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Icon brings home the opals: Icon v Liberty Mutual Insurance – Rectification in the Opal Towers case

Most people will recall the Opal Tower incident on Christmas Eve 2018 where structural cracking led to the evacuation of residents of a newly constructed residential tower. It was widely publicised and was the first of a number of high-rise projects which gained media attention as a result of significant structural defects.

As a result of the damage, the contractor Icon Co (NSW) Pty Ltd (“Icon”) incurred costs totalling approximately $31,000,000 including rectification costs, alternative accommodation costs for the residents and consequential legal fees.

A claim was made under Icon’s insurance policies, however the insurer refused to provide indemnity on the basis that the damage occurred after the expiry of the period of insurance. This was so even though the policy included an additional “defect liability period” of 12 months in addition to the period of insurance as is customary under such policies.

As a result, the contractor filed a claim in the Federal Court of Australia against both Liberty Specialty Markets (the insurer at the time of commencement, “Liberty”) and QBE Underwriting Limited as Managing agent for underwriting members of Lloyds syndicates 386 and 299 (the underwriter at the time of the event, “QBE”) on the basis that the loss should be covered.[1]

In issue, and disputed by Icon was respectively:

  • Liberty asserted that the claim was not covered as the period of insurance had expired and the insuring clause did not cover any subsequent defects liability period. Icon sought to have this decision overturned on the basis that the incident was as result of an Occurrence within the period of cover.

  • QBE’s asserted that the development did not meet the definition of a “product” and therefore the product liability section of the policy was not triggered.

The Court found the following:

Liberty

At the time the cover was placed Liberty were the security for a binder via Chase Underwriting. This added an additional layer of communication in relation to the project. The broker notified Chase of the contract and the defect liability period, however Chase failed to advise Liberty of this period.

The policy form used was on a “turnover basis” and the full value of the contract was declared to Chase at the time of placement; not just the turnover associated with the project during the period.

When the claim was made, Liberty denied indemnity on the grounds that the policy expired at the date of practical completion. This is not the customary way that such policies are put in place.

There is an expectation under most if not all construction contracts that there is an ensuing defect liability period (of varying lengths) following completion.

Icon sought rectification of the insurance contract, arguing that it was the common intention of all parties to the insurance contract that the policy would cover both the construction and defect liability period, despite the fact that the objective meaning of the terms included in the insurance contract did not reflect the cover negotiated by the broker.

Expert evidence supported this position. That is, any policy covering such a large project would be intended to include cover for the defects liability period. That being on the basis that such risk and obligation would not easily be transferred to another insurer in circumstances where the project had been insured elsewhere.

Notably, Liberty did not call a representative from Chase Underwriting to provide evidence in support of its position. Whilst Liberty’s failure to call evidence in respect to this issue was not determinative, Justice Lee noted that the absence of this evidence supported the conclusions as to the true intentions of the parties to the insurance policy.

The Court determined that the Liberty policy should be rectified to reflect this intention, therefore the Liberty policy was required to extend cover for events occurring during the defect liability policy.

QBE

QBE became security for the Chase liability binder and subsequently Icon’s insurer rom September 2018 up to and including the date of the structural cracking.

As the event occurred during that period, Icon contested that the completed building was a product under the definition provided in the wording and therefore a claim could be made under the product liability section of the Chase policy.

Whilst the definition of product included a number of terms which could be construed in favour of Icon for the Opal Tower development, QBE contended that their intention was to only cover products which were tangible and portable and could be transferred from one person to another.

The court disagreed and confirmed that the QBE Policy should provide indemnity to Icon.

Conclusion

This is a significant decision not only for Icon, but more globally exemplifies the Courts’ willingness to rectify a policy based on “intention”, even in circumstances where the contract of insurance is unclear.

There is no doubt that the contractor intended to insure both its construction and defect liability period and that this was relayed to the underwriting agency who accepted the risk. However, in this case it was fortunate that Icon was able to carry the $31M in losses whilst coverage was being resolved in the courts – many contractors could not have afforded to do so – getting policy coverage and intention right is of upmost importance. In this regard we refer you to our article where the luxury of such funds are not available to many insureds who have been victims of “grey” coverage positions or what we call “strategic denials”: see here.

Insured’s are reliant on the policy coverage being suitable and compliant with their contracting conditions. In this case there were no adverse findings against the broker representing Icon. This demonstrates the need for contractors to trust that their broker is providing adequate cover requirements by either taking time to understand their policy documents, or having all policies reviewed by a third party who can provide a comprehensive “post placement” review of the cover in place – before a loss occurs.

Bellrock is often engaged to undertake such reviews, and engages with clients (and or in a non-adversarial way with the placing broker) to review the placement and to provide advice post placement.

[1] Icon Co (NSW) Pty Ltd v Liberty Mutual Insurance Company Australian Branch trading as Liberty Specialty Markets [2020] FCA 1493 – Lee J