Context must be considered when there is ambiguity in an insurance policy – Insurance


In the decision of the Full Federal Court of Liberty Mutual Insurance Company Australia Branch trading as Liberty Specialty Markets v Icon Co (NSW) Pty Ltd [2021] FACAC 126 rendered on July 20, 2021, the Plenary Court examined the construction and scope of civil liability insurance policies in the context of claims made by a building and construction company for damage arising as a result of the manifestation of defects serious inside a building, in the case of civil liability for defects. period.

Factual background

Construction and construction company Icon Co (NSW) Pty Ltd (‘Icon’) entered into a design and build contract (‘the Contract’) in October 2015 to construct the now infamous Opal Tower, a building of 37 story mixed residential / commercial development. at Sydney Olympic Park. The contract provided for a liability period for defects of 12 months after practical completion, which took place in August 2018.

On Christmas Eve 2018 (after the practical completion, but during the period of liability for defects), serious defects, including major cracks in the wall panels, floor tiles and hobs, occurred (” the incident ”). As a result, residents of the building were evacuated while rectification work was undertaken.

The proceedings in Federal Court concerned disputes between Icon and its two liability insurers: Liberty Mutual Insurance (“Liberty”) and QBE, both of which refused to indemnify Icon for the incident.

Decision at trial

With respect to the Liberty policy, Icon argued that a condition of the policy, when incurred, effected coverage of contracts commencing – such that, under the terms of the policy, in each year insurance, Icon has obtained coverage for all contracts declared during the relevant insurance year. for the life of these contracts and, above all, during the periods of liability for defects in these contracts.

Icon also argued that while it was not entitled to compensation under the written terms of the policy, as properly interpreted, it was entitled to have the policy rectified in order to give effect to the intent. Common of Icon and Liberty (i.e. the policy would act as an inception policy and thus provide coverage during the liability period for defaults).

The senior judge was not persuaded that the condition in question could be interpreted so as to give effect to the coverage of the contracts commencing. However, the senior judge accepted that the parties have a mutual intention that coverage for commencing contracts be provided and said the Liberty policy needs to be rectified to reflect the parties’ common intention.

He therefore considered that coverage under the Liberty policy extended to the incident, which occurred during the period of liability for defects.

Regarding the policy of QBE, the Senior Judge accepted that the Opal Tower and its constituent parts were a “product” as defined by the policy, and that the policy responded to the incident. The senior judge also classified the contract under which Icon was insured by QBE as a “completed transaction”, and therefore concluded that the policy exclusions did not apply.

Cross call

Icon argued that the senior judge erred in his interpretation of the condition and argued that the condition was textually clear and extended coverage to the period of liability for defects in contracts that were incomplete at the expiration date. , provided that the appropriate instructions are given. Icon further argued that this interpretation of the condition was consistent with the business purpose of the insurance that it required as a commercial construction contractor, whose risks and responsibilities extended to the period of liability for faults.

In case of ambiguity in an insurance policy, the Plenary Court considered that it should be resolved taking into account the context (including the market) in which the parties operate. The Full Court agreed with Icon on the business purpose of insurance.

The Full Court allowed the cross-appeal finding that Icon had obtained insurance coverage in the event of Liberty’s liquidation under condition 15 of the Opal Tower policy. Accordingly, she found that Liberty policy coverage extended to the incident that occurred during the defect liability period.

Call for freedom

After allowing the appeal, the Full Court was not bound to resolve Liberty’s appeal other than setting aside the orders made by the senior judge – as they were inconsistent with Icon’s rights under the condition. and the success of the cross-appeal. However, the Full Court considered the liberty appeal and ultimately concluded that the conclusion that the parties knew each other’s intentions and that the intention of the contracts commencing was commonly accepted was clearly available to the senior judge. .

QBE call

QBE argued that the Senior Judge erred in concluding that the Opal Tower, the baking sheets, slabs and walls subject to the defects were each a “product” within the meaning of QBE policy.

QBE argued that the Full Court should take into account the absence of terms encompassed in the definition of “insured’s business”, including “built” and “built” in the definition of “Products” to conclude that the definition of “Products” was deliberately designed to exclude an entire building.

QBE argued that the relevance of this distinction was that the risk of liability for “completed operations” arose from completed projects, handed over and in particular when Icon’s liability arising from contractual conditions imposing a liability period for defects had expired. This construction would show that QBE could escape responsibility.

Conversely, Icon argued that if there had been an intention to exclude an entire building from the definition of “product”, then one would expect a clear statement to that effect.

The full court ruled that the absence of words clearly designating the construction and construction process was important although not determinative. The Plenary Court relied on the conclusions of HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296 [28] to find that where the words are ambiguous, the context of the agreement must be analyzed.

As such, the Full Court considered the context of the QBE policy as a whole, taking into account the distinction between “product” and “completed transactions”, as well as the exclusions applicable under the policy.

The Full Court concluded that the Senior Judge erred in concluding that the definition of “Completed Transactions” was not redundant by the Senior Judge’s definition of “Proceeds”. The result of this error led the principal judge to reject the importance of the distinction between “Completed Transactions” and “Products” with regard to exclusions.

The senior judge ruled that the exclusions would not apply to construction contracts and that the contract itself was a “completed operation” – and therefore did not take into account the exclusions which he said did not apply. applied only to a “product”.

The Plenary Court accepted QBE’s observations that where the word “Product” can be extended to completed buildings and the liability for “Completed Operations” relates to faulty construction work, the exclusions should apply. ‘apply.

The full Court ultimately allowed the appeal on the grounds that the senior judge should have considered the contextual context in circumstances where the meaning of ordinary words was not clear.

Key to take away

  1. The Full Court held that in the event of ambiguity in an insurance policy, the context (including the market) in which the parties operate, as well as the business purpose of the policy, must be taken into account (Icon’s Cross Appeal); and
  2. Likewise, the Full Court held that the context of insurance policies must always be considered in circumstances where the definition of ordinary words is unclear (QBE appeal).
  3. The Plenary Court ultimately prefers the interpretation of the policy which refers to extrinsic contextual elements where the terms of the policy are not clear.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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