August 6, 2018

Insurance | QLD

Introduction

In the real world the answer to this question ought to be obvious. However in an insurance setting words aren’t always given their plain meaning.

A prime example of this is a Reasonable Care Condition. There is always tension where an insured has paid a premium to be covered for negligence but that negligence may be so extreme that it violates a Policy condition requiring the Insured to exercise reasonable care to prevent damage. In a number of recent decisions[1], the Court has found in favour of Insureds by determining that without evidence of deliberate intent to cause damage or some unsoundness of mind leading them to take no action when action was required then such conditions won’t be enforced despite their plain meaning.

This pro-insured approach has also called into question conditions requiring an Insured to “comply with Legislation and Australian Standards” (“a Compliance Condition.”) Given their broad scope and the fact that failure to comply will almost always be a particular of negligence you might suspect that an insurer wishing to decline cover must go further and establish deliberate intent to breach or recklessness in not caring about such compliance.

However, a recent decision of the Western Australian Court of Appeal in WFI Insurance Ltd v Manitowoq Platinum Pty Ltd [2018] WASCA 89 suggests that is not necessarily the case.

An insured company had sought coverage in respect of a claim for water damage caused by negligent plumbing work that breached various Australian Standards. The deficient work included incorrectly installed joins in pipes and improper drainage and resulted in a refit bill of $1,635,277.50. Their policy was a WFI “Commercial Plan” policy which stated “you must… comply with legislation and Australian Standards.

Because the Insured company became deregistered, the Plaintiff proceeded directly against WFI[2] leaving it to walk the tightrope between establishing that the plumbing works were defective whilst avoiding the operation of the Compliance condition.

The trial judge followed the line of authority stemming from Fraser v B N Furnman (Productions) Ltd. [3] There a condition in an employer’s liability policy required the insured to take reasonable precautions to prevent accident. This was read as only excluding cover in the event of reckless conduct. To find otherwise would be contrary to the commercial intent of the parties (”the Repugnancy Rule”). She therefore held that the proper construction was to also read the Compliance Condition down to taking reasonable care to comply with Australian Standards and it would only be breached if the failure was the consequence of reckless conduct. The trial judge found that the insured had not been reckless and the insurer could not refuse indemnity. 

The insurer appealed.

The finding

Chief Justice Martin and the rest of the Court of Appeal disagreed with the trial judge and the claim against the insurer was dismissed.[4]

The Court held that a Compliance condition was of a different character to a Reasonable Care condition and as the condition was not qualified by any obligation to take reasonable care[5], the words should be given their plain meaning.[6] In other words this qualification is not to be automatically read into the words of a Compliance Condition.

The Court relied on the following factors to reject the Insured’s argument that an obligation to comply with Australian Standards entirely defeated the purpose of the policy:-

  • Australian Standards for plumbing were concerned with the quality and standard of work performed and it was consistent that the Policy excluded the cost of rectifying defective work;

  • noncompliance with Australian Standards was not the only or even the predominant source of potential liability policy and there was still room for the policy to operate in  circumstances such as leaving equipment lying around, or stacking equipment which unbalances and strikes someone causing injury;

  • the policy provided indemnity for all liability incurred within the entire range of circumstances giving rise to a duty of care, whereas the Compliance condition only excluded indemnity where there was a breach of the duty to perform work with care and skill and the breach corresponds to a breach of relevant legislation or Australian Standards and was a breach that was causative of loss.

As to the argument that the Condition was obscure and obliged the insured to comply with every applicable legislative prescription or Australian Standard, the Court said this overlooked section 54 of the Insurance Contracts Act 1984 (“ICA.”). Unless non-compliance was causally connected to the liability incurred by the insured, then the obligation to indemnify would not be affected by breach of the condition.

conclusion

This decision flies somewhat in the face of a recent trend of reading broad exclusions in third party policies in a narrow fashion. It will nevertheless give Insurers some comfort that they do not have to establish recklessness – a test that now hovers very close to proving deliberate intent.

This makes sense in a scenario where the legislature has imposed specific safety or quality requirements on a particular industry and the industry ought to be aware same. The public policy consideration is presumably that if the Insured realises they will be uninsured if a standard is breached, they are much more likely to follow it. This is consistent with the view of McPherson JA in Kim v Cole[7] that “it is a statutory provision that is plainly intended to serve the interests and ensure the safety both of consumers and members of the public whose persons and property would be placed at serious risk if it were to be omitted”.

Were it to be argued that some technical breach of an obscure piece of legislation activated the Compliance Condition, the Insured has the protection of section 54 ICA.

If you are facing this issue, the approach is to consider:

  1. whether the wording of the Compliance Condition itself requires only reasonable care to comply with a standard/legislative requirement or an imperative that the Insured must so comply;

  2. if it doesn’t require reasonable care, then subject to causation issues and s54 ICA the condition will be given full effect;

  3. if it does – ask whether the principle of repugnancy requires that that the obligation should be construed as limited to an obligation to not act recklessly – this involves asking whether a strict obligation to comply would substantially defeat any cover or whether there is still room for the policy to operate in a meaningful way. If there is room for the Policy to still operate then breach will be fatal. If there is not then you must show breach and recklessness.

Please do not hesitate to contact the firm to discuss your options if you are uncertain how to proceed when interpreting a Compliance Condition.


[1] Including Barrie Toepfer Earthmoving and Land Management Pty Ltd v CGU Insurance Ltd [2016] NSWCA 67 and Matton Developments Pty Ltd v CGU Insurance Limited [2016] QCA 208

[2] pursuant to section 601AG of the Corporations Act 2001 (Cth).

[3] [1967] 3 All ER 57

[4] Nevertheless, the Courts summation of the law with respect to Reasonable Care conditions is useful. It was said:

      “In that line of cases it was held that, where the evident commercial purpose of the insurance contract is to provide cover in respect of liability arising from the negligence of the insured, construing a condition of the policy as requiring the insured not to be negligent would defeat the commercial purpose of the policy, with the consequence that such an intention should not be attributed, objectively, to the parties. In order to avert commercial futility in such cases, the courts have construed the relevant policies as only denying cover if the conduct of the insured has been reckless, in the sense that the insured has actually recognised the existence of the danger and has either responded in a way which the insured knew to be inadequate or taken no action at all when the insured understood that action was required. In this line of cases, the question was not whether the obligation of compliance should be construed as an obligation to take reasonable care to comply. Rather, the question was whether an obligation to take reasonable care to comply should be construed as an obligation to not act recklessly in relation to compliance.”

[5] The Court noted that the relevant clause under consideration contained three obligations. Two of which were expressly qualified by the requirement to take reasonable care and the subject one which was not. It was said a clause constructed in this way provided strong support for the insurer’s proposition that the relevant obligation should not be read as qualified by words which the parties have omitted in relation to that obligation, but included in relation to others. The court distinguished the decisions in Buckley and Barrie Toepfer where similar conditions appeared but under a clause headed “Reasonable Care” which provided a sound basis for a qualified construction of the obligations contained within the clause.

[6] And the trial judge was wrong to distinguish cases such as Casino Show Society v Norris and Kim v Cole.

[7] [2002] QCA 176 - which was followed in this case