EDWARDS DUNLOP and CO LTD v CE HEATH UNDERWRITING and INSURANCE (AUSTRALIA) PTY LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CLARKE, MEAGHER JJA and Hope AJA 26 March 1991, 17 May 1991 [1991] NSWCA 87 Term of Industrial Special Risks policy — indemnity available only for losses which occurred during currency of policy and which were discovered during term of policy or within 12 months of termination — construction of Fidelity Policy — Trial judge finds the defendant not liable to indemnify the plaintiff definition of policy period — was period confined to period mentioned in original policy, and in succeeding years to period covered by renewal? In 1983 the plaintiff, Edwards Dunlop and Co Ltd, takes out Industrial Special Risks policy from the defendant, C E Heath Underwriting Insurance (Australia) Pty Ltd which undertakes to insure it against, amongst other things, the risk of loss arising from the dishonesty of employees for 11 months. Policy is renewed for 1 year and thereupon replaced by Fidelity policy which ran for 1 year. This policy was renewed until 1989. In 1988 the plaintiff discovers losses sustained through dishonest acts of employee, Beck, extending from 1982 to 1988. The defendant agrees to indemnify the plaintiff in respect of losses occurring after April 1987 only. HELD (by Clarke JA, Hope AJA) (1) The policy failed to deal expressly with the contingency of renewal. (2) Upon each renewal the policy period was extended in accordance with the length of the renewal. In order to qualify for coverage under the policy the insured must establish that the events from which the loss flowed occurred, and the loss was discovered, during the currency of the policy (including the original terms and each renewal), or, in the case of discovery within 12 months thereafter. (3) The provisions dealing with limitation of liability are consistent with the conclusion that the parties intended that the policy remain in force when ever a renewal remained current, and that the original term, and the term of each renewal were regarded as separate periods of insurance for the purposes of ascertaining the appropriate limitation of liability. Per Meagher JA (contra): Upon each twelve monthly renewal, the period of the renewal should be treated as referable to a new "policy period". Clarke JA This appeal concerns the construction of an insurance policy described as a "Blanket Fidelity Policy" ("Fidelity Policy") pursuant to which the respondent insured the appellant and others against the risk of loss arising from the dishonesty of employees. The history of the difference between the parties can be shortly summarised as follows: In 1983 the appellant took out a policy of industrial special risks insurance ("ISR") numbered NHO 3739 under which the respondent undertook to insure the appellant against a variety of risks including the risk of loss arising from the dishonesty of employees for the period 31 May 1983 to 30 April 1984. In 1984 the policy was renewed to continue until 30 April 1985. Upon its expiration on that date it was replaced, so far as concerns losses resulting from employee dishonesty, by the Fidelity Policy which commenced on 30 April 1985 and ran until 30 April 1986. That policy was then renewed for each succeeding twelve months period until 1989. 2 UNREPORTED JUDGMENTS In about July or August 1988 the appellant discovered that it had sustained losses through the dishonesty of an employee named Beck. According to the trial judge it was agreed between the parties that the losses were sustained by reason of a series of dishonest acts extending from 1982 to June 1988. The respondent agreed to indemnify the appellant in respect of losses which occurred after April 1987 but denied its liability to provide indemnity in respect of those losses which occurred between 31 May 1983 and 30 April 1987. (There was no claim in respect of pre 31 May 1983 losses for the simple reason that there was no policy with the respondent under which such a claim could be maintained.) The disputed losses amounted, the court was advised, to $419,114.47 together with accountant's fees and interest. It will be observed that some of the disputed losses occurred during the first year of the ISR Policy, some during the year of its renewal and the others during the first two years of the Fidelity Policy. Under the terms of the ISR Policy indemnity was available only for those losses which occurred during the currency of the policy and which were discovered either during the term of the policy or within 12 months of its termination. As none of the relevant losses were discovered until years after the termination of the ISR Policy there was no question that the respondent could be liable under that policy. Its liability, if any, was to be found under the terms of the Fidelity Policy. Accordingly, the resolution of the dispute depends upon the proper construction of the Fidelity Policy and the relevant renewal certificates. In that policy the "Insuring Agreement" read: "The Underwriter, in consideration of the payment of the premium, and subject to the Declarations made a part hereof, the General