Constructive Notes®
Introduction
A deductible or excess charge leaves a certain level of risk with the insured. However, such provisions can work to the serious disadvantage of the insured when several separate incidents of damage all flow from one underlying cause. The purpose of the aggregation provision is to avoid that consequence.1
This newsletter relates primarily to the operation of deductibles and the impact of aggregation in the context of first-party and not third-party insurance.2
Although some regard will be had to decisions involving third party general liability policies, as was said by Cooper J in DellaVedova v HIH Casualty & General Insurance Ltd:
‘… great care must be taken in having regard to the interpretation of clauses in other insurance policies because of the importance of context to the meaning of language.3
In illustrating that point, the judge went on to state:
‘Bearing that caution in mind, the use of the word “occurrence” in insurance policies in the context of legal liability to third parties carries a meaning that the occurrence is causally relevant to that liability. The context itself identifies the relevant occurrence as being the mishap rather than its consequences: Distillers Company BioChemicals (Australia) Pty Ltd v Ajax Insurance Company Ltd’.4
While establishment of a causally relevant ‘occurrence’ in connection with the insured’s business was required and found to be made out under the liability insurance policy in Bigby v Kondra,5 in Government Insurance Office (NSW) v Atkinson-Leighton Joint Venture (‘GIO v Atkinson-Leighton’), Stephen J when considering the material damage section of a Contractors’ All Risks Policy observed:
‘The indemnity afforded by the policy is empathetically unrelated to particular causes’.6
These comments reflect the fact that in first-party policies — whether in the nature of Contract Works, Industrial Special Risks and other forms of all risk property insurance — the scope of cover provided is generally not confined to particular risks of physical damage. Ordinarily the structure of these policies is that the limits of the scope of cover emerge from the application and operation of a number of exclusions.7
The deductible in such policies may be said to apply ‘Any One Event’ (as defined) and ‘for each event giving rise to a claim’,8 or ‘each and every loss’.
Commonly, the indemnity under such policies is not in respect of damage to property caused by an ‘Occurrence’ or ‘Event’,9 but rather the trigger for cover is ‘damage’ itself.
Furthermore, when the words ‘occurrence’ or ‘event’ do appear in insurance policies, but not as defined terms, they are often used interchangeably.
For example, in Countrywide Assured Group plc v Marshall, Morison J observed:
‘The word “event”, “occurrence” or “claim” describes what has happened; the word “cause” describes why something has happened.’10
In Rawson Homes Pty Ltd v Allianz Australia Insurance Ltd (‘Rawson Homes v Allianz’), the primary judge stated:
‘Event and occurrence usually have the same meaning. They are directed to the cause of loss, rather than the loss itself: David Kelly and Michael Ball, Kelly and Ball Principles of Insurance Law (2001, Butterworths Australia, looseleaf) at [8.0130.10].’11
Yet in the earlier mentioned High Court of Australia judgment in GIO v Atkinson-Leighton, Stephen J stated:
‘The “occurrences” of which the deductibles clause speaks must, I think, refer to the happening of loss or damage … An occurrence will therefore not be the causal event itself, but rather the consequential loss or damage which follows upon such an event.’12
This dicta may at first blush also appear to be at variance with observations made by the New South Wales Court of Appeal in Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance (Weir Services Australia), in which it was said by Barrett AJA:
‘there is a necessary distinction between the “occurrence” and the damage which results from it — or putting it another way, the “occurrence” itself cannot be the damage.’13
However, his Honour’s remarks in that case were predicated upon an insuring clause in a liability policy which defined ‘Occurrence’ as an ‘event’ which ‘results’ in property damage.14
Matters can become further complicated when one of these terms is defined within a policy of insurance, with the meaning of the defined term dependent upon the establishment of the other undefined term.
For example, in the liability insurance policy under consideration in Weir Services Australia ‘Occurrence’ was defined as ‘an event which results in Property Damage neither expected nor intended by the insured’. Frequently an insurance policy will contain a definition of ‘Event’ being ‘an occurrence or series of occurrences …’.15
It can also be problematic when the same term is used both as a defined and undefined term in the policy of insurance. For example, in the judgment at first instance in Rawson Homes v Allianz Australia Insurance,16 Henry J considered that the characterisation of the hailstorm as the one event that gave rise to Rawson Home’s claim (or claims) conformed to common sense and the ordinary and natural meaning of the word ‘event’.
Her Honour found, however, that this was to be distinguished from the meaning of ‘Indemnifiable Event’ which was the trigger for indemnity under the Insuring clause in relation to an Insured Contract.
In concluding that an ‘Indemnifiable Event’ was the damage to the specific Contract Works caused by the hailstorm, rather than to the hailstorm event itself, her Honour said:
‘That said, in my view, the deliberate use of the defined term in the Insuring clause and the use of the word “event” in other parts of the Policy signifies an intention they are to have different meanings, with the undefined word “event”… not read as limited or displaced by the defined term.’17
This has been set out to reinforce the notion that in determining the correct operation of deductible provisions within a policy of first-party insurance, great care should be taken to treat the matter as primarily one of construction of the applicable insurance policy, in the context of the loss in respect of which indemnity is sought under that policy.
