The NSW Court of Appeal has recently upheld Mr Ali's appeal against an earlier decision of the District Court. On proper construction of his insurance policy, Mr Ali's cause of action arose (and the limitation period started to run) when the insurer decided whether to accept or decline his claim. The cause of action did not arise when the property damage occurred. In this update, we unpack the Court of the Appeal's key findings, which will be relevant to insurers with similar policy wordings.

The facts

On 9 October 2013, Mr Ali experienced a break-in at his home in Bonnyrigg Heights. The following day, he made a claim under his home and contents insurance policy with Insurance Australia Limited (IAL). On 20 May 2014, IAL declined his claim.

On 16 October 2019, Mr Ali commenced proceedings in the District Court, seeking damages in relation to IAL's failure to indemnify him under the policy. IAL argued that Mr Ali's action was statute-barred, relying on section 14 of the Limitation Act 1969 (NSW). IAL reasoned that its liability under the policy arose on the date of the break-in, and not the date that it declined cover. The District Court accepted IAL's argument that the cause of action arose on the date of the break-in and dismissed the proceedings as being out of time. Mr Ali appealed that decision.

Questions on appeal

The Court of Appeal was asked to consider the following:

• Did the primary judge err in concluding that, on the proper construction of the policy, the cause of action accrued at the time of the alleged break-in?
• Did the primary judge err in relying on and applying the Court of Appeal's decision in Globe Church and was Globe Church wrongly decided?

Findings on appeal

The policy documentation

Mr Ali's policy comprised of a certificate of insurance, the Product Disclosure Statement (PDS) and Supplementary PDS. The PDS contained the policy terms and conditions. The policy documents had been written in plain English and were prepared for retail customers.

At the outset, the Court of Appeal criticised the PDS as not being a 'model of concision or clarity', observing it to be difficult to distinguish between the intended policy terms and conditions and materials intended to be guidance. As the primary judge had described, there were a number of high level statements explaining the terms of the policy as well as more specific statements regarding the way the policy would work. These drafting features were considered to generate an 'undue level of complexity' in ascertaining the policy terms and determining proper construction.

In particular, the Court of Appeal noted that IAL had avoided precise legal terms such as 'indemnity', substituting that word with 'cover', which was deployed throughout the PDS in various senses. Some examples of this in the policy, and the Court's analysis as to the consequences of that approach, are set out as follows:

• The first subsection of Section 1, titled 'Who's covered by the policy', stated that the policy 'covers' the insured and the family who normally live at the home. In that context, 'cover' is used descriptively to convey who falls within the scope of the policy.
• The following subsection, titled 'Your insurance cover', stated that 'Your policy is made up of cover for your home and cover for your contents. The insurance cover we provide under your policy depends on…'. In that context, 'cover' is used interchangeably with and in combination with 'insurance'.
• A further passage, titled 'Listed events', stated 'We cover your home or contents when certain things happen…You can make a claim if a listed event you are covered for takes place and causes loss or damage to your home or contents during the policy period. The listed events we cover under your policy are…'. From the perspective of a reasonable insured, the word 'when' performs a conditional rather than temporal function, drawing attention to the fact that the policy only applies when a listed event occurs. In context, 'cover' in relation to 'when certain things happen', is not obviously construed as a contractual promise to indemnify the insured from the time of the occurrence of the listed event. To do so would be an overly technical reading of words intended for a non-technical audience. The word 'can' signals that the insurer's liability is contingent on the making of a claim.
• Finally, the subsection under the heading 'Our agreement with you' stated 'Your current Certificate of Insurance shows the insurance cover you have chosen…It also shows the period your policy covers – we only cover you for incidents that happen during this time.' Again, 'cover' is used liberally in a number of senses, but generally as a proxy for 'insurance', except for where it says 'the period your policy covers', where it is used to refer to the scope of the policy. Neither use says anything about the operation of the policy in terms of the time at which liability arose.

Proper construction of the policy

The general construction principles to be applied were recently summarised in HDI Global Specialty SE v Wonkana No 3 Pty Ltd. In essence, those principles are:

• the Court is required to determine the intention of the parties expressed in the words recording the agreement;
• that task is to be approached objectively, considering what a reasonable person would have understood the language to convey;
• the language of the contract is to be given its natural and ordinary meaning, with regard to the circumstances and objects of the document;
• the language of an insurance contract in particular, is to be construed from the perspective of a reasonable prospective insured; and
• as a last resort, ambiguity in a policy of insurance should be resolved by adopting the construction favourable to the insured (the contra proferentem rule).

