Deeds of indemnity for homeowners warranty insurance - A statutory version of unconscionable conduct

The Home Building Act 1989 (NSW) requires a contractor who wishes to enter into a contract for residential building work to obtain statutory mandated home building insurance, commonly known as Homeowners Warranty Insurance. It is common practice for insurers offering Homeowners Warranty Insurance to seek to protect their position by requiring either the builder or a third party (including directors of building companies) to provide a deed of indemnity in the event that a claim is made upon the insurance policy. 

Whilst common practice, a question that arises is whether, in circumstances where Homeowners Warranty Insurance is mandated by law, requiring a party to provide a deed of indemnity is unconscionable. This is a question the Supreme Court of NSW was required to consider in Allianz Australia Insurance Limited v Anthony Vitale and Anor [2014] NSWSC 364 (Allianz v Vitale).

Background

In Allianz v Vitale, Avcon Constructions (a building company) sought Homeowners Warranty Insurance in order to undertake residential building work. Ultimately, insurance was obtained from an agent of Allianz (Dexta); however, due to amongst other things, the limited building experience of Avcon Constructions, two deeds of indemnity were sought from Anthony and Giuliana Vitale (first and second defendants). Unfortunately for the Vitales, after the developments were complete, claims were made under the Homeonwers Warranty Insurance by the owners corporation and individual owners whilst Avcon Constructions was in voluntary administration. The claims were investigated by Allianz and some of the claims were accepted. Legal proceedings were instituted against Allianz and eventually settled.  Allianz issued demands for payment upon the defendants pursuant to the deeds of indemnity for some $1.35 million that was, amongst other things, paid out as part of that settlement.

Basis of Denial

Amongst other grounds, the defendant denied that they were liable on the basis that by insisting upon the provision of indemnities by them, Allianz had engaged in unconscionable conduct under the Trade Practices Act 1974 (Cth) and/or ASIC Act 2001 (Cth).  If that was proven, then the indemnities could be set aside.

Unconscionable Conduct

The allegation of unconscionable conduct was somewhat unique in that it was agreed that the defendants understood the terms of the deed of indemnity.¹ The allegation was based on the argument that it was unconscionable for the insurer to seek an indemnity in circumstances where the builder was forced, by statute, to obtain the policy of insurance i.e. that Allianz unconscionably took advantage of the legislative regime in requiring the provision of the deeds of indemnity.

Whilst the policy of insurance was not in issue itself but the deed of indemnity, the Court found that merely because one party to a contract negotiation may be in a stronger position, or the other party was compelled to agree to a contractual term because they feel unable to resist, did not automatically lead to a finding of unconscionability.²

In analysing the commercial background, the Court concluded that the choice to enter into residential building work was a choice made by the defendants, but that choice came with legislative constraints.³ Furthemore, the requiring of indemnities in the circumstances was a prudent course taken by Allianz in a case of a building/developer with Avcon Constructions’ profile and limited experience, and the indemnities were considered as reasonable and necessary to protect the legitimate interests of Allianz.⁴

Specifically on the issue of unconscionability, the Court found that the defendants could not demonstrate any behaviour on the part of the plaintiff which could be described as unconscionable either in general law or pursuant to the Trade Practices Act or ASIC Act.

The decision makes it clear that even though the insurance scheme is mandatory for builders who wish to conduct residential building work, if indemnities are sought prior to the issuing of a policy of insurance, something more than unequal bargaining power will need to be shown before any unconscionable conduct will be established and liability under an indemnity avoided.