Secure Funding Pty Limited v Insurance Australia Limited t/as NRMA Insurance [2010] FCA 1094
Introduction
In this case an insurer successfully declined indemnity to a mortgagee, whose interests were noted on a property policy, in circumstances where a person who entered premises with the consent of the insured deliberately set fire to the insured property.
Background
Mr Philp owned land and a building ('the property'). In December 2004, Philp and a Ms Parker obtained insurance from IAL in respect of damage to the property caused by fire ('the policy'). Ms Parker lived at the property.
In April 2005, Secure Funding lent money to Philp and Parker secured by a mortgage over the property.
The terms of the mortgage required Philp to:
- Effect and maintain insurance cover in respect of the property
- Ensure that Secure Funding was entitled to the benefit of the policy to the extent of its interest as mortgagee by noting Secure Funding's interest in the policy.
IAL agreed to note Secure Funding's interest in the property as a credit provider / first mortgagee / interested party.
The policy was renewed in December 2005. The renewed policy noted:
- The 'insured' as Parker and Philp
- The 'Credit providers 1st Mortgagee' / "Interested Party" as including Secure Funding.
The renewed policy contained an exclusion in the following terms:
who has entered your home or site with your consent, or the consent of a person who lives in your home.'
The PDS for the policy defined 'You' as follows:
In April 2006, Philp, with the intention of causing damage, deliberately set fire to the property. Philp had entered the property with the consent of Ms Parker.
Secure Funding made a claim under the renewed policy. IAL refused the claim. The dispute came before Middleton J in the Federal Court on a set of agreed facts.
The Court's decision
Secure Funding relied, in particular, on the decision of Tadgell J, Victorian Supreme Court, in VL Credits Pty Limited v Switzerland General Insurance Co. [1990] VR 938. That case involved a fire policy taken out by the lessee of insured premises for the benefit of itself and its original mortgagee. The benefits of the policy were assigned with the consent of the insurer to the lessee and VL Credits which had lent money to the lessee. VL Credits and the lessee were specified as insureds for their respective rights and interests in the relevant policy document. It was assumed for the purpose of the case that the insured property had been destroyed by arson, at the hand of the lessee. The insurer declined indemnity, relying on Condition 7 of the relevant policy, which was in the following terms.
Secure Funding submitted this clause was, in substance, identical to the exclusion clause relied on by IAL in the subject case. In VL Credits, Tadgell J said that:
- The claim referred to in Condition 7 was a claim made under a composite policy by a co-insured for indemnity in respect of its loss by reference to its insurable interest
- 'The insured' in Condition 7 should be read as referring to the particular claimant.
His Honour said:
The result was that the insurer in VL Credits could not rely on the wrongful conduct of the lessee to defeat VL Credit's claim.
Middleton J distinguished VL Credits. His Honour found the relevant clause here was not focussed upon the claim, or claimant. Rather, it defined the risk undertaken by the insurer. The exclusion expressly stated that it would operate if the relevant person 'entered your home or site with your consent, or the consent of a person who lives in your home.' The relevant person did not have to be the claimant or someone acting on its behalf, as was required by Condition 7 in VL Credits. The exclusion was therefore not dependent upon whether the claimant was the named insured, or Secure Funding.
Middleton J said that the focus must always be on the precise terms of the contract. His Honour set out the terms of the relevant clause, but restated to take account of the agreed facts and the claim made by Secure Funding under the policy. His Honour found the clause should be read as follows:
Who lives in [the home insured on the ertificate of Insurance], or
Who has entered [the insured home], or site with [Secure Funding's] consent, or the consent of [Parker, a person who lives in the home].'
Here, Philp entered the property with the intention of causing damage to it. He entered with the consent of Parker. She lived at the property. That was enough. The policy did not cover the event which caused the damage.
In an effort to avoid this result, Secure Funding relied on an alternative submission that the commercial object of the policy was to protect a financier, and not to disentitle it to cover where arson or illegal action was undertaken by the 'insured', as defined.
The Court rejected this argument and found that one can readily understand an insurer (otherwise accepting liability for deliberate conduct) seeking to exclude indemnity in the case of the deliberate and wrongful acts of specific individuals such as residents, tenants or their families.
His Honour noted that it is possible for a person with a limited interest, such as a mortgagee, to take out their own policy to avoid difficulty with insurance should the mortgagor (or someone with temporary carriage of an asset) be tempted to destroy property.
Conclusion
The decision indicates that, with an appropriately worded policy, it is possible for an insurer to successfully decline indemnity to interested parties such as a lender in cases of arson. The case is a reminder that proper construction of the words of the contract will be pivotal.
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