Overview

This article considers the Mk.IV Advisory ISR policy and how its indemnity clauses make no reference to events occurring “during the Period of Insurance”. While this omission was addressed in the Mk.IV Modified ISR policy, many ISR policies transacted in Australia:

1. continue to use the Mk.IV Advisory ISR policy; or
2. are based on the Mk.IV Advisory ISR policy and repeat this omission.

In my view, the Mk.IV Advisory ISR policy was never intended to operate differently from the vast majority of Property policies. To the extent that the Mk.IV Advisory ISR policy has been interpreted differently, this has been based on an incorrect interpretation of the policy’s “operative clause”. This is a problem which has created a significant coverage gap and has a simple solution, but remains unaddressed by the insurance industry.

1. The Mk.IV Advisory ISR: “insured events” and the “Period of Insurance”

The Mk.IV Advisory and Mk.IV Modified ISR policies both have the same “operative clause”:

Whereas the Insured named in the Schedule has paid or agreed to pay to the Insurer(s) specified below the Premium shown on the Schedule, now the Insurer(s) agree(s), subject to the terms, Conditions, Exclusions, Memoranda, Warranties, limitations and other provisions contained herein or endorsed hereon, to indemnify the Insured as specified herein, against loss arising from any insured events which occur during the Period of Insurance stated in the Schedule or any renewal thereof. [emphasis added]

However, The Indemnity clauses in Sections 1 and 2 of the Mk.IV Advisory ISR make no reference to the “Period of Insurance”. For example, The Indemnity in Section 1 of the Mk.IV Advisory ISR reads as follows:

THE INDEMNITY
In the event of any physical loss, destruction or damage (hereinafter in Section 1 referred to as ‘damage’ with ‘damaged’ having a corresponding meaning) not otherwise excluded happening at the Situation to the Property Insured described in Section 1 the Insurer(s) will, subject to the provisions of this Policy including the limitation on the Insurer(s) liability, indemnify the Insured in accordance with the applicable Basis of Settlement.

In Understanding the ISR^[1], Manning identifies a problem with this indemnity clause:

[The Indemnity] makes no reference to the damage occurring during the Period of Insurance. Underwriters soon learned that this created a deficiency in the Policy from their perspective, in that claims have been made and paid where the occurrence giving rise to the damage occurred during the Period of Insurance but the Damage occurred after the Policy had expired. [emphasis added]

These claims arose because of how the words “any insured events which occur during the Period of Insurance” in the operative clause of the Mk.IV Advisory ISR policy were interpreted.

2. Vintix v Lumley General Insurance

Manning refers to Vintix Pty Ltd v Lumley General Insurance Ltd (1991) 6 ANZ Insurance Cases 61-050^[2] (‘Vintix‘) as an example of a claim where the occurrence giving rise to the damage occurred in a different period of insurance to the damage.

In Vintix, Giles J considered that the proximate cause of the damage in that claim was an earthquake which occurred on 28 December 1989, while the damage upon which the claim was based resulted from heavy rains that occurred six weeks later in February 1990. But the issue of which policy responded, i.e.

1. the policy in force during the proximate cause event, or
2. the policy in force when the damage occurred,

was not at issue in Vintix. Furthermore, Vintix did not involve a Mk.IV ISR policy. Vintix’s usefulness is therefore limited to an example where damage occurred subsequently to its proximate cause.

For completeness, Vintix was appealed to the New South Wales Court of Appeal: see Lumley General Insurance v Vintix Pty Ltd (1991) 6 ANZ Insurance Cases 61-087^[3]. While determining proximate cause wasn’t relevant to the issues before the court (since the policy covered both “earthquake” and “storm and/or tempest and/or rainwater”), two judges considered that rain was the proximate cause of damage, while the other judge considered earthquake to be the proximate cause.

3. What does the Mk.IV Advisory ISR mean?

I have not been able to find any Australian cases where a court has considered the Mk.IV Advisory ISR policy and what is meant by:

1. its operative clause referring to “insured events which occur during the Period of Insurance”; and
2. its indemnity clause being silent about the Period of Insurance.

