Common sense becoming more common
In keeping with a refreshing recent trend, the Full Federal Court has construed a policy wording with common sense and in a businesslike fashion.
Background
An indemnity dispute arose between road construction companies (the Applicants), and a consortium of underwriters (the Insurers).
The Applicants were third party beneficiaries (or deemed insureds) under a contract works policy issued to the RMS.
RMS entered a design and construction contract with the Applicants to perform works including construction of a dual carriageway in Northern New South Wales, between Warrell Creek and Nambucca Heads. The policy covered damage at the Project Site (19.5 kms in length), subject to exclusions, including an exclusion for damage caused by rainfall, unless the damage is the result of a 1-in-20-year rain event at the Location insured.
In June 2016, heavy rainfall and flooding occurred in the region, causing significant damage to the project works. Only one of the four weather stations in the region recorded a 1-in-20-year rain event. The closest weather station to a section of the damaged road works did not record such an event.
Submissions
The Applicants argued Location insured should be construed as encompassing the entire Project Site (as defined), as one situation. On this construction, the fact one of the four weather stations recorded a 1-in-20-year rain event was sufficient to trigger the writeback (the exception to the rain exclusion) and trigger cover for the entire 19.5 kms of road works.
The Insurers contended that Location insured was limited to the location of the damage and only the rainfall data at the closest weather station can be considered when applying the writeback.
Judgment
In joint judgment, their Honours unanimously accepted the Insurers’ position, rejecting the Applicants’ argument that Location insured should encompass the entire Project Site.
It was held to be a matter of common sense and basic logic that, ‘in an exclusion dealing with cover for damage to certain materials by unusually heavy rain, the chosen area for ascertaining what is unusual as to its heaviness would be that area at or about which the damage occurred…’
To accept the alternative construction, the Court found, would lead to unbusinesslike outcomes and would undermine the intention of the rain exclusion – which was to exclude such damage unless caused by uncommonly heavy rainfall.
The Court also noted that the phrase Location insured could sensibly be understood as ‘that location where the damage occurred for which the insurance would be relevant’. It followed that the damaged section of road works the subject of the dispute was excluded from cover and the writeback was not engaged.
The Full Court’s common sense and businesslike approach to the resolution of this indemnity dispute forms part of a clear recent trend, with the same approach being taken in the second COVID-19 BI test case and related cases[1]. A few years ago, a dispute like this would probably have been resolved in favour of the Applicants on the grounds of ambiguity and contra proferentem. It is refreshing to see such an outbreak of common sense and commercial policies being given a businesslike construction.
Acciona Infrastructure Australia Pty Ltd v Zurich Australian Insurance Limited [2023] FCAFC 47
This article was written with the assistance of Thomas Webster, Paralegal
[1] Star Entertainment Group Limited v Chubb Insurance Australia Ltd [2021] FCA 907; Outback Music Festival Group Pty Ltd (formerly known as Big Run Events Pty Ltd) v Everest Syndicate 2786 at Lloyd’s [2022] FCA 13