Building, Construction & Property Building, Construction & Property

Building, Construction & Property

29 July 2020 | Insurance & Health
Form trumps substance as builder escapes liability for fire

In this important case, we discuss the Court of Appeal’s key findings, including what may prove to be the most important and far-reaching element of its decision, namely the determination that it is form, rather than substance, which is critical to determining whether a claim is ‘apportionable’ under the proportionate liability regime. 

The background

In February 2019, we reported on the decision of the Victorian Civil and Administrative Tribunal related to a fire which occurred at Melbourne’s Lacrosse residential tower on 24 November 2014. The fire was sparked by a stray cigarette discarded by a French tourist but spread rapidly due the presence of aluminium composite panels (ACPs) used on the façade of the tower. The ACPs had a 100% polyethylene core and were highly combustible. The losses claimed as a result of the fire exceeded $12M.

At first instance His Honour Judge Woodward found that the use of ACPs did not satisfy the Deemed-to-Satisfy (DTS) provisions of the Building Code of Australia (BCA) and that as such, the builder involved in the project had breached warranties implied into the contract by s.8 of the Domestic Building Contracts Act 1995 (Vic) (DBCA).

Judge Woodward found that there was no failure to take reasonable care by the builder in the selection and use of ACPs as the builder had engaged and relied on advice provided by highly skilled professionals. Judge Woodward apportioned liability as follows:

  1. Fire engineer - 39%
  2. Building surveyor – 33%
  3. Architect – 25%
  4. French tourist – 3%

The decision on appeal

The VCAT decision was appealed by the building surveyor, architect and fire engineer (collectively referred to as the consultants). The Court of Appeal (CoA) comprised of Justices Beach, Osborn and Stynes considered 11 grounds of appeal. All but one very minor ground of appeal were unsuccessful. 

Commentary on the CoA’s decision has largely focused on the following key takeaways:

  1. the CoA endorsed the position that the Tribunal was correct in finding that the builder had no liability, because it was entitled to rely on the skill and expertise of the highly skilled professional consultants it had engaged and otherwise confirmed the consultants’ respective exposure;
  2. any dispute regarding whether ACPs satisfied the DTS provisions of the BCA have been firmly dismissed; and
  3. the building surveyor’s reliance on the peer professional opinion defence was found to be unsuccessful because approving combustible cladding under the DTS provisions of the BCA was unreasonable.

Whilst the above findings are significant, perhaps the most far-reaching element of the decision is the CoA’s finding that certain implied warranties under the DBCA were not apportionable and in particular the determination that it is form, rather than substance which is critical to determining whether a claim is apportionable. We discuss the decision in greater detail below.

Apportionability of the warranties under the DBCA

At first instance the owner applicants (Owners) implemented a strategy whereby they only pursued a claim under the warranties contained in the DBCA, in lieu of pursuing a negligence claim against all parties. This was seemingly done in an effort to avoid the proportionate liability regime under the Wrongs Act 1958 (Vic).

The warranties relied on by the Owners were contained in sections 8(b), (c) and (f) of the DBCA which warranted that the building would be:

  • built with materials which were suitable for the purpose for which they are used;
  • the building work would comply with the Building Act 1993 and regulations; and
  • the building would be fit for the disclosed purpose for which it was built.

Notably, none of those warranties included reasonable care as an element.

On appeal, it was argued that the warranties under the DBCA were apportionable as they necessarily involved a ‘failure to take reasonable care’ as a part of their factual basis.

The CoA firmly rejected that position stating that whether a claim was apportionable will be determined by ‘the terms in which a claim is framed’. In reaching that decision the CoA noted that an interpretation which found that the statutory warranties were apportionable would undermine the purpose and function of the statutory warranties in the DBCA, by enabling a builder to avoid liability by introducing an element of reasonable care to a cause of action, which on its face, does not include failure to take care as an element.

The CoA decision is significant in that it clarifies that Courts prioritise form rather than substance when considering whether a claim is apportionable.  In reaching this view, the CoA dismantled what many understood the position in Dartberg Pty Ltd v Wealthcare Financial Planning 1 to be (i.e. that it was necessary to look beyond the expressly pleaded form of the case).

Liability of the Builder

An issue of significance during the trial at first instance was whether the builder ought to bear some liability given that it selected the particular ACPs product that was used on the building (i.e. Alucobest). The architect had specified the use of a ‘cladding system indicative to Alucobond’. The evidence at trial was that the Alucobond range included products with a 100% polyethylene core such that the experts agreed that the combustibility of the Alucobond product specified would have been equivalent to the Alucobest product which was ultimately used.

On appeal, it was determined that it was appropriate to find that there was no failure to take reasonable care on the part of the builder. The CoA found that the evidence established that, even though the builder had selected the particular ACP product used, it sought and obtained approval to use the Alucobest product from the architect. Further, the CoA endorsed the view that the product used was a substitution of a specified product, which had the same characteristics and was equally likely to have been combustible. In the circumstances, the builder had engaged, and was entitled to rely on the skills and expertise of highly qualified consultants.  

Were the DTS provisions of the BCA misinterpreted

The building surveyor contended that the Tribunal had incorrectly determined that the ACPs did not fit within the DTS provisions of the BCA, because the Tribunal incorrectly interpreted the relevant sections of the BCA.

The DTS provisions of the BCA provided that although parts of the product may be combustible, ‘bonded laminate’ materials could be used where combustible materials were required provided that ‘each laminate is non-combustible’.

The building surveyor contended that the ACPs satisfied the requirements of the BCA because the DTS provisions did not require the polyethelene core to be non-combustible because it was a ‘core’, rather than a ‘laminate’. The Tribunal rejected this interpretation of the DTS provisions and found that the clear intention of the BCA was that each layer of the bonded laminate product (excluding the adhesive) was a ‘laminate’, such that the polyethelene core was required to be non-combustible. 

On appeal, the CoA concluded that the use of the word ‘laminate’ had been deliberately used to refer to the structural elements of the product, rather than the word ‘layer’, because the adhesive layer and exterior paint were not required to be non-combustible. The CoA observed that the interpretation advanced by the building surveyor lacked logic and did not give effect to the plain meaning of the DTS provisions of the BCA. As such this aspect of the building surveyor’s appeal failed.

Peer professional opinion

At first instance the Tribunal rejected the building surveyor’s peer professional opinion defence, finding that while treating ACPs as satisfying the DTS criteria under the BCA was commonly accepted as competent practice by a significant number of building surveyors, the practice lacked a logical basis and was unreasonable. In finding that the practice was unreasonable Judge Woodward noted:

‘that otherwise experienced and diligent practitioners were beguiled by a longstanding and widespread (but flawed) practice into giving insufficient scrutiny to the rationale for that practice’

Save that the CoA determined that it was the acceptance of the practice, rather than the practice itself which had to be unreasonable, the CoA firmly rejected this ground of appeal finding the criticism of the Tribunal’s decision had no basis.

Implications for you

The CoA’s decision firmly puts to bed the suggestion that the Tribunal misinterpreted the DTS provisions of the BCA, such that it provides a clear direction for future cladding claims. While each case will turn on its own facts, it appears to endorse the Tribunal’s apportionment of liability and provides guidance for future claims of a similar nature, given the judicial authority which comes with a CoA judgement.

Of far greater significance is the impact the decision will have on the current application of the defence of proportionate liability. In particular, the decision confirms that a claimant can avoid the proportionate liability regime by carefully selecting the cause of action it chooses to pursue. It is now clear that sections 8(b), (c) and (f) are not apportionable. However the CoA’s decision is not limited to the implied warranties under the DBCA and will extend to any warranties or indemnities having application to any claim for property damage or economic loss which do not include reasonable care as an element.

Moving forward defendants will need to take particular care to pursue claims for contribution and indemnity wherever there is any ambiguity about whether a claim is apportionable, particularly where statutory warranties directed at consumer protection. 

Lawyers and insurers of building professionals alike should now carefully review each of their claims, particularly those involving statutory warranties, and consider whether their litigation strategy needs to be reviewed so as to ensure that they do not miss out on seeking contribution from any potential wrongdoers.

Property Insurance Update – Second Australian COVID-19 Business Interruption Test Case

On 24 February 2021, proceedings were commenced in the Federal Court of Australia to examine further issues with respect to COVID-19 and the coverage of business interruption policies in Australia. The Insurance Council of Australia’s media release regarding this second test case can be found below. 

UK Supreme Court appeal decision on COVID-19 business interruption cover

The United Kingdom’s Supreme Court has upheld the decision of the High Court which largely found in favour of policyholders in respect of business interruption coverage for COVID-19 claims. The Court also determined that the Orient Express Hotels Ltd1 (Orient Express) case, which related to causation, was wrongly decided and should be overruled.

The decision is likely to be important in the Australian market, particularly given the recent Supreme Court of Appeal decision on the Quarantine Act 1908 (Cth) exclusion which also favoured policyholders. However, the United Kingdom approach may not necessarily be followed in the Australian market because the decision is not binding in Australia, and there are important differences between the Australian and United Kingdom coverage wordings. 

The Supreme Court Appeal

On 15 September 2020, the United Kingdom’s High Court handed down judgment in the test case of the Financial Conduct Authority v Arch and Others [2020] EWHC 2448 (Comm) (the test case). This judgment was appealed and the Supreme Court hearing took place between 16 and 19 November 2020. The appeal judgment was then delivered on 15 January 2021. Our previous summary of the High Court decision may be found here.

While each party appealed on multiple different issues, the relevant issues on appeal can be broadly categorised as:

  1. The interpretation of “disease clauses” which provide cover for business interruption losses resulting from the occurrence of diseases like COVID-19, at or within a specified distance of the business premises;
  2. The interpretation of “prevention of access clauses” which provide cover for business interruption losses resulting from public authority intervention preventing or hindering access to, or use of, the business premises;
  3. The interpretation of “hybrid clauses” which combine the main elements of disease and prevention of access clauses;
  4. Causation – insurers argued that policyholders would have suffered the same or similar business interruption losses even if the insured risk or peril had not occurred. The insurers relied heavily on the decision of Orient Express which had already been criticised by the High Court in the test case; and
  5. The interpretation of “trends clauses” which provide cover for business interruption losses to be quantified by reference to what the performance of the business would have been had the insured peril not occurred.

Disease Clauses

The Supreme Court considered the wording of a typical disease clause taken from an RSA policy. This clause provided cover for “any…occurrence of a Notifiable Disease within a radius of 25 miles of the Premises”.

The insurer’s position was that this clause only provided cover for the business interruption consequences of Notifiable Disease cases within 25 miles of the insured’s premises. This interpretation did not benefit the policyholders in most cases, as it was extremely difficult to establish that their business losses resulted from a localised occurrence of COVID-19 rather than the pandemic and associated government response generally. The Supreme Court found that the words “occurrence of a Notifiable Disease” provided cover for business interruption losses caused by any cases of COVID-19 that occurred within a 25-mile radius of the insured’s premises. The Supreme Court went on to agree with the High Court that the scope of cover was not confined to business interruption losses that resulted only from cases within a 25-mile radius as opposed to elsewhere.

Other policy wordings were also considered, the most notable being the wording of two QBE policies that covered:

  1. business interruption losses in consequence of an “event” which included the occurrence of a Notifiable Disease; provided that
  2. the insurer shall only be liable for loss arising at those premises which are directly subject to the “incident”.

The Supreme Court held that the words “event” and “incident” did not change the meaning of these particular disease clauses and (like the RSA wording) they covered losses caused by any case of COVID-19 that occurred within a 25-mile radius of the insured’s premises. Noting that cases within a 25-mile radius did not need to be the only cause of the losses.

Prevention of Access and Hybrid Clauses

With respect to these clauses, the Supreme Court appeal concerned two main issues:

  1. The nature of “public authority intervention” required to trigger the clauses;

The High Court previously held that the public authority intervention required to trigger the clause constituted mandatory restrictions imposed by order and supported by statute (i.e. the Regulations introduced on 21 and 23 March 2020). However, the Supreme Court expanded this definition and made it clear that the restrictions imposed did not need to refer to any specific statute to trigger the policy and only needed to be in mandatory terms.

The insureds argued on appeal that cover should also be triggered by Government intervention like the Prime Minister’s instructions to ‘stay at home’ and for certain businesses to close on 16 March 2020. While the Supreme Court did not rule on the Prime Minister’s 16 March statement, it held that any statement that constituted a “mandatory instruction given on behalf of the UK Government” would trigger the relevant policies. This included a statement by the Prime Minister on 20 March 2020 which gave specific instructions for certain businesses (nightclubs, theatres, cinemas, gyms, and leisure centres) to close. Whether the remainder of each of the government announcements constituted the requisite public authority intervention was left for agreement or further argument between the parties. 

  1. The nature of “prevention or the hindrance of access/use” required to trigger the clauses.

As part of the Court’s analysis of this issue, the terms “inability to use”, “prevention of access” and “interruption” were considered as they appeared in a number of different policy wordings.

The Supreme Court found that the term “inability to use” is satisfied if the policyholder is unable to use the premises for a discrete part of its business activities or if it is unable to use a discrete part of its premises for its business activities.

For example, if a bookshop is required to close thereby losing all of its walk-in customer business (80% of its income) but is still allowed to use the premises for telephone orders (20% of its income). Then the bookshop will have an ‘inability to use’ its premises for a discrete part of its business activities (walk-in customers) and will meet the definition of “inability to use” if it claims for a loss of 80% of its income as a result of the closure.

The term “prevention of access” was found to be consistent with the definition of an “inability to use” such that policies that refer to this term may also cover prevention of access to a discrete part of a policyholder’s premises and/or prevention of access to the premises for a discrete purpose. Importantly, this term was distinguished from a mere “hindrance”. The example used by the Court was that an announcement by the Government to stay at home unless you have a reasonable excuse was not a prevention of access, as people were still allowed to visit shops for the purposes of buying essential supplies or transacting business that could not be carried out remotely. Rather, this was merely a hindrance in the use of a shop’s premises.

“Interruption” was interpreted broadly as the Court held this term was able to encompass an interference or disruption that does not necessarily cause a complete cessation of business or activities.

Ultimately, the Supreme Court interpreted the wording of certain Prevention of Access and Hybrid clauses more broadly than the High Court. Government directions needed only be of a mandatory (and not necessarily legal) nature to trigger coverage and the insured business did not need to sustain a complete cessation of activity to successfully claim for losses to a discrete part of its business activities (for example, walk-in sales).

Causation

On this issue, the Supreme Court accepted that each case of COVID-19 in the UK could be considered an equal cause of the Government response that ensued. Although, insurers went on to argue that it was necessary for policyholders to establish that their business interruption loss would not have been sustained but for the occurrence of the insured peril. This argument was centred on the contention that (because the COVID-19 pandemic was so widespread) policyholders would have suffered the same or similar business interruption losses even if the insured risk or peril (being the occurrence of COVID-19 within a 25-mile radius, or a public authority action causing a prevention of access) had not occurred, and therefore the policies did not respond.

The Court rejected this argument on the basis that the “but for” test was not conclusive in determining whether causation had been established under the policies. Instead, the Court confirmed that the standard position is that causation is established provided the causal link between the insured peril and loss is one of proximate causation. This default position of proximate causation can be displaced if the policy provides for some other kind of causal connection.  

There were arguably two proximate causes of loss, namely:

  1. the occurrence of COVID-19 within the prescribed radius of the insured’s premises/the public authority action preventing access; or
  2. the widespread nature of the pandemic.

The Court found that, where there are two proximate causes of loss:

  1. of which neither are excluded but only one is insured, then the insurers are liable for the loss (as per the case of Miss Jay Jay2);
  2. of which one is an insured peril but the other is expressly excluded, the exclusion will generally prevail (as per decision of Wayne Tank3).

Using this reasoning, they agreed with the earlier High Court decision and found that no individual case of COVID-19 could be said to have caused the UK Government to introduce restrictions. Instead, measures were taken in response to COVID-19 cases all across the UK as a whole, such that each case was an equal cause of the restrictions.  

The Court concluded that the concept of causation did not preclude an insured peril, in combination with many other similar uninsured events, from being regarded as a proximate cause of a loss that had a sufficient degree of inevitability even if the insured peril would not be sufficient to cause the loss by itself.

In the context of the different policies, the Court held:

  1. Disease clauses

No reasonable person would have intended for cases of COVID-19 outside the 25-mile radius to be a countervailing cause that displaces the causal impact of COVID-19 cases inside the radius. Therefore, the policyholders merely needed to prove that their business interruption losses were a result of Government action taken in response to all COVID-19 cases (including at least one case within the 25-mile radius or other geographical area prescribed by the policy).

  1. Prevention of Access and Hybrid Clauses

The wordings of these policies indemnified the policyholders against the risk of all the elements of the insured peril (UK Government directions to close/restrict walk-in customers from attending certain businesses) acting in combination to cause business interruption loss. Even if the loss was concurrently caused by other uninsured but non-excluded factors arising from the COVID-19 pandemic.

However, this indemnity will not extend where the COVID-19 pandemic generally is the sole proximate cause of the loss. For example, if a travel agency lost most of its business due to overseas travel restrictions imposed as a result of COVID-19 (an uninsured but non-excluded factor) and people were also unable to enter the agency due to the restrictions on walk-in customers attending certain businesses (the insured peril). The loss will not be covered if the sole proximate cause of the loss was the travel restrictions and not the walk-in restrictions. 

Trends clauses

These clauses provide cover for business interruption losses that are quantified by reference to what the performance of the business would have been had the insured peril not occurred.

An example of such a clause (taken from the Hiscox 3 wording) is as follows:

“The amount we pay for loss of gross profit will be amended to reflect any special circumstances or business trends affecting your business, either before or after the loss, in order that the amount paid reflects as near as possible, the result that would have been achieved if the damage had not occurred.”

Insurers argued that these clauses operated as an exclusion such that they were not liable to indemnify policyholders for losses which would have occurred irrespective of the insured peril because of the wider effect of the COVID-19 pandemic.

The Court disagreed with the insurers’ arguments and held, consistent with their interpretation of causation, insurers could not reduce the indemnity provided on the basis that the losses were caused equally by other uninsured perils resulting from the COVID-19 pandemic.

Pre-trigger Losses

A secondary issue concerned the High Court’s interpretation of “pre-trigger losses”. The High Court had previously found that the trends clauses operated such that any measurable downturn in a businesses’ turnover prior to the insured peril being triggered ought to be taken into account as a trend and operate to reduce the indemnity payable by the insurers.

The Supreme Court disagreed with this reasoning, finding that the indemnity should be calculated by reference to what the business would have earned had there been no COVID-19, disregarding any demonstrable revenue downturn prior to the policy being triggered that resulted from the COVID-19 pandemic generally.

Orient Express

Insurers relied heavily on the decision in Orient Express when advancing their arguments regarding causation and the trends clauses.

In Orient Express, an insured hotel was claiming for business interruption losses caused by Hurricanes Katrina and Rita which devastated large parts of New Orleans in 2005. Insurers argued there was no cover because, even if the hotel itself had not been damaged, the damage to the surrounding area meant that the hotel would have suffered the same business interruption losses. Therefore, the Court found in Orient Express that the required test for causation could not be met as the insured peril was the physical damage to the hotel alone, and the surrounding damage to New Orleans and the specific damage to the insured hotel were competing causes of the business interruption.

The High Court at first instance distinguished the Orient Express case from the present circumstances and simply declined to follow it. However, the Supreme Court held that the Orient Express case itself should be overturned finding that:

  1. In cases where both an insured peril and an uninsured peril arise from the same underlying source (i.e. Hurricanes); and
  2. Provided the damage caused by the uninsured peril is (i.e. the surrounding damage to New Orleans) is not excluded; then
  3. The loss resulting from both causes operating concurrently is covered; and
  4. In this instance, the “but for” test is not determinative of cover for business interruption losses.

Implications

Policyholders’ arguments for business interruption coverage for COVID-19 losses have been persuasive with the United Kingdom’s High Court and Supreme Court appeal.  However, the Australian position may not necessarily follow the United Kingdom because: 

  • The Australian courts are not bound by the United Kingdom Supreme Court decision, but an appeal decision of a High Court judgment is likely to be given substantial weight by policyholders, and may be persuasive in Australia.
  • The common disease and prevention of access cover wordings differ.
  • The government mandates and restrictions imposed differ. 
  • The exclusions in respect of diseases have not been considered (i.e. the meaning of references to ‘listed human diseases’ under the Biosecurity Act 2015 (Cth) and or Quarantine Act 1908 (Cth), or ‘disease’ generally). 

In Australia, the New South Wales Supreme Court of Appeal also found in favour of policyholders on a business interruption test case relating to COVID-19 claims (our update can be found here). In that case, the Court found that the outdated reference in an exclusion to diseases listed under the Quarantine Act 1908 (Cth) could not be read as excluding diseases under the Biosecurity Act 2015 (Cth). As COVID-19 is not listed under the Quarantine Act 1908 (Cth), that policy reference does not exclude COVID-19 claims. An application for special leave to appeal to the High Court of Australia was made on 16 December 2020. The outcome will be important for the Australian market as many policies contain the outdated Quarantine Act (worth $10 billion in claims estimated by the Insurance Council of Australia). 

Given the wide scale business interruption losses arising from COVID-19 and the United Kingdom and Australian decisions having found in favour of policyholders, a number of business interruption class actions are being considered in Australia. This is likely to lead to the Australian market seeking clarification from the courts on COVID-19 coverage claims.    


1 v Assicurazioni General SpA [2010] EWHC 1186.
2 J. J. Lloyd Instruments Ltd. v Northern Star Insurance Co. Ltd. [1985] 1 Lloyd’s Rep. 264.
3 Wayne Tank & Pump Co Ltd v The Employers’ Liability Assurance Corporation Ltd [1974] QB 57

Property Insurance Update – Implications for Australian Insurers of the UK Covid-19 Test Case

The United Kingdom’s High Court delivered its judgment in Financial Conduct Authority v Arch and Others1 on 15 September 2020. The case found largely in favour of policyholders and that business interruption cover would extend to COVID-19 losses under some covers. The judgment is not binding on Australian courts, but may be persuasive authority. A copy of our case summary can be found here.

There are a number of important differences between the common business interruption policy wordings in Australia and those in the United Kingdom case.  For disease covers in particular, most Australian wordings contain an exclusion likely to apply to COVID-19 claims. For prevention of access covers, many Australian wordings require property damage to have occurred. The consequence of these and other policy differences mean that the Australian coverage position will not necessarily follow the United Kingdom.2    

Disease Cover

In Australia, disease cover is commonly provided under an extension to the policy headed ‘Infectious or Contagious Diseases’. The wording typically requires closure or evacuation of whole or part of the insured premises, by order of a competent public authority, consequent upon infectious or contagious disease manifested by any person, whilst at the premises or in a defined vicinity. In the United Kingdom case, the wordings considered required a notifiable disease, arising from a human infectious or contagious disease manifested by any person, at or in a defined vicinity of the insured location. Notably, there is no requirement for an order for closure by an authority, as required under Australian wording.      

Pandemic coronavirus exclusion

Most disease covers in Australia are subject to an exclusion for any Listed Human Disease under the Biosecurity Act 2015 (Cth). This Act lists diseases that are communicable and may cause significant harm to human health. In response to COVID-19 “human coronavirus with pandemic potential” was declared a Listed Human Disease on 21 January 2020. In consequence of this exclusion, many COVID-19 claims will fall outside the terms for coverage in Australia.  

However, there are still policies within the market where the disease cover exclusion refers to the repealed Quarantine Act 19083 or any amendments.  This leads to an argument that as human coronavirus with pandemic potential is not listed in the Quarantine Act 1908 and there are no effective amendments to that Act, the exclusion does not apply. The contrary position is that the references to the Quarantine Act 1908 should be construed as references to the Biosecurity Act 2015. That construction would arguably give effect to the intention of the exclusion to exclude significant communicable diseases. 

This is likely to be the more significant issue for Australian disease covers and a test case addressing Quarantine Act 1908 exclusions is being pursued by the Australian Financial Complaints Authority and Insurance Council of Australia. The test case will be heard by the New South Wales Court of Appeal and will commence on 2 October 2020. See our earlier update about that case here

Manifestation of disease

One of the issues considered by the United Kingdom’s High Court was when COVID-19 was considered to have ‘manifested’. In this respect, the Court made findings that the disease had manifested when it had been ‘sustained’, which specifically arose from the definition of Notifiable Disease under the Health Protection (Notification) Regulations 2010 (UK). Based on the meaning of ‘sustained’, the Court found that the disease manifests when the person is symptomatic and that diagnosis was not a requirement, except for any cases which were asymptomatic.4  

As the Court’s approach to this issue arose from the definition of Notifiable Disease under United Kingdom legislation, Australian courts may take an alternative approach to determining the manifestation of COVID-19 at the premises. This may require the more restrictive requirement for COVID-19 to have been evidenced through testing or medical diagnosis. 

Causal nexus between insured disease and government restrictions  

A significant aspect of the judgment addressed the casual connection between the government measures and the disease manifested within the specified insured area. The Court held that “the right way to analyse the matter is that the proximate cause of the business interruption is the Notifiable Disease of which the individual outbreaks form indivisible parts”.5 On this analysis, all of the outbreaks were effective causes, because the authorities acted on a national level on the basis of information about all the occurrences of COVID-19.

The Court also did not accept that the disease cover was confined to disease which ‘only’ manifests within the insured area and not to disease which manifests both inside and outside the insured area. The Court held that this construction was not expressly, nor implicitly, made out on the wording.6  

However, the Court took a different approach to this issue in respect of two QBE policies. For those policies, the Court found that the insureds would only be able to recover if they could show that the cases of COVID-19 within the insured area, as opposed to any elsewhere, were the cause of the business interruption.7 The Court considered that this arose from the overall wording including the references to “in consequence of” and “event”.8

The approach in Australia will likely depend upon the evidence as to the basis of decisions made by the government, but there is likely to be similar scope to argue that the government action was based upon all COVID-19 cases, which included any COVID-19 case within the insured premises. In contrast the United Kingdom however, many restrictions in Australia will be state or territory based, and others national. The Australian wording generally also requires that the loss “arise from” the orders for closure from the authority and that these orders be “consequent upon” the disease at the premises or defined area. 

Vicinity

The Court considered that the term vicinity would depend in part on the nature of the relevant “event” but which could be very extensive. In the context of the disease cover, the Court considered that a reasonable person would understand the term ‘Vicinity’ to mean an area whose extent would depend in part on the nature of the relevant event.9 On this basis it found that when COVID-19 occurred, it was of such a nature that any occurrence in the United Kingdom would reasonably be expected to have an impact on insureds and their businesses, and therefore that all occurrences of COVID-19 were within the relevant “Vicinity”.10 

In Australia however, disease covers are generally confined to the insured premises or a more geographically defined vicinity.

Prevention of Access

In Australia, prevention of access cover is commonly provided under an extension headed ‘Premises in the Vicinity (Prevention of Access)’. Primarily, this extension only covers damage to property within the vicinity of the insured premises, but not always.

There are also policies in the Australian market with cover in similar terms to the United Kingdom policies considered by the Court. This includes cover where there is a risk to life in the vicinity of the premises, and an action or order of an authority, which prevents or hinders, the access to or use of, the insured property. Given the commonality of terms, the Court’s views on these terms, particularly in the context of COVID-19 claims, is likely to be relevant within the Australian market. 

Prevention of Access and Hindrance

The Court examined the meaning of the term ‘prevention of access’ as opposed to ‘hindrance’ and found that, in this context, prevention of access means more than simply a physical impossibility of access but could also include the prevention of access to premises as a result of government action or advice. The Court further explained that there was only a prevention of access to premises if government actions or advice required or recommended complete, not partial, closure of the premises.11

Whereas, ‘hindrance’ merely referred to access to premises being made more difficult.12 For example, the United Kingdom’s government advice for certain essential business to stay open and for people to only visit these businesses for essential supplies may amount to a hindrance in the use of the premises, but not a prevention of access.13

Action

The Court then considered what the nature of the government action or advice would need to be to give rise to prevention of access coverage. Ultimately, the Court found that this connotes steps taken by a relevant authority to prevent access to premises which have the force of law.14 Government advice, no matter how strongly worded, did not have the force of law until mandatory regulations were passed by the government requiring business to close. Only then was there ‘action’ by the government within the meaning of most prevention of access clauses.15

Vicinity

The final key issue considered was the reference to an emergency or danger ‘in the vicinity of the premises’, which the Court considered required something specific happening at a particular time and in the local area. The Court stated that the term ‘vicinity of premises’ is an elastic concept but does connote neighbourhood and could not include the entirety of the United Kingdom for the purposes of the restriction of access clauses examined.16

The Court stated that what ‘in the vicinity’ means in any particular case may depend upon the nature of the ‘emergency’ and the facts of the case.17 However, absent any special definition of the term, vicinity evidences an intention to provide narrow localised cover and so action taken in response to a national pandemic did not necessarily satisfy the requirement that there be an emergency in the vicinity (or neighbourhood) of the insured premises.18 In this respect, there could only be cover under this wording if the insured could show that there was an emergency by reason of COVID-19 in the vicinity of their premises as opposed to the country as a whole.19

The Court’s findings on the extent of cover available under prevention of access clauses is likely to be considered in the context of any Australian COVID-19 claims. The narrow localised requirement of vicinity will be of particular relevance, but needs to be considered in the context of the Australian restrictions, most of which are state and territory based, rather than national. 

Implications

While the usual wordings for disease and prevention of access covers generally differ in the United Kingdom and Australia, the policy wordings and implications of the decision should be carefully considered by insurers, as well as the factual circumstances giving rise to the government orders within Australia in the context of each policy response. 

Many disease covers will have an operative exclusion for COVID-19 where the Biosecurity Act 2015 is referenced, and for those with outdated references to the Quarantine Act 1908, the pending determination of the New South Wales Court of Appeal will be important. Most prevention of access covers will require property damage to have occurred, but those which extend cover where life is endangered, may warrant consideration of the Court’s determinations regarding the narrow localised element of vicinity and the mandatory nature relating to government actions. 

The COVID-19 pandemic and any unexpected coverage consequences are also likely to result in underwriting changes such that coverage and any restrictions on cover are clear in any future pandemics. This may include assessment of broad exclusions relating to pandemics, which are applicable to all sections of the business interruption policy.

References    

1 [2020] EWHC 2448 (Comm).
2 The comments in this article are of a general nature only. 
3 Repealed on 16 June 2016 under the Biosecurity (Consequential Amendments and Transitional Provisions) Act 2015 (Cth).
4 [224].
5 [111], [112].
6 [142].
7 [235].
8 Notably the RSA wording also used “in consequence of” but was treated differently to the QBE 2 and 3 wordings. 
9 [140].
10 [140].
11 [330].
12 [325]-[326].
13 [333].
14[434].
15 [435].
16 [406].
17 [466].
18 [466].
19 [467].


Further information

The Financial Conduct Authority v Arch Insurance (UK) Limited and Others [2020] EWHC 2448 (Comm)

 

Property Insurance Update – UK High Court judgment on COVID-19 business interruption cover

Case description

The United Kingdom’s High Court has delivered its judgment in the test case regarding business interruption cover for COVID-19 claims. The Court found in favour of policyholders in the majority of issues. The case addresses disease and prevention of access extensions, as well as trends clauses and causation issues. 

High Court Test Case

On 15 September 2020, the United Kingdom’s High Court handed down judgment in the test case of the Financial Conduct Authority v Arch and Others. The proceedings were commenced on 9 June 2020 by the Financial Conduct Authority (FCA) as a test case to determine issues of principle on policy coverage and causation under representative business interruption insurance wordings. 

The FCA represented the interests of the policyholders, who were small to medium sized enterprises. There were eight insurer defendants. The Court considered 21 policy wordings and the case was decided on the basis of certain agreed facts. The wordings selected were considered representative of the policy coverage issues arising out of the pandemic and the decision is expected to have significant implications as a result. 

Business interruption insurance covers loss of profits and additional expenses which an insured suffers as a result of insured damage to physical property. However, business interruption cover also contains specific extensions of cover where there has not been any physical damage to the insured’s property. The application of these extensions to the COVID-19 pandemic were considered by the Court in this test case.

