Preparation is key: are your faulty workmanship exclusions watertight?

In 2015, Helicopter Aerial Surveys (HAS) engaged Bradford Marine Pty Ltd (Bradford Marine) to provide services coating the hull and topside of its vessel Mishima.

HAS later discovered that Bradford Marine had not properly prepared the relevant surface before applying the coatings which caused ongoing problems. HAS engaged GT Mac to carry out rectification works:

• In 2016, GT Mac rectified the anti-fouling and the hull maintenance works for the sum of $92,149.49 (2016 rectification).
• In 2019, GT Mac carried out further remedial works directly caused by the original works, costing $148,697.36 (2019 remediation).

HAS filed proceedings against Bradford Marine and succeeded in that claim at trial in 2020^[1] and was awarded:

• $260,000 in damages; and
• $320,000 in costs.

After Bradford Marine was deregistered in October 2024, HAS claimed directly against Bradford Marine’s liability insurer, Insurance Australia Ltd (IAL), under s 601AG of the Corporations Act 2001 (Cth). 

The key issue in these proceedings was whether Bradford Marine’s liability insurance policy with IAL covered Bradford Marine’s Liability to HAS.

Bradford Marine held an IAL Marine Trades Public & Products Liability Policy with Marine Trades Additional Cover (Addendum).

The central terms were:

Policy Clause 6:

We shall not be liable to indemnify the Insured in respect of:

…

6.6 Faulty Workmanship

Any liability for the cost of performing, completing, correcting or improving any work done or undertaken by the Insured.

…

Clause 3.4 of the Addendum:

Notwithstanding Policy exclusion 6.6 Faulty Workmanship, and in addition to any indemnity provided elsewhere in this Policy in respect of resultant damage, We will pay for the rectification of faulty workmanship consequent upon resultant damage, limited to:

1. the wholesale cost of any parts;
2. the net labour cost;

required to perform or re-perform work, in whole or in part, on any property on which:

3. the Insured had contracted to perform work, repairs, maintenance or service prior to the Occurrence causing the resultant damage, and;
4. the performance or re-performance of the work is made necessary by the same Occurrence causing the resultant damage,

We will pay up to $25,000 for all claims in the aggregate for any one Period of Insurance under this benefit.

To what extent did Policy clause 6.6 exclusion and Addendum clause 3.4 write-back apply to Bradford Marine’s lability to HAS? 

Policy construction guidance for insurers

The Court restated the principles for construing an insurance policy:

An insurance policy is a kind of commercial contract and should be construed according to the principles of businesslike interpretation:

the rights and liabilities of parties are determined objectively, by reference to the policy text, context and purpose;

it is necessary to ask what a reasonable businessperson would have understood those terms to mean; with consideration of the language used, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract; and

unless a contrary intention is indicated in the contract, a court is entitled assume that the parties intended to produce a commercial result and not commercial nonsense.

Insuring and any exclusion clauses must be read harmoniously so that due effect is given to both, and the right conferred by the insuring clause is not negated or rendered nugatory by the construction adopted for the exclusion clause.

Exclusion clauses should be construed according to their natural and ordinary meaning, read in the light of the contract as a whole, giving weight to the context including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity.

The contra proferentem rule is a last resort used only if the orthodox process of construction has failed to resolve an ambiguity; it is not a rule which may be applied to resolve 'any ambiguity'.

The Court held that:

2016 rectification works ($92,149.40):

• These works were undertaken to correct the works performed by Bradford Marine, and therefore were excluded by clause 6.6.
• However, the works were to rectify Bradford Marine's faulty workmanship and were within the clause 3.4 write-back, such that the Policy covered $25,000 of the 2016 rectification works.

2019 remediation ($148,697.36)

• IAL had the onus of proving the 2019 remediation were performed to rectify Bradford Marine's work, but did not do so.
• The 2019 remediation works were to remedy damage that resulted from the works performed by Bradford Marine.
• Therefore, the 2019 remediation works were not excluded by clause 6.6 and were covered in full.

Outcome:

• The 2016 rectification works were covered up to $25,000.
• The 2019 remediation works were covered in full.
• IAL was ordered to pay HAS $173,697.36 of the $260,000 that Bradford Marine was found liable for.

In the proceedings against Bradford Marine, the costs awarded to HAS ($320,000) were greater than the awarded damages ($260,000). The question arose whether any cover exclusions or limitations applied to the awarded costs.

Policy clause 4.1 provides:

With respect to the indemnity provided by this Policy, We will:

1. Defend, in the Insured's name and on the Insured's behalf, any claim or suit against the Insured alleging such … Property Damage … and seeking damages on account thereof even if any of the allegations of such claim or suit is groundless, false or fraudulent and may investigate, negotiate and settle any claim or suit as is deemed expedient;
2. Pay all changes, expenses and legal costs recoverable from or awarded against the Insured in any such claim or suit and all interest on Our portion of any judgment until We have paid, tendered or deposited in court that part of such judgment that does not exceed the Policy Limit …

The Court held that the costs raised by HAS would have been materially the same had HAS commenced proceedings for only the covered sum ($173,697.36) compared with the full claim sum ($260,000). Therefore, IAL was ordered to pay the full costs sum of $320,000 that Bradford Marine was found liable to pay.

Total award to HAS:

• Damages: $173,697.36
• Interests: $13,813.25
• Costs: $320,000

The parties were invited to make submissions on HAS' legal costs in bringing its claim against IAL.