Australia – Opal Tower Coverage Decision: Icon Co (NSW) Pty Ltd V Liberty Mutual Insurance Company Branch Trading As Liberty Specialty Markets [2020] FCA 1493.

The Federal Court of Australia has recently published a decision in a large piece of construction litigation clarifying a property developer’s entitlement to indemnity and the circumstances in which the Court will rectify a policy of insurance to reflect the common commercial intention of the parties.

 

Factual Background

 

Insurance Position

 

Between 2012 and 2018, Icon Co (NSW) Pty Ltd, as part of the Icon Construction Group (collectively, Icon), obtained Material Damage Contract Works and Third Party Liability insurance cover from Liberty Mutual Insurance Company Australian Branch trading as Liberty Specialty Markets (Liberty).

 

Icon placed this cover via its agent, Austbrokers Countrywide (Austbrokers), who, in turn, obtained the cover via Liberty’s agent, Chase Underwriting Pty Ltd (Chase).

 

In or about September 2018, Icon obtained new insurance cover from QBE Underwriting Limited as Managing Agent for Underwriting Members of Lloyd’s Syndicates 386 and 299 (QBE). The QBE Policy was similarly placed by Austbrokers on Icon’s behalf, via Chase.

 

Opal Towers

 

In or about October 2015, Icon entered into a contract to design and build a 37-storey mixed residential and commercial development known as the Opal Tower located at Sydney Olympic Park in western Sydney.

 

The Opal Tower development comprised 392 residential apartments, commercial spaces and an underground carpark.

 

Construction of Opal Tower commenced on 16 November 2015 and practical completion was achieved on or about 8 August 2018 (several days ahead of schedule).

 

Incident

 

On 24 December 2018, residents of the Opal Tower were evacuated when major cracks were observed in wall panels, floor slabs and hobs on three floors of the tower (Incident).

 

Several days after the Incident, Icon re-entered the development and undertook rectification works. These works allowed residents to return to their apartments progressively throughout 2019.

 

In response to the Incident, residents of the Opal Tower have made claims against Icon and have commenced a class action in the Supreme Court of New South Wales against the Sydney Olympic Park Authority (the owners of the land) (Authority). The Authority has subsequently issued a Cross-Claim to Icon joining it, amongst others, to the class action.

 

As at 28 February 2020, Icon had paid out in excess of AUD31million as a result of the Incident. These costs have included:

 

1. AUD17million in property rectification costs;
    

2. AUD8.5million in alternative accommodation costs; and
    

3. AUD530,000 in legal fees associated with defending the class action.
    

Issues
 

Both Liberty and QBE had declined to indemnify Icon in respect of the Incident. These declinatures were based on the operation of differing Insuring Clauses within each policy, as well as general conditions related to the relevant period of insurance.  
 

In particular, Liberty contended that cover under its policy extended to the date of ‘practical completion’ of projects undertaken during the period of insurance and did not provide cover for any subsequent defects liability period.
 

QBE, on the other hand, contended that the Opal Tower development did not satisfy the definition of a ‘Product’ of Icon in order for indemnity to trigger under the Insuring Clause.
 

As against Liberty, Icon sought declarations from the Court to the effect that the Incident reflected, or was the result of, an ‘Occurrence’ within the period of cover of the relevant Liberty Policy.
 

As against QBE, Icon sought a declaration that the Incident reflected was the result of an ‘Occurrence’ in connection with a ‘Product’ of Icon within the meaning of the QBE Policy.
 

Determination
 

Liberty Policy

 

Between September 2012 and September 2017, Icon and Liberty entered into successive, relevantly identical, annual contracts of third party liability insurance. These policies were issued pursuant to payment of a premium that was on a turnover basis[1].
 

The relevant policy that was the subject of consideration by the Court in this case was the policy commencing 20 September 2015 and expiring on 20 September 2016 (Liberty Policy).
 

The Period of Insurance specified in the Liberty Policy was relevantly defined as the period from 20 September 2015 at 4:00pm to 20 September 2016 at 4:00pm, “or any subsequent period for which the Insured has requested and the Insurer(s) has accepted renewal.”
 

The Opal Tower Contract provided for a defects liability period of 12 months from the date of practical completion. The resultant clause within the Contract obligated Icon to rectify all defects that occurred during that time.
 

In accordance with its standard practice, Icon, via Austbrokers, notified Liberty, via Chase, of the Opal Towers development and requested that it be incorporated into the cover provided by the Liberty Policy. At the time that this request was received, Chase omitted to refer to the 12 month defects liability cover required to be included within the Liberty Policy.
 

Accordingly, when the request for indemnity was received, Liberty pointed to the fact that Policy cover expired at the date of practical completion (8 August 2018).
 

In support of the declarations sought in the Liberty Policy, Icon relied upon three primary grounds:
 

1. a Run Off Claim[2];
    

2. a Statutory Extension of Coverage Claim[3]; and
    

3. a Rectification Claim.
    

The majority of the evidence adduced by Icon during the Hearing related to the Rectification Claim. Accordingly, for the purposes of this update, we propose to discuss this argument in more detail.
 

The Rectification Claim was premised by Icon on the understanding that there was a common intention between the parties that the Liberty Policy was to:
 

…apply on “contracts commencing” basis and thus the cover [would be] in place during the defects liability period.”