Additionally, business interruption clauses will include how the insured’s losses should be quantified such as through ‘trends’ provisions. These provisions allow for business trends which would have impacted the business had the event causing loss not occurred. They seek to put the insured in the position they would have been had the event not occurred.

The Court considered whether an insured will be able to claim for business interruption losses caused by the closure of businesses by the government in response to the COVID-19 pandemic. 

Disease covers

The Disease wordings extended cover to business interruption loss arising from notifiable disease. Generally, the wordings under consideration required:

  • interruption or interference with the business;
  • following/arising from/as a result of;
  • any notifiable disease/occurrence of a notifiable disease/arising from any human infectious or human contagious disease manifested by any person; and
  • within 25 miles/1 mile/the ‘vicinity’ of the premises/insured location.

The Court found that the vast majority of notifiable disease clauses provide cover for pandemic loss. One of the key issues was whether the disease needed to be local to the insured location. However, the Court held that the proximate cause of the business interruption is the notifiable disease, of which the individual outbreaks form indivisible parts. Alternatively, each of the individual occurrences was a separate but effective cause of the national actions. This meant that cases within the relevant policy area are not independent of, and a separate cause from, cases outside of the relevant policy area.

However, the Court did note that in the case of two policies, the clause used the wording “in consequence of” together with “events” and this had the effect of limiting cover to matters occurring in a particular place and in a particular way. The Court found that this wording required that the disease within the relevant policy area needed to have caused the business interruption (citing Axa Reinsurance v Field [1996] 1 WLR 1026).

Prevention of Access / Public Authority covers

The Prevention of Access and Public Authority clauses extend cover where there has been a prevention or hindrance of access to or use of a premises resulting from an action/restriction by a government or local authority.  Generally, the wordings under consideration required:

  • prevention/denial/hindrance of access to the Premises;
  • due to actions/advice/restrictions of/imposed by order of;
  • a government/local authority/police/other body; and
  • due to an emergency likely to endanger life/neighbouring property/incident within a specified area.

In contrast to the Disease wordings, the Court found that the Prevention of Access clauses generally provided narrow localised cover which were not triggered by the pandemic (apart from some specific wordings).  

One of the key issues was the reference to ‘in the vicinity’, which the Court considered required something specific happening at a particular time and in the local area. This evidenced an intention to provide narrow localised cover and so action taken in response to a pandemic did not satisfy this local requirement.

The nature of government directions were also considered. The government’s announcements to direct people to stay at home and businesses to close were characterised as advice and were therefore not considered sufficient to constitute an ‘action’ by an authority or restrictions which were ‘imposed by order’. Those terms required that the government restrictions be of a mandatory and legal nature.     

The Court also indicated that ‘prevention’ did not require physical inability to access the premises, but a closure of the premises such that the business cannot be conducted. The Court also made findings that ‘interruption’ does not require a complete cessation of the business for cover to be triggered.

Therefore, whether cover is available to an insured under a Prevention of Access clause will turn upon the terms of the policy and the specific application of government advice and regulations to the insured’s business.

Hybrid Covers

The Court also considered policies, which contained a hybrid of the Disease and Prevention of Access clauses. Those clauses generally required:

  • an interruption to the business;
  • due to an inability to use the premises;
  • due to restrictions imposed by a public authority; and
  • following an occurrence of disease.

The Court made similar findings in respect of these clauses. However, ‘inability to use the premises’ required that the premises were completely closed, rather than restricted in trading.   

Trends and Causation

The basis of settlement under the trends clauses was also a significant issue in the case. The insurers submitted that the loss the insured experienced should be considered in the context of the pandemic and that essentially, even if there had not been any disease or prevention of access within the vicinity of the premises that a similar business interruption would have been suffered. In contrast, the FCA argued that the trends clause is intended to put the insured back in the position it would have been had there not been that insured peril (the Disease or Prevention of Access). The Court found in favour of the FCA, and indicated that what was relevant was what the business would have achieved had the matters in the insurance cover not been operating. In respect of Disease covers, the entirety of the COVID-19 outbreak is removed and in respect of the prevention of access cover, you would consider the position of the insured had there not been a prevention or hindrance of access to the premises, by an action of an authority,  due to an ‘emergency/incident which could endanger human life’.

Insurers had also relied on the decision in Orient Express Hotels Ltd v Assicuraziono Generali SpA [2010] EWHC 1186 (Comm). That case involved business interruption losses to a hotel in New Orleans as a result of hurricanes Katrina and Rita, which not only damaged the insured hotel, but the surrounding area. The finding in that case was that even if the hotel had not been damaged, the devastation to the area around the hotel caused by the hurricanes was such that the business interruption losses would have been suffered in any event. However, the Court distinguished the test case on the basis that it included specific perils rather than an all risks policy, and otherwise considered that Orient Express failed to appropriately consider the ‘insured peril’ and proximate cause of the loss claimed (i.e. the business interruption arising specifically from the damage caused by the hurricanes). Further, the Court noted that the reasoning in Orient Express created the ‘absurd’ result that the loss would be covered if the hurricane only impacted the hotel, but not if it impacted the surrounding area. 

Implications

The test case has confirmed that in the United Kingdom, businesses impacted by the COVID-19 pandemic may have cover under similarly worded Disease covers, and to a lesser extent, Prevention of Access covers. The cover is also likely to extend to the position the businesses would have been in had the pandemic never happened. The FCA has indicated that any appeal should be undertaken swiftly, given the broad implications of this decision for businesses. 

The test case is likely to be of wide interest to Australian business interruption insurers, although the common wordings using in Australia differ in several significant respects. The implications for Australian insurers will follow in our next update.   

Further information

The Financial Conduct Authority v Arch Insurance (UK) Limited and Others [2020] EWHC 2448 (Comm)


This article was co-authored by Graduate Ashlee Sherman.

Separating the Biowood from the ACP's

A consideration of the recent decision of the NSW Civil and Administrative Tribunal and subsequent Appeal Panel regarding the use of Biowood cladding on a building in NSW.

While the insurance and construction industries and indeed the public are now familiar with combustible cladding, particularly aluminium composite panels (ACP), the focus to date has largely been on ACPs with a polyethylene core - noting that the NSW Government banned all ACPs containing more than 30% polyethylene core in August 2018.

On 15 November 2019, the NSW Civil and Administrative Tribunal (Tribunal) threw more wood on the fire for the building and construction sector by determining (in The Owners – Strata Plan No. 92888 v Taylor Construction Group Pty Ltd and Frasers Putney Pty Ltd [2019] NSWCATCD) that Biowood panels (which according to the Biowood website, are made up of reconstituted timber and PVC), present an undue risk of fire spread and therefore are not fit for purpose. On 4 August 2020, the Appeal Panel subsequently issued its decision upholding the Tribunals’ original decision.

We set out below a summary of the Tribunal’s and the subsequent Appeal Panel’s decisions together with consideration of the potential implications moving forward.

Code of Conduct for Building Surveyors in Victoria to take effect on 1 January 2021

With the attention of the construction industry focused squarely on dealing with the implications of Covid-19 and the ongoing cladding crisis, the release of the new Code of Conduct for Building Surveyors in Victoria (‘Code’) by the Victorian Building Authority (VBA) in June 2020 appears to have gone largely unnoticed.  In this update, we will discuss the key aspects of the Code and its implications for practitioners and insurers.

The Code, which has come in response to Professor Peter Shergold and Bronwyn Weir’s 2018 report ‘Building Confidence: Improving the effectiveness of compliance and enforcement systems for the building and construction industry across Australia’ and which comes into effect in January 2021, appears designed to restore public confidence in the construction sector by providing greater clarity around the scope of the role and professional obligations of building surveyors.

The Code establishes principles and rules for professional conduct and outlines the standards building surveyors in Victoria must, at a minimum, adhere to when providing building surveying services. Failure to adhere to the requisite standard as set out in the Code may lead to disciplinary action being taken by the VBA against a registered building surveyor.

The Code contains the following 8 core principles that building surveyors must comply with:

  1. Act in accordance with the law and in the public interest
  2. Act with integrity, honesty, objectivity and impartiality
  3. Perform competently and within the required level of expertise and experience
  4. Act independently
  5. Avoid conflicts of interest
  6. Document and maintain records
  7. Communicate promptly and effectively
  8. Provide a complaint handling process and address issues of non-compliance.

The two core themes throughout the Code are competence and independence. In addition, frameworks surrounding record keeping, communication standards and complaints processes have been introduced. We have summarised how the Code addresses these topics below.

Competence

Building surveyors must ensure that they do not perform any work that is outside their area of expertise or experience unless under the direct supervision of a building surveyor who holds the required expertise or experience. The Code notes that if a building surveyor is unsure as to whether a function falls outside their capacity or conditions of registration they should seek guidance from the VBA or relevant professional body.

By way of example, a building surveyor who has only had experience in low rise buildings for the last 10 years should not undertake work for a high rise building despite the role being within their registration, as they do not have the experience or expertise to competently discharge their duty.

The Code also places an onus on surveyors to take reasonable steps to ensure that any reports or advice that they rely on for work outside of their area of expertise or experience have been completed honestly, independently (as required), competently and to a professional standard by an appropriately qualified person. This means that surveyors must be more active in satisfying themselves that compliance is occurring.

The Code provides the following examples of inappropriate conduct by a surveyor in this context:

  1. Allowing a builder and engineer to organise inspections on structural matters between themselves and leaving it to them to notify the building surveyor at a later stage.
  2. Not requiring all notifications at the completion of a mandatory stage to be made to the building surveyor or not causing an inspection to be done in accordance with the Building Act.
  3. Asking for and accepting a certificate of compliance from the engineer just prior to issuing the occupancy permit without asking about details of any inspections, if any problems were identified by the engineer, if the builder and engineer agreed to variations to the building work, or if any re-inspections were conducted.
  4. Receiving and filing an inspection certificate from a structural engineer without reviewing it to ensure the certification was done applying the appropriate compliance standards and by someone with the appropriate expertise.

Consistent with the above, the Code makes it clear that under section 128 of the Building Act, a municipal or private building surveyor is not liable for anything done or omitted to be done in ‘good faith’ in reliance on a certificate given by a registered building practitioner under section 238 of the Building Act. However, good faith does not mean blind acceptance. The building surveyor must review the certificate and consider whether the person providing it had the skills and experience to do so.

Under the Code it is also deemed inappropriate conduct for a surveyor to:

  • not adequately or appropriately supervise unregistered staff who work for them;
  • not adequately ascertain the qualifications, registration and experience of a building inspector who is inspecting building work on their behalf; or
  • accept a statutory declaration in lieu of a mandatory inspection.

Independence

Building surveyors must avoid situations that a reasonable person may conclude has or could compromise their impartiality or professional judgement. The Code relevantly provides the following examples of what may be, or perceived to compromise independence:

  • Having an office in the premises of a builder or developer for which the building surveyor is performing work;
  • Wearing shirts or caps with the logo of a building company that is the builder on projects for which the building surveyor or their company are the relevant building surveyor; or
  • Accepting gifts or hospitality (other than token gifts or hospitality valued at less than $50) from builders, designers or suppliers who are often engaged on projects for which the building surveyor is the relevant building surveyor.

Building surveyors must not participate in or give advice on the development of designs or performance solutions for proposed building work before or after accepting an engagement to be the relevant building surveyor for that building work. If they have already been involved in the design process or provided advice on design solutions on a project, they must not accept appointment as the relevant building surveyor for that project.

Building surveyors must avoid conflicts of interest and not provide building surveying services where there is a conflict of interest or a significant risk of a conflict of interest, for example:

  • Where a family member of a building surveyor, who is a registered domestic builder is appointed to work on a project for which the building surveyor is the relevant building surveyor; or
  • Where a building surveyor is a director of a company that is engaged in building work, such as drafting or engineering, and an application is made to the building surveyor to be the relevant building surveyor for a project that is designed by that company.

Beyond actual conflicts, surveyors must also avoid any conduct that could give rise to a conflict such as:

  • Offering to be a consultant building surveyor to a developer when the building surveyor is already acting as the relevant building surveyor for another project for the same developer; or
  • Where a builder or developer seeks to influence a building surveyor to make decisions in their favour, for example, by threatening to take their business elsewhere if they do not agree; or
  • Where a developer “promises” to provide a building surveyor with the next job if they issue an occupancy permit even though the building may not be suitable for occupation.

Record keeping, Communication & Complaints

Building surveyors must ensure all advice, opinions, decisions and actions (such as enforcement action) are reasonably supported by appropriate documentation including findings of fact and references to evidence or materials relied on.

Building surveyors must also comply with a reasonable request of a client, the VBA or relevant parties in a co-operative manner and keep clients or relevant parties informed of any changes to agreed timeframes and any professional costs associated with changes to scope.

Building surveyors must also have a complaints management process for the handling of complaints that explains the steps they will take to address and resolve a complaint.

Implications

Many in the construction industry will welcome the Code as it will provide greater clarity on the scope of professional obligations of building surveyors by providing, in effect, a set of practical guidelines.  However, it is likely that the Code will have an unintended consequence of placing building surveyors at a greater risk of civil claims and regulatory complaints in circumstances where, on its face, the Code will broaden the scope and standard for the professional obligations of building surveyors.

This article was co-authored by Lucy Mitchell (graduate).

 

 

 

Building Sector Overhaul in NSW

Executive Summary

  • The NSW Government has introduced legislative reform to prevent defective works and increase public confidence in the construction sector, particularly for high-rise residential buildings, and create a new customer-focused facing construction industry.1
  • Many of the new provisions are now in force, however some sections will not take effect until 1 July 2021.
  • Insurance claims are set to rise in 2021 as design and building practitioners and professional engineers must register for professional indemnity insurance.

Background

The NSW Government has unsurprisingly recognised the need for vast change to the obligations on design and building practitioners, introducing the Design and Building Practitioners Act 2020 (NSW) (DBP Act) and the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) (RAB Act) (together, the Acts). The Acts were assented to on 10 June 2020, although some sections of the DBP Act do not come into force until 1 July 2021. The RAB Act commences on 2 September 2020.

The Acts form part of the first tranche of reforms the NSW Government expect to make as part of a general overhaul of the NSW building industry, which are expected to be implemented between 2019 to 2025. The primary goal of this legislative reform to the building sector is to increase the accountability of design and construction professionals in complying with national building codes and standards.

Prior to the amendments, there were a number of statutory protections already in place for residential building owners, including statutory warranties under the Home Building Act 1989 (NSW) (HB Act), the strata building bond scheme2, and the home building compensation cover for buildings up to three storeys.3

However, the Government recognised that more protections needed to be introduced. The subject reforms came off the back of recent cases leaving this space of law uncertain, and various high profile incidences that were heavily scrutinised by the media. Of note, the evacuation of the Opal Towers in Sydney Olympic Park in 2018, followed by the evacuation of the Mascot Towers in Sydney’s inner-south,  due to significant defects, created a climate for urgent reform.  

The reforms have also occurred as a response to the Building Confidence4 Report authored by Professor Peter Shergold AC and Bronwyn Weir of February 2018 (Building Report). The Building Report included findings of the uncertain accountabilities of different parties, insufficient controls on the accuracy of documentation, and, in respect to design practitioners in particular; there was systemic failure to expressly require documentation to demonstrate compliance with the National Construction Code.5

While the Acts implement a vast array of amendments made to the outstanding building and construction laws in place, we focus on some key areas that may affect insurers and Insureds in this new legislative landscape.  

Key Amendments

Victorian Government to fast-track cladding rectification scheme and give builders a chance to rectify their own work

As reported in our 17 October 2019 update, the Victorian Government introduced reforms aimed at funding rectification of non-compliant ACP cladding, including through litigation directed at wrongdoers responsible for the use of such products. In this regard, the Crown now has the power to ’stand in the shoes‘ of an owner who receives or received government funding to bring recovery claims against building practitioners involved in the installation or use of non-compliant cladding.  

In our article on 6 April 2020, we spoke about a series of problems with the rectification approach adopted by the Victorian Government, which can be summarised as follows:

  1. The Victorian Government’s decision to allow certain building practitioners to maintain their registration despite their professional indemnity insurance containing an exclusion for claims concerning cladding means that judgments may not be enforceable. Even if the Crown succeeds in a claim against the relevant building practitioner, it may be unable to enforce any monetary award if the claim is caught by the ‘cladding exclusion’ in the practitioner’s professional indemnity policy.
  2. The approach fails to account for buildings with non-compliant ACP cladding, which also have other non-related defects (such as design defects or workmanship issues). Owners may find themselves out of pocket for the rectification of non-ACP cladding related defects, which require addressing at the same time as cladding issues. 
  3. Further, if the Crown is empowered and prepared to pursue claims in respect of non-ACP related defects as part of its mandated claim for non-compliant ACP products, and to the extent that it is, whether this would require a contribution from the relevant owners to its litigation costs.

Following our last update on 27 May 2020 about the Victorian Building Authority’s (VBA) tough stance on practitioners’ in light of the cladding crisis, there have been further developments with the cladding rectification scheme.

On 24 June 2020, Cladding Safety Victoria (CSV) announced it has fast tracked rectification works to support the construction industry in the wake of COVID-19. The program funding has been brought forward and it is in the process of identifying and selecting builders of ‘good repute’ to undertake rectification works on their original buildings.1 CSV  expects the time it takes to have rectification plans in place to be cut from 33 weeks to 16 weeks where the original builder is involved. Strict vetting and oversight processes around practitioner conduct will provide robust assurance that the practitioner is able to work in the program. Relevantly, the process will not extend to negligent builders.

Further to the announcement, Planning Minister Richard Wynne has commented that “those found to have done the wrong thing will not be able to participate” however “this is a chance for the original builders to become part of the solution and keep their workers employed during these challenging times.”2 It has been reported that the scheme would run on a no-profit basis.3

The scheme appears to be premised on ‘good builders’ coming back to make right their initial projects with the rationale that it would keep rectification costs down for the government whilst also avoiding litigation and reputational damage for the builder.

Whilst this approach appears to be sensible and pragmatic, further clarification is needed. Potential issues include the following:

  1. It is unclear what is meant by builders who have ‘done the wrong thing’ and how this will be determined. For example, is it contemplated that builders will only be approved if they are exonerated by the Judiciary? Such a process would be lengthy and costly and would be at odds with the intent of fast-tracking necessary rectification works. Alternatively, is it proposed that the CSV or another body determines whether a builder has ‘done the wrong thing’? This in turn poses questions of procedural fairness and natural justice. 
  2. Industry experts have raised concerns that a ‘no-profit’ scheme is problematic as it may result in builders being able to “inflate their costs from other parts of their business to show the cladding rectification was not profitable.”4

No doubt further guidance about builder eligibility requirements for the scheme will become apparent in the coming weeks and months.

This articled was co-authored by Lucy Mitchell (Graduate).

Property Insurance Update – Insurers’ defences to COVID-19 claim

The UK High Court test case addressing business interruption cover for COVID-19 business closures has been set down to commence on 20 July 2020 (8 days). The eight insurers involved have now filed their defences to the claim setting out the reasons why these claims are not covered.   

In this update we provide an overview of insurers’ position on coverage for COVID-19 claims. Insurers argue that COVID-19 claims are not covered because the pandemic is not localised to the insured area, but is a global issue and that pandemics are not intended to be covered. Insurers also argue that many businesses had their trade restricted but were not closed, and would have experienced that loss of trade even without government lock down measures. 

Insurers' Defences

COVID-19 is not confined to the insured area (proximate cause)

Many of the policies in issue provide cover for closure caused by the presence of an infectious disease within a certain distance, usually 25 miles or one mile, from the insured premises. All of the insurers put forward arguments around proximate cause in their defences, arguing that the pandemic is a global or national rather than local issue.

Ecclesiastical and MS Amlin jointly stated “Neither the pandemic nor the countrywide reaction to the pandemic by the government which happens therefore to cover the area within a radius of 25 miles from the premises without reference to or reliance upon the specific case or cases within the relevant area is sufficient.”

Argenta accepted that most of its policyholders would have had an occurrence of COVID-19 within its 25 mile radius of each insured premises, but that COVID-19 at those locations was not a cause, let alone a proximate cause, of the policyholder’s loss. It said that “there is no basis on which a single local occurrence can be treated as a cause of the pandemic, or of the governmental response to the pandemic, or of the public response to the pandemic, or of the further consequences of such responses. All of these things have a common cause in the pandemic itself, but not in the occurrence of cases within a specific locality.”

Hiscox, in its defence to the denial of access cover, argues that “the 'incident' has to be within the one mile radius of the premises. An event which is only incidentally within and entirely or preponderantly outside the radius is not an 'incident' within the radius.”

The government orders did not prevent access to or close the business premises

Insurers also argued that the government advice regarding social distancing and working from home did not result in the premises being unusable or closed.  Rather it resulted in a restriction on trade, but this is not what is insured. 

Arch said “None of the official orders or advice precented access to the premises…. social distancing, working from home, lockdown, etc. did not prevent access to insured Premises, even if they resulted in less use (or, in some cases, no use) being made of insured Premises.”

Zurich argued that while restrictions were imposed on businesses, many of them were technically allowed to stay open but were restricted (such as restaurants being able to provide take-away meals) or to trade “by virtual or distance means”.

Hiscox argued that the inability to “use” the premises must be that of the insured itself, not its customers. It also argued that there “needed to be a cessation of business” and not just that “the insured’s business activities have become more inconvenient or burdensome or difficult to perform, or are subjected to external limitations or are less profitable. A constriction in flow is not an interruption.”

Trade losses would have been incurred regardless of the lock down measures

Insurers also argued that the social and economic effects of the pandemic were not insured losses. 

Argenta argued “It is clear that ‘but for’ the insured peril (i.e. an occurrence of COVID-19 within 25 miles of the relevant premises) policyholders would in all or almost all cases have suffered the same or substantially the same loss in any event, irrespective of any local occurrence of the disease.”

Arch argued that “COVID-19 affected levels of employment, consumer behaviour, economic activity and confidence” and that the policy “does not insure against the financial consequences of COVID-19 nor of the Government intervention in response to COVID-19." 

Hiscox’s defence made reference to Sweden, where businesses were not restricted with the same lock down measures as the UK, but still suffered significant economic loss to demonstrate that those losses are not insured losses within the policy. 

Wordings are not ambiguous and contra preferentum rule does not apply  

Insurers also disputed that the contra proferentem rule should be applied. This rule states that any clause considered to be ambiguous should be interpreted against the interests of the party that created that clause. Insurers rejected this assertion, stating that their wordings are unambiguous.

Several insurers also set out that the policies were sold by brokers, whose responsibility it is to advise their clients. QBE said in its defence: “Each of the policyholders of policies with the QBE Wordings acted through an authorised insurance broker intermediary at the time of the placing of the policies with the QBE Wordings whose duty, inter alia, was to advise on the suitability of the insurance being obtained.”

RSA also pointed to the role of brokers in formulating their wordings “RSA4 was drafted by Marsh/Jelf who acted as agents for the relevant insureds. In such circumstances, the insureds (and not RSA) would fall to be treated as the proferens."

Financial Conduct Authority Reply

The Financial Conduct Authority’s reply to the defences is due on 3 July. In the interim, it is calling for public submissions on the defences for it to consider inclusion in its Reply. 

Property Insurance Update – Particulars of Claim Filed with UK High Court

The Financial Conduct Authority in the United Kingdom has filed its Particulars of Claim in the High Court. It sets out nineteen declarations being sought from the High Court as to the application of seventeen business interruption policies to the COVID-19 business closures. The declarations are intended to cover the majority of business interruption wordings in dispute as identified by the Financial Conduct Authority’s team of Queens Counsel which reviewed submissions from over 1200 policyholders. 

A summary of the declarations are outlined in this update and show the complexity of the issues at play in COVID-19 business interruption claims. These include the evidence as to COVID-19 being present at the premises, assumptions as to whether COVID-19 was present within the designated vicinity area and whether the loss is minimised by COVID-19 economic effects such as social distancing. 

Disease Covers

When COVID-19 became a notifiable disease or occurred

  1. COVID-19 is a human infectious and contagious disease COVID-19 became ‘notifiable’ in England and Wales on 5 March 2020.
  2. The initial outbreak was 31 December 2019, alternatively 31 January 2020, alternatively such later date as the Court may specify.
  3. COVID-19 ‘occurred’ on 5 March 2020.

When COVID-19 occurred within the vicinity

  1. COVID-19 occurred within the Vicinity:
    • of all premises on 31 January 2020.
    • alternatively when COVID-19 occurred within a more localised area surrounding the insured premises (such as within a 1 mile or 25 mile radius).

Evidence of COVID-19 at premises

  1. COVID-19 was sustained, manifested, and occurred wherever a person had contracted COVID-19, whether or not it was verified by medical testing or a medical professional and/or formally confirmed or reported to the PHE and whether or not it was symptomatic.

Evidence of COVID-19 in the vicinity

  1. COVID-19 was sustained, or manifested, or occurred within a given radius of the premises, and there was an incident within that given radius, when such a person or persons who had contracted COVID-19 was/were within that radius of the premises.
  2. As to the presence of COVID-19, on the balance of probabilities:
    • Based on Reported Cases, COVID-19 was sufficiently widespread that it was present within every LTLA in England by at least 31 March 2020, but in some LTAs by 16 or 23 March 2020.
    • A case of COVID-19 was present in the Relevant Policy Area as at a particular date based on any one of the following methodologies (individually or in combination):
      • If the COVID-19 related deaths in a local authority area reported by the Office for National Statistics, when averaged across that area, have occurred within the Relevant Policy Area.
      • If Reported Cases in a regional, UTLA or LTLA Zone, when averaged across that Zone, have occurred within the Relevant Policy Area.
      • If Reported Cases in a regional, UTLA or LTLA Zone, when uplifted to take account of the Undercounting Ratio applicable.
      • If there is a hospital within the Relevant Policy Area and the NHS hospital death data shows a COVID-19 death at that hospital.
      • If the Government regional hospital COVID-19 admissions data, when averaged out across the hospitals in the region, shows that admissions have occurred at a hospital within the Relevant Policy Area.

Emergency and danger to health

  1. There was an emergency likely to or which could endanger life, danger, incident, threat or risk of damage or injury and health reasons or concerns in the vicinity of all premises in the UK and within 1-mile of all premises in the UK from 3 March 2020, alternatively 12 March 2020.

Public Authority Covers

Public authority actions

  1. The advice, instructions and regulations [set out in paragraph 18 of the Claim] were all actions of government, governmental authority or agency, public authority, competent public authority, civil authority, competent civil authority and/or statutory authority.
  2. The actions were in the Vicinity of all premises in the UK.
  3. The advice, instructions and regulations as to social-distancing, self-isolation, lockdown and restricted travel and activities, ‘staying-at-home’ and home-working given on 16 March 2020 and on many occasions subsequently amounted for all businesses on that date, alternatively on such subsequent date as is to be determined by the Court for specific policy wording variances. 

Specific business categories such as restaurants, retail and travel

  1. Further or alternatively, where a business in certain business Categories was ordered on 20, 21, 23, 24 and/or 26 March to close the premises or cease the business, or only to provide a take-away/mail order/online business there was prevention of access or use (or other wording variations such as hindrance, restrictions and closure). 
  2. Further, from 16 March 2020, given the Government requirements including to cease travel and self-isolate, alternatively from 24 March 2020, there was for certain business Categories interruption or closure or restrictions as a result of COVID-19 manifesting itself within 25 miles provided it did so manifest in that radius. 

Exclusions

  1. The following exclusions are inapplicable:
    • pollution
    • contamination
    • competent local authority exclusion.

Causation and Trends Clauses

COVID-19 is the proximate cause

  1. The COVID-19 and public authority occurrences that trigger cover are all proximate causes of the resulting loss and all the causal relation wordings (‘resulting from’, ‘as a result of’, ‘directly resulting from’, ‘resulting solely and directly from’, ‘caused by’, ‘arising from’, ‘in consequence of’, ‘whereby’, ‘following’, ‘due to’ etc) are satisfied in all cases.

Loss arising from large scale closures

  1. The applicable causation tests are satisfied where the business interruption losses would not have been suffered had the COVID-19 pandemic and associated public authority actions not occurred.

Trends clauses do not apply to extensions

  1. The trends clauses contained in the business interruption sections of the policies are not applicable to claims under the item(s) of additional cover or extension(s) of cover.

COVID-19 economic effects from self-isolation etc not relevant

  1. Losses do not fall to be reduced under the trends clauses or otherwise by reason that but for the business closure or particular Government measures all or the majority of the losses would have been suffered anyway as a result of the broader COVID-19 pandemic, the lockdown, self-isolation, social distancing, or other national measures imposed by the Government. Alternatively, if this is wrong, in cases of disease or action required to be within the Relevant Policy Area the correct counterfactual is to assume that there is no disease or action (as applicable) within that Area but that the disease or action continued outside it, and there remains cover for losses that would not have been suffered had the Relevant Policy Area been disease/action-free, including on the counterfactual (which in some cases may increase the indemnifiable amount) that there was an ‘island’ of normal disease-free trade in a ‘sea’ of disease/public action.

Other

  1. Further declarations as apply to specific policies only. 


Further Information

For the full details of the Particulars of the Claim: https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-particulars-of-claim.pdf

Property Insurance Update – Australian Business Interruption Claims Begin

Australian media coverage

You may have seen over the weekend that the media have reported on the Australian insurer response to COVID-19 business closures following developments in the UK. The articles indicate that policyholders are engaging lawyers, approaching litigation funders and lodging complaints with the Australian Financial Complaints Authority. The Age and The Sydney Morning Herald refer to having obtained business interruption policies from Hollard, QBE, CGU, AON Australia and Steadfast and suggested that they “include clauses in some policies that could save thousands of businesses from collapsing if their insurers paid them out”.

Policyholder coverage comments

John Berrill, principal lawyer at Berrill & Watson, found that the policy wordings clearly covered business interruption losses caused by the government shutdown because of the threat of COVID-19.  "Some talk about the risk to life or the threat of damage to people or property, while some specifically refer to infectious diseases,” he said. “Others are broader and talk only of access prevention. But the trigger is a government shutdown which is what occurred in Australia in March," he said. Some of the policies purport to limit or exclude cover for shutdowns due to broad pandemics but some prescribe "quantifiable diseases" under the now-repealed Quarantine Act of 1908. The Quarantine Act was repealed in 2016 and replaced with the Biosecurity Act. However, some of the policies refer to the Act as "amended", which is incorrect. Insurers might argue that the intent of the exclusion was to cover the current COVID-19 pandemic but as a matter of insurance law, this argument is likely to fail because the wording is explicit and clear."

Mark Waller, a partner at law firm Clayton Utz, said he had been advising a number of clients on business interruption policies that contained exclusions for "quarantinable diseases under the Quarantine Act 1908 and subsequent amendments". He said the Parliamentary Act was repealed in 2016 and COVID-19 was not a "quarantinable" disease under that Act, therefore the claims should be covered.  Mr Waller also said: “Where the policies simply require that the outbreak occur within a specified radius of the premises, the insurance policy should respond, as it is likely that the business will be able to establish that the outbreak is present within that area.”

Dallas Booth, chief executive of the National Insurance Brokers Association, said his organisation had not taken a position on the debate but said he understood the argument of insurers. "There are various legal advices around that have examined the issue, and I’m told the advices tend to agree that the exclusions will be effective, primarily because regardless of the actual words used, that was clearly the intent of the parties. I can understand that position," he said.

The Insurance Council of Australia, which represents general insurers, also maintained that even in the cases where the wrong act is referred to, the intention is clear. 

Regulatory response and test case in Australia

The Age refers to the lack of regulatory response in Australia quoting an industry insider as saying we are “months and months behind the UK". The Australian Prudential Regulation Authority and ASIC said they were monitoring the situation. ASIC said it was working with AFCA, APRA and Treasury to "fully understand the complex problem and how best to resolve uncertainty for business and insurers". AFCA has received a request relating to business interruption and was in discussions to approve the issues that would form part of a test case in Australia.


