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Construction Project Insurance Explained

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Construction Project Insurance Explained

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Cristian Claussen

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Insuring Risk in Construction Projects, (2019) 34 Building and Construction Law...

Building and Construction Law Journal

Volume 34
No 5, 2019
Insuring Risk in Construction Projects
Original author(s): Laina Chan *
Last Review: 01/01/2019

Insuring Risk in Construction Projects

Abstract
Construction projects are inherently risky in terms of cost, time and quality. Part of the risk is managed by insurance.
This article identifies the types of insurance that are typically available on construction projects and focuses upon
Contractors All Risks Insurance and Professional Indemnity Insurance only. Both are forms of liability policies. Some
of the key issues that can arise in considering the scope of coverage and indemnity under each type of policy are
highlighted and discussed.

(2019) 34 BCL 378

The Need for Insurance

Construction projects are inherently risky in terms of cost, time and quality. The parties therefore typically seek to contractually
allocate these risks between them. The result of this allocation of risk and the application of the Abrahamson principles 1 is that
the risks are pushed downwards to the design consultants and subcontractors. This allocation of risk is also accompanied by an
obligation on some of the parties to obtain insurance to manage the risks that they have assumed.

In determining the insurance needs for each construction project, it is necessary to identify the risk that each of the parties to
the project face. While the risks facing a principal can be summarised as time,

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cost and quality, the risks facing contractors are more extensive. They include design risks which can be laid off to the design
sub-consultants; unforeseen site conditions; construction risk in terms of defects supervision; responsibility for the works of the
subcontractors which can be dealt with via the provision of indemnities obtained from the subcontractors; specified, defect and
warranty obligations; delay, penalties and liquidated damages claims as well as the obligation to monitor and ensure compliance
with the insurance requirements of subcontractors. The risks facing design consultants are the risk of negligent and defective
design. The risks facing financiers include the economic viability of the project, ensuring cash flow from the project which can
be impacted upon by delays, claims against the contractor and the insolvency of major parties.

Once the risk is identified, the following issues then have to be considered in deciding whether the risk is insurable and if so,
whether it should be so insured:

(a) Is the risk insurable?

(b) If the risk is insurable, is the cover adequate?
(c) Is the cost of the insurance prohibitive such that the costs outweigh the risk to be insured?
(d) What is the nature of the policy? In other words, how long does the policy operate to provide cover and what
are the preconditions and conditions to indemnity?
(e) Can the policy be tailored or negotiated to the specific needs of the insured?
(f) The solvency and long-term viability of the insurer.

Types of Insurance
These include:
(a) Contractors All Risks Insurance policies which provide cover for property damage as well as liability for third-
party property damage and personal injury during the construction phase of a project;
(b) Industrial Special Risk policies which take over insurance of the project once the works are complete;
(c) Professional Indemnity policies which cover civil liability for loss and damage arising from the design
professional's failure to exercise reasonable care and skill in the discharge of their retainer;
(d) Public Liability Insurance which provides cover for third-party property damage and personal injury;
(e) Workers Compensation;
(f) Compulsory Third-Party Motor Vehicle; and
(g) Marine Cargo or Transit.

This article will focus upon Contractors All Risks Insurance and Professional Indemnity Insurance only. Both are forms of
liability policies. Some of the key issues that can arise in considering the scope of coverage and indemnity under each type of
policy are highlighted and discussed.

Contractors All Risks Insurance

The Insured under the Policy

The Contractor usually takes out the contract works policies. However, it can also be taken out on a principal-controlled or
project manager-controlled basis and in such case the principal, project manager, contractors and subcontractors should be
named as insured under the policy. This reflects the intention that the policy is for the benefit of the principal, its contractors
and subcontractors. The High Court in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd 2 held that a non-signatory
party to an insurance contract who has not provided any consideration can enforce the policy of insurance for its own benefit
where the objective intention of the policy of insurance is that the parties to the policy intended it to be insured.

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The position in Australia has now been codified by the 1995 amendment to the Insurance Contracts Act 1984 (Cth) which saw
the addition of s 48. 3 Sections 16 4 and 17 5 of the Insurance Contracts Act 1984 are also relevant. By the operation of s 16, it
is not necessary for the insured to have had an insurable interest at the time that the contract of insurance was entered into. By
reason of s 17, an insured need not have a proprietary interest (either legal or equitable) in the subject matter of the risk at the
time of the loss either. All that is required to engage the operation of the policy is for the insured to have suffered a monetary loss.

The Extent of the Cover

Contract works insurance is an occurrence-based combined material damage and liability policy. The first part of the policy
insures against physical loss or damage to the works under construction, materials for the project stored onsite and offsite, and

temporary works. Hire plant and equipment as well as contractor's plant and equipment, temporary buildings and employees
effects are often excluded from cover. The second part of the policy insures against liability for third-party property damage or
personal injury arising from construction activities on and off the site.

In determining whether cover is engaged under a policy of insurance, it must be borne in mind that a policy of insurance is
a commercial contract and is construed so as to give it a business-like interpretation. It is therefore necessary to consider the
language used by the parties in its ordinary meaning, the circumstances addressed by the contract as well as the social purpose
and objects that it is intended to secure. The policy is to be construed in the context of the surrounding circumstances. The market
or commercial context in which the parties are operating is relevant and a court will assess how a reasonable person in the position
of the parties would have understood the language. 6 The commercial purpose of the agreement calls for an understanding of
the genesis of the transaction, the background, the context and the market within which the parties are operating. 7

Fortuity Principle
Policies of insurance are premised upon the fortuity principle. Indemnity is provided for civil liability where the damage is
unexpected and accidental only. 8

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A useful illustration of what constitutes accidental damage is in Matton Developments Pty Ltd v CGU Insurance Ltd. 9 The
Queensland Court of Appeal had to consider whether the damage to a crane had been accidental or whether the insured had
deliberately courted the risk. The policy provided extended cover for accidental overloads. The damage to the crane had occurred
in the course of lifting a concrete tilt panel when the boom of the crane collapsed and the crane was damaged beyond economical
repair. The issue was whether the overloading of the crane was neither unexpected nor unforeseen and thus not accidental.
McMurdo P was satisfied on the facts that both the overloading and the damage were uninvited, unlooked for mishaps and
untoward events not expected or designed. While the insured deliberately took a risk, he was by no means inviting the disaster
that followed. 10 Morrison JA was not satisfied that: 11

(a) the “risk of the mishap was foreseen or courted even though it was thought unlikely that it would occur”; 12 or
(b) they were gambling or courting the risk, or taking a calculated risk, deliberately accepting the outcome; or
(c) that they voluntarily embarked on a foolhardy venture, with the damage an inevitable consequence, by
“courting, inviting or wooing” of the risk; or
(d) that they deliberately incurred the risk.

In Sheehan v Lloyds Names Munich Re Syndicate Ltd, 13 Allsop J said that the issue of whether damage falls within the cover
for accidental loss or damage under a policy is a question of construction, informed by the principles that have developed
around the question whether an event is an accident or loss is accidental loss for the purposes of insurance law. The meaning
is ultimately to be determined based on the policy wording and context. 14

Accidental damage must involve something “fortuitous and unexpected”. 15 Allsop J endorsed the statement of Starke J in
Robinson v Evans Bros Pty Ltd 16 where his Honour stated that, for the purposes of determining whether an event is an accident:

The test I think is, whether an ordinary, reasonable sensible [person], in the position of [the insured] would or would
not have expected the occurrence. … The test is I think objective and not subjective: whether an ordinary, reasonable

man with the knowledge, information and experience of [the insured] reasonably would have expected the event that
did happen …

Allsop J confirmed that the test (to the extent that it is appropriate to refer to it as a test) is an objective one. However, it
incorporates the specific knowledge and experience of the person involved. 17

The recent English case of Leeds Beckett University v Travelers Insurance Co Ltd 18 summarised the principles in relation to
accidental damage. Accidental damage means damage that was caused by a chance event, against the risk of which insurance
was taken out. Accidental damage does not mean damage that is inevitable. Accidental damage does not mean damage that
was inevitable with inevitability being assessed prospectively from the time that cover was taken out. Accidental damage also
does not

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mean damage to the property due to the inherent characteristics of that property. A policy of insurance covers damage that is
caused by an external fortuitous event but not damage that is caused by an inherent weakness in that property.

There can be an external fortuitous event which causes damage to the rigs while they are being shipped because of their natural
behaviour in the ordinary course of the voyage. Lord Saville said that the external fortuitous event took the form of the rolling
and pitching of the barge in the sea conditions encountered catching the first leg of the rig at just the right moment to produce
stresses sufficient to cause the leg to break off, thereby leading to increased stresses on the remaining legs and their subsequent
breakage. 19

Contractor's all risks policies typically include a “due care” clause where the insured agrees to take all reasonable precautions
to prevent loss, damage or liability. The “due care” clause moderates the full effect of the fortuity principle. Diplock LJ in
Fraser v BN Furman (Productions) Ltd 20 commented on the proper construction of a “due care” clause. “Reasonable” does
not mean reasonable as between the employer and the employee. It means reasonable as between the insured and the insurer
having regard to the commercial purpose of the contract, which is in part, to indemnify the insured against liability for his –
the insured's – personal negligence. The insured must take measures to avert dangers that the hypothetical reasonably careful
employer would have foreseen. The insured should not deliberately court a danger, the existence of which he recognises, by
refraining from taking any measures to avert it or by taking measures which he himself knows are inadequate to avert it. The
employer's omission to take any particular precautions to avoid accidents must be at least reckless, made with actual recognition
by the insured himself that a danger exists, and not caring whether or not it is averted.

In CGU Insurance Ltd v Lawless, 21 Redlich JA noted that the test is wholly subjective. A failure to take reasonable precautions
will occur only where there is a deliberate course of action or inaction which the insured realises exposes him to the risk of
someone being injured by the danger which has been recognised. The insured might establish compliance with the condition
by showing one or more of the following things:
(a) there was no recognition of the danger or the extent of the danger of bodily injury;
(b) particular precautions would not have been reasonable in the circumstances;
(c) no particular precaution was considered or it was not regarded as reasonable or practicable in the circumstances;
and
(d) the failure to take the precautions was not due to a lack of desire and concern to prevent bodily injury.

Causation
The causation inquiry in insurance law is directed to determining the proximate cause of the relevant loss or damage in terms
of proximate in efficiency and not the last in time. 22 A proximate cause is determined based upon a judgment as to the “real”,

“effective”, “dominant” or “most efficient” cause. 23 Determining what is proximate in a case is a matter of judgment, applying
the commonsense knowledge of a business person. The court should first seek to identify a single proximate cause of the loss
or damage. 24 If a

383

conclusion is reached that there are instead multiple proximate causes, and one is an insured event but the other is not, then the
insured will be able to recover. However, where there are two proximate causes and these are concurrent and interdependent,
and where one is an insured event and one is an excluded event then as a matter of construction of the policy the insured will
not be able to recover. The causes are inseparable, and as one is excluded under the policy, recovery will not be possible. 25

No Cover for Pure Economic Loss

The insuring clause for contract works covers loss or damage to specified contract works within a defined territory occurring
during the period of insurance. The principle of fortuity in insurance contracts means that insurers will cover loss or damage
that happens by chance so long as the terms and conditions of the policy of insurance are otherwise satisfied. The insured does
not have to establish the reason for the loss or damage. However, it is only physical loss or damage that is covered. There is
generally no cover for pure economic loss.

This is significant because building defects are not considered to be physical loss or damage. Where a construction or building
defect is discovered before any injury to person or health, or damage to property – other than the defective house itself – has been
done, the expense incurred by a subsequent purchaser of the house in putting the defect right is pure economic loss: Murphy
v Brentwood DC, 26 Delta Pty Ltd v Team Rock Anchors Pty Ltd 27 and Woolcock Street Investments v CDG Pty Ltd. 28 The
nature of the damage that an Owners Corporation might suffer (as agent for the owners of the lots) by reason of the defects in
the common property is also pure economic loss. 29

The policy wording would therefore have to clearly extend cover to third-party claims in contract for pure economic loss in
order for a policy to cover pure economic loss. However, the issue of what constitutes property damage can be complex.

Property Damage
Property damage generally requires some form of physical alteration or change, not necessarily permanent or irreparable, which
impairs the value or usefulness of the thing said to have been damaged. 30 In Graham Evans & Co (Qld) Pty Ltd v Vanguard
Insurance Co Ltd (Graham Evans), 31 the plaintiff agreed to erect a building and retain a surveyor to lay out grids on the site,
to be used for the location and identification of particular features on each level of the building. When the construction of the
building reached the fifth level, it became clear that the surveyors had laid the grids wrongly. The evidence showed that the
probable cause of the errors was defective measurement using a tape measure and defective use of the plumb-bob or similar
apparatus. The plaintiffs sought indemnity under a policy of insurance which covered “all risks of physical loss of or damage
to property of every kind and description (including the whole of the Contract Plant, Equipment, Materials and Supplies up to
but not exceeding the respective sums insured in the Schedule) owned by the Insured or for which the

384

Insured may be responsible or, prior to any occurrence for which may be made hereunder, assumed responsibility, used or to
be used in part of or incidental to the ‘Insured's Contracting Operations’ detailed in the Schedule”. 32

The issue was therefore whether the defects in the building constituted physical damage to property. Dowsett J said that
“‘damage’ involves in my view in the way in which the word is used in this context, some injury to property”. 33 There had
not been any physical loss of property or damage.

