Marketform Managing Agency Ltd v Amashaw Pty Ltd

[2018] NSWCA 70

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:

Marketform Managing Agency Ltd v Amashaw Pty Ltd [2018] NSWCA 70

Hearing dates:

9 March 2018

Decision date:

11 April 2018

Before:

Meagher JA at [1];
Leeming JA at [72];
Emmett AJA at [73]

Decision:

1. Appeal dismissed.
2. Cross appeal dismissed.
3. Appellant pay the respondent’s costs of the appeal and the cross-appellant pay the cross-respondent’s costs of the cross appeal.

Catchwords:

INSURANCE – Insurance Contracts Act 1984 (Cth) – duty of disclosure – innocent non-disclosure – pollution cover – whether reasonable person in insured’s circumstances could be expected to know that existing site contamination was materially different from what insurer could assume to exist in property used as service station for several years and accordingly relevant to underwriter

 

INSURANCE – liability insurance – public liability – pollution cover – where petroleum hydrocarbons from insured’s petrol station entered neighbouring sewer owned and operated by Sydney Water – where Damage defined in policy to include nuisance – whether liability for Damage occurring in its entirety during period of insurance and arising out of pollution – whether pollution the direct result of sudden, specific and identifiable event during period of insurance – whether indemnity extended to installing of interception trench to prevent escape of further contaminated groundwater from petrol station

  TORTS – private nuisance – substantial interference with enjoyment of rights in land – whether unknown presence of risk of fire or explosion could so interfere with Sydney Water’s interest in sewer

Legislation Cited:

Insurance Contracts Act 1984 (Cth), ss 21(1), 28(3)
Limitation Act 1969 (NSW), s 14(1)(b)
Protection of the Environment Operations Act 1997 (NSW), s 91
Sydney Water Act 1994 (NSW) ss 37, 38
Uniform Civil Procedure Rules 2005 (NSW), r 42.34

Cases Cited:

AXA Reinsurance (UK) Plc v Field [1996] 1 WLR 1026
Boiler Inspection & Insurance Co of Canada v Sherwin-Williams Co of Canada Ltd [1951] AC 319
Brewer v Incorporated Nominal Defendant [1980] VR 469
CGU Insurance Ltd v Porthouse (2008) 235 CLR 103; [2008] HCA 30
Chappel v Hart (1998) 195 CLR 232; [1998] HCA 55
Don Brass Foundry Pty Ltd v Stead (1948) 48 SR (NSW) 482
Environment Agency v Empress Car Co (Abertillery) Ltd [1999] 2 AC 22
Evans v Balog [1976] 1 NSWLR 36
GIO General Ltd v Newcastle City Council (1996) 38 NSWLR 558
GIO General Ltd v Wallace [2001] NSWCA 299; 11 ANZ Ins Cas 61-506
Government Insurance Office of NSW v RJ Green & Lloyd Pty Ltd (1966) 114 CLR 437
Halsey v Esso Petroleum Co Ltd [1961] 1 WLR 683
Hargrave v Goldman (1963) 110 CLR 40
Hunter v Canary Wharf Ltd [1997] AC 655
Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350
Manson v Shire of Maffra (1881) 7 VLR (L) 364
Nicholls v Ely Beet Sugar Factory Ltd [1936] Ch 343
Permanent Trustee Australia Ltd v FAI General Insurance Ltd (2003) 214 CLR 514; [2003] HCA 25
Shadwell v Hutchinson (1830) 4 Car & P 333; 172 ER 728
St Helen’s Smelting Co v Tipping (1865) 11 HLC 642; 11 ER 1483
Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Limited [2017] NSWCA 71
Thompson-Schwab v Costaki [1956] 1 All ER 652
Transport Accident Commission v Jewell [1995] 1 VR 300
Walter v Selfe (1851) 4 De G & Sm 315; 64 ER 849
Whitehouse v Fellowes (1861) 10 CB (NS) 765; 142 ER 654

Texts Cited:

FH Newark, “The Boundaries of Nuisance” (1949) 65 LQR 480
IH Jacob, Bullen and Leake and Jacob’s Precedents of Pleadings, (12th ed 1975, Sweet & Maxwell)
J McDonald, “The Insurance Implications of Environmental Liabilities” (1997) 9 Insurance Law Journal 1
WVH Rogers, Winfield and Jolowicz on Tort, (6th ed 1954, Sweet & Maxwell)

Category:

Principal judgment

Parties:

Marketform Managing Agency Ltd for and on behalf of the underwriting members of Syndicate 2468, a company incorporated in England and Wales, No. 3584320 (Appellant/Cross Respondent)
Amashaw Pty Ltd (Respondent/Cross Appellant)

Representation:

Counsel:
MR Elliott SC (Appellant/Cross Respondent)
A Sullivan QC, T Brennan (Respondent/Cross Appellant)

  Solicitors:
Colin Biggers & Paisley Pty Ltd (Appellant/Cross Respondent)
A R Connolly & Company (Respondent/Cross Appellant)

File Number(s):

2017/187097

 Decision under appeal 

Court or tribunal:

Supreme Court

Jurisdiction:

Equity Division – Commercial List

Citation:

[2017] NSWSC 612

Date of Decision:

19 May 2017

Before:

McDougall J

File Number(s):

2016/124113

Headnote

[This headnote is not to be read as part of the decision]

The appellant provided public liability insurance in respect of the respondent’s petrol station between 5 December 2011 to 15 June 2012 and then for a further 12 months. The policy relevantly indemnified the insured against “liability to pay damages … for and/or arising out of … Damage occurring in its entirety during the Period of Insurance and arising out of Pollution, but only to the extent that the Insured can demonstrate that … such Pollution was the direct result of a sudden specific and identifiable event occurring during the Period of Insurance …”. Damage was defined to include “nuisance”.

In November 2011, the insured had received a report identifying a plume of dissolved petroleum hydrocarbons in groundwater beneath and immediately beyond the petrol station. A further report in March 2012 showed the concentrations of such hydrocarbons to be generally stable or slightly lower. By May 2013, however, the plume increased due to a substantial leak of ULP 98 petrol from a failed check valve. Around that time, Sydney Water advised that petroleum hydrocarbon odours had been detected in a sewer owned and operated by it. On 3 June 2013, an explosion occurred in the sewer system. Thereafter, the insured undertook short term measures to remove contaminated groundwater from the sewer and later measures to prevent the spread of hydrocarbons from the petrol station.

The insured claimed indemnity for the costs of those measures, which the insurer denied on three grounds: (i) that non-disclosure reduced its liability to nil under Insurance Contracts Act 1984 (Cth), s 28(3); (ii) that those costs were not in respect of an insured liability; and (iii) that the insured liability only extended to the cost of the short term measures.

The primary judge (McDougall J) held: (i) that s 28(3) was not engaged because the reports received before the second period of insurance showed only historic and gradual contamination, and nothing that a reasonable person in the insured’s circumstances could be expected to know would be relevant to the insurer’s underwriting decision; (ii) that the 2013 release was a sudden, specific and identifiable event during the second period of insurance, which directly resulted in Pollution by petrol-contaminated groundwater entering neighbouring properties, and that the relevant Damage arising out of that Pollution occurred in its entirety during the second period of insurance because there was no evidence of damage (in the ordinary meaning of that word) before the explosion; and (iii) that the indemnity did not extend to the later measures because such works were undertaken not to make good existing damage but to prevent further damage. The insurer appealed against conclusions (i) and (ii) as to the existence of liability, and the insured cross appealed against conclusion (iii) as to quantum.

Held (Meagher JA, Leeming JA and Emmett AJA agreeing), dismissing the appeal and cross appeal:

i.   As at May 2012, a reasonable person in the insured’s position would have been justified in continuing to believe that the existing contamination was the result of historical leaks and spills, and neither out of the ordinary having regard to the earlier use of the site nor at risk of shifting to neighbouring properties: at [41]–[42].

Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Limited [2017] NSWCA 71; Permanent Trustee Australia Ltd v FAI General Insurance Ltd (2003) 214 CLR 514; [2003] HCA 25 applied.

ii.   The relevant Damage in the insured’s claim to indemnity was loss actionable in nuisance for substantial interference with the enjoyment of rights in land. Any such interference only occurred when Sydney Water became aware of the risk of fire or explosion associated with the presence inside its sewer line of petroleum hydrocarbons on the surface of groundwater, which occurred in its entirety during the second period of insurance. Even if the earlier, unknown presence of such hydrocarbons constituted Damage, it was not the Damage to which the short term measures were directed: at [50]–[57].

FH Newark, “The Boundaries of Nuisance” (1949) 65 LQR 480 considered. Walter v Selfe (1851) 4 De G & Sm 315, 324; 64 ER 849; St Helen’s Smelting Co v Tipping (1865) 11 HLC 642; 11 ER 1483; Don Brass Foundry Pty Ltd v Stead (1948) 48 SR (NSW) 482; Thompson-Schwab v Costaki [1956] 1 All ER 652; Shadwell v Hutchinson (1830) 4 Car & P 333; 172 ER 728; Whitehouse v Fellowes (1861) 10 CB (NS) 765; 142 ER 654; Manson v Shire of Maffra (1881) 7 VLR (L) 364 applied.

The 2013 release of ULP 98 petrol from a failed check valve was sufficiently causal to be the relevant “event” within the insuring clause because it stated a necessary and sufficient condition for, and revealed the mechanism giving rise to, the contamination of Sydney Water’s sewer. Notwithstanding the presence of contaminants released before the second period of insurance, the relevant Damage arose out of that event because that causal criterion did not require the identification of a sole cause and the large quantities of petrol released from March 2013 were sufficient to produce the fire and explosion risk: at [60]–[64].

Boiler Inspection & Insurance Co of Canada v Sherwin-Williams Co of Canada Ltd [1951] AC 319; Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350; Environment Agency v Empress Car Co (Abertillery) Ltd [1999] 2 AC 22; Government Insurance Office of NSW v RJ Green & Lloyd Pty Ltd (1966) 114 CLR 437; Brewer v Incorporated Nominal Defendant [1980] VR 469; Transport Accident Commission v Jewell [1995] 1 VR 300 applied.

iii.   The later measures were not directed to any existing nuisance because the only existing contamination to which they responded was within (or marginally outside) the petrol station and not there exposing neighbouring property to an appreciable risk of fire or explosion. Accordingly, the indemnity only extended to the short-term measures: at [68]–[69].

iv. As the quantum of the insured’s indemnity remained less than $500,000, the primary judge did not err in making no order as to the costs of the proceedings: at [70].

Uniform Civil Procedure Rules 2005 (NSW), r 42.34 applied.

Judgment

MEAGHER JA:

Introduction

1. The respondent (Amashaw) operated a petrol service station in Loftus. That and four other such sites owned by related companies were insured by the appellant (Marketform) under a Public Liability Combined Liability insurance policy. That policy was issued for the period from 5 December 2011 to 15 June 2012 and then renewed for a further 12 months. Section B insured against Pollution Liability. The northern boundary of the service station was bordered by Loftus Lane, under which a Sydney Water sewer main ran. On 3 June 2013, there was an explosion in the same sewer system, but to the west of the site (see [23] below). At about the same time, petroleum hydrocarbons were detected in works and properties to the north and east of the service station.

2. In response to the leakage of petroleum products from the Loftus site, Amashaw incurred costs totalling $1,197,320. The short-term measures undertaken were directed to pumping out the sewer, damming it and flushing it down-gradient from that damming point. Later measures included the installation of an interception trench just outside the northern and eastern boundaries of the site. Amashaw sought to recover the cost of those measures under the renewed policy. Marketform denied liability on three bases: that non-disclosure entitled it to reduce its liability to nil pursuant to Insurance Contracts Act 1984 (Cth), s 28(3); that the costs and expenses incurred were not in respect of a liability insured under Section B; and that the insured liability could only extend to the part of those costs incurred in making good damage caused by the incursion of petrol into Sydney Water’s sewer main.

3. The primary judge (McDougall J) held that Amashaw was entitled to an indemnity but only for the cost of removing contamination from Sydney Water’s sewer main, which the parties calculated as $274,000 before interest: Amashaw Pty Ltd v Marketform Managing Agency Ltd [2017] NSWSC 612. In so concluding, his Honour rejected the insurer’s non-disclosure and policy coverage arguments, but accepted its argument that the major part of the cost incurred did not represent a liability in damages to Sydney Water or any other entity affected by the contamination. Marketform appeals against the rejection of its arguments as to its liability, and Amashaw cross appeals against the determination as to quantum and refusal to make an order as to its costs of the proceedings.

4. It is convenient to deal with these issues in the order just described

Relevant terms of the insurance

5. The general insuring clause (cl 1 headed “Operative Clause”) indemnified the insured:

… as is set out in each insured Coverage Section of this Policy in respect of the Insured’s Business as stated in Item 3 of the Schedule …

6. That occupation is described as “service stations excluding motor repairs”. Coverage Section A indemnified against public liability in respect of injury or damage occurring during the period of insurance, specifically excluding liability arising directly or indirectly out of Pollution or in connection with any Product. Limited cover in respect of those excluded liabilities was provided by Coverage Sections B (cl 10) and C (cl 12), the former of which provided:

COVERAGE SECTION B – INDEMNITY

The Insured is indemnified by this Coverage Section in accordance with the Operative Clause against the Insured's liability to pay damages, including claimants' costs, fees and expenses, in accordance with the law of any country for and/or arising out of Injury and/or Damage occurring in its entirety during the Period of Insurance and arising out of Pollution, but only to the extent that the Insured can demonstrate that

10.1   such Pollution was the direct result of a sudden, specific and identifiable event occurring during the Period of Insurance;

10.2   the Insured had taken all reasonable precautions to prevent loss by Pollution.

7. There are two relevant definitions. Pollution is defined to mean “any pollution or contamination of the atmosphere or of any water, land or other tangible property”. By cl 26.4, the definition of Damage was amended to mean:

26.4 1   loss or destruction of or damage to physical property;

26.4.2   loss of use of physical property not lost, destroyed or damaged arising out of an occurrence;

26.4.3   conversion, trespass, nuisance or wrongful interference with the enjoyment of rights over physical property or interference with servitude or right of access across the property of another;

26.4.4   piracy. plagiarism, passing off, unfair competition or idea misappropriation, infringement of design, patent, copyright, title or slogan none of which arise out of advertising activities;

26.4.5   infringement of trademark, service mark or trade name.

Uncontroversial facts

Before the renewal

8. The six-month cover was agreed on, and bound from, 6 December 2011. At some time before that date, a proposal form, completed and signed on behalf of Amashaw, was forwarded to the underwriting agency, which had a limited authority to bind Marketform (and accordingly the Lloyds syndicate of which it was managing agent). That proposal drew attention to Amashaw’s duty of disclosure and contained very general questions addressed to the proposing insured’s “history”. No questions were directed to the subject of pollution, either generally or in the operation of any service station: see Judgment [62]. And no further proposal was completed when the policy was renewed on 11 May 2012.

9. From 1 June 2011, Amashaw was required by environmental protection legislation to monitor the groundwater in and around the site for petroleum hydrocarbon contamination. Thus, in the second half of 2011, Alliance Environmental Engineering and Consulting Pty Ltd (Alliance) installed fourteen monitoring wells: MW1 to MW6 on the service station site; and MW7 to MW14 to the north of the site. In particular, MW5 was located towards the northern boundary, slightly east of the north-south centre line of the site, and MW7, MW8 and MW9 were located just outside the northern boundary, at the western end, centre and eastern end, respectively. The Sydney Water sewer ran under Loftus Lane a metre or so north of the line formed by MW7, MW8 and MW9.