Agreements, Conditions and Limitations, and other terms of this Policy, agrees to indemnify the Insured against any loss of money or other property which the Insured shall sustain through any fraudulent or dishonest act or acts committed by any of the Employees, acting alone or in collusion with others, to an amount not exceeding in the aggregate the amount stated in Item 3 of the Declarations." That agreement was subject to a number of conditions and limitations the most important of which, for present purposes was S1 which read: "Loss is covered under this Policy only if discovered not later than one year from the end of the policy period. Subject to General Agreement C this policy applies only to loss sustained by the insured through fraudulent or dishonest acts committed during the policy period by any of the employees..." The policy period was defined in Item 2 of the Declarations to be "12 months from noon on 30 April 1985". General Agreement C, which was in the nature of a transitional provision, provided as follows: "Tf the coverage of this Policy is substituted for any prior policy of insurance carried by the Insured or by any predecessor in interest of the Insured, which prior policy is terminated, cancelled or allowed to expire as of the time of such substitution, the Underwriter agrees that this Policy applies to loss which is discovered as provided in S1 of the Conditions and Limitations and which would have been recoverable by the Insured or such predecessor under such prior policy except for the fact that the time within which to discover loss thereunder had expired; provided: 1. the indemnity afforded by this General Agreement C shall be a part of and not in addition to the amount of insurance afforded by this Policy; URWARDS DUNLOP and CO LTD v CE HEATH UNDERWRITING and INSURANCE (AUSTRALIA) PTY LTD (Clarke JA) 2. such loss would have been covered under this Policy had this Policy with its agreements, limitations and conditions as of the time of such substitution been in force when the acts or defaults causing such loss were committed; and; 3. recovery under this policy on account of such loss shall in no event exceed the amount which would have been recoverable under this Policy in the amount for which it is written as of the time of such substitution, had this Policy been in force when such acts or defaults were committed, or the amount which would have been recoverable under such prior policy had such prior policy continued in force until the discovery of such loss, if the latter amount be smaller." Brownie J held that the respondent was not liable to indemnify the appellant in respect of the disputed losses. What his Honour found determinative was that the obligation to indemnify arose only in respect of losses 'discovered not later than one year from the end of the Policy Period', which phrase was defined, as I have indicated, in the initial Fidelity Policy as '12 months from noon on 30th April 1985'. When read together with the other provision of the policy these provisions were, according to his Honour, clear expressions of a consensual intention to limit liability to indemnity under the initial Fidelity Policy to losses occurring during the policy period (April 1985 to April 1986) and discovered no later than one year from the end of that period (that is, by the 30th April 1987). In addition, insofar as General Agreement C subjected claims for losses occurring during the currency of the ISR Policy to the same time limitation those claims were not maintainable. Although the position regarding losses which occurred during the period covered by the first renewal of the Fidelity Policy was slightly more complicated (there being no definition of 'policy period' in the renewal certificate) his Honour concluded that the period of renewal stipulated in the certificate (30th April 1986 to 30th April 1987) should be regarded as the 'policy period'. Before this Court counsel for the respondent relied on his Honour's conclusions arguing that, although the renewal certificates did not specify a particular policy period, it was clear that the parties intended that the period for which the policy was renewed was to be the "policy period" for the purposes of S1. The general thrust of these submissions was that indemnity was only provided under the original policy, or a specific renewal, if a dishonest act occurred within the year covered by the policy or renewal and the losses resulting from that act were discovered either during that year or within one year thereafter. The appellant contended that this was an erroneous view and that there was but one Fidelity Policy which was renewed from time to time so that the policy period would effectively be extended upon each renewal. According to this view while the original policy period was only 12 months, commencing on 30 April 1985, it was extended to two years upon the first renewal, three years upon the second renewal and so on. In addition those losses which occurred during the term of the ISR policy were covered under the Fidelity Policy by virtue of General Agreement C. The essential issue between the parties