On Christmas Eve in December 2018, cracking was observed in a high-rise, mixed-use residential and commercial building known as 'Opal Tower' (Building) while the project was still in the defects liability period. This lead to the evacuation of residents while rectification works were undertaken.
Various legal actions were brought against parties to the project including the original owner, the developer, the builder, the structural engineer, and the manufacturer of the precast panels, and their respective insurers.
This case involved a claim for indemnification brought by structural engineer, WSP Structures, under the builder, Icon's, policy of public liability insurance (Icon's PL Policy) following settlement of the substantive proceedings.
New South Wales State Government owned Sydney Olympic Park Authority (SOPA) and was the original owner of the land on which the Building now stands.
In March 2014, it procured the development of the Building by entering into a project delivery agreement with property developer Australia Avenue Developments Pty Limited (AAD) and its holding company Ecove Group Pty Limited (Ecove), as guarantor of AAD (together, the Developer).
AAD engaged Icon Co (NSW) Pty Ltd (Icon) for the design and construction of the Building.
Icon engaged WSP Structures as structural engineers (WSPS). WSP Australia (WSPA) is the holding company for WSPS.
Evolution Precast Systems Pty Limited (Evolution) manufactured, supplied and installed precast panels used in the Building.
In December 2018, during the defects liability period, the Building suffered significant structural damage in the form of major cracks leading to the evacuation of residents.
Initial reports identified the failure of hob beams – a beam that sits on the edge of a slab of concrete or pillar – as one of the likely causes of the cracking that developed in the Building.
Various legal proceedings were commenced. These included claims by the Developer (Developer proceedings), by the lot owners of the Building (Class Action proceedings), and by the owners corporation (Owners corporation proceedings).
Builder Icon alleged that design failures by WSPS, including the under-design of the hob beams, led to damage. WSPS alleged that Evolution failed to fully grout the precast panels.
The Opal Tower proceedings
In February 2019, the Developer commenced an action in the Supreme Court of New South Wales against Icon, WSP and others for loss and damage arising from the cracking. Various cross-claims were brought.
Class Action proceedings
In July 2019, a class action was brought by the owners against SOPA, for breaches of the statutory warranties under the Home Building Act 1989 (NSW).
SOPA brought a cross-claim against AAD, Ecove, Icon, and WSP. Those parties brought claims against each other and against Evolution.
In June 2021, Icon and WSP were joined as defendants to the proceedings. The claims against Icon and WSP included breaches of the statutory duty under the Design and Building Practitioners Act 2020 (NSW) and breaches of the Australian Consumer Law (ACL).
Owner's corporation proceeding
In June 2020, the owners' corporation opted out of the Class Action Proceedings and brought its own claim against Icon and SOPA, after independent experts discovered additional defects in the common property.
The Class Action proceedings sought the losses incurred by the apartment lot owners including claims for loss of rent or loss in property value. The owners corporation proceedings focused on the losses suffered to the common property. Both proceedings settled at the same time.
As part of settlement of both proceedings:
- WSPS accepted a liability to pay an amount to Icon. This was paid by WSPA.
- WSPS contributed to settlement of the class action. This was paid by its professional indemnity (PI) insurers.
WSPS commenced proceedings against Icon's PL insurers in the Supreme Court of New South Wales (WSPS proceedings).
The issues under consideration in the WSPS proceedings were:
- Is WSPS an insured under Icon's PL policy?
- If yes, has it already been indemnified by its own professional indemnity insurer?
- Is WSPA the correct applicant to pursue the claim under Icon's PL policy?
- If WSPA made the settlement payment, has WSPS suffered a loss?
Issue 1 - who is insured under Icon's PL policy?
The definition of "insured" in Icon's PL policy extended to include:
- "sub-contractors engaged by any of the above; and/or
- manufacturers and suppliers, but only in relation to their manual on-site activities; and/or
- architects, engineers and other professional consultants, but only in relation to their manual on-site activities; and/or...".
WSPS accepted that it did not fall within item 8 as it performed no on-site manual activities but relied on item 4 – that it was a subcontractor.
The primary insurer conceded that WSPS was a subcontractor, excess insurers did not.
Excess insurers sought to rely on evidence from structural engineer, David Carolan, regarding whether engineers could properly be categorised as subcontractors. On objection from WSPS, the evidence was not permitted.
The court considered Icon's PL policy as a whole including the broad description of the Insured's Business as including "... builders, engineers, construction contractors, project managers, construction managers, property developers, plant and equipment owners/operators and hirers, property owners and occupiers, lessees and lessors ...".
The court concluded that WSPS was an insured under Icon's PL policy because:
"Given the structure of the policy as a whole and the terms in which the definition of insured is expressed in the policy in this case lead to the conclusion that WSP Structures is an insured within item 4 of the definition of insured. It also leads to the conclusion that item 4 should not be read as being subject to item 8. Rather, the interaction between item 4 'and/or' item 8 should be construed to mean that the reference to engineers in item 8 is to engineers who are not subcontractors engaged by an insured to undertake work that the insured is itself contracted to perform".