10. Alliance was also retained to monitor the groundwater in those wells. Its first report, dated November 2011 (before the initial insurance was bound), showed that the concentrations of benzene, toluene, ethyl-benzene, xylenes and naphthalene (BTEXN, which are light-end volatile chemical constituents of petroleum fuels) in wells MW5 and MW8 exceeded relevant assessment criteria. For example, the notification trigger for naphthalene under the Contaminated Land Management Act 1997 (NSW) is 16 μg/L; the sampled levels at MW5 and MW8 according to Alliance’s November 2011 report were 341 μg/L and 890 μg/L, respectively. Alliance advised Amashaw of its obligation to notify the NSW Office of Environment and Heritage where those criteria had been exceeded. On 14 December 2011, Alliance wrote to that office enclosing a completed “site contamination notification form”, signed on behalf of Amashaw and dated 1 December 2011. That notification also enclosed a copy of Alliance’s November 2011 assessment.

11. The NSW Environment Protection Authority (EPA) responded by letter dated 30 January 2012, which included the following:

We have assessed the information provided and note that the investigations undertaken between August and November 2011 identified petroleum hydrocarbon contamination in 4 wells onsite. We note that a dissolved phase hydrocarbon plume was also identified. This extended across the Northern site boundary in the vicinity of MW8, below the bitumen sealed Loftus Laneway and the adjacent gravel sealed car parking area. As petroleum hydrocarbon contamination was not detected in 4 of the offsite wells installed we agree that the Alliance groundwater investigation appears to have delineated the current extent of the offsite impact.

The Alliance report infers that the source of the contamination is associated with historical leaks and spills from the former UPSS refuelling activities as the current site operations have not indicated any loss of petroleum. While this could potentially be the source, consideration must also be given to possible other sources at the site. If the leak from operational tanks is below the loss monitoring detection limit, it may not be detected through Statistical Inventory Reconciliation Analysis, thus there may be potential for an ongoing source.

We also understand that two underground storage tanks at the site (tank 6 & 7) are no longer operational. These may also be a contamination source. It is not stated whether these tanks and their associated lines have been decommissioned. If tanks have not been used for a period of two years they must be decommissioned. After decommissioning the tanks, a validation report must be prepared in accordance with the UPSS Regulation and submitted to the local relevant authority.

12. In this context, the expression “dissolved phase hydrocarbon plume” referred to the lateral extent and distribution of petroleum hydrocarbon impact, according to dissolved benzene concentrations (as shown in a figure attached to the Alliance November 2011 report). Dissolved phase hydrocarbons (DPH) differ from phase separated hydrocarbons (PSH) in that the former are dissolved in groundwater whereas the latter float on the surface of groundwater.

12. The EPA then made the following three recommendations:

-   Undertake another round of groundwater monitoring to ensure that observed contaminant levels are reducing at both on site and off site locations, and

-   Undertake integrity testing of the underground petroleum storage systems and any associated lines to ensure that the system is tight and undertake rectification actions as necessary, and

-   Confirm to the EPA that the non operational tanks are not contributing to the observed contamination and have been decommissioned in accordance with both EPA and WorkCover regulatory requirements. Removal of the tanks is preferred industry best practice.

14. Further monitoring was undertaken by Alliance and reported in March 2012 and October 2012. The primary judge summarised the findings of its March 2012 report in relation to wells MW5 and MW8 as follows (Judgment [21]–[22]):

[21]   The Alliance report of March 2012 showed that the concentration of C6-C9 hydrocarbons in MW5 had diminished substantially. However, it showed, the level of BTEXN contamination had not diminished to anywhere near the trigger level for reporting. Some compounds had decreased in concentration (in the case of toluene, significantly) but others, in particular benzene and naphthalene, increased significantly.

[22]   The Alliance report of March 2012 stated that the plume of contaminated groundwater continued to exist, in the same location as before (that is to say, encompassing both MW5 and MW8, among other locations). As to MW8, the March 2012 report demonstrated that the levels of C6-C9 hydrocarbons and BTEXN in MW8 had diminished very substantially, although in each case they remained well above the trigger levels.

15. That report concluded in relation to the dissolved phase hydrocarbon plume and its impact:

In summary, the DPH plume remains contained to within the boundaries of the site, with the exception of BTEXN concentrations which extend for a short (approximately 5m) distance across the northern site boundary in the vicinity of MW8, below the bitumen sealed Loftus Laneway. An isolated exceedance of the Naphthalene criteria in MW14 was again identified, however this concentration is only marginally above the adopted criteria . The DPH impact identified within the study area including the service station site, adjacent laneway and car parking areas are unlikely to pose a risk to the environment and human health. Ongoing use of this site for retail storage and sales of petroleum products is appropriate.

16. Monitoring of the underground petroleum storage systems for leaks was undertaken by Leighton O’Brien Pty Ltd, using data obtained from the service station to produce a statistical inventory reconciliation analysis (SIRA): see Judgment [23]. Those analyses were undertaken monthly and did not suggest that there were significant leaks in the storage tanks or their associated lines at any time before about March 2013. In late March 2012, Leighton O’Brien also subjected those tanks and lines to pressure testing for leaks. Its report dated 3 April 2012 advised that all “tanks and their associated lines passed the test” and made no recommendations.

After the renewal

17. The primary judge summarised the findings in Alliance’s October 2012 report as follows (Judgment [92]):

Alliance carried out further testing in September 2012, and issued a third report in October 2012. [It] reported that the plume of contaminated groundwater appeared to have increased in size since March 2012. It reported, further, that contamination in MW5 had deteriorated. The levels of C6-C9 and C10-C14 contamination had increased markedly since March 2012. The levels of BTEXN contamination had also increased since then: markedly so, in the case of benzene. In addition, the October 2012 report indicated, for the first time, the existence of significant contamination in MW6 (which is located inside the site just east of the western boundary and close to the northern boundary, within the plume of contaminated groundwater).

18. Aurora Environmental Consulting Pty Ltd (Aurora) undertook further groundwater monitoring in April 2013 and issued a report in May 2013 (written by the same author as the earlier Alliance reports). That monitoring indicated that concentrations of petroleum hydrocarbon compounds exceeded the adopted site assessment criteria in MW6, MW7 and MW9 for all BTEXN concentrations. Aurora also reported that the dissolved benzene plume had increased from its dimensions as at September 2012. Most significantly, PSH “with a measured thickness of 0.340 m” was reported in MW5.

19. The Leighton O’Brien analyses of data from March and April 2013 indicated that the ULP 98 (unleaded petrol) tank or its associated pipes were leaking substantial volumes of petrol: Judgment [28], [94]. In particular, they suggested leakage rates, exceeding the minimum rate detectable at a 95% or greater confidence, of 43.6 litres per day in March and 80 litres per day in April. Those analyses indicated a total leakage over the months to May 2013 of about 6,660 litres of petrol: Judgment [140].

20. On 11 and 12 May, neighbours in separate properties near the site of the petrol station reported petrol odours. In response, Amashaw retained JBS Environmental Pty Ltd (JBS) to undertake an investigation. Around the same time, Sydney Water advised that petroleum hydrocarbon odours had been detected in its sewer immediately downstream from the service station’s connection point to that sewer. A likely contamination event was then reported to Marketform’s Australian underwriting agent.

21. Following a meeting on 30 May, Sydney Water wrote to Amashaw recording that the cause of the contamination would be urgently investigated to enable the scope and costs of remediation action to be quantified. Sydney Water’s letter made clear that it would seek to recover “all costs incurred for additional asset protection, clean-up, sampling of liquid and/or air sampling, monitoring and investigation costs”.

22. In its report dated 5 June 2013, JBS advised as follows:

•   Monitoring of groundwater wells has identified phase separated hydrocarbon (PSH) impact to groundwater at groundwater monitoring well MW7 located at the north-east of the service station … Observations of the groundwater monitoring well on the 2nd and 3rd June 2013 indicate that significant petroleum impact occurring as PSH is migrating towards the monitoring well. The petroleum impact was consistent with a motor spirit source. This is a strong indication that motor spirit based petroleum impact is discharging through soil and groundwater at least at the north-east portion of the site.

