In May 2024 the Federal Court of Australia held that an insurer’s primary obligation to meet the costs of reinstatement of damaged insured property necessarily extends to the cost of remediating any further damage to the property which is relevantly connected to that primary obligation. This principle applies regardless of whether the insurer’s obligation is to reinstate or to pay the costs of reinstatement. It does not matter that the further damage resulting from the primary cause sustained to the property occurred following the conclusion of the period of policy cover. The insurer’s obligation to meet the cost of reinstatement attached during the policy period, and it does not matter that the obligation became more onerous after the end of the period of cover.

A radial stacker belonging to a coalmine, which conveys coal from a train onto a product stockpile, sustained substantial structural damage in a storm on 12 March 2019 during the policy period of their Industrial Special Risks Policy. The policy period ended on 30 April 2019. In September 2019 the insured entered into a contract for remediation works to the stacker. After repairs, the stacker collapsed on 27 October 2019 during a test to determine whether the repairs of the damage caused by the March 2019 storm event had been completed. The contract works were not concluded at the time of the October 2019 failure. The court held that the policy covered the cost of reinstatement, replacement or repair and for that reason the cover extended to damage happening in the course of the repairs.

Although there was an exclusion for damage “in the course of construction” that did not apply to damage resulting from the storm damage suffered for which the insurers were already subject to an obligation to indemnify the insured. The exclusion for “testing and commissioning” did not exclude cover where the damage occurred when the property which had been damaged by an insured peril was being tested so as to bring it back to working order as part of its repair.

On the evidence, the insurer was liable to meet the costs of reinstatement and of the secondary damage which was related to and connected with that primary obligation.

A similar conclusion would be reached in South Africa under similar policy wording but the connection between the primary obligation and the subsequent damage would depend on there being an unbroken chain of causation. If some new intervening peril results in the subsequent damage unconnected with the original obligation, no duty to indemnify the subsequent damage would arise.

[Baralaba Coal Company v AAI trading as Vero Insurance [2024] FCA 532]

Baralaba Coal Company Pty Ltd v AAI Ltd trading as Vero Insurance [2024] FCA 532