The District Court of Western Australia has recently handed down a decision regarding the scope of general conditions in a policy of insurance which purport to limit an insurer’s liability for claims (Limiting Clauses): Manitowoq Platinum Pty Ltd & Anor v WFI Insurance Limited  WADC 32. In the absence of any submissions made in respect of the operation of section 54 of the Insurance Contracts Act 1984 (Cth) (the ICA), the case was decided on the construction and operation of the Limiting Clause of the policy.
The claim in the proceeding arose from the alleged negligence of a contractor retained by the plaintiffs to undertake fitout work at the plaintiffs’ restaurant. The contractor’s substandard workmanship resulted in the plaintiffs having to close their restaurant and undertake expensive rectification work.
The plaintiffs made a claim against the contractor for damages resulting from the contractor’s negligence and breach of contract. The contractor claimed on its Business Liability insurance policy. The contractor subsequently went into liquidation and was deregistered. Pursuant to section 601AG of the Corporations Act 2001 (Cth) the plaintiffs brought legal proceedings against the contractor’s insurer. The insurer conceded that the contractor had been negligent when undertaking the fitout work.
The primary dispute related to whether the insurer was permitted to deny the claim or limit its liability on the basis that the contractor, in undertaking the fitout work, had failed to comply with a general condition in the policy which required the contractor to “comply with legislation and Australian Standards” (General Condition) when undertaking the construction work. As noted by the Judge, no submissions were made as to whether section 54 of the ICA prevented the insurer from denying the claim.
The expert evidence given during the trial concluded that the construction work, in particular the plumbing work, was carried out in a manner which did not comply with the relevant Plumbing Standards. The insurer submitted that the contractor’s breach of the General Condition meant the insurer was entitled to avoid the claim.
General principles relating to Limiting Clauses
Her Honour made the following general statements in relation to the operation of Limiting Clauses in a policy of insurance:
- A policy of insurance is a commercial contract and attention must be given to the language used by the parties, the commercial circumstance which the policy seeks to address and the objectives of the insurance cover.
- The court, in construing a written contract, must give effect to the “common intention of the parties”. The parties’ intention is to be ascertained objectively. How would a reasonable person understand the terms of the contract of insurance? The subjective intention of the parties as to their contractual rights and liabilities is irrelevant.
- When interpreting Limiting Clauses, the court must give effect to the natural and ordinary meaning of the clause when read in the context of the whole policy. There is no general rule of construction in an insurance contract that Limiting Clauses are to be construed strictly or narrowly.
- When construing a condition of an insurance policy which is a condition precedent to the insurer’s liability, the court must have regard to the context of the specific risks covered by the policy. “The policy may be read down in an appropriate case to avoid a situation where the purpose of the policy and indemnity granted by it would be substantially defeated”.
- If Limiting Clauses are ambiguous when viewed in the context of the whole policy, they should be construed against the insurer in accordance with the contra proferentem rule.
The insurer submitted that the General Condition was not ambiguous and was a condition precedent which allocated the risk to the contractor in the event that the contractor did not comply with the Australian Standards. Conversely, the plaintiffs asserted that when the term was read in the context of the whole policy, the General Condition was ambiguous because it contravened the commercial purpose of the policy which was to indemnify the contractor for its liability and negligence.
The court’s decision
Her Honour held that a breach of the General Condition by the contractor did not entitle the insurer to refuse to indemnify the claim for the following reasons:
- An objective analysis of the policy did not support a conclusion that it was the common intention of the contractor and the insurer that a breach of the General Condition would allow the insurer to deny the claim.
- If the intention was that a breach of the General Condition would override the terms of the Insuring Clause in the policy, then it was incumbent on the insurer to make this clear to the contractor. The policy did not expressly state that compliance with the General Condition was a condition precedent to a grant of indemnity.
- The consequence of the contractor breaching the General Condition was unclear and uncertain which created an ambiguity in the policy. The ambiguity meant the insurer could not rely on the General Condition to avoid liability for the plaintiffs’ claim.
- Having regard to the terms of the policy, it would be inconsistent with its commercial purpose and the terms of the Insuring Clause (which is to provide cover to the contractor for acts of negligence) to construed the General Condition in favour of the insurer.
Her Honour concluded that the General Condition should be read down and construed to imply in its terms that the insured contractor must “take reasonable care to” comply with legislation and Australian Standards. Her Honour found that the contractor’s “conduct did not reach a level of recklessness” which would breach the General Condition and allow the insurer to deny the claim. Interestingly, the insurer did not allege that the contractor had acted recklessly in undertaking the fit out work.
Lessons for insurers
The Manitowoq case reinforces that, even where section 54 of the ICA is not invoked:
- insurers may not be able to rely on an unusual term in a policy which seeks to avoid or limit the insurer’s liability unless that term has been expressly brought to the insured’s attention prior to entering into the contract of insurance.
- Courts may read down a Limiting Clause if the clause is designed to circumvent the purpose of the policy.
- A Limiting Clause which conflicts with the purpose of the Insuring Clause may be deemed uncertain and/or ambiguous and may be construed against the insurer.
- Limiting Clauses may be operative if the insurer can show that an insured party has acted recklessly in undertaking the insured activity.