As was observed by Jackson J when considering another exclusory position in LMT Surgical Pty Ltd v Allianz Australia Insurance Ltd:
‘…The surest approach is a close consideration of the contractual text in its context.’18
This is the task upon which the author will now embark by reference to decided authorities. These authorities provide illustrations of the operation of deductible provisions where firstly, there is no scope to import aggregation; and secondly, where it is permissible to infer aggregation from context, and finally where express wording dictates a search for a unifying factor.
Consideration will then be given to typical wordings which contain varying levels of aggregation.
It will be observed that notwithstanding the stated aim of aggregation clauses, being to avoid harsh outcome for insureds, this outcome is often not achieved.
Authorities
Wording which affords no scope for aggregation
In GIO v Atkinson-Leighton,19 the High Court (by Stephen, Mason, Murphy and Wilson JJ, Barwick CJ dissenting) held that the damage resulting from each of several storms which caused damage to an embankment (including prior to the completion of restoration work from earlier storms) was a separate occurrence giving rise both to an entitlement to indemnity and to an application of the deductibles clause under a contractors’ all risks policy of insurance.
As Stephen J observed:
‘That an insured should … bear a specified part of each loss is a familiar feature of insurance policies …In the present case problems arise because some of the successive storms which damaged the embankment in the course of its construction occurred in relatively quick succession, so that damage caused by one storm was not wholly made good before another storm caused further damage. Moreover, the extent of further damage to the embankment was affected by it being in an already damaged condition.’20
The insurance policy in question provided indemnity against unforeseen loss or damage to property from any cause other than those specifically excluded.
The first of the exclusions to which the clause referred provided that the insurers should not however be liable for the deductibles stated in the Schedule to be borne by the Insured in any one occurrence other than lightening or explosion.
The Schedule provided:
‘Amounts to be borne by the Insured in respect of each and every occurrence arising out of (a) earthquake, storm, tempest … the first $100,000.’21
Stephen J described this language as being:
‘”explicit”; … it involves no diminution of the continuous cover which the policy affords but it does ensure that, whenever the cover afforded by the promise to indemnify is availed of, the deductibles clause will also apply; “each and every occurrence” of loss or damage will give rise both to an entitlement to be indemnified and to an application of the deductibles clause.’22
And then:
‘It is upon the happening of every such “occurrence” that the deductibles clause operates and the plain language of the policy seems to me to require that the happening of a second damage causing storm should bring the deductibles clause into operation for a second time.’23
In adopting the interpretation of the policy urged on behalf of the insurer24 — which was that damage arising from each storm is a separate occurrence and that since each occurrence attracts a deductibles clause — the joint venture must bear the first $100,000 of damage occasioned by each storm, Stephen J said:
‘This conclusion means that in the case of each storm it is necessary to determine the relevant damage which is subject to indemnity and to apply it to the provisions of the deductibles clause. This involves in each case no more than a determination of the pre- storm state of the embankment with its post-storm state.’25
This case provides an illustration of where cause was not material, other than in determining whether, when there was an occurrence of damage, any and what amount was to be borne by the insured.
Wording which affords scope for aggregation by implying a unifying factor from general context
In the decision of Seele Austria GmBH & Co KG v Tokio Marine Europe Insurance Ltd26 (a case relevantly concerned with contract works cover), the England and Wales High Court of Justice Queens Bench Division (Technology and Construction Court) noted that the Court of Appeal (from which the case had been remitted) had held that workmanship deficiencies to each window represented a separate occurrence or event, and thus permitted the defendant to apply the retained liability (or deductible as it was called) of £10,000 to each repaired window. It noted that if, on the other hand, the defects to the repaired windows were due to design errors, it had long been accepted by the defendant that such defects, repeated throughout the glazing works would constitute only one event or occurrence under the policy, and therefore gave rise to one deductible of £10,000 in respect of all the windows.
The operative clause to the policy stated:
‘the Insurer hereby agrees to indemnify the Insured … in respect of any occurrence of loss or damage … during the period of insurance.’
Moore-Bick LJ said:
‘One must start by identifying the occurrences of damage in respect of which an insured is entitled to be indemnified, since it is to these that the aggregation provisions apply.’27
While noting that the damages had certain identifying characteristics, Moore-Bick LJ observed that the relevant aggregation provision required that the separate instances of damage should arise out of (in the sense of being caused by) one event.28 If there was to be aggregation, it was necessary therefore, to find one event which could properly be regarded as the source of all the damage.
In the judgment of the Court of Appeal majority (Moore-Bick LJ with whom Richards LJ agreed), the issue was answered:
‘The workmanship deficiencies to each window represent a separate occurrence; there was a series of occurrences, but they did not arise out of one event.’
