Liberty Mutual Insurance Company Australian Branch trading as Liberty Specialty Markets v Icon Co (NSW) Pty Ltd
[2021] FCAFC 126
•20 July 2021
FEDERAL COURT OF AUSTRALIA
Liberty Mutual Insurance Company Australian Branch trading as Liberty Specialty Markets v Icon Co (NSW) Pty Ltd [2021] FCAFC 126
Appeal from: Icon Co (NSW) Pty Ltd v Liberty Mutual Insurance Company Australian Branch trading as Liberty Specialty Markets [2020] FCA 1493 File numbers: VID 732 of 2020
VID 737 of 2020Judgment of: ALLSOP CJ, BESANKO AND MIDDLETON JJ Date of judgment: 20 July 2021 Catchwords: INSURANCE – third party liability claims by construction company for serious building defects occurring after practical completion but within 12 month defects liability period – two policies with separate insurers – cover denied by insurer of annual policy as outside period of insurance – whether proper construction of the policy, through the “run off” condition, can provide for “contracts commencing” cover, contract by contract, that includes defects liability period
INSURANCE – cover denied by underwriter of later policy as outside scope of cover – proper construction of insuring clause: damage in connection with “Insured’s Products Liability and/or Completed Operations” – whether completed building and/or its component parts, including hobs, slabs, columns and walls, were a “product or thing” within the meaning of “Product” and whole policy – whether “Completed Operations” only covers damage occurring in policy period for completed projects for which defects liability period has expired – relevance of distinction between “Products Liability” and “Completed Operations” and “and/or” and exclusions – where “erected” included in definition of “Product” but not “built” or “constructed”
EQUITY – rectification – whether parties held a common intention to effect contracts commencing cover – where parties represented by experienced insurance brokers – relevance of their intentions – actual and ostensible authority – weight to be given to trial judge’s advantage of assessing witness credibility
Cases cited: Abalos v Australian Postal Commission [1990] HCA 47; 171 CLR 167
Aspen Insurance UK Ltd v Adana Construction Ltd [2015] EWCA Civ 176
Australasian Correctional Services Pty Ltd v AIG Australia Limited [2018] FCA 2043
Australian Broadcasting Commission v Australian Performing Right Association Ltd [1973] HCA 36; 129 CLR 99
Bigby v Kondra [2017] QSC 37
Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969
Bush v National Australia Bank (1992) 35 NSWLR 390
Cassell & Co Ltd v Broome [1972] AC 1027
Chubb Insurance Company of Australia Ltd v Robinson [2016] FCAFC 17; 239 FCR 300
Codelfa Construction Pty Ltd v State Rail Authorityof New South Wales [1982] HCA 24; 149 CLR 337
Crane v Hegeman-Harris Co Inc [1939] 1 All ER 662
Electricity Generation Corp v Woodside Energy Ltd [2014] HCA 7; 251 CLR 640
Federal Commissioner of Taxation v The Trustee for the Michael Hayes Family Trust [2019] FCAFC 226; 273 FCR 567
Fox v Percy [2003] HCA 22; 214 CLR 118
Gestmin SGPS SA v Credit Suisse (UK) Limited [2013] EWHC 3560 (Comm)
Gollin & Co Ltd v Karenlee Nominees Pty Ltd [1983] HCA 38; 153 CLR 455
GPI Leisure Corp Limited v Herdsman Investments Pty Ltd (No 4) (1990) 9 BPR 17,461
HDI Global Speciality SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296
Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310
Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2004] 1 AC 715
Igloo Homes Pty Ltd v Sammut Constructions Pty Ltd [2005] NSWCA 280; 61 ATR 593
Jacob v Utah Construction and Engineering Pty Ltd [1966] HCA 67; 116 CLR 200
Johnson v American Home Assurance Company [1998] HCA 14; 192 CLR 266
Jones v Dunkel [1959] HCA 8; 101 CLR 298
Lee v Lee [2019] HCA 28; 266 CLR 129
Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390
McCann v Switzerland Insurance [2000] HCA 65; 203 CLR 579
Metricon Homes Pty Ltd v Great Lakes Insurance SE [2017] VSC 749
Miliangos v George French (Textiles) Ltd [1976] AC 443
Muriti v Prendergast [2005] NSWSC 281
Proctor v Jetway Aviation Pty Ltd [1984] 1 NSWLR 166
Reardon Smith Line Ltd v Yngvar Hansen-Tangen and Sanko SS & Co Ltd [1976] 1 WLR 989
Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13; 267 CLR 514
Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; 69 NSWLR 603
Simic v New South Wales Land and Housing Corporation [2016] HCA 47; 260 CLR 85
State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (In Liq) [1999] HCA 3; 160 ALR 588
Stratton Finance Pty Ltd v Webb [2014] FCAFC 110; 314 ALR 166
SZGME v Minister for Immigration and Citizenship [2008] FCAFC 91; 168 FCR 487
Todd v Alterra at Lloyds Ltd [2016] FCAFC 15; 239 FCR 12
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; 165 CLR 107
Zhu v Treasurer (NSW) [2004] HCA 56; 218 CLR 530
Division: General Division Registry: Victoria National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance
Insurance ListNumber of paragraphs: 435 Date of hearing: 10–11 May 2021 Counsel for the Appellant: Mr C Caleo QC with Ms G Crafti Solicitor for the Appellant: Lander & Rogers Lawyers Counsel for the First Respondent: Mr J Slattery QC with Ms J Collins Solicitor for the First Respondent: K & L Gates Counsel for the Second Respondent: Mr S Donaldson SC with Ms N Oreb Solicitor for the Second Respondent: Barry Nilsson Lawyers ORDERS
VID 732 of 2020 BETWEEN: LIBERTY MUTUAL INSURANCE COMPANY AUSTRALIAN BRANCH TRADING AS LIBERTY SPECIALTY MARKETS (ABN 61 086 083 605)
Appellant
AND: ICON CO (NSW) PTY LTD (ACN 604 790 409)
First Respondent
QBE UNDERWRITING LIMITED AS MANAGING AGENTS FOR UNDERWRITING MEMBERS OF LLOYD'S SYNDICATES 386 AND 299
Second Respondent
AND BETWEEN: ICON CO (NSW) PTY LTD (ACN 604 790 409)
Cross-Appellant
AND: LIBERTY MUTUAL INSURANCE COMPANY AUSTRALIAN BRANCH (ABN 61 086 083 605)
First Cross-Respondent
QBE UNDERWRITING LIMITED AS MANAGING AGENTS FOR UNDERWRITING MEMBERS OF LLOYD'S SYNDICATES 386 AND 299
Second Cross-Respondent
ORDER MADE BY:
ALLSOP CJ, BESANKO AND MIDDLETON JJ
DATE OF ORDER:
20 JULY 2021
THE COURT ORDERS THAT:
Within seven (7) days the parties file any submissions as to the form of the orders set out at [351] of the reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ORDERS
VID 737 of 2020 BETWEEN: QBE UNDERWRITING LIMITED AS MANAGING AGENTS FOR UNDERWRITING MEMBERS OF LLOYD'S SYNDICATES 386 AND 299
Appellant
AND: ICON CO (NSW) PTY LTD (ACN 604 790 409)
First Respondent
LIBERTY MUTUAL INSURANCE COMPANY AUSTRALIAN BRANCH TRADING AS LIBERTY SPECIALTY MARKETS (ABN 61 086 083 605)
Second Respondent
ORDER MADE BY:
ALLSOP CJ, BESANKO AND MIDDLETON JJ
DATE OF ORDER:
20 JULY 2021
THE COURT ORDERS THAT:
Within seven (7) days the parties file any submissions as to the form of orders at [435] of the reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
THE COURT:
INTRODUCTION
The two appeals, one associated notice of contention, and one cross-appeal in this matter concern the response of two insurance policies to claims made by Icon Co (NSW) Pty Ltd, the builder of the Opal Tower, a 37 storey mixed residential and commercial development at Sydney Olympic Park.
Icon entered into a design and construct contract (the Opal Tower Contract) in October 2015. Practical completion occurred in August 2018. The contract provided for a 12 month defects liability period. Extremely serious defects (major cracks appeared over three floors in wall panels, floor slabs and hobs, causing the evacuation of residents) manifested themselves on Christmas Eve 2018 after practical completion and during the defects liability period. The size of the problem is to be appreciated by the fact that by February 2020 Icon had paid out over $31 million as a result of the incident, including $17 million in rectification costs, $8.5 million in alternative accommodation costs and substantial legal fees.
In July 2019, residents commenced a class action in the Supreme Court of New South Wales against the Sydney Olympic Park Authority, which cross-claimed against Icon.
The proceedings brought in this Court in the Insurance List concerned the controversies that arose between Icon and its two third party liability insurers: Liberty Mutual Insurance Company Australian Branch trading as Liberty Specialty Markets and QBE Underwriting Limited as managing agent for underwriting members of two Lloyd's syndicates.
None of the issues raised in the controversy concern the detail of the building work undertaken by Icon. There was no dispute between the respective parties about whether there was damage or an occurrence for each of the relevant policies. The disputes between Icon, as insured, and Liberty and QBE under the separate policies, were as to the response or engagement of the policies in question by reason of expiry of cover (as to the Liberty policy) and by reason of the defined scope of cover: whether the building was a "Product or thing" (as to the QBE policy).
The Liberty dispute was factually wide ranging because Icon claimed that if it was not entitled to indemnity on the written terms of the policy as properly construed, it was entitled to have the policy rectified to give effect to a common intention (the Contracts Commencing Intention) of Icon and Liberty which would provide for indemnity.
The factual matrix of the Liberty dispute commenced in 2012, when Icon first took out the Liberty policy covering third party liability, and reached forward to 2015, when Icon entered into the Opal Tower Contract and arranged cover for it, and eventually through to late 2018 when the claim was made and rejected.
The QBE dispute was in much narrower compass, concerning, as it did, the uncontroversial events towards the end of the period of the wider controversy in the taking out and proper scope of the third party liability policy issued by the Lloyd's syndicates (to which we will refer for convenience as the QBE policy).
