In Thiess Pty Ltd & Anor v Zurich Specialties London Ltd & Anor  NSWCA 47, the New South Wales Court of Appeal strongly supported the argument that an 'all reasonable precautions' clause in a construction insurance policy is merely a condition precedent to the insured's right to indemnity under the policy rather than it being a separate 'construction contract' captured by security of payments legislation.
The issue before the Court was whether a construction risks insurance policy issued for construction work contained a 'construction contract' within the meaning of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act).
Thiess had taken out a construction risks policy (Policy) with Zurich for work on the Lane Cove Tunnel in Sydney, New South Wales. The Tunnel collapsed in November 2005 following which Thiess sought to obtain progress payments from Zurich for construction work carried out by Thiess. Thiess argued that the Policy contained a 'construction contract' under the Act and that accordingly it was entitled to progress payments. Thiess was not successful at first instance and subsequently appealed.
Policy and legislation
Section 4 of the Act states that:
'Construction Contract means a contract or other arrangement under which one party undertakes to carry out construction work, or to supply related goods and services, for another party.'
Section 7(2)(a) of the Act states that the Act does not apply to:
'a construction contract that forms part of ... a contract of insurance under which a recognised financial institution undertakes: ...
(iii) to provide an indemnity with respect to construction work carried out, or related goods and serves supplied, under the construction contract, ...'
Clause 18 of the Zurich Policy stated:
'Project Deed Compliance
Insurers agree that they are aware of the obligation imposed on Insureds #1 and #3 by the project deed and other contracts for the Project that specifies that Insureds #1 and #3 must – following loss or damage to the Subject Matter Insured for Section I:
(a) subject to allowing reasonable time for inspection by
Insurers, take immediate steps to clear any debris and begin
initial repair work;
(b) promptly consult with Insured #2 and carry out such steps as are necessary to ensure the prompt repair or replacement of the Subject Matter Insured so that it complies with contractual requirements, disruption of the Project is minimised and Insureds #1 and #3 continue to comply with their contractual obligations to the greatest degree possible.
Notwithstanding the above, the Insured shall take and cause to be taken all reasonable precautions to safeguard the Subject Matter Insured and to prevent loss or damage. The Insured shall also afford reasonable facilities for Insurers' representatives to examine any of the Subject Matter Insured.'
Thiess argued that the Zurich Policy contained a separate construction contract arising from clause 18. As a consequence, Thiess' case was that it was able to obtain progress payments from Zurich under the relevant provisions of the Act for construction work that Thiess had performed following the collapse of the Lane Cove Tunnel. Essentially, Thiess argued that the obligations in clause 18 of the Policy could include the need to carry out construction work.
The critical question was whether the 'take all reasonable precautions' requirement in clause 18 of the Policy simply constituted a condition precedent to Thiess' right to be indemnified under the Policy, or whether it was a contractual promise by Thiess to take the steps. The parties agreed that in some circumstances, an insurance policy could contain a construction contract. However, Zurich argued that this was not the case for the Policy in question.
The Court held that the commercial purpose of the Policy was to provide indemnity against loss and damage, not to enable the insurers to enter into a separate construction contract with Thiess for the construction works.
Justice Macfarlan held that the requirement to take all reasonable precautions, which could involve the performance of construction work, is designed to protect the insurers by limiting their obligations to indemnify the insureds. His Honour held that the position in this kind of dispute should be determined with regard to the commercial purpose:
'Whether there is a promise, or to use the expression used in the definition of "construction contract" in the Act, undertaking to carry out construction work, can in my view be tested by asking whether the insurers could sue the insureds for damages if the insureds failed to take reasonable precautions as required by clause 18. Clearly, in my view, they could not. That would not be in conformity with the commercial purpose of the policy and is not dictated by any language used by the parties.'
His Honour held that the requirement of reasonable precautions is a condition of the insurer's obligation to indemnify, not a promise or undertaking by the insured to take those steps. Accordingly, the appeal was dismissed.
The case all but closes the door on arguments that the 'all reasonable precautions' clauses in insurance policies are a separate 'construction contract' capable of being captured by the Act. These clauses have to be interpreted in a commercial sense, and as the test put forward by Justice MacFarlan emphasises, unless the clause gives the insurers the right to sue the insureds for damages for failing to take those precautions, it cannot be interpreted as a separate construction contract.
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