Australia: So What Is Accidental Loss Under An ISR Policy?

The Supreme Court of the ACT recently considered the operation and interpretation of a perils exclusion and accidental damage clause in an Industrial Special Risks (ISR) insurance policy (policy) issued by Suncorp Metway Insurance Ltd (Suncorp). Strategic Property Holdings No 3 Pty Ltd (Strategic) was the insured under the policy.

The policy provided indemnity for the physical loss, destruction or damage to a number of properties, including the Australian Defence Academy complex at Weston Creek.

On 30 January 2006, during the period of insurance, there was a major collapse of a section of the roof at the northern end of the building. It was accepted by the parties that the collapse was a result of faulty workmanship.

Indemnity under the policy for removal of debris, glass repairs and loss of rent was granted by Suncorp. At issue was the following part of Suncorp's response to Strategic's insurance claim:

"...your policy coverage does not extend to cover the cost of replacement of the roof trusses and adjoining supports. The resultant damage to the roof is covered under section 1 of the Policy as it comes within the proviso to section 4(c) and 4(e) of the Perils Exclusions...
Accidental damage is limited to $200,000.00. Our client considers that the roof's collapse comes within the definition of accidental loss, destruction or damage provided in the Policy."

Strategic sued Suncorp seeking several declarations. Gray J held that when Suncorp's response is properly considered, the only declaration which ought to be considered was the declaration that 'the sub limit for "Accidental Damage as Defined" does not apply to the plaintiff's [Strategic's] claim for indemnity'.

Strategic argued that the loss was an excluded peril (despite the proviso applying) and therefore could not fall within the definition of 'accidental' to which the sub limit applied. Suncorp argued that on a proper construction of the policy, the loss fell within the proviso (and was therefore not excluded), and that did not preclude the loss also falling with the definition of 'accidental loss' for the purposes of the sub limit.

In order to address the reasons for his Honour's findings, it is necessary to set out the relevant sections of the policy:

  • The sub limit for ACCIDENTAL DAMAGE AS DEFINED = $200,000
  • The terms Accidental loss, Destruction or Damage shall not include loss, destruction or damage caused by Fire, Lightning, Explosion, Implosion, Smoke, Impact, Aircraft or articles dropped therefrom, Riots, Strikes, Civil commotion, Storm, Tempest, Rainwater, Flood, Water or other Liquid Discharge or Leakage, Sprinkler Leakage, Earthquake, Subterranean Fire, Volcanic Eruption, Malicious [sic] Acts, Burglary, Theft, Breakage of Glass, Transit or any peril excluded by this policy.
  • Clause 4 of Peril Exclusions:

    The Insurer(s) shall not be liable under Sections 1 and/or 2 in respect of:

    physical loss, destruction or damage occasioned by or happening through:
    (a) ....
    (e) faulty materials or faulty workmanship.

    Provided that this Exclusion 4(a) to 4(e) shall not apply to subsequent loss, destruction of or damage to the Property Insured occasioned by a peril (not otherwise excluded) resulting from any event or peril referred to in this exclusion [proviso].

As Suncorp accepted that the resultant damage to the roof fell within the proviso to the Perils Exclusions (and was therefore covered by the policy), the only issue in dispute was whether the sub limit of $200,000 for accidental damage applied to that loss.

His Honour found that the limit for "Accidental Damage" did apply to the resultant loss claimed and refused to make the declarations sought by Strategic. His Honour's reasons were as follows:

  • The definition of 'accidental loss, destruction or damage' under the policy applied to the term 'Accidental damage as defined' for the purposes of the $200,000 limit. His Honour considered that Lord Macnaghten's definition of 'accident' in Fenton v Throley & Co Ltd [1903] (Fenton) as "an unlooked-for mishap or an untoward event which is not expected or designed" was particularly apt to the circumstances of the case.
  • The definition of accidental damage in the policy is non-exclusive and stated what it did not include. The events which are excluded from the definition are what the policy is insuring, albeit, without the sub limit applying.
  • On the other hand, damage occasioned by an event that is not listed, but which can be considered to fall within what is 'accidental' (under Lord Macnaghten's definition), will be covered subject to the limit on the insurer's liability ($200,000). It follows that such an event could include an event which also falls within the proviso to the Perils Exclusion.
  • Strategic's argument that the definition of 'accidental damage' excludes this loss as a loss 'excluded by this policy' was rejected, principally due to the fact that the faulty workmanship, which was the source of the subsequent damage, would not in fact be a "peril excluded by this policy" as it fell within the proviso. The exclusions under clause 4 for damage occasioned by faulty workmanship did not apply to subsequent damage arising from that faulty workmanship.
  • Once it was established that the loss did not fall within the listed losses under the definition of 'accidental loss', the loss then had to fall within the definition of 'accidental' for the sub limit to apply.
  • The damage sustained arose from the 'faulty workmanship' and resulted in a peril that caused a subsequent loss. The subsequent damage however falls within the definition of accidental damage as defined in Fenton. The subsequent damage was not an inevitable consequence of the faulty workmanship causing the damage to the trusses and supports. Therefore, it is accidental damage within the definition and the sub limit of liability applies to it.

Whilst the consequence of faulty workmanship being held to be "accidental damage" might surprise some insurers and insureds alike, given the manner in which the issues of subsequent loss and accidental loss or damage were addressed in the policy, the result is not entirely unexpected or unusual.

Strategic Property Holdings No 3 Pty Ltd v Suncorp Metway Insurance Ltd [2009] ACTSC 8

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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