Council of the City of Penrith v Govt Insurance Office of NSW

The Council of the City of Penrith (the Council) sought to recover damages from the Government Insurance Office of New South Wales (GIO) for losses sustained due to the collapse of a retaining wall. The wall, constructed by a contractor engaged by the Council, failed shortly after completion, causing damage to adjacent land owned by a third party. The Council had settled the claim brought by the adjacent landowner and now sought to recover this amount from GIO, which had insured the contractor against liability for damage caused by faulty workmanship.

The central legal issue before the court was whether GIO was liable to indemnify the Council under the policy of insurance issued to the contractor. Specifically, the court had to determine if the damage sustained by the adjacent landowner constituted "damage to property" as defined within the policy, and if the Council's settlement with the landowner was a liability that fell within the scope of the contractor's insurance. A further question arose as to whether the Council's own actions or omissions in supervising the construction or in failing to mitigate the damage could preclude recovery from GIO.

The court considered the terms of the insurance policy and the nature of the liability incurred by the Council. It was held that the policy covered damage to property caused by the contractor's faulty workmanship. The collapse of the wall and the resulting damage to the adjacent land were found to be direct consequences of the contractor's defective work. The court reasoned that the Council's settlement with the landowner was a reasonable and necessary step to discharge its own liability arising from the contractor's breach of duty, and therefore, this liability was covered by the indemnity provided by GIO. The court rejected arguments that the Council's conduct absolved GIO of its responsibility, finding that the primary cause of the loss was the contractor's faulty workmanship.

The appeal was allowed, and GIO was ordered to indemnify the Council for the amount paid in settlement to the adjacent landowner, together with costs.