Moore-Bick LJ, having considered various possible candidates for the ‘event’ stated:
‘I do not think that the installation of defective windows can be regarded as an event for these purposes either, however, if they had all suffered from a common defect in design and manufacture which lay at the root of the problem, it might have been possible to argue, despite the number of separate units involved, that the installation of windows with a common defect was an event for these purposes, but as I understand the Judge’s findings, that is not really the case … Rather the impression one obtains from the findings in paragraph 5 of the judgment … is that poor workmanship was really to blame. It seems fairly clear that similar short comings in workmanship affected all the windows and I am prepared to assume for present purposes that in each case the same mistakes were made. However, there is no evidence that those mistakes were attributable to a single event, such as giving the workmen wrong instructions which they then conscientiously followed so as to produce a series of similar defects. Again, had that been the case, it may have been possible to argue that giving faulty instructions was the unifying event, but the Judge’s findings point to the conclusion that the defects were simply the result of poor workmanship repeated over and over again.’29
Prior to making those findings, the Court of Appeal had considered the ‘best test’ of the existence of a single event, being to ask whether there is a unity of cause, intention, location and time.30 The Court also noted that it was not altogether easy to say precisely what constitutes an ‘event’, but noted that in AXA Reinsurance (UK) plc v Field,31 Lord Mustill (with whom the other members of the appellant committee agreed) suggested that in ordinary speak, an event is something that happens at a particular time, at a particular place, in a particular way.32
Wording containing express aggregation language: ‘continuous or repeated exposure to substantially the same general conditions’
In the Queensland Supreme Court decision by Ambrose J in QBE Insurance Ltd v MGM Plumbing Pty Ltd (QBE Insurance v MGM Plumbing),33 his Honour made a declaration that each occurrence of property damage to individual properties as a result of alleged defective waterproofing works was a separate occurrence under a broad form liability policy and attracted a separate excess. The wording in the ‘Commercial Package Policy’ relevantly was as follows:
‘Excess
If an Excess is specified in the Schedule, then you will be liable to pay that amount for every Occurrence for
which You lodge a claim under this Section.’
Under the policy, indemnity was expressed to be ‘$5m each occurrence’. ‘Occurrence’ was defined to mean:
‘an event including continuous repeated exposure to substantially the same general conditions, which results in … Property Damage neither expected nor intended to happen by You.’
In making a declaration that each occurrence of property damage to an individual property as a result of allegedly defective waterproofing works was a separate occurrence and that the insured was obliged to pay a separate excess on each and every claim, Ambrose J reasoned as follows:
‘In my view it was the unworkmanlike application of the membrane on each of the occasions it was installed in the many houses in respect of which MGM contracted with Glenwood which was the “event” or “occurrence” against liability for which the defective board given rise to multiple claims or to a single composite claim … I think … the plaintiffs are alleging a single, albeit composite head of loss and I see no basis for apply the deductible more than once.
MGM was entitled to be indemnified by QBE. It would be an unsustainable construction of the policy to hold that the relevant “event” or “occurrence” was the adoption, probably prior to the commencement of the operation of the policies, of an unacceptable method of doing subcontract work for Glenwood in the future so that each of the deficient installations could then be treated as a consequence of that one event or occurrence.34
Similarly in my view the provisions in the policy which refer to “continuous or repeated exposure to substantially the same conditions” (vide para 18 hereof) do not upon proper construction permit the unworkmanlike method of membrane installation by MGM to be categorised as a “condition” exposure to which caused all the deficient membrane installations to “arise”.35
Those provisions, in my view were directed to cases such as where a building operation conducted over a period of time causes damage to separate properties or different persons by the escape from the site of vibrations, noxious substances, etc.’36
It is clear from this case authority, that the Court regarded the ‘condition’ referred to in the ‘Occurrence’ clause as a physical condition rather than a reference to a human agent.
The impact of a '72 hour clause'
In AXA Global Risks (UK) Ltd v Haskins Contractors Pty Ltd,37 the New South Wales Court of Appeal upheld the insurer’s contention that there should have been a separate excess with respect to each wall. In that case, the Contract Works and Liability Insurance Policy had relevantly stipulated:
‘Underwriters will indemnify the Insured in respect of all Physical loss or damage to the Property Insured …
arising from any cause whatsoever subject to the exclusions …’
Excess
The Insured shall bear the following amounts in respect of each claim or series of claims arising out of the
one event.
$50,000 every loss.
The Policy also contained an Occurrence Clause in the following terms:
It is agreed that any loss or damage to any Property Insured arising during any one period of 72 consecutive hours, caused by an insured peril shall be deemed as a single event and therefore to constitute one occurrence with regard to the Excess stated in the Schedule Notwithstanding the above, it is hereby declared and agreed that where an occurrence or series of occurrences has arisen from substantially the same condition persisting for a period of time greater than 72 hours there shall be only one Policy Excess applied.
The insurers submitted that the Excess Clause was engaged and that the Occurrence Clause was not.38 The two walls were constructed at separate points in time, one being completely finished before the other was commenced. They were in different places. Different physical damage manifested itself and at different times. It was said to be irrelevant that the insured contractor had apparently committed similar breaches of contract when it erected each wall.
The insured relied on the paragraph in the Occurrence Clause which contemplated that there may be more than one occurrence, provided the several occurrences can be described as a ‘series’, and that the only connection that must exist between each occurrence in the series was that it had arisen from substantially the same condition persisting for a period of time greater than 72 hours.39
This requirement was satisfied according to the insured,40 because the damage that each wall sustained during any one period of 72 consecutive hours caused by defective workmanship or materials constituted one occurrence. The condition causing damage to each wall was substantially the same, namely defective materials and workmanship. It followed, according to the insured, that collectively the total damage to both walls constituted a series of occurrences arising from substantially the same condition persisting for longer than 72 hours.
The court upheld the insurers on the excess point, noting that the losses were separate, albeit that they stemmed from similar causes.41
The author would observe that the insured’s argument was ambitious, given that the condition referred to in the Occurrence clause is a physical condition which was clearly not the same cause of the damage to the two walls.
