circumstances, whereas the existence of the term is to be determined at the time of formation of the contract.

The question of the conceptualisation of an insurance contract has been dealt with in a couple of cases in New Zealand, but those did not involve liability policies but contingency policies.³ The New Zealand Courts appear to be tending to the minority position in Globe Church. The issue however has not been fully argued in New Zealand.

New Zealand’s Limitation Act 2010 (LA 2010) is different from the LA 1969(NSW). The LA 1969 and the New Zealand Limitation Act 1950 (LA 1950) have similar wording. Time commences for limitation purposes when a “cause of action” accrues.

However, under the LA 2010 time starts to run from the date on which the “act or omission” on which the claim is based occurred. It is arguable that even if the UK Conception is followed in New Zealand, under the LA 2010 the act on which the claim is based could be alleged to be the wrongful declinature or failure to confirm indemnity.⁴ That way, the plaintiff may be able to avoid the effect of the UK Conception.

We understand that there are cases currently before the New Zealand Courts where the issues are the same as those in Globe.  The decision of what an insurance policy is an agreement to do will have a significant impact on the risks the insurance industry faces when issuing policies.  Given the indications in Scott it may be prudent to factor into premiums the possibility that insurers will be on risk longer than they currently expect to be on risk in respect of events they have agreed to insure against.

1. Which has similar wording to the Limitation Act 1950 (NZ) S4
2. New Zealand’s equivalent is s 9 Insurance Law Reform Act 1977.
3. Arnold v American International Assurance Company (Bermuda) Ltd t/a AIG Life (2009) 15 ANZ Insurance Cases 90-140 (HC); Scott v Sovereign Assurance Company Limited (2010) 16 ANZ Insurance Cases 61-867
4. See Ward Ranch Ltd v The Minister Of Conservation/Te Papa Atawhai [2018] NZHC 2893 [8 November 2018] Wylie J.