The building materials which were used in the construction of the building did not continue to be owned by the Insured in the
common sense in which the word is used after that incorporation into the building. 34 Further, even if the property could be
taken to be the building, it is difficult “to see how that building was to be used as part of or incidental to the insured's contracting
operation”. The loss was therefore not within the risk insured under the policy. 35

In AXA Global Risks (UK) Ltd v Haskins Contractors Pty Ltd, 36 the issue was whether a contract works and liability insurance
policy responded to the damage. Haskins Contractors had entered into a building contract to construct a subdivision project at
Bayview. The construction of two timber crib retaining walls was subcontracted. The eastern wall was completed in October
1999 and the western wall completed in March 2000. During March 2000 various defects and non-conformities were identified
with the construction of the walls. The defective works were not rectified. As time progressed, damage was observed in the
walls, including the splitting and crushing of headers. At issue was whether relevant physical loss and damage had occurred
within the policy period of 31 December 1999 to 31 December 2000. A distinction was drawn between property that is liable
to be damaged and property that is damaged. Although the eastern wall was defective when built, until the defects manifested
themselves in injury to the structure there was no “physical damage to the property insured” within the meaning of the policy.
Unfortunately for the insured, the damage in the eastern wall did not manifest itself until after the policy period.

In Delta Pty Ltd v Team Rock Anchors Pty Ltd, 37 the Court had to consider whether the contractor had suffered property loss.
Queensland Investment Corporation (QIC) owned land at 175 Albert Street, Brisbane. QIC had entered into a contract with the
plaintiff, Delta, to undertake excavation works on the site. In September 2006 QIC contracted with Watpac as the builder, and
the contract between QIC and Delta was novated so that Delta was in a contractual relationship with Watpac. Delta engaged
the first defendant (TRA) to install anchors and walers to secure the retaining walls for the basement excavation. TRA began
work in November 2006. The performance of TRA was woeful 38 and one section of the retaining wall moved excessively. The
Court said that wall movement independent of damage to tangible property could not constitute property loss. 39 The costs of
rectification 40 constituted economic loss and not property loss. 41

385

No Cover for Defective Workmanship and Design

Contract works policies do not cover risk associated with defective workmanship and design. In Australia, with the exception of
home warranty insurance prescribed by the various legislatures (except Tasmania) to cover breach of the statutory warranties in
limited circumstances 42 and bespoke Inherent Defects Insurance policies that can be written to cover faulty design, engineering,
workmanship and materials in load bearing elements for a period of 10 years, there is typically no insurance that covers risk
for defective workmanship.

In Lennar Corp v Great American Insurance, 43 Lennar had applied a synthetic stucco called Exterior Insulation and Finish
System (EIFS) to about 400 homes. EIFS was defectively designed in that it trapped water behind it and did not allow the water
to drain. The trapped water then caused water damage to the homes. The evidence showed that Lennar's intent to fully remove
and replace the EIFS was a preventative measure because it was defective. Lennar's costs to remove and replace EIFS as a
preventative measure and its overhead costs, inspection costs, personnel costs, and attorneys' fees were held to be not “damages
because of … property damage”. Consequently, the Insurers had no duty to indemnify Lennar for these costs. However, Lennar's
costs to repair water damage to the homes were “damages because of … property damage”.

In Graham Evans 44 the issue arose as to whether coats of paint once applied to a 26-storey building can constitute property.
In this case, three coats of paint had been applied to the building. The first coat was a cement-primer intended to be applied to,
and to some degree bond with, the cement surface of the exterior walls. The second coat was an undercoat intended to bond

with the primer coat and provide a textured surface for the third finishing coat which, in the case of the building in question
was intended to provide a rippled external surface. The manufacturers of the paint also supplied a specification as to the manner
in which the ingredients for the different coats should be mixed and applied. As it turned out, the specification for the primer
was defective in that the specifications caused the primer coat to have been applied in an overly dilute form which had caused
the primer to fail to achieve adequate adhesion to the concrete surfaces of the wall and adequate cohesion within itself. As a
result, the other two coats were prevented from adhering to the walls of the building. The paintwork flaked off in many areas
of the building and the plaintiff, as a responsible building company had to strip a considerable amount of paintwork with a
view to large areas being repainted.

The policy provided cover in the same terms as the policy cited in the case referred to above of Graham Evans. 45 The defendants
denied that the loss suffered by the plaintiff fell within the cover provided by the policy. If it did, the defendants argued that they
could rely upon a provision of the policy excluding “loss or damage directly caused by defective workmanship, construction
or design”, although it was provided that the exclusion “shall be limited to the part which is defective and shall not apply to
any other part or parts lost or damaged in consequence thereof”.

Foster J noted that the policy was a commercial document and had to be construed beneficially in favour of the insured. The
plaintiff had brought itself within the insuring clause on the basis that the rendering useless and valueless of the second and
third coats of paint of considerable magnitude separately applied and composed of different ingredients, and their necessary
stripping from the building, constitutes relevantly physical loss or damage to the coats of paint. 46

The defective workmanship only related to the preparation and/or application of the primer coat. As the defective workmanship
had caused damage to the primer coat only and not to the second and third coats

386

of paint, the exclusion clause for defective workmanship only excluded cover for the loss or damage to the primer coat. Any
causal effect of the defective workmanship to the second and third coats of paint was indirect. The exclusion clause therefore
did not operate to preclude cover for the loss or damage to the second and third coats of paint. 47

In Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (Chalmers Leask), 48 the High Court had to consider the
following exclusion clause that “loss or damage directly caused by defective workmanship, material or design or wear and
tear, or mechanical breakdown or normal upkeep or normal making good but so that this exclusion shall be limited to the part
immediately affected and shall not apply to any other part or parts lost or damaged in consequence thereof”. A claim was made
under the policy in respect of damage caused to flood mitigation works through the breaching by flood waters of a coffer dam
that had been impacted by vehicles passing over its top.

The High Court was satisfied that the claim for “de-silting” was not part of loss or damage caused by the alleged defective
workmanship, material or design of the coffer claim. The exclusion of loss or damage caused by defective workmanship,
material or design was limited to the part immediately effected and did not apply to any other part or parts lost or damaged
in consequence thereof. 49

The principle in Chalmers Leask was applied in Walker Civil Engineering v Sun Alliance & London Insurance PLC. 50 The
insured, Walker had contracted to build three sewerage pumping stations. When construction of the sewerage stations was
almost complete, the fibreglass sewerage tanks started to leak. During reconstruction of the tanks, concrete which had been
poured on top of the fibreglass tanks to counter the hydrostatic ground pressure which had caused the tanks to pop, had to be
jack-hammered and removed. The insured did not claim for the cost of the replacement of the fibreglass tanks, but claimed for
the costs of removing the concrete as being loss or damage flowing from the necessity to carry out rectification works. 51

Rolfe J at first instance was satisfied on the evidence before him that the concrete was an integral part of the tanks such that
the totality of the tank structure was infected with defective workmanship, construction or design. He held that to draw any
distinction between the different components of the tank was not justified and he was not satisfied that in the circumstances of
the case the concrete constituted “any other part or parts” within the meaning of the exclusion clause.

Rolfe J distinguished the case of Graham Evans in the following way:

387

His Honour held, as I understand it, that whilst the three coats of paint were necessary to establish a finished painted
surface, only the first coat was defective and that lack of quality in it caused damage to the second and third coats. I
consider His Honour's reasoning to be that each of the second and third coats had a function to perform, which was
independent of that to be performed by the first coat, notwithstanding that all coats were necessary to bring about the
desired result. Accordingly the facts of that case are distinguishable from the present where the concrete had no other
function to perform than to stabilise the fibreglass tanks. 52

Insofar as Foster J had found that the causal connection was indirect rather than direct, Rolfe J disagreed. It is impossible to
conclude that the damage to the second and third coats did not arise directly from the failure of the first coat or that there was
indirect causation. The correct approach to that case should have been whether it could be said on a proper construction of that
clause, that the second and third coats were “ ‘other part or parts’”. 53

Rolfe J was guided by the High Court in Chalmers Leask because he was satisfied that the damage caused to the construction
works in Chalmers Leask as a result of the failure of the coffer dam was consequential loss or damage to the works which the
insured had been constructing and was not loss or damage to the coffer dam itself. By contrast, in the present case, a similar
distinction could not be drawn between the fibreglass tanks and the concrete which had been poured onto the fibreglass tanks
to stabilise it against the hydrostatic ground pressure.

The NSW Court of Appeal dismissed the appeal. 54 The appellant's claim is properly characterised as a claim to be indemnified
under the policy for the cost of reinstating the defective part, namely the fibreglass tanks as a whole. It was not a claim in respect
of any other part or parts lost or damaged in consequence of defective workmanship, construction or design. Sheller JA then
went on to record his disapproval of the conclusion in Graham Evans. Sheppard AJA who handed down the main judgment
also distinguished the case of Graham Evans. The loss or damage suffered by the appellant as a result of having to remove the
tanks because of their defectiveness was “directly caused” by the need to replace them. 55

In Cementation Piling and Foundations Ltd v Aegon Insurance Co Ltd and Commercial Union Insurance Co PLC, 56 the case
had proceeded before the primary judge by statement of agreed facts. Cementation were contractually bound to complete and
maintain bored piling and continuous walls forming part of a series of quays to be constructed within the existing dock at
Barrow-Inn-Furness. The area was reclaimed from the sea by depositing pumped sand to form a land area of berm some 7ha in
area protruding 2.5m above sea level. The walls were designed and constructed to retain the sand wholly within the berm. The
walls were constructed by excavating cavities in the sand in the shape of the concrete sections which would form the walls of the
dock. Steel reinforcement cages were lowered into the cavity which were then filled with liquid concrete. At the joints between
the section, side panels were cast in such a shape as to enable the next panel to abut and provide a tight fit behind the wall in the
finished dock. The design did not provide for any form of tie between the panels. Upon completion of the sections, the sand in
the centre of the structure was dredged out. As the sand was removed, the sea water was permitted to enter and take its place.

In September 1985 it was discovered that quantities of the sand fill which had previously been placed in the area retained by
the walls had escaped into the newly constructed dock. On inspection of the

388

concrete panels it was discovered that in a number of places there were gaps and voids between adjacent panels which had
permitted sand to escape. Cementation were obliged to carry out works to remedy these matters. It was accepted by the parties
that the need for these works arose from defects in design, materials and workmanship. For the most part, gaps in the concrete
were filled with bagged concrete. In some places the gap was covered and liquid concrete was poured in a similar manner to
the original construction technique. Jet grouting was used to fill smaller voids.

The losses suffered by Cementation fell into three distinct areas. First, rectification of the gaps and/or voids in the walls. Second,
the removal of the sand fill from the dock bed and third, grouting and filling behind the walls of the voids from which the
sand fill had escaped.

The latter two costs were paid for by Commercial Union under its policy on the basis that those items constituted damage
respectively to the dock and the berm. The issue for decision before the Judge was whether the first item was covered by the
commercial union's policy or not. The relevant insuring section provided that the insurers would “indemnify the insured for
an amount not exceeding the limit of indemnity in respect of physical loss of, or damage to, the property insured howsoever
caused … and arising from any cause whatsoever except as hereinafter mentioned”. 57 A relevant exclusion clause was that
the insurers shall not be liable in respect of:

… (2) the cost of replacing or rectifying defects in design, materials or workmanship unless the property insured suffers
actual loss, destruction or damage as a result of such defects. However, initial costs of introducing improvements,
betterments or corrections in the rectification of the design, material or workmanship causing such loss or damage shall
always be excluded. 58

The trial judge said that s 1 of the commercial union policy imposed an obligation upon the insurers to pay the cost of repairing
physical damage which occurred to property insured under the policy. The berm had been damaged through the escape of sand
through holes in the wall which was intended to contain it. It was impossible to say that the berm had been repaired when the
spaces left by the escaping sand had been filled, but the sand used to fill them was bound in its turn to escape because the holes
in the wall had not been filled. The costs of remedying the defects in the wall were, therefore, part of the indemnity due from
the insurers “in respect of physical damage to the property insured”. That conclusion followed from the interpretation of the
definition of the risk read alone.

Sir Ralph Gibson who delivered the leading judgment of the Court of Appeal and with whom the other two judges agreed,
dismissed the appeal. The outcome of the appeal was dictated by the terms of the policy and in particular the existence of
the curiously worded exclusion clause. To say that the insurers shall not be liable for certain costs unless a certain event has
happened created a clear inference that if that event has happened then the insurers would be liable. Further, the exclusion
clause provided that “additional costs of introducing improvements, betterments or corrections in the rectification of the design
materials or workmanship causing such loss or damage shall always be excluded”. Sir Ralph Gibson held that the fact that
certain additional costs were excluded necessarily implied that there are other costs of rectification, that is the costs involved in
rectifying without such improvements, which would be recoverable under the policy. This construction arose from the use of
the word “additional” to describe the cost of introducing the improvements, betterments or corrections. 59 The exclusion clause
was therefore pivotal in the construction of the ambit of the insuring clause. 60

389

There has not been a consistent application of principle in respect of the exclusion clause for defective workmanship. For
example, the conclusion reached in Graham Evans, 61 is counterintuitive and at odds with the conclusion reached in Walker Civil
Engineering v Sun Alliance & London Insurance PLC. 62 Whether a policy responds to a claim may be open to more than one
conclusion depending upon the view taken in respect of the extent of the application of the exclusion clause for defective works.