Further information

https://www.theage.com.au/business/banking-and-finance/insurers-deny-business-insurance-claims-as-battle-begins-20200605-p55000.html

https://www.afr.com/companies/financial-services/iag-based-pandemic-exclusions-on-outdated-law-20200513-p54sma

https://www.lawyersweekly.com.au/biglaw/27945-business-interruption-claims-may-be-still-possible

Property Insurance Update – UK COVID Test Cases

UK High Court test cases

The United Kingdom Financial Conduct Authority (FCA) is pursuing test cases with the High Court which address business interruption coverage for COVID-19 pandemic claims. It has engaged Colin Edelman QC, Leigh-Ann Mulcahy QC, Richard Coleman QC. The UK’s High Court interpretation of these covers will likely be persuasive in Australia, particularly where those wordings are reflective of those used in the test cases. 

Key legal issues identified

The test cases will include policy interpretation of 17 business interruption wordings and therefore will cover a broad range of potential wordings. The FCA’s legal counsel identified these wordings as capturing the key legal issues in dispute between policyholders and insurers. They were identified after reviewing over 1200 policyholder submissions and the FCA approached 56 insurers. The key legal issues include:

  • Denial or prevention of access cover
  • Disease cover
  • Causation
  • Pollution and contamination exclusions

Critical dates

  • 9 June 2020: Test case claims will be filed by the FCA
  • 23 June 2020: Insurers’ defences will be filed
  • Early June 2020: FCA will publish a comprehensive list of other insurers and policies that it expects the test cases will effect.
  • Late July 2020: 5-10 day hearing before the High Court

Given the importance of the issue, it is expected that the judgments by the High Court will be handed down as early as August 2020. 


For more information

Complete list of insurers and policies: https://www.fca.org.uk/publication/corporate/preliminary-list-affected-insurers-policies.pdf
Selected 17 policy wordings: https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-proposed-representative-sample-of-policy-wordings.pdf
Framework governing the process and timetable: https://www.fca.org.uk/publication/corporate/bi-interruption-test-case-framework-agreement.pdf
Proposed assumed facts: https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-proposed-assumed-facts.pdf
Proposed issues matrix: https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-proposed-issues-matrix.pdf
Proposed questions for the court: https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-proposed-questions-for-determination.pdf

Insurance implications of the VBA’s “tough stance” on building practitioner conduct

You do not need to search far to find evidence of the Victorian Building Authority’s (VBA) tough stance on registered building practitioners in the wake of the ‘combustible cladding crisis’.

Indeed, the VBA’s press reel has of recent times run hot, with multiple media releases concerning suspensions and prosecutions taken in relation to ‘dodgy’ practitioners’ conduct. With headlines such as ‘VCAT upholds building surveyor’s suspension’, and ‘VBA determined to fight fire engineer’s attempt to avoid disciplinary action’, it is clear that the authority has adopted a ‘tough on practitioners’ mandate in an effort to renew consumer and industry confidence in the building industry.

Consistent with the VBA’s tough stance, and despite the implications of the coronavirus pandemic, in the week ending 15 May 2020, the VBA reported:

  • issuing two show cause notices and one notice of decision;
  • conducting eleven cladding inspections across five municipalities; and
  • conducting thirteen cladding expert panels, which rated six buildings ‘high risk’, five buildings ‘moderate’ risk and two buildings rated ‘low’ risk.

These statistics make it clear that the impacts of the ‘cladding crisis’ are likely to be felt in the industry for considerable time to come, and the prevalence of cladding related insurance claims and notifications is only likely to increase.

The Show Cause process

Pursuant to section 182 of the Building Act 1993 (Vic), if the VBA reasonably believes a ground exists for taking disciplinary action against a registered building practitioner, and it proposes to take that action, the VBA must issue the registered building practitioner with a “show cause notice”.

A show cause notice:

  • states that the VBA intends to take disciplinary action in respect of the building practitioner’s registration (and where the building practitioner has multiple registrations, for example if a registered building surveyor is also registered as a building inspector, which of the registrations the notice relates to);
  • sets out the relevant facts and circumstances (i.e. in the context of cladding, which building or buildings are alleged to have non-compliant combustible cladding);
  • sets out the proposed disciplinary action and the grounds for it; and
  • invites the building practitioner to make representations (in writing or orally) about the notice within a set period of time.

Detrimental findings by the VBA have a significant impact on building practitioners, and may expose the individual to financial penalties, a suspension of their registration (including immediate suspension) or reprimands. The VBA’s show cause notices can include both concurrent and cumulative penalties, which can significantly impede a building practitioner’s ability to continue to practise. In some instances, the VBA deems the building practitioner’s alleged poor conduct to be of such a degree that a notice of immediate suspension is required, impeding the practitioner from completing current projects, possibly exposing that person to a greater volume of claims for compensation.

In addition to related non-completion claims, a significant secondary impact of the show cause process is the rise of related claims for projects that include the use of non-compliant combustible cladding.

Insurance implications

As a consequence of the VBA’s increased use of show cause notices dealing with the alleged use of non-compliant or non-conforming external wall cladding products, we have seen a rise in notifications by building practitioners, particularly by building surveyors, seeking indemnity for ‘Inquiries’ cover (and to notify possible related Claims).

What is clear is that responding to a show cause notice is time consuming and costly and often causes tension between building practitioners and their insurers. 

In circumstances where: 

  • a significant portion of professional indemnity policies which provide Inquiries cover (which would on their face respond to a VBA inquiry) only do so in respect of costs associated with responding to or participating in an inquiry but otherwise exclude cover for fines and penalties; and

  • show cause responses require a fast response, unless an extension of time is granted by the VBA,  

the following list of issues may help both building practitioners and their insurers to navigate the show cause process.  

For building practitioners

  • Act quickly: It is imperative that building practitioners act quickly to notify their insurer if they receive a show cause notice. In addition to notifying their insurer of the inquiry, practitioners should immediately begin to collate material relevant to the projects referenced in the show cause notice. For example, for show cause notices relating to cladding, a building practitioner’s file is likely to be voluminous.   While it is important to provide full and unfettered access to the insurer (or a private lawyer), it can also be greatly beneficial for the building practitioner to highlight key documents and their overarching views so that a response strategy can be formulated. 

  • If the building practitioner wishes to appoint a private lawyer: A building practitioner might be keen to appoint a private lawyer they have worked with in the past, or who they know has the right skills and experience to help them respond to the show cause notice.  If a building practitioner intends to appoint a private lawyer, they should first seek their insurers’ consent to avoid later issues with indemnity, including being potentially out of pocket for a portion of the legal fees incurred.

  • Considering enforceable undertakings: Consideration should be given by building practitioners to offer to accept an enforceable undertaking to mitigate their exposure to the more serious proposed penalties detailed in a show cause notice. In this regard, it is critical that the insurer’s consent is obtained noting the possible implications that an undertaking may have in respect of any subsequent related claims for compensation. Specifically, we have observed an increase in prevalence of related claims by affected property owners, who are able to ‘piggy-back’ off the VBA’s show cause process, including by any admissions or concessions that might be made by the building practitioner as part of the response process. This can have an implication on indemnity in relation to any related claims.  

For insurers

  • Act fast on indemnity: For insurers, and bearing in mind the above, it is important to quickly resolve any indemnity issues and make sure this is clearly and accurately communicated to the building practitioner (and the broker). An insured building practitioner’s decision to appoint a private firm can have significant costs implications, both in relation to the show cause notification and possible related claims, meaning coverage issues need to be carefully set out in an indemnity response. 

  • Work proactively with brokers: There is clear merit in both the building practitioner and the insurer working proactively with brokers to, in effect, manage and streamline the response process. We have seen that by taking steps to determine policy response as soon as possible and ensuring that this position is communicated to and, importantly, accepted by the building practitioner, costs and time in responding to the show cause notices can be reduced.  For example, where:

  1. indemnity is granted, be it in respect of Inquiry costs only, say shortly after receipt of the show cause notice; and
  2. the insured building practitioner accepts the above position;

panel lawyers can be appointed to assist the insured to respond to any show cause notice. The obvious benefit to this approach is that insurers avoid having to incur the cost of retaining coverage counsel while the building practitioner gets she benefit of panel lawyers with expertise in this area of the law without being out of pocket for the difference between panel rates and rates charged by non-panel lawyers. 

Combustible cladding claims amidst the coronavirus crisis

Unsurprisingly, the novel coronavirus and the illness it causes, COVID-19, are dominating discussion around the world. COVID-19’s impact on health and the economy remains the subject of great concern and interest. In the construction industry, it has been reported that the outbreak of COVID-19 may lead to construction work ceasing, or at the very least, decreasing in light of material supply chain restrictions and restrictions on movement effecting workers. In addition to new projects, this industry wide slow-down will also have an impact on buildings affected by the combustible cladding crisis, which emerged from the non-compliant use of aluminium composite panel (ACP) cladding products.

Putting to one side the question of whether construction rectification work should continue in the current climate, the likely delay in undertaking rectification work on buildings with ACP cladding arguably masks a series of problems with the broader rectification approach adopted by the Victorian government; an approach which is likely to be followed by other States and Territories.  

As reported in our 17 October 2019 update, the Victorian Government introduced reforms aimed at funding rectification of non-compliant ACP cladding, including through litigation directed at wrongdoers responsible for the use of such products. In this regard, the Crown now has the power to ’stand in the shoes‘ of an owner who receives or received government funding to bring recovery claims against building practitioners involved in the installation or use of non-compliant cladding.  

While on its face the above approach appears to be sound and justified, it is arguably undermined by the Victorian Government’s decision to allow certain building practitioners to maintain their registration despite their professional indemnity insurance containing exclusion for claims concerning cladding. 

Indeed, in Victoria as a result of changes to the Building Practitioners’ Insurance Ministerial Order (MO) in force from 12 August 2019, certain registered building practitioners are permitted to hold professional indemnity insurance policies which exclude liability for loss or damage arising from or concerning work where the claim directly relates to or is connected with the use of an external wall cladding. As a result of the amendment to the MO, it is theoretically open for CSV to pursue a claim against a building practitioner such a building surveyor in respect of the use of non-complaint ACP, succeed with that claim, but be unable to enforce any monetary award if the claim against that surveyor is caught by the ‘cladding exclusion’ in a professional indemnity policy. In Victoria, this is particularly the case for buildings that have not been the subject of the cladding audit1 and therefore may not have been notified to professional indemnity insurers.

A further problem with the Victorian Government’s current rectification approach is that it fails to account for buildings with non-compliant ACP cladding, which also have other non-related defects (such as design defects or workmanship issues). It was reported last week that 15 Melbourne properties entitled to funding for non-complaint ACPs were also riddled with other construction problems2. Consequently, funding would only be limited to the rectification of non-compliant ACPs with the owners being responsible for the cost of all other rectification work. Practically speaking, the above scenario demonstrates that despite the Victorian Government’s best intention of providing consumer focused funding, owners may find themselves out of pocket for the rectification of non-ACP cladding related defects, which are required to be addressed at the same time as cladding issues. 

The above problem extends to the subrogated litigation commenced by the Crown. Specifically, it raises the question as to whether the Crown is empowered and prepared to pursue claims in respect non-ACP related defects as part of its mandated claim for non-compliant ACP products, and to the extent that it is, whether it would require a contribution from the relevant owners to its litigation costs.

What is clear is that COVID-19 presents unparalleled challenges, many of which are yet to be identified. However, its impact on the cladding crisis should not mask a number of inherent problems with rectification adopted in Victoria likely to be followed in other States and Territories.

 

1 The Victorian statewide cladding audit examined buildings constructed after March 1997 that fell into the following classes under the National Construction Code:
Class 2 buildings (including apartments) of three storeys or more;
Class 3 buildings (including hotels, motels and student accommodation) of three storeys or more; and
Class 9 buildings (including hospitals, schools and aged care facilities) of two storeys or more.

Fix now, litigate later: Building Amendment (Cladding Rectification) Bill 2019 (Vic)

The Building Amendment (Cladding Rectification) Bill 2019

On Tuesday, 15 October 2019, the Victorian State Government introduced into the Legislative Assembly the Building Amendment (Cladding Rectification) Bill 2019 (Bill) – a bill aimed in part at furthering the Government’s apparent mandate of holding “dodgy building practitioners”[1] to account for the use and installation of combustible cladding.

The Bill primarily relates to proposed reforms relating to the Government’s funding of “cladding rectification work”[2] associated with “non-compliant or non-conforming external wall cladding products”[3].  Indeed, one of the key purposes of the Bill is to continue to provide financial assistance for building work associated with cladding rectification[4], and to provide subrogation of the Crown to the rights and remedies of an owner who receives financial assistance[5] from the Government.  

The proposed subrogation provisions would apply retrospectively to funds previously paid by the Government, as well as to future payments by the Government.

Practically, this means that the Crown would “stand in the shoes” of an owner who receives or received funding from the Government to bring recovery claims against any person involved in the installation or use of non-compliant cladding that required cladding rectification work to be undertaken.  The Bill gives the Crown the right to choose whether to bring the proceedings in its own name, or in the name of the owners (payees).

Consumer Protection

There is a clear consumer protection element to the Government’s continued funding of cladding rectification work.  This is particularly important given the potential safety implications arising from the use of combustible cladding.  Having consumer protection at the forefront in decision making appears to have led the Government to “fix the buildings” first, and to worry about the “rest” later. The “rest”, of course being, to work out who pays the repair bill.

Now that the Government has turned its mind to the “rest”, it has continued its consumer protection focus by including safeguards in the Bill, including in relation to subrogation.  To that end, it is proposed that:

  • if the Crown brings proceedings under the name of the owner, the Crown will indemnify the owner against any costs awarded against the owner in the proceedings; and
  • if the Crown brings proceedings in the name of the owner and the Crown recovers more than the amount of financial assistance the Government provided to the owner, the Crown is required to pay the difference to the owner after deducting its costs associated with recovering the money.

Owners are otherwise prevented from double-dipping as part of the proposed amendments – meaning that if they receive financial assistance from the Government and subsequently recover from another source/s an amount in relation to the use or installation of the non-compliant cladding, they are required to repay the Government.

Concerns for the Industry - A Liability Perspective

While we can see the clear consumer benefits arising from the Bill, the Bill appears to create a myriad of potential problems for builders and consultants who were previously involved in projects with non-compliant cladding.

Anticipated delays

From all the talk of “getting in there to fix the problem” – it appears that the cladding crisis will not be over for many years. 

Noting with the plethora of current cladding related demands, and now anticipated further wave of proceedings, delays in recovery proceedings appear inevitable.

Indeed, we anticipate delays will arise from pressures on the Courts and the Victorian Civil and Administrative Tribunal due to the sheer number of claims, and also due to the limited number of experts (such as fire engineers) able to provide expert evidence in cladding related disputes.  In circumstances where each case “turns on its facts”[6] – expert evidence is crucial to resolving cladding disputes.

Liability of consultants and suppliers

While we suspect the primary target of the exercise of rights and remedies by the Crown is builder, the ability to recover against “any person in relation to the installation or use of any non-compliant or non-conforming external wall cladding product, or other building work, that required the cladding rectification work to be undertaken”[7] clearly extends the scope of potential targets of anticipated recovery proceedings. This approach is consistent with what we have seen from a liability perspective in terms of claims against builders and consultants more broadly.  

Further, the scope of the right to recover may possibly also extend to claims against the suppliers or manufacturers of the products – assuming that is, that the word “use” in the Bill is broad enough to extend to that camp.  To that end, neither the Bill nor the explanatory memorandum provides guidance on the term.

Insurance implications

Consultants, particularly registered building surveyors, will be aware of the difficulties of obtaining professional indemnity insurance free from exclusions relating to cladding.  To overcome the problem (and in an effort to avoid the construction industry grinding to a dramatic halt), from 12 August 2019 the Victorian Building Authority (VBA) accepts professional indemnity insurance policies containing exclusions for cladding.

In the lead up to the change, many building surveyors sought to “bulk notify” circumstances which might give rise to a claim under their then current policies.

Many brokers assisted their clients to cross-reference notifications with specific buildings, identifying the specific cladding material used, and concerns raised by the VBA as part of its cladding audit.

Where less specific bulk notifications were made, some insurers have reserved their positions regarding the treatment of the notifications as a circumstance which might give rise to a claim. It is therefore possible that if the Crown subrogates claims against:

  • builders, who look to apportion liability to consultants; or
  • builders and consultants jointly,

in some instances, there may be no insurance cover available for the claims.

On the whole, perhaps the only real “winners” from the Bill are lawyers, who will no doubt be kept busy in the months and years to come.


[1] Minister for Planning, Standing up for Combustible Cladding Owners in Victoria, media release, 15 October 2019, <https://www.premier.vic.gov.au/standing-up-for-combustible-cladding-owners-in-victoria/>, accessed 17 October 2019

[2] Defined in clause 4 the Bill as “(a) building work in connection with, or otherwise related to, a product of material that is, or could be, a non-compliant or non-confirming external wall cladding product; or (b) work of a type specified in a notice under section 1854 of the Local Government Act 1989”.

[3] Defined in clause 4 of the Bill as “(a) an external wall cladding product that does not comply with the requirements of this Act and the regulations; or (b) an external wall cladding product that is installed or used in, or applied to, a building in a manner that does not comply with the requirements of this 5 Act and the regulations; or (c) a high risk external wall cladding product that is used in contravention of a declaration under section 192B applying to that product;".

[4] Readers will be aware that $600 million was announced by the Andrews Labor Government on 16 July 2019 to “fix buildings with combustible cladding” and managed by “Cladding Safety Victoria”

[5] See clause 9 of the Bill containing the new proposed section 137F of the Building Act 1993.

[6] See our recent case note on the Lacrosse Tower decision as an example.

[7] See clause 9 of the Bill containing the new proposed section 137F of the Building Act 1993.

Government response to combustible cladding crisis

While media attention surrounding combustible cladding has begun to wane, the construction and insurance industries continue to deal with the significant ongoing consequences of the issue.

Governments across Australia are grappling with updated regulations for future construction and also the coordination (and funding) of remedial works to ensure that existing buildings do not pose an unacceptable risk to safety.

The issue of funding remedial works remains contentious with the Commonwealth Government firmly maintaining the position that building regulation is an issue that falls squarely within the remit of individual State Governments. As a consequence, a varied approach has been adopted across the country.

In the circumstances, we have reviewed the current status of each response adopted by the different State Governments across Australia.

New South Wales

The NSW Government Cladding Taskforce is continuing its audit of all relevant buildings across the State. Most recent estimates indicate that over 500 buildings have been identified as ‘high-risk’.

The process adopted in NSW is that buildings identified by the Taskforce are referred to the relevant local Council which, in turn, issues a Fire Safety Order that, where necessary, requires remedial work to be undertaken at the cost of the building owner.

To date, the NSW Government has not announced any funding to assist with the remedial works.

Going forward, the NSW Government has commenced a Parliamentary Inquiry into building regulations which is expected to produce a report by 14 February 2020.

Victoria

The Victorian Cladding Taskforce and the City of Melbourne are carrying out a State wide audit to identify all buildings with non-compliant cladding.

As of July 2019, 2,227 buildings had been inspected with 72 buildings categorised as imposing an ‘extreme risk’ and 409 buildings categorised as imposing a ‘high risk’.

The Victorian Government is the only Government in Australia that has announced some funding to assist with remedial works. The funding package was initially announced at $600 million (with an invitation to the Commonwealth Government to chip in half of that amount). With that invitation having been politely declined by the Commonwealth Government, the Victorian Government announced plans to make up the $300 million short fall (over the next 5 years) by imposing an increased levy on building permits on larger projects.

The funding will be applied to carry out remedial works to buildings deemed high or extreme risk, with the program overseen by Cladding Safety Victoria.

South Australia

The South Australian Government is implementing a State wide audit, delivered over three stages. The first two stages involved identification of buildings with potentially non-compliant cladding followed by a more detailed investigation of those buildings. The final stage will involves carrying out remedial works to those buildings identified during stages one and two.

The ABC reported back in August 2018 that 1,117 buildings were identified during stage one and that (nearing completion of stage two), 47 buildings had been identified as requiring remedial works to improve fire safety.

Tasmania

An audit carried out by the Tasmanian Government and completed in January 2018 identified 43 buildings in the State that warranted further investigation. Those further investigations concluded that only one building, the Launceston General Hospital, required rectification works. Those works have now been completed.

There has been some criticism (led by the opposition party in Tasmania) of the conclusion that the other 42 buildings identified during the audit process do not require remedial works. In particular, Jenna Butler, the opposition building spokesperson has stated publicly that all non-compliant cladding ought to be replaced at the cost of the tax payer.

Western Australia

The Western Australian Government has conducted a State-wide cladding audit, focussing on buildings that are three-storeys or higher and were built or refurbished between 1 January 2001 and 30 June 2017.

The audit process identified 1,795 buildings within its scope. Of those buildings, 258 were identified as requiring a detailed risk assessment. Upon completion of that risk assessment, 52 buildings were referred to the local authorities for issuing remedial building orders where necessary.

As of 19 September 2019, remediation works had commenced on 46 (of the 52) buildings identified during the audit process.

The drafting of a Final Cladding Audit Report has been commenced and is said to be ‘advanced’.

Queensland

The Queensland Government has established an Audit Taskforce to conduct a targeted investigation into buildings with potentially combustible cladding.

The process in Queensland (in relation to privately owned buildings) involves relevant owners registering their buildings and completing a combustible cladding checklist. Over 18,000 buildings have now been registered. In circumstances where combustible cladding is identified, the owner of that building is required to engage a fire engineer to complete a fire safety risk assessment (by no later than May 2021).

So far, the audit process is said to have identified combustible cladding on 237 Queensland buildings, including five buildings owned by the State. Of particular significance, the Princess Alexandra Hospital was identified as requiring the removal and replacement of 20,000 square metres of cladding (with the costs of those works estimated between $10 and $15 million).

Following the announcement by the Victorian Government of its funding package, the Queensland Government quickly moved to confirm that it would not be following suit with Public Works Minister Mick de Brenni stating in no uncertain terms that “In Queensland, building owners are responsible for rectification of their buildings”.

A day clad with announcements

Coinciding with the publication of the Victorian Cladding Taskforce’s Final Report (Final Report), the Victorian Government has today announced the establishment of a new agency, Cladding Safety Victoria together with a $600 million package aimed at rectifying privately owned buildings with high-risk combustible cladding.

According to the Final Report, out of a total pool of 1,069 private buildings, the Taskforce has deemed 72 to be “extreme risk” with a further 409 in the “highest risk” category (accounting for, respectively, 7% and 38% of the buildings with cladding which have been inspected and assessed to date). 

The Victorian Government has already announced that 15 properties have been selected for rectification through funding from the 2019/2020 budget leaving open the question as to when the funding will be available to the remaining 466 properties.

At this stage the Victorian Government has indicated it will directly fund half the rectification and called on the Federal Government to contribute the remaining $300 million required. That assumes that previous estimates are inflated and the properties can be fixed within this amount.

Should the Federal Government continue to decline to contribute, the outstanding $300 million will be raised over the next five years through changes to the building permit levy.  It is estimated the levy increase will affect 6% of permits, with permits for low-rise buildings and building works under $800,000 being excluded from the increase.

The Final Report has recommended that the Victorian Government offsets the costs of the rectification program from “wrongdoers” and insurers while potentially having owners transfer their recovery rights to the state as a condition of receiving rectification funding.  While the Government has been quick to announce the partial funding, the devil will be in the detail with no announcements made as to how it will perform its due diligence around scoping and costing the works.

Cladding Safety Victoria will be contacting owners corporations and property owners shortly, beginning with those whose buildings are identified as high risk in the Final Report. A referral to Cladding Safety Victoria will trigger a six-step rectification process as outlined here.

Relevantly however, it is unclear whether the Victorian Government will be seeking to subrogate recovery rights immediately.  If the Victorian Government does seek to recover from construction professionals and insurers, it runs the risk of perpetuating the current insurance and construction related crisis by discouraging insurers to re-enter the professional indemnity market, particularly for building surveyors.  Moreover, such an approach seemingly ignores and is at odds with the Victorian Government’s recent regulatory changes which enable building professionals, such as building surveyors, to maintain their registration despite their professional indemnity insurance containing ‘cladding exclusions’ aimed at excluding cover for cladding related claims.  Put simply, it may result in the Victorian Government having to pursue building surveyors for effectively uninsured losses.

Today’s announcements come after it was revealed last month that owners were yet to take up the Victorian Government’s offer for owners to enter into cladding rectification agreements.

The Final Report can be viewed here.

‘The Composite Cladding Crisis’: Will the Building Surveying Industry ‘self-combust’?

Victorian building professionals will by now have heard of the ‘combustible cladding crisis’ affecting Victoria’s domestic and commercial buildings.

In fact, for many in the construction industry, the term ‘aluminium composite cladding’ has become synonymous with the threat of costly and hard fought litigation. However, for building surveyors in particular, the ‘crisis’ is posing a real and genuine thread to the industry’s long-term viability.

We have previously reported on developments on the issue of combustible cladding, and the implications for building practitioners and their insurers.

In this article, we explore the potential insurance implications of the ‘combustible cladding crisis’ on the building surveying industry.

Background

In November 2014, the now infamous ‘Lacrosse’ building located in Melbourne’s Docklands caught fire. The fire could by now have been long forgotten, but for the cause of the dramatic spread of flames on the exterior, its aluminium composite panel cladding (ACP).

The Lacrosse fire served to ignite serious concerns about the widespread use of ACP products in the Victorian market and resulted in the establishment of the Victorian Cladding Taskforce. The taskforce’s initial report highlighted the prevalence of ACP materials in commercial and domestic buildings across Victoria[1] and has resulted in a State-wide audit by the Victorian Building Authority[2] of buildings constructed after March 1997. The current audit extends to the certain apartment buildings, hotels, motels, student accommodation, hospitals, schools and aged care facilities.

Local councils have also been playing a role in the review process. If a building is suspected as containing ACP products, Municipal Building Surveyors are issuing letters, emergency orders, building orders (minor works), building notice (precedes a Building Order), and/or building Orders to the owners of the buildings regarding their cladding[3].

Litigation involving building surveyors

Concurrent with the audit is the ongoing threat of litigation to construction professionals, including building surveyors.

Naturally, the flow-on effect of a building owner receiving a notice from the VBA is for notification of the relevant building surveyor involved in the approval of the works – the first hint of the substantial liability exposure to building surveyors sparked by the use of unsuitable cladding products.  

Further down the track, and four years after the fire, the Victorian Civil and Administrative Tribunal recently heard the Lacrosse trial over a six week period. Media has since reported that while Judge Woodward is yet to make a judgment in relation to liability for the use of non-compliant cladding, the builder has agreed to pay $5.6 million to replace the combustible cladding on the 21 storey residential building.

Worryingly for those in the profession, there has also recently been considerable discussion about a possible class action in relation to combustible cladding. Indeed, IMF Bentham and William Roberts Lawyers have sought to ‘investigate and bring viable claims for compensation, on behalf of persons and entities with proprietary interests in residential or commercial buildings, on which there is installed [ACP] cladding with a core comprised substantially of polyethylene.’ If the class action proceeds, it will be Australia’s third relating to flammable cladding. Two other groups, Adley Burstyner and Roscon Property Services, and Slater and Gordon, are also considering action.  

In response to the perceived threat of claims, many building surveyors have conducted their own internal audit of services provided in the previous 10 years, to determine their own risk of liability and for the purpose of notifying their insurers of potential claims.

Insurers’ response to the ‘cladding crisis’

The real and ongoing threat of litigation has made insurers nervous, with many previously providing professional indemnity insurance to building surveyors either:

  • withdrawing entirely from the market (and not writing risk for building surveyors);
  • limiting their scope of cover offered to building surveyors by excluding cover for building works using non-conforming combustible cladding products, as well as building works involving the intentional non-compliant use of cladding materials;
  • inserting caps on indemnity for claims relating to the use of non-compliant cladding materials; and/or
  • significantly increasing the premiums payable by building surveyors for professional indemnity insurance policies.

In fact, most insurers have introduced restrictions on professional indemnity policies for building surveyors.

In Victoria, all registered building surveyors are required to hold professional indemnity insurance[4]. However, because of the limited number of building surveyors practising in Victoria, the pool of premiums may not be large enough to cover the risk of one substantial cladding class action.

If insurers elect to exclude or reduce coverage amounts to building surveyors, this will have the flow-on effect of the building surveyors not complying with their ongoing registration requirements for professional indemnity insurance. That is, the requirements set out in the relevant ministerial order, which include that the building surveyor’s policy of professional indemnity insurance must (amongst other things):

  • indemnify the building surveyor against ‘any civil liability in respect of any claim first made against the building practitioner during the period of insurance and notified to the insurer during such period’; and
  • must ‘not exclude liability for loss or damage arising out of or concerning building work as defined in the Building Act 1993 in the State of Victoria’.[5]

The requirements of the ministerial order essentially mean that if building surveyors fall foul of the insurance requirements, they may be unable to maintain their registration to practice in Victoria. Worryingly, if building surveyors are no longer able to practice, the end result will be the Victorian building industry rapidly grinding to a halt. The impact of this would no doubt affect the Victorian economy as a whole, and should clearly be avoided.

So, what are the options?

A clear way to avoid the impending insurance crisis for building surveyors would be for insurers to avoid excluding liability for combustible cladding from their policies (and/or, imposing caps for this type of liability). However, bearing in mind the mass exodus of insurers from the market and the limited potential premiums payable, this is unlikely to occur in the short-term.

Therefore, given that the mandatory professional indemnity requirements for building surveyors arise because of the ministerial order, the Victorian Government holds the ultimate power to keep the industry going.

As a reflection of the Government’s powers to regulate the building industry, a second option would be for it to create a statutory insurance scheme providing coverage for claims arising out of building surveyor’s conduct.

We know from experience in the domestic building space, that a limited liability scheme is likely to draw heavy criticism if framed too narrowly. However, this type of scheme is clearly preferential to the Victorian building industry effectively grinding to a halt due to the uninsurability of building surveyors.

It would also be open to the Government to amend or vary the ministerial order to permit exclusions or caps on claims relating to combustible cladding for policies going forward. This may be the best option, particularly in light of the VBA’s new guidelines on the use of combustible cladding – which, will no doubt mean that claims relating to cladding for new buildings are less likely.

Finally, if building owners are left with the responsibility to rectify works following state-wide audits or related investigations, it may be necessary to consider introducing a government or industry funded scheme, as a means of recovery. We know the VBA audit is reviewing buildings constructed after 1997; however, bearing in mind the 10 year limitation period for Building Actions, it is likely that there will be a considerable number of building owners who are unable to bring a proceeding against the people involved in the construction of their buildings, and accordingly, be left without redress.

The limited fund could be in addition to the Government’s new loan scheme relating to ‘Cladding Rectification Agreements’ for the repair of building’s with combustible cladding, where owners are not eligible for loans through the scheme.

Conclusion

The hotly anticipated Lacrosse decision should shed further light on the types of proceedings and extent of liability to building surveyors, likely to arise from the use of non-compliant ACP cladding.

If, as a result of that decision, the remaining insurers providing unrestricted coverage to building surveyors elect to withdraw from the market (or insert their own exclusions relating to the use of ACP), the Government will clearly need to step in to ensure the building industry in Victoria remains viable. The degree of the Government’s required intervention is as yet, to be determined.


[1] In its interim report the taskforce identified 1,400 Victorian buildings as ‘most likely’ having ACP with a polyethylene core or expanded polystyrene – see Victorian Cladding Taskforce, Interim Report, November 2017, available at: https://www.planning.vic.gov.au/__data/assets/pdf_file/0012/110316/Victorian-Cladding-Taskforce-Interim-Report-November-2017.pdf
[2] Pursuant to its broad powers afforded by section 198 of the Building Act 1993 (Vic).
[3] http://www.vba.vic.gov.au/__data/assets/pdf_file/0005/86369/Building-Notices-and-Orders.pdf
[4] http://www.vba.vic.gov.au/__data/assets/pdf_file/0017/18233/Ministerial-Order-Building-Practitioners-Insurance.pdf
[5] Ibid.

Combustible cladding in Australian construction – where to from here?

In May 2016, we reported on further developments on the current issue of combustible cladding, and the implications for building practitioners and their insurers. Read our article 'Non-compliant' cladding issues update.