The primary judge heard the matter over five days in May 2020 (using technology to hear the matter otherwise than in person). There was a significant body of documents, and a number of witnesses were cross-examined, none as to their truthfulness, but a number as to the reliability of their recollections. His Honour delivered judgment in October 2020, finding that both insurers were liable to indemnify Icon. As to Liberty, the primary judge found that, properly construed, the Liberty policy did not respond to the claim, but that Icon was entitled to an order rectifying the policy in a way that entitled Icon to indemnity. As to the syndicates represented by QBE, the primary judge found that properly construed the QBE policy responded to the claim and that Icon was entitled to be indemnified.
OUR VIEWS IN SUMMARY
As to the claim against Liberty, for the reasons that follow, we would allow the cross-appeal by Icon on the basis that in the circumstances condition 15 of the Liberty policy, properly construed, was able to be engaged and was engaged so as to entitle Icon to indemnity. That conclusion removes the need for rectification; but we have dealt with the appeal on rectification on the assumption that we are wrong on the question of construction, and because the primary judge has made orders which cannot stand consistently with the premise of cover which we have found. On this hypothesis, we would dismiss Liberty’s appeal.
As to the claim against the underwriter under the QBE policy, we would allow the appeal.
THE STRUCTURE OF THESE REASONS
We will deal first with the Icon cross-appeal and then with the Liberty appeal and Icon notice of contention. The appeal and cross-appeal (in particular the former) call for close attention to a number of factual findings by the primary judge. The issue of rectification in the Liberty appeal calls for an understanding of events and apparent states of mind of various people over a period of six years. Some of these events and exchanges are relevant to the question of the construction of relevant provisions of the Liberty policy in the Icon cross-appeal; some are relevant to the intention of the parties to engage provisions of the Liberty policy in the Icon cross-appeal, and some are relevant to the question of rectification in the Liberty appeal. We recognise that some of the evidence may have different purposes to other evidence, and that care needs to be taken not to use evidence for a purpose that is not legitimate.
We will then deal with QBE’s appeal.
We will first briefly set out some essential background facts and describe the approach and reasoning of the primary judge.
THE ICON CROSS-APPEAL, THE LIBERTY APPEAL AND THE ICON NOTICE OF CONTENTION
Background facts and the broad scope of issues
The Liberty policy was first issued in September 2012. Icon employed an insurance broker, Austbrokers Countrywide which arranged the policy on its behalf. Austbrokers’ position as Icon’s broker had been challenged by the efforts of other brokers, but it maintained the Icon account. The Liberty policy was only one insurance that Austbrokers placed for Icon in 2012 and later years. The principal actor at Austbrokers in the relevant events was Mr Mark O’Reilly. In the dealings leading up to the issue of the policy in 2012 and also in the dealings up to and including 2018, Liberty was represented by an underwriting agent, Chase Underwriting Pty Ltd. The principal actor at Chase who dealt with Mr O’Reilly at Austbrokers was Mr Adam Burgess, though sometimes Mr Adam Bortone. Both Mr O’Reilly and Mr Burgess were experienced insurance intermediaries. The principal actor in the underwriting of the risk for Liberty was Mr Daniel Hingston.
As explained in the expert evidence of Mr Bovington, which was largely uncontroversial, there were, and are, two approaches to the coverage of construction third party liability risks by annual policies of insurance. There could be policies based on annual turnover covering all projects on hand during the year and covering liability for damage or occurrences within the annual policy period, with premium calculated upon the turnover of the business for the policy year. An alternative was a so-called “contracts commencing” policy which covered liability for damage or occurrences in connection with building contracts commenced in the policy year, the coverage being for damage or occurrences during the life of the building contracts, which were expected to extend beyond the policy period. In such circumstances, premium would be calculated for each project by reference to the total contract value of the project: in effect the contribution to turnover of the company from that contract.
In the former type of arrangement, damage or occurrence needed to occur within the annual policy period and premium was referable to the turnover of the policy period. In the latter, damage or occurrence needed only to occur in the life of the building contract which commenced within the policy period and premium was referable to the total contract value of the projects commenced within the policy period. Importantly, Mr Bovington’s evidence was that contracts commencing policies provided cover that included the defects liability period.
These different structures explain expressions in the evidence such as “dirty on / clean off” for the annual turnover type of policy and “clean on / dirty off” for contracts commencing policies.
The difficulties and arguments that have arisen in this matter stem from how Icon (through Austbrokers) wanted the policy wording (offered by Liberty through Chase) to work, and from how the relevant parties dealt with Icon’s commercial preferences in the operation of the policy.
Two clauses of the Liberty policy issued in 2015 are critical, conditions 8 and 15 (the draft wording for the 2012 policy discussed between Mr O’Reilly and Mr Burges contained an almost identical condition 16, the minor variations in which no party submitted were relevant to the cross-appeal or appeal):
8. Adjustment of Premium
The premium for this Policy is provisional (unless otherwise agreed) and is based on the estimated Turnover for the Period of Insurance. The Insured shall, as soon as practical after the expiry date of this Policy, declare to the Insurer(s) the Turnover during the preceding Period of Insurance.
An adjustment premium shall be determined by calculating the difference between the provisional premium and the sum of the agreed rate applied to the Turnover.
Notwithstanding the above, the maximum allowable return premium will be 25% of the provisional premium paid.
