This is an appeal from the decision of Justice Bergin in the
Technology & Construction List of the Equity Division of The
Supreme Court of NSW. In this case the insured (Thiess) contended
they were able to obtain progress payments from their insurer
(Zurich) for construction work undertaken by them after a tunnel
Appellant's Submissions – a separate construction
Theiss submitted that a separate construction contract between
them and Zurich existed within their contract of insurance. It was
submitted that the obligation to take "all reasonable
precautions" to safeguard the insured subject matter and to
prevent loss or damage would, in certain circumstances, include the
need to carry out construction work.
Primary Judgment – the commercial purpose of this
The appellant's submissions were rejected in the first
instance. Justice Bergin based her decision on the fact that the
clause must be read to give effect to the commercial purpose of the
contract (Legal & General Insurance Australia Ltd
–v– Eather  6 NSW LR 390 at 405 McHugh
JA). Her Honour ruled that the commercial purpose of this
policy was to provide indemnity for the insured on the terms and
conditions included in the policy. The clause was not an agreement
for the insured to carry out construction work for the insurer, but
an agreement that construction work carried out for the
principals/owners had to be done in a particular manner to qualify
for indemnity under the insurance policy. The insured was required
to take "reasonable precautions" in order to qualify for
indemnity under the policy.
The judgment of the Court of Appeal was delivered by their
Honours Justice of Appeal MacFarlan, President Allsop and Acting
Judge of Appeal Sackville agreeing. His Honour Justice MacFarlan
agreed with the reasoning and conclusion of Justice Bergin.
His Honour Justice MacFarlan decided that the critical question
was whether the requirement for the insured to take
"reasonable precautions" constituted a condition
precedent to the insured's right to indemnity or whether it
embodied a contractual promise by the insured to take the steps.
His Honour noted that the proper approach to construction of an
insurance policy is to give it a business like interpretation
(McCann –v– Switzerland Insurance Australia
Ltd  HCA 65, per Gleeson CJ; affirmed in CGU
Insurance –v– Porthouse (2008) 235 CLR
103, at ).
His Honour ruled that the commercial purpose of the policy was
to provide indemnity against certain loss and damage. It was not to
enable the insurers to procure the performance of construction
work. The requirement to take "reasonable precautions"
was designed to protect the insurer by limiting it's
obligations to indemnify the insured. The insured's policy made
it clear that compliance with the terms, conditions and limitations
of the policy was a condition precedent to any liability of the
insurers to make payment under the policy.
His Honour's final test in determining whether there was a
promise to carry out construction work was asking whether the
insurers would have been able to sue the insured for damages if the
insured failed to take the reasonable precautions required by the
insurance contract. In his Honour's view it is clear that they
could not as this would not be in conformity with the commercial
purpose of the policy.
The appeal was dismissed.
Conclusion – a separate contract of construction does
It is clear that the duty to take reasonable precautions to
avoid and/or minimise loss can cost an insured money out of its own
pocket. It is more to the point though, that the obligation to take
these precautions is a condition precedent to the liability of the
insurer under the policy. We observe that, because the liability of
the insurer has not arisen until the condition is satisfied,
section 54 cannot be availed by the insured to access the policy
New South Wales legislation protecting parties who undertake
construction work, specifically the Building and Construction
Industry Security of Payments Act will not apply between the
insurer and the builder. The builder will not be entitled to
progress payments from the insurer.
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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Contractors and principals should ensure they have appropriate insurance coverage instead of relying on indemnity clauses.
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