How Contractual Construction Burnt Insurer and Sent Their Case Up in Flames
29 Nov 2023
The function of an important provision in an insurance policy often depends on seemingly unimportant terms or phrases. This proved to be the case in the matter of AIG Insurance Australia Ltd v McMurray [2023] WASCA 148, in which the Court of Appeal of the Supreme Court of Western Australia determined whether traditional principles of contractual construction had been appropriately implemented to interpret the term ‘structure’ within an insurance policy. The dissection of an outwardly innocent and harmless term cost an insurer millions in this instance.
Background
During August 2014, Fredrick and Jennifer McMurray purchased a luxury property located at 179 Wellington Street, Mosman in Western Australia (the Property) for $8,950,000.00. With a desire to renovate the Property prior to occupancy, the McMurray’s took out a home insurance policy with AIG Insurance (Policy) and invested almost $1,000,000.00 into renovations between 2015 and early 2016.
Around 16 January 2016, a fire started at the Property, believed to have been caused by the spontaneous combustion of oil rags that were being used to stain timber panels and doors within the home. The damage was so extensive that the Property needed to be demolished and the McMurray’s lodged a claim with AIG Insurance under the Policy. AIG Insurance denied the McMurray’s claim for indemnity under the Policy, relying upon an exclusion clause. The McMurray’s sued AIG Insurance in the Supreme Court of Western Australia.
The exclusion clause (hereon referred to as the Clause) stated:
Notwithstanding any terms or conditions to the contrary no cover shall be provided under the Policy for:
- Damage:
- In connection with the Contract Work, Temporary Work, Free Issue Materials or Works…
For the purposes of this exclusion the following definitions apply:
Damage means any loss, fine, penalty, cost, charge, liability, physical loss, or Property Damage including any Earth Movement.
Contract Work means any and all structures constructed or in the course of construction wheresoever located or whilst in transit and which are incorporated or are to be incorporated into a permanent structure at the Location.
All other terms utilised in this exclusion shall be defined in accordance with the applicable definition of such terms as found in Your Policy.
At First Instance
It was AIG Insurance’s position that the Clause applied in this instance because the timber panels and doors that the oily rags were used to stain were ‘structures’ per the definition of ‘Contract Work’ and that the damage caused to the Property occurred in ‘connection with Contract Work’. The McMurray’s rejected this position, maintaining that the timber panels and doors did not classify as ‘structures’ within the meaning of the Policy.
Smith J referred to the Policy for context, and ultimately found that a ‘structure’ was “… a building or a substantial built form that has a particular purpose, which can contain either built form of contents or is designed to contain contents once constructed, such as furniture in a granny flat, and not merely items installed or constructed in the course of, alteration, renovation or refurbishment work to the house”.
The Court ultimately found in the McMurray’s favour by applying the contra proferentum rule – the legal doctrine that provides that the preferred meaning of ‘structure’ ought to be one that works against the interests of AIG Insurance who drafted the ambiguous wording.
On Appeal
AIG Insurance appealed the decision on the basis that her Honour’s interpretation of ‘structure’ was too narrow and that the contra proferentum rule had been inappropriately applied. Further, AIG Insurance maintained that the term ‘structures’ extends to include building materials utilised to create structures.
The Court ultimately dismissed AIG Insurance’s appeal and the insurer was liable to indemnify the McMurray’s after looking to the term’s ordinary and natural meaning. The Court concluded that Smith J’s interpretation of ‘structure’ was “consistent with the ordinary and natural usage of the word”. The Court also determined that ‘structure’ was ambiguous and supported Smith J’s reliance on the contra proferentum rule as a complementary approach to interpreting the term based on its ordinary and natural meaning.
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