15. Run Off
Subject to written instructions from the Insured to the Insurer(s) prior to expiry of the Period of Insurance, this Policy will continue in full force and effect at terms and conditions prevailing immediately prior to expiry for all incomplete contracts as at date of expiry until completion of those contracts including any testing and/or defects liability and/or maintenance periods.
The Insured is required to provide the Insurer(s) with a list of contracts requiring Run Off and additional premium is to be calculated on expiring rates applied to value of works declared for completion of projects after expiry of the Period of Insurance.
They are to be read with the relevant part of the insuring clause, as follows:
The Insurer(s) agree to:
1.Indemnify the Insured in respect of all amounts which the Insured shall become legally liable to pay in respect of:
1.1 Personal Injury;
1.2 Property Damage;
1.3 Interference with traffic or to property or the enjoyment of use thereof by obstruction, trespass, loss of amenities, nuisance,
happening during the Period of Insurance as a result of an Occurrence in connection with the Insured’s Business
…
In the policy schedule, Premium was stated : “As Agreed”.
A brief discussion of conditions 8 and 15 reveals the issues and contending approaches of the parties. Condition 8 provides for adjustment of premium based on the turnover of the year of insurance. A provisional premium is calculated based on an estimate of the annual turnover anticipated for that year, and immediately after the expiry of the policy period the actual turnover would be disclosed and the premium adjusted. This was “unless otherwise agreed”. By the insuring clause, the insurer was liable to indemnify the insured for amounts which the insured shall become liable to pay in respect of injury, damage or interference happening during the (annual) period of insurance as a result of an occurrence in connection with the business. There was no limitation or exclusion depending on the particular contract or project or what stage the contract or project had reached: The cover was annual based on turnover for liability in respect of damage happening in the period as a result of an occurrence in the business.
As will be discussed, Icon through Austbrokers wanted to fix cover for each contract or project as it commenced, for the life of the contract or project. An annual turnover policy operating as described above would not have provided that life of contract or project cover. It is Icon’s case that condition 15 provided the contractual framework in this policy to effect that commercial aim and that the parties, in what they did, that is in the actions they took, engaged condition 15, contract by contract, to effect contracts commencing cover such that within the terms of the policy, in each policy year, Icon obtained cover for all contracts declared in the relevant policy year for the life of those contracts, including during the defects liability periods of the contracts, given the terms of condition 15.
Condition 15 is entitled “Run Off”. A reading of its terms reveals at least one clear contractual purpose: what might be called run off properly so-called. If at the end of a policy period of an annual turnover policy an insured wished to have all unfinished or incomplete contracts covered to their end of life, including defects liability period, whether because a new insurance programme was to be obtained requiring a “clean” position with no on-going contracts, or the insured was ceasing business or for some other commercial reason, this clause enabled the whole business (“all incomplete contracts”) to be covered in run off to completion (to the end of the defects liability period) by the provision of one list of incomplete contracts and the payment of premium upon expiring rates applied to the total value of works outstanding. Liberty submitted that such was not only its plain meaning, but also it was its only meaning and the only intended operation of the condition.
A broader and more commercially flexible meaning or content was urged by Icon. Condition 15 was said to be able to be used, individual contract by individual contract as they were entered into, in order for there to be cover for the life of each contract for individual premiums based on the total contract value of each contract. Conditions 8 and 15 would then operate by a deposit premium being accepted and as instructions were given for individual contracts additional premium would be charged based on the total value of the contracts notified. The list of contracts required by the second paragraph of condition 15 can be taken to be the sum of the instructions given in respect of individual contracts.
As shall be seen, the documentation that gave effect to the parties’ communications included endorsements to the policy. The place of those endorsements is central to the dispute. Liberty’s position (which was agreed in by the primary judge) was that the endorsements were contractual documents which provided for the period of insurance to be extended for each contract to a nominated date being the date of practical completion, such that cover expired before commencement of the deficits liability period.
There was no case put by Liberty that only annual cover (as first described above) was provided. It accepted that it gave amendments to each annual policy by amending the policy to grant cover for each contract for which Icon gave instructions; but its position was that it only gave cover in respect of those contracts up to the date of practical completion of each project, or at least, relevantly, of the Opal Tower Contract.
It was from this position that the primary judge concluded that the parties had a mutual intention that contracts commencing coverage was intended to be given and that such a type of coverage that was intended to be given included cover for the defects liability period.
The primary judge’s reasons as to contractual coverage (the subject of the cross-appeal)
In section B of the reasons (J[11]–[40]) the primary judge gave the relevant background to the disputes. At J[12]–[21] the primary judge summarised the pattern of the dealings between Liberty and Icon as follows:
12. Between at least 2012 and the end of 2018, Icon and the Icon Group engaged Austbrokers to act as their broker for the purpose of obtaining “Material Damage Contract Works” and “Third Party Liability” insurance for Icon and the Icon Group. The primary contact at Austbrokers was Mr Mark O’Reilly.
13. Between approximately June 2012 and July 2017, Chase was authorised to act as agent for Liberty in respect of, inter alia, the sale of third party liability insurance for the construction industry. In May 2016, Liberty and Chase executed two agency agreements, one for the period 1 June 2012 to 31 August 2015 (First Agency Agreement), and a second for the period 1 September 2015 to 1 September 2018 (Second Agency Agreement). The First and Second Agency Agreements attached policy wordings for both an annual third party liability policy and for a project specific third party liability policy.
