Manitowoq Platinum Pty Ltd & Anor v WFI Insurance Ltd  WADC 32
May 1, 2017
It is orthodox under Australian law to apply the contra proferentum principle where there is ambiguity in a limiting clause in a policy of insurance to reach a decision that an insurer is not entitled to deny indemnity for a claim.
This approach was recently utilised in the decision of the District Court of Western Australia in Manitowoq Platinum Pty Ltd & Anor v WFI Insurance Ltd. The Court held that the insurer (WFI) was not entitled to deny indemnity, despite the insured having breached a condition which required it to comply with legislation and Australian Standards in the business liability policy.
The plaintiffs (Manitowoq) were the owners of a restaurant premises. Manitowoq retained WFI’s insured (Boss) to undertake a fitout of the premises. Boss retained a subcontractor, Millstream, to perform plumbing works.
The premises sustained water damage. There was no dispute on the expert evidence that the plumbing works did not comply with the relevant Australian Standards and were negligently undertaken by Millstream. The Court held that Boss was liable in contract for the consequential loss sustained by Manitowoq.
The primary argument at trial was whether WFI’s policy responded to provide cover to Boss for its liability to Manitowoq.
WFI denied liability to indemnify, asserting that Boss had breached the terms of the policy in failing to comply with legislation and Australian Standards, and thus it was entitled to refuse any claim and cancel the policy.
Manitowoq contended that it was necessary to assess the context of the condition in light of the policy as a whole and, to the extent to which there was any ambiguity in the condition, that ambiguity should be read against WFI. As the policy was intended to cover negligence and breach of statute, assessment of the commercial purpose of the policy was relevant to construction of the conditions.
The primary submission was that it was appropriate for the Court to read a ‘reasonable conduct’ requirement into the condition so as to provide business efficacy to the policy.
WFI contended that the condition was unambiguous such that it plainly provided an entitlement to deny liability if the insured did not comply with Australian Standards.
The Court was not satisfied that by breaching the condition, WFI was entitled to refuse indemnity for the claim having regard to the commercial purpose and the terms of the policy, in particular, the insuring clause, which was to cover Boss for acts of negligence and breach of the Standards.
In reaching its decision, the Court considered that:
- There was ambiguity – on an objective reading of the policy as a whole – as to the consequences of Boss’ entitlement to indemnity if Boss did not comply with the condition;
- If it was intended that compliance was an absolute obligation on Boss which overrode the terms of the insuring clause or was a condition precedent to indemnity, then this had to be made expressly clear;
- The terms of the policy did not make that obligation fundamental to the availability of cover;
- The proper construction of the condition was that it be construed to include an obligation on the insured to take reasonable care to comply with legislation and Australian Standards. The condition thus had effect when Boss acted recklessly in breaching the Standards or was negligent (which had not occurred in Boss’ supervision of Mainstream’s undertaking of the plumbing works); and
- This construction gave the policy business efficacy and was also consistent with the commercial purpose of the policy.
Implication of this decision
This decision provides a further example of the care which must be taken by an insurer in denying indemnity for a claim based on a literal reading of a limitation clause, where that denial impacts on the overall purpose of the policy.
Although each case is to be determined on its own facts, it is clear that the courts will approach policy construction in a way that attempts to uphold the commercial purpose of the policy. A policy intending to cover loss arising through negligence will be held to respond, unless the insured acts recklessly in undertaking the work. If that is not the intention of the policy, then the wording of limitation conditions is required to be absolutely clear in allowing the insurer to reduce or deny liability to indemnify.
Authored by Margarita Ntostas, Associate, Melbourne.
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