Occurrence and the Four Trigger Theories

In order to determine whether cover under an occurrence-based liability policy is triggered, the law has devised four different
trigger theories. They are the exposure theory of coverage; the manifestation theory of coverage; the injury in fact theory of
coverage; and, the continuous trigger theory of coverage.

Exposure Theory of Coverage

Under an exposure theory of coverage, a liability policy is triggered whenever there is exposure to an injury – or damage-causing
agent during the policy period. Property damage is considered to have occurred on that first exposure so that the deterioration
following that exposure is merely the manifestation of the damage that has already occurred requiring repair or replacement.
Only the insurance policy in effect at the date of the first exposure is triggered to respond to the loss. 63

Manifestation Theory of Coverage

Under a manifestation theory of coverage, coverage is triggered at the time the damage to the property becomes apparent. Only
the insurance policy in effect on the date of manifestation of the damage is triggered to respond to the loss. The property damage
is caused after a period of dormancy. The date of property damage is the date of manifestation. 64

In first party property damage cases, when loss occurs over the policy periods of successive policies and is not discovered
until several years after it commences, the insurer that is on the risk at the time of manifestation is solely responsible for
indemnification. The “manifestation of the loss” occurs at the same time that “inception of the loss” occurs for limitations
purposes. 65

Injury in Fact Theory

Under the injury in fact theory, a policy responds if in fact there was damage which actually occurred during the policy period,
whether or not anyone was aware of it or could have been aware of it. Where property damage is ongoing or continuous, every
policy in effect while the damage continues to occur is triggered to respond to the loss.

Continuous Trigger Theory

Under a continuous trigger theory of coverage, all insurance policies in effect from the date of initial exposure to a damage-
causing agent, through any period of progressive or continuous damage, up to the time the damage is discovered, are triggered. 66
In Australia, the continuous trigger theory of

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coverage has been considered in determining liability in workers compensation liability policies for mesothelioma cases where
there has continuous exposure during successive policies of insurance and there is a progressive injury over many years. 67
Australian policies for construction risks insurance are now defining occurrence by reference to continuous exposure. 68 For
example, in Lumley General Insurance Ltd v Port Phillip City Council, 69 the construction risks policy under consideration

defined Occurrence to mean “an event, or continuous or repeated exposure to conditions, which results in loss of and/or damage
to and/or destruction of property, provided the Insured neither expected nor intended that such loss would result”. Occurrence
was similarly defined in the third-party liability section of the policy. This is significant because it would be a factor that the
courts may take into account in deciding whether the continuous trigger theory of coverage should be applied to property loss
and damage cases.

The controversy can arise from trying to determine whether there has been loss or damage caused by an occurrence during the
period of the policy of insurance. This is because there can be a time lag between the occurrence, the manifestation of the loss
and damage and the making of the claim under the policy. As a result, an insured may not be able to comply with its obligation
to notify its insurer of circumstances that might give rise to a claim. This issue becomes live when property damage does not
manifest during the policy period an insured seeks to assert that the policy responds to such damage. 70

Application of Continuous Trigger Theory to Property Damage Cases

In Home Ins Co v Landmark Ins Co, 71 the Court of Appeal found that as between two successive first-party insurers which
indemnified a hotel against property loss, the one which was on the risk on the date of the first manifestation of property damage
in the form of concrete spalling was liable for the entire claim resulting from the spalling damage, notwithstanding the fact
that the problem was continuous, continued beyond the end of the first policy period and extended, in part, into the second
policy period.

The concrete “spalling” was caused by defects in the design and construction of the concrete exterior of the building and concrete
room balconies in that such structures were improperly reinforced with

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steel and contained chemical components which when confronted with sea air and sea spray began a continuous and progressive
course of deterioration from the date of installation. 72

The policy defined occurrence to mean “an accident, including continuous or repeated exposure to conditions, which results in
bodily injury or property damage neither expected nor intended from the standpoint of the Insured”. 73

The Court decided that the date of manifestation and the date of discovery was the same. In the circumstances, the general
rule that the date of manifestation determines which carrier must provide indemnity for a loss suffered by its insured. Liability
will not be imposed under an all-property insurance policy where damages occur and are apparent before the date the policy
takes effect. 74

The Court also said in obiter that California Union v Landmark Ins Co 75 had misapplied the three pre-manifestation cases to
hold a post-manifestation carrier jointly and severally liable.

The Court pointed out that “[c]ommon sense tells us that property damage cases, even those involving continuous damage
such as the one before us, differ from asbestos bodily injury cases where injury is immediate, cumulative and exacerbated by
repeated exposure. We believe the rationale for apportioning liability in the asbestos cases is not a basis to deviate from settled
principles of law applicable to this case”. 76

In American Employer's Insurance Co v Pinkard Construction Co, 77 Pinkard had installed a roof which had corroded. The
corrosion was a continuous, progressive condition which began immediately following the construction of the roof in 1973 and
which was caused by the use of a certain fill material. By the time the portions of the roof collapsed 11 years after construction and
the corrosion was discovered, the damage was widespread. Here, the damage slowly progressed. And, although not immediately

apparent, the evidence showed that progressive and continuous deterioration of the roof infected the integrity of the structure
causing actual property damage during the respective policy periods. The insured contended that because the corrosion was a
progressive and continuous condition, coverage was triggered under a series of general liability insurance policies. The Court
found the fact pattern distinguishable from a situation in which the manifestation theory is usually applied, that is, when tortious
conduct sets in motion a process that ultimately causes injury after a period of dormancy.

The policy defined an occurrence as “an accident, including continuous or repeated exposure to conditions, which results in
bodily injury or property damage neither expected nor intended from the standpoint of the insured”. 78

The Insurer had argued that the situation at issue constituted one occurrence triggering coverage only when the roof collapsed.
The Court agreed that the damage arose from one continuous process. However, none of the language in the policies conditioned
coverage upon the resulting damages manifesting themselves during the policy period. Rather, coverage was provided if property
damage occurred during the policy period. Property damage triggered coverage when actual damages were sustained. 79 The
Insurer argued that damage which begins in one policy period, and continues through several more, is but one occurrence. This
was not accepted.

In TBG Inc v Commercial Union Ins Co, 80 the plaintiff, TBG, Inc and its predecessors, owned and operated a brake
manufacturing plant in Cloverdale, California from 1967 to 1984. From 1965 to 1972,

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TBG used hydraulic fluids containing polychlorinated biphenyls (PCBs) in its manufacturing operations. During this period,
waste water containing PCBs was periodically discharged from the plant into an adjacent field. As a result, TBG's property
and adjacent parcels of land were contaminated with PCBs. During the years between 1966 and 1970, when much of the
PCB contamination on the MGM Site occurred, TBG was insured by Commercial Union Insurance Company under five
comprehensive general, umbrella, and excess liability insurance policies.

The policies defined an occurrence as “an accident, including injurious exposure to conditions, which results, during the policy
period, in bodily injury or property damage neither expected nor intended from the standpoint of the insured”. 81

The Court decided that the continuous trigger theory of coverage would be inappropriate in this case because it would require
coverage from every insurer of the property from the time the contamination occurred in the late 1960s until the time it was
discovered in the early 1980s, despite the fact that, after 1972, there were no new occurrences causing property damage. The
Court also rejected the manifestation theory of trigger as being inconsistent with the terms of the policies. The policies provided
coverage for property damage that occurred during the policy period, not for property damage that was discovered during the
policy period. The Court held that the exposure theory was appropriate in this case.

In Browder v United States Fidelity & Guaranty Co (Browder), 82 Fletcher had been the owner and general construction
contractor of a Motel. Fletcher had purchased a Special Multi-Peril Policy in 1975. In April 1976, after completion of the motel,
the Browders purchased the motel. As part of the sale, the policy was assigned to the Browders. In January 1985, the Browders
noticed the ceiling of the motel was cracking and sagging. The trial judge held that no loss was recoverable under the policy
as no loss had occurred during the relevant policy period. The Court of Appeal held that so long as the damage results from
a progressive and continuous condition, an insurer can be held liable even in a situation in which the ultimate injury becomes
manifest after the relevant policy term expires. Nevertheless, even though there may have been damage to the property during
the period of Fletcher's policy, there could not have been any damage to the Browders because they owned no interest in the
motel at that time. 83

In Hoang v Assurance Co of America 84 the Court had to consider a commercial general liability (CGL) insurance policy which
insured the homebuilder against liability arising out of the property damage that occurred during the policy period. At issue was
whether liability insurance coverage for property damage was voided if the damage occurred when a predecessor in interest
owned the damaged property, despite the insured being found legally liable to pay all damages, including those damages owing
to property damage. The proceeds of a CGL insurance policy were available to satisfy the judgment of a subsequent purchaser
of damaged property against the homebuilder when:
(a) the builder insured itself against liability for damage occurring during the policy period;
(b) the damage to the property occurred during the policy period;
(c) no exclusion to the policy rendered the insured's policy coverage inapplicable because of a change in the
property's ownership; and
(d) the builder was liable for the damage to the property.

The Court said that Browder differed from this case in two significant respects. First, the insurance policy at issue in Browder
was a special multi-peril insurance policy, as opposed to the CGL. Additionally, Browder involved property the insured owned,
a circumstance expressly excluded from the policy's coverage.

In Alie v Bertrand & Frere Construction Co Ltd, 85 Bertrand supplied concrete for the construction of about 140 homes in 1986,
1987 and 1988. Bertrand used material known as type C fly ash supplied by

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Lafarge Canada Inc as one ingredient in its ready-mix concrete. The concrete used in the foundations of the homes proved
defective and in 1992 it was determined that the foundations needed total replacement. The defect was traced to the use of
Lafarge's fly ash. One hundred and thirty-seven homeowners sued Bertrand & Lafarge. Bertrand joined five of its insurers to
the proceedings claiming they were obliged to indemnify Bertrand for any damages it owed to the plaintiff. Lafarge also joined
18 of its insurers to the proceedings.

The policies defined an occurrence as “an accident including continuous or repeated exposures to conditions neither expected
nor intended by the insurer”. 86

The high levels of sulphates and alkalis in the fly ash supplied by Lafarge caused the concrete to deteriorate, leading to the
damages suffered by the plaintiffs and the need for complete replacement of the footings and foundation walls. The deterioration
of the foundations had resulted from chemical reactions originating in whole or in part from components of the fly ash.
The deterioration took place over time, with exposure to wetting and drying and, in some cases, freezing and thawing. The
deterioration had begun shortly after the concrete was placed. The plaintiffs inter alia recovered all of the costs of replacing
the foundation walls and footings.

The five Bertrand insurers were obliged to indemnify Bertrand for damages owed to the plaintiffs. Damage had occurred from
1986, when the first foundations were poured, to 1992 when it was determined that the foundations had to be replaced. Each of
the five policies in effect for any of the one-year periods between 1986 and 1992 had been triggered.

The damage suffered by the plaintiffs whose foundations were poured in 1986 were apportioned equally over the seven policy
periods from 1986 to 1992. Damages suffered by those whose foundations were poured in 1987 were spread equally over the
six policy periods running from 1987 to 1992 and damages referable to the houses whose foundations were poured in 1988
were spread equally over the five policy periods from 1988 to 1992.

Some of the Lafarge insurers were obliged to indemnify Lafarge for the damages suffered by the plaintiffs. The Court quantified
the liability of the individual insurers using the same pro rata approach that had been used to quantify the liability of the Bertrand

insurers. On this approach, five of the Lafarge insurers (who had been on risk at the time that the damage had been suffered)
were ultimately held liable to indemnify Lafarge.

On appeal, the Court of Appeal held that if the injury in fact is found to have occurred at the date of exposure to the hazard, at the
date of manifestation of the damage, or on a continuous and progressive basis, one might refer to the application of the exposure,
manifestation or continuous trigger theories as descriptive of the timing of the damage as it actually occurred. However, the
most straightforward and accurate nomenclature in each case is injury in fact. 87

If the full extent of the damage had become a certainty at a point in time before it is discovered, the injury in fact has occurred by
that point in time. Consequently, the fact that there may be further deterioration after that point does not trigger any policies in
place after that point, because the damage is already complete. It will be a matter of evidence at the trial as to when the damage
became complete. The point when the full extent of the damage becomes known is the manifestation date. In this case, there
was no evidence acceptable to the trial judge that the damage was complete before the experts did conclusive testing in 1992.
Therefore, that date was accepted as the date when the damage became complete. 88

Because it was not possible on the evidence to determine how much of the damage occurred during any particular policy period,
the application of the continuous trigger theory was appropriate in order to allow the trial judge to apportion the damage on a
pro rata basis through the affected policy periods. 89

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Cross Liability Clauses

Contract Works policies have cross liability clauses. 90 The commercial objective behind such a clause is to enable all
participants in a construction project with an insurable interest to be insured so that every tradesperson can work towards the
common goal of completing the project rather than fighting between themselves to determine responsibility for any property
damage arising from the negligence of any of them. 91 The courts have also found such a clause significant in their construction
of the policy as to whose property is insured under the policy.

In Transfield Pty Ltd v National Vulcan Engineering Insurance Group Ltd 92 the underwriters agreed to insure Transfield
Holdings Pty Limited and all subsidiary and controlled joint venture companies, their subcontractors and all principles under a
contractor's floater policy. The policy had three sections. Section A provided insurance for loss or damage to property owned
by the insured or for which the insured may have been responsible. Section B covered legal liability under the terms of any
contract maintenance or defects liability clauses for loss and/or damage in identified circumstances. Section C set out various
terms and conditions.