14. Between September 2012 and September 2017, Icon and Liberty entered into several successive, and relevantly identical, 12 month contracts of third party liability insurance. As noted above, the Liberty Policy was the relevant annual policy to which Icon’s claims against Liberty are concerned, which identified the “Period of Insurance” as 20 September 2015 to 20 September 2016.
15. Icon did not deal directly with Liberty in relation to its insurance programme; all communications as to the policies were between Austbrokers and Chase. Within Liberty, the person with primary responsibility for Icon’s insurance programme was Mr Daniel Hingston. Mr Hingston was employed by Liberty first as a senior underwriter, and later as Assistant Vice President & Victorian Casualty Manager.
16. At the outset of the contractual dealing between Liberty and the Icon Group, in September 2012, Austbrokers, on behalf of Icon, issued Chase with a “quotation slip” seeking a quotation for both “contract works” and “liability” policies of insurance. Chase then forwarded the quotation slip to Liberty.
17. Shortly thereafter, Liberty sent an email to Chase confirming the rates which Chase could offer to Icon for annual third party liability insurance and Chase sent a quotation to Austbrokers in respect of both the “contract works” and “liability” policies of insurance. It was agreed that Chase was acting as agent of Liberty only in respect of the “liability” policy for which it provided a quotation. Chase then sent an email to Austbrokers attaching two separate policy wordings for a “contract works” policy and a “third party liability” policy and then, on 19 September 2012, Austbrokers emailed Chase to confirm that Icon had accepted the “terms”.
18. During the currency of the annual insurance policies, between September 2012 and September 2017, Austbrokers “notified” Chase, usually by email, of new construction projects in respect of which Icon sought third party liability insurance cover.
19. In respect of each construction project, Chase then usually provided Austbrokers with what was referred to as an “endorsement”, confirming that cover was in place in respect of each project notified. Such endorsements usually commenced with a statement substantially in the following terms:
IT IS HEREBY NOTED AND AGREED THAT THE ANNUAL THIRD PARTY LIABILITY FLOATER POLICY IS AMENDED TO INCLUDE THE FOLLOWING CONTRACT, WITH AMENDMENTS DETAILED HEREIN. ALL OTHER TERMS CONDITIONS AND LIMITATIONS APPLY AS PER POLICY.
20. The endorsement then contained various matters describing the project, including an “Estimated Project Period”.
21. From at least September 2013, and in respect of each subsequent annual policy, Icon paid a deposit premium which was then offset or deducted against the premium payable when projects were declared under the relevant annual policy. This was calculated and charged by reference to the full contract value of each project. Icon contends that this was the case from the outset of the first annual policy in 2012, but Liberty disputes this contention.
As will be seen in due course, this approach to cover, contract by contract, was discussed between the intermediaries (Mr O’Reilly and Mr Burgess) in September 2012, although the clear use of endorsements issued by Liberty did not commence until some time after commencement of the 2012/2013 policy. Importantly, in September 2012 (at least according to Mr O’Reilly whose evidence was accepted), Mr O’Reilly (Austbrokers) and Mr Burgess (Chase) discussed the use of condition 15 (then condition 16 in the draft wording for the 2012 policy before them) to effectuate a form of contracts commencing cover. That evidence was relevant to the rectification claim. Whilst it could never be relevant to the proper construction of condition 15, it was admissible, so far as relevant, to understand what the parties were doing or what they were intending to do: in this case, engage condition 15 if, on its proper construction, it was sufficiently wide and flexible to permit attachment of contracts to the policy by giving instructions, individual contract by individual contract, and paying the premium for the total value of each individual contract.
At J[23]–[27], the primary judge described the taking out of the relevant policy (for 2015/2016) as follows:
23. On 7 September 2015, in the customary manner by which the parties had previously conducted themselves, Austbrokers sent Chase an email attaching a quotation slip seeking terms for the renewal of the Icon Group’s annual “Material Damage Contract Works” and “Third Party Liability” insurance policies for the period 20 September 2015 to 20 September 2016.
24. On 16 September 2015, Chase sent Liberty an email, attaching Icon’s quotation slip, seeking approval for Chase to offer Icon third party liability cover on expiring terms.
25. On 17 September 2015, Mr Hingston sent an email in response to Chase stating that “I confirm agreement to continuation of expiring terms for the 2015-16 period”. Later that day, Chase sent Austbrokers an email attaching a renewal offer, for the period 20 September 2015 to 20 September 2016, for Icon’s annual third party liability insurance policy and for its annual contract works insurance policy. The renewal offer identified that Icon’s annual third party liability insurance policy would be provided by Liberty for that period.
26. On 18 September 2015, Austbrokers sent Chase an email attaching a “placing slip” to confirm the renewal of both policies for Icon for the period 20 September 2015 to 20 September 2016. Later that day, Chase sent an email to Austbrokers confirming Liberty’s cover for the annual third party liability insurance policy for that period, and the Liberty Policy came into effect.
27. The “Period of Insurance” is specified in the Schedule to the Liberty Policy as the period from 20 September 2015 4:00pm local standard time to 20 September 2016 4:00pm local standard time, “or any subsequent period for which the Insured has requested and the Insurer(s) has accepted renewal.”
