March 2014

Insurer not liable for Antarctic oil spill

by Kate Tilley and Krystal Belcher, KT Journalism

Insurer Vero is not required to indemnify the Federal Government for the cost of remediating an oil spill at an Australian Antarctic base.

In a majority decision, the Federal Full Court ruled in Vero's favour late last year after the Federal Government appealed against Federal Court Justice David Yates's decision it was uninsured for remediation costs from the 1999 fuel spill, when up to 2,300 litres of fuel was spilt.

Vero had issued an ultimate net loss (UNL) policy on July 13, 1999, with the insured noted as the Commonwealth of Australia through its self-managed fund, Comcover.

The policy was to reimburse fund members for claims for loss, damage or injury. The in-house retention was $1 million and each member had a $250,000 excess. The Australian Antarctic Division’s (AAD) property sum insured was $418 million.

On July 20, 1999, the oil spill occurred at Casey Base Station within the Australian Antarctic Territory (AAT), which Justice Yates found was “the Commonwealth’s real property under domestic law”, managed by AAD.

Comcover was not notified of the spillage until August 2004, some five years later. AAD told Comcover on August 10, 2004, the remediation cost was estimated at $1 million to $3 million, although the cost had not been determined completely at that time.

However, as events unfolded, it became apparent the cost was significantly more. On August 24, 2004, a loss adjuster engaged by Comcover, Technical Assessing (Vic) Pty Ltd (TA), advised a $3 million reserve should be provided.

TA’s opinion was that “policy liability attaches in respect of whatever remediation works are agreed in the future”. The reserve was amended to $5 million on September 27, 2004, and to $6 million on September 12, 2005.

On December 23, 2004, Comcover told AAD it declined to cover the event. In early 2005 the Australian Government Solicitor made representations to Comcover on AAD’s behalf. Comcover reconsidered and agreed to indemnify AAD. However, by then, Vero had declined Comcover’s claim under the UNL policy.

The Federal Government took action against Vero in 2011, seeking indemnity for remediation costs. It had paid $2.87 million by Feb 2011 (net of AAD's excess).

Vero argued no AAD-owned property was damaged. "As AAD does not own Antarctica (or any part of it), the insuring clause is not activated and Comcover was not obliged to accept the claim. In those circumstances, Vero is not required to indemnify Comcover for the AAD claim," the court heard.

In a notice of contention, Vero denied Casey was AAD's real or personal property within the definition "property" in the Comcover manual; and denied any damage was caused to any real or personal property within the policy's definition of "property".

Justice Yates found the Vero policy covered "real and personal property", not land. The Federal Government appealed against that decision, seeking to establish Comcover's claim to indemnity.

Vero also argued any action was barred from July 20, 2005, at the latest, under the NSW Limitation Act 1969.

The Federal Government argued time began to run from either the date Comcover notified AAD it was indemnified (June 2005), or the date its payments to AAD exceeded the $1.25 million excesses (January 2008).

On December 6, 2013, Federal Court Justice John Dowsett said Justice Yates correctly concluded Vero was not liable to indemnify Comcover and Justice John Logan agreed.

Justice Dowsett said the cost of remediation for damage to land would only be covered if it were within the definition of the term "replacement value". "I doubt very much whether land can have a replacement cost. Land probably cannot really be destroyed or lost." Similarly, the definition "item" for property was unlikely to denote a parcel of land or the rights held in it.

Justice Logan agreed. But he said, while the Federal Government's appeal failed, so did Vero's notice of contention.

The court was split on the question of whether the insuring clause in the Comcover manual covered damage to the land. Justice Jayne Jagot said: “There is real ambiguity in the Comcover manual. Land is real property. The promise of indemnity relates to all tangible real property. Land is patently capable of suffering damage by any one of a number of means, oil and other spills being one of the most obvious examples. Yet the measure of indemnity is expressed in terms not readily applicable to land.”

In her minority judgement, Justice Jagot found the appeal should be allowed; Vero's notice of contention dismissed; orders of August 14, 2012, set aside; and the case remitted to Justice Yates. She said the measure of indemnity, being the replacement value of the property lost, destroyed or damaged, did not only include replacement cost, it also included "repair cost".

Justices Dowsett and Logan ordered costs against the Federal Government.

(Commonwealth of Australia v Vero Insurance Ltd [2013], FCAFC 152, 06/12/2013)

(Commonwealth of Australia v Vero Insurance Ltd [2012], FCA 826, 7/08/12)