 

During the Hearing, Icon led evidence from an experienced insurance broker and adviser about the general construction insurance market (particularly over the past 20 years). Based on that evidence, the Court was asked to accept a series of common practices in the construction insurance market:
 

1. ‘contracts commencing’ policies were said to typically provide cover for a project up to the date of practical completion plus the relevant defects liability period;
    

2. ‘contracts commencing’ policies “usually” required the payment of a premium based on the total contract value of contracts commenced during the annual policy period and cover was provided for the duration of these contracts even if that duration extended beyond the end of that annual policy period; and
    

3. ‘turnover’ policies cover projects which are commenced or are on hand during the annual period of insurance but only during the annual period of the insurance policy.
    

Despite being described as a “turnover policy”, Icon’s contention was that commercially sensible parties in their position with Liberty would have expected that the Liberty Policy covered Icon during the defects liability period.
 

In order to reach a concluded view on the veracity of this contention, the Federal Court recounted and relied upon on a series of settled principles of contractual construction. These included:

 

1. the extent to which it is permissible for the Court to have regard to extrinsic evidence in construing the Liberty Policy[4];
    

2. that the Court is required to give the Liberty Policy a business-like construction (on the assumption that the parties intended to produce a commercial result)[5];
    

3. whether notification of individual projects during a relevant annual policy year created circumstances for which protections under s 58 of the Insurance Contracts Act 1984 (Cth) would apply[6];
    

4. the general principles of equitable rectification, including the six principles relevant to determining common intention[7]; and
    

5. the actual (and ostensible) authorities held by managing agents/insurance brokers and the extent to which the intentions of those agents can bind the parties that they represent[8].
    

A substantial amount of lay evidence was led at the Hearing regarding the common, commercial intention of the parties and whether the Liberty Policy was intended to provide cover for the defects liability period.
 

After undertaking a substantive review of this evidence, the Court ultimately determined that the Liberty Policy should be rectified to reflect the common intention of the parties. Accordingly, the Liberty Policy was held to extend cover for incidents and damage during the defects liability period.
 

Comment

 

A determination on common intention will almost always turn on the relevant facts that can be led by the parties at Hearing. However, there are a number of general principles to be gleaned from the Court’s judgment in this case. These include:
 

1. principals can be bound by the common intention of their agents;
    

2. the frequency and regularity of terms within prior policies of insurance can be relied upon when those same terms and conditions are omitted from a single policy (whether by mistake or without explicit acknowledgement);
    

3. strictly termed agency agreements may not necessarily be relied upon if the agent is regularly permitted to undertake works or negotiations that fall outside the strict scope of authority provided by the agreement; and
    

4. that the Court will not grant rectification of a document “merely because it fails to achieve the fiscal objects of the parties to it.”
    

QBE Policy
 

The QBE Policy commenced in September 2018 and expired on 31 December 2018.
 

The Insuring Clause of the QBE Policy relevantly indemnified Icon for Property Damage happening during the Period of Insurance as a result of an Occurrence in connection with [Icon]’s Product Liability and/or Completed Operations[9].
 

The principal question that arose for the Court’s consideration in this aspect of the case was whether the Opal Tower project satisfied the definition of ‘Product’ within the Insuring Clause. The term ‘Product’ was broadly defined in the QBE Policy[10].
 

In support of its argument, Icon relied upon, amongst other things, the evidence of several employees to the effect that the Opal Tower, and each of its constituent parts, was a “thing” that was “supplied”, “installed”, “manufactured”, or erected by Icon in the course of its Business.

 

In reply, QBE contended that the underwriting intention behind the word ‘Product’ was to denote that which was ‘tangible’ and ‘moveable’ and could be transferred from one person to another. Further, it argued that the absence of the words “built” and “constructed” in the definition of Product demonstrated a clear intention to exclude completed buildings, or their constituent parts, from cover[11].
 

Ultimately, the Court held that the hallmarks of a ‘Product’ does not necessarily require the hallmark of something which is a “tangible and moveable” item as opposed to something which “only came into existence to form part of the land on which it was created”[12]. Accordingly, the Court held that indemnity under the QBE Policy had triggered and that cover was available.
 

Analysis
 

This case provides a thorough explanation of several of the key considerations a Court will have regard to when considering the intended (and actual) operation of different policies of insurance. Although the outcome was against insurers, there are a number of lessons to be learnt by all stakeholders in the industry about the matters that they should have regard to when drafting policies, going to market to place risk and when acting as agents. These lessons include, but are certainly not limited to:
 

1. Commercial Insureds – it is essential for managers, or officers responsible for insurance coverage, to closely check and question key insurance policy documents to ensure that the practical effect of the policy provides the necessary cover. In this case Icon has incurred more than AUD31million in losses related to the Incident. If there is existing ambiguity around the scope of indemnity under one (or more) policies of insurance, the amount of time required to reach a concluded view on indemnity may exceed the amount of time that the Insured can continue to satisfy uninsured losses.
    

2. Insurers – when considering agency agreements the Court will haveregard to the actual and ostensible authority those agents are given. Further, a strict reading of the terms and conditions of an agency agreement will not necessarily be adopted if the day to day operations of the agent exceed the authority as strictly defined.
    

3. Brokers – it is critical that policy wordings and endorsements are closely reviewed to ensure that the cover agreed between the parties is the cover actually defined within the scope of the policy.
    

In addition to each of these specific lessons, the case also stands as a strong reminder of the importance of keeping contemporaneous correspondence relating to important coverage issues. These pieces of contemporaneous correspondence will often be the primary evidence relied upon by the Court when considering whether to make rectification orders on commercial bases.
 

 

 

For further information, please contact:

 

Lucinda Lyons, Partner, Clyde & Co

Lucinda.Lyons@clydeco.com