At J[29]–[36], the primary judge described the notification of the Opal Tower project as follows:
29. The Opal Tower Contract provided for a defects liability period of 12 months after the date of practical completion, during which time Icon was required to rectify all defects. Clause 17 required Icon to maintain public liability insurance until the issue of the final certificate under the contract, which occurred at the later of various specified events, one of which was within 28 days of the expiry of the defects liability period.
30. On 2 November 2015, Mr O’Reilly of Austbrokers sent Chase an email notifying it that Icon had been awarded the Opal Tower Contract (Opal Declaration). Mr O’Reilly’s email provided particulars of the contract, relevantly including that: (a) the time period of the build was “notional start date 16th November 2015 to anticipated completion 10th August 2018”; (b) the Project had a defects liability period of 12 months; (c) the Project involved construction of 369 residential apartments over 34 storeys plus 3 levels of basement car parking; and (d) the cost value of the Project was $154,707,111.
31. Also on that day, Austbrokers sent Icon certificates of insurance, which stated the “Contract Works and Public & Products Liability” insurance had been arranged for the Project for the period of insurance from 16 November 2015 “to Practical Completion estimated at 10th of August 2018 plus 12 months maintenance period”.
32. On 24 November 2015, Chase sent an email to Liberty informing it that Austbrokers had notified it of the Project “which began on 16 November 2015 and is to be included under the annual (but paid in full now)”. Chase stated in that email that the “contract period” was “16th November 2015 to 10th August 2018” and that the “cost value of the project” was $154,707,111. Chase did not refer to the 12 month defects liability period in that email.
33. On 9 December 2015, Chase sent Austbrokers an email relevantly informing it that: (a) “cover” was in place for the Project “from 16th November 2015 and ending on 10th August 2018”; (b) that the base premium payable by the Icon Group for “Third Party Liability” insurance cover for the Project was calculated to be $92,050.73 (net) plus charges; (c) that “all other terms and conditions were as per the annual policy”: and (d) that an endorsement would be sent to Austbrokers for its records.
34. Chase again did not make mention in that email that cover was in place for the additional 12 month defects liability period.
35. On 22 December 2015, Mr Hingston signed an “endorsement” for the Project (Opal Endorsement) which relevantly stated that:
(a)IT IS HEREBY NOTED AND AGREED THAT THE ANNUAL THIRD PARTY LIABILITY FLOATER POLICY IS AMENDED TO INCLUDE THE FOLLOWING CONTRACT, WITH AMENDMENTS DETAILED HEREIN. ALL OTHER TERMS CONDITIONS AND LIMITATIONS APPLY AS PER POLICY.
(b)the “Estimated Project Period” was “16th November 2015 to 10th August 2018 at 4:00pm local standard time”; and
(c)the “Endorsement Premium Calculation” was based on the “Full Value of Works” of $154,707,111.
36. The Opal Endorsement was not provided to Austbrokers or Icon.
At J[37]–[38], the primary judge (substantially for the purpose of explaining the background for the rectification case) described wording of the 2017/2018 policy (the Contracts Commencing Endorsement). Liberty’s last policy was for the 2016/2017 year. The 2017/2018 policy was placed through Chase with a syndicate of Lloyd’s underwriters. The wording had a contracts commencing provision, as follows:
Endorsement – TPL008
The following Endorsement forms part of the Third Party Liability Policy Number: 438396
Contracts Commencing Amendment to Policy
It is hereby noted and agreed that this Policy is endorsed to include the following amendments:
(A) the Schedule is amended to include:
Construction Period
Maximum Construction Period 24 months any one Contract Including any testing and commissioning period
Maximum Maintenance/ Defects Liability Period 12 Months any one Contract
(B) The Insuring Clause is amended to read as follows:
The Insurer(s) agree to:
1.indemnify the Insured in respect of all amounts which the Insured shall become legally liable to pay in respect of:
(a) Personal Injury;
(b) Property Damage;
(c)interference with traffic or to property or the enjoyment of use thereof by obstruction, trespass, loss of amenities, nuisance,
1.1happening during the Construction Period as a result of an Occurrence in connection with the Insured’s Business
1.2happening during the Period of Insurance as a result of an Occurrence in connection with the Insured’s Products Liability and/or Completed Operations
(C) Condition 8 (Adjustment of Premium) is deleted and replaced by:
8. Adjustment of Premium
The premium for this Policy is provisional and is based on the estimated value of works to commence during the Period of Insurance. The Insured shall, as soon as practical after the expiry date of this Policy, declare to the Insurer(s) the actual total value of works for all contracts that commenced during the Period of Insurance.
An adjustment premium shall be determined by determining the difference between the provisional premium and the sum of the agreed rate applied to the actual total value of works commenced during the Period of Insurance. The adjustment premium paid to the Insurer(s) or refunded by the Insured(s) as the case may be.
Notwithstanding the above, the maximum allowable return premium will be 25% of the provisional premium paid.
(D) Condition 15 (Run Off Cover) is amended to read:
15. Run Off
This Policy will continue in full force and effect at terms and conditions prevailing immediately prior to expiry for all incomplete contracts as at date of expiry until completion of those contracts including any testing and/or defects liability and/or maintenance periods subject to the Maximum Construction Period noted in the Schedule.