•   High levels of hydrocarbon vapours are present throughout the Telstra access points on and in proximity of the site. This is indicative of potentially widespread hydrocarbon contaminated soils and groundwater on the site and potentially extending off-site to the east. High levels of vapours commonly occur with recent / fresh releases of petroleum products where the most volatile constituents are present.

•   Impact present as PSH is present in the Council footpath to the east of the site. It is unknown how far to the east this impact extends. There are no measures in place to prevent vapour accumulation in service corridors in Loftus Ave as being caused by the subsurface fuels.

23. On 3 June 2013, an explosion occurred in the sewer system at National Avenue, Loftus, to the west of the site. Mr Mintilakas of Action Installations and Services Pty Ltd (AIS), retained by JBS, then undertook an investigation to identify the source of any petroleum release: Judgment [103], [104].

Expert evidence

24. Experts called by Amashaw (Dr Ryall) and Marketform (Mr Scott) gave evidence concerning the petroleum contamination. They agreed that groundwater under the northern portion of the site, the adjacent Loftus Lane and beyond had been contaminated with petroleum hydrocarbons from the service station between August 2011 and April 2013. They also agreed that the groundwater level monitoring indicated the presence of a groundwater “mound” in the area of the sewer line near MW8, which was probably attributable to a flow of water away from the sewer line. Dr Ryall’s evidence was that groundwater could flow either into or out of a damaged sewer line depending on the amount of rainfall in the locality: when the sewer lines are not at capacity, contaminated groundwater was likely to be “pulled” into the sewer line; but, after a high-rainfall event, stormwater was likely to flow from the damaged sewer line pushing the groundwater contamination away from the sewer line.

Non-disclosure (grounds of appeal 1, 2, 3 and 4)

The issue and relevant principles

25. Where an insured has innocently breached its duty of disclosure, Insurance Contracts Act, s 28(3) permits an insurer to have its liability in respect of a claim under a contract of insurance “reduced to the amount that would place the insurer in a position in which [it] would have been if the failure had not occurred”. The relevant contract was that renewed on 11 May 2012 for a 12-month period commencing 15 June 2012.

26. The duty of disclosure under s 21(1) required Amashaw:

to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:

(a)   the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or

(b)   a reasonable person in the circumstances could be expected to know to be a matter so relevant, having regard to factors including, but not limited to:

(i)   the nature and extent of the insurance cover to be provided under the relevant contract of insurance; and

(ii)   the class of persons who would ordinarily be expected to apply for insurance cover of that kind.

27. Ultimately before the primary judge, the question of non-disclosure turned on the operation of s 21(1)(b): Judgment [45]. As I observed in Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Limited [2017] NSWCA 71 at [39]:

The test for disclosure in s 21(1)(b) takes an objective standard – that of a hypothetical reasonable person – and requires a determination as to whether “in the circumstances” it “could be expected” that person would “know” the matter not disclosed to have been relevant. Thus it poses the question whether a reasonable person in the circumstances could be expected to know that the matter was relevant to the insurer’s decision to accept the risk. In answering that question:

“it is necessary … to take into account the circumstances affecting the actual insured, but the ultimate question turns on what could be expected of a reasonable person’s state of mind, not on the insured’s state of mind”.

GIO General Ltd v Wallace [2001] NSWCA 299; 11 ANZ Ins Cas 61-506 at [23] (Heydon JA), cited with approval in [CGU Insurance Ltd v Porthouse (2008) 235 CLR 103; [2008] HCA 30 at [52] n 37].

28. As the primary judge observed at Judgment [78], the requirement of knowledge in s 21(1)(b) is not satisfied by a mere belief or suspicion, however strongly held: see Permanent Trustee Australia Ltd v FAI General Insurance Ltd (2003) 214 CLR 514; [2003] HCA 25 at [30].

The primary judge’s conclusion

29. The matters said to be relevant to the insurer’s underwriting decision were contained in the November 2011 and March 2012 Alliance reports. They included (Judgment [66]):

(1)   the site was contaminated by BTEXN contaminants substantially in excess of the trigger levels that required reporting;

(2)   Amashaw was required to report the first report’s findings to the EPA;

(3)   the findings were reported, and the EPA required further monitoring to ensure that the contaminant levels were reducing;

(4)   although the levels of some contaminants reduced, the levels of others increased – in the case of benzene, very substantially;

(5)   the contaminants had polluted the subsurface groundwater; and

(6)   a plume of contaminated groundwater extended out past the northern boundary of the site and about five metres into Loftus Lane.

30. The primary judge accepted the evidence of the two underwriters called by Marketform that the content of those reports was relevant to their decision whether to accept the risk: Judgment [72].

31. His Honour then addressed what a reasonable insured in the circumstances of Amashaw could be expected to have known concerning the relevance of those reports to the insurer at the time of renewal. As to the context in which that question arose, his Honour found that such a person would know or understand (Judgment [75]–[77]):

1. that the policy insured against the risk of damage resulting from a sudden, specific and identifiable polluting event, rather than the general risk of damage by the escape of contaminants;

2. that Marketform as a regular insurer of service stations would have known that service station sites are likely to be contaminated by hydrocarbons; and

3. that the proposal form completed before the earlier period of insurance had not asked any questions as to the contamination of the site, reflecting the “obvious fact” that Marketform would have known that such sites were likely to be contaminated.

32. The critical question was then identified as being whether that hypothetical reasonable person would come to “know” from the Alliance reports of a state of affairs materially different from that which could be assumed to exist by the insurer because of the use of the insured property as a service station for a number of years: Judgment [79], [80]. In relation to that question, his Honour found that there was nothing in the evidence to suggest to such a person that the kinds or levels of contaminants described in the two Alliance reports signified anything other than the existence of contamination “that one would expect to be present having regard to the history of use of the site” (Judgment [81]). On the contrary, his Honour found that such a person would have understood (Judgment [82], [83]):

1. that those reports demonstrated only historic and gradual contamination both of the site and to some distance beyond it;

2. that those reports did not suggest that there had been any sudden, specific and identifiable event of contamination;

3. that those reports did not suggest that there was any feature of the site or its improvements that was likely to cause, or to facilitate, the occurrence of a sudden, specific and identifiable pollution event;

4. that the author of those reports did not consider the levels of contamination reported to pose any risk to the environment and human health; and

5. that the contamination was of a kind that would be unlikely to cause harm to others or to property.

33. It followed, in his Honour’s view, that there was nothing in those reports that a reasonable person in the insured’s circumstances could be expected to “know” would be relevant to Marketform’s underwriting decision; the contamination reported demonstrated only historic and gradual contamination, and not the likelihood of a sudden polluting event: Judgment [82], [84].

The parties’ submissions

34. Marketform challenges those conclusions. First, it submits that the relevant evidence pointed to a state of affairs different from what would have been expected by the insurer:

… The contamination exceeded the regulatory reporting limits by significant margins, and extended well off the site and into areas where public infrastructure lay (ie sewer pipes). The EPA did not react in a way that indicated that the pollution was everyday and expected, and instead wanted to see evidence demonstrating that the position was resolving. Amashaw itself did not think that the pollution was everyday or expected. It was positively worried and concerned about the contents of the reports, and what the EPA would make of it, and assessed the level of contamination as "significant".

35. Secondly, Marketform submits that a reasonable person, knowing that the cause of contamination had not been identified, would have appreciated that the “unknown” problem might produce or result in a further and sudden polluting event:

… as at June 2012 [following receipt of the March 2012 report], the sources of and reasons for the significant and worrying contamination on and off the site had not been identified and remained unknown. A significant problem existed; that problem was not resolving; and no specific cause for either its existence or its continuation had been established.

36. Thirdly, Marketform submits that such a person, aware that BTEXN concentrations in MW5 and MW8 continued to exceed reporting limits, would appreciate that some “climatic or geological change” might result in that pollution “shifting from offsite to onsite”.

37. In response, Amashaw relies on the primary judge’s reasoning and emphasises that nothing in the March report suggested that the measured contamination was the result of ongoing, as distinct from historic and gradual, pollution.

