Australia: Policy conditions upheld: Insurer denies indemnity for failure to comply with Australian standards

In brief - Insurer successfully appeals trial judge's findings

In WFI Insurance Ltd v Manitowoq Platinum Pty Ltd [2018] WASCA 89, the Court of Appeal in Western Australia allowed the insurer to deny indemnity for a claim where the insured failed to comply with a condition of the business liability policy relating to compliance with Australian Standards and relevant building legislation.

The background to the case is that Manitowoq and JDE Roma Pty Ltd (collectively respondents) engaged Boss Shop Fitting Pty Ltd (Boss) to perform the "fit-out" of a restaurant. The plumbing works were defective and there was significant water damage to the restaurant which required rectification. The plumbing work was found to have not complied with the relevant Australian Standards.

Respondents successfully seek damages from insurer at first instance

The respondents commenced proceedings against Boss claiming damages for breach of contract and breach of a duty of care. Before liability was established, Boss went into liquidation and was deregistered. The respondents sought to recover from Boss's insurer, WFI Insurance Ltd, pursuant to section 601AG of the Corporations Act 2001 (Cth).

The insurer denied that it was required to indemnify Boss because Boss had breached a condition of the policy which required it to comply with legislation and Australian Standards. The relevant legislation was Regulation 47 of the Water Services Licensing (Plumbers Licensing and Plumbing Standards) Regulations 2000 (WA). The breach of the Australian Standards also amounted to a breach of the Building Code of Australia.

The insurer further argued that the breach of the condition was causally connected to the liability which Boss had incurred to the respondents. As always, the case turned upon the proper construction and effect of the insurance policy.

The District Court found that the policy was a business liability policy. The relevant condition was found in a section headed "General conditions applying to all policies" and stated as follows:

You must comply with legislation and Australian Standards.

Australian Standards means standards published by the Standards Association of Australia.

The trial judge construed the condition in the policy as being qualified by reference to an implied obligation to take reasonable care in complying with legislation and the Australian Standards. Her Honour found that, if Boss had been reckless in its conduct, then that would have amounted to a breach of the condition. Her Honour also concluded that, even if the condition had been breached, the breach would not have entitled the insurer to refuse indemnity under the policy. This was because the wording was ambiguous and failed to describe the condition as a "condition precedent to indemnity". The judge found for the respondents, and awarded that the insurer indemnify Boss for the damages.

Court of Appeal overturns trial judge's findings

The insurer appealed the decision challenging the trial judge's findings.

The Court of Appeal held that the trial judge erred in finding that the obligation was limited to reasonable care in complying with the relevant standards. The Court of Appeal found that the insured was in breach of the condition if there was a breach of the legislation and the Australian standards. The Court of Appeal held that the case law did not support the trial judge's position that the condition only applied to exclude cover if the professional had acted recklessly.

The Court of Appeal also held that the trial judge was wrong to find that construing the relevant condition in accordance with its express meaning would be inconsistent with the commercial purpose of the policy, which was to cover Boss for acts of negligence. The trial judge gave no reasoning or basis for the conclusion and the Court of Appeal held that such a conclusion was not available to the trial judge.

Finally, the respondents (who were a party to the appeal and who would have the benefit of succeeding against the insurer because the insurer was required to indemnify Boss) submitted that allowing an insurer to deny a claim for indemnity on the basis that the professional did not comply with the relevant Australian Standards was contrary to the purpose of the policy, namely to provide cover for negligent work. However, the Court of Appeal held that a finding of negligence and a finding that work is not compliant with the relevant Standards was a false equivalency. Cover can still be provided under the policy for other types of liability, for example, negligently leaving equipment lying around where someone may trip over it.

Insurers should consider reviewing business liability and professional liability policies

The main takeaways for insurers in light of the Court of Appeal's decision are:

  • Insurers can rely upon express terms in insurance policies which seek to deny indemnity where policyholders fail to comply with the relevant Australian Standards and legislation.
  • Insurers may wish to review their business/professional liability policies and consider whether similar conditions as in this case might be included in their policies.
Thanh Bui Fraser Oakley
Insurance and reinsurance
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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