On expiry of the Period of Insurance the Insured is required to provide the lnsurer(s) with a list of all Insured Contracts that commenced during the period of insurance and additional premium is to be calculated as per Condition 8 (Adjustment of Premium). Any contracts not declared to Insurers will not be covered by this Policy.
(E) The following definition is deleted in its entirety:
Turnover
Turnover is defined as the total value of work completed during the preceding twelve months period for the Business and/or Activities of the Insured to which this Policy applies, including the value of principals supplied materials where appropriate
In all other respects this Policy remains unaltered.
Icon’s contract claim was that the invocation and engagement of condition 15 brought about the same effect for 2012–2017 as this endorsement did for 2017/2018. The primary judge disagreed with that contract argument of Icon, but concluded in the rectification claim that what had always been intended by the parties was contracts commencing coverage which extended to include the defects liability period and that such an intended effect of the policy was embodied in a form of words reflected by such an endorsement.
In section C of the reasons the primary judge set out the list of factual and legal issues that the parties had agreed before the hearing. The only issue relevant for the appeal and cross-appeal were the so-called Run Off Claim (regarding condition 15) and the rectification claim. Though this section of these reasons primarily concerns the contractual claim of Icon (and so the cross-appeal) it is convenient to set out the issues on rectification. The contested factual and legal issues involving Liberty were as follows:
Factual issues:
Run Off Claim
1 Did Icon comply with the terms of Condition 15 of the 2015/16 Liberty TPL Policy in respect of the Opal Tower project?
2 How was the premium for the 2015/16 Liberty TPL Policy calculated, and on what basis?
…
Rectification Claim
7. Was it the intention of:
(a) Icon;
(b) Austbrokers;
(c) Chase Underwriting; and/or
(d) Liberty,
at the time of commencement of the 2015/16 Liberty TPL Policy, that the 2015/16 Liberty TPL Policy would apply during the construction and defects liability period for any projects:
(i) commenced by Icon or the Icon Group during the period of insurance of the 2015/16 Liberty TPL Policy;
(ii) declared by the Icon Group to Liberty; and
(iii)for which an additional upfront premium was calculated by Chase (as agent for Liberty) based on the total project value and paid by the Icon Group.
8.Was a common intention to the effect set out in question 7(i) – (iii) communicated between Icon/Austbrokers and Chase Underwriting/Liberty?
9.Was a common intention to the effect set out in question 7(i) – (iii) not reflected in the written terms of the Liberty 2015/16 Annual TPL Policy?
10.Did the Contracts Commencing Endorsement, which was introduced into the 2017/18 Chase TPL Policy Wording, reflect the common intention of Icon/Austbrokers and Chase Underwriting/Liberty at the time of commencement of the 2015/16 Liberty TPL Policy?
Legal Issues:
Run Off Claim
11.What was the legal effect of Icon “declaring” the Opal Tower project to Liberty and what was the period of insurance obtained in respect of the Opal Tower project as a consequence?
12.On the proper construction of Condition 15 of the 2015/16 Liberty TPL Policy, did Icon and the Icon Group obtain run off insurance cover from Liberty for the Opal Tower with the consequence that the terms and conditions of the Liberty 2015/16 Annual TPL Policy continued to apply to the Opal Tower until completion of the Defects Liability Period on 8 August 2019?
13.Did the parties “otherwise agree” to calculate premiums payable under the 2015/16 Liberty Policy pursuant to Condition 8 of that policy as alleged by Liberty in paragraph 13 of its defence?
14.If the answer to question 13 is “no”, would the effect of the 2015/2016 Liberty TPL Policy be that, but for s. 54(1) of the Insurance Contracts Act 1984 (Cth) (ICA), Liberty may refuse to pay the claim made by Icon by reason of Icon’s failure to expressly state that it was seeking “run off” cover, being an act or omission that occurred after the 2015/2016 Liberty TPL Policy was entered into?
15.If the answer to question 15 [sic] is “yes”, is Liberty prohibited from relying on any such act or omission by reason of s. 54(1) of the ICA?
…
Rectification Claim
19.For the purpose of rectification, which entities’ conduct and state of mind are relevant?
20.Is the conduct and state of mind of Austbrokers relevant to determining Icon’s intention?
21.Is the conduct and state of mind of Chase relevant to determining Liberty’s intention?
22.Should the 2015/16 Liberty TPL Policy be rectified by adding the Contracts Commencing Endorsement?
A number of matters arise from these issues. First, factual issue 1 tends to roll up the meaning (construction) of condition 15 and execution (engagement) of condition 15 (if it was wide enough to apply). Secondly, legal issues 11–13 can perhaps be more simply expressed as factual and legal questions: Is condition 15 wide enough or apt to permit the declaration of individual contracts from their inception as covered by the relevant annual policy, and, if so, did the parties do so in such a way as to engage condition 15?
At J[43]–[44], the primary judge recognised that much of the evidence about the dealings between the parties concerned the rectification claim, though some of it was relevant to the surrounding circumstances of the Run Off Claim.