The tragic Grenfell Tower fire in London has sparked a global concern about the hazard associated with the use of combustible aluminium composite panel products in the construction of high-rise buildings and the potential for vertical fire spread. Namely, it has become apparent that a fire hazard is likely to be present unless the exterior wall assembly of buildings and all associated components are non-combustible, or have passed comprehensive fire safety testing.[1]

In this update, we report on recent developments, in particular Australia’s approach to fire risks and associated insurance implications for building practitioners.

Australia responds to fire risks

From 2017 Australian state and territory governments commenced a review of existing buildings to identify the use of highly flammable, combustible external wall cladding products. Addressing both the Grenfell Tower and Lacrosse building fires, the various taskforce units established by Australian state and territory governments have made a number of uniform recommendations to reduce the risk of fire. The recommendations include the undertaking of further audits of existing buildings and further work in formulating a shared responsibility regime applying to manufacturers, importers, suppliers and installers of building products alike.

State and territory investigations

Whilst the approach taken between the Australian states and territories is not identical, there is an overlapping consensus that fire risks need to be minimised, through increased regulation and compliance measures. The response of certain states and territories are more advanced than others, with legislation recently being passed in NSW and Queensland aimed at preventing the use of unsafe building products and increasing broader accountability.

In July 2017 the Victorian Government established the Victorian Cladding Taskforce (VCT) to investigate the extent of non-compliant external wall cladding on buildings and provide recommendations on how to ensure safety in the homes and offices of Victorians. The VCT issued its interim report[2] and findings on 1 December 2017, confirming the widespread use of combustible cladding products throughout Victoria. It reported that the problem derives from the supply and marketing of unsuitable building materials, a low level of compliance within the construction industry and the need for increased regulation. Audits of Victorian buildings are continuing to take place, and in turn may lead to a number of prosecutions in the event of wrongdoing.[3]

The responses of the Western Australian, South Australian, Tasmanian and Australian Capital Territory governments have mirrored Victoria’s approach, with a focus placed on auditing buildings for the use of combustible cladding materials.

Similarly, the NSW government[4] has responded to the issue by implementing an inter-agency Fire Safety and External Wall Cladding Taskforce to develop a government action plan and introducing new legislation. On 18 December 2017, the Building Products (Safety) Act 2017 came into operation, which now enables the Fair Trading Commissioner (Commissioner) to ban the use of building products in construction when a safety risk has been identified. Relevantly, a safety risk caused by the use of a building product is defined to exist when occupants of the building are or will likely be at risk of death or serious injury. The Act also provides the Commissioner with the power to investigate the safety of building products and the extent to which they have been used in building works. It also provides the Commissioner with the broad power to investigate and examine documents and mandates the requirement of any individual to provide information relating to the investigation. Further, the Act makes it an offence for a builder or owner to engage in the non-compliant use of building products, for the purpose of saving costs or otherwise. 

The Queensland government’s Non-Conforming Building Products (NCBP) Audit Taskforce has taken a proactive approach to the issue. Brisbane’s Princess Alexandra Hospital has already been identified as a government-owned building posing a fire risk with various others continuing to be investigated.[5] In order to enact an appropriate response, the taskforce has established a process of investigating and notifying Queensland Fire and Emergency Service of building works identified to comprise combustible materials. On 31 August 2017, the Queensland Parliament introduced new legislation to regulate the use of building products; namely the Building and Construction Legislation (Non-conforming Building Products – Chain of Responsibility and Other Matters) Amendment Act 2017. The Act expands compliance and enforcement powers in Queensland and establishes a more even chain of responsibility amongst designers, manufacturers, importers, suppliers and installers of building materials. It creates new offences and penalties for breaching the obligations placed on participants in the building product supply chain to prevent and address non-conforming building products. Although only applying to the installation of products after 1 November 2017, powers extend to ordering a wrongdoer to undertake remedial works.

Professional indemnity insurance implications

Whilst the above developments might be a step in the right direction, it is clear that building practitioners face a substantial liability exposure arising out of the use unsuitable products, which has made insurers nervous. This exposure is of particular interest to professional indemnity insurers, some of which have either stopped writing risk for building practitioners or limited their scope of cover by excluding cover for building works using non-conforming combustible cladding products, as well as building works involving the intentional non-compliant use of building materials.[6]

The decision to limit the scope of cover may also have some unintended consequences. Specifically, pursuant to the differing state regulations,[7] various classes of building practitioners are required to provide evidence of their professional indemnity insurance at the time of each registration renewal. There are implicit concerns as to whether holding limited professional indemnity insurance, due to insurer exclusions or reduced coverage amounts to a building practitioner inadvertently not complying with their ongoing registration requirements.

Recently, in LU Simon Builders Pty Ltd v Victorian Building Authority[8], LU Simon Builders were successful in action against the Victorian Building Authority (VBA) for exceeding its powers when issuing six notices to rectify buildings around Melbourne’s CBD, including the Lacrosse building, identified to contain combustible cladding. In finding in favour of the builder, the Victorian Supreme Court held that builders are only required to rectify any building defects identified during the construction process, thereby forcing the owners’ hand to recover the cost of rectification on their own accord.

Following this decision, whilst we may start to see insurers softening their approach, in light of the current insurance climate and the possibility for subsequent litigation, this may not be a given. If this trend continues, building practitioners may be unable to maintain registration in their respective states/territories and their exposure to litigation will remain. Accordingly, state and territory governments may need to consider limiting exposure to building practitioners for non-conforming cladding and the non-compliant use of building products. Alternatively, if building owners are left with the responsibility to rectify works following state-wide audits or related investigations, it may be necessary to consider introducing a government or industry funded scheme, as a means of recovery.


You local contacts

David Kerwin | Brisbane
Simon Black | Sydney
Hubert Wajszel | Melbourne
Andrew Hilditch | Adelaide
Toby Barrie | Perth
Peter Forbes-Smith | Hobart


[1] https://media.corporatesolutions.swissre.com/documents/combustible_exterior_cladding_pub.pdf
[2] https://www.planning.vic.gov.au/__data/assets/pdf_file/0016/90412/Victorian-Cladding-Taskforce-Interim-Report-November-2017.pdf 
[3] http://www.insurancenews.com.au/local/vba-to-conduct-new-cladding-audit
[4] https://www.finance.nsw.gov.au/about-us/media-releases/update-fire-safety-and-external-wall-cladding-taskforce
[5] http://www.hpw.qld.gov.au/construction/BuildingPlumbing/Building/Pages/NonConformingBuildingProducts.aspx
[6] https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Non-conforming45th/Interim_report_cladding
[7] (VIC) http://www.vba.vic.gov.au/__data/assets/pdf_file/0017/18233/Ministerial-Order-Building-Practitioners-Insurance.pdf
(NSW) http://bpb.nsw.gov.au/sites/default/files/public/insurance_9.pdf
(TAS) https://www.justice.tas.gov.au/__data/assets/pdf_file/0005/273920/Required_Insurance_for_Building_Practitioners_2008.pdf 
(NT) Building Amendment Regulations (No 2) 2005 (NT) s 40
(WA) Building Services (Registration) Regulations 2011 s 28F
(QLD) Building Act 1975 (Qld) s 167
(ACT) Construction Occupations (Licensing) Act 2004 (ACT) s 5, 9, 16B, 17, 18
(SA) Development Regulations 2008 (SA) Sch 23; Reg 93
[8] LU Simon Builders Pty Ltd v Victorian Building Authority [2017] VSC 805

‘Non-compliant’ cladding issues update

Earlier this year in May 2016, we reported on the implications for insurers arising out of non-compliant cladding, an issue sparked by the fires at Melbourne Dockland’s Lacrosse Apartments.

We now report on further developments.

Disciplinary action by the VBA

Since the Victorian Building Authority’s (VBA) referral of the relevant building surveyor for the Lacrosse Apartments to the Building Practitioners’ Board (BPB) for disciplinary action, in June 2016 two more building practitioners involved in the building of the Lacrosse Apartments have also been referred to the BPB. These practitioners are the registered builder and the fire safety engineer who prepared a fire engineering report in relation to the building work at the site.

While the VBA has indicated that their investigation into the conduct of the building practitioners involved in the Lacrosse building has now concluded, the BPB is yet to make its determinations in relation to the practitioners’ conduct.

Interpretation of the Building Code

On 24 February 2016, the VBA first issued an industry alert in relation to external walls and compliance with the National Construction Code (Code), which was updated on 28 June 2016 (Alert). The VBA indicated that the purpose of the Alert is to clarify circumstances where aluminium composite panels (ACPs) and other combustible materials in the construction of external walls. Specifically, the VBA outlined its interpretation of various clauses of the Code.

In response to the focus on cladding systems in the building industry, the Australian Institute of Building Surveyors (AIBS) has produced a report, ‘Issues Relating to the Use of External Wall Cladding Systems in Australia’ and a technical discussion paper ‘External Cladding Systems and the BCA’, available here. Interestingly, the AIBS report and technical paper compare the interpretation of the Code put forward by the VBA in its Alert with those from industry professionals. Namely, the AIBS provides an outline of how the use of external wall systems with combustible content, including APCs, have been permitted under the Code, which is in direct conflict with the conclusion of the VBA’s interpretation of the Code as expressed in its Alert that use of combustible material in external wall systems are non compliant with the Code.

The role of the VBA

Another issue discussed by AIBS is the role played by the various regulatory building authorities, such as the VBA, in administering and enforcing building regulations and the associated exercise of professional and expert judgement. AIBS has however expressed concerned that the Alert was developed by the VBA without industry consultation.

To this, we note that the functions of the VBA as outlined in the Building Act 1993 (Building Act) include:

  • to monitor and enforce compliance with the Building Act and the regulations; and
  • to provide information on matters relating to building standards, the regulation of buildings, building work and building practitioners.

Ultimately, the VBA is given very broad powers to “do all things necessary of convenient to enable it to carry out its functions”. [1]

In light of the above, it is clear that non-compliant cladding remains very much a live and current issue in the construction industry. It follows that construction professionals and their insurers should keep a close eye on further developments as they arise.

 

[1] Building Act s 198.

Are claims for breach of the implied warranties in domestic building contracts apportionable claims? – An overview of the positions in NSW, VIC and QLD

Authors: Reena Dandan, Jordan Farr, Thomas Byrne & Hubert Wajszel

The relationship between implied warranties and proportionate liability in the context of domestic building disputes is of relevance to both construction professionals and their insurers. On one hand, the implied statutory warranties in domestic building contracts (domestic building warranties) provide important protection for home owners in the event of defective building work. On the other, the proportionate liability regimes, which allow for the apportionment of liability between concurrent wrongdoings in certain claims, are often utilised in domestic building disputes to limit a defendant’s liability. This article seeks to explore the ability of defendants to claims for breach of domestic building warranties to successfully argue the defence of proportionate liability under the respective legislative provisions in New South Wales, Victoria and Queensland.

THE LEGISLATION

In New South Wales, the domestic building warranties are provided for under part 2C of the Home Building Act 1989 (NSW) (HBA), in Victoria, under section 8 of the Domestic Building Contracts Act 1995 (VIC) (DBC Act) and in Queensland, under division 1, part 3 of Schedule 1B of the Queensland Building and Construction Commission Act 1991 (Qld) (QBCC Act)[1] (collectively, the Building Acts).

The Building Acts provide various warranties, including warranties in relation to the materials supplied, time for completion and compliance with legal requirements. Notably, each Act also provides for a warranty in relation to the standard of care and skill required when carrying out building work. While the wording between the states differs slightly, the warranties are essentially equivalents of one another. In New South Wales, the building contractor must warrant that “the work will be done with due care and skill”[2], and in Victoria and Queensland, “that the work will be carried out with reasonable care and skill”.[3]

In relation to the relevant civil liability legislation, proportionate liability is provided for under part 4 of the Civil Liability Act 2002 (NSW) (CLA NSW), Part IVAA of the Wrongs Act 1958 (Vic) (Wrongs Act), and part 2, chapter 2 of the Civil Liability Act 2003 (Qld) (CLA Qld) (collectively, Civil Liability Acts).

Relevantly, the proportionate liability regimes in each state only apply to “apportionable claims”. The Civil Liability Acts define an apportionable claim as a claim for economic loss or damage to property in an action for damages “arising from a failure to take reasonable care” under the wording in NSW and Victoria, and “arising from a breach of a duty of care” under the wording in Queensland. Accordingly, it has come at issue before the Courts as to whether breach of the domestic building warranty that work be done with due care or skill or similarly reasonable care and skill falls within the meaning of an approtionable claim, whereby the position between the three states is discussed individually below.

NEW SOUTH WALES

While the position in New South Wales was initially uncertain as demonstrated by the following decisions, legislative amendments have provided clarity on the relationship between domestic building warranties and proportionate liability.

In The Owners-Strata Plan No. 72357 v Dasco Constructions Pty Limited & Ors [2010] NSWSC 819, the Owners Corporation issued a claim against a builder in relation to defective building work. The only cause of action pleaded against the builder was breach of the statutory warranties pursuant to section 18DA of the HBA. The builder sought to rely on the proportionate liability provisions in part 4 of the CLA NSW to reduce any ultimate liability to the claim.

The court noted that Parliament had been careful to exclude from Part 4 of the CLA NSW a number of claims by reference to certain acts, for example, it excluded personal injury claims and the matters in section 3B.  Einstein J noted that “it would have been a simple matter for the legislature to include in s 3B actions such as the type made by the plaintiff thereby taking them outside the operation of the Act. They chose not to do so.”[4]

The Court make reference to the decision of Owners Strata Plan v Brookfield Multiplex Ltd  [2010] NSWSC 360, where his Honour MacDougall J granted the defendant builder in that case leave to amend its list response to plead that its various sub-contractors were concurrent wrongdoers pursuant to the CLA NSW. Einstein J accepted the defendant’s submissions that MacDougall J’s decision in Brookfield Multiplex implicitly supports its contention that the CLA NSW applies to the plaintiff’s cause of action. Ultimately, Einstein J concluded that:

It is trite law that the court must apply the words of the drafter in their ordinary and natural meaning and by reference to the intention in the second reading speeches...I accept that the ordinary and natural meaning of s34 means that proportionate liability applies.[5]

In Pastovic & Co Pty Limited v Farrington [2011] NSWDC 94, the owner of a residential property issued a claim in the Consumer, Trader & Tenancy Tribunal against the builder as a result of defects in a retaining wall. The claim relied on domestic building warranties under the HBA. The Tribunal found that the builder failed to comply with the statutory warranties under the HBA and the builder was negligent in the building of the retaining wall. The builder appealed on a number of grounds, including failing to apply the CLA NSW so as to apportion liability amongst concurrent tortfeasors (ground 14).

The court concluded that the Tribunal was bound to consider whether the builder’s liability should be limited having regard to his responsibility for the damage and loss. On that basis the appeal in relation to ground 14 succeeded.

The above cases can be contrasted with the NSW Court of Appeal case of The Owners-Strata Plan No. 64757 v MJA Group Pty Limited [2011] NSWCA 236, whose judgment was made only a few days after Pastrovic. That case involved a claim by the Owners Corporation against a developer arising out of defects in a residential redevelopment. The claim was made under s18 of the HBA. There was no doubt that the work carried out by the builder was defective. The principal issue on appeal was whether the cause of action was commenced in time. Depending on the outcome of this issue, there was a further possible issue surrounding the relevance of the CLA NSW.

Ultimately the Court considered that the claim was statute barred and therefore it was not necessary to consider whether the proportionate liability provisions under s34 of the CLA NSW applied. Young JA did note however that the issue was “an extremely significant one and it is not in the public interest that, without full argument on it, a definitive decision should be given”, and commenting further that:

…there is much to be said for the view that a claim under s18C of the [HBA] is not an action for damages from a failure to take reasonable care within the meaning of s34(1) of the [CLA NSW]. One principal reason for taking this view is that any other view would completely negate the whole purpose of s18C in the case where the builder has become insolvent.[6]

Home Building Amendment Act 2011

As a result of the above cases, and particularly Dasco Constructions, the NSW Government introduced the Home Building Amendment Act 2011 (Amendment Act). The Amendment Act expressly removed actions based on breach of the domestic building warranties under the HBA from the operation of the proportionate liability regime in New South Wales. Accordingly, section 34(3A) of the CLA NSW provides that “[t]his Part does not apply to a claim in an action for damages arising from a breach of statutory warranty under Part 2C of the [HBA] and brought by a person having the benefit of the statutory warranty.”  Relevantly, the Amendment Act only applies to claims commenced after 25 October 2011.

VICTORIA

Unlike the position in New South Wales, the Wrongs Act does not expressly exclude claims for breach of the domestic building warranties from the scope of the proportionate liability provisions. Accordingly, the position is relatively uncertain as demonstrated by the following decisions.

Gunston v Lawley [2008] VSC 97 was an appeal from the Victorian Civil and Administrative Tribunal (VCAT/Tribunal). The VCAT proceedings involved, among other things, a claim by the applicant owners against the builder respondent for breach of the implied warranties under section 8 of the DBC Act. Ultimately, the Tribunal concluded that the owners’ claim against the builder were not claims within the meaning of Part IVAA of the Wrongs Act. While this finding was not challenged on appeal to the Supreme Court of Victoria, Byrne J nevertheless made specific reference to the Tribunal’s findings, noting:

The Tribunal noted that one of the statutory warranties relied on by the owners was that “the builder would carry out the work with reasonable care and skill”. It nevertheless concluded that this was not an apportionable claim, that is, it was not “a claim… (whether in tort, in contract, under statute or otherwise) arising from a failure to take reasonable care.” This conclusion was not challenged before me and nothing turns upon this. I would not, however, like to think that my silence should be taken as an indication that I share this view. The point is of no significance in this appeal because, in the Tribunal’s consideration of the responsibility of the other respondents for the loss or damage of the owners, the builder was in fact treated as a concurrent wrongdoer. (our emphasis)

In light of the above, it is apparent that the Court did not expressly accept nor reject the approach taken by the Tribunal in the first instance.

Byrne J’s  comments in Gunston were revisited by Aird DP in LU Simon Builders Pty Ltd v Allianz Australia Insurance Ltd & Ors (Domestic Building) [2013] VCAT 468. The VCAT proceedings concerned an application for joinder by the builder of subcontractors for the purposes of apportionment under Part IVAA of the Wrongs Act. Here, Aird DP considered whether it was arguable that a claim for breach of the s 8 warranties under the DBC Act was an apportionable claim. She found that it was for the purposes of allowing the joinder.

In coming to this conclusion, Aird DP made reference to two earlier VCAT decisions which supported the contention that such claims were not apportionable claims. The first decision was that of Macnamara DP in Serong v Dependable Developments Pty Ltd (Domestic Building) [2009] VCAT 760, where it was held:

The contractual claim against [the builder] does not arise from a claim for misleading and deceptive conduct… nor does it arise from an alleged failure to take reasonable care. Rather it arises out of allegations that [the builder] has failed to meet certain absolute standards arising out of the contract… [The builder’s] liability under the contract is to perform its terms not to use reasonable care to perform them. Mr Gurr submits that the effect of Section 24AI is that there should be no apportionment as between the contractual claim against [the builder]... I agree with this submission.

The second decision referred to was that of Lacava J in Spiteri & Ors v Stonehenge Homes & Associates Pty Ltd (Domestic Building) [2011] VCAT 2267, whereby reasoning consistent to Serong was applied:

136. Mr Laird submitted that the claims made against [the builder] in the primary proceedings are brought under the statutory warranties in the case of the Owners and in contract in the case of Wesfarmers. He correctly, in my view, submits that claims brought under the statutory warranties contained in the Act and the claim in contract are not apportionable claims within the meaning of the Wrongs Act 1958.

137. With respect, that submission must be correct. Part IVAA of the Wrongs Act 1958 requires a court or tribunal when apportioning a claim, to assess from the facts, the degree of responsibility or liability between concurrent wrongdoers. That can be done in the context of a negligence claim but not in a claim in contract or where the claim is based in breach of warranty…

Despite the views expressed  in Sergon and Spiteri, Aird DP was not persuaded that the question of whether breach of the implied warranty under s8(d) of the DBC Act satisfies the definition of an apportionable claim under the Wrongs Act had been finally determined. Referring to Byrne J’s comments in Gunston, as referred to above, to exemplify the current uncertainty in the law Aird DP ultimately  allowed the joinder, partly on the basis that the question as to whether the claim for breach of the warranty under section 8(d) is an apportionable claim was arguable.

QUEENSLAND

As noted above, the definition of “apportionable claim” used in the civil liability legislation in Queensland differs from that in New South Wales and Victoria. Rather than a claim arising from “a failure to take reasonable care”, section 28 of the CLA Qld provides that an apportionable claim is “a claim for economic loss or damage to property in an action for damages arising from a breach of a duty of care”. “Duty of care” is defined to mean “a duty to take reasonable care or to exercise reasonable skill (or both duties)”. Further, “duty” is defined to mean a duty of care in care in tort, or a duty of care under contract that is concurrent and coextensive with a duty of care in tort, or another duty under statute or otherwise that is concurrent with a duty of care of either of those kinds. 

There are few reported decisions dealing with section 28 of the CLA Qld, and the scope of the proportionate liability regime in Queensland (particularly in a contractual context) is not settled. The extent of any practical distinction between claims “arising from a breach of duty of care” and claims “arising from a failure to take reasonable care” is uncertain, but the adoption of the former language in the proportionate liability regime in Queensland may result in a narrowing of its scope in certain circumstances. 

Although it does not deal with a claim for breach of the domestic building warranties, the decision in Hobbs Haulage v Zupps Southside [2013] QSC 319 offers guidance as to the scope of the proportionate liability regime in general. The case involved the purchaser of a modified vehicle suing the vendor, alleging breach of the conditions as to fitness for purpose or merchantable quality implied under the Sales of Goods Acts 1896 (Qld) and the Trade Practices Act 1974 (Cth) (TPA), as well as breaches of the warranty that services will be rendered with due care and skill, implied under the TPA.[7]

The Court held that none of the purchaser’s claims for damages for breach of any implied condition as to fitness for purchase or merchantable quality were apportionable claims “because none of them is a claim arising from a duty to take reasonable care or to exercise reasonable skill”.

The Court went on to question whether the purchaser’s claim for breach of the implied warranty that services will be rendered with due care and skill was an apportionable claim, “because it is not a claim from a breach of “duty of care””. It considered that because a “contractual obligation to render services with due skill and care is, in a general sense, a duty to take reasonable care or to exercise reasonable skill”, it could be a “duty of care” as defined in the CLA Qld - provided that the obligation is a duty within the meaning of the definition of “duty”. For a duty based in contract to meet that definition, there would have to be a concurrent and co-extensive duty of care in tort owed by the promisor to the promisee.

The Court noted that the relevant question was whether the vendor arguably owed a duty of care to the purchaser in tort which is concurrent and coextensive with the implied contractual term under the TPA. However, because the purchaser did not argue that point, the Court did not have to consider it further. The Court did however make reference to the High Court’s decision in Astley v Austrust Ltd [1999] HCA 6 which examined whether the contributory negligence provisions in the Wrongs Act 1936 (SA) could apply to cases of breach of contract where there is a breach of concurrent and co-extensive contractual and tortious duties of care. Here, the High Court examined a number of United Kingdom decisions which applied contributory negligence legislation to breaches of contract and ultimately found that “those decisions… are wrong and should not be followed in this country.”

Examining the warranties implied into domestic building contracts by the QBCC Act  in light of the particular wording of the CLA Qld (and the Court’s decision in Hobbs Haulage), it might be concluded that claims for damages for breach of implied warranties to produce a particular result[8] would not be apportionable claims under the CLA Qld, because they arise from a party’s failure to produce what they contracted to produce, rather than from any failure to take reasonable care or to exercise reasonable skill.

In contrast, claims for damages for breach of those implied warranties that call for the exercise of reasonable care or skill[9] may be apportionable claims under the CLA Qld, on the basis that a contractual obligation to render services with due skill and care is, in a general sense, a duty to take reasonable care or to exercise reasonable skill – but only if upon looking to the facts, it is arguable that the promisor owed a concurrent and co-extensive duty of care in tort. 

CONCLUSION

The position differs between New South Wales, Victoria and Queensland as to whether claims for breach of domestic building warranties constitute apportionable claims under the Civil Liability Acts. While each of the states’ Building Acts provide that the building contractor must warrant that the work will be done with “due care and skill” or similarly “reasonable care and skill”, claims for breach of this warranty may not necessarily constitute an a claim “arising from a failure to take reasonable care” or similarly “a breach of a duty of care” as required for the proportionate liability provisions to apply.

While statutory amendments to the CLA NSW now make it clear that the proportionate liability defence is not available to defendants in claims for breach of the domestic building warranties, this statutory clarity is not provided for under the legislation in Victoria and Queensland.

While no authoritative determination on this issue has been made in Queensland, it is arguable that breach of the limited number of domestic building warranties that call for the exercise of reasonable care and skill may be apportionable, however only if there a concurrent and co-extensive duty of care in tort owed by the promisor.

In Victoria, although the Courts have been hesitant to expressly confirm that the position in New South Wales also applies in Victoria, it is arguable that this position may be preferred particularly noting the recent emphasis on consumer protection.   

In Victoria, it is arguable that the High Court’s rejection of the application of contributory negligence provisions in cases of breach of contract where there is a breach of concurrent and co-extensive contractual and tortious duties of care could be applied in the context of the proportionate liability provisions. If this reasoning is followed, this would prevent the ability of defendants to utilise the defence of proportionate liability in claims for breach of the domestic building warranties, in that they are purely claims for breach of contract, regardless of whether a concurrent duty in tort may exist. 

Given that it is not uncommon for home owners to make claims for breach of domestic building warranties, it is important for building professionals subject to these claims, including their professional indemnity insurers, to carefully consider the ramifications of joinder applications for the purposes of apportionment, such as costs, settlement options and the ability to claim contribution from other parties.

For more information, please contact our Queensland, New South Wales and Victoria representatives from Barry.Nilsson.'s Insurance & Health Law Team. 

QUEENSLAND                                                                  
Richard Leahy | Partner                                                        
E: richard.leahy@bnlaw.com.au     
P: +61 7 3231 6318  

NEW SOUTH WALES
Nicholas Andrew | Partner
E: nicholas.andrew@bnlaw.com.au
P: +61 2 8651 0201

VICTORIA
Hubert Wajszel | Partner
E: hubert.wajszel@bnlaw.com.au
P: +61 3 9909 6302                    

Disclaimer: The information contained in this e-alert is not advice and should not be relied upon as legal advice. Barry.Nilsson. recommends that if you have a matter that is legal, or has legal implications, you consult with your legal adviser.


[1] These provisions apply to all regulated domestic building contracts entered into after 1 July 2012. The equivalent provisions under the now repealed Domestic Building Contracts Act 2000 (Qld) continue to apply to domestic building contracts entered into prior to that date.
[2] s 18B(1)(a) HBA.
[3] s 8(d) DBC Act and s 22, schedule 1B QBCC Act.
[4] At [18].
[5] At [23].
[6] At [53].
[7] Now section 60 of the Australian Consumer Law.
[8] See sections 20(1)(a), 20(1)(b), 21, 23(2) and 24(2)), schedule 1B QBCC Act.
[9] See sections 22, 25 and 27, schedule 1B QBCC Act

Clad Wrap: Implications for insurers arising out of non-compliant cladding

On 25 November 2014, a fire broke out on an eighth floor balcony of the Melbourne Docklands’ Lacrosse Apartments (Lacrosse Apartments). The fire spread from the eighth floor balcony up another 13 floors within a matter of minutes. Smoke detection systems, alarms and sprinklers all appear to have performed as intended, and all residents of the building were successfully evacuated, however the fire caused several million dollars worth of property damage.

It later emerged that aluminium composite panels (ACPs) had been used to clad the Lacrosse Apartments to provide a decorative finish. The Metropolitan Fire Brigade’s Post Incident Analysis concluded that the ACPs in question did not comply with the combustibility requirements for high-rise buildings specified by the Building Code of Australia and had contributed to the rapid spread of the fire.[1]

The Lacrosse Apartments was a relatively new complex and, in circumstances where such serious deficiencies had been identified, the immediate question was how many other high-rise buildings in Melbourne (and beyond) were clad with similar non-compliant ACPs?

A Federal Senate inquiry into the use of non-compliant ACPs followed, hearing from Metropolitan Fire Brigade fire safety director Adam Dalrymple that the use of cheap, non-compliant imported ACPs posed a serious risk to the public, that all state building regulators should undertake audits and that, whilst it had once been fair to assume that newer buildings are safer than older buildings [f]rom a fire services perspective right now, I cannot guarantee that”.[2]

The Victorian Building Authority (VBA) subsequently undertook a comprehensive audit of around 170 high-rise and public buildings in the Melbourne CBD and surrounding suburbs, to determine the rates of cladding non-compliance.[3] The audit’s key findings, released in February of this year, make for grim reading:

  • of all the building permits audited, the incidence of non-compliant ACPs was found to be 51%;
  • 101 incidences of non-compliant ACPs were published immediately on the VBA website, with the remainder being progressively published on the VBA website after input from building surveyors had been obtained; and
  • one other building in the Melbourne CBD, in addition to the Lacrosse Apartments, was found to require immediate emergency remediation.

That said, the VBA concluded that none of the other non-compliant buildings identified posed a safety issue requiring immediate action. [4]

As recently as 8 May 2016, ‘The Age’[5] reported that non-compliant ACPs had been identified at the Exo Apartments in Docklands and the Elm Apartments in South Melbourne. In addition, non-compliant ACPs have been located in some of Melbourne's tallest buildings, including Melbourne's fourth-tallest tower, the Prima Pearl, the Crown Metropol and Oaks on Lonsdale hotels and Melbourne’s tallest building, Eureka Tower.

Further afield, in February it was reported that occupancy permits had been refused for Iglu’s new student unit building in Mary Street, Brisbane, on the basis that non-compliant ACPs had been used in construction.

Costs of replacement
Replacing non-compliant ACPs on high-rise buildings is an extremely costly proposition and one that poses serious logistical problems. In the case of the Lacrosse Apartments, the cost of replacing non-compliant cladding has been estimated at in excess of $20 million. Who will ultimately foot that bill is far from clear.

The builder of the Lacrosse Apartments initially appears to have suggested that ‘behavioural changes’ could be implemented at the apartments to avoid the risk of fire and render replacement of ACPs unnecessary. Those behavioural changes are said to have included[6]:

  • using drones to regulate the incidence of cigarette-smoking by residents and the build-up of clutter on balconies;
  • limiting occupancy to two occupants per bedroom; and
  • installing additional sprinklers.

These “work arounds” were rejected by the Melbourne City Council (the Council) which has now issued 312 apartment owners with building notices requiring the complex be bought into compliance with Australian building, safety and fire codes - i.e. that the building be entirely reclad.

The builder of the Lacrosse Apartments has rejected the Council's demands that it replace the ACPs itself, while Melbourne’s municipal building surveyor admitted to apartment owners that he is powerless to order the builder to replace the ACPs. 

The cost of replacing cladding on more substantial high-rise buildings will likely run into the many tens of millions.

The implications for the insurance industry
The sheer scale of the use of non-compliant ACPs in Melbourne, and no doubt beyond, suggests that a cluster of high value claims are ultimately likely to emerge as the full scale of this problem becomes clear. In circumstances where the VBA audit concluded that “[n]o single category of practitioner involved in the design, approval or construction of the buildings audited was consistently responsible for the use of cladding components of external walls that did not comply with the BCA”, [7] we would expect claims to be levelled at a broad range of professionals and entities all along the construction matrix – from developers, to architects, to builders and surveyors.

Disciplinary Action
The first actions to have already materialised are regulatory/disciplinary actions which flowed from the VBA investigation. Following the publication of its findings, the VBA referred the relevant building surveyor to the Building Practitioners’ Board (BPB) on the grounds that he had failed to undertake his work in a competent manner or to a professional standard. The potential penalties, include a fine and/or the cancellation or suspension of the surveyor’s registration. Similarly, the VBA has referred the relevant architect to the Architects’ Registration Board of Victoria (ARBV) for potential disciplinary action. Neither the BPB or ARBV have completed their investigations.

