The Queensland Supreme Court had to consider whether an excavation contractor's losses were covered under its subcontractor's insurance policy and whether following a complex regime of settlements, the excavation contractor was entitled to indemnity as an assignee under the subcontractor's policy.
- Interpretation of Professional Indemnity insurance policy
- Assignment of right to indemnity
- Liability of insurer to assignee of insured’s right
In May 2006, Queensland Investment Corporation (QIC) engaged Delta Pty Ltd (Delta) to undertake excavation works on QIC’s land. In September 2006, QIC contracted with Watpac as builder and novated the contract with Delta so that Delta was in a contractual relationship with Watpac. Delta engaged Team Rock Anchors Pty Ltd (TRA) as a subcontractor to install anchors and walers (horizontal beams between piles) to secure the retaining walls for the basement excavation. However the installation of anchors by TRA was deficient and the defects ultimately required Delta to backfill the entire excavation and to essentially begin the excavation process again.
Delta and Watpac both suffered significant financial loss and delay. Watpac claimed its losses from Delta as a set-off against the contract price for the excavation contract. This claim was settled by deed in 2010.
Delta then claimed against its insurer, HSB Engineering Insurance Pty Ltd (HSB) to recover its own losses and the amount of the settlement of Watpac’s claim. The claim against the HSB policy was settled, with HSB paying part of Delta’s claim.
Delta sued and then settled with TRA on terms that TRA agreed to pay damages, the settlement sum being limited to the amount actually recovered by Delta from TRA’s insurer, Mecon, as an assignee of TRA’s rights under that policy.
Mecon was joined to the TRA proceedings as a further defendant. Delta alleged that it was an insured under the Mecon policy and entitled to be indemnified for its own rights and interests. It also prosecuted TRA’s claim for indemnity under the Mecon policy, as TRA’s assignee. The losses claimed by Delta against Mecon were the residual amount of its own losses and the Watpac claim which were not paid by HSB or TRA in the two settlements.
The court found that Delta was an insured under the Mecon policy, by virtue of the meaning of “Insured” extending to principals – which included Delta, as the entity which engaged TRA.
The first part of Delta’s claim under the Mecon policy was for the shortfall between the payments to which it was entitled under the excavation contract and the amount agreed to be paid in the settlement with Watpac. Delta alleged this amounted to “Property Loss” (“physical loss, damage or destruction of tangible property including resultant loss of use of such property…”) as defined by the Mecon policy.
Delta argued that were it not for TRA’s defective installation of the ground anchors, it would have been paid the additional amount under its contract with Watpac, using the original contract price as evidence of its entitlement. The court rejected this argument, stating that Delta did not show that it had ever become liable to pay any sum as compensation, and thus the insuring clause in the Mecon policy was not triggered.
In addition, Delta’s costs and damages resulting from the delay and cost of rectification work constituted economic loss, rather than “Property Loss”. The court also held that movement of a wall cannot be loss or damage to tangible property – the movement of a wall may cause damage to other property, but is not loss and damage in and of itself. Delta had not established that “Property Loss” had occurred or was the cause of the amounts it claimed against Mecon.
Delta additionally brought a claim for “costs incurred for temporary protective repairs undertaken to prevent any immediate threat of Property Loss or Personal Injury”, seeking indemnity for the cost of complying with Superintendent directions to backfill the site. However, the court construed the clause to relate only to costs incurred to prevent or minimise “Property Loss” for which Delta could have become legally liable – costs which would ordinarily only arise in situations of immediate threat. In any event, the court noted that Delta had been paid a substantial sum by HSB for the cost of the work required to protect the site following the anchor installation. As Delta had recovered its loss from one insurer (HSB) it could not recover the same loss from another insurer (Mecon).
Although Mecon argued that the TRA’s rights under the Mecon policy could not be assigned to Delta, the court indicated that while the primary obligations under a policy cannot be assigned, secondary rights (i.e. the right to be indemnified) can be.
Delta argued that TRA’s obligations under the settlement deed between Delta and TRA was a liability to pay “compensation for Property Loss”. However, Mecon submitted that the settlement deed provided that TRA would become liable to pay “on demand” and no demand had been made by Delta. In other words, Delta had not established that TRA had become “legally liable”.
The court agreed with Mecon. Because of the terms of the settlement deed and the fact that Delta had taken assignment of TRA’s right to indemnity, if Delta recovered any amount as TRA’s assignee, it would be a result of judgment in the proceedings – that amount would be paid directly to Delta, meaning that there would never be any funds in the hands of TRA in respect of which Delta could make a demand to pay. The net result of this technical circularity was that TRA could never have a liability to pay compensation, so that the insuring clause in the Mecon policy was not triggered.
As an additional point, the court found that Delta had failed to establish that the settlement agreed with TRA was a reasonable evaluation of TRA’s prospects in Delta’s claim against it and this additionally went against establishing that the settlement deed amounted to a liability to pay within the meaning of the Mecon policy insuring clause.
Implications for you
There are three points to note from this decision. First, the court had to examine a complex regime of settlements in order to arrive at the true picture of Delta’s position. The case demonstrates how the courts will look at the true effect of settlement agreements to establish a party’s entitlement to the loss it is claiming. Second, the case is an important reminder of the principle that an insured cannot recover the same loss from two different insurers and how that principle is applied in practice. Third, care is required when drafting settlement agreements that involve the assignment of a right of indemnity under someone else’s policy of insurance. Such arrangements can be fraught.