Disposition

38. I agree with the primary judge’s conclusion on this issue. Although the first of the Alliance reports disclosed contamination on and off site and at levels which had to be disclosed to the EPA, it contained the following conclusions:

1. that the site had been used as a retail store and fuel facility since at least 1990;

2. that the existing DPH plume was contained within the boundaries of the site with the exception of an area extending for a short distance across the northern site boundary in the vicinity of MW8;

3. that the fact of that contamination, both on and off the site, was unlikely to pose a risk to the environment and human health; and

4. that ongoing use of the site for retail storage and sales of petroleum products was “appropriate”.

39. That report was provided to the EPA in December 2011 and the subject of its response, which included three recommendations (see [11] and [13] above). That response did not express any concern about the reported existing contamination or likelihood of further significant contamination or take issue with the Alliance conclusions and views summarised above. Accepting that the Alliance report implied that the source of the contamination was associated with historical leaks and spills “as the current site operations have not indicated any loss of petroleum”, the EPA recommended consideration be given to “possible other sources at the site”. Two sources were suggested: underground storage tanks 6 and 7, which were no longer operational, and the current underground petroleum storage systems and associated lines. The EPA’s recommendations were directed to testing the correctness of the Alliance view.

40. Amashaw complied with the first two of those recommendations. The storage tanks and their associated lines were subjected to pressure testing in March 2012 and passed that test. And Alliance undertook further groundwater monitoring and reported in March 2012 that (with the exception of the benzene, ethyl-benzene and naphthalene levels in MW5, which showed slight to moderate increases) DPH concentrations were “generally stable, or slightly lower than [those] recorded during the August/November 2011 sampling rounds”. Alliance concluded that the petroleum contamination impact identified by the decreasing area of the DPH plume continued not to pose a risk to the environment and human health and that the ongoing use of the site for the sale of petroleum products remained appropriate.

41. The further testing recommended by the EPA and undertaken by Leighton O’Brien and Alliance did not identify any continuing source of leaks at the site. Considering the position as at May 2012, a reasonable person in the insured’s position would have been justified in continuing to believe that the existing contamination was the result of historical leaks and spills, and not out of the ordinary having regard to the earlier use of the site.

42. Finally, nothing in the Alliance reports suggested that a climatic or geological change might shift the onsite pollution to neighbouring properties. That risk would not be self-evident to a lay person, and there was no evidence that it was something known, or likely to be known, to Amashaw in May 2012.

Coverage under cl 10 (grounds of appeal 4.1 and 5 to 10)

Amashaw’s case before the primary judge

43. In the language of cl 10, Amashaw’s case at first instance was that the leak of ULP 98 petrol in March, April and May 2013 was a “sudden, specific and identifiable event” during the policy period; that the “direct result” of that event was “Pollution” by petrol-contaminated groundwater entering the neighbouring subsoil, sewer and storm water drains; that “Damage”, relevantly loss actionable in nuisance, occurred entirely during the second period of insurance and arose out of that Pollution; and that it thereby became liable to pay damages to Sydney Water, Sutherland Shire Council, Cityrail and owners of residential properties for that injury. On that basis, Amashaw claimed an indemnity for the cost of pumping out the Sydney Water sewer, damming it and flushing it out (the Short Term Measures) and of installing a trench just beyond the northern and eastern boundaries of the site to intercept, and thus prevent the spread of, petroleum hydrocarbons (the Later Measures). Unsurprisingly, given the costs sought to be recovered, the argument before the primary judge focused on Amashaw’s asserted liability to Sydney Water, whose statutory right to maintain the sewer was treated as analogous to an easement giving title to sue in nuisance. Senior counsel for Amashaw described the actionable loss as being:

… the contamination of the Sydney [W]ater sewer by petrol spilling or leaking from the service station creating noxious, odorous and explosive vapours which led to the explosion in the sewer on 3 June 2013.

… the cause of action accrues in nuisance when the first non-negligible loss or damage is suffered and therefore what we say here is that that occurred when the first material interference with the land or the ordinary [comfort or healthfulness] of human existence was materially diminished … [the language referring to IH Jacob, Bullen and Leake and Jacob’s Precedents of Pleadings, (12th ed 1975, Sweet & Maxwell) at 708, citing St Helen’s Smelting Co v Tipping (1865) 11 HLC 642; 11 ER 1483]

44. He repeated that submission in reply:

… mere contamination of the sewer would not constitute a nuisance and therefore not damage within 26.4.3, unless it materially interfered with the use of the property or the ordinary comfort or healthfulness of people. And it is the nuisance which is expressly stated in the policy, to constitute, Damage …

The primary judge’s reasoning

45. The primary judge upheld Amashaw’s claim that it was liable in nuisance to Sydney Water, at the latest on 3 June 2013 when petroleum hydrocarbons from the site, having entered the sewer main, exploded causing damage: Judgment [121]. In so holding, his Honour rejected two arguments by Marketform. The first was that Amashaw’s statutory obligation to make good the damage to Sydney Water’s sewer main (see Protection of the Environment Operations Act 1997 (NSW), s 91) precluded any liability for damages in nuisance to Sydney Water: Judgment [121]–[123]. That conclusion was challenged by grounds of appeal 9 and 10, neither of which is pressed except in answer to Amashaw’s cross appeal. The second argument was that the Damage did not occur in its entirety during the second period of insurance, but rather “occurred progressively over time as and when hydrocarbons from Amashaw’s service station travelled through the groundwater and entered the sewer main”, which, on Marketform’s case, was “progressively from before November 2011 … up until 3 June 2013”: Judgment [126]. The primary judge accepted, as was common ground between the experts, that petroleum hydrocarbons had entered the sewer main over a period of time starting well before the inception of the renewed policy: Judgment [105], [106], [127]. But, in answer to this second argument, his Honour found that there was “no evidence of any damage (in the ordinary meaning of that word) being caused” before petrol in the sewer main ignited and exploded: Judgment [127], [128].

46. The primary judge then addressed whether the release of about 6,660 litres of ULP 98 petrol in March, April and May 2013 was a relevant “sudden, specific and identifiable event”. Marketform had submitted that this release could not be an “event” within cl 10.1, which had to be separate from the “Pollution”, and that, even if it could, the groundwater which contaminated Sydney Water’s sewer from March 2013 onwards included petroleum hydrocarbons from leakages which had occurred before the renewed insurance period. With respect to this issue, his Honour found that the 2013 release was the result of the “spontaneous failure” of a check valve, underground and adjacent to a ULP 98 pump, as identified by Mr Mintilakas of AIS: Judgment [107], [139], [140]. He also found that the source or cause of the earlier and ongoing leakage to which Dr Ryall and Mr Scott referred was not that failed valve: Judgment [141]. From these circumstances, he inferred that the March 2013 release was the source of the PSH that entered the sewer and ignited: Judgment [133].

47. The primary judge held that release was an “event” separate from the Pollution which was its “direct result”:

[144]   In the present case, the Pollution out of which the Damage is said to have arisen (being the Damage giving rise to Amashaw’s liability to pay damages) is the contamination by petrol of Sydney Water’s sewer. It is not the contamination of the service station site itself.

[145]   The petrol that contaminated Sydney Water’s sewer was, I have found, petrol that escaped when the triangular check valve failed. The failure of the valve released petrol (the 6,660 litres to which Mr Sullivan referred) into the soil below the service station. The petrol so released then flowed with the groundwater in a generally northerly direction, across (or under) the northern boundary of the service station site and into Sydney Water’s sewer main and the soil surrounding it.

[146]   In short:

(1)   the relevant Pollution giving rise to Damage is the contamination of Sydney Water’s sewer main by petrol; and

(2)   the event causing that Pollution was the earlier discharge (in and after March 2013) of petrol from the failed check valve.

