Insurable Interest Issue 36

Contents

 

Pure Economic Loss 2

Heavy Burden

Glass Half Full

Time’s Up

Sentimental Value

Unknown Quantity

Water Works


Pure Economic Loss 2

 

In Insurable Interest Issue 34 we reported on a decision by the New South Wales Court of Appeal which has since been successfully appealed to the High Court. The High Court delivered a landmark ruling that a commercial builder does not owe an owners corporation or a subsequent purchaser of commercial property a duty of care to avoid pure economic loss.

In 1997, a commercial builder entered into a contract with a developer to design and construct a 22 storey mixed use retail, restaurant, residential apartment and serviced apartment complex. The serviced apartments were contained on Levels 1 to 9. On completion of the building and on registration of the strata title, the common property of the serviced apartment levels vested in an owners corporation. The apartments were owned by individual lot owners who leased the apartments to a hotel chain.

The design and construction contract between the builder and the developer provided for certain warranties by the builder about the quality of the work and provided a defects liability period of 52 weeks which commenced upon practical completion. After the expiry of the defects liability period, latent defects were discovered in the common property in the serviced apartment complex within Levels 1 to 9.

The owners corporation sued the builder for the pure economic loss suffered by it in remedying the latent defects. There was no contract between the builder and the owners corporation, so the claim was brought in negligence. The key issue was whether the builder owed the owners corporation (and by extension the individual lot owners who purchased the apartments from the developer) a duty of care to avoid pure economic loss arising from latent defects.

The High Court has previously ruled that a builder of residential premises may owe a duty of care to a subsequent purchaser of a residential property for economic loss arising out of latent defects that could not be identified at the time of purchase.

In the present case, the High Court rejected the idea that a duty of care to avoid pure economic loss should be imposed on a commercial property development which was itself governed by sophisticated contractual arrangements.

Vulnerability has traditionally been recognised as the touchstone for a finding of a duty of care in relation to pure economic loss. Clearly the developer and the subsequent individual lot owners relied on the builder to do its work properly and a subsequent lot owner could not check the quality of the work that was being done. Reliance in this sense is a necessary element of establishing vulnerability but it is not sufficient in itself. The Court stated that vulnerability in relation to pure economic loss claims is concerned with a plaintiff’s inability to protect itself from the defendant’s want of reasonable care. In this case the purchasers could have protected themselves by inserting warranties (about the quality of construction) in the sales contracts.

Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36

This case draws a clear distinction between duties of care owed by builders to subsequent purchasers of commercial premises and subsequent purchasers of residential premises. It was clear from this decision that the element of vulnerability which is an essential criterion of establishing a duty of care for pure economic loss will not easily be made in the commercial sphere where the parties are generally sophisticated and well-advised. 

It also demonstrates that claims for pure economic loss remain at the margins of tort law and whether a duty of care in relation to pure economic loss will exist very much depends on the factual circumstances of each case.

This article was written by Melissa Macrae, Special Counsel


Heavy Burden

 

The plaintiff’s home in Orange, New South Wales was significantly damaged by arson The plaintiff made a claim under her policy of insurance, which was denied.

The policy provided that if the plaintiff’s home was damaged by fire, the insurer would rebuild or repair that part of the home that was damaged. Cover for fire damage was, however, subject to a number of exclusions including that:

We will NOT cover loss or damage as a result of fire started with the intention of causing damage by you or someone

Who lives in your home, or

Who has entered your home or site with your consent, or the consent of a person who lives in your home.”

The insurer submitted that in order to be covered by the policy the plaintiff not only had to prove that her home was damaged by fire, but also that the fire was not intentionally started by the plaintiff or by someone who had entered the home with her consent.

After considering a number of anomalies including the plaintiff’s apparent financial motive, the arsonist’s apparent familiarity with the home, the plaintiff’s lack of cooperation and the lack of evidence of forced entry to the home, the trial judge determined that the plaintiff had failed to discharge her burden of proof. Accordingly, the trial judge found that the insurer was entitled to deny indemnity.

