Insured covered for cost of restorative works but not preventative works under liability policy of insurance

Legal Directions

Amashaw Pty Limited v Marketform Managing Agency Ltd [2017] NSWSC 612

Introduction

In this decision, the New South Wales Supreme Court held that the insured petrol station operator was entitled to indemnification in respect of the cost of restorative works but not preventative works it had incurred after a water main exploded. The Court held that the restorative works constituted ‘damages’ for which the insured had a liability under the terms of the liability policy. The insurer’s non-disclosure defence was also rejected.

Background

In June 2013, a water main located near a petrol station operated by Amashaw Pty Limited (Amashaw) exploded due to the escape of petrol vapour, resulting in extensive damage.

Amashaw paid for the cost of remediating the damage (restorative works) and preventing further escape of vapour (preventative works), then made a claim for indemnity under a liability policy issued by the defendant manager of an underwriting syndicate at Lloyds for those costs.

The insuring clause of the policy provided coverage to Amashaw for its ‘liability to pay damages arising out of pollution. Relevantly, ‘Damage’ was defined to include ‘trespass and nuisance’.

Was there a liability for Amashaw to pay damages as a result of the leak?

The insurer denied that there was a liability for Amashaw to pay damages on the basis it had an overarching statutory obligation to make good the cost of the petrol leak.

Notwithstanding that the operator of the water main had not made a claim in nuisance against the company, Amashaw contended that there was a relevant liability to pay damages which arose in nuisance for both the cost of restorative works and the preventative works. Amashaw also contended that the statutory obligation was concurrent with the liability to pay damages such that the statutory obligation did not obliterate the liability that Amashaw had in nuisance – a liability which accrued when the damage resulted from the explosion.

Was the insurer entitled to reduce to nil the liability for Amashaw’s non-disclosure?

The insurer contended, in the alternative, that even if there was a liability for Amashaw to pay damages, the insurer was entitled to reduce it to nil due to Amashaw’s failure to disclose reports to the insurer which confirmed elevated levels of contaminants in groundwater prior to the inception and renewal of the policy.

Amashaw contended there was no requirement to disclose the reports as it was commonly understood that the ground under service stations was polluted with contaminants.

Decision

The Court held that Amashaw was entitled to indemnity for the cost of restorative but not preventative works. In reaching its decision, it concluded that:

  • Amashaw’s liability in damages for nuisance crystallised when the explosion caused the damage;
  • The relevant legislation did not operate such that the imposition of a statutory obligation to repair discharged, or otherwise impacted upon, liability to pay damages for negligence or nuisance;
  • Amashaw was liable to the owner of the water main in nuisance for the damages caused by the sewer main. Amashaw rectified the damage and incurred costs in doing so. By acting in that way, Amashaw discharged its liability to pay damages for nuisance. The position was no different than if Amashaw permitted the owner of the sewer main to complete the restorative works and serve a demand for payment;
  • There was no reason why Amashaw should be in a worse position because it undertook the restorative works itself; and
  • The preventative works were not undertaken to make good the damage caused. They were undertaken to prevent further damage from being caused, which did not constitute a damage for which it was liable.

The Court also rejected the insurer’s non-disclosure defence. It held that a reasonable person would know that the insurer regularly underwrote insurance cover for service stations and must be taken to have known that service station sites are likely to be contaminated. Thus, the Court found that a reasonable person would not think that disclosure of such every day and expected contamination was relevant to the insurer’s decision to accept the specific risk.

Implication of this decision

This case is consistent with other authorities taking a relatively broad approach to the meaning of ‘damages’ for the purposes of a liability policy, although it remains important to closely consider the claimed loss to assess whether it results from the insured event.

Authored by Margarita Ntostas, Senior Associate, Melbourne


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