Inquiry costs
Professional indemnity insurers providing inquiry costs cover can expect a range of similar disciplinary proceedings to emerge going forward, as the scale of the use of non-compliant ACPs becomes clearer. For Victorians, the VBA has indicated that future audits will include “a focus on the application of the technical advice published by the VBA”. [8] Going forward, developers, architects, builders and certifiers would be well advised to familiarise themselves with such advice published by the VBA. Insurers would also be well advised to confirm that their Insureds have read and understood such technical advice.

For the remainder of the insurance industry, disciplinary proceedings should likely be viewed as a precursor to significant claims for compensation.

Claims against Builders, Developers, Architects, Surveyors
In Burbank Australia Pty Ltd v Owners Corp [2015] VSC 160, the Victorian Supreme Court concluded that the consumer protection provisions in the Domestic Building Contracts Act 1995 (Vic) extend to high rise apartments. That Act allows owners to bring claims against builders using materials that were not suitable for their intended purpose or failing to undertake work in accordance with the relevant building standards.

Similarly, owners may have claims against the relevant builder, developer, architect, building surveyor and others involved in the construction process on the basis that they have failed to take reasonable care to ensure that the cladding used on their building complied with the relevant building standards.

A class action has already been mooted on behalf of the owners of the Lacrosse Apartments, and plaintiff firms have been canvassing interest from owners potentially impacted by the use of non-compliant ACPs. Class actions are ultimately commenced on behalf of owners and/or owners’ corporations, the value of such claims will be considerable.  

Contract works claims
In terms of contract works and project PI policies, there may be issues regarding whether the costs of replacing / rectifying non-compliant ACPs will be covered in circumstances where it may be argued there is no actual physical damage to the cladding itself, but rather it is simply non-compliant with building codes. We would also expect to see faulty products exclusions coming into play, although some better policies are likely to write back in cover for resultant loss or damage. Finally, faulty design and workmanship exclusions will likely warrant attention. 

Property Claims
Owners of buildings and apartments clad in non-compliant ACPs face a litany of issues, from depreciation in value, hefty bills for rectification works and potential implications for their property insurance.

Going forward, how owners manage (and notify) non-compliance issues may have a significant impact on their position. For starters, owners of buildings identified by the VBA as defective to date are likely to bear the brunt of increased insurance premiums. Furthermore, evidence that an insured building is not compliant with building codes has the potential to complicate the processing of future claims. 

If policy holders become aware of information that materially alters the level of risk they face, they are obliged to notify their insurer. Owners will likely be placed in the position of determining whether to notify their insurers (and being the subject of increased premiums and potentially seeing a decrease in their property’s value) or fail to notify their insurer and face the inevitable consequences in the event of a claim.

Valuers’ claims
Another issue which we perceive emanating from the widespread use of non-compliant ACPs is the potential for claims to be levelled against property valuers (either by purchasers, lenders or their insurers) on the basis of negligent over-valuation.

Typically, property valuations of apartments such as the Lacrosse Apartments would be very unlikely to have considered whether or not compliant ACPs had been used in the premises. The presence of non-compliant ACPs is likely to have a significant impact on property values and, in order to ward against claims of professional negligence, going forward property valuers would be well advised to:

  • consider whether a building or apartment being valued has previously been identified as having non-compliant ACPs (by way of a review of the VBA website for example); and
  • where possible, obtain a materials certificate from the relevant builder to ensure that reputable and compliant materials have been used in construction.

Conclusion
The issue of non-compliant ACPs certainly has a long time to run yet, and it would seem to be only a matter of time before claims, and likely litigation, begins to follow.

While we are yet to see it in the market, we expect that underwriters will begin seeking to limit their potential exposure across a range of policies for claims arising out of non-compliant ACP type claims by expressly excluding such cover from policy wordings. Given the size of claims likely to emerge in the future, we would also expect insurers to seek to work closely with construction companies, developers and professionals in actively managing the inevitable rectification of buildings clad with non-compliant ACPs.

[1] LU Simon Builders’ Managing Director, Peter Devitt, told Fairfax that the ACPs “complied with Australian standard tests for ignitability, spread of flame, heat and smoke, but that it, like all other aluminium composite panels, did not pass the test for combustibility back in 2010 when the Building was commissioned”(http://www.architectureanddesign.com.au/news/non-compliant-cladding-fuelled-melbourne-apartment)
[2] http://www.theaustralian.com.au/national-affairs/state-politics/cities-at-mercy-of-deadly-cladding-says-fire-brigade/news-story/17c44e85c7a370c76bc61317dd3953c7
[3] http://www.vba.vic.gov.au/__data/assets/pdf_file/0016/39103/VBA-External-Wall-Cladding-Report.pdf
[4] For a full list of the buildings identified, see http://www.vba.vic.gov.au/__data/assets/pdf_file/0004/41647/Cladding-Report.pdf
[5] http://www.theage.com.au/victoria/new-flammable-cladding-threat-for-melbourne-apartments-20160508-gopa0q.html
[6] http://www.theaustralian.com.au/national-affairs/state-politics/use-drones-to-enforce-smoke-ban-lacross-tower-firm-lu-simon/news-story/a3ccc7b0960c024abb7631b7d680d2fe
[7] VBA External Wall Cladding Audit Report, 17 February 2016, page 2.
[8] http://www.vba.vic.gov.au/__data/assets/pdf_file/0015/39102/VBA-External-Wall-Cladding-Report-VBA-Media-Release.pdf

UPDATE: Building Legislation Amendment (Consumer Protection) Bill 2015 (Vic)

On 29 March 2016 we published an update on the Building Legislation Amendment (Consumer Protection) Bill 2015 (Vic) (Bill) which at that time was being advanced through the Victorian parliament.  The Bill has now passed the Legislative Assembly, with amendments, and is awaiting royal assent.

The amendments to the Bill were minor and constrained.  They apply only to clause 30 in Part 3 which sets out the circumstances in which certificates of consent may be issued to owner-builders.

This means the Bill as passed will usher in a number of significant changes affecting the process and procedure for the resolution of domestic building disputes; the regulation, registration, and disciplining of domestic building practitioners; and the appointment of building surveyors. 

By tightening regulation of practitioners, and expanding consumer protections, the Bill broadens the circumstances in which claims against building practitioners may arise (e.g. a practitioner undertaking building work contrary to conditions attached to their registration by the VBA).  The Bill also introduces a new layer of dispute resolution (conciliation) which stands to have time and cost ramifications in complex multi-party disputes not suitable for conciliation.

We will provide further information once there is more guidance as to how the dispute resolution framework is to operate in practice.

Building Legislation Amendment (Consumer Protection) Bill 2015 (Vic)

Introduction

During 2014, the then Victoria Liberal state government intended to legislate a number of amendments to the Domestic Building Contracts Act 1995 (DBC Act), the Building Act 1993 (Building Act), and consequential amendments to the Victorian Civil and Administrative Tribunal Act 1998 (VCAT Act).  Delayed due to a change of state government at the November 2014 election, these amendments (with some modification) are now being advanced through the new parliament by way of the Building Legislation Amendment (Consumer Protection) Bill 2015 (Vic) (Bill).

Responding to findings of the Victorian Ombudsman[1] and the Victorian Auditor-General’s Office[2], the amendments contained in the Bill are directed at addressing consumer protection issues arising from domestic building works by improving dispute resolution mechanisms within the domestic building industry and strengthening domestic builder regulation and registration practices.

Key Changes

Dispute Resolution – Part 2 of the Bill

The Bill provides for a new dispute conciliation framework.  This framework will include a new service named Domestic Building Dispute Resolution Victoria (DBDRV) which will consist of a chief dispute resolution officer, conciliation officers and technical assessors.  The DBDRV will be administratively linked to Consumer Affairs Victoria.

All domestic building work disputes (not already commenced in VCAT or a court prior to the Bill being enacted) will be required to be conciliated at DBDRV before a party may make any application to VCAT or a court (save for actions for injunctive relief).

Any party to a domestic building work dispute may refer the dispute to the chief dispute resolution officer within 10 years after the date an occupancy permit is issued, a certificate of final inspection is issued, the date of practical completion, or the date the domestic building contract was entered into (which ever is applicable in the particular circumstances).

Upon referral to DBDRV a dispute will be initially assessed by a conciliation officer who will recommend to the chief dispute resolution officer if the referral should be accepted or rejected.  If accepted, the chief dispute resolution officer will refer a dispute to a conciliation officer for conciliation.  If rejected, the chief dispute resolution officer must issue a certificate of conciliation certifying the dispute is not suitable for conciliation, with reasons.  A party to a dispute must be issued with such a certificate, or otherwise participate in conciliation before they may make any application for a hearing before VCAT.

During the conciliation process, a technical assessor may be directed by the chief dispute resolution officer to examine domestic building work for defects and completeness.  Also, a party to a domestic building contract may request the chief dispute resolution officer to direct an assessor to undertake such examination.

Should conciliation not resolve a dispute a ‘dispute resolution order’ may be issued by the chief dispute resolution officer.  These orders may, for example, require rectification of defective or incomplete work; compel a building practitioner to meet the costs of rectification by an alternative builder; and payment to a builder or into a trust fund (to be established under the Bill) for release to a builder upon completion of rectification or incomplete work.

If a party refuses to participate in conciliation or refuses to participate in good faith, the dispute will still be heard by DBDRV with the non-participant liable for costs.  Similarly, if a party seeks review of a dispute resolution order in VCAT and loses, a costs order against them may be made.

A party may apply for review of a dispute resolution order in VCAT.  However, if the dispute resolution order is either confirmed by VCAT or varied by VCAT to increase the obligations on the party applying, a costs order may be made against that party.

If a dispute resolution order is not complied with, the aggrieved party (whether building owner or building practitioner) may terminate the relevant building contract and apply to VCAT for compensation.

Regulation of building work and building practitioners – Part 3 of the Bill

The Bill provides for the abolition of the Building Practitioners Board and the transfer of its registration and regulatory functions to the Victorian Building Authority (VBA).  Consequently, the VBA will carry responsibility for the registration, regulation and disciplining of building practitioners together with its role in monitoring and enforcing compliance with the Building Act and regulations.

The VBA’s regulatory powers will also be strengthened.  For example, it will be able to direct a building practitioner to rectify non-compliant or defective building work.

Registration of building practitioners

The Bill introduces time-limited registrations which will last for up to a maximum of five years.  That means building practitioners will be required to apply for renewal of their registration every five years, with renewal subject to the applicant demonstrating their ongoing competence (such as by completing prescribed continuing professional development requirements).

The VBA will be able to attach conditions to registrations.  These will operate to categorise or class building practitioners to restrict them to work activities the VBA considers they are competent to undertake.

A broader ‘fit and proper person test’ more aligned with grounds for discipline will be introduced to replace the existing, narrower, ‘good character’ test.  A building practitioner may be disciplined if they are found to not be a fit and proper person to practise.

The VBA will be able to approve new codes of conduct, whether prepared by the VBA or an organisation representing building practitioners.  These codes may make different provision for different categories of practitioners who will be required to comply with any code applicable to their category or class of registration.  Non-compliance with a code will be grounds for VBA disciplinary action.

The Bill includes provision for building practitioners to seek internal review of VBA registration decisions and a right of appeal of an internal review decision to VCAT.

Disciplinary processes and sanctions

Show cause

The Bill also introduces a ‘show cause’ disciplinary process.  If, after investigation, the VBA reasonably believes grounds exist to take disciplinary action against a registered building practitioner the VBA must give the practitioner a show cause notice.  The notice must outline the facts and circumstances underpinning the grounds of the VBA’s proposed action, the registration to which the proposed action is related, the intention of the VBA to take disciplinary action and the nature of that action, and invite the practitioner to show within the show cause period why the VBA should not take the proposed action.  The show cause period is at least the 14 days after the date on which the practitioner receives the show cause notice, but may be extended by the VBA at the request of the practitioner.

A registered building practitioner may make written or oral representations to the VBA about the show cause notice within the show cause period.

The VBA must decide within 28 days after the show cause period ends whether any grounds exist to take disciplinary action against the building practitioner concerned.

Sanctions

Grounds for VBA disciplinary action are expanded by the Bill and include non-compliance with any of the following:

  • an applicable code of conduct;
  • a dispute resolution order;
  • a direction of the VBA or VCAT; or
  • a condition of registration.

The Bill provides for the VBA to impose a range of sanctions including conditions on a registration, and suspension or partial suspension of a registration.

Additionally, the grounds for immediate suspension of registration are expanded beyond the existing public interest ground to include bankruptcy or insolvency of a practitioner, contravention by a practitioner of the Building Act, DBC Act or other prescribed Act or law, conviction of a practitioner of an indictable offence involving fraud, dishonesty, drug trafficking or violence, a practitioner ceasing to be covered by the required insurance, and non-compliance by a practitioner with a condition of registration.

The Bill includes provision for building practitioners to seek internal review of VBA disciplinary decisions within 28 days of the later of the notice date or the date the notice is given to the practitioner, and a right of appeal of an internal review decision to VCAT.  An application to VCAT will automatically stay the disciplinary decision (except decisions for immediate suspension of registration – these applications will require the VBA to have the opportunity to be heard on the matter).

Building surveyors

Conflicts of interest

The Bill seeks to bolster surveyor independence by providing that a registered building practitioner will be prohibited from appointing a building surveyor on a property owner’s behalf in relation to domestic building work.

Also, a building surveyor will be prohibited from accepting appointment by a registered building practitioner and must not carry out any functions where the surveyor or a related person (a partner, director, employer or employee of the surveyor) has a conflict of interest.

Compliance

Directed at improving compliance with document lodgement requirements, a building surveyor will need to certify that all documents required to be given to the relevant council pursuant to s 30 of the Building Act have been given to that council.

Prior to issuing a building permit a building surveyor will be required to ensure that the building practitioner’s name and registration details appearing on the building contract are identical to those details which appear on the builder’s certificate of insurance.

It will be mandatory for building surveyors to issue building practitioners directions to fix non-compliant work (the practitioner involved will commit an offence and be liable for disciplinary action if they do not comply with such directions).  Building practitioners may seek review of building surveyors’ directions at the Building Appeals Board.

The Bill also provides for the appointment of a manager of a building surveyor in circumstances where the surveyor is unable to complete their work (surveyor has died, is imprisoned, had their registration suspended or cancelled, or has become insolvent).  It is intended that this measure will reduce delays and disruptions to domestic building work.

Conclusions

The legislative intentions underpinning the Bill include strengthening consumer protection, providing for better and faster outcomes for consumers and builders, and to enhance the quality of building projects in Victoria.

Practitioner registration requirements will be strengthened as will the regulatory powers of the VBA and building surveyors.  Together with expanded practitioner disciplinary measures, the Bill amendments are a serious attempt by government to address a number of identified failings of the existing building system concerning the domestic building sector and domestic building practitioners.

The new conciliation process may assist in the earlier resolution of more straightforward claims involving just a building practitioner and property owner (and reduce the rates at which such disputes are litigated).  However, this additional step has the potential to slow the dispute resolution process and increase costs in complex disputes involving multiple parties that cannot be conciliated as a certificate of conciliation must be issued by the chief dispute resolution officer before an application to VCAT may be made.

The state government has foreshadowed further legislative changes are being considered for 2016, including to the building permit system.

We are monitoring the progress of the Bill and any additional measures that may be announced by the government and will provide further update on developments when they occur.
 


[1] Ombudsman Victoria, Own motion investigation into the governance and administration of the Victorian Building Commission, December 2012.

[2] Victorian Auditor-General’s Office, Victoria’s Consumer Protection Framework for Building Construction, May 2015.

Volvo announces it will accept full liability if its autonomous cars are involved in a crash

In a speech delivered last week at a high level seminar on self-driving cars in Washington DC, the president and chief executive of Volvo has announced that Volvo will accept full liability whenever one of its cars is in autonomous mode and is involved in a crash.

This is an unprecedented move by Volvo to address what has been one of the most controversial aspects in relation to the development of self-driving cars.

Over the past few years, numerous carmakers including Audi, Toyota, Mercedes and General Motors (as well as technology companies such as Google) have all been busily developing next-generation autonomous cars for the future consumer. What has been a topic of much debate however has been how the courts might deal with the interesting liability situation where the high-tech computer system of an autonomous car fails and a crash occurs. Would the individual driver be deemed to retain ultimate control over and legal responsibility for the vehicle or would carmakers be open to a finding of liability?

It appears Volvo has now provided an easy answer to this question by announcing it will accept full responsibility for any crash that occurs. This comes after Mercedes and Google recently told 60 Minutes in the US that it will accept responsibility and liability for any incident if its technology is at fault.

But what will this mean for the insurance industry? For example, will a carmaker’s acceptance of liability extend to circumstances where a vehicle’s computer system is hacked and the operation of the vehicle is taken over by a third party? Will drivers of autonomous cars still require third party insurance coverage? Or will it be up to carmakers to take out extensive insurance coverage to protect against the risk of litigation being commenced against them? Gone may be the days that an insurer looks at commencing a subrogated action against the other driver involved in a car crash but rather that proceedings are commenced directly against carmakers themselves. Other interesting issues include:

(a) the liability position if a component of the computer system present in self-driving cars fails and this component was manufactured and supplied by another company;

(b) the liability position once a car goes out of its warranty period;

(c) the liability position in respect of any traffic offences which are committed while cars are in autonomous mode, for example if the car fails to correctly read a speed sign or traffic light signal;

(d) determining at what point a driver of an autonomous car might assume liability in circumstances where the driver is required to take over control of the car because the car is unable to deal with, for example, snow, heavy rain or other wayward drivers;

(e) the difficulties a prospective plaintiff might face in gathering and presenting sufficient evidence to prove negligence on the part of the carmaker; and

(f) the difficulties in proving, on the balance of probabilities, that the driver did not in any way interfere with the operation of the vehicle.

All these questions remain unanswered at this point and we will have to wait and see what impact autonomous cars will have on the insurance industry. It will also be interesting to see what conditions Volvo might attach to its announced full acceptance of liability when fully autonomous cars hit our roads in the near future and if other carmakers will follow Volvo’s lead. 

Commissioner finds the Grantham quarry did not cause or materially contribute to the Grantham floods

On 10 January 2011, the town of Grantham was inundated by flooding which swept away houses and killed 12 people, making it one of the most deadly natural disasters ever to hit Queensland.

Walter Sofronoff QC, the Commissioner of the Grantham Floods Commission of Inquiry (‘the Commission’), has today presented his report to the Queensland Premier. The Commission was established in May 2015 to conduct a full inquiry into whether any natural or man-made features of the landscape surrounding Grantham could have altered or contributed to the flooding which occurred, in particular whether the existence or breach of the Grantham quarry caused or materially contributed to the flooding.

This was the key focus of the Commission as concerns had been raised by the Grantham community that the quarry had, over time, made a significant alteration to the natural landscape, and therefore the natural flow of water in a flood.

Prior to the flood, stockpiles of material had been placed around the quarry pit and a high ‘bund’ had been constructed which was made of dirt and prevented the ingress of water into the quarry, directing any water along the natural course of the Lockyer Creek. The quarry was owned by Wagner Investments Pty Ltd at the time of the flood. 

After extensively considering the expert geotechnical and hydrological reports, the Commissioner concludes in his report that the flooding occurred in the way that it did because of the combination of the volume of water that surged down Lockyer Creek after rain was dumped in its upper catchment and also due to the natural shape of the land near Grantham. The only effect the Grantham quarry had was to marginally increase the water level immediately upstream of the quarry by about 20 centimetres and to slightly delay the commencement of the flooding downstream by a few minutes while the quarry pit briefly absorbed part of the flow. As the Commissioner noted in the report:

Quarry or no quarry, railway line or no railway line, if there is ever another sudden dump of water in the upper catchment of the Lockyer Creek of the order of that which fell on 10 January 2011, the same thing will happen againThe flood of 10 January 2011 was a natural disaster and no human agency caused it or could have ever prevented it.

This report comes after the Honourable Justice Catherine Holmes (as she then was)  presented a report, as the Commissioner of the Queensland Floods Commission Inquiry, to the Queensland Premier in March 2012 dealing with the Statewide flooding events which occurred in 2010 and 2011.  

Expert evidence used to support an insurer’s declinature of cover under a policy

The Supreme Court of Queensland handed down its decision in Matton Developments Pty Ltd v CGU Insurance Limited (No 2) [2015] QSC 72 on 15 April 2015. 

Barry.Nilsson. Lawyers represented CGU Insurance Limited (CGU) in successfully defending a claim brought by Matton Developments Pty Ltd (the plaintiff) in response to the decision by CGU to decline the plaintiff’s claim under a Contractors Plant and Machinery policy of insurance.

Matton Developments Pty Ltd v CGU Insurance Limited

CGU provided Contractors Plant and Machinery insurance in respect of a 100 tonne Telescopic Crawler Crane (the crane) owned by the plaintiff.

On 1 February 2009, the crane’s boom collapsed damaging the crane beyond economical repair. The plaintiff submitted a claim to CGU seeking recovery for the damage under the policy. The plaintiff argued the collapse of the crane was due to a pre-existing defect in the base of the boom to which the ‘Material Damage’ cover responded or that the failure was an accident to which the ‘Accidental Overload’ cover responded. CGU obtained expert engineering evidence which, supported its assertion that, at the time of the incident the crane was operated in contravention of Australian standards and manufacturer’s guidelines. When declining the claim, CGU informed the plaintiff that the damage to the crane did not fall within the relevant insuring clause (namely it was not ‘accidental, sudden and unforseen’ within that meaning of the expression in the policy).  CGU also relied on exclusions in the policy, which denied cover where the crane was not operated in the manner for which it was designed and/or in accordance with the manufacturer’s guidelines.

Flanagan J of the Supreme Court delivered judgment in the matter.

There were a number of key issues dealt with in the judgment.

The expert evidence relied upon by the parties

The plaintiff relied upon expert evidence from an engineer to allege that the crane collapsed due to pre-existing structural damage in the base of the boom. The plaintiff argued that the presence of large cracks in the welding on the base of the boom caused its collapse but then abandoned this initial theory in response to the inability of the various experts to identify any defects. The plaintiff’s subsequently argued that the cause of the collapse was the presence of small pores in the welding of the boom.

CGU relied upon expert evidence from a crane engineer, a metallurgist and an engineer specialising in fracture mechanics. His Honour accepted the unanimous opinion of CGU’s experts that the collapse occurred due to structural overload as opposed to any material defect.  His Honour noted that this conclusion was entirely consistent with the photographic evidence (which placed the crane, at the time of the boom collapse, on a 7 degree slope) and it was also the most logical explanation for the collapse. 

Did the policy respond to the plaintiff’s claim?

The ‘Material Damage’ policy covered the plaintiff for accidental, sudden and unforeseen damage to the crane while it was located and in use in the manner in which it was designed to be used. After a detailed consideration of the meaning of ‘accident’, His Honour concluded that accidental meant ‘unintended and unexpected’ and that the plaintiff had failed to establish that the collapse of the boom was ‘accidental’. His Honour found that the operator knew the crane should not be operated on a slope and that if he did so there was a real risk of the boom collapsing. Despite this knowledge he operated the crane on a 7 degree angle.

The policy contained additional benefit for damage caused by ‘Accidental Overload’ which was non-deliberate and clearly unintentional. The plaintiff submitted that the term ‘overload’ in the policy should be read to encompass a situation where the crane was overloaded because it was operated on a slope.

His Honour examined the meaning of ‘overload’ and held that the plain meaning of the word, being ‘physically overloaded with an excessive load’, was consistent with a proper construction of the policy as a whole.

His Honour concluded, contrary to the plaintiff’s submissions, that the ‘Accidental Overload’ cover responded to accidental ‘physical’ overload of the crane where it had otherwise been operated in the manner in which it was designed to be used. As the crane was operated in contravention of manufacturer’s guidelines, the additional cover under that policy provision did not respond to the plaintiff’s claim.

After consideration of additional cover and exclusions in the policy, His Honour concluded that the policy did not respond to the plaintiff’s claim.

Was a statutory duty of utmost good faith imposed upon CGU?

Section 13 of the Insurance Contracts Act 1984 (Cth) (the Act) implies the duty of utmost good faith as a term into the contract of insurance.

The plaintiff submitted that, as a matter of statutory construction, when considering the clear meaning of section 13 and the context of the Act, a statutory duty of utmost good faith was imposed upon CGU. Therefore, as a consequence of any breach of this duty, damages sound for all causally connected loss, including default interest on the finance of the crane.

After a detailed consideration of section 13 of the Act, His Honour held that the section was enacted to clarify with certainty that the duty of utmost good faith applied to both the insured and insurer and provided a basis for either party to seek contractual damages for its breach. His Honour noted that the further amendments to provide for regulatory sanctions did not support the existence of a concurrent liability in tort, either by way of a statutory duty or a tort of bad faith.

His Honour again held in favour of CGU that no statutory duty was imposed to afford the plaintiff a private right of action for the breach.

Did CGU breach the duty of utmost good faith?

The plaintiff also submitted that CGU had breached its duty of utmost good faith by relying on conclusions drawn by its own experts, in its decision to refuse indemnity, rather than giving due consideration to the eye witness testimony.

His Honour accepted CGU’s argument that the decision to decline the claim was made after careful consideration of the available evidence, including the lay evidence. His Honour held that an insurer was not obliged to accept the statement of an operator or even an insured, who may be honestly mistaken. Accordingly, His Honour concluded that the refusal of cover by CGU did not constitute any breach of its duty of utmost good faith.

Flanagan J ordered for the claim against CGU to be dismissed.

Effect

This decision shows that an insurer can establish with appropriate use of forensic and eye-witness evidence that refusal of cover under a policy is justified.

Terrorism Insurance: When are terrorism exclusions effective and what more needs to be done for the victims of terrorist acts?

On 15 December 2014, Man Haron Monis walked into the Lindt Chocolate Café in Sydney’s Martin Place, sat down and ordered dessert. He then asked Tori Johnson, the café manager, to lock the doors and declared that this was an attack and that he had a bomb. Hostages were ordered to hold a flag with Islamic inscriptions facing out the window of the café. Mr Johnson was told to call 000 and to say that Australia was under attack by the Islamic State.  The Sydney CBD was in shut down 10 days before Christmas.

So commenced the Sydney siege, the latest of the few terrorist attacks to have taken place in this country. The siege ended with the tragic death of Tori Johnson and Sydney barrister, Katrina Dawson.

On 15 January 2015, Treasurer Joe Hockey, in consultation with Attorney General George Brandis, declared the siege a “terrorist incident” for the purposes of the Terrorism Insurance Act 2003. But what does this mean for insurers and those affected by the siege?

Terrorism Insurance Act 2003

In his media release, the Treasurer said that the effect of the Ministerial declaration was that insurers would be prevented from relying on terrorism exclusion clauses to refuse claims made by affected businesses. This is true, but not for all policies. It will depend on whether the policy is an “eligible insurance contract” under the Terrorism Insurance Act. 

The Act states that any terrorism exclusion clauses in an eligible insurance contract will have no effect where there is a loss or liability arising from any declared terrorist incident. 

When does the Act apply?

An eligible insurance contract covers loss or damage to “eligible property” and associated business interruption and public liability losses caused by an “eligible terrorism loss”.

Eligible property:- includes commercial buildings, as well as structures, works and property located in or on them. Farms are included but only where they are covered for property and business interruption risks. Residential property is not covered by the Act.  

Eligible terrorism loss:- arises from a declared terrorist incident but does not include any loss from nuclear attacks.

The Act does not affect any other part of an eligible insurance contract. Cover will continue to depend on policy terms and conditions, except for the fact that any terrorism exclusion is treated as if it did not exist.

Any sub limit for terrorism related loss in an eligible contract won’t be enforceable. A terrorism sub limit is seen to be an exclusion within the meaning of the Act.

Curiously the Act does not affect policy exclusions for loss caused by biological and chemical pollution or contamination.

Terrorism reinsurance scheme

The Australian Reinsurance Pool Corporation (ARPC) administers the terrorism reinsurance scheme and provides insurers with reinsurance for commercial property as well as associated business interruption and liability losses arising from a declared terrorist incident. 

The ARPC can provide $13.6billion in cover which includes a $10billion Commonwealth Government guarantee. Where the loss is likely to exceed this amount, insurers who reinsure with the ARPC can reduce the amount payable to the insured by a “reduction percentage” to ensure that no more than the $10billion guarantee is drawn. An insurer not reinsured with ARPC does not get the benefit of the reduction percentage.

Insurers who reinsure with the ARPC will have a retention of anywhere between $1million and $10million per incident. There is a maximum industry retention of $100million. All of the Sydney siege claims have (so far) fallen below each insurer’s retention.

Looking after the victims

The focus of the Terrorism Insurance Act 2003, and access to the ARPC fund, is limited to commercial (and farm) property/income and associated business losses and third party liability risks. In all other insurance policies terrorism exclusions are permissible and prevalent.

As well as policies covering residential premises, the Act does not apply to life insurance, income protection insurance, workers compensation insurance, health insurance and all other non-eligible insurance contracts.

What we are left is a terrorism reinsurance scheme which focuses on property rather than people, profits rather than livelihoods, and seems to ignore that reality of large residential towers spread throughout Australia’s major cities which are just as susceptible to terrorist attack as commercial buildings.

The Act is required to be reviewed every three years to consider the continuing need for the terrorism insurance scheme and the ARPC. The latest report was submitted to the government in January this year. Although some commentators say that the reinsurance market now has the capacity and appetite to provide terrorism reinsurance cover, there is no obvious push to disband the scheme and similar schemes established overseas are there for the long term.

Rather than a review as to whether the scheme should be shut down, there are solid grounds for considering whether there should be a more expansive national response to those affected by terrorist acts. The focus on commercial interests ignores the real victims of terrorist attacks.

In conducting any such review it would be wrong to simply load up the insurance industry with another levy. This is an easy option which has been taken too many times before. Terrorism is a global issue that demands something more.

Compensation is available to Australian victims of overseas terrorist attacks and their families through an Australian Victim of Terrorism Overseas Payment.  But there is no such payment if the attack happens on home soil.

The Productivity Commission is ideally placed to consider available options and one would expect bipartisan support for the swift introduction of a victims compensation scheme.

Waiver of privilege by disclosure to insurer

A recent Federal Court decision demonstrates the importance of putting adequate safeguards in place to prevent an insured from inadvertently waiving legal professional privilege when disclosing documents to its insurer as part of an insurance claim.

This article considers why the insured in this case was held to have waived privilege and suggests steps that both an insured and insurer might take to guard against such an outcome.

The Asahi case

Background

In the case of Asahi Holdings (Australia) Pty Ltd v Pacific Equity Partners Pty Ltd Limited (No 2)[1],

Flavoured Beverages Group Holdings Limited (FBG) agreed to sell its shares to Independent Liquor (NZ) Limited (ILNZ), acting as the nominated purchaser for Asahi Holdings (Australia) Pty Ltd (Asahi).

It was a condition of the sale agreement that Asahi and ILNZ take out insurance to cover any loss they sustained as a result of any breaches of warranty by FBG (the policy).

Fortunately in one sense such cover was acquired because Asahi and ILNZ subsequently commenced proceedings against FBG, its directors and employees alleging that they had engaged in misleading and deceptive conduct and breached certain warranties as to FBG’s financial position.

The solicitors for Asahi and ILNZ had prepared a report which analysed the true financial position of FBG at the relevant time (the report). The purpose of the report was both to assist in providing legal advice and make the insurance claim under the policy. They disclosed a redacted version of the report to FBG and a copy to the insurer which was not redacted.

FBG sought an order requiring Asahi and ILNZ to disclose an unredacted version of the report on the basis that they had waived privilege in respect of the redacted content by providing a full version of the report to the insurer.

Issues

The parties conceded that the report was privileged. The issue was whether privilege was waived by the disclosure of the unredacted report to the insurer. If so, FBG were entitled to an unredacted version of the report.