The following table sets out the relationship between the parties to the proceedings.

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Two floods occurred during the construction of the project. As a result of the first and/or second incidents, a dredge belonging
to Pearce was damaged, a caterpillar excavator belonging to Elliot was damaged and a part of the cofferdam, sheet piling and
certain plant and equipment belonging to Transfield was damaged. Various claims were also made against Transfield, Connell
Wagner and Coffey for compensation for loss and damage.

The following claims for compensation for “loss of and/or damage to and/or destruction of property and/or loss or use thereof”
within the meaning of section C of the policy were made:

(a) Pearce claimed against Transfield, Connell Wagner and Coffey;

(b) Elliot claimed against Transfield, Connell Wagner and Coffey;
(c) Transfield claimed against Connell Wagner and Coffey;
(d) Connell Wagner claimed against Coffey and Transfield; and
(e) Coffey claimed against Connell Wagner and Transfield.

Connell Wagner and Coffey denied all liability and responsibility for the first and second incidents and the quantum of all claims
made by all parties made against them. The underwriters invoked exclusion 3(b) 93 of the policy to deny indemnity to Connell
Wagner and Coffey in respect of their alleged liability to Transfield. At issue was the construction of the exclusion clause and
the operation of the cross liability and waiver of subrogation clause. 94

McClellan J said that each party was to be considered as a separate insured entity as if a separate policy had been issued to each
of them. 95 The insuring clause provided that the Insurer will pay all sums which the Insured shall become legally obligated
to pay in certain circumstances. The Insurer in this context must be a reference to the party which has the obligation to make
the payment and will be the party which makes the claim. The exclusion clause can only operate in relation to that claim and
it follows that the Insured referred to in the exclusion clause must be the party making the claim. 96 The insurer was therefore
precluded from relying upon the exclusion clause to deny indemnity to Connell Wagner and Coffey in respect of their liability
to Transfield.

Waiver of Subrogation
Pursuant to a contract of insurance, an insurer has the right to be subrogated – exercise the rights of the insured against the third
parties – once it has indemnified the insured for the claim. Some contracts modify this principle and provide that the insurer
may be subrogated to the rights of the insured when it makes a part payment under the policy in the insured's favour.

The right of subrogation allows the insurer to commence recovery action against third parties in the shoes of the insured to
recover the loss of the insured. The obligation of the insurer when it commences a subrogated recovery action is to pursue
the third party for the whole of the insured's loss even if part of that loss is uninsured. It is up to the insurer to come to an
arrangement with the insured as to legal costs.

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In GPS Power Pty Ltd v Gardiner Willis & Associates Pty Ltd, 97 the Queensland Court of Appeal had to construe the definition
of “the insured” 98 and the clause relating to subrogation. 99

The Queensland Court of Appeal construed the waiver of subrogation rights clause very broadly by giving it its ordinary meaning
and not reading it down to achieve “a more acceptable commercial result”. By majority, the Court said that A and B need not be
each insured under the same policy of insurance with respect to a loss in order for the waiver of subrogation clause to operate.
As a matter of construction, the waiver extended to each insured under the policy irrespective of whether they were insured
in respect of the loss under that policy. Otherwise, “it would be meaningless for the insurer to think in terms of subrogation
with respect to a claim against B consequent upon paying out a claim made by A. B would be entitled, if such a claim was
made, to say that the insurer was obliged to indemnify it with respect to the loss”. 100 The waiver of subrogation clause was
therefore not commensurate with cover.

This judgment has been applied in the New South Wales courts in the case of Larson-Juhl v Jaywest. 101 Handley J affirmed
the decision of Master Macready and said that “the duty of this Court is to construe the language of the clause fairly and simply
without making any extensive or extravagant implication. Under the clause the insurer agrees that it ‘shall waive any rights and

remedies or relief’ and there is nothing to confine the generality of these words. … this Court should give the clause its ordinary
meaning and if this is done it covers the causes of action pleaded by the Appellant”. 102

In Standard Publishing House (Aust) Pty Ltd v Chen, 103 the NSW Supreme Court had to determine whether or not the defendant
was a “co-insured” under the relevant policy for the purposes of defeating a subrogated claim brought by the insurer. Standard
Publishing House (the lessee) leased premises from Chen (the lessor) for the purposes of its printing businesses. On three
separate occasions during 2008, rainwater entered the premises and caused damage to the lessee's printing machinery and
stock. The insurer (Allianz) indemnified the lessee for the damage caused by the first and third incidents. Allianz commenced
proceedings in the name of the lessee, seeking damages from the lessor in respect of those two incidents.

The waiver of subrogation clause in the policy stated that the insurer waived its “rights and remedies or relief to which We may
or may not become entitled by subrogation against: i) any co-insured (including directors, officers and employees)”. McDougall
J looked to s 8 of the policy which stated that the “insured” was to include parties “to whom the Named Insured is obligated
by virtue of any contract or agreement to provide insurances such as is afforded by this Policy”. As a matter of construction of
the policy, the lessor was a party to which s 8 applies. McDougall J said that the waiver of subrogation clause should not be
limited so as to be “commensurate with the cover”. While the lessor was only

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afforded cover under s 8 of the policy and was not entitled to cover for the subject claim, the lessor was an “insured” under
that section which meant that it was also a “co-insured” for the purposes of the waiver of subrogation clause. The lessor was
therefore entitled to be indemnified and the subrogated claim brought by Allianz was rejected.

It is convenient to note that the approach taken by the courts in New South Wales and Queensland diverges from the two-step
approach of the courts in the United Kingdom. The prevailing approach taken there is that where there is an express waiver of
subrogation in a contract of insurance then the waiver is commensurate with the cover. 104 However, where the express waiver
of subrogation does not cover the scope of the claim, a construction of the underlying contract terms may lead to the conclusion
that the parties had objectively intended to waive their rights of subrogation against each other. 105

Circuity of Action

In Larson-Juhl v Jaywest, 106 Master Macready in obiter said that the defence of circuity of action is available whenever the
rights of the competing litigants is such that the defendant would be entitled to recover back from the plaintiff the same amount
which the plaintiff seeks to recover from the defendant whether those sums are categorised as debts, or damages. 107 The
elements of the defence are that (a) it must be shown that precisely the same amount of damages would be awarded in the
defendant's proposed action as in the plaintiff's action; (b) both the plaintiff and the defendant must be suing each other in the
same right; (c) both actions must be actions at law, not one in law and one in equity; and (d) either the cause of action must
be complete, or alternatively, the defendant so obviously has an action as a result of the finding for the plaintiff that it would
be scandalous to put the defendant to the trouble of starting a fresh action. 108 However, the defence would have failed as any
amount that the defendants could have claimed on the policy of insurance for their loss of profit would have been in a different
amount to that of the plaintiff's claim. 109

Miscellaneous Issues – Failure to Note an Insured

In Thiess Contractors Pty Ltd v Norcon Pty Ltd, 110 the issue was whether a plaintiff who had suffered loss as a result of a
defendant's negligence, but is the beneficiary of an insurance policy covering that loss should have the sum that it has received
from the insurer taken into account to reduce the damages recoverable from the defendant.

A workman had been injured at a construction site when he tripped over a piece of uncapped reinforcing steel and injured his
spine. He contended that the accident was caused by the negligence of his employer.

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He subsequently commenced proceedings against his employer claiming damages. Thiess Contractors and Norcon Pty Ltd were
joined as defendants to the action. Thiess Contractors was the occupier of the site and the main contractor for the purposes
of the construction work being performed there. The respondent was one of the subcontractors of Thiess Contractors. It was
responsible for the installation of the reinforcing steel and the workman alleged that it too was negligent.

Thiess Contractors had issued a Contribution Notice against Norcon alleging that it was a term of the subcontract between it
and Norcon that Norcon would at its own expense, procure and maintain an insurance policy in the joint names of Thiess and
Norcon and others, covering liability in respect of personal injury to any person where the injury arises out of or is caused by
the execution of the subcontract works. Thiess Contractors alleged that the respondent was in breach of that term and that it
had failed to procure the proposed policy. In its defence, Norcon said that as Thiess Contractors was the beneficiary of another
policy, it had suffered no loss. as Thiess Contractors had lost the benefit of the policy of insurance. 111

Professional Indemnity Policy

A contractor's all risk policy excludes cover for professional negligence. A professional indemnity policy provides cover for
legal liability to pay damages in respect of claims that were made against the insured and notified to the insurer during the
policy period arising from a failure to exercise reasonable care and skill in the provision of its professional services. 112

Nexus between the Legal Liability and the Business of the Insured
The legal liability must arise from or be in connection with the professional services of the insured as defined in the policy. The
negligence has to be in connection with the business of the insured. 113 In Hurlock v Johnstone Shire Council, 114 the issue was
whether the insured Council had negligently subdivided and sold flood prone land. The insured had sought indemnity from the
local government insurance scheme. 115 The Council contended that there was a “negligent act, error or omission” on its part
with respect to the design and construction of the subdivision. The proceedings had settled but the Council had to demonstrate
that the policy responded to the claim. On the pleadings, negligence with respect to the design and construction of the subdivision
had not been an issue for determination. However, the Court said that as there was negligence by the respondent with respect
to the design and construction of the subdivision there was a valid claim pursuant to the professional indemnity provision. 116

Ascertainment of Legal Liability

What constitutes legal liability? Legal liability is ascertained via judgment, arbitration, award or by agreement. 117 The basic
proposition is that a judgment is conclusive evidence of legal liability. 118

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However, a judgment may not be conclusive of legal liability if it is a consent judgment 119 or there has been a failure to run a
proper defence. 120 A consent judgment is treated as a compromise or a settlement of the proceedings.

Where an insured has settled the claim against it, the prevailing view in Australia is that where an insurer has wrongfully
repudiated a contract by denying indemnity, an insurer is bound by a reasonable settlement determined on an objective basis 121

at the time of settlement. 122 Once a settlement is shown to be reasonable then it will satisfy the requirements of causation and
remoteness. 123 An insured does not have to prove underlying liability to the claimant via extrinsic evidence. 124

Legal reasonableness may coincide with commercial reasonableness but the two are not necessarily coextensive. An outstanding
commercial settlement will not necessarily be legally reasonable. 125

Demonstrating reasonableness requires proof not only that the result was reasonable but also that the negotiations were
conducted with proper care and skill. The settlement amount must reflect the relevant party's true prospects of success on the
basis that the proceeding had been conducted with care and skill because otherwise it would merely reflect that party's impaired
prospects. The risk involved in the litigation and the reasons which led to the settlement are the factors that will determine
whether or not the settlement amount was reasonable. 126 Evidence of the advice which the insured received to induce it to
accept the settlement is not proof in itself of the reasonableness of the settlement advised. The factors which lead to the giving
of the advice are factors relevant to the reasonableness of the settlement. The relevance of advice given by the insured's legal
advisers to settle is that it tends to negative the hypothesis that the insured acted unreasonably in accepting the settlement. 127

Ultimately, there is no single answer to the question of what will constitute a reasonable settlement amount. That question
requires consideration of the chances of the parties succeeding in their respective

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claims or defences. As prediction of likely outcomes in litigation is imperfect and imprecise, in each case there will be a range
within which a settlement amount will be reasonable. 128

What Is a Claim?

A claim is a written demand for compensation. 129 A claim for civil compensation can include a claim for equitable
compensation. 130 However, a claim for civil damages or civil compensation does not include a claim in debt. A claim also
does not encompass a claim for restitution, or for a civil penalty. 131 The civil liability that is ultimately established need not
precisely correlate with the claim that was first made and notified. This arises from the use of phrases like “in respect of claims”
or “as a result of claims” in the insuring clause. 132 The nature of the liability that has been established has to be characterised.
Civil liability in respect of negligence, breach of contract and misleading or deceptive conduct will be covered if it falls within
the terms of the policy. 133 This is determined by reference to the facts that give rise to the liability rather than the form of the
liability. 134 However, it does not matter how the claim is conveyed. For example, it can be via correspondence, a statement
of claim or via arbitral process.

Claim vs Circumstances
There is a distinction between a claim and a circumstance that might give rise to a claim. The policy may include a notification
of circumstances clause which invites the insured to notify the insurer of circumstances that reasonably might give rise to a
claim. If the policy does not have such a clause then s 40(3) of the Insurance Contracts Act 1984 135 enables an insured to
notify the Insurer of circumstances. The effect of such notification is that if a claim does eventuate then the policy under which
notification of circumstances is made may be extended to provide cover for the later claim that is demonstrated to fall within
the circumstances that was notified. 136 The High Court has termed these as “discovery policies”. 137 Sufficient notification
would be satisfied if an insured provides an Insurer with fulsome and timely notification of circumstances that a reasonable
person might expect in the circumstances of each particular case. 138 A causal link is required between the circumstances that
were notified and the claim that eventuates. 139

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Nevertheless, if an insured is aware of circumstances that might give rise to a claim but fails to notify its insurer of these
circumstances and a claim eventuates then s 54 of the Insurance Contracts Act 1984 140 may operate to overcome the failure of
notification. The key is the knowledge of the insured of the existence of circumstances. 141 If circumstances do not exist then
s 54 cannot operate to overcome the absence of notification to extend cover under the policy. 142

Section 54 of the Insurance Contracts Act

Section 54 is remedial in character and its language is to be construed so as to give the most complete remedy which is consistent
with the actual language employed and to which its words are fairly open. 143 The purpose behind s 54 is to ameliorate the
unfairness of a strict construction of a policy of insurance which would entitle an insurer to refuse to pay a claim, either in
whole or in part, because the insured or “some other person” has done some act after the contract was entered into even when
the act or omission did not cause or contribute to the loss covered by the insurance. The explanatory memorandum described
this situation as “unsatisfactory”. 144 Section 54(1) prevents an insurer from refusing to pay a claim in those circumstances. To
the extent that the act or omission caused or contributed in part to the loss covered by the insurance then s 54(4) operates to
ensure that the insurer pays that part of the loss that gave rise to the claim that was not caused by the act.