To the extent that claims have been “made and paid” (to use Manning’s words) under Mk.IV Advisory ISR policies based on when the proximate cause occurred, this seems to be based on a misunderstanding of the words “insured events” as they are used in the operative clause. Because the totality of insurance theory, insurance law and other passages in the Mk.IV Advisory ISR policy – as considered in 3A., 3B. and 3C., below – strongly suggest that the “insured events” in the operative clause of the Mk.IV Advisory ISR policy (and the Mk.IV Modified ISR policy) are:

1. under Section 1 of the policy, “damage” (i.e. physical loss, damage or destruction); and
2. under Section 2 of the policy, “Damage” (i.e. loss, destruction or damage caused by any cause or event not excluded).

3A. The ISR: a policy of indemnity

The ISR policy is a policy of indemnity, and the insured only suffers loss when damage occurs. Until the damage occurs, the insurer has no obligation to indemnify the insured. In Globe Church Incorporated v Allianz Australia Insurance Limited (2019) 99 NSWLR 470 at 209, the majority (Bathurst CJ, Beazley P and Ward JA) held that:

Absent a provision in an indemnity insurance policy that makes lodgement of a claim a condition precedent to liability, the concept of a promise to indemnify (to make good the loss or to hold harmless against loss) in the context of a property damage insurance policy is such that the promise is enlivened when the property damage is suffered. Unless it be necessary for there to be a claim on the insurer to give rise to the liability, it is at the point of property damage that the insured has not been held harmless against the loss… [emphasis added]

In its “Observance of Terms and Conditions” clause, the Mk.IV Advisory ISR policy makes the “due observance and fulfilment” of the policy’s conditions and other terms of the policy conditions precedent to the insurer’s liability (“insofar as the same are capable of being construed as such”). If the insured did not exercise “due observance and fulfilment” of the Notification of Claims condition, then the insurer’s promise to indemnify would only be enlivened upon satisfactory notification. But the responding policy would still be that which was in force when the damage occurred.

3B. Other ISR policies and questions of intent

This issue with the Mk.IV Advisory ISR policy does not arise in the Mk.IV Modified ISR policy. In the Mk.IV Modified ISR policy, The Indemnity clauses in Section 1 and Section 2 were amended to contain the words “during the Period of Insurance”. For the Mk.IV Modified ISR policy, its Section 1 indemnity clause is as follows:

In the event of any physical loss, destruction or damage (hereinafter in Section 1 referred to as ‘damage’ with ‘damaged’ having a corresponding meaning) not otherwise excluded happening during the Period of Insurance at the Situation to the Property Insured described in Section 1 the Insurer(s) will, subject to the provisions of this Policy including the limitation on the Insurer(s) liability, indemnify the Insured in accordance with the applicable Basis of Settlement. [emphasis added]

The drafters of the Mk.IV Modified ISR policy made this change to remove any ambiguity about how the Mk.IV Modified ISR policy would operate. Interestingly, the drafters of the Mk.IV Modified ISR policy did not change the Operative Clause of that policy. Since it is highly likely that they would have considered the Operative Clause in conjunction with The Indemnity, the fact that they did not amend the Operative Clause suggests that:

1. they considered its “insured events” to be “damage” under Section 1 and “Damage” under Section 2; and
2. adding “during the Period of Insurance” to The Indemnity was strictly a clarification, rather than a significant change in how the policy would operate.

Separately, in the Mk.V Advisory ISR and Mk.V Modified ISR policies, the Extent of Cover clauses are explicit that “the Insured will indemnify the Insured against Damage occurring to Property Insured during the Period of Insurance”.

While I haven’t read every Property insurance policy, the overwhelming majority of such policies are explicit that they are enlivened by damage which occurs during the period of insurance. The Mk.IV Advisory ISR is highly unusual in that its indemnity clauses do not have this requirement. This invites the following questions:

1. was omission of the words “during the Period of Insurance” from The Indemnity clauses an oversight from the drafters of the Mk.IV Advisory ISR policy? Or,
2. did the drafters of the Mk.IV Advisory ISR policy intend for the policy to operate differently from the overwhelming majority of Property policies? If this was their intention, it is hard to believe that they would not have made that intention explicit.

