Following the HIH collapse in 2001, insurers writing HOW policies under the various state Home Building Warranty schemes have routinely sought indemnities and bank guarantees from builders before issuing certificates of insurance. A decision in the Western Australian District Court case of Vero Insurance Ltd v Harden-Jones & Anor has called into question the legality of this practice and suggested insurers may be acting in contravention of the Insurance Act 1973 (Cth) (Insurance Act).
Mr & Mrs Harden-Jones (HJ) were the directors of HBC Pty Ltd (HBC). Before issuing a certificate of HOW insurance for homes being constructed by HBC, the insurer procured a deed of indemnity from each of Mr & Mrs Harden-Jones which covered the insurer for all 'all claims, payments, costs and any other expenses, losses and damages' arising under the HOW policy. When HBC fell into financial difficulties, the insurer paid another builder to complete and rectify works. The insurer then sought to recoup its costs directly from HJ, who entered a defence denying all liability.
The insurer was initially successful in having the defence struck out and summary judgment entered. HJ applied to have the summary judgment set aside on the basis that there was a triable issue as:
the deeds of indemnity were in fact contracts for re-insurance
insurers are obliged under the Insurance Act to seek approval from the prudential authority (APRA) prior to entering into re-insurance arrangements
the insurer did not obtain the prior approval from APRA
accordingly, the deeds of indemnity were illegal by operation of the Insurance Act.
The insurer argued that if the deeds were contracts for re-insurance in contravention of the Insurance Act, whilst that would give rise to a penalty under the Insurance Act, the deeds are still enforceable.
The Court determined that the deeds of indemnity could be characterised as contracts of re-insurance and there was a genuine question as to whether the deeds were illegal by reason of non-compliance with the Insurance Act. Accordingly, the Court found there was a triable issue, allowed the appeal and set aside the summary judgment.
The outcome of this matter will ultimately depend upon the decision after trial as to whether the deeds of indemnity are in fact illegal under the Insurance Act. If they are found to be illegal, then that could have significant adverse impacts for providers of HOW insurance and possible benefits for those builders who have paid out monies under deeds of indemnity in favour of HOW insurers.
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The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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