48. These conclusions made it unnecessary to consider Amashaw’s further argument that the insuring clause could be satisfied if contamination from that 2013 release, as distinct from any earlier leakages, was a necessary and sufficient, though not the sole, cause of the relevant Damage. That argument was put as follows:

… there was undoubtedly leakage of hydrocarbons into the site prior to March 2013, and a gradual process. However, that was not sufficient to cause the nuisance. I'm talking to the nuisance here because that is the Damage. What was needed and did create the nuisance was the sudden, unexpected leakage of the fuel from March onwards which caused the build up to a dangerous level of the petroleum vapours so that the odour was noticed and then there was the explosion, and that it does not matter if the earlier gradual increase contributed to that, as long as the sudden event is also an effective cause of that, that is sufficient for our purposes and for the purposes of the policy.

49. By its grounds of appeal, Marketform challenges a number of these conclusions.

Period of damage (grounds of appeal 4.1 and 5)

50. By ground 5, Marketform submits that the primary judge erred in treating the explosion on 3 June 2013 as having caused injury or damage in some sense relevant to the operation of cl 10: Judgment [127], [128]. In my view, this ground must be upheld. The indemnity at issue in Marketform’s appeal (as distinct from Amashaw’s cross appeal) relates to the Short Term Measures, which concerned the removal of existing contamination in the sewer owned and maintained by Sydney Water. Those measures were not directed to replacing sewer pipes or otherwise rectifying physical damage to land or chattels caused by the explosion. On Amashaw’s case as pleaded and conducted, and maintained on appeal, that indemnity was said to respond to liabilities in nuisance to various entities, including Sydney Water, for substantial interference with rights over land which “commenced probably on 11 May [2013], with the first complaints of petrol odours”. To the extent that interference arose from the risk of fire or explosion, the materialisation of that risk had no bearing on Amashaw’s liability, or entitlement to indemnity, in relation to the Short Term Measures.

51. That being so, the explosion did not itself constitute or cause any actionable loss in respect of which Amashaw asserted a liability to pay damages in nuisance. That conclusion makes it necessary to consider afresh Marketform’s argument that the relevant Damage did not occur in its entirety within the period of insurance as required by cl 10. That argument, which is maintained by ground 4.1, directs attention to the particular Damage allegedly suffered by Sydney Water, as understood within general principles of private nuisance.

52. For present purposes, a nuisance may be defined as an “unlawful interference with a person’s use or enjoyment of land, or of some right over, or in connection with it”: WVH Rogers, Winfield and Jolowicz on Tort, (6th ed 1954, Sweet & Maxwell) at 712 [14-4], quoted in Hargrave v Goldman (1963) 110 CLR 40 at 59 (Windeyer J). Such interference may take several forms, including the infringement of rights constituting an easement, from which interference “the law presumes damage”: Nicholls v Ely Beet Sugar Factory Ltd [1936] Ch 343 at 349–350 (Lord Wright MR). Whether by analogy with that position or otherwise, Marketform conceded that the presence of petrol in the sewer was capable of constituting a nuisance against Sydney Water, which enjoyed statutory rights to operate and maintain its sewer in land: see Sydney Water Act 1994 (NSW) ss 37, 38. Thus, both Marketform and Amashaw accepted that the state of affairs in the sewer could substantially interfere with Sydney Water’s enjoyment of rights in land, an actionable loss expressly included within the definition of “Damage”.

53. The real issue between the parties was whether that interference occurred upon the arrival of PSH in the sewer with its attendant risk of explosion (as Marketform argued) or only upon Sydney Water’s discovery of that risk (as Amashaw argued). The resolution of that issue turns on the character of the interest of Sydney Water protected from injury by the law of nuisance. As Professor Newark explained in his article “The Boundaries of Nuisance” (1949) 65 LQR 480, 488–489, extracted in Hunter v Canary Wharf Ltd [1997] AC 655 at 687–688 (Lord Goff):

In true cases of nuisance, the interest of the plaintiff which is invaded is not the interest of bodily security but the interest of liberty to exercise rights over land in the amplest manner. A sulphurous chimney in a residential area is not a nuisance because it makes householders cough and splutter but because it prevents them taking their ease in their gardens. It is for this reason that the plaintiff in an action for nuisance must show some title to realty. Likewise, it is because the plaintiff must show some act which disturbs the actual or prospective enjoyment of rights over land that we have the rule that the true nuisance should normally have some degree of permanence about it.

54. Whether a state of affairs so injures the ample exercise of rights over land is a question of fact, which may depend, for example, on the character of the locality in which an inconvenience is created: see Walter v Selfe (1851) 4 De G & Sm 315 at 322, 324; 64 ER 849 at 852 (Knight Bruce V-C); St Helen’s Smelting Co v Tipping (1865) 11 HLC 642 at 650; 11 ER 1483 at 1486 (Westbury LC); Don Brass Foundry Pty Ltd v Stead (1948) 48 SR (NSW) 482 at 486 (Jordan CJ). Noises or smells or fumes may suffice: see, eg, Halsey v Esso Petroleum Co Ltd [1961] 1 WLR 683 at 695–696 (Veale J). But they are not necessary. In Thompson-Schwab v Costaki [1956] 1 All ER 652, the alleged nuisance consisted in the use of adjoining premises for prostitution. Lord Evershed MR (with whom Romer and Parker LJJ agreed) made clear (at 654) that nuisances need “not impinge on the senses – for example, the nose or the ear”, and continued:

The case made for the plaintiff shows to my mind at least a sufficient prima facie case to this effect, that the activities being conducted at No. 12 Chesterfield Street are not only open, but they are notorious and such as force themselves on the sense of sight at least of the residents in No. 13. The perambulations of the prostitutes and of their customers in something which is obvious, which is blatant, and which as I think the first plaintiff has shown prima facie to constitute not a mere hurt to his sensibilities as a fastidious man, but so as to constitute a sensible interference with the comfortable and convenient enjoyment of his residence where live with him his wife, his son and his servants.

55. By its nature, that interference with the “convenient enjoyment” of rights could not have occurred so long as the claimant was ignorant of his neighbour’s activities. The same is true in the present case. An unknown risk of fire or explosion within the sewer lines could not restrict Sydney Water’s liberty to operate and maintain sewer works. Only upon becoming aware of that risk was Sydney Water deprived of the opportunity reasonably to exercise those rights without, for example, endangering a person working on or close to the relevant works. For that reason, any material interference with Sydney Water’s rights over land occurred when it became aware of the risk associated with the presence of PSH. It is not suggested that this took place before mid-May 2013. It follows that the relevant Damage occurred in its entirety during the second period of insurance and ground 4.1 should be dismissed.

56. There is another reason why that is so. If the mere presence of PSH in the sewer with its attendant risk of fire or explosion (whether known or unknown) constituted a nuisance against Sydney Water, that state of affairs would give rise to a fresh cause of action at every moment that it subsisted: Shadwell v Hutchinson (1830) 4 Car & P 333 at 334; 172 ER 728 at 729 (Lord Tenterden CJ); Whitehouse v Fellowes (1861) 10 CB (NS) 765 at 783–784, 786–788; 142 ER 654 at 661–662 (Williams J), 663 (Willes, Byles and Keating JJ, separately); Manson v Shire of Maffra (1881) 7 VLR (L) 364 at 375 (Stawell CJ). The instances of that state of affairs might differ only in time and extent, but the law would regard each as a distinct source of liability. By way of illustration, had Amashaw not reinstated the sewer, Sydney Water could have commenced an action six years after 15 June 2012 for any damages arising from the continuance of the risk after that date, notwithstanding that its causes of action before that date were no longer maintainable: Limitation Act 1969 (NSW), s 14(1)(b).

57. The Short Term Measures undertaken in late May and early June 2013 were directed to removing the risk of fire or explosion that existed by reason of the petrol-contaminated groundwater (including PSH) then present in the sewer, not any risk existing at an earlier point in time. It was not controversial that the ongoing presence of that risk was due to the continuous entry and flow of contaminated groundwater through the sewer. The Short Term Measures discharged a liability to Sydney Water for the reasonable cost of putting the sewer in the state it would have been in had such groundwater not entered: Evans v Balog [1976] 1 NSWLR 36 at 39–40 (Samuels JA, Moffitt P and Hutley JA agreeing). Accordingly, if the risk of fire or explosion constituted Damage, the Damage for which Amashaw was liable in damages to Sydney Water occurred in its entirety during the period of the renewed policy.

