The NSW Court of Appeal has considered some interesting issues in the context of a contract works/liability policy. 

The insured constructed a dam to retain stormwater run-off in a catchment pond for a local council.  During very heavy rainfall the water level rose and the dam wall was at risk of failing.  Had it failed there would have been serious flooding of residential areas.  The insured pumped water out of the pond and shored up the dam wall with boulders.

The insured claimed the cost of those exercises ($470,000) from its contract works insurer.  The cost of shoring up the dam wall was accepted, but the insurer said the pumping exercise was not covered because of a dewatering exclusion.

Section 1 of the policy provided cover for material damage to contract works.  The Court declined to extend the cover provided by that section to the expenses incurred in pumping out, and diverting, the water in the pond.  Such expenses were not incurred in the repair of the insured works.

However, the Court decided that such expenses were covered by an extension to section 1 which covered expenses necessarily incurred for shoring up, or other temporary protection of, insured property so as to avoid further loss to insured property occurring.

The policy excluded costs associated with the installation and operation of dewatering equipment or any other costs of dewatering operations.  The insurer argued that dewatering operations means ‘moving water from a place’.  The Court thought that such interpretation was too wide.  It concluded that in this context dewatering meant 'removing water from a particular place so as to enable an activity or work to proceed in that place.'  None of the claimed dewatering expenses fell within the scope of such meaning, and so the exclusion did not apply.

Section 2 of the policy provided liability cover.  There was a condition that, in the event of an Occurrence, the insured should at its own expense take immediate action to minimise the damage.  The insured argued that there should be implied into the policy a term that the insurer would cover expenditure incurred by the insured to avoid loss, damage or liability which would otherwise have been incurred.

The Court noted that there is no legal authority in Australia (or in England) for implying such a term.  Further, in this case, to imply such a term would be inconsistent with the express condition in the policy requiring the insured to take action at its own expense.

Finally, in the context of deciding what was the applicable deductible, the Court decided that although the rainfall was torrential, that did not amount to a storm or tempest.

Vero Insurance v Australian Prestressing Services

Ever since the 1974 High Court decision of Guardian Assurance v Underwood Constructionsthere has been a query whether there can be implied into insurance policies a term to the effect that expenditure incurred by an insured to avert a loss is covered.  The NSW Court of Appeal does not support the implication of such a term.  This decision also provides a useful discussion about the meaning of ‘dewatering’ in the context of a construction risk policy.