can be shortly stated as - 'Whether the policy period was confined to the period mentioned in the original policy, and in succeeding years to the period covered by each renewal, or whether the period grew in the manner I have earlier described upon renewal of the policy in each succeeding year?' 4 UNREPORTED JUDGMENTS While I can see the force of the argument which his Honour accepted I do not find it determinative. In 1985 the parties negotiated, and ultimately agreed upon, the terms of the Fidelity Policy. One of those terms was that the policy was, as is usual in the insurance industry, for a period of one year. That was the period of cover for which the insured paid the premium. If the policy had not been renewed the position would be quite clear. There could be no argument but that the policy period was that expressed in the definition. But there was no term in the policy which expressed the intentions of the parties as to whether, upon renewal, the policy period was to be extended or whether there was a new policy period for a period of twelve months. Although there was an endorsement on each renewal certificate which read "This insurance is renewed for a further period of 12 months. Subject to the terms and conditions of the policy" it is readily apparent that the renewal did not incorporate the definition of policy period which appeared in item 2 of the Declarations in the policy. It could hardly have done so given that the defined policy period expired before the commencement of the period covered by the renewal. In addition there was no definition of the policy period in the renewal certificates, nor any provision equating the period of the renewal with the policy period. Accordingly, while I see the force of his Honour's view that the literal terms of S1 and the definition of policy period in item 2 of the Declarations in the Fidelity Policy were determinative of the question I am unable to accept it. The policy simply failed to deal expressly with the contingency of renewal and, as I see it, its terms shed only limited light on the issue which has been thrown up in this litigation (that is, whether the policy period was extended on each renewal). Although it is not free from doubt I consider that when the policy was renewed a new policy of insurance did not come into existence. Rather the parties agreed on a variation of the policy when in April 1986 the respondent offered to renew the policy and the appellant accepted the offer and paid the premium appearing in the Renewal Certificate. My principal reasons for saying this are the use of the same policy number, the reference to "the terms and conditions of the policy" in the endorsement to which I have already made reference and the wording in the relevant certificate of insurance, dated 30 July 1985, to the following effect: "From 30 April 1985 to 30 April 1986... and for such further period or periods as may be mutually agreed.... The only variation which was expressed in the first renewal related to the period of insurance cover. In later years the terms of the policy were varied in another respect, that is, by increasing the sum insured in respect of "any one employee/all employees in the aggregate any one period of insurance" (my underlining). This wording, which is to be found in each of the renewals and is similar to the wording in Item 3 of the Declarations in the Policy, is an indication that upon renewal the original policy continued in force and that each twelve month term was to be treated as a discrete period for the purpose of the identification of the amount of the cover. I do not find the question of construction an easy one. There are, as it seems to me, pointers either way. The most significant in favour of the construction favoured by Brownie J is to be found in S1. There the phrase 'policy period' is used twice. Once to denote the time limitation on the discovery of the loss and once to indicate the period within which the dishonest acts, from which loss flowed, must occur. URWARDS DUNLOP and CO LTD v CE HEATH UNDERWRITING and INSURANCE (AUSTRALIA) PTY LTD (Clarke JA) Under this section loss was to be covered under the policy only if (a) it resulted from dishonest acts committed within the 'policy period' and (b) the loss was discovered no later than one year from the end of that period. Assuming no renewal its meaning was relatively clear, providing that a loss was covered only if the event from which the loss resulted occurred within the 12 month period commencing on 30 April 1985 and the loss was discovered no later than 30 April 1986. Although this provision said nothing about the effect of renewal its importance lies in the linking of both the time of the dishonest act and the discovery of the loss to the policy period. The argument being that upon renewal only losses which resulted from acts occurring during the period of renewal and discovered no later than one year from the end of that period were covered. On the other hand the period of the policy would, in the absence of a defined meaning, normally be understood to refer to the whole of the period when the policy remained in force. Here