Inception 2: A tale of two periods (of insurance)

In March we discussed Chief Justice Allsop’s Judgment in Swashplate Pty Ltd v Liberty Mutual Insurance Company trading as Liberty International Underwriters in our article: Yesterday, all my troubles seemed so far away… the importance of timing in the attachment of marine cargo cover. But a lot has changed in the world since March. The judgment was appealed, and on 13 August 2020, the Full Federal Court handed down its decision.

The Full Court has overturned the first instance decision and found Liberty, Insurers, liable to indemnify their Insured, Swashplate, for damage to a helicopter in transit from Mississippi to Queensland.

Act 1 – The First Instance Decision

A facility provided for the terms on which Insurers agreed to issue single transit insurance for the subject matter insured to the Insured as well as the premiums that were payable for each transit (Facility). The terms of the Facility were recorded in a master placement slip (Master Slip) which incorporated a policy wording and certain specified conditions and exclusions, including the Institute Cargo Clauses (A) (2009) (ICC(A)) and an extension providing cover for five days prior to loading (Static Cover extension). A placing slip issued by Insurers under the Facility for the subject helicopters stated “Period of Insurance: From 19 May 2018” (Placing Slip).

Insurers’ position was that the insurance took effect or attached from a point in time that commenced after the transit was underway because the Period of Insurance in the Placing Slip was stated as being from 19 May 2018.

It was common ground that the cause of the damage to the helicopter was insufficiency or unsuitability in the way the helicopter was packed for transit.

Insurers denied coverage relying on an “insufficiency of packing” exclusion under clause 4.3 of the ICC(A), which excludes indemnity for unsuitable packing which occurs “…prior to the attachment of the insurance”.

The Insured maintained that the insurance applied to the whole of the transit and in addition, by the Static Cover extension, for a further period of up to five days before loading. As the packing occurred within that period, the Insured maintained it had occurred after the risk had attached, and so it was entitled to indemnity.

The Federal Court found in favour of Insurers and held that the Period of Insurance in the Placement Slip was a plain reference to when the Static Cover commenced. This provided certainty to Insurers as to when the insurance attached. As the helicopter was packed prior to 19 May 2018 in Mississippi, the exclusion applied.

Act 2 – The Appeal

The Full Court’s reasoning on appeal centred on developing an argument for the “commercial logic” of the Static Cover extension. The Full Court held at [93]:

[Insurers] agreed to provide insurance on a worldwide basis for single transit of helicopters on terms that did not require certainty as to the date when the risk commenced or the date when the risk terminated. That certainty was to be provided by clauses in the ICC(A) that described the events when the risk attached and, importantly, also described events as to when the risk terminated. They also agreed to provide Static Cover by way of an extension for up to five days prior to the specified event which determined when risk attached, namely loading. It was not five days from a date to be specified. It was to be five days calculated from the point of loading. …providing Static Cover calculated in that way had commercial logic.

The Full Court noted that the scope of the Facility was defined on the basis that the insurance would attach in the manner provided for in ICC(A). Interpreting the Placement Slip in a manner that resulted in the risk attaching by reference to a specific date, such as from 19 May 2018, was inconsistent with the type of insurance contemplated by the Facility and would be a different risk altogether.

A commercial construction of the words adjacent to the description “Period of Insurance” in the Placement Slip was that they specified the basis upon which the particular transit was said to be within the “Period of Insurance” specified in the Master Slip. The Placement Slip did not use the language of attachment (or for that matter termination) of risk, which would be expected if it was to specify dates intended to replace the terminology set out in the ICC(A).

The Court found against Insurers on arguments around the language used in communications between Insurers and the Insured’s broker which contained references to queries on an “inception date” and confirmation that cover was “bound with effect from” 19 May. The Full Court said:

….the expression 'inception date' may be contrasted with terms such as commencement date or coverage date. Inception is a word that is commonly used to describe the starting point of an activity, undertaking or process rather than the commencement of a liability or obligation (at [46]); and

…the language used, [‘bound with effect from’], does not specify that the cover is to commence or attach from 19 May 2018….This is a statement that could establish when the agreement was to be taken to have been made… It is also a statement to be considered in the context of the nature of the insurance that was being placed, namely transit insurance under the Facility recorded in the Master Slip (at [52]).

Act 3 – The Final Period?

This case serves as an important reminder that the terms of an insurance contract will be considered in their totality and having regard to the commercial expectations of the parties.

Insureds, brokers and insurers alike should review insurance facilities to clearly understand how they are intended to operate with regard to attachment of risk and how they might be interpreted consistently with the terms of any master facility.

Clear, unambiguous and consistent language referring to attachment, the commencement of cover or for that matter the termination of a risk should be used if the parties intend that certain dates in a subsequently issued slip are to replace the terminology of the other type written terms incorporated into a master facility.

With compelling arguments on both sides, only time will tell if this decision marks the final period for this dispute…

To be continued…