Decision

The Court held that Asahi and ILNZ had waived privilege in respect of the redacted content in the report for a number of reasons, in particular:

  • The material provided was not obviously sensitive or privileged. It was not enough that some pages of the report were marked ‘Privileged and Confidential’.
  • Indemnity under the policy had not been confirmed by the insurer. Asahi and ILNZ had provided the report to a “potential adversary” who could use the report in open court should coverage under the policy be the subject of legal proceedings.
  • The duty of good faith does not compel an insurer to maintain confidentiality. An interpretation of the duty in this way would prevent an insurer from pursuing its legitimate purposes under a policy including using information provided by an insured to asses and/or resist a claim for cover.   

Implications for insurers and insureds

The Asahi case only applies to documents which are privileged. That is, documents which are created for the dominant purpose of providing legal advice or in anticipation of litigation. All other documents which are relevant to a matter in a litigated dispute or one that could well proceed to litigation are required to be disclosed.

Insurers are not necessarily under an obligation to keep an insureds privileged material confidential, particularly where coverage under the policy has not been confirmed and the parties do not share a common interest in maintaining the privilege.

In fact, insurers may often be interested in seeing the contents of privileged material but that does not mean that this privileged material needs to be disclosed by an insured simply because it is relevant to its insurance claim for cover.  All that an insured needs to do is bring itself within the insuring clause. If it can only do that by disclosure of key privileged material, then that is a decision for the insured to make. However, it is a decision that ought to be made with the knowledge of the consequences i.e. the potential waiver of privilege over the documents in any separate litigation or dispute. If an insured is able to bring itself within the insuring clause without disclosing confidential information, then it would be wise to do so.

Insurers providing some sort of warning about disclosing confidential information to them would absolve the insurer from any criticism and would at least be consistent with the insurer’s duty of utmost good faith to the insured.

With or without such warning, insureds (particularly commercial insureds who might be involved in a related dispute regarding the loss sustained under the policy) ought to think carefully about the documents that they or their solicitors provide to their insurer in support of their insurance claims. 


[1] [2014] FCA 481.

Important amendments to the Home Building Act 1989 (NSW) passed by NSW Parliament

Residential building claims for defective works have continued to grow significantly over the last decade, resulting in an increased focus on legislative reform in the NSW construction industry, most notably in respect of the Home Building Act 1989 (HBA).  

Against the background of a weak residential construction market in 2011, the NSW Government sought to respond to the most pressing concerns of home owners and industry by introducing amendments to the HBA designed to “cut red tape”. The Home Building Amendment Act 2011 (NSW) introduced a package of reforms affecting home warranty insurance and claims, enforcement of statutory warranties and proportionate liability.  However, these amendments only represented an initial step in the reform of the HBA, with more wide-reaching reforms now passed following a comprehensive consultation process during 2012 and 2013.

The Home Building Amendment Bill 2014 (NSW) (the Bill) had its second reading in the NSW Parliament on 6 May 2014, with its stated intention being “to ensure home building laws reflect current practice and reduce any unnecessary red tape for industry while providing consumers with appropriate protection”.  The Bill was passed unamended by the NSW Parliament on 28 May 2014 and, once proclaimed, will significantly amend the HBA. The key aspects of the reforms are noted below.

“Structural Defect” now "Major Defect"

The statutory warranties regime is the basis of the consumer protection framework in the HBA and creates legally enforceable standards for workmanship, enabling consumers to pursue remedies in the event of defective work.

The definition of “structural defect” in section 18E of the HBA has been reworked and replaced with a new concept of “major defect”.

Previously, statutory warranties covered work for 6 years from completion for “structural” defects, and 2 years for other breaches of warranties. Consequently, a claim falling outside the two year protection period might have been significant or, indeed, “major” but, critically, not “structural”. The Bill attempts to address what was seen to be an unsatisfactory position leading to inconsistent court and tribunal decisions in certain circumstances.

Whether a defect constitutes a major defect (attracting a 6 year warranty period) will be a two limb test, the first limb being whether the defect is in a major element of a building (either a structural load bearing component, a fire safety system or waterproofing). The Bill also provides a regulation making power to prescribe additional major elements (or additional major defects). In this respect, the scope of the major defects definition is wider than the old definition for structural defects. However, the second limb requires that the defect, to be deemed “major”, must cause or be likely to cause: a building to be uninhabitable or unusable, the destruction of the building (or part thereof) or a threat of collapse of the building (or part thereof).

The second limb narrows things considerably and the “severity of damage” requirement has come under fire from some consumer advocates on the basis that many defects will now be left with only a 2 year warranty period.

Defence of reasonable reliance on relevant professional

A new defence under s18F has been provided to builders for future projects. It will be a defence to a claim for breach of statutory warranty if the builder can prove the deficiencies complained of arise from its reasonable reliance on written instructions given by a “relevant professional” acting for the home owner and the professional is independent of the builder. This is likely to lead to an increase in the involvement of professionals such as engineers and architects in the sphere of home building defect disputes.

Completion Date clarified for Strata Schemes

Importantly for owners corporations (not parties to the original building contract), a new definition of completion of building work for strata schemes has been included, being the date on which an occupation certificate is issued for the whole building. This provides owners corporations with certainty as to when their building defect warranty periods expire, albeit that the new definition will apply only to contracts entered into after proclamation of the Bill.

Duty to mitigate

New section 18BA imposes a positive statutory duty on homeowners who claim under a statutory warranty to mitigate their loss, including a duty to not unreasonably refuse a builder access to a building site to rectify defective work. Homeowners also are required to make reasonable efforts to notify a builder in writing of an alleged breach within 6 months of a defect being apparent.

Subcontractors responsible

New subsection 18B(2) provides that the statutory warranties are implied into every contract to do residential building work, including subcontracts. This means that where a breach of the statutory warranties relates to work performed by a subcontractor, the subcontractor may be liable to the principal contractor for that breach.

Rectification preferred over compensation

New section 48MA requires courts and tribunals to have regard to the principle that rectification of defective work by the party responsible (as opposed to payment of compensation) is the preferred outcome in building disputes.

Home warranty insurance

A number of changes have been made to provisions relating to insurance of residential building work. Most notably, rectification works performed by the original builder for no additional payment will not require a separate home warranty insurance policy to be issued as the work will continue to be covered under the original policy.

The Bill also clarifies the definition of “disappeared” as meaning a contractor, supplier or owner-builder cannot be found in Australia, in response to previously inconsistent judicial interpretation.

A Home Warranty Insurance public certificates register will be made available to combat the use of false insurance certificates.

Other amendments

The Bill contains a raft of other reforms relating to building contracts, license obligations, disciplinary proceedings, owner-builder obligations, penalties for unlicensed work and rectification orders to name a few. For more details of all amendments contained in the Bill, please click here to view the Explanatory Note.

Flood decision has potential to unleash a torrent of claims

Flood claims have been thrust back into the spotlight with a recent decision handed down by the Supreme Court of Queensland. The plaintiff, a medical supplies company, operated out of premises at Milton in Brisbane. Like much of Brisbane, the plaintiff’s premises was inundated on 11 January 2011. The inundation was caused by both local run off along with water from the Brisbane River that back flowed through two stormwater drains situated near the premises.

As a result of the inundation, the plaintiff suffered loss and damage. It sought to be indemnified in respect of such loss under its policy with Allianz. The policy included a flood exclusion. For the purpose of the exclusion, flood was defined as:

“...the inundation on normally dry land by water overflowing from the normal confines of any natural watercourse of lake (whether or not altered or modified), reservoir, canal or dam”.

While the water that inundated the premises was a mixture of stormwater and water from the Brisbane River that had back flowed through the pipes the plaintiff conceded that river water represented the dominant source of the water.

The issues in dispute narrowed down to whether the stormwater pipes constituted an altered or modified natural water course or canal, and whether it could be said that the water that inundated the premises had overflowed from the normal confines of the Brisbane River. The first issues were disposed of easily. The court found that the stormwater pipes did not constitute a modified or altered natural watercourse. Similarly, the court held that underground stormwater pipes do not fall within the ordinary meaning of a canal.

The issue then became whether the water that back flowed through the pipes was water that overflowed from the natural confines of a watercourse. The court resolved this issue by adopting a narrow construction of the phrase. As the pipes were held not to constitute the normal confines of the river it followed, according to Jackson J that water that back flowed from the pipes could not be water that had overflowed from the natural confines of a watercourse. This result was not altered by the fact that the ultimate source of that water was a natural watercourse. Consequently, Allianz was found not to be entitled to rely on the flood exclusion to decline the claim.

While the decision will undoubtedly excite advocates for insureds, its application is likely not to be as universal as some in the industry fear. The court expressly acknowledged that the outcome of the matter turned on the language of the specific flood exclusion. It was for this reason that Jackson J somewhat surprisingly made no reference to the existing body of case law regarding flood claims. Accordingly, the impact of the decision will need to be assessed on a case by case basis.

As most in the industry is aware, section 37B of the Insurance Contracts Act operates to insert a standard definition of flood into prescribed contracts. To the extent that it is relevant, the definition provides that flood now means the covering of normally dry land by water that has escaped or been released from the normal confines of a lake, river, creek or other natural watercourse (whether or not it has been altered or modified), or from a reservoir, canal or dam. While the court in LMT Surgical emphasised that the application of flood exclusions will vary depending on the particular wording of the exclusion, it is arguable that the result would have been different had the standard definition applied. “Escape” is a broader term than “overflows” in that it envisages a range of means by which water might leave a watercourse as opposed to “overflow” which tends to connote the overtopping of banks. This broader meaning supports an argument that water from the overflow of a river that backflows through stormwater pipes constitutes water that has escaped the confines of the watercourse.

The decision in LMT Surgical stands in contrast to the position taken by the Financial Ombudsmans Service (FOS). FOS took the view that water from a watercourse that back flowed through stormwater pipes constituted flood water. Such a view avoids the paradox of flood water altering its character as a result of its journey through stormwater pipes (in that flood water, being water that has escaped or been released from the normal confines of a natural watercourse, enters the stormwater pipe at one end, but what emerges at the other end is something other than flood water).

We understand that Allianz is considering appealing the decision.

The UK government has taken a different approach to the provision of flood cover. In the face of an increasing number of flood claims, property owners in high risk areas were confronted with the possibility of unaffordable premiums. Against this background, the industry and the government entered into negotiations on how best to address the issue. This has resulted in an agreement to establish Flood Re, a fund designed to cover the cost of flood claims arising from high risk properties. Flood Re will be funded by a levy that will be added to all insurance premiums. This sharing of the cost of insuring high risk properties has the advantage of avoiding the adversarial aspects of flood claims but possibly fails to achieve the desirable policy outcome of causing people to think twice before building in flood prone areas.

As Flood Re is not expected to be established until June 2015, insurers have agreed to continue to offer flood cover to all home owners in the meantime.

A professional services exclusion defeats an insured builder's claim for indemnity under a public & products liability contract

Damage to a house built and sold by Metricon fell within an insuring clause for "property damage" cover. However, a professional services exclusion applied to defeat Metricon's claim against its insurer for indemnity for an amount paid by Metricon to the owners for rectification costs.

In Issue

  • Whether damage to a completed house resulting from building defects constituted “damage to property”.
  • Whether policy exclusions, including a professional services exclusion, applied to defeat the insured’s claim for indemnity.

The Background

In late 2007 the house owners entered into a “design and construct” building contract with Metricon for the construction of a residential dwelling house. The house was completed in mid 2008 but, between early 2011 and mid 2014, the owners reported damage to the house. The damage was eventually determined to have been caused by design and construction errors involving the concrete slab, timber roof trusses and other miscellaneous defects. 

The house owners claimed the cost of rectification from Metricon, and reached a settlement with Metricon in January 2015.  Metricon then made a claim on its public and products liability policy with Great Lakes Insurance (GLI). The policy had three insuring clauses, but only the insuring clause in Section 3 of the policy was determined to be relevant to the claim.

GLI denied indemnity on the basis that the loss (being the payment to the owners) arose from Metricon’s beach of contract rather than from property damage and that, in any event, various exclusion clauses applied so as to deny cover.

The Decision

The court rejected GLI’s submission regarding the nature of the loss and determined that, when given its ordinary meaning, damage to property could include damage flowing from building defects during construction, meaning that the claim was covered by the relevant insuring clause. 

The court went on to examine the exclusions relied on by GLI including a professional services exclusion. The court decided that, even though Metricon had outsourced relevant engineering designs to others, the provision of those services to the house owners under the “design and construct” contract constituted a professional service the kind of which was intended to be captured by the exclusion. 

This meant that, even though the claim was found to be covered by Section 3 of the GLI policy, Metricon’s claim was defeated due to the operation of the professional services exclusion clause. The court found, in addition, that other exclusion clauses may also have applied. 

In examining the operation of the exclusion clauses, the court went into significant detail to explain its views on the principles of policy interpretation in Australia. It focused on “plain” reading of policy conditions and exclusions, with the policy needing to be read as a whole (consistent with Re Media Entertainment & Arts Alliance; ex pate Hoyts Corp Pty Ltd).

Implications for you

It is important for insurers to apply plain reading and whole instrument interpretation principles when considering claims for indemnity. This is particularly relevant where policies have what appear to be overlapping sections or exclusions.

Metricon Homes Pty Ltd v Great Lakes Insurance SE [2017] VSC 749 (12 December 2017)

The lucky number for insureds is still 54...

Section 54 of the Insurance Contracts Act 1984 offers protection to an insured whose acts or omissions could, in the absence of section 54, give an insurer the right to refuse to pay a claim. Essentially, it provides that if an insured is in breach of the policy, the insurer is permitted to reduce its liability only to the extent that the insured’s breach has caused prejudice to the insurer. In other words, an insurer will be precluded from declining indemnity for a claim if the insured’s breach was not causative of the loss.

In our Autumn 2012 edition, we reported on the Supreme Court of Western Australia’s foray into the sometimes murky waters of section 54.

To re-cap: The court had been asked to consider the operation of section 54 in a dispute between Highway Hauliers and its insurer. Highway Hauliers operated a trucking business whose main source of income was transporting freight back and forth from Perth to the eastern states (“east-west runs”). It held cover in respect of its fleet of trucks with certain underwriters at Lloyds. Two of the insured’s trucks were damaged following two separate accidents while carrying freight on east-west runs. Highway Hauliers claimed under its policy in respect of the damage sustained in both accidents.

The policy contained an endorsement that provided there would be “no cover” for drivers of trucks on east-west runs who had not achieved a minimum score on a driver test known as the PAQS test. Neither of the drivers of the damaged trucks had undertaken the PAQS test and Highway Hauliers conceded that the PAQS endorsement had not been satisfied. Underwriters declined indemnity on this basis. WA’s Supreme Court found that section 54 excused Highway Haulier’s failure to satisfy the PAQS endorsement and, because the failure had not caused or contributed to the losses suffered, Highway Hauliers was entitled to indemnity.1

A year on, in Matthew Maxwell v Highway Hauliers Pty Ltd2, Western Australia’s Court of Appeal has now voiced its support for the Supreme Court’s decision and, in doing so, has given insureds seeking to rely on section 54 another weapon for their arsenal.

In upholding the decision of the trial judge, the Court of Appeal adopted a broad interpretation of section 54 favourable to insureds. They emphasised the following:

  • Section 54 was introduced by the legislature to overcome the “inequitable” operation of laws allowing termination of a contract of insurance regardless of whether or not the insurer had suffered prejudice.
  • The legislature intended section 54 to focus on the substance and effect of the terms of the policy rather than its form. Accordingly, section 54 should be extended not just to terms imposing obligations on the insured but also to exclusions from cover of certain risks so that the effect of section 54 could not be avoided by simply rephrasing an obligation (“the insured warrants that the car will be kept roadworthy”) so as to become a temporal exclusion (“the insurer will not be liable while the car is in an unroadworthy condition”).
  • Section 54 is remedial in character and its language should be construed so as to give the most complete remedy which is consistent with the actual language employed and to which its words are fairly open.3
  • When applying section 54, a court should not look to the precise scope or conditions of cover. Rather, consideration should be given to the “restrictions and limitations inherent in the actual claim by reference to the type or kind of insurance in issue”. The court looked at the type or kind of insurance very broadly. It categorised Highway Hauliers’ policy as a policy covering damage occurring in Australia within the period of insurance to specified vehicles. With the policy so categorised, the Court concluded that Highway Hauliers’ claim was susceptible to section 54 because it was a claim in respect of a nominated vehicle for material damage that had occurred in Australia within the period of insurance. The Court acknowledged that the policy’s requirement that drivers achieve a minimum PAQS score may have “conditioned” the scope of cover. However, it held that the PAQS requirement was “a matter of detail of the particular policy” and not an inherent limitation or restriction qualifying claims made under a policy of the type the insured held. In those circumstances, the breach of the PAQS requirement could be excused by section 54.

The Court’s decision sends a clear message that section 54 ought to be given a wide ambit in favour of an insured, particularly in circumstances where the insured’s breach of the policy is not causative of the relevant loss. On the basis of this decision, it seems that a requirement of the policy that conditions the scope of cover will be susceptible to the operation of section 54.

It is important to note, however, that the WA Court of Appeal’s decision is irreconcilable with the decision of the Queensland Court of Appeal in Johnson v Triple C4. In circumstances strikingly similar to those considered by the WA courts, the Queensland Court of Appeal held that section 54 did not excuse an insured’s failure to comply with a condition of the policy that had the effect of requiring a pilot to successfully complete a flight review within 2 years of every flight. In those circumstances, the precise scope and application of section 54 remains in doubt.

1 Highway Hauliers Pty Ltd v Matthew Maxwell (The authorised, nominated representative on behalf of various Lloyds underwriters) [2012] WASC 53
2 [2013] WASCA 115
3 Applying Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35
4 [2010] QCA 282

Aggregation & the World Trade Center

One event or two: it all depends on the facts and the wording

The events of 11 September 2001 spawned more than a decade’s worth of litigation, a large proportion of which has been directed at the effect of aggregation clauses in insurance contracts. Most recently, the English Commercial Court has entered into the fray and, in the decision of Aioi Nissay Dowa Insurance Company v Heraldglen Limited and Advent Capital (No.3) Limited [2013] EWHC 154 (Comm), found that the attack on the twin towers of the World Trade Center (WTC) amounted to two events for the purpose of applying the policy limits.

The case considered by the English court had, as its genesis, the multitude of property, personal injury, business interruption and other losses that flowed from the collapse of the twin towers. In the years that followed, proceedings were brought in the US against the airlines involved and the security companies who had been responsible for screening the passengers who boarded the affected flights. Those proceedings were settled by the various liability insurers and claims were subsequently made on reinsurance contracts underwritten by Heraldglen and Advent Capital. Those claims, in turn, were settled on the basis that the destruction of the towers amounted to two events. Heraldglen and Advent then made claims on their retrocession excess of loss policies with Aioi Nissay.

Aioi Nissay’s policy provided cover in respect of “each and every loss or accident or occurrence or series thereof arising out of one event”. Aioi Nissay argued that the WTC losses were caused by one or more occurrences arising out of a single event. The dispute proceeded to arbitration where the arbitrators found that the losses were caused by two separate occurrences arising out of separate events. Aioi Nissay appealed that decision.

In February, the English Commercial Court upheld the arbitral award and found that the destruction of the twin towers of the WTC was two events.

In coming to its decision, the Tribunal considered that the relevant facts had to be considered “in the round and in the context of the particular contractual wording and the overall contractual purpose”. They then found as follows:

  • Although there were similarities in the timing of the events from the commencement of boarding of the flights to the collapse of the towers, these similarities did not justify a conclusion that there was one occurrence or one event.
  • The fact that the twin towers were located in close proximity to one another and were part of a single property complex did not give rise to a sufficient degree of geographical unity to conclude that there was one occurrence or one event. Each tower was a separate building, albeit connected by a single mall. The towers did not stand or fall together. If only one of the hijackings had succeeded, only one tower would have been destroyed.
  • With respect to the purpose of the persons responsible, the Tribunal acknowledged that the hijackings were both the result of a coordinated plot paid for by Al Qaeda. But the Tribunal observed that a conspiracy or plan cannot of itself constitute an occurrence or an event for the purposes of clauses in insurance contracts which refer to each and every “loss, occurrence or event”. On that basis, this did not justify a finding that there had been one event.
  • There was no unity of cause because “there were two separate causes…two successful hijackings of two separate aircraft, admittedly in execution of a plot to turn each into a guided missile each directed at one of the two signature towers that was a single property complex”.

On these bases, the Tribunal found that the hijackings, death and injury on board each flight and death, injury and property damage consequent on the towers being struck, constituted two separate occurrences that arose out of two separate events. In upholding the Tribunal’s award, the Court found that the Tribunal had accurately summarised and correctly applied the law.

It is interesting to contrast this decision with:

  • The decision of the US Court of Appeals in World Trade Center Properties v Hartford Fire Insurance Co1: In that case, the Court held that the destruction of both towers of the WTC constituted one occurrence. That decision, however, was based on a policy in which the definition of “occurrence” referred specifically to losses attributable directly or indirectly to one cause or one series of similar causes. The court found that the co-ordinated terrorist plot was the cause of the damage and therefore held that the terrorist attacks constituted one occurrence.
  • The decision of Kerr QC in the Dawson’s Field Arbitration: In that case, Mr Kerr was asked to decide whether the destruction of 3 aircraft hijacked by the PLO arose out of one event. The 3 aircraft were flown to Dawson’s Field, a remote desert airstrip in Jordan, where they were blown up in close proximity to each other, within a time span of a few minutes, and as a result of a single decision by the terrorists to do so. Mr Kerr concluded that the destruction of the 3 aircraft was one occurrence and one event.
  • The decision in Kuwait Airways Corporation v Kuwait Insurance Co SAK2: In that case, the court was asked to decide whether the seizure of 15 aircraft from Kuwait Airport by Iraqi forces was one occurrence for the purpose of an aggregation clause in a single direct war policy. Critically, in that case, Iraqi forces invaded Kuwait on the morning of 2 August 1990 and within hours were in control of Kuwait Airport. The seized aircraft were flown to Iraq over the course of several days or weeks. The court concluded that the aircraft were all lost on 2 August 1990 and accordingly, there was unity of time, location, cause and intent. In those circumstances, the court found that there was one occurrence. This decision was based on a conclusion that the occurrence for the purposes of the war risks policy was the successful invasion of Kuwait, incorporating the capture of the airport and with it the aircraft.

The Lessons

On reviewing the outcome in each of the above cases, it is clearly important to consider the specific facts of each case and, critically, the precise wording of the applicable policy. From policy to policy, a “loss” will not necessarily be the same thing as an “occurrence” and there may be subtle but important differences between the meaning of “occurrence” and “event”.

It is interesting to note that although the Court in the Aioi Nissay decision acknowledged the existence of a single terrorist plot and numerous similarities in the ways in which each of the twin towers was destroyed, it ultimately approved the emphasis placed by the Tribunal on the specific facts and on the proper construction and purpose of the particular policy. When contrasted with the outcome in the Hartford Fire Insurance case, it is also clear from the Aioi Nissay decision that there are important distinctions between the effect of aggregation clauses that operate with reference to “events” and those that operate subject to “cause”.

1[2003] 345 F.145
2[1996] 1 Lloyd’s Rep 664

The pitfalls of relying on insurance that has been arranged by others...

Australian Rail Track Corporation Limited v QBE Insurance (Europe) Limited [2012] NSWSC 952

Australian Rail Track Corporation Limited (ARTC) was responsible for managing a rail network in New South Wales known as the Country Regional Network (the network). Two claims were brought against ARTC in its capacity as manager of the network, as a result of two separate incidents. The first incident resulted in injuries to Mr Asimus, a worker whose employer had been engaged by ARTC to undertake re-sleepering works on the network (the Asimus claim). The second incident involved a derailment at Breeza that resulted in claims being brought by the owners of the rolling stock and cargo affected by the incident (the Breeza claim).

ARTC’s responsibility for managing the network arose under an agreement that ARTC had entered into with two statutory authorities: the State Rail Authority of NSW (SRA) and the Country Rail Infrastructure Authority (CRIA). Under the agreement, SRA and CRIA arranged third party liability insurance in respect of claims arising out of or in connection with the agreement. SRA, CRIA and ARTC were named insureds on the policy.

ARTC sought indemnity under the policy in respect of the Asimus and Breeza claims. Underwriters accepted both claims. However, underwriters advised that cover was subject to the application of a “Self Insured Excess Provision” which, according to underwriters, applied an excess of $2.5 million to each of the claims.

Item 6 of the policy’s schedule specified the self-insured excesses applicable to each and every occurrence and claim. The excesses applicable varied depending on whether they were “in respect of” either (i) Rail Corporation New South Wales, (ii) CRIA, (iii) SRA or (iv) Constructions (Clearways) activities. There were no excesses specified to be in respect of ARTC. On that basis, ARTC argued that there was no excess payable by them.

Unfortunately for ARTC, the New South Wales Supreme Court disagreed and found that there was an excess of $2.5 million payable by ARTC for each of the Asimus and Breeza claims.

In coming to this decision, the Court said that the natural, unambiguous meaning of the words used in the policy must be given effect, notwithstanding that the result may seem unreasonable, and notwithstanding that it is suspected that the parties intended something different. Although no excess was stated to be applicable in respect of ARTC, the Court found that the wording of the policy clearly applied an excess.

General Condition 1 of the policy provided that:

"Insurers shall only be liable for that part of any one Occurrence/claim or series of such Occurrences/claims arising out of any one originating cause under this Policy, including Defence Costs, which exceeds the amount of the Self-Insured Excess (including Defence Costs) stated in Item 6 of the Schedule...”

The Court found that the wording of that clause provided that underwriters could be liable only for “that part” of the insured’s liability that exceeded the amount of the self-insured excess. It held that these words contemplated that there MUST be an excess applied by Item 6. Accordingly, the court held that an excess would apply to all claims made by any insured under the Policy.

With this in mind, the Court found that Item 6 of the schedule did not stipulate the excesses for the entities named in the schedule. Rather, it was intended that the relevant excess be determined by reference to whether the relevant Occurrence was “in respect of” the named entities.

The court then found that ARTC’s entitlement to cover arose only with respect to its liabilities in connection with the network, and its agreement with SRA and CRIA. Therefore, any claim made by ARTC under the Policy was “in respect of” either SRA or CRIA. As a result, a $2.5 million excess was applicable in respect of each claim.

This is a useful reminder of the primacy of the policy wording when considering the scope and extent of cover provided. It should also serve as a salutary lesson to those who seek to rely on insurance that has been arranged by others: extra care should be taken to consider the terms and adequacy of the cover being provided. At the very least, a quick check of the applicable excesses, limits and sub-limits ought to be made so as to confirm that the insurance will, in fact, provide the cover intended in respect of all or a significant portion of any claims.

Property Insurance Update - COVID-19 not excluded in policies referring to the “Quarantine Act”

In a unanimous decision, the NSW Court of Appeal held that an exclusion in the infectious diseases extension for quarantinable diseases under the “Quarantine Act 1908 (Cth) and subsequent amendments” could not be construed as meaning listed human diseases under the Biosecurity Act 2015 (Cth).    

As “coronavirus with pandemic potential” was declared a listed human disease on 21 January 2020 under the Biosecurity Act, policies with exclusions which contain the outdated reference to the former Quarantine Act, will not apply to COVID-19 claims. 

Case Description

The 2019-nCov acute respiratory disease (COVID-19) pandemic has caused major business disruption in Australia. This test case, initiated by the Insurance Council of Australia, addresses the exclusion in the infectious disease cover.   

HDI and Hollard (the insurers) in HDI Global Specialty SE v Wonkana No.3 Pty Ltd1 sought declarations that references to Quarantine Act 1908 (Cth) (the Quarantine Act) in the exclusions contained in their respective policies should be construed to refer to the Biosecurity Act 2015 (Cth) (the Biosecurity Act). This construction would be in accordance with the intention to exclude communicable diseases that are sufficiently serious to attract a public health response and to overcome the mistaken assumption by the insurers that the Quarantine Act referred to in the policies was still in force. 

The case was filed with the NSW Supreme Court, but due to its wider significance, it was heard by the Court of Appeal. By a unanimous verdict, the NSW Court of Appeal found in favour of policyholders and that the policy only applied to exclude diseases listed under the Quarantine Act. In consequence of this decision, COVID-19 (which is not listed under the Quarantine Act) will not be excluded in these or similarly worded policies. 

Facts

HDI and Hollard issued policies of insurance on 11 May 2019 and 28 February 2020 with infectious disease cover in reasonably similar terms each providing cover for business interruption caused by outbreaks of infectious disease within 20 kilometres of the insured’s premises. Relevantly, the cover was restricted by an exclusion:

“The cover…does not apply to any circumstances involving ‘Highly Pathogenic Avian Influenza in Humans’ or other diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908 and subsequent amendments.”

The insurers were not aware at the time of issuing the policies that the Quarantine Act, upon which the operation of the exclusion relied, had been repealed and effectively replaced by the Biosecurity Act on 16 June 2016. This put the operation of the exclusion in respect of COVID-19 claims in issue, as “coronavirus with pandemic potential” was not declared under the Quarantine Act but was a listed human disease under the Biosecurity Act

The insurers denied the claims by the policyholders and sought declarations that the words “declared to be a quarantinable disease under the Quarantine Act 1908 (Cth)” should be read as or as including “determined to be listed human diseases under the Biosecurity Act 2015 (Cth).” 

Insurer submissions

The insurers submitted two constructions of the policy that would have resulted in COVID-19 claims falling within the exclusion:

  1. The Biosecurity Act constituted a “subsequent amendment” to the Quarantine Act; and/or
  2. The references to the Quarantine Act should be construed as if they were or included references to the Biosecurity Act.

The insurers contended that the wording of the exclusion anticipated the evolution of the statue referred to (the Quarantine Act) which included its repeal and replacement by another enactment which may be differently named but has the same substantive function (the Biosecurity Act). Insurers also referenced section 10(b) of the Acts Interpretation Act, which provides that a reference to one Act, which has been re-pealed and re-enacted with or without modifications, should be construed as meaning the re-enacted Act. Based on this, it was argued that the Biosecurity Act was no more than a re-enactment of the Quarantine Act.

Further, the insurers argued that to construe references to the Quarantine Act as references to that Act alone would be absurd as:

  1. The Quarantine Act had been repealed and replaced by the time the policies were entered into, and the parties could not have intended to refer to a statute incapable of being amended because it had been repealed;
  2. The parties intended the policies to refer to the operative legislation in force which dealt with quarantinable diseases at the time of the policies and during the cover; and
  3. It was irrational and commercial nonsense for the parties to have excluded diseases determined pursuant to repealed legislation but not listed human diseases determined under the equivalent legislation in force at the time the policies were issued and during the cover period.

Notably, although the insurers made submissions in respect of the reference to the Quarantine Act instead of the Biosecurity Act being a mistake, the insurers did not make any application for rectification of the policy wording.  

NSW Court of Appeal Decision

Construction principles

The Court noted that the interpretation of the wording in a policy is determined objectively by reference to its text, context, purpose, and what a reasonable person would have understood the wording to mean.

However, if on the face of a written contract, an error has been made, the literal meaning of the words will not be applied if it would bring about an absurd result. Although, if the literal meaning of the words simply brings about an inconvenient or unjust (but not absurd) result then the Court does not have a mandate to rewrite an agreement so as to depart from the language used by the parties merely to give the wording more commercial  sense. 

Re-enactment and “subsequent amendments”

The Court held that “subsequent amendments” was not ambiguous and did not comprehend a reference to an entirely new Act, they were merely a reference to the Quarantine Act as it stood. The Court stating: 

“whilst from the insurer’s perspective the purpose of the provision in question may be to exclude diseases which are sufficiently serious to attract a public health response, it has not chosen that language to describe the exclusion or how it is to operate. The exclusion adopts a specific mechanism provided for under the Quarantine Act, and no other. The possibility of that Act being repealed was real and would have the consequence that the machinery at least may not have any ongoing operation from the time of its repeal. The wording does not address that possibility. To suggest that the words “and subsequent amendments” include the enactment of the Biosecurity Act is many steps too far”. 

