In the Full Federal Court decision of Liberty Mutual Insurance Company Australia Branch trading as Liberty Specialty Markets v Icon Co (NSW) Pty Ltd  FCAFC 126 given on 20 July 2021, the Full Court addressed the construction and scope of thirdparty liability policies in the context of claims made by a building and construction company for losses occurring as a result of the manifestation of serious defects within a building, during the defects liability period.
Building and construction company Icon Co (NSW) Pty Ltd ('Icon') entered into a design and construct contract ('the Contract') in October 2015 to build the now infamous Opal Tower, a 37-storey mixed residential/commercial development property at Sydney Olympic Park. The contract provided for a 12 month defects liability period following Practical Completion, which occurred in August 2018.
On Christmas Eve 2018 (after Practical Completion, but during the defects liability period), serious defects including major cracks in wall panels, floor slabs and hobs occurred ('the Incident'). As a result, residents of the building were evacuated whilst rectification works were undertaken.
The proceedings in the Federal Court related to the disputes between Icon and its two thirdparty liability insurers: Liberty Mutual Insurance ('Liberty') and QBE, who both declined to indemnify Icon for the Incident.
Decision at trial
In relation to the Liberty policy, Icon argued that a Condition within the policy, when engaged, effected Contracts Commencing cover - such that within the terms of the policy, in each policy year, Icon obtained cover for all contracts declared in the relevant policy year for the life of those contracts and, most importantly, during the defects liability periods of those contracts.
Icon also argued that if it was not entitled to indemnity under the written terms of the policy, as properly construed, it was entitled to have the policy rectified in order to give effect to the common intention of Icon and Liberty (this being that the policy would act as a Contracts Commencing policy and so provide cover during the defects liability period).
The Primary Judge was not persuaded that the Condition in question could be read in such a way as to give effect to Contracts Commencing cover. However the Primary Judge did accept that the parties had a mutual intention that Contracts Commencing coverage was to be given, and declared that the Liberty Policy be rectified to reflect the common intention of the parties.
He therefore held that cover under the Liberty Policy extended to the Incident, which occurred during the defects liability period.
As to the QBE policy, the Primary Judge accepted that the Opal Tower and its component parts were a "Product" as defined by the policy, and that the policy responded to the Incident. The Primary Judge also categorised the contract under which Icon was insured by QBE to be a "Completed Operation", and therefore found that the exclusions under the policy did not apply.
Icon argued that the Primary Judge erred in his interpretation of the Condition, and submitted that the Condition was textually clear and extended cover to the defects liability period for contracts that were incomplete at the date of expiry, so long as the appropriate instructions were given. Icon further submitted that this interpretation of the Condition was consistent with the commercial purpose of the insurance required by it as a commercial construction contractor, whose risks and liabilities extended to the defects liability period.
In the event of ambiguity in an insurance policy, the Full Court held that it should be resolved by having regard to the context (including the market) in which the parties are operating. The Full Court agreed with Icon in respect of the commercial purpose of the insurance.
The Full Court allowed the cross appeal finding that Icon had obtained run-off insurance cover from Liberty under Condition 15 of the policy for the Opal Tower. As a consequence, it held that cover under the Liberty Policy extended to the Incident which occurred during the defects liability period.
Having allowed the Appeal, the Full Court was not required to resolve Liberty's Appeal other than by setting aside the orders made by the Primary Judge - as they were inconsistent with Icon's rights under the subject Condition and success on the cross-appeal. However, the Full Court did address the Appeal of Liberty and ultimately held that the finding that the parties knew of each other's intentions, and that the Contracts Commencing intention was commonly held, was clearly available to the Primary Judge.
QBE argued that the Primary Judge erred in finding that the Opal Tower, hobs, slabs and walls subject to the defects were each a "Product" within the meaning of the QBE Policy.
QBE submitted that the Full Court should consider the absence of terms encompassed in the definition of the "insured's business", including "builds" and "constructs" from the definition of "Products" to find that the definition of "Products" had been deliberately designed to exclude a whole building.
QBE argued the relevance of this distinction was that the risk of liability for 'Completed Operations' arose from projects that were complete, handed over and notably where Icon's responsibility arising from contractual terms imposing a defects liability period had expired. This construction would find that QBE could escape liability.
Conversely, Icon submitted that if there had been an intention to exclude a whole building from the definition of 'Product' then one would expect a clear statement to that effect.
The Full Court found the absence of words clearly denoting the building and construction process to be significant although not determinative. The Full Court relied on the findings in HDI Global Speciality SE v Wonkana No. 3 Pty Ltd  NSWCA 296  to find that where words are ambiguous, the context of the agreement must be analysed.
As such, The Full Court turned to the context of the QBE Policy as a whole, considering the distinction between "Product" and "Completed Operations", as well as the applicable exclusions under the Policy.
The Full Court found that the Primary Judge erred in finding that the definition of "Completed Operations" was not made redundant by the Primary Judge's definition of "Product". The result of this error led the Primary Judge to dismiss the significance of the distinction between "Completed Operations" and "Products" as they relate to the exclusions.
The Primary Judge held that the exclusions would not apply to construction contracts, and that the contract itself was a "Completed Operations" - and therefore did not consider the exclusions which it found to only apply to a "Product".
The Full Court accepted QBE's submissions that where the word "Product" can be extended to completed buildings, and liability in respect of a "Completed Operations" is in connection with defective building work, the exclusions must apply.
The Full Court ultimately allowed the Appeal on the basis that the Primary Judge should have considered the contextual background in circumstances where the meaning of ordinary words were not clear.
Key Take Away
- The Full Court maintained that in the event of ambiguity in an insurance policy, the context (including the market) in which the parties are operating, as well as the commercial purpose of the policy, must be considered (Icon's Cross Appeal); and
- Similarly, the Full Court considered that the context of Insurance Policies must always be considered in circumstances where the definition of ordinary words are not clear (QBE Appeal).
- The Full Court ultimately prefers Policy Interpretation which refers to extrinsic contextual material where Policy terms are not clear.
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