Excavator digs itself into a deep hole with respect to property lossMay 2019 | Insurance
The decision from Delta Pty Ltd v Mechanical and Construction Insurance Pty Ltd1 highlights the subtle yet important difference between liability for causing harm and liability for defective performance of a contract resulting in economic loss. Also highlighted is that issues surrounding the formulation of a settlement are complex and caution must be exercised when parties are considering a Settlement Deed. Finally, the case is a reminder that a prudent step for a principal contractor is to undertake thorough due diligence to ensure that any sub-contractors have appropriate insurance cover for the nature and scope of the project being embarked upon.
In September 2006 Watpac contracted Delta to excavate the foundations of a new building in Brisbane. Delta then engaged Team Rock Anchor Pty Ltd (TRA) to install anchors and walers to secure the retaining walls. The installation of the anchors by TRA was deficient and the majority of the anchors were not installed in accordance with the design specifications resulting in significant costs and delay to Watpac and Delta.
In 2012 Delta sued TRA. TRA held an insurance policy from Mechanical and Construction Insurance Pty Ltd (Mecon) that covered ‘amounts which [an insured] become legally liable to pay in compensation for … Property Loss’, ‘Property loss’ where ‘physical loss, damage or destruction of tangible property’. TRA made a claim under the policy, which was declined by Mecon on a number of grounds. Delta subsequently entered into a Settlement Deed with TRA. The settlement provided that TRA agreed to pay damages recovered by Delta from Mecon, as assignee.
At trial in 2017 in the Queensland Supreme Court, Delta advanced two arguments against Mecon. The first claim alleged that Delta was an insured under the Mecon policy and entitled to be indemnified for its own rights and interests. The second argument advanced by Delta was that as TRA’s assignee, Delta was entitled to any amount recovered under the Mecon policy.
On 27 July 2017, the Queensland Supreme Court dismissed both of Delta’s claims against Mecon citing the terms of TRA’s Public Liability insurance policy and the flawed assignment of the right to indemnity. Delta appealed the decision to the Queensland Supreme Court of Appeal.
The Court of Appeal had to consider two issues:
- Whether Delta was an insured under the TRA’s policy; and
- Whether Mecon was legally liable pay Delta, as TRA’s assignee, compensation for ‘Property Loss’.
On 12 April 2019, Delta’s appeal was dismissed. In dismissing the appeal Fraser JA affirmed the Supreme Court’s decision from 2017 that Delta’s losses were not covered by the policy. The Court of Appeal found that while Delta was an insured under the policy, its claims failed because the loss claimed by Delta was characterised as economic loss which was not covered by the policy.
Was Delta an insured under the policy?
The Court of Appeal found that Delta was an insured ‘principal’ for the purpose of the Mecon policy. Delta advanced two arguments with respect to damages. One for property damage caused by TRA’s defective works, and one for additional works carried out by Delta to remediate TRA’s defective works. Delta argued that this amounted to 'Property Loss'. The Court of Appeal disagreed, finding that the loss alleged was economic loss, and no ‘physical loss, damage or destruction of tangible property including resulting loss of use of such property’ as defined by the policy, had occurred.
Did Delta have the benefit of the claim assigned to it by TRA?
The Court of Appeal did determine that TRA’s right to receive the proceeds of the policy could be assigned. Delta argued that TRA’s obligations under the Settlement Deed constituted a liability to pay 'compensation for Property Loss'. Conversely, Mecon submitted that in accordance with the Settlement Deed, TRA would become liable to pay compensation 'on demand' and no demand had been made by Delta. Accordingly, Delta had not established that TRA had become 'legally liable'.
The Court of Appeal found that the effect of cl 2 would mean that under the settlement between TRA and Delta, TRA would never have any funds which Delta could make a demand to pay. The Court of Appeal concluded that due to this circularity within the wording of the Settlement Deed, TRA could never have a liability to pay compensation as the Settlement Deed was not, in practice, capable of establishing liability under the policy.
Finally, the Court of Appeal found that the assigned claim would fail in any event because as with the direct claim Delta made against Mecon under the policy, it was for economic loss and not ‘Property Loss’ within the meaning of the policy.
This decision highlights the subtle yet important difference between liability for causing harm, for example property damage, and liability for non-performance or defective performance of a contract resulting in economic loss. Unless clearly stipulated in the insurance policy, typically the latter is not covered by public liability insurance. Non-performance or defective performance of a contract is a business risk, and public liability cover for economic loss would encourage non-performance or possibly negligent performance of contracts on the basis that the liability would be covered.
There is a good reason to distinguish the nature of a claim which is to be covered by public liability insurance. Public liability insurance is not intended to be a warranty for the insured’s performance of ordinary contractual obligations, the breach of which causes economic loss in that the third party that does not receive the economic benefit of the contract. Furthermore, public liability insurance is not intended to cover the insured against liability for providing defective work or products in breach of a contract if the loss arises purely from the inadequacy of the performance of the insured obligations. In this instance, movement of a retaining wall, even to a dangerous degree, will not result in property loss unless the movement damages the wall itself, or some other tangible property.
The case also highlights that when formulating a Settlement Deed in respect of assigning rights by reference to insurance recoveries, particularly with regard to accepting the benefit of insurance claims assigned by a defendant, caution must be exercise when structuring such settlements. As seen in this case, issues surrounding these matters are complex and if care is not exercised in the formulation of a Settlement Deed, a settlement may result in the assignment of an insurance claim being effectively worthless.
Finally, it is worth noting that before embarking on any project where there is a principal contactor and sub-contractors, a prudent step for the principal contractor is to undertake thorough due diligence to ensure that any sub-contractors have appropriate insurance cover for the nature and scope of the project being embarked upon.
1  QCA 62
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