Relevant to the Court’s determination was the wording “declared to be a quarantinable disease”, which could not be read as referring to the Biosecurity Act as diseases are not “declared” under this new enactment. The word “subsequent” was also not redundant on this construction as contended by insurers, as it referred to amendments being made to the Quarantine Act during the policy period.    

The Acts Interpretation Act also did not apply as it concerned statutory, not contractual, construction and interpretation.

Construction where absurdity

Regarding the insurers’ submission that interpreting the policy wording as only referring to the Quarantine Act is absurd, the Court noted that in a commercial context absurdity is more than just lacking in genuine commercial good sense. It entails commercial nonsense, to the point where it is obvious that the parties did not mean what they said and obvious what they meant to say. 

The Court held that the words used in the policy were not incoherent, and the exclusion still has work to do because declared quarantinable diseases under the Quarantine Act were still identifiable. It was also held that it was not clear from the language used that that the parties intended to allow for an ambulatory, rather than a static, list of excluded diseases or that the parties intended to pick up replacement legislation.

The Court referred to fact that the intention of the parties must be discerned from the language in the contract itself, and as such, “correction” by construction is concerned with errors of expression. That is to say, something must have gone wrong with the language. The Court indicated that the difficulty in this case was not the error in expression, but the assumption underlying it that the Quarantine Act was still in force. 

Accordingly, notwithstanding the repeal of the Quarantine Act, the exclusion still had a sensible, albeit limited, operation in respect of diseases declared under that Act at the time of its repeal. That result may have been unintended, sub-optimal or uncommercial, but it was not absurd. 

Appeal

The Insurance Council of Australia has indicated that it will urgently review the determination and specifically the grounds on which it could seek special leave to appeal against the decision to the High Court of Australia. An application for leave to appeal must be made by 18 February 2021. 

Implications for Insurers

The outdated reference to the Quarantine Act remains in many policies and is likely to be a significant issue for those insurers. While the risk has been underwritten and priced on the basis that cover is not provided for pandemic diseases, insurers may now be exposed to large-scale claims for business interruption loss during COVID-19. Insurers are likely to carefully consider any appeal, and may also consider rectification of policy wordings in equity.    

Insurers will otherwise need to consider the other COVID-19 coverage issues which could arise when determining their response. These issues include:

  1. When COVID-19 is considered to have occurred or ‘manifested’ at a premises;
  2. The causal connection between government restrictions and the manifested disease. Noting that the restrictions in Australia will largely be state or territory based in contrast to the UK; and
  3. The geographically defined ‘vicinity’ of the policy.

These issues are yet to be tested in an Australian Court, but have been considered in the context of the United Kingdom policy wording and government response, with the United Kingdom High Court largely finding in favour of policyholders. Our updates on that decision can be found here and here but we note that the decision has been appealed, with the judgment likely to be delivered in late December or January 2021. 

The case will otherwise have broader implications for insurers that have outdated legislative (and any other) references in their policies which if altered, would impact the risk being underwritten. This may involve legislative monitoring and or policy revisions.

HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296 (18 November 2020)


[1] [2020] NSWCA 296.

Should insurers be identified as “interested non-parties” in litigation?


Ask any insurer and most will say no. Technically, the identity of an insurer and the existence of insurance cover should not have any bearing on a court’s determination of a dispute nor on its decision with respect to a party’s liability. It would seem, therefore, that there should be no need to identify insurers as interested non-parties. The issue, however, is not so straightforward and there has been conflicting comment from the courts and commentators on the subject.

In the case of Kirby v Centro Properties Ltd (ACN 078 590 682) [2009] FCA 695, the Federal Court confirmed that the existence of policies of insurance held by a party or the details of such policies, will not normally be relevant to the proof of any cause of action pleaded against that party.

However, this decision appears at odds with the views expressed by Justice Kirby, in Imbree v McNeilly (2008) 236 CLR 510. In that case, Justice Kirby indicated that the existence of insurance, especially statutory cover, was a relevant factor to consider when reaching his decision with respect to the parties’ liabilities. He recently repeated these views at the 2012 Barry.Nilsson. Insurance Law Review.

The Western Australian legislature has recently brought the issue a little more into the open but at this stage, their purpose in doing so is still unclear.

With effect from 26 June 2012, Western Australia has introduced a new court rule that forces a person to inform the court and the other parties to the litigation of the identity of “interested non-parties”. This would include the identity of insurers defending a claim or pursuing a subrogated recovery claim.

Order 9A of the Rules of the Supreme Court 1971 (WA) imposes the obligation on parties to notify the Principal Registrar of the court and the other parties about the identity of the person (defined as the ‘interested non-party’) who:

(a) Provides funding or other financial assistance to the party for the purposes of conducting the case; and
(b) Exercises direct or indirect control or influence over the way in which the party conducts the case.

The court is to be notified in writing as soon as is reasonably practicable of the identity of the interested non-party.

The rule appears to impose an obligation on parties to disclose to the court who their insurer is, as generally, insurers will satisfy both elements of the rule i.e. they provide funding in order to conduct the case and exercise direct control over the way the case is conducted. However, it does not appear to go as far as requiring a party to disclose the extent of their insurance cover.

At the moment, it is unclear whether the identity of an insurer needs to be disclosed if an insured’s costs inclusive deductible has not yet been fully eroded. In that instance, an insurer is not yet technically providing funding to conduct the case. When an insurer actually becomes an interested non-party is, therefore, unclear at this stage.

While the effect of the rule will be to require the identification of litigation funders, insurers and others with an interest in a case, it does not appear to change the general position that insurance cover should not influence a court’s findings on liability.

Interest under section 57 of the Insurance Contracts Act 1984


Section 57 of the Insurance Contracts Act 1984 (Cth) imposes an obligation on insurers to pay interest on unpaid claims where it is found that the insurer is liable to pay a claim and has not done so. Interest under this section is to be paid by the insurer to the insured from the day on which it becomes unreasonable for the insurer to withhold payment of a claim to the day on which payment is actually made. In other words, insurers are allowed a “reasonable period” to investigate and pay claims. Interest becomes payable if no claim payment is made on expiration of that reasonable period. What is considered a reasonable period depends on the facts of each case and is at the court’s discretion.

The rate at which section 57 interest is to be calculated is set out in Regulation 32 to the ICA. According to the regulation, interest is calculated on the formula of Y + 3%, where Y is the 10 year treasury bond rate at the end of the relevant half-financial year.

The rate of interest as at today’s date would therefore be 6%, calculated as follows:

 

 

Y = 10 year treasury bond rate as at 30 June 2012 which was 3.04% (rounded to the nearest lower quarter of 1% would be 3%)
+ 3%
 

In the recent case of Summers v The National Mutual Life Association of Australasia (No 2) [2012] TASSC 9, the Tasmanian Supreme Court looked at when interest runs from, and in doing so held that, in the circumstances of the case before them, a reasonable time to investigate the total and permanent disability claim (TPD claim) was 3 months. After this time, the court found that it was unreasonable for the insurer to withhold benefits. The insurer was ordered to pay over $100,000 in interest pursuant to section 57 for the delay in insurance payments.

In that case, the plaintiff insured suffered shoulder and knee injuries and subsequently made a TPD claim in respect of those injuries. Benefits were paid by the insurer under the plaintiff’s insurance policy until 20 January 2000, when the Financial Industry Complaints Service (FICS) determined that no further benefits were payable to the insured under the policy. However, on 13 April 2000, and in spite of the FICS determination, the insurer received a progress claim from the insured in relation to his TPD claim. The insurer did not make any further payments and the insured commenced proceedings against the insurer as a result. The insured succeeded and the insurer was ordered to pay the claim. Not surprisingly, the insured claimed interest on the unpaid claim payments and the court was asked to determine the date on which interest began to accrue.

The court held that the insurer had been on notice from the date of receiving the insured’s progress claim that the insured had not accepted the FICS’s determination. At that point, the insurer should have taken steps to investigate the claim. The court found that a reasonable time to investigate the progress claim was 3 months. Therefore, interest was found to run from 13 July 2000, 3 months after the progress claim had been received by the insurer. The insurer was ordered to pay interest for the period 13 July 2000 to the date of payment. Interest was payable at the agreed rate of 8.5%.

Although the 3 month period was considered reasonable in light of the particular circumstances of the case, we note that a 3 month period has now been considered by numerous courts in the context of a variety of insurance claims to be a “reasonable period” within which to investigate and pay a claim. This decision and others like it highlight the importance of insurers investigating claims promptly in order to avoid paying large sums of interest pursuant to the ICA.

 

What do the words ‘arising out of’ actually mean?
Government Insurance Office of NSW v RJ Green and Lloyd Pty Ltd 
(1965) 114 CLR 437

In Australia, the High Court’s decision in Government Insurance Office of NSW v RJ Green and Lloyd Pty Ltd (1965) 114 CLR 437 is often cited when the words “arising out of” require interpretation. In that case, the High Court was asked to consider the operative provision of a policy that provided that the insurer would indemnify the insured against "all liability incurred by the [insured] in respect of the death or bodily injury to any person caused by or arising out of the use of the motor vehicle".

Ultimately, the High Court in that case did not consider it necessary to express a general view as to the precise meaning and ambit of the expression “arising out of”. However, Barwick CJ, Menzies and Windeyer JJ all indicated that the words “arising out of” imported a causal connection that was “wider”, “less proximate” and “less immediate” than that imported by the words “caused by”. This has been applied by many a lesser court in Australia.

The meaning of the words “arising out of” has recently been considered, with interesting effect, by the High Court of England and Wales (Queen’s Bench Division) in the decision of British Waterways v Royal & Sun Alliance Insurance [2012] EWHC 460 (Comm).

The decision arose out of a tragic set of circumstances. British Waterways had engaged two men, a father and son, to trim hedges along the towpath of the Kennett and Avon Canal. To undertake the work, the men used a tractor, with an attached hedge cutter, owned by British Waterways. As the men were carrying out the work, the bank of the canal along which they were reversing collapsed and the tractor toppled into the canal. Both men were killed. The families of the men brought claims against British Waterways. British Waterways sought indemnity in respect of the claims from its insurer, Royal & Sun Alliance.

The insurer declined cover in respect of the claim, pointing to an exclusion in the policy that provided that:
 

“The insurers shall not be liable for liability arising out of the operation as a tool of the Insured Vehicle or attached plant...”


The insurer sought to rely on this exclusion and the question for the court was whether the deaths “arose out of” the operation of the tractor as a tool.

Mr Justice Burton held that:

(i) The tractor was on the towpath to carry out hedge-cutting;
(ii) Hedge-cutting had taken place immediately prior to the accident;
(iii) The tractor was being reversed so that it could make its way to another part of the towpath to recommence hedge-cutting;
(iv) The proximate cause of the tractor toppling into the canal was it being reversed too close to a vulnerable part of the canal bank; and
(v) The men’s deaths had arisen out of the collapse of the bank and not out of the operation of the tractor as a tool.

In coming to these conclusions, Mr Justice Burton found that the words “arising out of” in the policy exclusion before him required him to consider what the “proximate cause” of the men’s deaths was. He noted that this was contrary to indications given by Australia’s High Court in the Government Insurance Office of NSW case. However, he drew a distinction between the meaning of the words “arising out of” when used by an insurer to rely on an exclusion containing them, compared to their meaning when used to determine whether there is cover under an insuring clause.

If a similar approach is adopted by Australian courts, insurers will need to consider carefully the wording of future policy exclusions.

The Insurance Industry and Disaster Events

Never before have there been so many inquiries into the insurance industry as there have been in the past two years. Combined with this we have a Federal Government which, despite many and varied distractions over that same period, has been very focussed on the industry and implementing reforms based on recommendations contained in these reports.

On Monday 27 February 2012, the House Of Representatives Standing Committee On Social Policy And Legal Affairs delivered its report “Volume 1: The Operation Of The Insurance Industry During Disaster Events”.

The Committee was charged with inquiring into the operation of the insurance industry during disaster events. It received submissions from 79 individuals and organisations, 700 responses to an online survey and travelled to areas affected by natural disasters where it held 18 public hearings and 5 site inspections.

The report can be found at www.aph.gov.au.

The Committee made the following recommendations:

  1. Legislation should be enacted obliging general insurers to offer an insurance policy that conforms to Standard Cover, including flood cover and full replacement in the event of total loss.
  2. Legislation should be enacted requiring general insurers to make it clear to policy holders where a policy deviates from Standard Cover.
  3. The Insurance Contracts Amendments Bill 2011 should be enacted.
  4. Legislation should be enacted to remove the exemption of general insurers from unfair contract terms laws.
  5. The General Insurance Code of Practice should be amended significantly, to ensure that consumers are provided with more information on the claims handling process and to ensure that timeframes and standards are adhered to during disaster events.
  6. The Australian Securities And Investments Commission should be empowered to publicly name and shame insurers that breach the Code of Practice.
  7. Legislation should be enacted to make a breach of the duty of utmost good faith a breach of the Insurance Contracts Act, thereby empowering the Australian Securities and Investments Commission to regulate insurance claims handling.
  8. Legislation should be enacted to make the General Insurance Code of Practice compulsory for all general insurers.
  9. Regulations should be amended to oblige general insurers to provide clear and comprehensive information about both internal and external dispute resolution processes to policy holders at the time of claim lodgement, and to prohibit multi-tiered models of internal dispute resolution.
  10. Australian Government funding should be allocated to the Insurance Law Service so that it can mobilise temporary offices in areas of need following natural disasters.
  11. Funding from the Australian Government and the insurance industry should be allocated to the establishment of a consumer advisory position with the Financial Services Ombudsmen.
  12. The Australian Government should investigate ways to reduce the cost of calling 1300 numbers from mobile telephones in areas of natural disasters.
  13. A joint industry Government action group should be established immediately to address the rising costs of potential market failure of insurance premiums across Australia.

Article by Robert Samut, Partner.

World Trade Centre Default Judgement - But enforcement may be difficult

On 15 December 2011 Federal Judge George Daniels entered default judgement against Iran, the Taliban, Al-Qaeda and Hezbollah finding each liable for the September 11, 2001 terrorist attacks on the World Trade Centre in New York. The $100 billion law suit brought by family members of the victims of the attacks is now to be considered by a Magistrate Judge who will decide remaining issues, including the assessment of compensatory and punitive damages.

The judgement is a controversial one in that it attributes liability for the attack to Iran. An Iranian Government memorandum was lead as evidence of Iran’s involvement. It purportedly showed that Supreme Leader Ayatollah Khamenei had prior knowledge of the attacks. The Iranian Government has repeatedly denied any connection with the World Trade Centre attacks.

Will insurers who have paid out hundreds of millions of dollars in compensation consider recovery claims against any or all of the named defendants? Collecting the money may be a problem.

Article by Robert Samut, Partner.

The Queensland Flood Crisis - Part 3

Treasury Releases Flood Law Reform Report

The city of Ipswich is not usually a location that Federal ministers choose to release key policy changes, but yesterday was different when Bill Shorten released the report by Treasury, Reforming Flood Insurance - Clearing the Waters.

Key proposals contained in the report are:-

  • a standard definition of “flood”.
  • a one page Key Facts Statement for home and contents insurance policies.

The Government is seeking feedback and submissions from members of the public on both proposals. The closing date for submissions is 13 May 2011.

Flood

With regard to the public confusion regarding what is (and what is not) a flood the report refers to:-

“The variations in usage of the term ‘flood’ and ‘flooding’ in policies are a potential source of confusion for many consumers. For example, a policy which is stated to cover ‘accidental flood’ or ‘flash flooding’ could give the initial impression that the policy covers risks arising from rivers breaching their banks. However, the policy might contain an exclusion for riverine flooding cover that would be evident on a careful examination.

The different approaches taken in policies to ‘flood’ and related terms and potential confusion for many consumers makes product comparison difficult and may lead to underinsurance for flood risk.”

The proposed definition is:-

“Flood means the covering of normally dry land by water that has escaped or been released from the normal confines of:-
A. any lake, or any river, creek or other natural water course, whether or not altered or modified; or
B. any reservoir, canal, or dam.”

The proposed law reform is to restrict the use of the term ‘flood’ or ‘flooding’ in insurance contracts for anything other than riverine flooding. So for instance the terms ‘flash flood’ and ‘accidental flooding’ would disappear under these reforms. The reforms will ultimately be effected through the Insurance Contracts Act 1984 (Cth). How exactly it is to be done is not set out in the report. It appears that the Government is in 2 minds ie. whether to limit the standard definition to domestic policies (home buildings and home contents policies) or also include business policy holders.

It seems that insurers will be free to use their own definitions for other types of inundation such as storm water, rainfall runoff and actions of the sea. The alternative of defining these other types of inundation within legislation is raised in the report but not with any apparent enthusiasm.

Key Facts Statement

The Key Facts Statement (KFS) is a response to consumer concerns regarding the size of insurance documents, including the product disclosure statement (PDS), and their complexity. In domestic classes there is already an obligation on insurers to present information in a PDS identifying important features of the policy and the scope of coverage in a “clear, concise and effective” manner. The report refers to:-

"Concerns have been raised by a number of stakeholders that the PDS rules for general insurance, as currently implemented, may not be as effective as they could be for informing consumers about the policy, and enabling comparisons between policies. This is likely to be connected with the length and complexity of the PDS and the variations in presentation.

If key information about policies is not readily accessible to consumers, there is a greater risk of consumers acquiring insurance that does not fully match their requirements, and may contribute to underinsurance.”

The proposal being considered involves the issuing of a KFS to be no more than one A4 page in length which contains a set of key facts about the policy. A draft sample is set out in the report. The KFS or parts of it might be prescribed by the Government in the amending legislation. The KFS may not only need to be provided on inception but also at each renewal. The Government seem undecided on this point.

Implications

Rob Whelan, Chief Executive of the Insurance Council of Australia has been very active in working with Bill Shorten, Assistant Treasurer, to settle upon the standard definition of flood. Whilst there may be a few tweaks to the definition contained in the Treasury Report, any amendments are unlikely to be significant.

The proposal to differentiate between riverine flooding and storm water or flash flooding is sensible. There is no doubt that domestic policy holders are often genuinely confused about the difference between the 2 events.

The proposals do not impose any obligations upon insurers to cover flood in circumstances where they otherwise would not.

One would hope for a generous transition period to allow policy wordings to be amended to contain whatever definition(s) is ultimately legislated.

As for the KFS that will also most likely be standardised, or at least the essential terms proscribed by legislation with variations between insurance companies limited by the maximum size of this document ie. one A4 page.

We assume that the obligation to provide the KFS to domestic policy holders will be contained in the Corporations Act 2001 (Cth) which will allow this document to be distributed electronically (under the Insurance Contracts Act there is no ability to effectively deliver documents electronically).

One of the benefits in the government settling upon a definition for ‘flood’ and the contents of the KFS will be that the other reforms to the Insurance Contracts Act, which have been sitting in somebody’s drawer for far too long, may be put back on the table and brought back before Parliament for passing. Previously these amendments were not given the attention they deserved because insurance was not really a priority. Now the amendments are not being passed because insurance is too high a priority. It seems the government is waiting for the reforms indentified in this report to be finalised (as well as considerations regarding whether or not to include insurance contracts in unfair contracts law) before it proceeds with the other amendments.

Should you require any further information about these reforms or other government initiatives such as the Natural Disaster Insurance Review, please do not hesitate to contact Robert Samut who will be pleased to assist.

This is the final publication in our series on legal issues arising out of the Queensland floods. If your company has staff who are involved in flood claims, we have a workshop focussing upon legal and evidentiary issues which we can deliver in your boardroom (using your policy wordings). For more on our training program, please contact Robert Samut.

Can Bob the Builder still fix it? The Design and Building Practitioners Act 2020 (NSW) and implications for insurers

The Design and Building Practitioners Act 2020 (NSW) (DBP Act) was assented to on 10 June 2020 and represents the first step in the NSW Government’s reform of the building industry following Shergold and Weir’s review of compliance and enforcement systems and their Building Confidence report of February 2018. There have been many well-publicised cases of major construction defects impacting high-rise residential developments including Grenfell Tower, the Lacrosse fire, Opal Tower, Mascot Towers, the use of combustible cladding and the Aya Eliza building in Auburn. The building industry is a significant contributor to economic activity in NSW and diminishing consumer confidence in the industry remains of significant concern to the government.

There are a number of aspects of the DBP Act that are of particular interest to the insurance industry, particularly the following:

  1. The creation of a statutory duty of care owed by persons who carry out construction work to take reasonable care to avoid economic loss caused by defects arising from the work.
  2. The requirement for compliance declarations by construction professionals.
  3. The imposition of mandatory insurance requirements on construction professionals.

However, much of the detail has been left to the regulations, which have yet to be drafted. 

Statutory duty of care

In Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36, the High Court held that a builder did not owe a duty of care to successors in title to the original owner (developer) to avoid pure economic loss as a result of latent building defects affecting an apartment complex that was operated as a serviced apartment hotel. Although the High Court did not exclude the possibility that a builder might owe a duty of care to a subsequent owner in certain circumstances, there was at least considerable doubt about when the duty would arise.

To overcome this uncertainty, the DBP Act specifically provides for a statutory duty of care. Key components of the statutory duty of care are as follows:

  • The duty is imposed upon any person who carries out construction work: section 37(1) of the DBP Act. “Construction work” has the following  expansive definition (section 36 of the DBP Act):

(a) building work;

(b) the preparation of regulated designs and other designs for building work;

(c) the manufacture or supply of a building product used for building work; and

(d) supervising, coordinating, project managing or otherwise having substantial control over the carrying out of any work referred to in paragraph (a), (b) or (c).

  • The duty may only apply in relation to residential building work within the meaning of the Home Building Act 1989 (NSW) as “building work” is given a non-exhaustive definition that references such work: section 36 of the DBP Act. The regulations, once promulgated, might further restrict the operation of the statutory duty of care as the second reading speeches foreshadowed the duty being limited initially to class 2 buildings and mixed-use buildings with a class 2 component; that is, a building containing two or more sole-occupancy buildings each being a separate dwelling.
  • The content of the duty is to exercise reasonable care to avoid economic loss caused by defects:

(a) in or related to a building for which work is done, and

(b) arising from the construction work

(section 37(1) of the DBP Act).

  • The duty is owed to each owner of the land in relation to which the construction work is carried out and to each subsequent owner of the land: section 37(2) of the DBP Act. Further, it is expressly stated that an owners corporation or a community association is taken to suffer economic loss for the purposes of Part 4 of the DBP Act if the corporation or association bears the cost of rectifying defects (including damage caused by defects that are the subject of a breach of the statutory duty of care: section 38(1) of the DBP Act).
  • The duty of care is non-delegable: section 39 of the DBP Act.
  • Contracting out of the duty of care is prohibited: section 40 of the DBP Act.
  • The statutory duty of care is additional to duties, statutory warranties and other obligations imposed under the Home Building Act 1989 (NSW) and the common law: section 41(1) of the DBP Act.  In reality, however, the statutory duty is much broader than the statutory warranties implied to contracts to do residential building work by the Home Building Act 1989 (NSW).
  • The statutory duty of care is subject to the Civil Liability Act 2002 (NSW): section 41(3) of the DBP Act.  Accordingly, whether the duty of care has been breached will be determined by the usual principles applying to a tortious duty of care.
  • Although not clearly expressed in the DBP Act (save for the note to section 41), the second reading speeches indicate that existing limitation periods prescribed in the Limitation Act 1969 (NSW) (that is, 6 years from the date the cause of action accrues) and the long stop provision in section 6.20 of the Environmental Planning and Assessment Act 1979 (NSW) (that is, 10 years after the date of completion of the work) will apply to the statutory duty of care.   

The imposition of a statutory duty of care and the classes of people such a duty is imposed upon (which extends to manufacturers and suppliers of building products) has the potential to significantly expand the liability of participants in the building industry for damages claims by subsequent owners in respect of pure economic loss. It represents a marked shift from the common law, where there was real doubt as to the likely very narrow circumstances in which a duty of care would be imposed. 

Further, the statutory duty of care has retrospective effect and applies to construction work carried out prior to commencement in respect of economic loss caused by a breach of the statutory duty of care if the loss first became apparent (defined to mean that owner became aware or ought reasonably to have become aware of the loss) within the last 10 years: clause 5 of schedule 1 of the DBP Act. There are likely to be many buildings that have been completed since June 2010 where construction defects that were previously thought not to be actionable might now result in claims, in respect of which construction professionals will look to their insurers for cover. Insurers may consider it prudent to revisit claims reserves in light of these amendments and to consider re-assessing their underwriting guidelines going forward, including reviewing retroactive dates.

Regulated designs and building work

Part 2 of the DBP Act deals with regulated designs and building work. These provisions will not commence until 1 July 2021. 

Registered design practitioners and principal design practitioners will be required to provide compliance declarations for regulated designs: sections 9 and 12 of the DBP Act. Regulated designs are designs prepared for a building element (fire safety systems; waterproofing; load-bearing components of a building essential to the stability of the building or a part of it; a component of the building that is part of the building enclosure; and those aspects of the mechanical, plumbing and electrical services for a building that are required to achieve compliance with the Building Code of Australia) or a performance solution for building work: section 5 of the DBP Act. The precise content of the compliance declaration will be prescribed by the regulations but will generally be to the effect of whether or not the design complies with the requirements of the Building Code of Australia and whether any other standards, codes or requirements have been applied in preparing the design.

Building practitioners will also be required to provide a building compliance declaration: section 17 of the DBP Act. Other statutory obligations are imposed upon building practitioners, including to take all reasonable steps to ensure that the building work complies with the requirements of the Building Code of Australia and other applicable requirements: section 22 of the DBP Act. 

It is anticipated the regulations will prohibit the issue of occupation certificates and other building certificates unless compliance declarations have been issued: section 26 of the DBP Act. 

Whether any practical benefits will arise from requiring compliance declarations remains to be seen. In the existing regime, certificates are routinely given by construction professionals to private certifiers and there are various common law and statutory rights against construction professionals whose design or workmanship is inadequate. Nevertheless, according to the second reading speeches, the new regime is intended to address issues with compliance and quality of design documentation as well as the not uncommon situation where there are significant discrepancies between designs and the final, as-constructed buildings. Perhaps the enforcement and penalty provisions in the DBP Act will be influential. 

Mandatory insurance obligations

Designers and building practitioners, as well as professional engineers, must not provide compliance declarations or do other work for the purposes of the DBP Act unless they are “adequately insured with respect to the declaration and work”: see sections 11, 14, 24 and 33 of the DBP Act. We await with interest the regulations dealing with insurance as the DBP Act provides that a person is “adequately insured” if that person:

(a) is indemnified by insurance that complies with the regulations against any liability to which the  practitioner may become subject as a result of providing the declaration or doing the work, or

(b) is part of some other arrangement approved by the regulations that provides indemnity against the liability.

Further, designers and builders will be required to provide to the Department of Customer Service information to establish they are adequately insured. Whether this information will be publicly available is not yet known, as the regulations are to prescribe what information is to be included on the register of registered practitioners: section 98 of the DBP Act. In the event that insurance information was included on the register, this would remove one impediment to claimants pursuing claims in circumstances where the relevant party has disappeared or been deregistered.      

On a related point, building practitioners will also be required to provide to the Department of Customer Service a “contractor document”, which will provide information as persons who performed any of the building work and copies of the final designs that are not regulated designs: section 17 of the DBP Act. The regulations may prescribe other documents to be included. The collation of this material (if it can be publicly accessed) may also make it easier for property owners to identify the relevant parties against whom claims should be made.

Next steps

The precise operation of the DBP Act, and its potential to increase legal liabilities imposed upon construction professionals, will need to be assessed when the regulations are published, which is expected later this year. Much of the devil of the reforms may be in the detail and we will provide our next update when the regulations are drafted.

Other building reforms are underway, with the Residential Apartments Buildings (Compliance and Enforcement Powers) Bill 2020 (NSW) also being assented to on 10 June 2020 and with the Act due to commence on 1 September 2020. We will shortly issue a separate note discussing the Residential Apartments Buildings (Compliance and Enforcement Powers) Act 2020 (NSW).


In the meantime, for more information about the DBP Act and its operation or other government reforms, please contact us. 

 

 

The Queensland Flood Crisis - Part 2

Commission of Inquiry into the floods

On Thursday 10 February 2011 the Commission of Inquiry into the Queensland Floods sat for the first time with Her Honour Justice Holmes presiding. All reports made by the Commission of Inquiry are to be made public. Justice Holmes is being assisted by Deputy Commissioner, Jim O’Sullivan (former Qld Police Commissioner) and Deputy Commissioner, Philip Cummins (an engineer specialising in dam safety and river management).

The Commission is to undertake an examination of the chain of events leading to the recent floods and their aftermath. The Commission has been established under the Commission Of Inquiries Act 1950. It is vested with all the powers of a Royal Commission, and will take public submissions from across Queensland and hold public hearings in affected areas. In keeping with the times, public hearings in affected communities will be streamed live onto the Commission’s website.

Insurance companies and the insurance industry generally will be subject to close examination by the Commission. One gets the feeling that the majority of the public submissions made to the Commission (see below) will relate to insurers and insurance brokers, with Seqwater a close second. The Commission’s terms of reference contain a 7-point hit list of enquiries. Number 2 on the list is an inquiry into the performance of private insurers in meeting their claims responsibilities.

Parties who think that their interests might be affected by the Commission’s activities and findings may apply for leave to appear at those parts of the Inquiry that concern them. Application for leave needs to be made in writing by no later than 5.00pm on 28 February 2011.

The Commission of Inquiry is not a court. It is not able to make any binding or enforceable findings against a person, corporation or government authority. The terms of reference require it to (amongst other things) make recommendations which it considers appropriate, feasible and cost effective to improve:-

  • the preparation and planning for future flood threats and risks, in particular the prevention of the loss of life.
  • the emergency response in natural disaster events.
  • any legislative changes needed to better protect life and property in natural disaster events.

The Commission of Inquiry has called for public submissions on issues of flood preparedness to be provided by 11 March 2011, and for submissions addressing any other matters in the Inquiry’s terms of reference to be delivered by 4 April 2011. Following receipt of these submissions public hearings will be held in Brisbane and regional flood affected areas. At those hearings witnesses can be examined and cross-examined. The Inquiry has the power to compel witnesses to attend and require the production of documents.

The terms of reference require the Commission to deliver an interim report by 1 August 2011 (focusing on matters associated with flood preparedness to enable early recommendations to be implemented before next summer’s wet season) and a final report covering all relevant issues by 17 January 2012. So far as the insurance industry is concerned the Commission will report on its assessment of insurers responses to flood claims in January next year.

For those of you who consider it prudent to be represented at the Commission of Inquiry mark 28 February 2011 in your calendar as that is the last day on which applications for leave to appear can be made.

Should you have any questions regarding the process of the Commission or obtaining leave to appear please contact Robert Samut.

Excluding flood damage – did somebody tell the insured?

The Insurance Contracts Act 1984 (Cth) has its own set of insurance policies known as “prescribed contracts” which set out insurance terms for various types of domestic cover (known as “standard cover”). There is a prescribed contract for home buildings insurance. The prescribed home buildings insurance policy contains flood cover (that is, damage/loss caused by flood is not excluded).

Section 35 of the Insurance Contracts Act requires insurers to make any differences between their policies and the equivalent prescribed policy under the Insurance Contracts Act made known to the insured before a contract is entered into. The main aim of standard cover is to ensure that exclusions and limitations which an insured might not expect to be present within insurance cover are brought to the insured’s notice. This part of the Insurance Contracts Act looks to protect mum and dad insureds from being left without cover in circumstances where they thought that their policy would respond. It does not apply to commercial policies of insurance.

Section 35 requires an insurer to “clearly inform the insured in writing (whether by providing the insured with a document containing the provisions, or the relevant provisions, of the proposed contract or otherwise)” of any diversions from standard cover. In recent days the question has been asked: How clearly must insureds be informed of the fact that their policies do not cover flood damage? Is it sufficient to have provided the insured with a Product Disclosure Statement and/or policy document which contains the flood exclusion somewhere within its pages?

