Opals lost on the tower: Insurers contest ambiguity of policy wordings
Further to our article dated 12 November, 2020 “Icon brings home the opals”, the Federal Court of Appeal was asked to determine the proper construction of a construction liability policy.
Initially, the Federal Court determined that the policy did not respond but then allowed the contract of insurance to be rectified to give common effect to the intention of the parties. On appeal, the Federal Court of Appeal found that the primary judge was wrong as to his interpretation of the policy and that the clause did provide the machinery for that to occur, so there was no need for rectification.
However, if the Court was wrong about that, it would have upheld the primary judge’s conclusions that the policy of insurance could be rectified to reflect the common intention of the parties as demonstrated by the course of dealing between Icon’s broker and Liberty’s intermediary (a managing general agent or MGA).
The judgment of the Federal Court of Appeal ultimately favours insureds. It is however demonstrative of protracted litigation that can ensue where bespoke policy amendments to standard wordings are drafted to achieve a “commercially and administratively convenient” mode of insurance transacting.
As further set out in our previous article Icon entered into a design and construct contract to build “Opal Tower”, a 37 storey mixed residential and commercial development at Sydney Olympic Park.
Practical completion occurred in August 2018. The construction contract provided for a 12 month defects liability period. Extremely serious defects (major cracks appeared over three floors in wall panels, floor slabs and hobs, causing the evacuation of residents) manifested themselves after practical completion and during the defects liability period.
By February 2020 Icon had paid out over $31 million as a result of the incident, including $17 million in rectification costs, $8.5 million in alternative accommodation costs and substantial legal fees.
The arguments between the parties flowed from how Icon (through its broker) wanted the policy wording (offered by the MGA under authority from Liberty ) to work, and from how the relevant parties dealt with Icon’s commercial preferences in the operation of the policy.
This in turn gave rise to Icon’s contention that if it was not entitled to cover on a proper construction of the relevant clause, then it was entitled to have the clause rectified in its favour to reflect the common intention of the parties.
Combined contract works and public liability policies are underwritten ordinarily as:
- “Annual turnover” policies: these cover all projects commenced or in progress at the commencement of the policy and covers liability for damage or occurrences within the annual policy period. The premium is calculated upon the turnover of the business for the policy year.
- “Contracts commencing” policies: cover liability for damage or occurrences in connection with building contracts commenced in the policy year, the coverage being for damage or occurrences during the life of the building contracts, which were expected to extend beyond the policy period. In such circumstances, premium is calculated for each project by reference to the total contract value of the project: in effect the contribution to turnover of the company from that contract.
The Court was required to interpret the “run off” clauses in the policy that provided:
- Adjustment of Premium
The premium for this Policy is provisional (unless otherwise agreed) and is based on the estimated Turnover for the Period of Insurance. The Insured shall, as soon as practical after the expiry date of this Policy, declare to the Insurer(s) the Turnover during the preceding Period of Insurance.
- Run Off
Subject to written instructions from the Insured to the Insurer(s) prior to expiry of the Period of Insurance, this Policy will continue in full force and effect at terms and conditions prevailing immediately prior to expiry for all incomplete contracts as at date of expiry until completion of those contracts including any testing and/or defects liability and/or maintenance periods.
An adjustment premium shall be determined by calculating the difference between the provisional premium and the sum of the agreed rate applied to the Turnover.
Notwithstanding the above, the maximum allowable return premium will be 25% of the provisional premium paid.
The Insured is required to provide the Insurer(s) with a list of contracts requiring Run Off and additional premium is to be calculated on expiring rates applied to value of works declared for completion of projects after expiry of the Period of Insurance.
The parties’ positions
Icon wanted to fix cover for each contract or project as it commenced, for the life of the contract or project. An annual turnover policy operating as described above would not have provided that certainty of cover Icon contended that the contractual framework expressed in the policy.