The plaintiff appealed the decision to the New South Wales Court of Appeal, submitting that the trial judge had erred in requiring the plaintiff to prove that the fire had not been intentionally started by her or by someone who had entered the home with her consent.

In allowing the appeal and ordering the insurer to pay the claim, the Court of Appeal made the distinction between:

  1. exclusionary provisions that qualify all of the circumstances in which the insurer’s promise to indemnify applies; and
  2. exclusionary provisions that exclude only particular classes of cases which would otherwise be covered.

In relation to (a), an insured must prove that the qualification does not apply in order to have an entitlement to indemnity. In relation to (b), once an insured establishes that the claim is within the scope of the insurer’s promise, the burden is then on the insurer to prove that it falls within an exception.

In this case, the insurer’s promise was to indemnify the plaintiff against loss or damage caused by fire. As not all fires are deliberately lit, the relevant exclusion relied upon by the insurer to deny indemnity only applied to certain limited circumstances in which the insurer’s promise to indemnify for fire damage would not apply. Accordingly, once the plaintiff had established that the home was damaged by fire, the onus was on the insurer to prove that the fire was started by the plaintiff or by a person who had entered the home with her consent.

McLennan v Insurance Australia Ltd [2014] NSWCA 300

An insured has the burden of proving that a loss falls within the cover as defined and limited by the policy. But an insurer has the burden of proving that an exclusion applies. Ultimately which party has the burden of proof will depend on the policy wording.

This article was written by Liam Campion, Lawyer


Glass Half Full

 

The Federal Court of Australia has considered circumstances in which the exchange of privileged material between an insurer and an insured may result in a waiver of legal professional privilege.

Asahi Holdings purchased shares in a business. As part of the share sale agreement, Asahi took out a Warranty and Indemnity insurance policy to insure against breaches of various warranties given by the seller in the share sale agreement.

The sale went through and Asahi later accused the seller of misrepresenting its financial position prior to the sale. Asahi made a claim under the policy for breach of those warranties and, given that its alleged loss was greater than the sum insured, also issued a proceeding against the seller claiming loss and damage caused by the seller’s misleading and deceptive conduct.

In anticipation of the litigation, Asahi’s solicitors prepared a report which purported to analyse the true financial position of the seller at the relevant time. Asahi sent a copy of the report to its insurer, which it labelled “privileged and confidential.” The seller argued that by providing the report to its insurer, Asahi had waived its right to assert privilege over the document.

The leading High Court authority on the waiver of legal professional privilege, Mann v Carnell, essentially provides that a party will waive its right to assert legal professional privilege over a document if it acts in a manner that is inconsistent with the maintenance of that privilege. This is to be measured objectively. There may be an implied waiver of privilege in circumstances where a party has acted inconsistently with privilege even if that party’s subjective intention was to maintain privilege.

Ordinarily if a party voluntarily provides another party with a privileged document, this will be regarded as conduct that is inconsistent with the maintenance of privilege. However, there is an exception to this rule where two parties have such a commonality of interest that sharing privileged information is consistent, rather than inconsistent, with maintaining privilege. This may be the case where an insured shares privileged information with its insurer (and vice versa). In the context of a typical liability claim, an insured and an insurer share a common interest in defending a claim against an insured. Accordingly, in such circumstances, there will not be a waiver of privilege if the insurer and insured exchange privileged documents.

However, the facts in this case were distinct from an ordinary liability claim. The unusual terms of Asahi’s Warranty and Indemnity policy and the terms of the share sale agreement meant that there was no commonality of interest between Asahi and its insurer (which had not granted indemnity). In fact, the insurer’s interests were aligned with those of the seller. While it was in Asahi’s interest to establish that the seller had engaged in misleading and deceptive conduct and breached its warranties, in order to avoid liability, it was in the interest of both the insurer and the seller to establish that there had not been any misleading and deceptive conduct. It is important to note that the policy limited the insurer’s right of subrogation against the seller to circumstances in which the seller had acted fraudulently, of which there was no evidence in this case. Accordingly the insurer and Asahi did not have a common interest.

