In February 2018, we wrote about the decision in Rushleigh Services Pty Ltd v Forge Group Limited (in liquidation) (receivers and managers appointed)  FCA 26 and the Federal Court’s application of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (Third Party Claim Act). Since then, the Third Party Claim Act has continued to create disruption in the insurance world – most recently this month with a further decision granting leave to a party to bring a direct action against a company’s insurers where the (insured) company was in liquidation.
This decision highlights issues faced by insurers in relying on exclusion clauses (even ones that are broadly drafted) to escape the operation of the Third Party Claim Act. It also raises tactical questions for insurers – whether to argue the operation of an exclusion at the interlocutory or final hearing. This decision will surprise some insurers as, on its face, it is a claim which an insurer would likely have denied in whole.
Murphy, McCarthy & Associates Pty Limited (MMA) was granted leave to bring a direct action against Zurich Australian Insurance Ltd (Zurich), the insurer of CFC Fibre Cement Pty Ltd (CFC) which was placed into liquidation on 14 September 2017. Pursuant to the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (Third Party Claim Act), Zurich now stands in the place of CFC, against which MMA has brought claims for damages in contract, tort and under the Australian Consumer Law in connection with waterproofing and coating the internal walls of a well at Balmain.
MMA had been retained by Sydney Water to install the well and subcontracted the coating work to CFC. An inspection revealed significant defects with the coating and MMA subsequently gave notice to CFC of the defects. When CFC did not remedy the works, MMA engaged a third party, Eptic Services Pty Ltd (Eptec), to carry out remedial works. The sub-contracting of the works to CFC proved to be critical in the Court’s consideration.
CFC held a Business Insurance Policy (Policy) with Zurich, which provided cover for property damage (as defined in the Policy). Zurich accepted that at least part of MMA’s claim was arguably in respect of a sum for which CFC would be legally liable to pay for compensation in respect of property damage, as defined in the Policy. Zurich’s position was that the Policy did not respond as the claim fell foul of one or more of the exclusions.
Analysis of the decision
Justice Hammerschlag observed the requirement for the party to apply for leave with the Court before being able to bring a direct action against the insurer is “one imposed to insulate insurers against untenable claims.” On this occasion, the only issue for the Court to determine was whether it was arguable that the Policy would respond to the claimed liability of CFC to MMA (if not then leave should be refused). That is because according to section 5(4) of the Third Party Claim Act, leave must be refused if the insurer can establish that it is entitled to disclaim liability under the Policy or any Act or law.
Zurich argued that a number of exclusion clauses applied but each argument was rejected by the Court. The exclusion clauses relied upon were broadly drafted. In exercising the Court’s discretion, Justice Hammerschlag was satisfied that MMA had an arguable case and that its claim was not excluded by any of the exclusions in the Policy as argued by Zurich. A summary of the Court’s analysis is below:
- Product Efficacy Exclusion: the Policy excluded indemnity for property damage which was caused by a failure of MMA’s products to cure, alleviate, prevent, monitor, detect, eliminate or retard, as expressed, implied, warranted or represented to MMA. It was found to not apply because the damage to the well was not the result of MMA’s failure in accordance with the Policy, but by CFC’s defective workmanship it the application of the waterproof coating.
- Contractual Liability: A garden-variety contractual liability exclusion was included in the Policy. His Honour rejected Zurich’s reliance on this exclusion primarily because it was arguable that the liability or obligation of CFC to MMA was not one which was assumed by it under their contractual agreement, but also because MMA has non-contractual claims.
- Damage to products: the Policy excluded property damage to products if the damage is attributed to any defect in them. Justice Hammerschlag found that the damage was not damage to a product (as the well itself was unlikely to be construed as a product) and the cause of the damage was arguably attributable to the faulty application of the waterproof coating, not to the product itself.
- Faulty workmanship: the Policy excluded indemnity for the cost of performing, correcting or improving any work undertaken by MMA. The reliance on this clause was rejected as it was arguable that the amount claimed was not for the cost of work undertaken by CFC (which had already been done and was of no value) but was for the work undertaken by Eptec in its place.
- Loss of use: the Policy excluded loss of use of tangible property. His Honour found that it was not a claim for loss of use and not a claim resulting from delay. Further, the Court considered that this was arguably not a loss resulting from lack of performance (as opposed to defective performance).
- Product guarantee: the Policy excluded indemnity for any products warranty or guarantee given by MMA. Justice Hammerschlag held that it was not a claim under any product warranty or guarantee given by CFC to MMA.
This decision should put insurers on notice. Whilst Courts must refuse leave if any exclusion under the contract of insurance applies, this case illustrates that the “exclusion bar” is a high one for insurers. It is a useful reminder to insurers that they must be careful in drafting exclusion clauses. Whilst his Honour noted the requirement to apply for leave being to protect the insurer from untenable claims – the decision reflects the focus of the Third Party Claims Act is ultimately to protect the ability of a wronged person/entity to bring a claim.
Also of interest will be how the Court determines any ultimate proceedings. Having arrived at the decision that Zurich was not able to disclaim liability, and that none of the exclusion clauses apply, it may be difficult for a later Court to determinate otherwise on policy response at a final hearing. That raises a tactical consideration for insurers – argue the applicability of exclusions at an interlocutory stage when all facts and evidence may not be available or keep that powder dry until the final hearing.