Pollution and event (grounds of appeal 6, 7, 8)

58. As Lord Mustill observed, uncontroversially, in AXA Reinsurance (UK) Plc v Field [1996] 1 WLR 1026 at 1035, “in ordinary speech, an event is something which happens at a particular time, at a particular place and in a particular way”. The primary judge found that the release of ULP 98 petrol was an event which happened in and after March 2013; underground beneath a fuel dispenser in the north-eastern corner of the site; and following the “spontaneous failure” of a gasket in the check valve identified by Mr Mintilakas: Judgment [103], [128], [139], [140]. The petrol so released flowed with the groundwater in a generally northern direction under that boundary of the site and into the sewer main and soil surrounding it: Judgment [145]. Marketform does not challenge these findings, which describe a specific happening that could sensibly be an “event” in some contexts.

59. Nevertheless, by ground 6, Marketform challenges the primary judge’s conclusion that the release was an “event” for the purpose of cl 10. Its argument fixes on the need to identify a causal relationship between the “event” and the Pollution (out of which the Damage must arise). On this basis, it submitted at trial, and the primary judge accepted, that the “Pollution must be something separate from, because it is the result of, the relevant event”: Judgment [143]; cf the similar conclusion reached under a differently worded policy in GIO General Ltd v Newcastle City Council (1996) 38 NSWLR 558 at 566–567 (Kirby P). His Honour, however, regarded Amashaw’s case as compatible with such a distinction, namely, between hydrocarbon contamination introduced into sewer pipes by the entry of groundwater (the Pollution) and the earlier release of ULP 98 on Amashaw’s site (the “event”). On appeal, Marketform does not deny that distinction. Its argument is simply that an “event” within cl 10 must be “something causal, something productive” of the Pollution and that the petrol release, as distinct from the earlier failure of the check valve, lacked that causal quality.

60. That the “event” must be causal is undoubtedly correct. Clause 10 restricts cover according to whether Pollution is the “direct” result of a “sudden, specific and identifiable event” that occurred during the period of insurance. That language requires that the event be the “proximate” cause of the Pollution: Boiler Inspection & Insurance Co of Canada v Sherwin-Williams Co of Canada Ltd [1951] AC 319 at 333 (Lord Porter). In Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350 at 369–370, Lord Shaw of Dunfermlin described the proximate cause as that which in reality is most efficient in bringing about the relevant consequence. The assessment of causal efficiency, like any question as to causation, requires a “common sense” approach in which due consideration is given to “the purpose for which the question is asked”: Environment Agency v Empress Car Co (Abertillery) Ltd [1999] 2 AC 22 at 30 (Lord Hoffmann), quoted in Chappel v Hart (1998) 195 CLR 232; [1998] HCA 55 at [63] (Gummow J).

61. The causal criterion in cl 10.1 is not directed to identifying the human agent ultimately responsible for a legal wrong. Its evident purpose is to exclude from cover liability arising from gradual polluting events: see Jan McDonald, “The Insurance Implications of Environmental Liabilities” (1997) 9 Insurance Law Journal 1 at 9. For that reason, an event identified as the proximate cause of Pollution should in general explain the process by which that Pollution results. The primary judge identified the event that directly resulted in contamination of Sydney Water’s sewer as “the earlier discharge (in and after March 2013) of petrol from the failed check valve”. That finding states a necessary and sufficient condition for, and reveals the mechanism giving rise to, that contamination, namely, the escape or release of ULP 98 petrol into subsoil and groundwater. By contrast, it is not apparent that the failure of the check valve by itself or inevitably resulted in the eventual contamination of the sewer. Nor does that failure explain precisely how that contamination occurred. The primary judge did not err in identifying the release in and after March 2013 as the event which directly resulted in the relevant Pollution. Accordingly, ground of appeal 6 should be dismissed. As Marketform no longer contends that this event was not “sudden, specific and identifiable”, ground of appeal 8 to that effect does not arise.

58. By ground of appeal 7, Marketform further submits that cl 10 was not satisfied because the Pollution out of which the relevant Damage arose included “old” contaminants, released into the groundwater before the second period of insurance and not directly resulting from the March 2013 “event”. Two considerations stand against this submission.

59. First, cl 10 limits cover by reference to Damage “arising out of” Pollution (itself the direct result of a “sudden, specific and identifiable event”). Especially where different causal criteria are used in the same clause, the expression “arising out of” requires a less proximate relationship than “caused by” or “resulting from”: Government Insurance Office of NSW v RJ Green & Lloyd Pty Ltd (1966) 114 CLR 437 at 443 (Barwick CJ). However, even the latter expressions do not require identification of the sole cause. A fortiori, the expression “arising out of” does not require that Damage “solely” arise out of the relevant Pollution: see Brewer v Incorporated Nominal Defendant [1980] VR 469 at 477 (Southwell J, Stark J agreeing); Transport Accident Commission v Jewell [1995] 1 VR 300 at 306 (Tadgell J, Ormiston J agreeing). Accordingly, even if the petroleum hydrocarbons that contaminated the sewer after March 2013 included hydrocarbons that had escaped from Amashaw’s tanks or lines before June 2012, the Damage constituted by the risk of fire or explosion in and after March 2013 arose out of Pollution in relation to which the condition in cl 10.1 was satisfied.

60. Secondly, the primary judge’s unchallenged findings that the March 2013 release permitted “large quantities of petrol to enter the soil underneath the service station” and that “petrol so released then flowed with the groundwater … into Sydney Water’s sewer main” (Judgment [140], [145]) justified a conclusion that pollution from that source was sufficient to produce the fire and explosion risk which existed from March 2013: Judgment [140]. The large quantities (thousands of litres) of PSH were orders of magnitude greater than the concentrations of DPH recorded in Alliance’s reports. For these reasons, ground of appeal 7 also should be rejected.

Quantum of indemnity (grounds of cross appeal 1 to 4)

The primary judge’s conclusion

65. The primary judge rejected Amashaw’s claim to an indemnity in respect of the Later Measures, which involved creating an interception trench running outside but parallel to the northern and eastern boundaries of the site; a pump system in the trench to remove intercepted groundwater; and vapour extraction pipes connected to that system to remove petrol vapour, particularly beyond the eastern boundary. In essence, his Honour concluded that such works “were not undertaken to make good the damage caused”, but rather “to prevent further damage from being caused”: Judgment [158].

The parties’ submissions

66. By its cross appeal, Amashaw maintains that the primary judge should have found that actionable nuisances were committed from mid-May 2013 with respect to “neighbouring properties in 10th Avenue, National Avenue and Loftus Avenue”; Telstra’s “access points” in proximity to the service station site; and Sutherland Shire Council’s stormwater drains (grounds of cross appeal 3 and 4). It also maintains that the Later Measures were reasonably incurred in the abatement of existing nuisances and their cost did not exceed the quantum of those liabilities (grounds of cross appeal 1 and 2). In support of that position, it seeks to characterise the Later Measures as work “necessary to be done to prevent or stop further consequences following from the existing nuisance”, by the movement of contaminants carrying a risk of explosion or other physical damage to neighbouring properties.

67. Marketform supports the correctness of the primary judge’s conclusion. It submits that the interception trench merely served to prevent contaminated groundwater from travelling away from the petrol station site and beyond the line of the trench, thereby preventing further contaminated material from reaching, encroaching upon and damaging third party property in the future. As such, it submits, those works were directed to preventing Amashaw from incurring a liability to pay damages in the future, not abating an existing nuisance.

Disposition

68. Marketform’s position should be accepted. The evidence did not suggest that the Later Measures were directed to rounding up and removing contaminated groundwater that might have already escaped beyond the trench line and in the direction of third-party property. The only “existing contamination” to which those measures responded was the contamination within (or marginally outside) the petrol station site as bounded by the interception trench. Amashaw did not suggest that the contamination so situated exposed neighbouring property to an appreciable risk of fire or explosion, or any other actionable loss. For that reason, it did not in any sense constitute an “existing nuisance” before its interception. The trench may have served to “diminish or minimise the consequences which were continuing of the existing contamination”, as Amashaw submitted. But it did not diminish or minimise the consequences of an existing nuisance. That conclusion accords with Mr Scott’s evidence, which clearly distinguished the Short Term Measures, directed to remediating existing contamination to the sewer lines, from the Later Measures, directed to preventing further contamination.