In Maxwell v Highway Hauliers Pty Ltd, 145 the High Court said that Antico v Heath Fielding Australia Pty Ltd established that
s 54 takes as its starting point nothing more than the existence of a claim and of a contract the effect of which is that the insurer
may refuse to pay that claim by reason of some act which the insured (or someone else) has done or omitted to do after the
contract was entered into. Section 54 does not postulate a liability of the insurer to pay the claim that has been made. Section
54(1) does not focus on the legal character of a reason which entitles an insurer to refuse to pay a claim – for example that the
claim falls outside a covered risk, that it falls within the ambit of an exclusion clause or there has been non-compliance with
a condition. Instead, s 54(1) focuses upon the actual conduct of the insured – on some act which the insured does or omits to
do. Section 54 is engaged when the doing of an act or the making of an omission would excuse the insurer from an obligation
to pay a claim for a loss actually suffered by the insured. 146

In Maxwell, the insured had entered into a contract of insurance which indemnified the insured against specified loss, damage or
liability occurring to or in respect of the insured's fleet of vehicles during the period of insurance. The policy required each driver
to undertake psychological testing. Accidents occurred and claims were made in respect of damage caused by each accident.
The insurer refused to pay

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the claims on the basis that each vehicle had been driven by an untested driver. The Insurers conceded at trial that the fact
that each vehicle was being operated by an untested driver could not reasonably be regarded as being capable of causing or
contributing to any loss incurred by the Insured as a result of each accident. The sole issue was therefore whether s 54(1) was
engaged. Section 54 is engaged if an insurer refuses to pay a claim by reason of an act or omission that occurred after the policy
was entered into and s 54(2) does not apply to the act or omission. Section 54(1) does not apply to inherent limitations in the
claim. For example, s 54(1) does not apply to a claim made outside of the policy period in respect of a claims made and notified
policy. In respect of “discovery policies”, s 54(1) does not apply to an occurrence that the insured did not become aware of
during the period of the policy. 147

Extent of Cover – Legal Expense

Professional indemnity policies provide cover for civil liability arising from the failure of the professional to exercise reasonable
care and skill in the discharge of his retainer. However, issues can arise as to whether the policy of insurance provides cover
for legal expenses incurred by the Insured in circumstances where there has not been a claim for civil liability. The answer to
this issue is determined by construction of the individual policies.

In Kyriackou v ACE Insurance Ltd, 148 the Victorian Court of Appeal had to consider whether the insurer had to indemnify the
insured for its legal costs of defending a claim when the claim was never determined on its merits. ASIC had brought proceedings
against the insured in respect of an alleged unregistered managed investment scheme. ASIC had not sought civil compensation
or damages and the issue was whether the claim was covered by the insuring clause of the professional indemnity policy. The
insured's costs liability did not fall within the insuring clause and the definition of “Defence Costs” in the policy. Harper JA said
that the ASIC claims were not claims for civil liability of any kind and did not fall within the insuring clause of the policy. 149

In Antico v Heath Fielding Australia Pty Ltd, 150 the issue was whether an insurer was obliged to indemnify an insured under
a claims made policy providing indemnity for legal expenses that an insured incurred as a director in circumstances where the
insured had not satisfied the condition precedent in the policy of obtaining the consent of the insurer prior to the incurring of
the legal expenses. The High Court held that s 54 of the Insurance Contracts Act 1984 applied to the omission of the insured
to seek consent and the insurer was obliged to indemnify the insured.

Exclusion Clauses

Contractually Assumed Liability

Most professional indemnity policies exclude cover for contractually assumed liability. While some insurers are currently
providing cover for insured who have contracted out of proportionate liability legislation, it is unclear how long this cover will
be available.

403

An insured who has contracted out of proportionate liability legislation or who has provided contractual warranties and
indemnities may find that they are not insured to the extent that the contractual liabilities that they have assumed are not
commensurate with their failure to exercise to reasonable care and skill.

Dishonesty
Professional indemnity policies exclude cover for loss in connection with a claim made against an insured that has been
brought about, or are contributed to, by the dishonesty of the insured. A causal connection is necessary between the loss
and the dishonesty. 151 There is no universal definition of dishonesty and each case is fact-dependent. Carelessness 152 and
incompetence as well as gross negligence are insufficient. 153

The test of whether conduct is dishonest is an objective one informed by the common sense and experience of the tribunal of
fact. 154 However, a deliberately false statement, 155 knowledge that a transaction is unauthorised, 156 deliberate concealment
of a matter that an insured knows ought to be disclosed as well as the deliberate preference of an insured's interests over the
interests of a client is likely to be found to be dishonest. 157

An example of dishonest conduct is an engineer signing off on the adequacy of a structural steel inspection at a complex
construction site knowing that every requisite element of the structure has not been inspected and tests carried out on
questionable materials sampled and tested for physical and analytical properties to enable the formation of such an opinion.

Duty of Utmost Good Faith

Finally, the insured and insurer owe each other a duty of utmost good faith. The concept of utmost good faith has always
been present in the law of insurance and predates s 13 of the Insurance Contracts Act 1984. 158 The concept of good faith
forbids either party to the insurance contract from concealing what he privately knows, to draw the other into a bargain from
his ignorance of the fact, and his believing the contrary. 159 If the duty of disclosure is breached then the insurer may avoid the
contract. The basis of avoidance is that the risk run is in fact different from what the insurer understood it to be and therefore
the insurer has been prejudiced by the non-disclosure because he was not able properly to estimate the risk. 160

The duty of utmost good faith encompasses notions of fairness, reasonableness and community standards of decency and fair
dealing, and may be breached by capricious or unreasonable conduct which falls

404

short of dishonesty. 161 Therefore, while honesty is a necessary element of the duty of utmost good faith, it is not sufficient. 162
The duty of utmost good faith may require an insurer to act in the legitimate interests of an insured as well as its own interests. 163
The duty of utmost good faith will usually require something more than passivity. It will usually require affirmative or positive
action on the part of the person owing a duty of it. 164 In Sharma v Insurance Australia Ltd (t/as NRMA Insurance), 165 the
Court held that given the state of information the insurer had and the advice that the insurer had received, the insurer had
breached it duty of utmost good faith by failing to determine the claim for indemnity within a reasonable time. In this case,
reasonable time, was a period of two weeks. 166

Duty of Disclosure
An insured has a duty of disclosure. This is considered an aspect of the insured's duty of utmost good faith and its obligation
to have regard to the legitimate interests of the insurer. 167 An insured must make full disclosure of all material circumstances
to the insurer. This is an objective test.

In CGU Insurance Ltd v Porthouse, the High Court had to consider whether the second limb of the definition of “known
circumstance” in the CGU professional indemnity policy was purely objective or subjective. The barrister had failed to disclose
a known circumstance to his insurer because he subjectively did not believe that a claim might eventuate from the circumstance.
The definition was however framed in objective terms. 168 The High Court held that the test was purely objective and the
subjective opinion of the insured was irrelevant. A reasonable person in the professional position of the insured would have
thought that a claim might eventuate from the circumstances and that was sufficient to invoke the operation of the exclusion
clause. The fact that the non-disclosure was innocent was irrelevant.

Footnotes

* Barrister, Selborne Chambers, Melbourne TEC Chambers and Director and Secretary of the Society of
Construction Law Australia.
1 Max Abrahamson, “Risk Management” (1984) 1 International Construction Law Review 241. The
Abrahamson Principles provide that a party should bear the risk where: “a. the risk is within the party's
control; b. the party can transfer the risk, eg through insurance and it is most economically beneficial to
deal with the risk in this fashion; c. the preponderant economic benefit of controlling the risk lies with the

party in question; d. to place the risk upon the part in question is in the interests of efficiency, including
planning, incentive and innovation efficiency; and e. if the risk eventuates, the loss falls on that party
in the first instance and it is not practicable or there is no reason under the above principles, to cause
expense and uncertainty by attempting to transfer the loss to another.”
2 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; (1990) 6 BCL 97.
3 Insurance Contracts Act 1984 (Cth) s 48(1) provides: “A third party beneficiary under a contract of
general insurance has a right to recover from the insurer, in accordance with the contract, the amount
of any loss suffered by the third party beneficiary even though the third party beneficiary is not a party
to the contract.”
4 Insurance Contracts Act 1984 (Cth) s 16(1) provides: “A contract of general insurance is not void by
reason only that the insured did not have, at the time when the contract was entered into, an interest in
a subject-matter of the contract.”
5 Insurance Contracts Act 1984 (Cth) s 17 provides: “Where the insured under a contract of general
insurance has suffered a pecuniary or economic loss by reason that property the subject-matter of the
contract has been damaged or destroyed, the insurer is not relieved of liability under the contract by reason
only that, at the time of the loss, the insured did not have an interest at law or in equity in the property.”
6 Todd v Alterra at Lloyds Ltd (2016) 239 FCR 12, 22–23 (Allsop CJ and Gleeson J); [2016] FCAFC 15
summarising the principles in Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603, [19]–
[23]; [2009] NSWCA 407; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579, [22]
(Gleeson CJ), [73]–[74] (Kirby J); [2000] HCA 65; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522,
[15], [16] (Gleeson CJ, McHugh, Gummow and Kirby JJ); [2005] HCA 17; Australian Casualty Co Ltd v
Federico (1986) 160 CLR 513, 520–521 (Gibbs CJ); see also Kirby J (in dissent) in Johnson v American
Home Assurance Co (1998) 192 CLR 266, [19]; [1998] HCA 14; International Air Transport Association
v Ansett Australia Holdings Ltd (Subject to Deed of Company Arrangement) (2008) 234 CLR 151, [8];
[2008] HCA 3; Durham v BAI (Run Off) (in Scheme of Arrangement) [2009] 2 All ER 26, [202]–[204];
[2008] EWHC 2692. See also Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR
104, 116–117 (French CJ, Nettle and Gordon JJ); [2015] HCA 37 affirming the law set out in Codelfa
Construction Pty Ltd v State Rail Authority (1982) 149 CLR 337; 1 BCL 16, Electricity Generation Corp
v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7; Horsell International Pty Ltd v Divetwo
Pty Ltd (2013) 18 ANZ Insurance Cases 61-991, [151]–[157]; [2013] NSWCA 368.
7 Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995–996 (Wilberforce L).
8 The concept of “accidental” was discussed in Australian Casualty Co Ltd v Federico (1986) 160 CLR
513, 532; Hurley Contractors Ltd v Farmers Mutual Association (1991) 6 ANZ Insurance Cases 61-076;
Mount Albert City Council v New Zealand Municipalities Co-op Insurance Co Ltd [1983] NZLR 190,
194 (Cooke J).
9 Matton Developments Pty Ltd v CGU Insurance Ltd [2017] 1 Qd R 467; [2016] QCA 208.
10 Matton Developments Pty Ltd v CGU Insurance Ltd [2017] 1 Qd R 467, [10]; [2016] QCA 208.
11 Matton Developments Pty Ltd v CGU Insurance Ltd [2017] 1 Qd R 467, [101]; [2016] QCA 208
(footnotes omitted).
12 An “accident” has been variously described as an “unlooked-for mishap or an untoward event which is
not expected or described” or “any unintended and unexpected occurrence which produces hurt or loss”:
Fenton v J Thorley & Co Ltd [1903] AC 443, 448 (Lord Macnaghten), 452 (Lord Lindley). See also
Australian Casualty Co Ltd v Federico (1986) 160 CLR 513, 533–534 (Wilson, Deane and Dawson JJ)
where this expression was adopted.
13 Sheehan v Lloyds Names Munich Re Syndicate Ltd [2017] 19 ANZ Insurance Cases 62-158; [2017] FCA
1340.
14 Australian Casualty Co Ltd v Federico (1986) 160 CLR 513, 525 (Wilson, Deane and Dawson JJ).
15 De Souza v Home & Overseas Insurance Co Ltd [1995] LRLR 453, 458; Sheehan v Lloyds Names Munich
Re Syndicate Ltd [2017] 19 ANZ Insurance Cases 62-158, [63]; [2017] FCA 1340.

