What you need to know
- The New South Wales Court of Appeal has recently held that the limitation period for a claim under an insurance policy runs from when loss is suffered, rather than from when the insurer refuses or fails to indemnify within a reasonable time.
- The question of when time starts to run for indemnity claims in commercial contracts is also often a tricky issue. While the outcome will always depend on the particular clause, a general starting point is that a claim under an indemnity in a commercial contract also accrues when loss is suffered. In some cases loss may be suffered when the indemnified party is exposed to a liability, which could be much earlier than when they actually pay money to a third party.
What you need to do
- Make sure you have that in mind when working out when you need to start proceedings, as you may need to commence (or arrange a standstill) before the insurer/indemnifier has even made a decision.
- The decision is also a good reminder that there can be arguments about when time starts to run and it makes sense to take a conservative approach when making a claim.
The uncertainty
There has been uncertainty about when the limitation period starts to run for property insurance claims – at least in NSW.
There is a long line of authority in England and Wales, and intermediate appellate court authority in Western Australia and Tasmania, to the effect that a cause of action against an insurer under an indemnity policy begins to run when the insured event occurs.
However, in NSW there was first instance authority going the other way:
- In one case, Giles J said that a breach of contract does not occur (and so the limitation period does not start to run) until the insurer has been required and failed to pay or do some other act in performance of its promise (Penrith City Council v Government Insurance Office of New South Wales (1991) 24 NSWLR 564).
- More recently, Stevenson J considered that the approach of Giles J had been endorsed by the NSW Court of Appeal in a separate decision, and that it was the preferable approach to be followed (Carillion Construction Ltd v AIG Australia Ltd Construction Ltd [2016] NSWSC 495, referring to the NSW Court of Appeal case CGU Insurance Ltd v Watson [2007] NSWCA 301).
The new NSW decision – time doesn't depend on a demand
In Globe Church Incorporated v Allianz Australia Insurance [2019] NSWCA 27, a majority of the NSW Court of Appeal held that time begins to run when loss is suffered – not when the insurer fails to pay.
This was because the court considered the insuring clause required the insurer to "hold the insured harmless against loss" – and so as soon as the insured suffered "harm" (ie loss), the insurer was liable under the clause and the insured could sue to enforce the promise. It is worth noting that the actual words of the clause were fairly standard: it required the insurer to "indemnify the Insured against Damage occurring to Property Insured".
In reaching that view, the court rejected a distinction between the promise to indemnify and the later breach of that promise (by refusing to pay) as a basis for time beginning to run later.
The fact that the amount payable could not be calculated also did not matter – there could still be a claim for unliquidated damages.
It was also important that the insuring clause did not depend on the insured making a demand or claim before the indemnity was enlivened (as opposed to the policy having procedural requirements surrounding making claims). If it did, the result may have been different. But it is clear that claim requirements would need to be clearly expressed as a condition precedent – in Globe Church the claims requirements were not considered conditions precedent even though the indemnity was expressed as being "subject to" them.
Where to from here?
In Globe Church, there was an Industrial Special Risks policy, and the damage related to rainwater and flooding. A claim was made under the policy roughly two years after the flooding, indemnity denied two years after that, and proceedings commenced five years after the denial of indemnity – ie about nine years after the flooding.
While this authority means that the Australian intermediate appeal courts are now aligned (and aligned with the English position), in part the NSW Court of Appeal's decision was made on the basis that the other state court authority was "not plainly wrong" and should therefore be followed.
The decision does give rise to some peculiarities. For example:
- As the cause of action accrues on the happening of an insured event, an insurer will almost always be in breach of an indemnity before it even knows about the event.
- There is arguably some tension between an insurer being liable before it knows about a claim and it only having to pay interest on a claim from the time it was unreasonable for it to withhold payment (under section 57 of the Insurance Contracts Act).
- For complex claims, there may be practical difficulties in having the claim assessed, a decision on indemnity made and the claim paid all within the limitation period. Does an insured need to commence proceedings even where indemnity has been granted if all loss has not been quantified and paid?
Insureds may look to protect themselves by bringing proceedings (or seeking a standstill) before the claim has been fully determined.
Insureds may also consider negotiating clauses which make it clear that the making of a claim is a condition precedent to liability and/or make it clear that the obligation to indemnify arises on the occurrence of property damage that is reasonably ascertainable by the insured.
Authors: Ian Bolster, Partner; Tim West, Senior Associate; and Prajesh Shrestha, Lawyer.