69. Finally, whilst there was evidence of contamination of Sutherland Council’s stormwater drain and the Telstra pits, in each case by petrol vapour, Amashaw accepted that no costs were incurred in removing that particular contamination from those drains or pits. Indeed, Amashaw’s case did not specifically relate the cost of any part of the Later Measures to the removal of contaminants in, or restoration of, property owned or operated by any person or entity other than Sydney Water. Accordingly, the existence of liabilities in nuisance to those other parties would not support the relief sought by the cross appeal.

Costs (ground of cross appeal 5)

70. The primary judge made no order as to the costs of the proceedings, with the intention that each party should pay its own costs: Amashaw Pty Ltd v Marketform Managing Agency Ltd (No 2) [2017] NSWSC 793. Because Amashaw recovered an amount less than $500,000, it was not entitled to a costs order unless the Court was satisfied that its commencement and continuation in the Supreme Court, rather than the District Court, was warranted: Uniform Civil Procedure Rules 2005 (NSW), r 42.34. If grounds 1 to 4 are rejected, the quantum of Amashaw’s indemnity remains less than $500,000 and the premise of ground 5 (that in considering costs his Honour proceeded on an error as to quantum) is not made out. Amashaw’s written submissions contend for two further errors of principle in the primary judge’s exercise of the costs discretion. Those errors are not the subject of any ground of appeal and were not relied on in the oral argument. It follows that ground 5 also must be dismissed.

Conclusion

71. In the result, I propose the following orders:

1. Appeal dismissed.

2. Cross appeal dismissed.

3. Appellant pay the respondent’s costs of the appeal and the cross-appellant pay the cross-respondent’s costs of the cross appeal.

72. LEEMING JA: I agree with Meagher JA.

73. EMMETT AJA: The respondent, Amashaw Pty Ltd (Amashaw), is the operator of a service station at Loftus. Amashaw made a claim under a public liability policy of insurance (the Policy), the underwriters under which are represented by the appellant, Marketform Managing Agency Ltd (Marketform). The claim was for reimbursement of expenses incurred by Amashaw following contamination, from petroleum products stored in the service station, of neighbouring land and sub-soil water abutting the site of the service station.

74. By cl 10 of the Policy, Amashaw was indemnified against its liability to pay damages for or arising out of “Injury and/or Damage occurring in its entirety during the Period of Insurance and arising out of Pollution”, but only to the extent Amashaw could demonstrate that:

• such Pollution was the direct result of a sudden, specific and identifiable event occurring during the Period of Insurance; and

• Amashaw had taken all reasonable precautions to prevent loss by Pollution.

The term “Damage” was relevantly defined in the Policy as:

• loss or destruction of or damage to physical property;

• loss of use of physical property not lost, destroyed or damaged arising out of an occurrence; and

• conversion, trespass, nuisance or wrongful interference with the enjoyment of rights over physical property.

The term “Pollution” was defined in the Policy as meaning any pollution or contamination of the atmosphere or of any water, land or other tangible property. The Period of Insurance under the Policy was 12 months to 11 May 2012.

75. Marketform refused indemnity. It denied liability on two bases. The first was that Amashaw had failed to disclose the contents of reports that it had received concerning contamination (the Contamination Reports). Marketform also rejected the claim on the basis that the expenses in question were not covered by the wording of the Policy. Amashaw thereupon commenced proceedings in the Commercial List of the Equity Division, claiming a declaration that it was entitled to indemnity in respect of certain expenses that it incurred. For reasons published on 19 May 2017, a judge sitting in the Commercial List (the primary judge) concluded that Amashaw was entitled to be indemnified in respect of one category of expense for work, referred to as “the Restorative Work”, but held that Amashaw was not entitled to indemnity in respect of the other category of expense for work, referred to as the “Preventative Work”. The primary judge declined to make an order for costs in Amashaw’s favour.

76. In relation to the question of whether or not the Restorative Work gave rise to a liability to pay damages arising out of Damage occurring during the Period of Insurance, the primary judge found that, from at least November 2011, there had been a leakage of petrol into the soil from some of the fixtures or installations on the site of the service station. His Honour found that it was not possible to identify the source of that petrol prior to March 2013. However, his Honour was satisfied that in about March 2013 a valve failed, thus permitting some 6,660 litres of unleaded petrol to enter the soil underneath the service station during the Period of Insurance.

77. The primary judge was satisfied that the leakage of petrol was an “event” for the purposes of the clause 10 of the Policy. The petrol so released flowed with the ground water in a generally northerly direction, across or under the northern boundary of the service station and into the sewer main belonging to Sydney Water and into the soil surrounding it. His Honour concluded that the leakage of petrol constituted a sudden specific and identifiable event that occurred during the Period of Insurance. He was satisfied that the contamination of the sewer main constituted Pollution and that that Pollution was the direct result of that event. His Honour was satisfied that Damage, consisting of wrongful interference with Sydney Water’s enjoyment of rights over the sewer main, had been occasioned. His Honour was satisfied that that Damage occurred in its entirety during the Period of Insurance. Finally, his Honour was satisfied that the Damage arose out of the Pollution described above.

78. By notice of appeal filed on 1 September 2017, Marketform appealed from the order that it indemnify Amashaw in respect of the Restorative Work. By Cross Appeal filed on 15 September 2017, Amashaw appealed from the order dismissing the proceedings in respect of the claim for indemnity in respect of the Preventative Work. Amashaw also cross appealed from the refusal to order costs in its favour.

79. I have the advantage of considering in draft form the proposed reasons of Meagher JA. I agree with his Honour that the primary judge made no error in concluding that there had been no relevant non-disclosure.

80. Marketform contends that the primary judge ought to have found that the contamination of the sewer with petrol, which it accepted constituted Damage, had not occurred in its entirety within the Period of Insurance, but rather had occurred across of a period that commenced prior to the Period of Insurance. It contended that his Honour ought to have found that, by reason of those matters, Amashaw had not established that its claim fell within the scope of clause 10. Marketform also contended that his Honour erred in not finding that the leakage of petrol was not an event within the meaning of clause 10. Finally, Marketform contended that the primary judge erred in concluding that leakage of petrol could be considered to be something different from Pollution and thus capable of constituting an event. Marketform conceded that the failure of the valve could constitute an event within the meaning of clause 10 but that case was not advanced on behalf of Amashaw. While Marketform originally contended that his Honour ought to have found that, even if the leakage of petrol could properly be characterised as an event, the event was not sudden, specific and identifiable, that contention was abandoned. I agree with Meagher JA, for the reasons proposed by his Honour, that the primary judge made no error in relation to the operation of clause 10.

81. In its cross appeal, Amashaw contended that the primary judge should have found that construction of the interception system in the public streets surrounding the service station, being the Preventative Works, was necessary to prevent continuation of petrol entering the water main from soil surrounding it and to control the continuation of the flow of petroleum beneath the land beyond the eastern boundary of the service station. I agree with Meagher JA, for the reasons proposed by his Honour, that the primary judge made no error in concluding that the Preventative Work was designed to prevent nuisance rather than to abate nuisance. In effect, Amashaw was seeking insurance cover in respect of the cost of satisfying the condition of cover that it had taken all reasonable precautions to prevent loss by Pollution. The Preventative Work was in effect a precaution to prevent loss in the future by Pollution.

82. Finally, I agree with Meagher JA that the primary judge made no error in the exercise of the costs discretion in making no order as to the costs of the proceedings, with the intention that each party should pay its own costs. I agree with Meagher JA that both the appeal and the cross appeal should be dismissed. I agree with the orders proposed by his Honour.

**********

Decision last updated: 11 April 2018