16 Robinson v Evans Bros Pty Ltd [1969] VR 885, 896.

17 Sheehan v Lloyds Names Munich Re Syndicate Ltd [2017] 19 ANZ Insurance Cases 62-158, [65]; [2017]
FCA 1340.
18 Leeds Beckett University v Travelers Insurance Co Ltd [2017] Lloyd's Rep IR 417, 449 [208].
19 Global Process Systems Inc v Syarikat Takaful Malaysia Berhad [2011] 1 All ER 869, [46]; [2011] UKSC
5.
20 Fraser v BN Furman (Productions) Ltd [1967] 1 WLR 898, 905–906. This test has been approved and
expanded in Albion Insurance Co Ltd v Body Corporate Strata Plan No 4303 [1983] 2 VR 339, 344–
345. See also the recent application of the test in Barrie Toepfer Earthmoving and Land Management
Pty Ltd v CGU Insurance Ltd (2016) 75 MVR 108; [2016] NSWCA 67.
21 CGU Insurance Ltd v Lawless [2008] VSCA 38, [17].
22 Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350, 369 (Lord Shaw);
Global Process Systems Inc v Syarikat Takaful Malaysia Berhad (The Cendor MOPU) [2011] 1 Lloyds
Rep 560, 564 [19] (Lord Saville), 568 [49] (Lord Mance); [2011] UKSC 5.
23 see Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350, 370 (Lord
Shaw); Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corp Ltd [1974] QB 57, 66 (Lord
Denning MR); Sheehan v Lloyds Names Munich Re Syndicate Ltd [2017] 19 ANZ Insurance Cases
62-158, [77]; [2017] FCA 1340.
24 Sheehan v Lloyds Names Munich Re Syndicate Ltd [2017] 19 ANZ Insurance Cases 62-158, [77]; [2017]
FCA 1340.
25 Sheehan v Lloyds Names Munich Re Syndicate Ltd [2017] 19 ANZ Insurance Cases 62-158, [81]; [2017]
FCA 1340. This is known as the Wayne Tank principle. See also McCarthy v St Paul International
Insurance Co Ltd (2007) 157 FCR 402, 430–431 [91]–[93], 432 [97], 434 [104], 438 [114]; [2007]
FCAFC 28 for an analysis of the Wayne Tank principle.
26 Murphy v Brentwood DC [1991] 1 AC 398, 464–468, 479.
27 Delta Pty Ltd v Team Rock Anchors Pty Ltd [2018] 1 Qd R 564; [2017] QSC 115.
28 Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515, 529; [2004] HCA 16.
29 Brookfield Multiplex Ltd v Owners – Strata Plan No 61288 (2014) 254 CLR 185, 208, 227 (Hayne and
Kiefel JJ), 213 (Crennan, Bell and Keane JJ), 241 [174] (Gageler J); [2014] HCA 36.
30 Switzerland Insurance Australia Ltd v Dundean Distributors Pty Ltd [1998] 4 VR 692; Bayer Australia
Ltd v Kemcon Pty Ltd (1990) 6 ANZ Insurance Cases 61-026; Mainstream Aquaculture Pty Ltd v Calliden
Insurance Ltd (2011) 16 ANZ Insurance Cases 61-911; [2011] VSC 286; AXA Global Risks (UK) Ltd v
Haskins Contractors Pty Ltd (2004) 13 ANZ Insurance Cases 61-611; [2004] NSWCA 138.
31 Graham Evans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd (1987) 4 ANZ Insurance Cases 60-772.
32 Graham Evans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd (1987) 4 ANZ Insurance Cases 60-772,
74,691.
33 Graham Evans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd (1987) 4 ANZ Insurance Cases 60-772,
74,693.
34 Graham Evans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd (1987) 4 ANZ Insurance Cases 60-772,
74,694.
35 Graham Evans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd (1987) 4 ANZ Insurance Cases 60-772,
74,694.
36 AXA Global Risks (UK) Ltd v Haskins Contractors Pty Ltd (2004) 13 ANZ Insurance Cases 61-611;
[2004] NSWCA 138.
37 Delta Pty Ltd v Team Rock Anchors Pty Ltd [2018] 1 Qd R 564; [2017] QSC 115.
38 Delta Pty Ltd v Team Rock Anchors Pty Ltd [2018] 1 Qd R 564, [6]; [2017] QSC 115. The great majority
of anchors installed were not in accordance with the shop drawings. The bundles of wire tendons did not
contain sufficient tendons. Nor were they long enough. Nor were they grouted into position properly at
their ends. They were not capable of performing as they should have done.

39 Delta Pty Ltd v Team Rock Anchors Pty Ltd [2018] 1 Qd R 564, [93]; [2017] QSC 115.
40 The basement was refilled and re-excavated; existing ground anchors were tested, and supplementary
ground anchors were installed. There was delay and the cost of the work.
41 Delta Pty Ltd v Team Rock Anchors Pty Ltd [2018] 1 Qd R 564, [91]; [2017] QSC 115.
42 Under Home Building Act 1989 (NSW) Pt 6; Building Act 2004 (ACT) Pt 6; Building Act 1993 (NT) s
24(3), Pt 5A Div 3; Building Work Contractors Act 1995 (SA) Pt 5 Div 3; where the builder has died,
disappeared or become insolvent. Under Queensland Building and Construction Commission Act 1991
(Qld) Pt 5; Building Act 1993 (Vic) Pt 9 Div 3; where the building work is incomplete.
43 Lennar Corp v Great American Insurance 2006 Tex Appeal LEXIS 1457.
44 Graham Evans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd (1986) 4 ANZ Insurance Cases 60-689.
45 Graham Evans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd (1987) 4 ANZ Insurance Cases 60-772.
46 Graham Evans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd (1986) 4 ANZ Insurance Cases 60-689,
74,101.
47 Graham Evans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd (1986) 4 ANZ Insurance Cases 60-689,
74,101–74,102. Note the discussion of Mason P of this case in AXA Global Risks (UK) Ltd v Haskins
Contractors Pty Ltd (2004) 13 ANZ Insurance Cases 61-611, [43]; [2004] NSWCA 138 who held that it
was not surprising that the second and third coats of paint were covered by the policy because they had
been rendered useless and valueless by the inadequacy of the primer coat.
48 Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (1983) 155 CLR 279.
49 Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (1983) 155 CLR 279, 282 (Gibbs CJ).
For the approach taken in Canada, see Ledcor Construction Ltd v Northbridge Indemnity Insurance Co
[2016] 2 SCR 23, [119]; [2016] SCC 37 where Cromwell J held that “making good faulty workmanship”
means “the cost of redoing the faulty work”. Cromwell J held that the principle does not operate at a very
high level of generality. Applying that principle turns on the scope of the faulty work and the nature of
redoing it, and its application in other cases will ultimately be decided on a case-by-case basis in light
of the particular circumstances of the particular case.
50 Walker Civil Engineering v Sun Alliance & London Insurance PLC (1999) 10 ANZ Insurance Cases
61-418).
51 The insuring clause provided: “This section, subject to the limitations, exclusions, terms and conditions
hereinafter mentioned, is to ensure in respect of occurrences happening during the period stated in
the Schedule against all risks of physical loss of or damage to property of every kind and description
(including the whole of the contract plant, equipment, materials and supplies up to but not exceeding
the respective sums Insured in the Schedule) owned by the insured or for which the Insured may
be responsible or, prior to any occurrence for which claim may be made hereunder, have assumed
responsibility, use or to be used in part of or incidental to the ‘Insured's Contracting Operations’ detailed
in the Schedule wherever the said property may be located in Australia or whilst in transit within and
between any place or places therein.” Exclusion 2(c) provided: “This insurance does not cover loss or
damage directly caused by defective workmanship, construction or design or wear and tear or mechanical
breakdown or normal upkeep or normal making good but this exclusion shall be limited to the part which
is defective and shall not apply to any other part or parts lost or damaged in consequence thereof.”
52 Walker Civil Engineering v Sun Alliance & London Insurance PLC (1996) 9 ANZ Insurance Cases
61-311, 76,456.
53 Walker Civil Engineering v Sun Alliance & London Insurance PLC (1996) 9 ANZ Insurance Cases
61-311, 76,456.
54 Walker Civil Engineering Pty Ltd v Sun Alliance & London Insurance PLC (1999) 10 ANZ Insurance
Cases 61-418.
55 A similar approach was taken in Prentice Builders Ltd v Carlingford Australia General Insurance Ltd
(1988) 6 ANZ Insurance Cases 60-951 where Fullager J held that “there is no difference in character
between what Mr Shaw calls rectification of non-defective parts and what he calls rectification of

defective parts because both parts merely are constituents of a defective whole, or a whole that embodies,
as a whole, defective workmanship.” As a consequence the Workmanship exclusion clause operated to
exclude indemnity.
56 Cementation Piling and Foundations Ltd v Aegon Insurance Co Ltd and Commercial Union Insurance
Co PLC [1995] 1 Lloyd's Rep 97.
57 Cementation Piling and Foundations Ltd v Aegon Insurance Co Ltd and Commercial Union Insurance
Co PLC [1995] 1 Lloyd's Rep 97, 100.
58 Cementation Piling and Foundations Ltd v Aegon Insurance Co Ltd and Commercial Union Insurance
Co PLC [1995] 1 Lloyd's Rep 97, 100.
59 Cementation Piling and Foundations Ltd v Aegon Insurance Co Ltd and Commercial Union Insurance
Co PLC [1995] 1 Lloyd's Rep 97, 103.
60 See also Zurich Australian Insurance Ltd v Regal Pearl Pty Ltd (2006) 14 ANZ Insurance Cases 61-715,
75,771 [82]; [2006] NSWCA 328 where the Court applied the principle in Cementation Piling and
Foundations Ltd v Aegon Insurance Co Ltd and Commercial Union Insurance Co PLC [1995] 1 Lloyd's
Rep 97, 103 and used the exclusion clause to assist in construing the intended meaning of the insuring
clause.
61 Graham Evans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd (1987) 4 ANZ Insurance Cases 60-772.
62 Walker Civil Engineering Pty Ltd v Sun Alliance & London Insurance PLC (1999) 10 ANZ Insurance
Cases 61-418).
63 TBG Inc v Commercial Union Ins Co , 806 F Supp 1444 (1990).
64 See Chemstar Inc v Liberty Mutual Ins Co , 41 F 3d 429 (1994); Pines of La Jolla Homeowners
Association v Industrial Indemnity , 5 Cal App 4th 714 (1992) where the policy of insurance under
consideration defined occurrence as an “accident … which results in … property damage neither expected
nor intended from the standpoint of the insured”.
65 Prudential – LMI v Superior Court , 798 P 2d 1230 (Cal 1990); Home Ins Co v Landmark Ins Co , 205
Cal App 3d 1388, 1396 (1988) where the policy of insurance under consideration defined occurrence to
mean an accident, including continuous or repeated exposure to conditions, which results in bodily injury
or property damage neither expected nor intended from the standpoint of the Insured.
66 Strauss v Chubb Indemn Ins Co , 771 F 3d 1026 (2014) (First-party liability) where the policy of insurance
under consideration defined occurrence to means “a loss or accident to which this insurance applies
occurring within the policy period. Continuous or repeated exposure to substantially the same general
conditions unless excluded is considered to be one occurrence”; Alie v Bertrand & Frere Construction
Co Ltd (2003) 222 DLR (4th) 687 where the policy of insurance under consideration defined occurrence
to mean “an accident including continuous or repeated exposures to conditions neither expected nor
intended by the insurer”; American Employer's Insurance Co v Pinkard Construction Co , 806 P 2d
954 (1990) where the policy of insurance under consideration defined occurrence to mean “an accident,
including continuous or repeated exposure to conditions, which results in bodily injury or property
damage neither expected nor intended from the standpoint of the insured”. In Pinkard, the Policy defined
Property Damage arising out of continuous or repeated exposure to substantially the same general
condition shall be considered as arising out of one occurrence; Californian Union Ins Co v Landmark Ins
Co , 145 Cal App 3d 462 (1983) (Continuous exposure but both insurers were jointly and severally liable)
where the policy of insurance under consideration defined occurrence to mean an accident, including
continuous or repeated exposure to conditions, which results in bodily injury or property damage neither
expected nor intended from the standpoint of the insured; Gruol Construction Co Inc v Insurance Co of
North American , 11 Wash App 632 (1974) (insurers are joint and severally liable but it was up to the
insurers to sort out apportionment between themselves); Miller v Safeco Ins Co of Am , 683 F 3d 805
(2012) (first-party liability case); Plastics Engineering v Liberty Mutual Insurance , 759 N W 2d 613
(2009) (coverage was not pro rata'd between the insurers as Liberty had failed to specifically include a
pro rata clause).

