The recent decision of the Supreme Court of New South Wales in Cape Byron Power I Pty Ltd v HSB Engineering Insurance Ltd  NSWSC 1081 provides a timely reminder of the importance of clear policy drafting for underwriters of debt servicing standing charges and the adverse interest consequence which can follow if a denial of cover is deemed "unreasonable".
In April 2005, the plaintiffs engaged contractors to construct two sugar refineries, at Broadwater and Condong, on the north coast of New South Wales (the Project). The Project was financed by a syndicate of lenders. The plaintiffs effected a "Debt Servicing Standing Charges Insurance Policy" (the Policy) with the insurer defendants under which they were indemnified in respect of their obligations to the lenders in the event of a Delay to the Project.
On 8 May 2008, the steam turbine generator (STG) at the Broadwater site was contaminated with oil and had to be recommissioned, which led to a significant delay of practical competition. Consequently, the plaintiffs made a claim under the Policy seeking to recover debt servicing standing charges for the period of delay.
Unfashionably late to practical completion
The Court identified three issues for consideration.
- Could the plaintiffs establish delay despite concurrent issues in the construction?
The Court found that, pursuant to the Policy, the Delay was the period between the date on which the works would have been completed but for the damage – the oil contamination – and the actual completion date, 21 November 2008.
The defendants led evidence that, as a result of concurrent issues with capacity of the fuel handling system, late provision of operation manuals and difficulty procuring a computer card component of the STG, the Delay caused by the oil contamination was significantly less than the 96 days alleged by the plaintiffs.
The Court rejected the defendants' arguments that fuel capacity and operation manuals issues would have affected the practical completion date as they were not on the critical path and were subsequently waived as requirements of practical completion. The Court accepted the Delay should be reduced by 3 days to account for the difficulty procuring the STG component, finding that the oil contamination caused a delay of 93 days with the hypothetical completion date being 20 August 2008.
- If delay was established, what was the quantum of recoverable financing charges under the Policy?
The defendants submitted that a proper interpretation of the Policy meant that a Delay was tied to events at either Condong or Broadwater and did not require looking at the operation of the two together. Further, as the Policy provided sub-limits to the total indemnity coverage of $20mil – being $10.5mil (52.5%) at Condong and $9.5mil (47.5%) at Broadwater – the debt servicing standing charges for which they were liable should be limited in proportion to the Broadwater sub-limit. They submitted that it could not have been intended that the full financing costs could be recovered for a Delay which affected only one of the plants. The Court rejected this argument finding that the relevant Finance Agreement under which the "Debt Servicing Standing Charges" were calculated, pursuant to the Policy, drew no relevant distinction between the two sites. Accordingly, the defendants were liable for the whole of the Debt Servicing Standing Charges over the delay period.
- If the defendants were liable, from which date should the interest run on the financing charges under the Policy?
The Court found that the defendants' declinature of cover on 24 December 2014 was unreasonable as, despite maintaining that the plaintiffs had presented them with insufficient information to support their claim made in July 2014, the defendants failed to request the requisite further information. As a result, the defendants were found liable to pay interest from the date of their denial of cover on 24 December 2014.
Take away points
- Insurers underwriting debt servicing standing charges must take care to adequately price the risk of bearing insureds' financing charges in the event of delay.
- It is imperative that policies are drafted clearly to ensure commercial certainty.
- Insurers must take care to make reasonable assessments as to cover and, in circumstances where insureds have provided inadequate information, request further information in a timely manner to avoid the adverse interest consequences associated with a finding the insurer's declinature was "unreasonable".