The report prepared by Asahi’s lawyers was protected by litigation privilege which served to protect the document from Asahi’s actual or potential opponents in litigation. However, by providing a copy of the report to its insurer, a potential opponent in litigation, Asahi waived its right to assert privilege over the report.

The Court noted that the policy did not require Asahi to disclose privileged information to the insurer and that it did so voluntarily. The fact that there was no obligation in the policy or elsewhere for the insurer to keep the information in the report confidential (the label on the report was considered inadequate) and the fact that Asahi had made no effort to obtain an assurance that the information would be kept confidential was also indicative of privilege having been waived.

Asahi Holdings (Australia) Pty Ltd v Pacific Equity Partners Pty Ltd (No 2) [2014] FCA 481

While this decision may cause concern for insurers who commonly exchange privileged material with insureds, so long as there is a commonality of interest privilege will not be waived. This obviously applies where indemnity has been granted. But even if indemnity has not yet been confirmed or may later be in issue, provided the insurer and insured are essentially on the same side in relation to a claim made by or against another party, privilege should be maintained. It is in circumstances where there is no commonality of interest that privilege may be waived.

This article was written by Liam Campion, Lawyer


Time’s Up

 

The Full Court of the Tasmanian Supreme Court has placed an interesting interpretation on section 601AG of the Corporations Act. That is the section which enables a third party to make a claim directly against an insurer where the insured is a company which has been de-registered and, but for that de-registration, the third party could have made their claim against the insured.

The plaintiff was injured in the course of his employment with the insured company in March 2008. The relevant limitation period for issuing legal proceedings was three years.

The employer company was de-registered on 26 November 2011. The plaintiff commenced a legal proceeding against the employer’s liability insurer (under section 601AG) on 21 February 2012, which was after the limitation period (as against the employer) had expired. There was no provision in the Tasmanian legislation for extension of the limitation period.

The insurer argued that the claim against it was statute-barred. The plaintiff argued that the claim against the insurer under section 601AG was a different cause of action to the one against the employer, and that it had its own limitation period which did not commence until the employer was de-registered. The proceeding against the insurer had been commenced only three months after de-registration, and so the claim under section 601AG was not statute-barred.

The Court said that the purpose of section 601AG was that the insurer stood in the shoes of the de-registered insured, in terms of the insured’s liability (and also in terms of its rights of recovery). The purpose was also for the plaintiff to be subrogated to the insured’s rights against the insurer.

Applying that interpretation, the Court said that the plaintiff’s cause of action against the insured, and the limitation period applicable to it, were ‘assimilated’ within section 601AG. As a result the plaintiff’s cause of action against the insurer was really the same cause of action which he had against the employer, which was statute-barred.

Accordingly (subject to a side issue about the date of discoverability of the plaintiff’s claim against his employer) the plaintiff’s claim against the insurer under section 601AG was statute-barred.

Allianz Australia v Mercer [2014] TASFC 3

This is an interesting decision which, perhaps surprisingly, was not taken to the High Court.  It seems a curious result that the plaintiff could not sue the insurer until after the employer was de‑registered, but by the time the de‑registration happened the potential claim against the insurer was already statute‑barred.

This the article was written by Andrew Lyle, Partner


Sentimental Value

 

Is there such a thing as ‘sentimental value’?  Well yes, there is, according to a judge of the Supreme Court of New South Wales.

The NSW police confiscated items of personal property. Subsequently when the owner demanded the return of them, he was told that they had been destroyed.

Ultimately the State of NSW accepted liability to the owner and agreed on the value of certain items (a watch, a belt, etc) at $15,000, but there was no agreement about the value of a pendant which was said to be a cherished family heirloom. The plaintiff could describe the pendant but produced no evidence of its value.