67 Orica Ltd v CGU Insurance Ltd (2003) 59 NSWLR 14, 58–59, 74–75 (Santow JA (dissenting); [2003]
NSWCA 331. See also Vero Insurance Ltd v Power Technologies Pty Ltd (2007) 5 DDCR 206; [2007]
NSWCA 226; Commonwealth Steel Co Ltd v Certain Underwriters at Lloyds Comprising Syndicate Nos
130, 144, 208, 210, 214, 235, 250, 404, 469, 490, 677 and 870 (2010) 16 ANZ Insurance Cases 61-837;
[2010] NSWCA 31 where the Court of Appeal rejected the underwriters' argument that the Court of
Appeal's decisions in Orica Ltd v CGU Insurance Ltd and Vero Insurance Ltd v Power Technologies Pty
Ltd had developed a legal rule directed to the response of insurance policies in respect of asbestos-related
diseases to the effect that only the first policy in time would respond.
68 The Allianz Construction Risks defines Occurrence to mean an event including continuous or repeated
exposure to conditions that results in Personal Injury, Property Damage or Advertising Injury where such
injury or damage is neither expected nor intended from the standpoint of the Insured. Occurrence extends
to include any intentional act by or at the direction of the Insured which results in Personal Injury if such
Personal Injury arises safely from the use of reasonable force for the purpose of protecting persons or
property.
69 Lumley General Insurance Ltd v Port Phillip City Council (2013) 18 ANZ Insurance Cases 61-994;
[2013] VSCA 367.
70 See discussion below regarding Occurrence and the four trigger theories.
71 Home Ins Co v Landmark Ins Co , 205 Cal App 3d 1388 (1988).
72 Home Ins Co v Landmark Ins Co , 205 Cal App 3d 1388, 1391–1392 (1988).
73 Home Ins Co v Landmark Ins Co , 205 Cal App 3d 1388, 1391 (1988).
74 Home Ins Co v Landmark Ins Co , 205 Cal App 3d 1388, 1395 (1988).
75 Californian Union Ins Co v Landmark Ins Co , 145 Cal App 3d 462, 477–478 (1983).
76 Californian Union Ins Co v Landmark Ins Co , 145 Cal App 3d 462, 477–478 (1983).
77 American Employer's Insurance Co v Pinkard Construction Co , 806 P 2d 954 (1990).
78 American Employer's Insurance Co v Pinkard Construction Co , 806 P 2d 954, 955 (1990).
79 Samuelson v Chutich , 187 Colo 155; 529 P 2d 631 (1974).
80 TBG Inc v Commercial Union Ins Co , 806 F Supp 1444 (1990).
81 TBG Inc v Commercial Union Ins Co , 806 F Supp 1444, 1452 (1990).
82 Browder v United States Fidelity & Guaranty Co 1993 Colo App LEXIS 278.
83 This decision was affirmed in Browder v United States Fidelity & Guaranty Co 893 P 2d 132, 134–135
(1995).
84 Hoang v Assurance Co of America 2007 Colo LEXIS 31.
85 Alie v Bertrand & Frere Construction Co Ltd (2003) 222 DLR (4th) 687.
86 Alie v Bertrand & Frere Construction Co Ltd (2003) 222 DLR (4th) 687, [59].
87 Alie v Bertrand & Frere Construction Co Ltd (2003) 222 DLR (4th) 687, [141].
88 Alie v Bertrand & Frere Construction Co Ltd (2003) 222 DLR (4th) 687, [142].
89 Alie v Bertrand & Frere Construction Co Ltd (2003) 222 DLR (4th) 687, [143].
90 For example, the Suncorp wording in its construction insurance annual policy provides: “(a) the word
‘Insured’ shall apply to each organisation or person comprising the Insured in the same manner as if a
separate Policy had been issued to each of them. (b) the Insurers' total liability in respect of all parties
comprising the Insured shall nevertheless not exceed the Sums Insured and/or Limits of Liability stated
in the Schedule.”
91 Transfield Pty Ltd v National Vulcan Engineering Insurance Group Ltd (2003) 12 ANZ Insurance Cases
61-547, 76,436; [2002] NSWSC 830 where McClellan J described the purpose of the policy in these
terms: “The purpose of the policy of insurance was plainly to provide insurance to Transfield and other
parties involved with relevant Transfield projects. Although separate policies could have been issued
this had obvious practical difficulties. By issuing one policy, which contained a cross-liability clause,
the relevant parties could each be insured by a policy which responds to any particular claim made by a
party. The commercial objective has been described elsewhere in these terms. … ‘On any construction

site … there is ever present the possibility of damage by one tradesman to the property of another and
to the construction as a whole. Should this possibility become reality, the question of negligence in
the absence of complete property coverage would have to be debated in Court. By recognising in all
tradesmen an insurable interest based on that very real possibility, which itself has its source in the
contractual arrangements, opening the doors of the job site to the tradesmen, the Courts would apply to the
construction field the principle expressed so long ago in the area of bailment. Thus all the parties whose
joint efforts have one common goal, eg the completion of the construction, would be spared the necessity
of fighting between themselves should an accident occur involving the possible responsibility of one of
them’ Commonwealth Construction Co Ltd v Imperial Oil Ltd (1977) 69 DLR (3d) 558 at 562-63.”
92 Transfield Pty Ltd v National Vulcan Engineering Insurance Group Ltd (2003) 12 ANZ Insurance Cases
61-547; [2002] NSWSC 830.
93 This section shall not apply to liability: “(b) for damage to property owned by the insured.”
94 “Each of the persons comprising the Insured shall for the purposes of this policy be considered a separate
and distinct unit and the words ‘the Insured’ shall be considered as applying to each of such persons in
the same manner as if a separate policy had been issued to each of them in his name alone and the Insurers
waive all rights of subrogation or action which they may have or acquire against any of such persons.
Provided that nothing in this clause shall be deemed to increase the limit of the Insurers' liability under
this policy in respect of any one occurrence.”
95 Transfield Pty Ltd v National Vulcan Engineering Insurance Group Ltd (2003) 12 ANZ Insurance Cases
61-547, 76,436; [2002] NSWSC 830.
96 Transfield Pty Ltd v National Vulcan Engineering Insurance Group Ltd (2003) 12 ANZ Insurance Cases
61-547, 76,436; [2002] NSWSC 830.
97 GPS Power Pty Ltd v Gardiner Willis & Associates Pty Ltd [2001] 2 Qd R 586; [2000] QCA 495.
98 “‘The Insured’ shall include: (a) the parties nominated in the Schedule; (b) all other principals and/or
owners of the site of the Works; (c) all contractors and sub-contractors (which shall include all other lower
tier subcontractors), but only to the extent of their activities in connection with the Insured Operations
and their interest therein; (d) any supplier or manufacturer of plant and materials to be incorporated in
the Works, but only to the extent their activity as a contractor or sub-contractor in connection with the
Insured Operations and then only to their interest, but only where the Principal contracts to insure their
respective interests under this Policy; (e) … (f) any director, executive director, employee or agent of the
Insured parties, whilst acting within the scope of his or her duties with such parties; (g) any unnamed
party being of other category than specified under (a) and (f) above, having an insurable interest in the
Insured Operations and/or Insured Property. This definition of ‘the Insured’ shall exclude consultants but
only in respect of such consultants' professional duty of care to other persons and/or parties included in
this definition of ‘the Insured’.”
99 “(a) Upon the payment of any claim under this Policy, subject to any restrictions imposed by the
Commonwealth Insurance Contracts Act 1984, the Insurers shall be subrogated to all the rights and
remedies of the Insured arising out of such claim against any person or corporation whatsoever. (b) …
(c) In the event of the Insurers indemnifying or making a payment to any Insured(s), the Insurers shall
not exercise any rights of subrogation against any other Insured(s) hereunder. (d) The Insurers agree to
waive any rights and remedies or relief to which they may become entitled by subrogation against: (i) any
corporation or organisation (including its directors, officers, employees or servants) owned or controlled
by the Insured named in para(a) of The Insured definition herein; (ii) any Insured named or described by
this Policy (including its directors, officers, employees or servants).”
100 GPS Power Pty Ltd v Gardiner Willis & Associates Pty Ltd [2001] 2 Qd R 586, [44], [47]; [2000] QCA
495.
101 Larson-Juhl v Jaywest (2001) 11 ANZ Insurance Cases 61-499; [2001] NSWCA 260.
102 Larson-Juhl v Jaywest (2001) 11 ANZ Insurance Cases 61-499, 75,787; [2001] NSWCA 260.

103 Standard Publishing House (Aust) Pty Ltd v Chen (2012) 17 ANZ Insurance Cases 61-951; [2012]
NSWSC 1544.
104 National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd's Rep 582 (QBD), 613 (Colman J).
105 See Dr Özlem Gürses, “Subrogation Against a Contractual Beneficiary: A New Limitation to Insurers'
Subrogation?” [2017] Journal of Business Law 557 where the author carried out a very detailed review
of the law in relation to subrogation and sets out the series of issues (p 574) that has to be considered in
determining whether an insurer is entitled to bring a subrogated claim against a co-insured. In particular,
1. Does the insurance contract contain a subrogation waiver clause? (a) Yes – no subrogation against
contractual beneficiary (who may or may not be co-assured). (b) No – refer to the underlying contract.
2. Does the underlying contract provide a joint insurance clause? (a) Yes – subrogation right cannot
be exercised against the co-assured. (b) No – refer to the underlying contract as it may still contain an
insurance provision albeit not expressly a joint insurance. 3. Does one party to the underlying contract
agree to insure his interest? (a) Yes – depending on the interpretation of the party's intention, it is likely
that this insurance will be interpreted for the benefit of the defendant as well as the assured. (b) No, the
contract is silent – it will ultimately be the interpretation of the underlying contract but it is likely in this
case that there is nothing in the contract precluding the insurer from exercising his rights of subrogation.
4. In 2(a) and 3(a) above, if the defendant to a subrogation action paid the premium, it may be taken as
an indication that the parties agreed to claim the loss from the insurer but not from each other. However,
the premium payment clause is a persuasive matter but not determinative on its own.
106 Larson-Juhl v Jaywest (2001) 11 ANZ Insurance Cases 61-472; [2001] NSWCA 260.
107 Larson-Juhl v Jaywest (2001) 11 ANZ Insurance Cases 61-472, 75,404 [8], 75,411 [49]; [2001] NSWCA
260.
108 Larson-Juhl v Jaywest (2001) 11 ANZ Insurance Cases 61-472, 75,411–75,412 [50]; [2001] NSWCA
260.
109 Larson-Juhl v Jaywest (2001) 11 ANZ Insurance Cases 61-472, 71,412 [51]; [2001] NSWCA 260.
110 Thiess Contractors Pty Ltd v Norcon Pty Ltd (2001) 11 ANZ Insurance cases 61-509; [2001] WASCA
364.
111 Thiess Contractors Pty Ltd v Norcon Pty Ltd (2001) 11 ANZ Insurance cases 61-509, 75,915 [17]; [2001]
WASCA 364. This has been applied in Clambake Pty Ltd v Tipperary Projects Pty Ltd (No 3) (2009) 77
ATR 242, [493]; [2009] WASC 52.
112 The key elements of a typical insuring clause for a professional indemnity that have to be satisfied in any
claim for indemnity have been highlighted and will be explored below.
113 Smart v AAI Ltd [2015] NSWSC 392; Hurlock v Johnstone Shire Council [2002] QCA 256, [34]–[35].
114 Hurlock v Johnstone Shire Council [2002] QCA 256.
115 The Business of the Council had been defined as: “Municipal or other Local Government Authorities,
and all incidental and associated functions of The Member (including … community housing scheme
(also known as the Low Cost Housing Rental Scheme) … and the like services).”
116 Hurlock v Johnstone Shire Council [2002] QCA 256, [35].
117 Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363; Edwards v Insurance Office
of Australia Ltd (1934) 34 SR (NSW) 88; Penrith City Council v Government Insurance Office (NSW)
(1991) 24 NSWLR 564; Bradley v Eagle Star Insurance [1989] 1 AC 957 (which approved Post Office
v Norwich Union Fire Insurance Society Ltd).
118 Parker v Lewis [1873] LR 8 Ch 1035, 1059–1060 where it was held in the context of a bond of indemnity
that a judgment is conclusive evidence of legal liability. Parker v Lewis was approved in Edwards v
Insurance Office of Australia Ltd (1934) 34 SR (NSW) 88, 94.
119 Hurlock v Johnstone Shire Council [2002] QCA 256, [29].
120 See Hurlock v Johnstone Shire Council [2002] QCA 256, [31] where: “A reading of those cases [Unity
Insurance Brokers, Biggin & Co v Permanite Ltd [1951] 1 KB 422; Distillers Co (Bio-Chemicals) (Aust)
Pty Ltd v Ajax Insurance; Edwards v Insurance Office of Australia; QBE Insurance v QBE Insurance]