As such, the omission of the words “during the Period of Insurance” from The Indemnity clauses of the Mk.IV Advisory ISR policy appears to be an oversight.

3C. The Property Insured

In the Mk.IV Advisory ISR policy, the clause titled “The Property Insured” provides that the definition of Property Insured is based on “the occurrence of any damage”, not the occurrence of an event (not otherwise excluded) which may cause damage:

THE PROPERTY INSURED
All real and personal property of every kind and description (except as hereinafter excluded) belonging to the Insured or for which the Insured is responsible, or has assumed responsibility to insure prior to the occurrence of any damage, including all such property in which the Insured may acquire an insurable interest during the Period of Insurance. [emphasis added]

If the Mk.IV Advisory ISR policy was intended to respond to the insured peril, then this should read “prior to the occurrence of the insured event”, or similar. It would be unfair for the insurer if property could become Property Insured after an event not otherwise excluded occurs, because the occurrence of such an event materially changes the risk.

3D. Summary

There is a significant and obvious conflict between:

1. the strong arguments that the “insured events” in the operative clause of the Mk.IV Advisory ISR policy are intended to be “damage” and “Damage” under Sections 1 and 2 of the Mk.IV Advisory ISR, respectively; and
2. claims that have been “made and paid” under Mk.IV Advisory ISR policies based on when the insured peril occurred.

4. Coverage gap created by the Mk.IV Advisory ISR

It is dangerous for insureds, their advisers and insurers to be relying on Mk.IV Advisory ISR policies given this conflict and uncertainty about policy response. Furthermore, this issue is not strictly limited to Mk.IV Advisory ISR policies: many broker-branded ISR policies and manuscript ISR policies are based on the Mk.IV Advisory ISR.

A potential coverage gap arises if an insured moves from a Mk.IV Modified ISR policy to a Mk.IV Advisory ISR policy for the subsequent policy period. For example, consider a scenario where:

1. an event not otherwise excluded occurs one day before the insured’s Mk.IV Modified ISR policy (or any other Property policy which is enlivened by damage during the period of insurance) is due to expire; and
2. the insured moves to a Mk.IV Advisory ISR policy (or an ISR policy based on the Mk.IV Advisory ISR) and damage occurs during that period of insurance.

If the Mk.IV Advisory ISR is treated as being enlivened by events not otherwise excluded during the period of insurance, then neither policy will respond to this damage or the resultant business interruption loss. If the policies provided equivalent coverage and the insurers of both policies were the same, then the insurers may agree to cover the loss and it is only a timing issue as to which policy responds. But if the policies would respond differently or the insurers are not the same, then it is not simply a timing issue: there is a real possibility of a disputed claim because the liability of the insurers may differ. Insureds, brokers and insurers should not find themselves in this position.

5. The solution: amend wordings without “during the Period of Insurance”

The solution to this problem is straightforward: Mk.IV Advisory ISR policies, and those based on such policies, should be amended to match the Mk.IV Modified ISR policy so that they operate similarly to the overwhelming majority of Property policies. Specifically,

1. in The Indemnity in Section 1 of the Policy, the words “during the period of insurance” should be added after the word “happening”; and
2. in The Indemnity in Section 2 of the Policy, the words “during the period of insurance” should be added after the word “damaged”.

While the solution is straightforward, implementation is not. While insurers are treated as the authors of insurance policies at law, insurance brokers are often responsible for those policies in practice. Furthermore, insurance brokers often:

1. oppose changes to those insurance policies; and
2. oppose insurers applying endorsements to amend them,

even when those changes or endorsements are eminently sensible. It is a sad reflection on the Australian insurance industry that this has been a known problem for over 30 years, that there is a straightforward solution for it, and that the problem persists. Insureds deserve better.