The ‘72 hour clause’ revisited: the relevant hierarchy between clauses and the impact of ‘open cover’
In Allianz Australia Insurance Ltd v Rawson Homes Pty Ltd (Allianz Australia Insurance v Rawson Homes), the facts of the case were as follows.42
The respondent, Rawson Homes, took out a construction insurance policy with the appellant, Allianz. It insured Rawson Home’s construction projects against material damage and for third party liability. Rawson Homes claimed under the policy in respect of damage to over 100 houses damaged by a hailstorm on 18 February 2017.
The policy made provision for the application of deductibles to certain claims. It provided that there should be a deductible of $10,000 for ‘Any One Event’ applicable to ‘Material Damage’ claims for ‘Major Perils’, which the parties agreed included the storm. In the court below, Rawson Homes contended that the deductible was to be applied only once; Allianz contended that the deductible was to be applied in respect of each building contract, each of which pertained to one of the damaged houses. The question turned on the construction of a number of terms in the policy.
The primary judge decided in favour of Rawson Homes. Her Honour held that Rawson Homes had made one claim and not multiple claims under the policy in respect of each insured contract, and that a ‘claim’ described what springs from the ‘event’. Her Honour explained that there was only one ‘event’ — the hailstorm — so that only one deductible was to be applied. At issue on appeal was whether the relevant deductible was to be applied only once, or to each building contract.
In the event, the Appeal was unanimously allowed.
Relevantly, the wording of the policy was as follows:
‘The Cover
Insuring Clauses
In respect of an Insured Contract only, we will indemnify the Insured in accordance with the Basis of
Settlement … for the following:
- Construction
For Contract Works against an Indemnifiable Event that occurs and is discovered both at the Contract Site
and during the Insured Construction Period.’
The Cover was given ‘in respect of an Insured Contract only’.
‘Insured Contract’ was defined as follows:
‘the contract or agreement entered into by the Named Insured which gives rise to the Contract Works’.
‘Contract Works’ was relevantly defined to mean:
‘the whole of the works described in the Insured Contract as required for the performance of the Insured Contract’.
‘Indemnifiable Event’ was defined relevantly to mean:
‘any sudden and unforeseen physical damage to … the relevant insured property … from any cause not otherwise excluded …’
‘Contract Site’ was defined to mean:
‘…the contract site … where the contract works are carried out …’
‘Insured Construction Period’ was defined to mean:
‘…for each Insured Contract, the period starting on the date of possession of each Contract Site by the contractor on the commencement date of the Contract Works at the Contract Site …’
‘Deductible’ was defined in the general definition to mean:
‘… either the amount of money specified in the Schedule for each applicable section or type of loss as specified, that the Insured must contribute as the first payment for all claims arising out of one event or occurrence…’.
Under the heading ‘Basis of Settlement applicable to this Section’ (viz section 1) the policy provided: ‘Application of Deductible
The amount of the Deductible will be subcontracted from the amount payable by us for each event giving rise to a claim under this Section … Only for the purpose of the application of any Deductible, any loss, destruction or damage to the Contract Works … arising during any one period of seventy two consecutive hours caused by… storm … shall be deemed to be a single event and therefore to constitute one occurrence
The Schedule provided:
‘Deductibles’
‘Major Perils [which included storm] of $10,000 Any One Event’.
As observed by Meagher JA, after noting agreement with the reasons of White JA and additional observations of Leeming JA:
‘The matter in contest is whether in circumstances where more than 100 residences under construction (each the subject of a separate building contract which commenced during the period of insurance) suffered damage in a single hailstorm, the applicable deductible of $10,000 “Any One Event” applies separately to damage to each residential site, or to the aggregate of the damage to them all’.43
His Honour went on to note that the policy was in some respects what he described as ‘open cover’ in that it insured on the terms of the standard policy wording, and subject to the limits and sub-limits in the schedule, each Insured Contract which Rawson Homes commenced during the 12-month policy period.44
His Honour then observed that the effect of this was that whilst no separate policy was issued in relation to each commenced contract, the position of Rawson Homes was essentially the same as it would have been had a separate policy been issued for each construction contract, with the Schedule not providing for the application of any aggregate deductible or limit beyond that applicable to each Insured Contract.45
As further noted, that contract in turn identified the Contract Works, Contract Site, Construction Plant and Machinery and Temporal Buildings which were insured against material damage under section 1 of the Policy. In fact, as a matter of construction, his Honour found that the whole of cover under sections 1 and 2 applied separately to each Insured Contract.46
Leeming JA, having noted agreement with White JA for the reasons given by his Honour, provided some helpful further guidance to the construction of the Policy:
‘The starting point is the insuring clause. Accepting as I do that the contract is to be read as a whole, that does not entail that each provision is equal. Rather, there is an inherent hierarchy between the insuring clause and other clauses which qualify that clause. This is because until and unless the insuring clause is engaged, the other clauses which qualify the indemnity granted in the insuring clause are inapplicable. Another way of making this point is that a premise of such other clauses applying is that the insuring clause is engaged’.47
