A recent Victorian Supreme Court decision has confirmed that a court, when interpreting a policy of insurance, will assess the matters by reference to the ‘natural and ordinary meaning’ of the word/clause.  Simple, right?  But determining the ‘natural’ or ‘ordinary’ meaning of words is not always straightforward and rarely receives universal acceptance.

Guastalegname v Australian Associated Motor Insurers Ltd [2017] VSC 420 provides a succinct summary of the principles to be applied when interpreting a policy of insurance.

The case concerned the interpretation of the soil movement exclusion in a Home Building Insurance policy. Under the policy, the insurer agreed to indemnify the policyholder in respect of loss, damage or destruction to the building caused by a number of insured events, including storm.

On Christmas Day 2011, a violent hail storm caused water to inundate the policyholder’s land and building. Water coursed around the building and pooled under and about the concrete slab.  This led to ‘heave’ of the clay soil beneath the slab, causing the soil to expand and raise the slab. The raised slab lifted the walls and roof frames, causing cracking and other consequential damage to the building.

The policyholder made a claim under the policy for the cost of repairing the damage to the building. The insurer agreed that the storm caused the inundation, the consequent ‘heave’ in the soil supporting the concrete slab, and that such heave was the cause of the plaintiff’s loss and damage. However, the insurer denied liability to indemnify, on the basis of a general exclusion of liability for loss and damage to the building caused by ‘soil movement’.

In deciding this matter, the Court had to determine whether ‘heave’, which was accepted to mean the upward movement of the earth supporting a building because of the expansion of clay soil, fell within the ‘natural and ordinary meaning’ of the soil movement exclusion.

The exclusion stipulated that there was no cover for:

“damage, loss, cost or liability caused by or arising from or involving:

  • erosion or washing away of soil, earth or gravel,
  • the washing away or movement of the surface of any path or driveway which has a surface consisting of a loose material such as gravel, stone or dirt,
  • soil movement or settlement,
  • subsidence or landslide unless caused by the insured event of earthquake, …”

The Court determined it necessary to construe the relevant provisions of the policy in accordance with the general principles to be applied in giving commercial contracts a businesslike interpretation. The Court approached the task on the assumption that the parties intended to produce a commercial result and, accordingly, a commercial contract is to be construed so as to avoid “making commercial nonsense or working commercial inconvenience”: Electricity Generation Corporation v Woodside Energy Ltd (2014) 241 CLR 640.

So, the Court considered what reasonable persons in the position of the parties would have understood the words to mean by reference to the text of the agreement, the surrounding circumstances known to the parties and the purpose or object of the transaction. To the extent of any ambiguity, the Court adopted a common sense and non-technical approach and sought to give the agreement a commercially sensible construction.

As regards ‘heave’ and ‘soil movement’, the Court concluded that considering the policy as a whole, there was no reasonable basis for concluding that the parties intended the soil movement to have the limited meaning as proposed by the policyholder, and although the soil movement exclusion was badly drafted, it was clear that the insurer intended to exclude indemnity for building damage caused by soil movement of whatever kind.

Therefore, the Court concluded that the natural and ordinary meaning of the soil movement exclusion was that damage to the building caused by any kind of soil movement is excluded. “Heave” was found to fall within the natural and ordinary meaning of the soil movement exclusion and the insurer had reasonable grounds to rely upon the exclusion to decline indemnity for the rectification costs claimed by the policyholder.

This case provides insureds and insurance lawyers alike with a succinct summary (and a helpful refresher) on the principles that are to be applied when interpreting a policy of insurance, and confirms that in the end, the natural and ordinary meaning of a word is still the key to policy interpretation.