In the recent Western Australian Court of Appeal decision of WFI Insurance Ltd v Manitowoq Platinum Pty Ltd & Ors [2018] WASCA 89, the former Chief Justice rejected the District Court judge’s interpretation of a condition in a business liability insurance policy that the insured had relied upon to deny indemnity.

Summary

The District Court judge held that the insurer could not deny indemnity on the grounds that the insured had failed to ‘comply with legislation and Australian standards’.  Also, if the insurer had wanted to deny indemnity for non-compliance with that condition, it should have stated so clearly in the policy, but had not done so.

CJ Martin allowed the insurer’s appeal.  He held the condition was clear enough and there was no reason not to give the words their ordinary and natural meaning.

The former Chief Justice’s decision is interesting for several reasons.  First, it provides a powerful critique of the primary judge’s use of precedents and approach to the ‘repugnancy rule’.  Second, it seeks to place ‘commercial purpose’ arguments in their proper place within the exercise of policy interpretation and construction.  Third, it makes an interesting observation about ‘Plain English’ policies and what they can reasonably be expected to say.

Background

Manitowoq Platinum Pty Ltd and JDE Roma Pty Ltd (the Claimants) carried on a restaurant business on Hay Street in the Perth CBD.  Before trading in 2008, the restaurant was fitted out by a contractor, Boss, who subcontracted the plumbing works.

After trading commenced, the Claimants noticed water damage at the restaurant, which led to major rectification works costing more than $1.6 million.

The Claimants brought proceedings against Boss, who claimed indemnity under its business liability insurance policy with WFI Insurance Pty Ltd (WFI).  Before the indemnity position was determined, Boss went into liquidation and was deregistered.  The Claimants proceeded directly against WFI.

WFI denied it was liable to indemnify Boss in respect of the Claimants’ damage because Boss had breached a condition of the policy requiring it to ‘comply with legislation and Australian Standards’ (the Condition).

District Court decision

The primary judge found that the plumbing work had failed to comply with local plumbing regulations and Australian Standards.  However, she found that Boss had not breached the Condition.

She interpreted the Condition as implying a requirement of reasonableness on the part of the insured and then, relying on previous English and Australian court decisions, found that the requirement to act reasonably required the insured not to be reckless.

In addition, she found a breach of the Condition would not enable the insurer to deny indemnity because the insurer had not clearly stated in the policy that this would be the consequence of a breach.  At most, the policy wording stated that a breach of the Condition may entitle the insurer to reduce or refuse indemnity or cancel the policy.  And the insurer had failed to describe compliance with the policy as a ‘condition precedent to indemnity’.  As a result, she said there was ambiguity in the policy.

Court of Appeal decision

Martin CJ gave the leading judgment.  He identified two grounds of appeal:

  1. Whether the Condition imposed an obligation on the insured only to “take reasonable care” to comply with relevant legislation and Australian Standards; and
  2. Whether the insurer’s liability was conditional upon compliance by the insured with the Condition.

Ground 1

The Chief Justice agreed the ‘repugnancy rule’ was relevant – that is, the words should not be construed so as to be repugnant to the commercial purpose of the policy.  In the context of insurance policies, this generally requires a consideration of the effect a particular construction will have on the ambit of cover provided by the policy.

However, he disagreed with the primary judge’s reasoning (or lack of reasoning) to support the conclusion that the insurer’s reliance on the Condition was repugnant to the policy’s commercial purpose.

The main difficulty with that reasoning was that it implied a requirement of reasonableness where there was no basis for implying such a qualification on the ordinary and natural meaning of the words.  The primary judge’s reliance on previous decisions was misplaced.

CJ Martin looked first at the words used in the Condition and noted that they were not qualified, unlike other conditions in the policy, by words requiring the insured to ‘take reasonable care’.

He then looked at whether a construction of the Condition that was strongly suggested by the words should be denied on the basis it would negate the evident commercial purpose of the policy.

He concluded it would not – he reasoned the insured’s argument would have ‘considerable force’ if breach of legislation and Australian standards was the only or predominant source of liability indemnified by the policy, but it was not.

In short, he found that reading the Condition without qualification did not deprive the policy of all or most of the benefit of the cover provided by the policy.

Ground 2

The primary judge had found that the insurer could not rely on a breach of the Condition to deny liability because the policy did not clearly state that a breach would have that consequence and the insurer had not described the Condition as a ‘condition precedent to indemnity’.

CJ Martin found there was no requirement for the insurer to specify that the consequence of breaching the Condition would be that the insurer would deny liability – indeed, that would be misleading, because not every breach would entitle the insurer to do that, particularly having regard to s54 of the Insurance Contracts Act 1984.

Also, he found that the insurer could not be criticised for having omitted to state that the Condition was a “condition precedent to indemnity” – terminology of that sort was not to be expected in policies written in “Plain English”.

Implications

CJ Martin’s judgment provides some useful pointers for the application of the ‘repugnancy rule’ when interpreting and construing insurance policies.  Generally, the Australian courts interpret and construe insurance contracts according to “text, context and purpose”.  Insurance contracts are a species of commercial contract and the courts require the parties to give insurance contracts a businesslike interpretation consistent with the commercial purpose of the policy.

Here, CJ Martin provided a roadmap for considering ‘commercial purpose’ arguments in the interpretation of insurance contracts.  To address an argument that a particular construction is uncommercial, it is necessary first to determine the ordinary and natural meaning of the words and then (and only then) to determine what impact a construction of those words has on the ambit of cover under the policy.  If the construction does not deprive the insured of meaningful cover under the policy, it should be allowed.

The finding that the Condition should apply unqualified should be approached with some caution.  Not every promise by a contracting party will be construed to create a strict duty for that party.  Context remains important and parties need to beware of relying on previous cases where the language and facts are not the same.

Finally, this decision gives helpful guidance for insurers using ‘Plain English’ or conversational forms of policy wording.  The primary judge’s finding that the policy should have specified that the Condition was a ‘condition precedent to indemnity’ was not without a sense of irony.  In all cases, insurers should aim to ensure the wording is clear and unambiguous.

But for insurers using ‘Plain English’ wordings, which are very common in consumer‑facing policies, such as motor, home and contents, that objective does not require (and insurers are not expected to use) special words or expressions that may be familiar to them, but difficult for others to understand.