His Honour noted that the need to read other clauses by reference to the insurance clause was given effect to in a number of decisions including that of the NSWCA in Malamit Pty Ltd v WFI Insurance Ltd,48 applying Viscount Sumner’s observation in Lake v Simmons,49 that exclusions are to be construed on the basis that they ‘cut out something already included by the general recitals and provisions’, with his Honour stating ‘the same is true of the clauses involved in the present appeal’.50
His Honour in adopting the explanations of White JA, noted that the wording of the insuring clause made clear that it turns upon each Insured Contract, which determined the ‘Contract Works’ and therefore, the ‘Contract Site’ and the ‘Construction Period’. In observing that the Total Sum Insured (of $2,732,000) was an amount per Insured Contract, His Honour went on to say:
‘Once it is seen that the Insuring Clause operates with respect to each Insured Contract, then the provisions of the policy, including the “Application of Deductible” which was central to Rawson’s construction, are to be understood as being applicable per Insured Contract and read accordingly …’51
White JA delivered the leading judgment. His Honour noted the respondent’s contention that the relevant ‘event’ (uncapitalised) in the clause headed ‘Application of Deductible’ was the hailstorm and that under the definition of ‘Deductible’, one deductible was payable for all claims arising out of that one event.52
White J determined the matter thus:
‘In the clause headed “Application of Deductible” a “claim” referees to a claim for an amount payable for each event which gives rise to a claim (“Claim” is not defined). In the absence of a definition of “claim” it must refer to a claim under the “Basis of Settlement” for the cost of repairs or the value of items damaged to the extent they are included in the Sum Insured. Such amounts are only included in the Sum Insured to the extent that the loss arises out of one event covered by the policy for any one Insured Contract after deduction of the relevant Deductible’.53
And then:
‘The primary judge held that Rawson Homes had made one claim and not multiple claims under the policy in respect of each insured contract ([69]) and [70]. Her Honour said that “a claim” described what springs from the “event” and was a demand for cover for damages for losses caused by the hailstorm ([71]).54
But as the cover was provided for each Insured Contract there was one claim for each damaged house, not one claim for all damaged houses.55
The primary judge held that the meaning of the second sub-paragraph of the clause headed “Application of Deductible” was that losses to Contract Works or other insured property over a 72 hour period caused by a storm or other natural peril were to be a single event for the purposes of the Deductible.56 This is true. But what is of more significance is the acceptance in this sub-paragraph that a Deductible is applicable to any loss, destruction or damage to the Contract Works. Contract Works are the works described in each Insured Contract, to each of which a deductible is applicable’.57
In adopting Allianz’ submission that the starting point for the construction of the policy should not be the clause headed ‘Application of Deductible’,58 but the insuring clause and that the insuring clause provided for cover for ‘Contract Works against an Indemnifiable Event’, his Honour went on to find:
‘The scheme of the policy was that there was a relevant Deductible for the cover provided against losses arising from an Indemnifiable Event for each Insured Contract’.59
While accepting the legal principles applicable to the construction of the policy set out by the primary judge which were not in dispute,60 including that:
‘An insuring clause and any exclusion clause, such as a deductible clause, must be read together in a harmonious way so that due effect is given to both and the right conferred by the former is not negated or rendered negatory by the construction adopted in relation to the later: Woodland Capital Pty Ltd v Motor Vehicles Insurance Ltd [2016] NSWCA 28 at [133]’.61
White JA found there was no ambiguity to be resolved in favour of the insured and that:62
‘The natural and ordinary meaning of the words of the policy are that Allianz insured Rawson Homes against loss or damage in respect of each Individual Contract up to the limit of the Sum Insured subject to a relevant or applicable Deductible. The Schedule to the policy shows that each event that would give rise to a claim would also trigger the relevant Deductible’.63
The decision highlights the inherent hierarchy between the insuring clause and other clauses which qualify that clause. It would have been an incongruous outcome if the insured had been found to be entitled to the benefit of multiple Limits of Liability, but subjected to only a single Excess.
Deductibles, aggregation and limits of liability
In AIG Europe v OC320301 LLP,64 it was said by the Queen’s Bench Division of the High Court of Justice:
‘Aggregation clauses permit two or more claims to be treated as a single claim where they are linked by a unifying factor of some kind. The choice of language used to express that unifying factor is of critical importance. The unifying factor may be express or it may be necessary to imply a unifying factor from the general context; see Lloyds TSB General Insurance Holdings Ltd & Ors v Lloyds Bank Group Insurance Co Ltd [2003] 4 AER 43 at paragraphs 14,15,17 and 26 per Lord Hoffman’.65
As will be apparent from the cases considered in some detail above, insurance policies can be structured such that there is essentially no aggregation of losses in relation to deductibles that can be derived from the wording, through to various levels of aggregation arising from to the particular wording used.
At the no aggregation end of the spectrum, you would expect to encounter wordings which provide an indemnity against ‘Damage to Property Insured’, with that indemnity said to be ‘subject to the Insured’s Retained Liability’, which is said to be a dollar figure ‘each and every loss’.66
As a general principle in such circumstances, it might be thought that the insured sustains a loss in respect of which it bears a retained liability, upon the occurrence of each instance of Damage to Insured Property.
