Is the obligation to pay a statutory debt a ‘liability’ under a public liability policy?
- Published 30.04.2020
SA Metropolitan Fire Service v ACN 008 275 296 Pty Ltd (in Liq) & Ors  SADC 45
A South Australian District Court Judge has found that a public liability policy does not cover a statutory debt:
- arising under section 42(5) of the Fire and Emergency Services Act (2005) (the Act); and
- in spite of section 141 of the Act extending coverage in insurance policies against damage or loss of property caused by a specified kind of emergency arising from measures taken by a person acting with the authority conferred by the Act.
Between 13 March and 16 March 2012 the South Australian Metropolitan Fire Service (SAMFS) responded to a fire burning at a waste processing facility at Wingfield operated by ACN 008 275 296 Pty Ltd (in liq) formerly known as Mulhern’s Waste Oil Removal Pty Limited (Mulhern).
The water used by SAMFS to contain the fire combined with oil from products on Mulhern’s property produced an oily run-off which escaped and contaminated the adjacent property and wetlands.
SAMFS retained contractors to contain, remove and dispose of the contaminated water and the value of those works totaled $660,811.37 inclusive of GST (the Claim Costs).
SAMFS, pursuant to section 42(5) of the Act, sought recovery of the Claim Costs from Mulhern and Mulhern made a claim under its public liability policy (the Policy) issued by the insurers, Newline Australian Insurance Pty Limited and/or Newline Syndicate 1218 at Lloyds (the Insurers).
The Policy provided cover for:
‘all sums… [Mulhern]… shall become legally liable to pay for damages or compensation and claimants costs and expenses for accidental Bodily Injury or Property Damage or Other Contingencies arising out of an Occurrence within the Policy Territory during the Period of Insurance in connection with the Business.’
Relevant sections of the Act state:
- if an officer of the SAMFS engaged a contractor to do something in relation to the fire or emergency the costs of engaging the contractor are recoverable by SAMFS as a debt from the owner of the dangerous structure, object, substance or material (section 42(5)); and
- a policy of insurance against damage or loss of property caused by a specified kind of emergency will be taken to extend to damage or loss arising from measures taken by the contractor at the scene of the emergency and for the purposes of the Act (section 141). Any term in a policy that seeks to vary or exclude the operation of section 141 is void.
The Insurers denied indemnity on the basis that liability was one for debt and did not fall within the insuring clause of the Policy. The Insurers also denied that the Policy was ‘a policy of insurance against damage or loss of property caused by a specified kind of emergency’ with the result that section 141 did not apply.
A separate trial was heard to determine whether:
- Mulhern’s liability to SAMFS pursuant to section 42(5) of the Act was a legal liability to ‘pay damages or compensation…for Property Damage or other Contingencies’ such that it fell within the insuring clause of the Policy; and
- Section 141 of the Act extended cover to Mulhern under the Policy in respect of the Claim Costs.
Question 1 – Whether the Claim Costs were covered under the Policy
SAMFS argued that despite the terminology used in section 42(5) of the Act, the amount sought to be recovered was not a ‘debt’ but a liquidated sum sought to be recovered as compensation under statute.
The Insurers maintained that the liability was not a ‘legal liability to pay for damages or compensation’ but rather a liability to pay a statutory debt in circumstances where that debt was imposed irrespective of any breach of duty or fault by Mulhern – and as such the Policy did not respond to the Claim.
Question 2 – Application of section 141 of the Act
SAMFS submitted that:
- section 141 of the Act had the effect of extending cover under the insuring clause in the Policy to include Mulhern’s liability for the Claim Costs. Specifically, it argued that the fire was an ‘emergency’ within the meaning of the Act and that section 141 brought the emergency which occurred within the ambit of the insurance cover to include the claim made by SAMFS under section 42(5) by deeming the liability of Mulhern to the plaintiff to fall within the insuring clause of the Policy;
- the intention of section 42(5) of the Act was to shift the burden of paying for the contractor costs incurred in the exercise of SAMFS’s powers away from the taxpayer and onto the party who owned the dangerous substance and that section 141 expands that public policy by ensuring that fire and emergency services are able to appropriately recover costs they incur in the exercise of their power and functions from an insurer providing cover for damage or loss of property caused by fire.
