Liberty Mutual Insurance Company Australian Branch t/as Liberty Speciality Markets v Icon Co (NSW) Pty Ltd [2021] FCAFC 126

Andrew Hales, Emily Miers, Paige Freeman

Key takeouts

This case reiterates the importance of providing due consideration to terminology used in construction insurance policies to ensure that the cover sought is captured.  The terms of market specific insurance policies need to be interpreted as a whole to bring about a reasonable and commercial result.

Participants in the construction industry should check their existing third party liability insurance policy wording before renewal to see whether it actually covers them for the risks they intend to be covered, especially in respect of the definition of ‘Product’ where the absence of words such as ‘built’ or ‘constructed’ may be significant.

Facts

The first instance decision was covered in our November 2020 to January 2021 edition of Construction Law Update.  In summary, Icon Co (NSW) Pty Ltd (builder) was the contractor for the residential and commercial development known as the Opal Tower at Sydney Olympic Park (Opal Tower).  The builder commenced building on 16 November 2015 and achieved practical completion on 8 August 2018, at which point the project entered a 12-month defects liability period.

On 24 December 2018, within the defects liability period, cracks were observed at the Opal Tower, forcing residents to evacuate (the incident).  Following the incident, the builder re-entered the site and undertook all necessary rectification works.  In July 2019, a class action by the residents of Opal Tower was commenced against the Sydney Olympic Park Authority who in turn, and amongst others, filed a cross-claim against the builder.

In the first instance proceedings in the Federal Court of Australia, the builder sought declarations against two insurers, the first respondent (Liberty) and the second respondent (QBE), with which it placed third party liability insurance policies through its broker in September 2015 and September 2018 respectively.

The relevant period covered by the policies differed, with the 2015/16 Liberty policy (Liberty Policy) being current at the time of the commencement of the Opal Tower contract while the QBE policy covered the period from 20 September 2018 to 31 December 2018 (QBE Policy).

Both Liberty and QBE denied the builder indemnity for the incident and, as a result, the builder sought declarations designed to progress its claims for indemnity against both insurers.

First Instance Decision

The Federal Court of Australia found in favour of the builder under each of the policies of insurance but on different grounds.

Claims against Liberty

The court held that the Liberty Policy was to be rectified to reflect the intention of the parties by including an endorsement extending the period of coverage of the Liberty Policy, in turn covering a period that would entitle the builder to coverage for the incident.

The parties’ dealings disclosed a common intention by each of the agents that the Liberty Policy operate as a ‘contracts commencing’ rather than a ‘turnover’ policy, thereby extending coverage for the defects liability period for projects commencing in the relevant insurance period.

The court dismissed the builder’s claim that, without rectification, on a proper interpretation of the Liberty Policy, it was a ‘contracts commencing’ rather than a ‘turnover’ policy.

Claims against QBE

The court held that the QBE policy extended to the incident at Opal Tower, because the building was a ‘Product’ within the meaning of that term in the QBE Policy.  This was on the following basis:

• as a construction company, the builder erected buildings which it supplied to its clients, which was covered by the definition of ‘product’ in the QBE Policy;
• the Opal Tower fell within the ordinary meaning of ‘product’, being a thing produced by any action or operation, or by labour; and
• QBE’s construction of the policy would produce an odd result, contrary to the parties’ intention, that there would be no cover for projects that had been completed and handed over to the principal, but for which the maintenance / defects liability periods had not expired.

Decision

Claims against Liberty

Liberty appealed the first instance decision, that the Liberty Policy required rectification, to the Full Court of the Federal Court of Australia.  The builder cross-appealed on its claim based on the proper construction of the Liberty Policy.

The builder’s cross-appeal

The builder argued that the proper interpretation of the terms of the Liberty Policy as a ‘contracts commencing’ policy could be determined by reference to the policy itself, and that the trial judge did not need to find that the Liberty Policy required rectification.

The court ultimately held that the policy was sufficiently worded to permit the insured to give instructions for each contract commencing in the policy year to be covered, upon the payment of an agreed additional premium.  In reaching this conclusion the court held:

• a businesslike construction of the Liberty Policy was to be preferred (to produce a reasonable and commercial result as required in determining the operation of insurance policy requirements), to allow contracts that are expected to be incomplete by the end of the policy year but commencing prior to the expiry, to be insured; and
• the Liberty Policy could be construed harmoniously and without commercial inconvenience to provide:
• annual turnover cover with run off cover that can be used in such manner as the insured may choose;
• run off cover to a program; or
• a form of contracts commencing cover upon giving instructions and paying a premium.

Liberty’s appeal

The court made determinations that:

• on the evidence the parties came to know of each other’s intentions, and the finding that the contracts commencing intention was commonly held was available; and
• although there was some merit to the grounds relating to whom the insurer’s agent’s intentions were to be attributed to, it was not determinative of the appeal and on balance should be rejected.

Claims against QBE

The dispute subject to the QBE Policy appeal was whether the Opal Tower (and its component parts) was a ‘Product’ for the purpose of the scope of cover provided under the QBE Policy.

In determining that the Opal Tower (and its component parts) was not a ‘Product’ as that term was defined under the QBE Policy the court:

• considered that the words ‘built’ or ‘constructed’ seemed the most apt descriptors of what a construction company does in relation to a building and the absence of those words in the definition of ‘Product’ was significant, though not determinative; and
• it was contrary to the operation of the QBE Policy as a whole to find that the Opal Tower (and its component parts) could be a ‘Product’ becasue:
  • the use of the terminology ‘Products Liability and/or Completed Operations’, conveyed an intention to distinguish between a ‘Completed Operation’ and a ‘Product’. Were a completed building to be a ‘Product’ for the purposes of the QBE Policy, then the definition and use of ‘Completed Operation’ would be made redundant which would be an error; and
  • some exclusions applying specifically in relation to ‘Products’ and none applying in relation to ‘Completion Operations’, demonstrated that that the parties did not intend the definition of ‘Product’ to extend to ‘Completed Operations’.