As was said by Stephen J in GIO v Atkinson-Leighton:
‘In the case of deductibles, the enquiry need proceed no further than ascertainment of the happening of damage, since that is the occurrence of which the deductibles clause speaks’.67
This is one feature that commonly distinguishes first-party policies from liability policies, as the time for determining policy response under a first-party policy is generally at the time of the physical damage.68
A deductible provision might also operate by reference to an ‘event’ as an undefined term. As was said by Barrett AJA in Weir Services Australia:
‘… Loss or destruction of property (or damage to it) is a readily observable physical phenomenon. If and when loss, damage or destruction is observed, one may search for an event or state of affairs from which it resulted’.69
In such circumstances, there may be some limited scope for aggregation. While an ‘event’ is something which has been said to take place at a particular time in a particular way and for a particular reason, this does not mean that every instance of ‘Damage to Insured Property’ is necessarily a separate event; rather instances of damage can have sufficient unity of time, location and cause to be the result of the one event.70
In Kuwait Airways Corporation v Kuwait Insurance Co SAK, Rix J (as he was) said:
‘An occurrence … is not the same as a loss, for one occurrence may embrace a plurality of losses. Nevertheless, the losses circumstances must be scrutinised to see whether they involve such a degree of unity as to justify their being described as or arising out of, one occurrence. The matter must be scrutinised from the point of view of an informed observer placed in the position of the Insured. In assessing the degree of unity regard may be had to such factors as to cause, locality and time, and intentions of human agents’.71
A deductible may also be imposed by reference to an ‘Occurrence’, which is commonly defined as per the clause considered in QBE Insurance v MGM Plumbing, which provided:
‘… Occurrence — an event including continuous or repeated exposure to substantially the same general conditions’.72
In Australian Rail Track Corporation Ltd v QBE Insurance (Europe) Ltd, Meagher JA said of the same words:
‘…The reference… to “continuous or repeated exposure to substantially the same general condition” describes a cause consisting of a continuing state of affairs, and indicates that an Occurrence is not to be taken to refer only to something which happens at a particular time, at a particular place and in a particular way, which is its ordinary meaning; see for example, AXA Reinsurance (UK) PLC v Field [1996] 1 WLR 1026 at 1035 per Lord Mustill’.73
In that same case, Meagher JA considered the further words contained in the definition of ‘Occurrence’ in the insurance policy before the Court, which provided for ‘peak aggregation’ [the author’s terminology], being:
‘All events of a series consequent on or attributable to one source of original cause will be deemed one Occurrence’.74
In relation to those words, the learned Appeal Court Judge said:
‘The second sentence of the definition of Occurrence aggregates events in respect of which there is one source or original cause. The presence of that unifying factor requires that events which might otherwise constitute separate Occurrences be treated as one Occurrence for the purpose of [in that case] fixing the limits of liability’.
First-party policies sometimes adopt similar language in relation to terms which inform the operation of the deductible provisions. For example:
‘The insured shall be liable to pay the amount of the Excess in respect of each Event. If a series of claims are made arising out of the one Event then only one Excess shall apply; with “Event” being defined to mean’:
‘…an occurrence or series of occurrences consequent upon or attributable to one source or original cause [emphasis added]’.
In Distillers Co (Bio-Chemicals) (Aust) Pty Ltd v Ajax Insurance Co Ltd (Distillers),75 the High Court of Australia had to construe an aggregation clause which made reference to a ‘series of occurrences’.
Stephen J concluded:
‘The meaning of “series” in the provision is, I think, that of a number of events of a sufficiently similar kind following one another in temporal succession … Since any number of distinct events will, unless by coincidence they occur simultaneously, necessarily occur in a temporal sequence, the only remaining attribute of the concept of a series to be satisfied is that the events should be, in sufficient degree, similar in nature’.76
In Pacific Dunlop v Swinbank,77 Mandie J adopted the Distillers position when interpreting the word ‘series’ in ‘series of occurrences’. His Honour considered that it was sufficient to constitute a series of occurrences to find a number of events of a sufficiently similar nature following one another in temporal succession.78
In Standard Life Assurance Ltd v ACE European Group, the court said:
‘The clause in the present Policy uses the phrase “originating cause or source”. The choice of the word “originating” opens up, in Lord Mustill’s words, “the widest possible search for a unifying factor in the history of the losses which it is sought to aggregate”. Furthermore, the words “or source”, as an explicit alternative to “cause”, can only have been included to emphasise yet further the intention that the doctrine of proximate cause should not apply and that losses should be traced back to wherever a common origin can reasonably be found’.79
Suffice it to say that the presence of such a clause, providing for ‘peak aggregation’, can have a large impact on the extent of an insured’s retained liability, particularly where, e.g., there is a common design error that has led to multiple instances of damage on a project.80
As will also have been observed, sometimes a definition of ‘Event’ or ‘Occurrence’ may serve a dual purpose of providing a causal link to both Limits and Sub-Limits of Cover as well as the operation of the Deductible provision.
A definition of ‘Event’ being ‘… an occurrence or series of occurrences consequent upon or attributable to one source of original cause’, may inform not only the Application of the Deductible clause in the Policy but also the Limits of Liability.