The judge accepted the maximum value of the pendant as estimated by a valuer engaged by the police ($10,000). He then added $2,500 on the basis that it was reasonably foreseeable by the police that the pendant was a possession of sentimental value to its owner.

Jianwei Liu v State of NSW [2014] NSWSC 933

‘Extra’ damages such as damages for inconvenience and damages for loss of sentimental value may be awarded if there is convincing evidence to support them.  However the amounts awarded tend to be modest.

This article was written by Andrew Lyle, Partner


Unknown Quantity

 

The Full Court of the Federal Court has considered the disclosure obligations of a person who is noted on a policy but who did not take out the cover. Basically, there are none.

American Home Assurance issued a professional indemnity policy to Company A. Company B – a subsidiary of Company A – was noted as an insured in an endorsement on the policy.

Company B ran into trouble for giving financial advice about derivatives when not licensed to do so. It sought indemnity under the policy, but the insurer declined on the basis that it had not been disclosed by Company B that it would be dealing in derivatives.

The Court unanimously confirmed Company B’s entitlement to claim, because it was noted on the policy (see section 48 of the Insurance Contracts Act), but also decided that it had no obligation of disclosure because it was not ‘an insured’ for the purpose of section 21 of the Act. So the insurer had to provide indemnity.

American Home Assurance Company v Local Government Financial Services Pty Ltd

Underwriters are frequently asked by brokers to note the interest of another party on a policy.  They should think carefully before doing so, because they may be taking on an additional and different or unknown risk, often for no extra premium.

This article was written by Andrew Lyle, Partner


Water Works

 

On 21 August 2009 a Swan Hill property was inundated with water from a burst main in the street. The main was operated by the local water authority Lower Murray Water (LMW) and had been constructed from asbestos cement pipes in 1956.

There were no records relating to the main’s performance between 1956 and 1996. A number of incidents between 1997 and 2008, some of which were ‘major’, had resulted in repairs.  However after the incident, the pipe which had burst was replaced and the entire main was replaced with PVC pipe about 12 months later.

The owners’ insurer sued LMW under Section 157 of the Water Act 1989 (Vic), which provides that a flow of water onto land which damages property is presumed to have occurred as a result of the authority’s negligent conduct.

LMW tried to rebut the presumption on the basis that the main had not exceeded its estimated 60 year life and had a very good performance history.  It also argued that it had a comprehensive maintenance and replacement system based on recommendations from engineering company GHD.

The authority also relied on the ‘public authority’ provisions contained in the Wrongs Act (Vic), particularly Sections 83 and 84. Section 83 provides that a court must have regard to the financial and other resources available to a public authority when considering whether it owes, or has breached, a duty of care. Section 84 provides that a higher threshold of unreasonableness applies when determining whether an authority has acted negligently in the exercise of powers which have been conferred on it specifically in that capacity.

However, the Victorian Civil and Administrative Tribunal found that Section 157 of the Water Act provides a ‘freestanding’ statutory cause of action and that any additional requirements or considerations concerning the existence of a duty of care at common law or under the Wrongs Act are irrelevant.

In determining that the damage resulted from LMW’s negligence, the Tribunal noted that the authority had put off replacing ageing sections of the water main for as long as possible, without giving proper weight to the consequences of resulting incidents.  Furthermore, failures occurring between 1997 and 2008 ought to have indicated that there was a real risk of another incident.

Quigley v Lower Murray Water [2014] VCAT 1325

In Victoria, statutory authorities cannot rely on the special provisions afforded by the Wrongs Act to defeat an action under Section 157 of the Water Act.

Section 84 of the Wrongs Act is specifically restricted to claims for breach of statutory duty.  It is different to the New South Wales public authority provisions contained in Section 43A of the Civil Liability Act (NSW), which apply more broadly to damages claims.

This article was written by Jennifer Kildea, Lawyer


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