the defined meaning could not extend past the expiry date nominated in the policy itself and there was no definition of that period in any renewal certificate nor any provision in the original agreement specifying whether the defined period was to be extended upon renewal. Although the question is one of considerable difficulty I have concluded that the appellant's submissions should be accepted and that upon each renewal the policy period was extended in accordance with the length of the renewal. The effect of this conclusion is that in order to qualify for coverage under the policy the insured must establish that the events from which the loss flowed occurred, and the loss was discovered, during the currency of the policy (which includes the original terms and each renewal) or, in the case of discovery within 12 months thereafter. Provided the insured can satisfy those two conditions then, assuming the loss occurs as a result of the conduct mentioned in the Insuring agreement, it is entitled to indemnity. That conclusion does not mean that the insured was entitled to indemnity up to the limit of liability expressed in the renewal certificate in force at the time of the discovery of the loss. Although the terms of the policy lack clarity in this regard also I tend to the view that the limit of liability expressed in the policy, or in any one renewal, applies in respect of conduct leading to a loss which occurs during the period of the policy or relevant renewal, as the case may be. The alternative view is that the appropriate limitation is determined by the date of the occurrence of the loss but in the present case it does not matter which is correct. The importance of the provisions dealing with limitation of liability is that they are consistent with the conclusion that the parties intended that the policy remain in force while ever a renewal remained current and that the original term and the term of each renewal were regarded as separate periods of insurance for the purposes of the ascertainment of the appropriate limitation of liability. The reasons which lead me to conclude in favour of the appellant are as follows: The policy came into force for a period of one year and the 'policy period' was defined in Item 2 of the Declarations to be the year the policy was in force. Renewal did not bring a new policy into existence but extended the period that the policy remained in force. Upon renewal the terms and conditions of the policy remained in force (this was expressly stated in the renewal certificates) but only to the extent that they could apply during the new term and had not been expressly varied in the renewal certificate. For instance, the definition of policy period could not have been one of the terms of the first, or later, renewals for the reason I have given. It must 6 UNREPORTED JUDGMENTS follow, therefore, that once the policy was renewed the 'policy period' had a meaning other than the defined one. There were two possibilities. One that when the policy was initially renewed it meant the period of the renewal, ie the second twelve months during which the policy remained in force. The other, that upon renewal the policy period meant the whole period during which the policy remained in force. The latter meaning accords with ordinary English usage and should be preferred unless there are compelling considerations in favour of the former. For my part I can see no factors supporting the view that upon renewal the policy period meant the period which was covered by the renewal (ie. a portion only of the period when the policy remained in force). As originally defined the policy period corresponded with the period that it had been agreed that the policy remained in force and nothing in the terms of the parties agreement indicated an intention that upon renewal it should mean something different from its ordinary meaning. It was submitted that in testing the competing constructions it was important to bear in mind the commercial context. That, in this case, was that the parties negotiated the appropriate premium to secure indemnity in respect of events occurring during that year. That is, in one sense, true. But there is nothing to be found in the agreement, either in its original form or as varied upon renewal, to indicate a consensual intention that upon renewal the policy period would not be extended so that losses resulting from conduct occurring prior to April 1980 but discovered more than twelve months after 30 April 1986 would not be covered. On the contrary the policy draws a clear dichotomy between the period during which the policy remained in force and specific periods of insurance which were to be applied for limitation of liability purposes That dichotomy is most clearly expressed in S9 which provides, inter alia: "Regardless of the number of years this Policy shall continue in force and the number of premiums which shall be payable or paid, the limit of liability stated in Item 3 of the Declarations shall not be cumulative from year to year or period to period." Item 3 of the Declarations, which immediately followed the definition of policy