convinces me that the compromise is binding or the insurer in circumstances such as these [where the
insurer in full knowledge, has stood by and allowed the insured to conduct the defence], unless it is
demonstrated that the compromise was unreasonable or that there was some other valid defence available
to it in the proceedings brought by the insured.”
121 HIH Casualty & General Insurance Ltd v Turner (1998) 72 SASR 399; Hurlock v Johnstone Shire
Council [2002] QCA 256; Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR
603; [1998] HCA 38; BNP Paribas v Pacific Carriers Ltd [2005] NSWCA 72; Komatsu Marketing
Support Australia Pty Ltd v Marsh Pty Ltd [2012] NSWSC 163, [15]; BHP Billiton (Olympic Dam) Corp
Pty Ltd v Steuler Industriewerke GmbH (No 2) [2011] VSC 659.
122 Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603, [7] (Brennan CJ), [130]
(Hayne J); [1998] HCA 38.
123 Rhyse Holdings Pty Ltd v Stanton Hillier Parker (Qld) Pty Ltd [2002] QCA 122; Hurlock v Johnstone
Shire Council [2002] QCA 256; BNP Paribas v Pacific Carriers Ltd [2005] NSWCA 72; Rail Corp New
South Wales v Fluor Australia Pty Ltd [2009] Aust Torts Reports 82-038; [2009] NSWCA 344. BHP
Billiton (Olympic Dam) Corp Pty Ltd v Steuler Industriewerke GmbH (No 2) [2011] VSC 659, [228].
124 Broadlands Properties Ltd & Broadlands Estates Ltd v Guardian Assurance Co Ltd (1984) 3 ANZ
Insurance Cases 60-552, 78,321; Royal Insurance Fire & General (NZ) Ltd v Mainfreight Transport Ltd
(1993) 7 ANZ Insurance Cases 61-172, 77,975–77,976, Baulderstone Hornibrook Engineering Ltd v
Gordian Runoff Ltd (2006) 14 ANZ Insurance Cases 61-701; [2006] NSWSC 223 and Limit (No 3) Ltd
v ACE Insurance Ltd (2009) 15 ANZ Insurance Cases 61-823; [2009] NSWSC 514.
125 Protec Pacific Pty Ltd v Steuler Services GmbH & Co KG [2014] VSCA 338, [756].
126 Protec Pacific Pty Ltd v Steuler Services GmbH & Co KG [2014] VSCA 338, [747] approving the
principle in BNP Paribas v Pacific Carriers Ltd [2005] NSWCA 72, [17] and Unity Insurance Brokers
Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603, 616 [35] (McHugh J), 653 [129] (Hayne J);
[1998] HCA 38. For a discussion on the evidence required to prove reasonableness of settlement, see
Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd , 653, 655 (Hayne J).
127 Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603, [6] (Brennan CJ); [1998]
HCA 38. See also at 616 [35] (McHugh J) where his Honour held that “in most cases where the settlement
is made on legal advice, the evidence of the relevant legal advisers is vital. This is because the risk
involved in the litigation and the reasoning which led to the settlement are the factors that will determine
whether or not the settlement was reasonable. If an unreasonable settlement is made on bad legal advice,
the innocent party's remedy is against the legal adviser, not the contract breaker”.
128 Protec Pacific Pty Ltd v Steuler Services GmbH & Co KG [2014] VSCA 338, [749], approving Unity
Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603, 653 [132]; [1998] HCA 38.
129 Junemill Ltd (in liq) v FAI General Insurance Co Ltd [1999] 2 Qd R 136; HIH Casualty General Insurance
Ltd v Pade (2001) 11 ANZ Insurance Cases 61-481; [2000] NSWCA 325; Cassidy v Leslie [2010]
NSWSC 742.
130 Amlin Corporate Member Ltd v Austcorp Project No 20 Pty Ltd (2014) 311 ALR 222, [71]; [2014]
FCAFC 78, referring to Chittick v Maxwell (1993) 118 ALR 728, 745 where Young J held that it was
a question of construction of the policy as to whether the policy covered civil liability to pay equitable
compensation and Kyriackou v ACE Insurance Ltd (2013) 17 ANZ Insurance Cases 61-973, [57]–[59];
[2013] VSCA 150 where Harper JA considered the issue but did not reach a concluded view.
131 Kyriackou v ACE Insurance Ltd (2013) 17 ANZ Insurance Cases 61-973, [51]–[52] (Harper JA); [2013]
VSCA 150, with whom Tate and Kyrou AJA agreed.
132 Smart v AAI Ltd [2015] NSWSC 392, [178]; Aquagenics Pty Ltd (in liq) v Certain Underwriters at Lloyd's
Subscribing to Contract Number NCP106108663 [2017] FCA 634, [60].
133 Smart v AAI Ltd [2015] NSWSC 392.
134 Australia & New Zealand Bank Ltd v Colonial & Eagle Wharves Ltd [1960] 2 Lloyd's Rep 241, 255;
Smart v AAI Ltd [2015] NSWSC 392, [179].

135 Insurance Contracts Act 1984 (Cth) s 40(3) provides: “Where the insured gave notice in writing to the
insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable
after the insured became aware of those facts but before the insurance cover provided by the contract
expired, the insurer is not relieved of liability under the contract in respect of the claim, when made,
by reason only that it was made after the expiration of the period of the insurance cover provided by
the contract.”
136 Timbercorp Finance Pty Ltd (in liq) v Vivian (2016) 114 ACSR 198, [61]–[62]; [2016] VSC 338; Gosford
City Council v GIO General Ltd (2003) 56 NSWLR 542; [2003] NSWCA 34.
137 FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; [2001] HCA 38.
138 L'Union Fire Accident & General Insurance Co Ltd v Klinker Knitting Mills Pty Ltd (1938) 59 CLR 709,
717–718 (Latham CJ), 723–724 (Starke), 726 (Evatt J).
139 Junemill Ltd (in liq) v FAI General Insurance Co Ltd (1996) 130 FLR 85; 9 ANZ Insurance Cases 61-315,
76,491.
140 Insurance Contracts Act 1984 (Cth) s 54 provides: “54 Insurer may not refuse to pay claims in certain
circumstances (1) Subject to this section, where the effect of a contract of insurance would, but for this
section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of
the insured or of some other person, being an act that occurred after the contract was entered into but not
being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by
reason only of that act but the insurer's liability in respect of the claim is reduced by the amount that fairly
represents the extent to which the insurer's interests were prejudiced as a result of that act. (2) Subject to
the succeeding provisions of this section, where the act could reasonably be regarded as being capable
of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the
insurer may refuse to pay the claim. (3) Where the insured proves that no part of the loss that gave rise to
the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of the act. (4)
Where the insured proves that some part of the loss that gave rise to the claim was not caused by the act,
the insurer may not refuse to pay the claim, so far as it concerns that part of the loss, by reason only of the
act. (5) Where: (a) the act was necessary to protect the safety of a person or to preserve property; or (b) it
was not reasonably possible for the insured or other person not to do the act; the insurer may not refuse
to pay the claim by reason only of the act. (6) A reference in this section to an act includes a reference
to: (a) an omission; and (b) an act or omission that has the effect of altering the state or condition of the
subject-matter of the contract or of allowing the state or condition of that subject-matter to alter.”
141 FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; [2001] HCA 38.
142 Gosford City Council v GIO General Ltd (2003) 56 NSWLR 542; [2003] NSWCA 34; see discussion
below.
143 Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652, 675.
144 Explanatory Memorandum, Insurance Contracts Bill 1984 (Cth) [182]. See also, [177]–[181].
145 Maxwell v Highway Hauliers Pty Ltd (2014) 252 CLR 590; [2014] HCA 33.
146 Maxwell v Highway Hauliers Pty Ltd (2014) 252 CLR 590, 597–598 [21]; [2014] HCA 33.
147 Maxwell v Highway Hauliers Pty Ltd (2014) 252 CLR 590, 598 [23]–[24]; [2014] HCA 33. The issue of
what constituted an inherent limitation was explored in Watkins Syndicate 0457 at Lloyds v Pantaenius
Australia Pty Ltd (2016) 244 FCR 5, 17 [40]–[41]; [2016] FCAFC 150. It involves the construction of
the constituent words of the policy as well as the characterisation of the essential character of the policy.
The latter will be influenced by the former and will involve the identification of the nature and limits
of the risks that are intended to be accepted, paid for and covered. The Court however cited the same
example as the High Court had to illustrate their point.
148 Kyriackou v ACE Insurance Ltd (2013) 17 ANZ Insurance Cases 61-973; [2013] VSCA 150. The Insuring
Clause had provided: “ACE will indemnify the Insured against [all amounts payable by the Insured …
as civil compensation or civil damages … including … payments for Defence Costs] arising from any
[written demand for, or an assertion of a right to, civil compensation or civil damages arising out of

the Firm's Business or a written intimation of an intention to seek such compensation or damages] in
respect of civil liability for breach of a duty owed in a professional capacity first made against an Insured
during the Period of Insurance.” Defence Costs was defined as: “legal costs and disbursements and related
expenses reasonably incurred in — (a) defending any proceedings; … incurred by – (i) the Insured with
the written consent of ACE after reporting the Claim to ACE.”
149 Kyriackou v ACE Insurance Ltd (2013) 17 ANZ Insurance Cases 61-973, [59]; [2013] VSCA 150. Tate
JA agreed with Harper JA at [129]. Kyrou AJA in a separate judgment also held that the ASIC claim did
not fall within the insuring clause (at [137]).
150 Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652.
151 McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; [2000] HCA 65; Youyang Pty Ltd
v Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15.
152 Abbey National Plc v Solicitors Indemnity Fund Ltd (1997) PNLR 306, 316.
153 Peters v The Queen (1998) 192 CLR 493, 503–504 (Toohey and Gaudron JJ); [1998] HCA 7; Macleod
v The Queen (2003) 214 CLR 230, 242 (Gleeson CJ, Gummow and Hayne JJ); [2003] HCA 24;
Harle v Legal Practitioners Liability Committee [2001] VSC 219; Harle v Legal Practitioners Liability
Committee (2003) 13 ANZ Insurance Cases 61-605, 77,302, [30] (Chernov JA, Callaway and Buchanan
JJA agreeing); [2003] VSCA 133; Brereton v Legal Services Commissioner [2010] VSC 378; Legal
Services Commissioner v Brereton (2011) 33 VR 126; [2011] VSCA 241.
154 McMillan v Joseph (1987) 4 ANZ Insurance Cases 60-822, 70,054 (Cooke P), 75,056 (Casey J) (Court
of Appeal of New Zealand).
155 HG & R Nominees Pty Ltd v Fava [1997] 2 VR 368.
156 Crowe v Wheeler & Reynolds [1988] 1 Qd R 40.
157 Harle v Legal Practitioners Liability Committee [2001] VSC 219.
158 Insurance Contracts Act 1984 (Cth) s 13 provides: “(1) A contract of insurance is a contract based on
the utmost good faith and there is implied in such a contract a provision requiring each party to it to
act towards the other party, in respect of any matter arising under or in relation to it, with the utmost
good faith. (2) A failure by a party to a contract of insurance to comply with the provision implied in
the contract by subsection (1) is a breach of the requirements of this Act. (3) A reference in this section
to a party to a contract of insurance includes a reference to a third party beneficiary under the contract.
(4) This section applies in relation to a third party beneficiary under a contract of insurance only after
the contract is entered into.”
159 Carter v Boehm (1766) 3 Burr 1905; 97 ER 1162.
160 Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501, 506.
161 AMP Financial Planning Pty Ltd v CGU Insurance Ltd (2005) 146 FCR 447, [88]–[89]; [2005] FCAFC
185, approved in CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 235 CLR 1, [15], [128]
(Gleeson CJ, Kirby and Crennan JJ); 81 ALJR 1551; [2007] HCA 36; Hellessey v MetLife Insurance Ltd
[2017] 19 ANZ Insurance Cases 62-152, [49]; [2017] NSWSC 1284; TAL Life Ltd v Shuetrim (2016) 91
NSWLR 439, [1] (Beazley P), [2] (Leeming JA), [214] (Emmett AJA); [2016] NSWCA 68; Kelly v New
Zealand Insurance Co Ltd (1996) 130 FLR 97, 111.
162 CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 235 CLR 1, [15], [130]–[132], [257]; 81
ALJR 1551; [2007] HCA 36; Speno Rail Maintenance Australia Pty Ltd v Metals and Minerals Insurance
Pte Ltd [2009] WASCA 31, [152].
163 CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 235 CLR 1, [15] (Gleeson CJ and Crennan
J); 81 ALJR 1551; [2007] HCA 36.
164 CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 235 CLR 1, [247] (Callinan and Heydon
JJ); 81 ALJR 1551; [2007] HCA 36.
165 Sharma v Insurance Australia Ltd (t/as NRMA Insurance) [2017] NSWCA 55.
166 Sharma v Insurance Australia Ltd (t/as NRMA Insurance) [2017] NSWCA 55, [113]. See also the recent
case of Lawcover Insurance Pty Ltd v Muriniti [2017] 19 ANZ Insurance Cases 62-157; [2017] NSWSC

1557 where the Court had to consider whether Lawcover had acted in bad faith in not pursuing an appeal
of a personal costs order made against two practitioners in some long running litigation that had eventually
sent their clients bankrupt. The principles in relation to the duty of utmost good faith are set out at [112]–
[115].
167 CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 235 CLR 1, [15] (Gleeson CJ and Crennan
J); 81 ALJR 1551; [2007] HCA 36.
168 In CGU Insurance Ltd v Porthouse (2008) 235 CLR 103; [2008] HCA 30, the policy under consideration
had the following exclusion clause: “We do not cover any of the following Claims (or losses): 6.1 Known
Claims and Known Circumstances … (b) Claims (or losses) arising from Known Circumstance, or (c)
Claims (or losses) directly or indirectly based upon, attributable to, or in consequence of any such Known
Circumstance or Known Claims (or losses). … The phrase ‘Known Circumstance’ is defined in s 11
as follows: 11.12 Known Circumstance. Any fact or situation or circumstance which: (a) Insured knew
before this Policy began or (b) A reasonable person in the Insured's professional position would have
thought before this Policy began, might result in someone making an allegation against an Insured in
respect of a liability that might be covered by this Policy.”

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Construction Project Insurance Explained

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Construction Project Insurance Explained

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Insuring Risk in Construction Projects, (2019) 34 Building and Construction Law...

Building and Construction Law Journal

Insuring Risk in Construction Projects

(2019) 34 BCL 378

The Need for Insurance

(a) Is the risk insurable?

Contractors All Risks Insurance

The Insured under the Policy

The Extent of the Cover

No Cover for Pure Economic Loss

No Cover for Defective Workmanship and Design

Rolfe J distinguished the case of Graham Evans in the following way:

Occurrence and the Four Trigger Theories

Exposure Theory of Coverage

Manifestation Theory of Coverage

Injury in Fact Theory

Continuous Trigger Theory

Application of Continuous Trigger Theory to Property Damage Cases

Cross Liability Clauses

(a) Pearce claimed against Transfield, Connell Wagner and Coffey;

Miscellaneous Issues – Failure to Note an Insured

Professional Indemnity Policy

Ascertainment of Legal Liability

Section 54 of the Insurance Contracts Act

Extent of Cover – Legal Expense

Contractually Assumed Liability

Duty of Utmost Good Faith

16 Robinson v Evans Bros Pty Ltd [1969] VR 885, 896.

End of Document © 2024 Thomson Reuters. All rights reserved.

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