- produced a copy of an ISR policy issued to Mulhern by a different insurer which provided indemnity against loss arising from any insured events (subject to the terms and conditions of the policy) (the ISR Policy); and
- submitted that the ISR Policy was the type of policy intended to be captured by the wording of section 141 of the Act (i.e. a first party policy rather than a third party liability policy), being ‘a policy of insurance against damage or loss of property caused by a specified kind of emergency’ and that the Policy was not such a policy.
The ISR Policy contained the standard ISR term that ‘in the event of physical loss, destruction or damage…not otherwise excluded happening at the Situation to the Property Insured described in Section I…will indemnify the Insured..’. The policy schedule also referred specifically to ‘Fire Extinguishment Costs’.
After considering a long line of authorities regarding the interpretation of the word ‘damages’ and the construction of policies of insurance, Judge Schammer found in favour of the Insurers. Her Honour concluded:
- ‘Damages’ in the context of public liability policies is to be interpreted to include such sums that fall to be paid by an insured because of a breach of duty, whether that duty is imposed by the common law, statute or contract.
- Mulhern’s liability to SAMFS pursuant to section 42(5) of the Act was not contingent upon any fault, breach of duty or obligation by Mulhern. Applying the relevant authorities, the Claim Costs could not be construed as a legal liability ‘for damages’. Mulhern’s liability to SAMFS pursuant to section 42(5) of the Act was derived simply from the fact that Mulhern owned the dangerous substance. This was distinguishable from legal liability arising under workers’ compensation payments. While such payments are made pursuant to statute, a pre-condition for such payment is a breach of a duty (or some actionable wrong) on the part of an insured.
- Mulhern’s liability was not a legal liability ‘to pay for damages or compensation…for Property Damage or other Contingencies…’ and as such did not fall within the insuring clause of the policy.
Hamcor Pty Ltd v Marsh Pty Ltd & Anor  QCA 262
Another case which dealt with the response of liability policies to statutory demands and/or notices was Hamcor Pty Ltd & Anor v Marsh Pty Ltd & Anor  QCA 262. The insured in that case was issued with a notice requiring remediation of its own land pursuant to the Environmental Protection Act 1994 (EPA).
The insured made a claim for the remediation costs under its ISR policy. It argued that the effect of the statutory notice was to render it liable for the cost to make good the pollution thus making it ‘liable’ to ‘pay compensation’ and bringing the costs under the insuring clause. Muir J (with whom McCurdo P and Atkinson J agreed) found that the insured’s construction failed because ‘liability’ meant being under a legal obligation to pay compensation - not one that is to comply with court orders or other statutory requirements regarding land.
In Hamcor the insured argued that the EPA notice and the court orders rendered the insured liable in respect of the pollution and what was spent, except in the employment of its own workforce, to comply with the notice. In that sense it was argued that the sums payable under court orders constituted compensation.
The Queensland Court of Appeal in Hamcor found that the ‘liability to pay compensation’ ought to be construed as a liability to recompense a third party in respect of the insured’s liability to that third party. The Court held that the insured’s claim for remediation costs was not a liability it incurred to a third party; they were costs of its own that it had incurred to comply with a statutory obligation.
In SA Metropolitan Fire Service, where there was a public liability policy and the insuring clause provided cover where the insured was ‘legally liable to pay damages or compensation…’, the South Australian District Court concluded that a statutory debt fell outside of cover because the insuring clause intended to provide cover in circumstances where an insured incurs a legal liability to third parties. This reasoning is similar to Hamcor but is distinguishable because the debt arose on a statutory basis and there was no element of fault, breach of duty and/or obligation of Mulhern to SAMFS.
What appears to be a common theme from the recent decision of SA Metropolitan Fire Service, and in Hamcor before it, is that courts are reluctant to find that costs incurred as a result of compliance with statutory notices, court orders regarding land or statutory debts are damages or compensation that insureds are legally liable to pay.
Despite an insured characterising such an obligation as a ‘liability’ such orders are consistently held by courts not to be ‘liabilities to pay compensation’ and, as such, are not covered under the majority of liability insurance policies.