A recent NSW Supreme Court decision1 suggests that Australian courts may interpret the phrase “in respect of" property damage in the insuring clause of a liability policy as expanding the scope of cover to include claims for economic loss that are causally connected to property damage. UK courts may take a narrower approach.
The Rail Corporation of New South Wales (Rail Corp) contracted the design and construction of a maintenance centre on its land, through a series of subcontracts, to John Holland Pty Ltd (John Holland).
The maintenance centre required a stormwater detention system which comprised of a large detention tank under a carpark. The drainage for the detention tank was to be provided by plastic cells. John Holland sub-contracted the design of the detention system to Kellogg Brown & Root Pty Ltd (KBR) and the manufacture of the plastic cells to Atlantis Corporation (Atlantis). In early 2013, the carpark collapsed following work undertaken on an adjoining site. The detention tank was subsequently removed and replaced with a concrete tank.
Downer commenced proceedings against Atlantis, KBR and John Holland to recover the costs of replacing the detention tank. Downer alleged the defects in the detention system were the result of poor design and construction, especially in relation to the plastic cells provided by Atlantis.
Atlantis was in administration and its public liability insurer, QBE, was joined to the proceedings in its place. John Holland argued that if it had any liability to Downer, it was entitled to pass this liability on to KBR and Atlantis. KBR pursued a similar claim against Atlantis on that basis that Atlantis would be liable to either John Holland or Downer.
Stevenson J of the NSW Supreme Court held that Atlantis was not liable to any party and the proceedings were dismissed.
The QBE policy
Although it was not necessary to determine the claim against QBE, Stevenson J nevertheless considered whether QBE’s policy would have responded had Atlantis been liable.
The relevant insuring clause was as follows:
“We agree…to pay to You…all amounts which You shall become legally liable to pay as Compensation in respect of...Property Damage…happening during the Period of Cover…and caused by or arising out of an Occurrence in connection with Your Business."
The term “Compensation" was defined in the policy to mean “monies paid or…to be paid by judgment…for…Property Damage".
Did the phrase “in respect of" cover claims against Atlantis by Downer, John Holland and KBR to recover the economic loss they would suffer if liable to compensate Rail Corp for property damage?
Stevenson J noted that there was:
- English authority2 in which the expression “in respect of" property damage in a liability policy was held to be equivalent to “for" property damage, with the result that the policies were construed to be limited to a liability to the owner of the property alleged to be damaged.
- Australian authority3 to the opposite effect, where the full Federal Court accepted that a claim for economic loss under a similar insuring clause could be a claim “in respect of" property damage, provided that the economic loss was sufficiently causally connected to property damage.
Stevenson J held that, had it been necessary to express an opinion on the question he would have followed the Australian authority as he considered it “more persuasive".
He held that the issue did not arise, however, because the definition of “Compensation" meant that the insuring clause covered only legal liability Atlantis may have:
- By reason of a judgment “for" property damage;
- Which judgment is “in respect of" property damage which;
- Happened during the relevant Period of Cover; and
- Was caused by or arises out of an unintended and unexpected event.
As it was common ground that the claims were not “for" property damage the QBE policy would not have responded.
Insurers and policyholders should ensure that the wording of an insuring clause reflects their understanding and intention regarding the scope of cover provided. It is a good idea to check the meaning of an insuring clause by inserting the full definition of defined terms and reading it as a whole.
In the context of liability policies that cover property damage claims, consider whether the intention is to cover claims for economic loss that are causally connected to property damage. If not, care should be given to the use of the phrase “in respect of".