Insurance Policies vs Expectations – The Opal Tower incident

On 19 October 2020, the Federal Court of Australia handed down its decision in Icon Co (NSW) Pty Ltd v Liberty Mutual Insurance Company Australian Branch trading as Liberty Specialty Markets [2020] FCA 1493.

The case concerned the applicant, Icon Co (NSW) Pty Ltd (Icon), who had entered into a contract (October 2015) to design and build a 37-storey high rise mixed residential and commercial development known as the Opal Tower at Sydney Olympic Park.

Major cracks (incident) were observed at the Opal Tower across three floors in certain wall panels, floor slabs and hob on the night before Christmas in 2018.

As at 28 February 2020, Icon had paid out in excess of $31 million as a result of the Incident, including approximately $17 million in property rectification costs, $8.5 million in alternative accommodation costs and $530,000 in legal fees associated with defending a class action.

Icon brought these proceedings against two insurers, the first respondent (Liberty) and the second respondent (QBE), with which it placed third party liability insurance policies through its broker, Austbrokers Countrywide (Austbrokers) in September 2015 and September 2018, respectively.

The 2015/16 Liberty policy (Liberty Policy) was in place at the time of the commencement of the Opal Tower Contract. The QBE policy covered the period from 20 September 2018 to 31 December 2018 (QBE Policy). The policies were each placed with the insurers through a specialised construction underwriting agency, Chase Underwriting Pty Ltd (Chase).

Icon sought declarations designed to progress its claims for indemnity against both Liberty and QBE as both insurers had denied indemnity.

What was Icon’s claim against Liberty?

As against Liberty, Icon sought declarations to the effect that the Incident reflected or was the result of an “Occurrence” within the period of cover of the Liberty Policy.  Icon’s position, framed in the alternative, was that:

1. Icon’s notification to Liberty of the Project engaged a provision of the Liberty Policy providing for “run off” cover, thus allowing for the insurance to cover the 12 month defects liability period which followed the contractual time period for the Project, during which the Incident occurred (Run Off Claim);
2. by operation of s 58 of the Insurance Contracts Act 1984 (Cth) (ICA), Liberty is precluded from denying indemnity for the period during which the Incident occurred (Statutory Extension of Coverage Claim); and
3. that the Liberty Policy should be rectified by the addition of an “endorsement” in terms that would entitle it to such cover (Rectification Claim).

What was Icon’s claim against QBE?

As against QBE, Icon sought declarations to the effect that the Incident reflected or was the result of an “Occurrence” in connexion with a “Product” of Icon within the meaning of the QBE Policy.

Icon’s claims against Liberty

The Run Off Claim

This line of argument required the Court to construe the terms of Liberty Policy to reach a determination as to whether Icon had complied with its obligations under the policy and, if not, whether Liberty was precluded from denying indemnity by operation of s 54 of the ICA.

Icon’s Run Off claim was unsuccessful. In his reasoning, Lee J highlighted some fundamental principles of contractual interpretation, including:

1. Lee J held that the “true rule”, as stated by Mason J in Codelfa[1], remained in force, in that it is only permissible to have regard to extrinsic material going to the surrounding circumstances if there is ambiguity.
2. Evidence as to establishing the common intentions of parties for the purposes of a rectification claim is irrelevant to the disposition of the construction of the agreement, with the admissibility of extrinsic materials in the latter instance limited to ascertaining the surrounding circumstances known to the parties.
3. A businesslike construction must be adopted, on the assumption that the parties intended to produce a commercial result.
4. Although it was traditionally the case that the contra proferentum principle applied commonly in insurance contracts, that rule is one of last resort, to “apply only when ambiguity remains after all other avenues of construction have been exhausted”.

The Statutory Extension of Coverage Claim

In summary, s 58 of the ICA provides that where an insurer fails to give an insured prior written notice of the expiry of a renewable insurance cover, and the insured does not obtain insurance to replace such cover, then by force of the section, the contract of insurance is to be extended for a period of time following its expiry.

Icon’s Statutory Extension of Coverage Claim failed, with His Honour finding that “endorsements” issued by Chase in its dealings with Austbrokers as variations to the Liberty Policy, as opposed to a stand-alone “project-specific” policy being issued for the Project so as to trigger section 58 of the ICA (i.e. it was not a “renewable insurance cover”).

The Rectification Claim

Icon’s Rectification Claim succeeded.

In reaching his decision, Lee J provided a good summary with respect to the general principles of rectification, including:

1. The purpose of the remedy is to make a contractual instrument “conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately”.
2. As to the establishment of a common intention, the evidence necessary to discharge the onus needs to be convincing, or put in another way, clear and convincing proof is necessary to succeed in a claim for rectification. Consistent with the mandatory requirements for consideration imposed by s 140 of the Evidence Act 1995 (Cth), in considering the nature of the equity of rectification, it is important to keep in mind the unlikelihood that commercial persons would have formed a common intention which was not reflected in the agreement which they deliberately reduced to writing
3. In determining whose intention is relevant in establishing whether the common intention has been made out, an antecedent question must first be answered as to, given in this matter, each party contracted with the other through agents, what was the scope of the authority conferred on the respective agents. This search for a directing mind, in the context of rectification, involves ascertaining the relevant decision maker for the particular transaction in question.This search necessarily calls for the application of settled rules of attribution, which must also include those of ostensible authority.

Key to note with respect to the Rectification Claim, is that:

1. Lee J held that it was Austbrokers’ and Chase’s intentions that were relevant, as:
   1. Icon intended to enter into the policies that were recommended by Austbrokers, and Austbrokers had the authority to negotiate and contract on Icon’s behalf, with no one from Icon having ever dealt directly with either Chase or Liberty in relation to the negotiation or placement of its policies (i.e. Mr Reilly of Austbrokers was the decision maker rather than a person conducting a “mere negotiation”); and
   2. Despite Chase’s authority being limited by the agency agreement with Liberty, Lee J took into account the evidence proffered on behalf of Liberty to ascertain the scope of Chase’s actual authority, which included being authorised by Liberty to write insurance business for Icon outside the scope of the agreed policy wording.
2. Although the requirement for a common intention to be “communicated” requires a disclosure of that intention between the parties, it is not a requirement that that intention be expressly stated. Further, there is no requirement for the parties to have a common intention as to the precise form of words the parties intended to use.

Icon’s claims against Liberty

The main substance of the dispute between Icon and Liberty revolved around the interpretation of “Product” under the QBE Policy, and therefore whether the Opal Tower and/or its constituent parts fell within its definition.

In finding support for Icon’s contention, Lee J held that in the context of an insurance policy issued to a construction company which delivers large-scale building projects, it is hard to imagine what other product or thing, besides a building, would be erected such to fall within the meaning of the definition. In reaching his judgment, Lee J considered the well-established principle that when the clause in question is an exception clause, it supports a narrow rather than a broad interpretation (therefore distinguishing the decision in Apsen[2] and Bigby[3] relied upon by QBE, as the relevant clause in this matter formed part of the insuring clause).

 Summary

This decision is a reminder for parties to ensure that agreements are always reduced to writing and that it clearly expresses each parties’ expectations as to what is being insured and how the policy is to operate. Parties should also be mindful as to the extent of authority they place on their agents when negotiating policies of insurance, and their understanding as to the extent of cover being obtained/provided.