Drummond v Gordian Runoff Limited ACN 052 179 647 [2024] NSWCA 239

Claire Tait  |  Harkiran Kaur |  Daphne Zhou

Key takeouts

• Beneficiaries of home warranty insurance should take care to notify insurers of a loss that has become apparent during the period of cover in a timely manner, even where an insured event has not yet occurred (ie a builder has not yet disappeared, died or become insolvent).

• Insurers should consider the terms of their policies in the context of this decision, in particular, whether the terms of the policy could be construed as incorporating section 103BB of the Home Building Act 1989 (NSW) (HBA). The effect of this is that section 54 of the Insurance Contracts Act 1984 (Cth) (ICA) may apply to preclude an insurer from refusing an insurance claim on the basis that a beneficiary has failed to notify the claim as required by the HBA.

Facts

On 12 January 2009, the Drummonds (Drummonds) entered into residential building contract with a builder. The HBA applied to the contract. A contract of home warranty insurance (policy) was entered into between the Drummonds and Calliden Insurance Limited (later Gordian Runoff Limited) (insurer). The policy provided cover for loss or damage arising from a breach of the statutory warranties implied into the contract by the HBA in circumstances where the builder is insolvent (among other things).

In January 2017, the Drummonds commenced proceedings against the builder in NSW Civil and Administrative Tribunal (NCAT) for defects. The builder was ordered to rectify the defects. On 18 August 2020 and before the works were complete, the builder was placed into liquidation. This insolvency of the builder triggered the insuring clause under the policy.

On 9 July 2020, the Drummonds provided a notification of loss to the insurer. On 11 December 2020, the Drummonds made a claim under the policy. The insurer rejected the claim in reliance on s 103BB(3) of the HBA (not on the provisions of the policy). Section 103BB(3) provides that when a loss becomes apparent during the period of insurance but a claim cannot be made during that period because an insured event has not occurred, a claim can be made after the period of insurance but only if the loss was properly notified to the insurer during the period of insurance.

The insurer rejected the claim on the basis that the first notification was provided on 9 July 2020 and the period of cover for non-major defects expired on 1 February 2013 (being 2 years after the insurer’s alleged date of completion of the works). The insurer asserted that the notification of loss was out of time. The Drummonds contended that s 54 of ICA operated to prevent the insurer from rejecting the claim as s 54 provided that ‘where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into…the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act‘.  

Issue

The court was required to determine whether s 54 of the ICA precluded an insurer from refusing to pay an insurance claim where the insurer’s refusal to pay is premised on a failure to notify the claim as required by s 103BB(3)(a) of the HBA.

The court answered the following questions:

1. whether the policy incorporated s 103BB of the HBA as a contractual term;
2. whether s 103BB of the HBA altered the effect of the policy so as to engage s 54 of ICA; and
3. whether the operation of s 54 ICA was attracted where a refusal to pay is premised upon the effect of s 103BB of HBA and not upon the policy.

Decision

The court dismissed the Drummonds’ claim and found in favour of the insurer.

In relation to the first question of whether the policy incorporated s 103BB of the HBA as a contractual term, the court answered no on the basis that there were no clear and unequivocal words to incorporate relevant sections or provisions of the HBA into the policy. This is different to other provisions of the HBA such as the statutory warranties under s 18B which are implied into every contract for residential work. The court took into account the language used in the policy, when read as a whole and determined that whether an insurance contract incorporates s 103BB of the HBA as a contractual term will depend on the terms of the policy.

In relation to the second question of whether s 103BB of the HBA alters the effect of the policy, the court rejected the contention that s 103BB alters contractual rights. The court held that, having regard to the language used in s 103BB as a whole, Parliament intended s 103BB of the HBA to operate by way of a supervening statutory scheme regulating the circumstances in which insurance cover under a home warranty insurance policy will respond to claims. However, the language of s 103BB does not suggest any intention to alter contractual rights under insurance contracts (unlike s 18B of the HBA as described above).

In relation to the third question of whether the operation of s 54 of ICA was attracted when the refusal to pay is premised on s 103BB of the HBA and not the policy, the court answered no on the basis that the inclusion of the words ‘but for this section’ in s 54 were out of an abundance of caution rather than to signal that s 54 is engaged where an insurer’s refusal to pay is premised upon statute and not upon the terms or effect of the contract of insurance itself.