Icon contended that the purpose of the above clauses was to enable Icon to obtain cover contract by contract that it declared in the relevant policy year for the life of those contracts, including during the defects liability periods of the contracts.
On the other hand, Liberty contended that the only meaning of the relevant clauses in the policy was that if Icon wished to have all unfinished or incomplete contracts covered to their end of life, including defects liability period, the clause enabled all incomplete contracts to be covered to the end of the defects liability period by the provision of a list of incomplete contracts and the payment of premium applied to the total value of works outstanding.
Liberty did not contend that it provided only “annual cover”. It accepted that it gave amendments to each annual policy by amending the policy to grant cover for each contract for which Icon gave instructions; but its position was that it only gave cover in respect of those contracts up to the date of practical completion of each project, not up to the end of the defects liability period.
The approach taken to interpretation of insurance policies
When construing what a clause in an insurance policy means, the starting point is to determine what the natural and ordinary meaning of words are. If a clause is unambiguous, the words cannot be ignored simply to reach a result that is apparently more commercially convenient. But construing a written contract requires more than just assigning the words their ordinary meaning. The Court must consider the “circumstances which the document addresses, and the objects which it is intended to secure”. The court will consider what meaning a reasonable person in the position of the parties would give those words.
In resolving the above controversy between Icon and Liberty, in its 144 page judgment, the Federal Court of Appeal reiterated that when determining the objective meaning and intention of a clause in an insurance policy, a business-like interpretation is to be applied so as to bring about a commercial result based on what a reasonable businessperson in the position of the parties would have understood the policy to mean.
To the extent that words used in an insurance policy have the capacity for broader or narrower operation, such constructional choice or ambiguity will be resolved by appreciating the context, including the market, in which the parties are operating, and the extent to which a reading of the words may produce commercial inconvenience or commercial efficacy as part of the ascription of meaning that would be made by a reasonable businessperson considering the language used; the surrounding circumstances known to the parties; and the commercial purpose or objects of the policy as a whole to be secured.
In short, the Court held that a business-like construction of condition 15 (Run Off) was one that permitted a reasonable and commercially efficacious result. In this case that was an interpretation which enabled Icon to obtain the benefit of cover under the condition for the life of the contract by giving instructions to identify contracts commencing prior to the expiry of the policy year and which were expected to be incomplete at the end of the policy year; and by paying the additional premium. The mechanism of the clause allowed Icon to give instructions to identify contracts that were incomplete at expiry of the period and the payment of premium based on the value of the whole of each contract; and provided a convenient way for Liberty to offer and an Icon to take up “contracts commencing cover” arising out of an annual turnover policy. In effect, the cover provided by the policy was, annual turnover cover plus run off cover, upon instructions.
If the Court was wrong in its conclusions about the proper construction of the policy, then it would have upheld Icon’s rectification claim.
Unlike the task of construction of the terms of a policy, the inquiry into whether a contract should be rectified requires consideration of the background circumstances and course of dealing of the parties in order to determine whether the parties objectively had a common intention as to what was actually intended where that intention is not reflected in the contract. A Court will not move to rectify a written agreement in absence of clear and convincing proof that the alleged common intention continued in the minds of all parties down to the time of the execution of the document.
Establishing a common intention of the parties, after a dispute has arisen, is no easy task. In the present case, much turned on the records and recollections of the parties’ agents. Factual inquiries of this sort that are required to establish a common intention are likely to involve far higher legal costs than disputes regarding only the construction of the terms of a policy.
Icon’s broker and Liberty’s MGA reasonably sought a convenient mechanism by which the parties could insure Icon’s projects and the applicable premium to be paid for same. Instead of achieving that result, the parties became involved in protracted litigation that involved wide ranging investigations into what the parties’ intentions were. If clarity between insured/broker and insurer is not achieved, then excessive opals may be expended in the Courts clarifying.
To discuss your insurance needs with one of Bellrock’s experienced brokers, please contact us via the form below.