The reasons given were:
- The use of the words "and/or" at the end of each sub-category meant that a party could fall within one or more sub-category (which excess insurers accepted).
- Items 7 and 8 include identified categories of persons 'but only in relation to their manual on-site activities'. A construction of the term subcontractors as used in item 4 that was so broad as to encompass the categories in 7 and 8 irrespective of whether they were undertaking manual on-site activities would make those provisions redundant. The policy wording was general whereas the schedule was used to "customise the operation of the policy to the circumstances of the particular insured".
- The broad definition of the insured's business in the policy schedule, particularly the inclusion of 'engineers' in that definition, means that there is wider scope for the category of subcontractors in item 4.
- The inclusion of other insureds was seen to be in the commercial interest of the Icon entities (i.e. the named insureds).
- The term subcontractor was used to encompass any party undertaking work that an Icon entity had contracted to undertake. The effectiveness of the policy would be substantially compromised if it did not cover WSP Structures who had been subcontracted to undertake the engineering design obligations of Icon under its own contract.
Issue 2 - does indemnity under one policy prevent an insured from seeking to recover under another policy?
The court found that it is a matter for an insured who suffers a loss covered under two insurance policies to decide whether to pursue a claim to recover a loss under one policy or the other. The court further noted that some policies may have express provisions dealing with what is to occur if an insured has coverage for a particular risk under more than one policy.
The court held:
- There is no inconsistency in pursuing rights under separate policies covering the same risk.
- Section 76 of the Insurance Contracts Act 1984 (ICA) allows recovery from one or more insurers of such amount as will, in the aggregate, fully indemnify the insured.
- Inconsistency only arises when receiving the benefit of the indemnity under one policy and continuing to maintain that there is an obligation to indemnify for the same loss under a second policy.
- If two insurers cover the same risk and the loss has been met by one insurer, the other insurer may plead the indemnity as a valid defence.
In addition, insurers would have a right of contribution under s.76 of the ICA or in equity.
Issue 3 – Is WSPA (who paid the liability on behalf of WSPS) the correct applicant?
No. The policy required the insurers to indemnify "the insured in respect of all amounts which the Insured shall become legally liable to pay". WSPS had the legal liability to pay. Payment by its parent, WSPA, did not satisfy the insurers obligation to indemnify.
Issue 4 – If WSPA paid the liability, has WSPS suffered a loss?
The final question the court was asked to consider was whether the fact that the liabilities of WSPS (including the settlement amounts and legal costs) were met by WSPA meant that there was no longer anything for the insurers to indemnify.
The court determined:
- The payments were not made by way of indemnity.
- The payments were made by a parent to meet the obligations of a subsidiary.
- There was no evidence to suggest that the payments were made to diminish or redress the loss incurred by WSPS.
- WSPA did not have a liability or responsibility to make the payments, it was simply the source of the funds that were used to make the payments to meet WSPS's liabilities.
Accordingly, WSPS was entitled to claim indemnity from the insurers.
In short, the court found:
- Structural engineer WSPS was an insured under Icon's PL policy, even though it carried out no manual on-site activities.
- WSPS could pursue the claim under both its own policy of professional indemnity insurance and Icon's PL policy (but an insurer under one policy may plead the indemnity under the other policy as a valid defence and/or make a claim for contribution).
- Payment of the liability by WSPS's parent company did not discharge the indemnity owed by insurers.
- WSPS had the legal liability to pay. Payment by its parent WSPA did not discharge insurers liability to indemnify.
Take-aways for insurers
The result was that WSPS (but not its parent WSPA) was insured under Icon's PL policy (even though it was not a contracting party to that policy). The decision raises questions of dual insurance, the circumstances in which a non-contracting party (in this case the structural engineer, WSP Structures) may be an insured, and who suffers/may claim for a loss. This will be relevant to both liability and professional indemnity insurers.
What was particularly interesting in this case was the defendants took alternative positions on the proper categorisation of WSPS. The primary insurer accepted that WSPS could be categorised as a subcontractor, the follow-form excess insurers did not. This is perhaps unsurprising because:
- In policies of professional indemnity insurance, cover may be extended to the insured's vicarious liability for the acts, errors or omissions of its contracted consultants, contractors, subcontractors and agents but usually does not extend to cover them or make them an insured. However, the extension of cover will usually be limited to professional liability only.
- Conversely, a liability policy may extend cover for a non-contracting party but indemnity is usually excluded for professional liability.
In other words, cover under liability policies and professional indemnity policies is usually distinguishable by the extent of cover for manual on-site activities compared with professional liability and would therefore usually not cover the same risk.
Consequently, insurers will need to consider the scope of who and what may be covered by its policies.
In the interim, insurers may witness an increase in claims made under multiple policies of insurance, in which case, questions of rights of subrogation and contribution may arise.