In Allianz Australia Insurance v Rawson Homes, Leeming JA said:
‘I would also add that the Schedule identifies a series of limits for “Any One Event”. It was common ground that “Any One Event” for the purposes of the indemnities and additional benefits applied for each Indemnifiable Event (were this not so, then Allianz’s total liability for the more than one hundred homes damaged by the single hailstorm would have been limited to little more than $2m). The same words on the same page under the heading “Deductible” ($10,000 Any One Event) should be given the same meaning.’81
Earlier in the same paragraph, his Honour had however, observed:
‘It is possible in principle for there to be a single (aggregated) deductible applicable to the distinct indemnities arising out of the same peril. But for reasons given above and more fully by White JA, that is not the proper construction of this contract.’82
Interestingly while a common definition of ‘Event’ may inform the operation of both the Limit of Liability and the Deductible provisions, not all policies consistently apply uniform terminology across Limits of Liability and Sub-Limits of Liability.
Furthermore, there is no rule or assumption that Limits or Sub-limits of Liability and Deductible go ‘hand in hand’. It is perfectly common for Limits and Deductibles to be fixed on a different basis, with one applying per event or occurrence and the other on an aggregated basis.
Conclusion
A notable feature of the Australian (and the one UK) authorities considered in this newsletter, is that notwithstanding courts being called upon to consider Deductible and Excess wordings in policies of insurance which made provision for varying levels of aggregation, the insured’s were uniformly unsuccessful when seeking to aggregate several separate incidents of damage which all flowed from one underlying cause.83
Even though the courts refer to the deductible clause as being in the nature of an exclusory provision, it is generally recognised that it is not a true exclusion. A similar approach is however said to be taken, being that an insuring clause and a deductible clause should be read together so that due effect is given to both and the right conferred by the former is not negated or rendered nugatory by the construction adopted in relation to the latter.
Whereas the application of this principle is often self-evident in the context of a true exclusion, given the multitude of loss scenarios to which an insurance policy may be called upon to respond, it seems unlikely that a deductible provision would render an insuring clause nugatory, unless the amount of the insured retention were to somehow exceed the amount of a Limit of Liability or Sub-Limit of Liability.
Outside of this scenario (which presumably would only come about through inadvertence or drafting error), the courts have evidenced a willingness to apply a fairly black letter construction to Deductible and Excess provisions.
Clearly, the approach is that not all clauses are created equal and that there is a hierarchy to be given effect to. The starting point is the insuring clause, and the courts have been prepared to have regard not just to the insuring trigger, but the nature of the policy itself (e.g., ‘Open Cover’).
In doing so, they have resisted attempts by insured’s to elevate Deductible and Excess clauses to enjoy equal footing with the insuring provisions, and have treated them as subordinate provisions. This is particularly notable in relation to so called ‘72 hour clauses’, which seem to have been treated as secondary to even the Deductible or Excess provisions.
1 Explained by Moore-Bick LJ in Seele Austria GmbH & Co KG v Tokio Marine Europe Insurance Ltd [2008] All ER (D) 68 (May) (‘Seele Austria GmbH’).
2 Although aggregation can also be a relevant factor in informing the operation of Limits of Liability in insurance and reinsurance policies, that is not the focus of this chapter, although some guidance may be drawn from cases which consider aggregation in that context. This chapter does not purport to provide a comprehensive analysis of aggregation generally in insurance policies nor of the multitude of cases relevant thereto.
3 (1997) 9 ANZ Ins Cases 61-383, 27,206.
4 (1974) 130 CLR 1, 19.
5 [2017] QSC 37, 169.
6 (1981) 146 CLR 206, 233 (‘GIO v Atkinson-Leighton’).
7 See, e.g. LMT Surgical Pty Ltd v Allianz Australia Insurance Ltd [2014] 2 Qd R 118 at [18] (‘LMT Surgical’).
8 See Allianz Australia Insurance Ltd v Rawson Homes Pty Ltd [2021] NSWCA 224 (‘Allianz Australia Insurance v Rawson Homes’).
9 As is more commonly the case in liability policies. See, e.g., in QBE Insurance Ltd v MGM Plumbing Pty Ltd (2003) 12 ANZ Ins Cas 61-555 (‘QBE Insurance v MGM Plumbing’): the limit of indemnity was expressed to be ‘$5 m each occurrence’ (as defined) and the Excess was payable for ‘every “Occurrence” for which You lodge a claim …’.
10 [2002] All ER (D) 203 (Oct) at [245]. In a passage which was agreed with by White JA in the NSWCA, although the Court ultimately unanimously overturned the first instance judgment: Allianz Australia Insurance v Rawson Homes [2021] NSWCA 224, [43]. Disclosure, Carter Newell acted for the Appellant.
11 [2020] NSWSC 1654, [61] (‘Rawson Homes v Allianz’).
12 (1981) 146 CLR 206, at 233.
13 (2018) 359 ALR 314, [95] (‘Weir Services Australia’).
14 Ibid.
15 Ibid 29.
16 Rawson Homes v Allianz Australia Insurance [2020] NSWSC 1654, 43 in reasoning which was again agreed with by White JA on appeal.
