“For”, “as a result of”, and “arising out of”: Insurers and third party property damage
The Supreme Court of New South Wales has considered whether an insured’s liability policy responds to a claim by a party for its liability to parties further up the contractual hierarchy.
- Whether an insuring clause responds to a claim by an insured for cover in a claim by a third party for property damage.
- The scope of an insuring clause in a property damage policy that provides cover “for”, “in respect of” and “caused by or arising out of” property damage.
The Auburn Maintenance Centre (maintenance centre) is located on land owned by Rail Corporation of New South Wales (RailCorp) and provides maintenance services to the Waratah fleet of trains on the Sydney rail network. The Auburn City Council required a stormwater detention system (detention system) to be incorporated into a newly constructed maintenance centre.
RailCorp contracted the design and construction of the maintenance centre to Reliance Rail Pty Ltd (Reliance Rail). Reliance Rail sub-contracted design and construction of the maintenance centre to Downer. Downer sub-subcontracted the design and construction of the maintenance centre to John Holland Pty Ltd (John Holland).
The detention system was to comprise a large detention tank under a carpark with drainage in the rail area to be provided by plastic cells. John Holland sub-contracted the design of the detention system to Kellogg Brown & Root Pty Ltd (KBR) and the manufacture of the plastic cells to Atlantis Corporation (Atlantis). In early 2013 the carpark collapsed and the detention tank under the carpark was exhumed and replaced with a concrete tank.
Downer commenced proceedings against Atlantis, KBR and John Holland alleging the defects in the detention system were the result of poor design and construction, in particular the use of the plastic cells manufactured by Atlantis.
Atlantis was in administration and its public liability insurer, QBE was joined to the proceedings in its place.
John Holland contended that if it had any liability to Downer it was entitled to pass this liability on to KBR and Atlantis. KBR pursued a similar claim against Atlantis, assuming it was liable to either Downer or John Holland.
The Decision at Trial
Atlantis was not found liable to any party and the proceedings were dismissed. However, had Atlantis been liable in the various claims against it, there was an issue as to whether QBE’s policy would have responded to cover the loss, which the court dealt with, in response to the lengthy submissions made by the parties directed to that issue.
QBE resisted the claims and submitted that Atlantis’ policy was limited to coverage for property damage. The relevant insuring clause is set out below:
“We agree…to pay to You…all amounts which You shall become legally liable to pay as Compensation in respect of...Property Damage…happening during the Period of Cover…and caused by or arising out of an Occurrence in connection with Your Business.”
A number of the terms in the insuring clause were defined, including “Compensation”, which was defined to mean “monies paid or…to be paid by judgment…for…Property Damage”. Accordingly, the trial judge found that QBE agreed to indemnify Atlantis for legal liability it may have by reason of a judgment entered against it “for” property damage and also “in respect of” property damage “caused by or arising from” an unintended or unexpected event (i.e. a two limb test).
It was common ground before the court that the claims made by Downer, John Holland and KBR against Atlantis were not claims “for” property damage. Accordingly, the QBE policy would not respond.
Although it was not necessary to deal with the issue, the trial judge went on to note that in its submissions QBE relied on English authorities equating the expression “in respect of property damage” in a liability policy, with “for” property damage. In those instances the cover was thus limited to liabilities to the owner or lessee of damaged property.
The trial judge noted, however, that had he been required to determine the point, he would have been inclined to follow Australian authorities with the opposite effect, citing Siegwerk Australia Pty Ltd (in liq) v Nuplex Industries (Aust) Pty Ltd (Siegwerk), in which the full Federal Court accepted that a claim for economic loss under a similar insuring clause could be a claim “in respect of” property damage, in circumstances where the economic loss was sufficiently causally connected to property damage.
Implications for you
This case serves as a timely reminder to insurers, underwriters and brokers to approach defined terms and words in commercial contracts, including policies of insurance, with caution. Language is important and choice of words can limit or restrict cover, where those words are narrowly judicially construed.