Catchwords

Insurance – Home Building Act 1989 (NSW) – Home Building Regulation (NSW) – proper construction of indemnity – whether condition precedent to liability established – meaning of 'structural defect' and 'structural element of a building'

Significance

In this case, the court found that an obligation under the terms of an indemnity to give notice of a proposed settlement may require the indemnifying party to be given the opportunity to consider the amount of the proposed settlement and take steps before a settlement is agreed. The court also considered the meaning of 'structural defect' and 'structural element of a building' as used in the Home Building Regulation 1997 (NSW) (Regulation). Although the Regulation has been repealed, the judgment may assist parties in negotiating contracts that use the phrase 'structural defect'.

Facts

Mr Laurence Kalnin developed a property through Kalnin Corporation Pty Ltd (developer). The developer engaged Definite Dimensions Pty Ltd (builder) to carry out the development.

The builder sought insurance—as required by the Home Building Act 1989 (NSW) (Act)—from AAI Ltd trading as Vero Insurance (Vero). Vero issued an insurance policy on the basis that Mr Kalnin and the developer executed an indemnity (Indemnity) in Vero's favour covering all claims, payments, costs and any other expenses, losses and damages resulting from the builder's acts or omissions and a claim by an insured under the policy.

The development was completed in 2004. In 2009 (after the expiry of the two-year period of insurance cover for non-structural defects but within the six-year period of insurance cover for structural defects), the owners corporation of the property (owners corporation) made a claim against Vero under the insurance policy in relation to allegedly defective work. By this time, the builder had gone into liquidation.

Vero notified Mr Kalnin and the developer of the claim, but did not contact Mr Kalnin again until February 2013, by which time Vero had agreed to settle the owners corporation's claim. Vero ultimately paid $4.232 million in respect of remedial works and sought to recover that sum from Mr Kalnin and the developer under the Indemnity.

Amongst a number of other issues, the court considered whether Vero had satisfied its obligation under clause 6(b) of the Indemnity to notify Mr Kalnin and the developer 'promptly of the proposed settlement' of the owners corporation's claim. Vero accepted (consistent with Victorian and Western Australian case law in respect of identical clauses in other Vero insurance policies) that compliance with clause 6(b) of the Indemnity was a condition precedent to Mr Kalnin's and the developer's liability to indemnify Vero.

Decision

The court found that Vero had failed to satisfy the condition precedent in clause 6(b) of the Indemnity and that this 'of itself, [was] an answer to Vero's claim'. Stevenson J held that the purpose of clause 6(b) of the Indemnity was to give Mr Kalnin and the developer the opportunity to consider the amount of the proposed settlement and to take steps (eg debate the amount of the proposed settlement or seek alternative means to resolve the claim) before any settlement was finally struck. His Honour noted that Mr Kalnin had taken a number of steps in 2009 to arrange for the defective work to be rectified, including engaging Brian Carpenter (a licensed builder and the former principal of the builder) to rectify the defects at no cost. However, Mr Kalnin heard nothing from Vero for over three years between the end of 2009 and February 2013, by which time the settlement with the owners corporation had already been agreed. Vero had therefore failed to comply with clause 6(b) of the Indemnity.

Stevenson J also considered the meaning of 'structural defect' and 'structural element of a building', as used in the Regulation. His Honour found:

  • a 'structural defect' must be a defect in a 'structural element of a building'; and
  • the phrase 'structural element of a building', when used in the Regulation, refers to load-bearing components of a building that are essential to the building's stability. However, the phrase does not capture elements of a building (eg waterproofing membrane) that are attached to load-bearing components but do not themselves play any role in promoting the structural integrity of the building.

Despite Stevenson J's conclusion that Vero had not complied with the condition precedent in clause 6(b) of the Indemnity, his Honour concluded his judgment by inviting Vero to identify any evidence that proved that the payments it made to the owners corporation were in respect of structural defects in the building which resulted from an act or omission of the builder.