17 Ibid 66.
18 LMT Surgical Pty Ltd v Allianz Australia Insurance Ltd [2014] 2 Qd R 118, 21.
19 Government Insurance Office (NSW) v Atkinson-Leighton Joint Venture (1981) 146 CLR 206.
20 Ibid 226–227.
21 Ibid 229.
22 Ibid 252.
23 Ibid 230.
24 Ibid 227.
25 Ibid 233.
26 Seele Austria GmbH & Co KG v Tokio Marine Europe Insurance Ltd [2008] All ER (D) 68 (May).
27 Ibid 54.
28 Ibid 55.
29 Ibid 56. The decision in this case can be contrasted with an earlier decision of the Court of Appeal in Mitsubishi Electric UK Ltd v Royal London Insurance (UK) Ltd [1994] 2 Lloyd’s Rep 249 (Mitsubishi Electric UK), in which Bingham MR reduced to trial judge’s finding of 94 deductibles down to a single deductible on the basis that cementitious board was the defective component in a singular sense which became part of each module: ‘has the defective board given rise to multiple claims or to a single composite claim … I think … the plaintiffs are alleging a single, albeit composite head of loss and I see no basis for apply the deductible more than once.’
30 Kuwait Airways Corporation v Kuwait Insurance Co SAK [1996] 1 Lloyd’s Rep 664 at 686 per Rix J. This has become known as the ‘unities test’ which was developed in the 1972 Dawsons Field arbitration award.
31 [1996] 3 All ER 517.
32 Ibid 1035. See also Distillers Co (Bio-Chemicals) (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 (Distillers); Pacific Dunlop Ltd v Swinbank (1999) 10 ANZ Ins Cas 61-439 (Pacific Dunlop) (affirmed on other grounds in (2001) ANZ Ins Cas 61-496). For a further illustration of a Court’s willingness to infer aggregation from context based on the undefined word ‘event’, please see the edition of Constructive Notes published on 21 January 2025, which considers the December 2024 decision of the Court of Appeal in Sky UK Ltd & Anor v Riverstone Managing Agency Ltd & Ors [2024] EWCA Civ 1567 (Sky UK).
33 (2003) 12 ANZ Ins Cas 61-555.
34 Ibid 36.
35 Ibid 37.
36 Ibid 38.
37 (2004) 13 ANZ Ins Cas 61-611 (AXA Global Risks).
38 Ibid 82.
39 Ibid 82–84.
40 Ibid 84.
41 Ibid 85.
42 Allianz Australia Insurance v Rawson Homes [2021] NSWCA 224. As conveniently summarised in the headnote.
43 Ibid [4].
44 Ibid [5].
45 Ibid [6].
46 Ibid [7]–[8].
47 Ibid [10].
48 [2017] NSWCA 162 at [21]–[22].
49 [1927] AC 487 at 507.
50 Allianz Australia Insurance v Rawson Homes [2021] NSWCA 224 at [10].
51 Ibid [12].
52 Ibid [39].
53 Ibid [45].
54 Allianz Australia Insurance v Rawson Homes [2021] NSWCA 224 at [46].
55 Ibid [47].
56 Ibid [57].
57 Ibid [48].
58 Ibid [49].
59 Ibid [50].
60 Ibid [43]–[47].
61 Ibid [47].
62 Ibid [61].
63 Ibid [60].
64 [2015] EWHC 2398.
65 Ibid [25].
66 In Mitsubishi Electric [1994] 2 Lloyd’s Rep 249, it was held by The Court of Appeal (at 251–3) that ‘loss’ in the deductible clause meant ‘insured loss’ since the deductible could not be intended to apply to a loss not covered by the insurance policy.
67 GIO v Atkinson-Leighton (1981) 146 CLR 206 at 233–4.
68 Callaghan v Dominion Insurance Co Ltd [1997] 2 Lloyd’s Rep 541; Globe Church Inc v Allianz Australia Insurance Ltd (2019) 99 NSWLR 470.
69 Weir Services Australia (2018) 359 ALR 314 [88].
70 R Merkin and I Enright, Sutton on Insurance Law (4th ed, Thompson Reuters, 2014).
71 [1996] 1 Lloyd’s Rep 664 at 689. This so called ‘unities test’ appears to have been accepted by the New South Wales Supreme Court as reflecting the position in Australia in Limit (No 3) Ltd v ACE Insurance Ltd [2009] NSWSC 514 (Limit (No 3)).
72 QBE Insurance v MGM Plumbing (2003) 12 ANZ Ins Cas 61-555 [16].
73 [2013] NSWCA 175 [22].
74 Ibid [23].
75 Distillers Company BioChemicals (Australia) Pty Ltd v Ajax Insurance Company Ltd (1974) 130 CLR 1.
76 Ibid [26]. Gibbs J agreed. This authority was cited with approval by the Court of Appeal of New Zealand in Moore v IAG New Zealand Ltd [2020] NZCA 319 at [20].
77 Pacific Dunlop Ltd v Swinbank (1999) 10 ANZ Ins Cas 61-439.
78 The decision of Mandie J was affirmed on appeal in the Victorian Court of Appeal.
79 [2012] EWHC 104 [259].
80 It should be noted however that in Cultural Foundation v Beazley J Ltd [2018] EWHC 1083 (Comm), it was said at [204]: ”…to construct ‘ original cause’ so widely as to encompass any claims arising from bad design on a particular project … would give too vague meaning to the words … [and that] … to say that the claims arose from ‘poor initial design … poses the test of so generalised a level as not be useful in the context of a search for an effective original clause.”
81 Allianz Australia Insurance v Rawson Homes [2021] NSWCA 224 [13].
82 Ibid [13].
83 Though see the edition of Constructive Notes published on 21 January 2025 in relation to the Sky UK decision, which featured success for the insured in the circumstances of that case.
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The material contained in this publication is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.