In Hams & Anor v CGU Insurance Ltd (2002) 12 ANZIC and Marsh v CGU Insurance Ltd [2003] NTSC 71 (cases which followed the Katherine floods in January 1998) it was held that providing the insured with the policy documents was sufficient to clearly inform the insured of the derogation of the insurance policy from standard cover ie. to inform of the exclusion of flood cover. However the courts have held that there can be special circumstances in which the complexity of, or confusions within a policy document may mean that the provision of it to an insured is not sufficient to clearly inform the insured of the limitations on cover. In Marsh v CGU Insurance Ltd the court held that the policy clearly told anybody who read it that flood damage was not covered. The rejection of cover was upheld. In a not so clearly worded policy document the result may have been different. In the Marsh decision Justice Mildren said in part:-

“Even though section 35 is plainly beneficial legislation, a fair reading of section 35(2) does not warrant the conclusion that the result need go further than provide for the relevant exclusion in the policy wording in clear and unambiguous language and in a manner which a person of average intelligence and education is likely to have little difficulty in finding and understanding if that person reads the policy in question.”

Following these two decisions the Corporations Act 2001 (Cth) introduced specific disclosure requirements for some insurance products (insurance policies sold to retail clients, which includes home building insurance). For insurance products subject to this regime, a PDS must contain information about any significant characteristics or features of the product or of the rights, terms, conditions and obligations attaching to the product. The incorporation of a flood exclusion in a home building insurance policy would be something an insurer would need to mention in the PDS document. Compliance with section 35 of the Insurance Contracts Act may be achieved through the PDS ie. by clearly informing the insured in writing of the deviations from standard cover in the PDS.

Expect to see arguments run that “hiding” a flood exclusion in a PDS or policy document is not “clearly informing” the insured.

What flood exclusion – nobody told me!

A recent decision of the Financial Ombudsmen is relevant. Case number 213228 dealt with a home insurance policy containing a flood exclusion. The policyholder was affected by severe storm activity in Roma, Queensland, in March 2010. The policy contained a flood exclusion. Ultimately it was established that the property damage had been caused by a flood as defined in the policy.

The insured argued that he had never been provided with a PDS or policy wording that identified the flood exclusion and he was therefore entitled to standard cover under the Insurance Contracts Act which provided for flood cover.

Issues in dispute were:-

  1. whether the insurer had established on the balance of probabilities that it provided a copy of the PDS or policy documentation to the insured.
  2. whether the insurer is entitled to refuse indemnity under the terms and conditions of the policy.

The panel reviewing the case was satisfied that the policy excluded a loss resulting from floodwater, but was not convinced that the insured received a policy document or a PDS relating to it.

Evidence was provided by a company employee that the insured was sent an offer to insure and confirmation of cover documents. But he could not say that a PDF or policy document would definitely have accompanied these documents. Effectively he said it was his practice to put them separately in the same envelope. The insurer’s failure to satisfy the panel that it had provided the insured with a copy of the PDS meant that the insurer could not rely on the flood exclusion. The insurer therefore had to cover the loss. The panel was concerned that the insurer had not done enough to establish that the PDS was forwarded to the applicant within the requirements of section 35.

The situation was different in the Katherine flood cases referred to above. In these cases the clear and well documented internal procedures of the insurer allowed it to establish that it had satisfied its duty of disclosure in cases where the insured had denied receiving that information.

Tunnel vision

In Chester County, South Carolina, insurance companies are creating a storm – literally. To simulate hurricane like conditions, an insurance industry group has constructed a wind tunnel of a size sufficient to accommodate nine large residential homes. Within this tunnel 105 fans deliver gusts of 175 miles per hour with the goal being to come up with a design and construction of a house that can withstand the worst that mother nature has to offer.

Julie Rochman, chief executive of the Institute for Building & Home Safety said in relation to the wind tunnel:-

“One thing we as a society don’t really do anymore is build for where we live. We build for how we want to live. . . . There is a wonderful ability to be living in denial and where disaster happened a long time ago we get disaster amnesia.”

When fully operational the wind tunnel centre will be able to generate hurricane force winds with torrential simulated rain. To add to the mix, the tunnel also has a fire pit which simulates how wild fires can spread from house to house.

In a country that consistently sees fires and rain, Australian insurers should take good note of the results coming out of the Chester County tunnel.

For further information on this topic please contact, Robert Samut.

The name’s Bond, Strata Building Bond… and Inspection Scheme

The new NSW Strata Building Bond and Inspection Scheme ("the Bond Scheme") finally commenced on 1 January 2018 and applies to construction contracts entered into, on or (where there is no written contract from) after that date.

While it may not have shaken the residential building industry, it is certainly likely to cause a stir.

What is the Bond Scheme?  

The Bond Scheme was introduced under part 11 of the Strata Schemes Management Act 2015 (NSW) ("the Act") and is regulated under part 8 of the Strata Schemes Management Regulation 2016 (NSW) ("the Regulations").

The Bond Scheme specifically applies to all building work involving the construction of residential or partially residential strata properties of four storeys or more - buildings of three storeys or under remain covered under the Home Building Compensation Fund.

In essence, the purpose of the Bond Scheme is to provide strata owners a fighting fund to rectify defects in a building that might not have ordinarily been discovered until after the expiry of the usual 12 months defects liability period.

How does it work?

Developers who have entered into an applicable construction contract are required to lodge a bond (by way of bank guarantee, unconditional undertaking, security bond or another form of security as prescribed by the regulations) of 2% of the contract price with the Commissioner for Fair Trading, Department of Finance Services and Innovation (Building Bond Secretary). The developer also needs to provide a lodgement form and supporting documents and information.

Under the Regulations, the contract price is calculated on the basis of the total price paid under all applicable contracts for building works as at the date of the occupation certificate. If there is no written contract or the parties are related entities or persons, the contract price is to be determined by a costs report prepared by an independent quantity surveyor. As the developer is the one paying those costs, there is certainly an incentive for developers to ensure that there is a written contract adequately setting out the contract sum to avoid uncertainty.

When is the bond payable?

According to Fair Trading, once a builder and developer enter into a contract, the developer should prepare to lodge the bond. However there is no specific timing provided for under the Act or the Regulations.   

Based on how the contract price will be calculated i.e. as at the date of the occupation certificate, we would expect that developers will not lodge the bond until construction is almost complete to avoid the potential impact of contract variations. Otherwise, any bond lodged early may not reflect the actual contract price as at the date of issuance of the occupation certificate.

While the timing of the lodgement of the bond may be a matter for the developer, it pays not to delay too long as no occupation certificate will be issued until the bond is lodged.

Appointment of an independent building inspector

Developers are also required to appoint and pay at their own cost, for an independent building inspector to conduct two inspections i.e. an initial inspection between 15 and 18 months and a final inspection between 21 and 24 months after completion of the building works. Defects reports will be issued in relation to each inspection and provided to all relevant parties.   

Notably, the Act or Regulations do not require any specific qualifications beyond being part of a strata inspection panel. The developer is not supposed to have any connection with the inspector in the two years prior to their engagement. Penalties may be imposed on the developer and building inspector where there is a connection between the building inspector and developer. However that does not stop a developer using former staff or business partners as inspectors.

The developer has to notify the strata owners and Building Bond Secretary of the proposed independent building inspector. If the strata owners reject the appointment, the Building Bond Secretary can appoint its own inspector. Whether the strata owners will be in a position to reject appointments, having only been newly formed remains to be seen.

Building inspection reports

If there are no defects identified in the initial report, the bond can be released to the developer, two years after the date of completion. If, which is more likely, defects are identified in the initial inspection, the builder is given an opportunity to undertake the rectification work. Notably, while defects are listed, the initial report does not have to provide a scope of repair work.

The final inspection report will determine whether the recognised defects in the initial inspection report have been rectified and what remains outstanding. However, if defects are discovered during the final inspection that were not identified in the initial report, they cannot be included in the final report. That means the strata owners will not be able to claim any bond in relation to those defects. 

The bond will be released in full to the developer if no further defects are identified. The bond money can however be claimed in full or in part by the strata owners if defects remain. The costs of rectification of the outstanding defects must be agreed between the parties’, otherwise the Building Bond Secretary will appoint a quantity surveyor to determine them.  

Scope for appeal?

The Building Bond Secretary must not pay the whole or any portion of the bond unless it has given at least 14 days written notice to the strata owners, developer and builder of the proposed payment. Within those 14 days, each party can apply for review of the decision of the Building Bond Secretary with the NSW Civil and Administrative Tribunal (NCAT). NCAT will be able to affirm, set aside, or vary the Building Bond Secretary’s decision.

Significantly, while the review is being undertaken, the bond cannot be released.

The Bond Scheme or review process does not affect any action or right that any party may have against the other. However, the fact that any bond has been paid or rectification work has been undertaken can be taken into account.

Implications for you

It will naturally take some time (several years in fact) to see how the Bond Scheme plays out and whether it reduces litigation between strata owners, developers and builders.

While the Bond Scheme is certainly a welcome development, practical issues remain. How independent the independent building inspectors will be remains to be seen. The fact that strata owners may not be able to recover any part of the bond if defects are identified after the initial inspection is a real concern – noting structural defects would take time to manifest themselves.

Where there are major defects (of a structural nature or otherwise), the relevant bond, being 2% of the contract price, would likely be exhausted pretty quickly rectifying the defects, leaving the strata owners to pursue litigation by traditional means in any event.

Developers will at least, need to ensure that they have their house in order before lodging the bond, including having all relevant supporting documents and information to avoid protracted delay in obtaining an occupation certificate.


Hayden Gregory, a Graduate in our Insurance & Health team, assisted in writing this article.

The Queensland Flood Crisis - Part 1
The Disaster Management Act 2003 (Qld)

The response to Queensland flood crisis has been remarkable. In fact, it has been so well planned and coordinated that Queensland was not required to accept any search and rescue assistance from other countries. The disaster management plans developed under the Disaster Management Act 2003 (Qld) have set the standard for worlds best practice in responding to a natural disaster.

The main objects of the Disaster Management Act 2003 include:-

  • Help communities effectively respond to and recover from a declared disaster or an emergency situation.
  • Provide effective disaster management for the State.
  • Establish a framework for the management of the State Emergency Service (SES) and Emergency Service Units.

The Disaster Management Act 2003 provides that local governments should be primarily responsible for managing events in their local government area. District and State groups are there to provide local governments with appropriate resources and support.

Persons authorised to exercise declared disaster powers

Under the Disaster Management Act 2003 the following persons (declared disaster officers) may be authorised to exercise declared disaster powers:-

  • Ambulance officer.
  • Fire officer.
  • Health officer.
  • Person who is a member of a class of persons who are considered to have necessary expertise or experience.
  • Police officer (has automatic authority).

Persons authorised to exercise declared disaster powers can:-

  • Evacuate people and animals, and otherwise control their movement.
  • Turn off or shut down any motor or equipment.
  • Shut off or disconnect the supply of fuel, gas, electricity or water.
  • Maintain, restore, or prevent the destruction of essential services.
  • Close traffic.
  • Remove, dismantle, demolish or destroy a vehicle or a building or other structure.

Under Section 78, a district disaster coordinator or a declared disaster officer may direct the owner of any property, by an approved notice, to put the property under the control or at the disposal of the person stated in the notice. For a residential premises or business premises the written approval of the relevant district disaster coordinator is required.

Protection from liability

The Act provides certain persons with protection from legal liability. It provides that civil liability does not attach to:-

  • The State.
  • A Minister.
  • A Local Government.
  • An Official,

because of anything done or omitted to be done under The Disaster Management Act 2003 in good faith and without reckless disregard for the possibility of injury to persons or damage to property.

An “Official” is said to include:-

  • A member of the State Disaster Group, District Disaster Group or Local Disaster Group.
  • A declared disaster officer.
  • An authorised rescue officer.
  • A person authorised to exercise rescue powers.
  • A person required to give reasonable help to a declared disaster officer, district disaster coordinator or authorised rescue officer.
  • An SES member.
  • An emergency service unit member.

So for example, if a policeman exercising declared disaster powers gave a direction to a person to allow water to flow through a property to avoid that property floating down river and possibly cause damage to critical infrastructure, then arguably no claim can be made against the Qld Police Service if that decision was made in good faith.

Compensation

While the Act protects key disaster personnel from being sued on the one hand, on the other it provides that a person who suffers loss or damage because of the exercise of a power by such a person or organisation is entitled to compensation. The compensation to be paid by the State is not payable where the loss or damage is covered by a policy of insurance.

Insurance policies

Section 130 applies to insurance policies covering property damage. If such damage is caused by the exercise of a power or performance of a function by a person under The Disaster Management Act 2003 looking to protect property from damage, or persons or animals from death or injury, then for the purposes of the policy such damage is deemed to be damage caused by the event for which the policy provides cover. The section does not apply if the person exercising the power does so negligently.

The deeming provision only applies to policies which cover the event ie. flood or flash flooding. So for instance, conduct undertaken pursuant to the Disaster Management Act 2003 causing property damage which is excluded or not covered because it is intentional damage may be brought back within cover.

Many home policies which cover flood exclude cover for confiscation or damage caused by the police or government authorities. However where the police or government authority are acting pursuant to the Disaster Management Act 2003 such exclusions won’t apply. To this extent, the Act effectively rewrites the insurance policy and extends cover to events which are otherwise excluded.

For further information on this topic please contact, Robert Samut.

Punitive damages - developments in the US

Exxon Shipping Company et al Petitioners v Grant Baker et al Supreme Court of the United States (25 June 2008)

The Facts

On 23 March 1989, the super-tanker Exxon Valdez was loaded with 53 million gallons of crude oil. The ship was captained by Joseph Hazelwood, who had only recently completed at 28-day alcohol treatment program. He had dropped out of the follow-up program and stopped going to Alcoholics Anonymous meetings. There was contested evidence at trial that Exxon executives and management knew of his alcoholic relapse. Witnesses testified that prior to the Exxon Valdez leaving port, Hazelwood downed at least five double vodkas. The ship sailed at 9.12pm under the guide of a State-licensed pilot from the port of Valdez in Alaska. At 11.20pm Hazelwood took control. Due to poor conditions in the outbound shipping lane, he received clearance from the Coast Guard to move to the inbound lane, which was a less icy path. That move put the ship in the path of an underwater reef off Bligh Island. To avoid the reef the ship had to turn at a point known as 'Busby Light'. Two minutes prior to the required turn, Hazelwood left the bridge to go to his cabin to "do some paperwork". The ship failed to make the turn. On 24 March 1989 the Exxon Valdez was grounded on Bligh Reef off the Alaskan coast, fracturing its hull and spilling eleven million gallons of crude oil into the Prince William Sound. The result was one of the most devastating man-made environmental disasters ever to occur at sea.

Hazelwood had a blood alcohol level of .061 eleven hours after the event. Experts testified that at or around the time of the spill, he would have had a blood alcohol level of around .241, three times the legal limit for driving in most States in the US.

In the aftermath, Exxon spent around $2.1 billion in cleanup initiatives. They were fined $25 million under various State and Federal Acts, and in a separate action by the United States and the State of Alaska, consented to paying at least $900 million towards restoring natural resources. The company paid another $303 million in voluntary settlements with fishermen, property owners, and other private parties. The remaining civil cases were consolidated into this action.

The Litigation

In the District Court of Alaska, a jury found that both Hazelwood and Exxon had been reckless and thus potentially liable for punitive damages. The jury awarded $287 million in compensatory damages to the commercial fishermen and others, $5000 in punitive damages against Hazelwood and $5 billion in punitive damages against Exxon.

Exxon appealed to the Court of Appeals for the Ninth Circuit. The punitive damages award was reduced to $2.5 billion.

Exxon appealed to the Supreme Court of the United States.

Appeal to the Supreme Court of the United States

Exxon unsuccessfully contested liability on the basis that the conduct of Mr Hazelwood was outside the scope of his employment. Liability being determined against it, the company then contested the quantum of the punitive damages award. It argued that the award exceeded all bounds of the principle underlying punitive damages awards, i.e. to deter reckless or worse behaviour and the consequent threat of harm. By a majority of 5:3, the Court held that the punitive damages award should be reduced.

The Court was concerned with common law principles and an award of punitive damages under federal maritime jurisdiction. This allowed the Supreme Court to assess the reasonableness of the award, rather than just reviewing it from a constitutional perspective to see whether it violated due process. To that extent the case is restricted, but the judgment was delivered in a manner to enable it to have wider application.

The Court observed that the prevailing rule in American courts was to limit punitive damages to cases involving, for instance, outrageous conduct on the part of a defendant, gross negligence, wilful wanton and reckless indifference for the rights of others, or behaviour even more deplorable. The Court also observed that in most American jurisdictions, the amount of the punitive damages award is generally determined by a jury in the first instance, and this determination is then reviewed by trial and possibly appellate courts to ensure that it is reasonable. The court conceded that punitive damages awards overall were higher and more frequent in the United States than anywhere else, but based on a consideration of extensive statistical analysis going back more than 20 years, considered the majority of the awards made to be principled. The Court referred to:

"A survey of the literature reveals that the discretion to award punitive damages has not mass produced runaway awards, and although some studies show the dollar amounts of punitive damages awards growing over time, even in real terms, by most accounts the median ratio of punitive to compensatory awards has remained less than 1:1. Nor does the data substantiate a marked increase in the percentage of cases with punitive awards over the past several decades. The figures thus show an overall restraint and suggest that in many instances, a high ratio of punitive to compensatory damages is substantially greater than necessary to punish or deter. The real problem, it seems, is the stark unpredictability of punitive awards."

The majority observed the spread between high and low punitive awards to be unacceptable. In proposing a solution to deal with the very high punitive damages awards, which were said to be the exception, their Honours went on to say:

"One option would be to follow the States that set a hard dollar cap on punitive damages, a course that arguably would come close to the criminal law, rather like setting a maximum term of years. The trouble is, though, that there is no 'standard' tort or contract injury, making it difficult to settle upon a particular dollar figure as appropriate across the board. And of course a judicial selection of a dollar cap would carry a serious drawback; a legislature can pick a figure, index it for inflation, and revisit this provision whenever there seems to be a need for further tinkering, but a court cannot say when an issue will show up on the docket again. The more promising alternative is to leave the effects of inflation to the jury or judge who assesses the value of actual loss, by pegging punitive to compensatory damages using a ratio or maximum multiple."

The majority held that a 1:1 ratio between punitive and compensatory damages was a 'fair upper limit' in a case such as this which involved recklessness on the part of the defendants rather than any malicious intent. Their Honours accepted the District Court's calculation of relevant compensatory damages at $507.5 million, and using a punitive to compensatory ratio of 1:1 reduced the award of punitive damages from $2.5 billion to that amount.

Comment

US insurers have given a collective thumbs up to the judgment. Robin Conrad, executive vice president of the National Chamber Litigation Centre said:

"The decision could have an effect far beyond Federal maritime law. Limiting punitive damages to no more than the amount of a compensatory award will go a long way in confining unpredictable punitive damages."

In reducing what started out as a $5 billion punitive damages award to just over $500 million, the majority of the Court had no regard to Exxon's capacity to pay. The company posted earnings of $40.6 billion in 2007.

In Australia, subject to statutory prohibition or modification, punitive or exemplary damages (as they are referred to here) may be awarded for any tort committed in circumstances involving a deliberate, intentional or reckless disregard of the plaintiff's interests. They are not available for breach of contract. The Ipp Committee called for their abolition in their report "Review of the Law of Negligence". The Australian States did not go that far. In Queensland, exemplary damages have been abolished for injury claims except where the injury was intentionally caused or unlawful sexual misconduct is involved.

Whilst Australian Courts are hesitant to use exemplary damages it is foreseeable that they became more of a feature in pollution and environmental harm cases. To that extent Australian courts may look for guidance from decisions abroad such as the Exxon Valdez case in deciding whether to award exemplary damages and if so, how much.

Climate change is something which affects everyone on this planet, and an international perspective to the assessment of damages to punish those harming the environment is not only appropriate, but desirable.

It must also be borne in mind that the 1:1 ratio as a suggested upper limit does not restrict punitive damages awards where the conduct is intentional or wilful.

For further information on this topic, please contact, Robert Samut.

It's Time

Insurance Contracts Amendment Bill 2010

On 10 September 2003 Senator Helen Coonan (then Minister for Revenue and Assistant Treasurer) and Senator Ian Campbell (then Parliamentary Secretary to the Treasurer) announced that the government was undertaking a comprehensive review of the Insurance Contracts Act 1984 (“the Act”). The government appointed Mr Alan Cameron AM and Ms Nancy Milne as the Review Panel who were supported by a Secretariat within the Treasury. The stated objective of the review was to make recommendations aimed at improving the overall operation of the Act through correcting deficiencies and clarifying ambiguities in its operation.

The Review Panel produced two reports:

  1. Review of Section 54 of the Insurance Contracts Act 1984 (final report provided to the government on 31 October 2003).
  2. Review of the remainder of the Insurance Contracts Act (final report provided to the government on 30 June 2004).

For almost three years not a lot was heard about the reform agenda until a flurry of activity in February 2007 when a package of Exposure Draft Legislation and Explanatory Materials was released by the Treasury. No further steps were taken by the government, due in large part to other more pressing issues which included the 2008 re-election campaign.

At the start of this year rumblings to do with the introduction of the Insurance Contracts Amendment Bill were met with a level of scepticism normally reserved for those who dared to suggest a revival in Queensland Rugby. On Wednesday 17 March 2010, the Insurance Contracts Amendments Bill 2010 was introduced into the Commonwealth House of Representatives, and the Queensland Reds were sitting just outside the top four on the Super 14 Rugby table. The sceptics have been silenced . . . for the moment.

We set out below a brief review of the provisions contained in the Insurance Contracts Amendments Bill 2010. We should point out that we only mention the more significant amendments and have not commented on all of the reforms to life insurance contracts, nor provisions affecting bundled cover (package policies). We will deal with all relevant issues in our upcoming Boardroom Update on the Insurance Contracts Act.

No Reform of Section 54

Much of the call for the review of the Insurance Contracts Act (ICA) in 2003 was generated by concerns regarding the affect of Section 54 on claims made and claims made and notified policies. The High Court decision in FAI General Insurance Company Ltd v Australian Hospital Care Pty Ltd was still fresh in the minds of those calling for the review. In that case the FAI claims made policy had a “deeming provision” which provided that should the insured notify the insurer of “events or circumstances” which may give rise to a claim within the period of insurance, then any subsequent claim made outside that period would be deemed to have been made within the policy period. The High Court held that a failure to notify the insurer of such “circumstances” within the policy period could be excused under section 54, meaning that a later claim, made outside the policy period, could be brought back within cover. Quite rightly the decision caused a stir within the industry at the time and was subsequently said to be having a material impact on the professional indemnity insurance market in Australia through the withdrawal of capacity by insurers (particularly London insurers). More than six years down the track it seems that the market has adjusted to the difficulties which Section 54 caused in the claims made context, and that reform of the section is no longer required. The deeming provisions within claims made, and claims made and notified policies, have largely been removed, at least by Australian underwriters, and those who choose to keep them in the policy know where they stand in the eyes of the law.

The Duty of Utmost Faith


Section 13 of the ICA implies a term into every insurance contract that each party act towards the other with the utmost good faith. A breach of that implied term will entitle the aggrieved party to make a claim for breach of contract provided that they can show loss.

The amending legislation takes the duty of utmost good faith a few steps further by:

  • Extending the benefit to third party beneficiaries; and
  • Making a breach of the implied term a breach of the Act.

By making a breach of the duty of utmost good faith a breach of the Act, the amendments will allow ASIC to commence or continue a representative action on behalf of an insured against an insurer. This is not an amendment to be taken lightly, as any breach of the duty of utmost good faith by an insurer may enable ASIC to access remedies under the Corporations Act 2001 which affect Australian financial services license holders. Those remedies include a banning order, suspension or cancellation of the financial services license, imposing conditions on the license and imposing an enforceable undertaking not to act in a particular way.

Electronic Communication

Currently notices required to be given under the ICA cannot be given electronically. The ICA is exempt from most of the operative parts of the Electronic Transactions Act 1999 which provides generally that where a Commonwealth law requires a notice to be given in writing, the notice may be given electronically if certain conditions are met.

It was widely recognised that the ICA needed to be updated to allow for communication by electronic means. The proposal is to remove the current exemption from the Electronic Transactions Act 1999.

There is provision made in the amendments for the content and legibility of electronic notices sent under the ICA to be regulated eg. it is anticipated that there will be restrictions on what material might accompany a statutory notice sent electronically. Advertising material, pop-ups or other links which may distract the recipient will presumably be prohibited.

Disclosure and Misrepresentation

The amending legislation contains a number of provisions dealing with disclosure and misrepresentation, the effect of which will require insurers (and brokers) to adjust their business practices. The government has recognised that such changes will not be able to be made overnight and so has built in an 18 month delay from when the legislation receives Royal assent to when changes impacting disclosure and misrepresentation take effect.

Insured's Duty of Disclosure

Section 21 of the ICA governs the insured’s duty of disclosure. What the insured must disclose before a contract is entered into is determined by two tests:

  • Subjective test – what the insured knows to be a matter relevant to the decision of the insurer on whether to accept the risk and if so on what terms.
  • Objective test – what a reasonable person in the circumstances could be expected to know to be a matter so relevant.

Over time the objective test has been applied inconsistently. Does the reference to “a reasonable person in the circumstances” refer to “extrinsic factors” (such as the circumstances in which a policy of insurance is entered into) or should “intrinsic factors” (such as an insured’s business acumen, education, cultural background and the like) also be taken into account? The amending legislation has sought to address this uncertainty by rephrasing the objective test to read:-

"What 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, the nature and extent of the insurance cover to be provided under the relevant contract of insurance."

It may be more helpful if the amending provisions rule out reference to intrinsic factors if that is the desire.

Eligible Contracts of Insurance

Eligible contracts of insurance are prescribed by regulation and include the following types of cover:

  • Motor vehicle.
  • Home buildings.
  • Home contents.
  • Sickness and accident.
  • Consumer credit.
  • Travel.

Section 21A of the ICA requires an insurer to ask the insured specific questions relevant to the insurer’s decision on whether to accept the risk, and if so, on what terms. An insurer is also permitted to ask a “catch all” question requiring an insured to disclose “exceptional circumstances” relevant to the insurers decision to accept the risk. The Review Panel considered the current ability to ask “catch all” questions as undermining the protection afforded to consumers.

The amending legislation requires an insurer to ask an insured wishing to acquire cover, specific questions relevant to the insurer’s decision on whether to accept the risk. If it fails to do so the insurer is taken to have waived the requirements for disclosure. The amending legislation does away with “catch all” questions, and if included in an application, they will have no effect.

Currently Section 21A does not apply to renewals. The amending legislation changes this. Upon renewal of an eligible contract an insurer wishing to rely on the insured’s duty of disclosure is required to:

  • Ask specific questions; and/or
  • Before entering into the contract provide the insured with a copy of any matters previously disclosed in relation to that cover and request that the insured disclose any changes to those matters or to indicate if there is no change.

If the insurer does neither on renewal, then it is taken to have waived any entitlement to rely upon non-disclosure by the insured with regard to the renewed contract.

Insurer's Duty to Inform of Duty of Disclosure

Under Section 22 of the ICA an insurer is required to inform the insured in writing of the general nature and effect of the duty of disclosure. If Section 21A (Eligible Contracts) applies, then the insurer must also inform the insured of the general nature and effect of that section. Such notice must be provided before the contract is entered into, and a failure to do so means that the insurer cannot exercise any rights unless the breach (non-disclosure) is fraudulent.

The amending legislation recognises that in some cases there may a significant time lag between the time when a prospective insured submits information to an insurer (eg. makes an application) and the time when the policy is issued. During this intervening period, circumstances may change or things may happen which need to be disclosed to the insurer. To overcome the risk of an insured innocently breaching its duty of disclosure and suffering the consequences because of the delay, the amending legislation provides that where more than two months has passed since the insured’s most recent disclosure, then along with an acceptance of the proposal or a counter offer, the insurer must also provide the insured with a reminder that the duty of disclosure applies and continues right up until the time when the proposed contract is entered into. Failure to provide the reminder notice will mean that an insurer is precluded from exercising a right in respect of a failure to disclose any new matter which the insured becomes aware of.

Non-Disclosure by Life Insured

The review panel recognised that contracts for life insurance are often entered into by one person to cover the life of another. The life insured may therefore be that of persons who are not the contracting insured, and therefore not subject to a duty of disclosure under the current law. Although not a contracting party, the person whose life is proposed to be insured will generally provide the insurer with information relevant to the insurer’s decision on accepting and pricing the risk. At the moment Section 25 of the ICA provides that if during the negotiations a prospective life insured makes a misrepresentation, then that misrepresentation will be deemed to have been made by the contracting insured. However the ICA only deals with misrepresentations, and not non-disclosure. That gap is remedied by the amending legislation which provides that any non-disclosure by a life insured will be imputed to the contracting insured.

Remedies of Insurers - Life Insurance Contracts

The amending legislation streamlines the way in which the Act deals with remedies for life insurers in cases of misrepresentation and non-disclosure made by contracting insurers and life insurers prior to entering into the contract of life insurance. The amendments are designed to make the remedies more flexible and tailored than those currently available.

Third Parties

A new definition of third party beneficiary has been included:-

“Third party beneficiary, under a contract of insurance, means a person who is not a party to the contract but is specified or referred to in the contract, whether by name or otherwise, as a person to whom the benefit of the insurance cover provided by the contract extends.”

Request by Third Party Beneficiaries for Information

Section 41 of the ICA enables an insured who has made a claim under a policy to inquire in writing of the insurer:

  • Whether the insurer admits that the policy covers the claim; and
  • If so, whether the insurer proposes to conduct the defence and any negotiations relevant to the claim made against the insured.

If the insurer does not respond within a reasonable time, or does not admit liability under the contract or agree to assume conduct of the defence, then the insurer cannot refuse payment if the insured settles the claim through its own conduct of the claim and is later able to establish a liability on the part of the insurer.

The amending legislation extends the same rights to third party beneficiaries.

Insurers Defences in Actions by Third Party Beneficiaries


Section 48 of the ICA deals with the defences available to a general insurer against a claim made by a third party beneficiary. Section 48AA contains similar provisions regarding certain contracts of life insurance.

When a third party beneficiary makes a claim against an insurer to do with the insurance contract, the intention of the ICA is that third party beneficiary should be in no better position than the insured. To give effect to this the amending legislation provides that in defending an action by a third party beneficiary:-

  • An insurer may raise defences relating to the conduct of the insured; and
  • The conduct of the insured that can be raised includes pre-contractual conduct (eg. non-disclosure).

Representative Actions by ASIC on behalf of Third Party Beneficiaries


Section 55A of the ICA permits ASIC to bring or continue actions against insurers if such action is seen to be in the public interest. Currently the actions are limited to those brought by or on behalf of insurers in relation to breaches of the Act.

The amending legislation extends ASIC’s power to bring or continue claims made against insurers by third party beneficiaries.

Subrogation

Section 67 of the ICA provides a mechanism for distributing money between insurer and insured that is recovered in a subrogated recovery action. The formula was subject to some criticism by the Review Panel and a new method for dividing the spoils of a successful subrogated recovery claim is set out in the amending legislation. Briefly the amending legislation provides that:-

  • The party taking the recovery action should be entitled to reimbursement of the administrative and legal costs of the action from any money recovered.
  • If the insurer funds the recovery action pursuant to its rights of subrogation, it is then entitled to an amount equal to that which it has paid to the insured under the contract of insurance.
  • If the insured funds the recovery action, it is entitled to be paid an amount equal to that which it is owed under the contract of insurance.
  • If the action is funded jointly by both insurer and insured, then they are both entitled to the amounts referred to above which are to be pro-rated in the event that there are insufficient funds to reimburse them in full.
  • Any excess or windfall recovery is to be distributed in proportion to the amount contributed by each party to the administrative and legal costs of the recovery action. However, the insurer only receives the benefit of a windfall after the insured has received full recovery for its losses.
  • Interest is to be divided fairly between the parties having regard to the amount each has recovered and the time that each has been deprived of the use of the subject funds.
  • The amending legislation extends the provisions regarding subrogation to third party beneficiaries.

Each party’s rights in relation to subrogation may be modified by the insurance contract.