Having regard to those principles, the Court of Appeal focussed on Section 3 of the policy, titled 'What you're covered for', and Section 6, titled 'Claims we pay', and provided the following analysis:

Section 3 is repetitive of language found in Section 1, which states 'We cover your home or contents when certain things happen. These are known as 'listed events'. You can make a claim if a listed event takes place and causes loss or damage to your home or contents during the policy period.'

However, the surrounding context is important. Adjacent to this passage was a table headed 'Listed events', cataloguing events by what was 'covered' and 'not covered'. Having regard to that context, the use of 'cover' in 'we cover you when certain things happen' does not constitute a clear contractual promise to the effect that the insurer is liable to indemnify an insured upon the occurrence of a listed event. 'Cover' is descriptive and delineates the particular events to which the policy applies. Properly understood, the sentence directs the reader to the existence of responsibilities, set out under 'Your responsibilities' in Section 6.

Section 6, under the heading 'What we pay for – Contents Insurance', states 'If we agree to cover your claim under the Contents Insurance, then we will: - ask you some questions over the phone; - tell you if you need to pay any excess and how to pay it.' This is then followed by similar introductory language with details of what the insurer will pay for.

Implicit in that conditional clause is a choice to be made by the insurer to cover or not cover the insured's claim. Therefore, the time for performance arose at the point of making that decision. The detail with which Section 6 informs the insured about making the claim, and the steps following afterward, supports the construction that the relevant promise for the purpose of Mr Ali's cause of action is to compensate a claimant for their loss following the process set out in Section 6. Therefore, the cause of action arose on the insurer's decision to accept or decline the claim.

It was found that the primary judge had erred in determining that the word 'cover' had a largely fixed meaning throughout the PDS, that was interchangeable with the word 'indemnify'. Consistent with Wonkana, a reasonable non-expert in insurance law would not have understood 'cover' to mean 'indemnify', or that 'indemnity' would have a special legal meaning. The Court of Appeal held that in circumstances where IAL had a choice as to how it worded the PDS, the wording actually used did not support the contention that the insurer was liable to indemnify the insured (and that the limitation period started to run) when the property damage occurred.

The accepted construction of the policy was found to be consistent with the objects of the policy, including making payments for losses arising from listed events pursuant to the Insurance Contracts Act and the cost-effective resolution of disputes about claims in accordance with the dispute resolution mechanism in the policy. If the insurer's preferred construction had been accepted, the insured would be able to bypass the dispute resolution processes in the policy and seek court relief in proceedings, even in circumstances where there might be no dispute between the insured and insurer.

Distinguishing Globe Church

Put simply, in Globe Church, the issue was whether an Industrial Special Risks policy contained a promise to indemnify, and if so, whether the principal loss for which the insured was to be held harmless arose on the occurrence of the property damage. In that case, the Court of Appeal found that the policy was plainly an indemnity insurance policy, containing a number of clauses with obligations to indemnify the insured. It was held that without a provision making lodgement of a claim a condition precedent to liability, the promise to indemnify in the content of a property damage insurance policy is engaged when the property damage is suffered.

The Court of Appeal refused to reconsider the correctness of the decision in Globe Church, on the basis that Mr Ali's insurance policy was drafted distinctly different to the policy considered in Globe Church. A key point of difference was that Mr Ali's policy was written in plain English and was prepared for retail purposes, the consequences of which have been explored further above. Accordingly, the decision in Globe Church could not be determinative of the construction of Mr Ali's policy.

What does this mean for insurers?

The Court of Appeal's findings are a timely reminder that the careful drafting of policy documentation, including the PDS, is critical to avoiding unintended consequences of its application to claims. Although plain English drafting is, evidently, necessary and in the interests of consumers, it does not guarantee that there will be sufficient clarity to support an interpretation advanced by the insurer.

Insurers should closely review the overall structure, including specific policy terms and high level guidance features of policy documentation, having regard to their combined effect, and be sure to clearly delineate between these different aspects. The benefit of plain English drafting may be weakened by unnecessarily complex structures. In the policy terms, particular caution must be taken in substituting precise terms that have significant legal meaning, particularly where those terms can be used (and understood) in a multitude of ways.

For more information about the Ali decision and its implications, please contact our team.