WA District Court finds that general condition in policy was not breached and exclusion clauses do not apply such that the policy covered the insured's liability to the plaintiffs immediately before its deregistration.

In Issue

  • Whether the policy covered the insured’s liability immediately before deregistration.
  • Whether the insurer was liable to indemnify the deregistered insured company pursuant to the policy.
  • Whether the insured breached the general condition in the policy requiring it to comply with relevant Australian Standards.
  • Whether the products and workmanship exclusions in the policy applied to the plaintiff’s claim.

Background

Boss Shop Fitting Pty Ltd (the insured) fitted out the plaintiffs’ restaurant premises known as ‘Tony Roma’s’ in Perth in 2007 and 2008. The insured undertook to complete all of the plumbing as part of the fit-out but that work was completed by a sub-contract plumber.

Due to problems with the fitout by the insured, the plaintiffs had to completely shut down the restaurant in 2013 for repairs and a refit. The cost of repairs was significant and the plaintiff also incurred a loss of trade as a consequence. The plaintiffs made a claim against the insured for damages for negligence and breach of contract. The insured made a claim on its policy with the defendant seeking cover for the plaintiffs’ claim. The insured went into liquidation and was subsequently deregistered. The plaintiffs then sought payment of the claim from the defendant pursuant to the Corporations Act 2001 (Cth) on the basis that the policy covered the liability immediately before the insured’s deregistration.

The defendant conceded that the insured was negligent. There was therefore no issue that the insured had a liability to the plaintiffs. The principal issue was whether the defendant was liable to indemnify the insured pursuant to the policy.

Policy

The policy between the defendant and the insured was described as a ‘commercial plan insurance cover’ which consisted of a number of different policies covering a range of risks including a business liability policy. The general conditions which applied to all of the policies provided that the insured must comply with legislation and Australian Standards. The general condition was expressed in absolute terms. By way of contrast, other general conditions in the policy were premised on the exercise of reasonable care. The policy also included exclusions for products and workmanship.

Decision

Based on expert evidence, there was no doubt that the plumbing work carried out by the sub-contract plumber did not comply in many respects with the relevant Australian Standards dealing with plumbing work. The defendant argued that the general condition had been breached and it was entitled to refuse indemnity for the whole of the plaintiffs’ claim. The defendant also argued that there were certain heads of damages in the plaintiffs’ claim which fell within the products and workmanship exclusions.

Having regard to the natural and ordinary meaning of the general condition, read in light of the policy as a whole, giving due weight to the context in which the clause appeared including the nature and object of the business liability policy, the trial judge was not satisfied that any breach of the general condition entitled the defendant to refuse indemnity.

The trial judge held that the policy did not expressly state that compliance with either the general conditions as a whole or the general condition in particular was a condition precedent to indemnity. The trial judge found that the effect of a breach of the general condition was uncertain and that lead to ambiguity in the policy. Having regard to the terms of the policy, the trial judge found that it would be inconsistent with its commercial purpose and the terms of the insuring clause to interpret the general condition as the defendant argued. The trial judge held that the general condition should be read down and construed it to imply in its terms that the insured must “take reasonable care to” comply with the relevant Australian Standards.

The issue was then whether the insured acted recklessly (or deliberately courted the danger) when it breached the general condition. As a reasonably competent builder would not have been aware of the defective work performed by the sub-contract plumber, the trial judge was satisfied that the insured’s conduct was not reckless. The defendant was therefore not entitled to refuse indemnity on the grounds of the breach of the general condition.

The trial judge further held that the products and workmanship exclusions also did not apply. Dealing first with the products exclusion, the trial judge determined that this was not a case of goods which had failed, or defective goods. Rather it was a case of a failure to properly perform a fitout, in particular, failure to properly carry out the plumbing work. The trial judge held that the natural and ordinary meaning of the workmanship exclusion was that it was only the cost of re-doing or correcting poor workmanship which was excluded from the policy and the exclusion did not apply to consequential damage.

The trial judge was satisfied that the policy covered the insured’s liability to the plaintiff immediately before deregistration and awarded judgment to the plaintiff in the sum of over $1.6 million plus interest.

Implications for you

In considering whether there has been a breach of a general condition, a court will have regard to the natural and ordinary meaning of that condition read in light of the policy as a whole, giving due weight to the context in which it appears. It must be clear that the common intention of the parties to the policy was that there will be no liability on the insurer to indemnify unless the general condition is complied with. That common intention must be evidenced by an explicit statement that strict compliance with the general condition is a precondition to the insurer’s liability.