APPEAL OUTCOME REMINDS INSURERS TO CONSIDER FULL WORDING & EFFECT IN POLICY CONSTRUCTION

Legal Directions

WFI Insurance Ltd v Manitowoq Platinum Pty Ltd [2018] WASCA 89

Background

In our Legal Directions dated 1 May 2017, we reported on the decision of Manitowoq Platinum Pty Ltd v WFI Insurance Ltd [2017] WADC 32 in which the trial judge applied the contra proferentum principle in finding that the ambiguity in a limiting clause in the policy of insurance prevented the insurer from reducing the level of cover and/or denying indemnity for the claim. The first instance decision has been reversed on appeal.

Facts

Boss Shop Fitting Pty Limited (Boss) entered into a contract with Manitowoq Platinum Pty Ltd (Manitowoq) on 19 July 2007 to undertake a fitout of Manitowoq’s restaurant, including all plumbing, for $786,628 (the Work). Boss subcontracted the plumbing work to Millstream Plumbing Pty Ltd (Millstream). Upon completion of the Work, Manitowoq discovered water damage and faulty plumbing throughout the restaurant. The rectification required Manitowoq to undertake substantial refitting, and Manitowoq commenced proceedings in the District Court of Western Australia against Boss for damages suffered as a result of Boss’ negligence and breach of contract to recover the cost of the rectification work. Boss made a claim under its commercial plan insurance policy underwritten by WFI Insurance Ltd (WFI).

It was not disputed that the plumbing works did not comply with the relevant Australian Standards and were negligently undertaken by Millstream. WFI declined indemnity to Boss on the basis that Boss had breached General Condition (b) (General Condition) of the policy. The General Condition required Boss to comply with Australian legislation and the Australian Standards applicable to a particular trade activity. In the same section of the policy, it was stated that ‘if you do not do what you are obliged to do under your policy, we may refuse to pay a claim or any part of it’.

Decision at first instance

The trial judge read down the terms of the policy and concluded that Boss was only required to take reasonable care to comply with the General Condition to satisfy the terms of the policy. The trial judge held that the breach of the General Condition did not entitle WFI to refuse to indemnify Boss, having regard to the commercial purpose and terms of the policy. The trial judge particularly noted that the insuring clause specifically provided cover for acts of negligence and breach of the Australian Standards.

The Court found that there was ambiguity between the terms of the policy (specifically the insuring clause) and the consequences of Boss’ entitlement to indemnity if it did not comply with the General Condition. The trial judge concluded that if it was intended that compliance with the General Condition was an absolute obligation which overrode the terms of the insuring clause, or was a condition precedent to indemnity, the policy ought to have made this expressly clear. As it did not do so, the trial judge held the ambiguity should be read against the interests of WFI.

WFI appealed to the Court of Appeal of the Supreme Court of Western Australia.

On appeal

The appeal turned on consideration of the following issues:

  1. Whether the trial judge erred in concluding that the General Condition only imposed an obligation on Boss to ‘take reasonable care’ to comply with Australian legislation and Australian Standards; and
  2. Whether the trial judge erred in concluding that WFI’s obligation to indemnify was not conditional upon Boss complying with the General Condition.

Martin CJ (who wrote the judgment), Murphy JA and Chaney J unanimously found that the critical question was whether construction of the General Condition and strict compliance with the same would negate the commercial purpose of the policy.

Manitowoq argued that the obligation to strictly comply with the General Condition was coincident with the ambit of cover for negligence and if construed literally, would defeat the commercial purpose of the policy. Manitowoq submitted that it could not have been intended that an insured be obliged to comply with every applicable legislative requirement or Australian Standard in a policy providing cover for negligence, that being a tort dependent on consideration of whether the alleged tortfeasor had taken ‘reasonable care’.

The Court disagreed. It held that that the purpose of the policy was inferred from the ambit of cover provided. The policy provided indemnity in respect of liability to pay compensation for personal injury or damage to property. The cost of rectification work (being doing, redoing, completing, correcting or improving any work) was expressly excluded by the policy.

His Honour then rejected Manitowoq’s submission, finding that the General Condition referred to compliance with the Australian Standards as regards the quality and standard of work performed. As such, excluding liability for work that fell below the Australian Standards was consistent with the exclusion relating to covering the cost of rectifying defective work.

In any event, the Court found that it did not follow that liability arising from breaches of the subject matter covered by the General Condition impacted the primary losses indemnified under the policy. The Court cited examples of circumstances where cover would be provided under the policy, such as liability for negligently leaving equipment in a state where it constituted a tripping hazard, or stacking equipment in a fashion where it overbalances and causes injury. Having regard to these examples, His Honour held that compliance with the General Condition did not deprive the policy of meaningful cover, and thus requiring compliance with the General Condition did not impact the commercial purpose since, with such liability excluded, the policy still provided a significant ambit of cover.

Ground two of the appeal challenged the trial judge’s finding that a breach of the General Condition did not entitle WFI to deny indemnity. The Court noted that the trial judge accepted the general assertion that declining to indemnify the insured for breach of the General Condition was not consistent with the terms and purpose of the policy, noting that the General Condition was not described as a condition precedent to indemnity.

The Court disagreed with this assertion, holding that construction is inconsistent with application of s54 of the Insurance Contracts Act 1984 (Cth) (ICA). The Court noted that the trial judge erred in drawing a distinction between ‘serious’ and ‘less serious’ breaches, noting that terminology was not supported by the policy itself. Rather, the terminology used by the policy supported a construction of the policy which enabled WFI to refuse indemnity in the event of a breach of condition which was causally related to the indemnified loss. The Court held that that the policy wording was unequivocal, and that the consequences of non-compliance with the General Condition was consistent with s54 of the ICA.

The Court accordingly upheld the appeal.

Implication of decision

Although it is difficult to reconcile the different conclusions reached by the trial judge and the Court of Appeal, this decision gives some reassurance to insurers that a condition in a policy that imposes an unqualified obligation on an insured to comply with legislation and Australian Standards will not necessarily be read down to disentitle an insurer to reduce or decline cover on the basis it negates the commercial purpose of the policy. As in all construction cases, the wording of the policy is critical and, in Manitowoq, the fact that the policy specifically excluded cover for rectification works was probably determinative, as it allowed WFI to show the commercial purpose was not frustrated by the construction it urged.

Further information / assistance regarding the issues raised in this article is available from the authors, Kerry Wood, Partner and Anna Chacko, Associate or your usual contact at Moray & Agnew.


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