period, expressed the limit of liability for the first year of insurance at $500,000 "any one employee and in all". There could be no clearer expression of the recognition that the policy might continue in force for more than one year and that the limit of liability in respect of each period of insurance should not be cumulative. In this context it seems clear enough that each period (whether a year or less) for which a premium had been paid represented a relevant period for the purposes of S9. There is a specific reference to the period of insurance in the same context in each of the renewal certificates demonstrating, if further demonstration be necessary, that where the parties used the phrase 'period of insurance' they were not talking about the period that the policy remained in force, or the policy period. On the contrary they were speaking of a discrete period during the continuance of the policy. There is, I should add, another indication in the policy that the parties contemplated the policy may continue beyond its original term. That is to be found in General Agreement A where the expression "current premium period" is used. In its context it is not an important factor in this case but it does serve to reinforce the support I derive from S9. UARWARDS DUNLOP and CO LTD v CE HEATH UNDERWRITING and INSURANCE (AUSTRALIA) PTY LTD (Hope AJA) It would seem, in summary, that the correct analysis is that during the first period of the policy (ie. before the first renewal) that "the policy period" was as defined but upon the renewal of the policy the terms of the parties' contractual arrangement was varied in a number of ways. The fundamental change was the extension of the period during which the policy remained in force but upon renewal the parties also impliedly agreed that the policy period be altered so as to conform with the period during which the policy remained in force. In my opinion the appeal should be allowed. I propose the following orders: (1) Appeal allowed. (2) Judgment of Brownie J set aside and in lieu declare that, on the proper construction of Industrial Special risks Policy No NH0379 and Blanket Fidelity Policy No NH004726, the appellant is entitled to be indemnified by the respondent in respect of losses sustained between 31 May 1983 and 30 April 1987 amounting to $419,114.47 together with accountant's fees and interest. (3) Remit the proceedings to the Commercial Division for the determination of the accountant's fees and interest. (4) Respondent to pay the costs at first instance and on appeal and, if qualified, to have a certificate under the Suitor's Fund Act in respect of the costs of the appeal. Meagher JA I have read the judgment of Clarke JA (which whom Hope AJA agrees) in draft. I am in melancholy dissent. I respectfully agree with the judgment of Brownie J under appeal, and I accept the submissions made by Mr Gee QC., senior counsel for the respondent, in seeking to uphold that judgment. The problem, as Clarke JA has said, is not easy of resolution; and the difficulty chiefly arises because the policies, and other documents, emanating from the insurer could not be more perplexing if they had been specifically drafted in order to generate ambiguity. The starting point must be s1 of the policy, the relevant parts of which are set out in full in Clarke JA's judgment. It is the central section of the policy. There is no doubt what it means. It employs the expression "policy period" twice, and on each occasion it referred to the yearly period of twelve months from noon on 30 April 1985. The policy did not state in express terms exactly what were the legal consequences of a renewal. However, in my view, the more appropriate inference to draw is that on each twelve-monthly renewal, the period of the renewal should be treated as referable to a new "policy period". I find it unrealistic to treat each renewal as extending the original "policy period" so that it commences by being fixed to 12 months, and gradually extends to 24 months, 36 months, 48 months, etc. It would, in my opinion, require much stronger evidence than was before his Honour to reach this conclusion. Accordingly, I would dismiss the appeal with costs. Hope AJA I agree with Clarke JA. 1. Appeal allowed. 2. Judgment of Brownie J set aside and in lieu declare that, on the proper construction of Industrial Special Risks policy No. NH0379 and Blanket Fidelity Policy No NH004726, the appellant is entitled to be indemnified by the respondent in respect of losses sustained between 31 May 1983 and 30 April 1987 amounting to $419,114.47 together with accountant's fees and interest. 8 UNREPORTED JUDGMENTS 3. Remit the proceedings to the Commercial Division for the determination of the accountant's fees and interest. 4. Respondent to pay the costs at first instance and on appeal, and, if qualified, to have a certificate under the Suitor's Fund Act in respect of 5 the costs of the appeal. Counsel for the Appellant: RBS Macfarlan QC, M Pembroke Counsel for the Respondent: C Gee QC, B Walker 10 — Solicitors for the Appellant: Mallesons Stephen Jaques Solicitors for the Respondent: Blake Dawson Waldron