Secure Funding Pty Ltd v. Insurance Australia Limited  FCA
1094 (1 October 2010)
Financiers routinely require borrowers to take out insurance
cover and to note the insurer's interests on the policy. This
case illustrates the limited cover available to financiers who are
noted as "interested parties" in circumstances where the
insured's actions trigger an exclusion in the policy.
Mr P owned a property in New South Wales. Mr P and his business
partner obtained insurance cover for the property from IAL. One of
the events that the insurance policy covered was damage caused by
fire. The policy also contained the following clause:
However, we will NOT cover loss or damage as a result of
fire started with the intention of causing damage by you or
(i) who lives in your home, or
(ii) who has entered your home or site with your consent, or
the consent of a person who lives in your home.
The following terms were defined in the policy:
"You" means the person or persons named as the
insured on your current Certificate of Insurance. If more than one
person is named as the insured, we will treat a statement, act,
omission or claim by any one of those people as a statement, act,
omission or claim by all those people.
"Your home" is the home insured identified on your
current Certificate of Insurance. If you are a landlord your rental
property is identified as the home insured on your current
certificate of insurance.
Mr P and his business partner later mortgaged the property to
Secure Funding Pty Ltd (Secure Funding). The
interest in the property that Secure Funding had as credit provider
was noted on the IAL policy, as required by the mortgage.
Mr P deliberately set fire to the property causing damage.
Secure Funding sought to claim under the insurance policy for the
loss it had suffered as a result of the property damage. IAL
refused the claim based on the exclusion set out above.
The court found that the exclusion clause in the policy operated
regardless of whether the claimant was the named insured (i.e. Mr P
and his partner) or Secure Funding.
Secure Funding argued that the purpose or commercial object of
the policy was to protect a financier, regardless of any illegal or
other conduct of the named insured.
The court concluded that whether or not Secure Funding was a
party to the wrongful conduct was irrelevant, as on a proper
construction of the policy it did not cover the event that
occurred. The court pointed out "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
This case highlights the vulnerable position of an interested
party to a contract of insurance. Unless a financier is prepared to
take out its own policy of insurance, it runs the risk that any
policy of insurance over mortgaged property will not respond
because of the actions or inactions of the insured.
If you have any questions regarding this alert, please
contact a member of our Insurance team.
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Contractors and principals should ensure they have appropriate insurance coverage instead of relying on indemnity clauses.
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