Whose contract works? Everyone’s contract works: determination of the scope of a contract works exclusion

By Bridget Wall 

The Federal Court of Australia in the decision of Prestige Form Group NSW Pty Ltd v QBE European Operations PLC^[1] recently considered the vexed question of whose ‘contract works’ are excluded from cover in a general liability policy. This issue is frequently the subject of disagreement between insureds and insurers as to whether it is only the insured’s contract works or all contract works, including third parties, that are excluded.

The decision is a good reminder that Courts will interpret the wording in an exclusion by adopting the natural and ordinary meaning.

The specific question the Court considered was focused on whether the works identified in the definition of Contract Works and referred to in the Contract Works Exclusion were limited to those owned by or in the possession of the Insured which makes the claim under the Policy.

Facts

Prestige sought indemnity from QBE under its contractor’s liability insurance policy (Policy) for claims for property damage arising out of the collapse of a concrete slab at a building site.

Prestige entered into a subcontract with Richard Crookes Constructions Pty Ltd (RCC) for the provision of formwork associated with a construction project. Prestige had completed the framework for basement one of the project. The formwork subsequently failed, causing the concrete slab to collapse.

RCC made a demand on Prestige for approximately $2.7 million for losses said to have been incurred by RCC arising from the slab collapse.

QBE declined to indemnify Prestige, citing the Contract Works Exclusion in the Policy. While QBE acknowledged that the insuring clause in the Policy would cover Prestige’s liability for the damage caused to the works, it argued that the circumstances fell within several exclusions, including the Contract Works Exclusion.

The Contract Works Exclusion in the Policy was:

‘6. Contract Works

liability in respect of damage to property which consist of or forms part of the Contract Works.’

Contract Works was defined in the Policy as:

‘“Contract Works” means engineering, construction, electrical or mechanical, installation or erection works, including formwork, hoardings, temporary buildings or works, scaffolding, principal supplied or free issue materials, materials for incorporation in the works and additions, alterations, refurbishing or overhaul of pre-existing property’.

Prestige commenced proceedings in the Federal Court of Australia seeking a declaration that the Policy responded to its claim for indemnity and that the Contract Works Exclusion was not triggered.

Parties’ positions

Prestige’s position was:

• the Contract Works Exclusion should be interpreted narrowly to apply only to Prestige’s own Contract Works or those within its possession.
• adopting a broader interpretation could lead to absurd results and anomalies.
• the Contract Works should be read as the Insured’s Contract Works to align with a businesslike operation and the parties’ intentions. This interpretation is supported by various features of the Policy, including the overarching third-party property insurance coverage provided to Prestige as a construction contractor.
• applying a broader definition would contradict the commercial intent of the Policy.

QBE’s position was:

• the natural and ordinary meaning of the words used in the Contract Works Exclusion does not support Prestige’s proposed construction. Prestige’s interpretation involves inserting words that are not present in the Policy. When incorporating the definition of Contract Works into the exclusion, it is clear the exclusion applies to all property that consists or forms part of engineering, construction, electrical or mechanical works, including formwork.
• the definite article (the) in introducing the defined term Contract Works should not be interpreted as qualifying or limiting the broad definition when used in the exclusion.
• it is not uncommercial for an insurer to exclude the unique risks associated with property undergoing construction from a general liability cover. Prestige could have obtained a separate contract works policy if they wanted cover for this specific class of risk.
• the Policy is a third-party liability policy, intended to cover claims made against the Insured by third parties and does not provide first-party coverage.

Findings

His Honour Justice Jackman stated that the ordinary and natural meaning of the exclusion does not support Prestige’s narrow interpretation. The use of the definite article (the) is not sufficient to create the distinction between Contract Works owned or possessed by the Insured and those that are not.

In His Honour’s words, it is too slender a hook to bear the weight of what Prestige was attempting to argue in its submissions. The other exclusions in the Policy explicitly refer to possession or control, demonstrating that if the parties intended to create such a distinction, they would have used similar language in the Contract Works Exclusion.

His Honour rejected the argument that adopting the ordinary and natural meaning of the exclusion would lead to an unbusinesslike result. The Policy still provides substantial coverage for property damage beyond the Contract Works. His Honour also dismissed the alleged anomaly raised by Prestige regarding adjacent owners undertaking building work, suggesting that the term Contract Works may be limited to works subject to a contract with one of the insured parties. The proposal for the Policy could potentially shed light on the Contract Works which were mutually known to the parties to the Policy, however this was not presented as evidence in the case.

His Honour was not persuaded by QBE’s argument concerning the unbusinesslike result of Prestige’s construction in the context of third-party liability policy. Within the scope of the insuring clause and on Prestige’s narrow construction, a claim by RCC against Prestige may fall within coverage if it relates to damage to RCC’s property rather than property owned or possessed by Prestige. His Honour reiterated that he finds no textual support for Prestige’s interpretation and that the language used in other parts of the Policy contradicts such a construction.

Takeaways

The decision reinforces the first principle of interpreting insurance policies, that words will be given their ordinary and natural meaning. The language used in other sections of the Policy can be used to provide textual support for one interpretation over the other, so long as there is consistency with the argument seeking to be made.

[1] [2023] FCA 749