Queensland Court of Appeal says you cannot compensate yourself
No cover under a liability policy for an insured liable at law to remediate its own land
Liability policies are generally limited to providing cover for an insured’s liability “to pay damages” or “to pay compensation”. Insureds and their brokers ought to pay attention to what is provided for in the insuring clause. Failure to do so may mean receiving less cover than intended. Many insureds receive a nasty surprise when they find out that the glossy third party liability policies that have been piling up in their cabinet over the years don’t cover them for legal liability when they need it.
Although every policy must be read as a whole, it has generally been recognised that a “liability to pay damages” refers to a legal liability on the part of the insured to pay damages to a claimant in response to a claim. Cover for “liability to pay damages” will not normally extend to cover an insured’s liability to pay compensation under statute. The word “compensation” has been interpreted more widely than “damages” and cover for “liability to pay compensation” has been held to extend to amounts for which an insured becomes liable under statute or as a result of an order by a governmental authority.
Recently, an insured has sought to test just how far their cover for “liability to pay compensation” really extended.1
The insured was Hamcor Pty Ltd. Hamcor owned land in Queensland on which a chemical manufacturing plant was operated. Hamcor suffered loss when the chemical plant was destroyed by fire. The fire was attended by the Queensland Fire and Rescue Service who, while bringing the fire under control, discharged large quantities of water into the plant and onto the surrounding land. The water became contaminated with chemicals from the plant and then overflowed bunds and dams on the insured’s land, contaminating the insured’s land and surrounding property. As a result of the contamination, the insured was served with a notice issued pursuant to the provisions of the Environmental Protection Act 1994 (EPA) ordering it to remediate the contaminated land. Orders were also later made by the Planning and Environment Court requiring the insured to remove contaminated substances from the land and to clean relevant structures. In response to the notice and the court orders, Hamcor spent in excess of $10 million remediating the land.
The insured made a claim for the remediation costs under its liability insurance policy and, after being knocked back by the insurer, made a claim against their brokers for failing to arrange adequate cover.
At a preliminary issue trial, the Queensland Supreme Court was asked to consider whether a policy providing cover for the insured in respect of their “liability to pay compensation for and/or arising out of...damage...to tangible property” entitled the insured to cover in respect of the costs incurred in remediating the insured’s own land in compliance with the EPA notice and the subsequent court orders.
The trial judge distinguished policies covering liabilities to “pay compensation” from policies providing cover in respect of liabilities to “pay damages”. The cover provided by each of those wordings, according to the court, is materially different and the term “compensation” refers to something broader than “damages”. The court looked at the relevant policy as a whole and emphasised that it was a “claims made” policy. On that basis, the trial judge concluded that the insured’s liability to pay compensation had to be in respect of “claims...made against the insured”. That, he said, can only be consistent with claims for compensation being made against the insured by third parties. The costs incurred by the insured in complying with the EPA notice and the court orders were costs met by the insured in respect of their own property and, therefore, could not be liabilities to pay compensation.
The insured appealed.
The Queensland Court of Appeal accepted that the issue of the EPA notice and the court orders in relation to the remediation of the insured’s own land were each a “liability” placed on the insured. But were they liabilities to “pay compensation”?
The Court of Appeal held that the words “liability to pay compensation” ought to have their ordinary, everyday meaning. “Liability” meant that the insured had to be under a legal obligation. Under the relevant policy, that liability had to be of a particular kind, ie. a liability to “pay compensation”, and not merely a liability to comply with court orders or other statutory requirements regarding the land. The Court of Appeal referred to dictionary definitions that defined “compensation” variously as “making things equivalent, satisfying or making amends” and “to make up for...redress, make amends, make good...nullify...neutralise” and found that the word “compensation” necessarily contemplated the recompensing of a third party.
On the basis of this decision, it now seems clear that, subject of course to the particular wording of each policy, cover for “liability to pay compensation” will extend cover to an insured only where the insured’s liabilities are incurred in respect of loss and damage suffered by a third party.
As for obtaining insurance to cover penalties imposed by statute...that remains a contentious issue. There are policies which provide such cover but whether a Court will recognise or enforce such a policy is a moot point. Many still see such cover to be against public policy due to it reducing or eliminating the deterrent effect of penalising legislation. More on this in our next edition of InsuranceFiles...
1 Hamcor Pty Ltd & Anor v Marsh Pty Ltd & Anor  QSC 9 and  QCA 262