At J[45]–[46], the primary judge summarised the expert evidence of Mr Bovington as follows:
45. Evidence about the construction insurance market was given by Mr Neil Bovington, who is an insurance broker and insurance adviser with over 20 years’ experience in the construction insurance sector in Australia and the United Kingdom. Mr Bovington explained that public and products liability insurance for the construction industry, when purchased on an annual basis by contractors and builders, is purchased in one of two ways, either: (a) on a “contracts commencing” basis (contracts commencing policies); or (b) on a “turnover” basis (turnover policies). Contracts commencing policies were said to provide cover for the project until works are completed plus the relevant defects liability period, even if this occurs after the annual period of insurance has expired. Turnover policies cover projects which are commenced or are on hand during the annual period of insurance (including those projects which are complete and in the defects liability period) but only during the annual period of the insurance policy. Mr Bovington observed that insurance professionals who are involved in the construction insurance market in Australia would have been well aware that contractors are required, under their construction contracts, to maintain public and products liability insurance during the construction and defects liability period.
46. Mr Bovington’s evidence was relevantly unchallenged by Liberty, and I accept it. Indeed, the parties expressly agreed with the market-based circumstances prevailing at the relevant time, to the extent they were relevant. Those circumstances included that most commercial construction contracts are based upon standard form contracts prepared by Standards Australia, and that those contracts require the contractor to obtain and maintain public liability insurance for the term of the contract, including any defects liability period. The parties were also ad idem that contracts commencing policies “usually” required the payment of a premium based on the total contract value of contracts commenced during the annual policy period, and cover was provided for the duration of those contracts even if that duration extended beyond the end of that annual policy period, including any defects liability period.
That evidence was, of course, important for the rectification claim. It was also important as objective evidence of surrounding circumstances as to the contract and its meaning as the mutually known and understood operation of the insurance market in the construction industry (see Lord Wilberforce in Reardon Smith Line Ltd v Yngvar Hansen-Tangen and Sanko SS & Co Ltd [1976] 1 WLR 989 at 995–996 and Mason J in Codelfa Construction Pty Ltd v State Rail Authorityof New South Wales [1982] HCA 24; 149 CLR 337 at 350), and in aid of understanding what the parties can be taken to have been doing in effecting the contract specific cover that in some, but not all, cases was finalised or documented by the endorsements.
At J[47]–[49], the primary judge described the parties’ use of endorsements, as follows:
47. As will be explained, there was a dispute between Icon and Liberty as to the relevance of the Opal Tower Endorsement to construing the Liberty Policy. Accordingly, it is necessary to make findings as to the parties’ use of such endorsements generally. As I have outlined above (at [18]–[22]), it was agreed that since the commencement of the parties’ dealings, Icon, through Austbrokers, declared to Chase, as agent for Liberty, each of its new construction projects commenced during the policy period, notifying it of the relevant contractual details. What then occurred is that Chase usually provided Austbrokers with an “endorsement” to the policy, which noted that the policy was “amended” to include the relevant building contract, and the details of that contract were then set out. A premium was then calculated and charged by reference to the full contract value of each project declared to Liberty, which was set out in the relevant endorsement. Although there was some dispute as to whether this method of calculation commenced in 2012 or 2013, it does not matter for present purposes because the premium was calculated and paid upfront upon declaration of the projects to Chase during the period of the Liberty Policy.
48. It was agreed that there were numerous endorsements prepared by Chase during the course of the parties’ dealing. These endorsements, 18 of which were in evidence, included endorsements on two projects declared to Liberty immediately prior to the Project and were in substantially the same form (save that each identified a different project, named different additional insureds, identified differing project periods and included a different premium payable).
49. The Opal Tower Endorsement was signed by Mr Hingston for the Project on 22 December 2015, but it was agreed that that endorsement was never provided to Icon. However, it will be recalled that on 9 December 2015, it was agreed that Chase, in response to the Opal Declaration on 2 November 2015, had emailed Austbrokers relevantly informing it that cover was in place “from 16th November 2015 to 10th August 2018” and that an endorsement would be sent to Icon for its records. Neither this email, nor the endorsement subsequently executed by Mr Hingston, referred to the defects liability period.
From J[50]–[95] the primary judge dealt with the Run Off Claim. At J[50]–[51] his Honour reformulated into simple form the relevant questions, as follows:
50. Notwithstanding that the parties framed the issues for determination in relation to this claim by reference to the series of questions set out above (at [42]), the parties’ submissions on each question oftentimes overlapped and it is convenient to reformulate the issues in a somewhat simpler way.
51. In relation to the Run Off Claim, broadly speaking, the following two issues fall for determination:
(1) Did the Opal Declaration meet the requirements of Condition 15?
(2) If Icon did not comply with Condition 15 by reason of an omission to use some precise form of wording, is Liberty precluded from denying indemnity on that basis by operation of s 54 of the ICA?
The first of these questions rolls up two issues: the meaning of, and the engagement of condition 15: What does condition 15 mean? And, if it was open to be engaged, was it engaged?
The primary judge, however, from J[52]–[90] approached this is only as a question of meaning, or at least as a question of construction.
The primary judge commenced with a discussion of relevant principles of construction and interpretation. In that discussion, the primary judge (in particular at J[57]–[60]) involved himself in the debate that has taken place in intermediate courts of appeal as to “ambiguity” for the purposes of the expression of the “true rule” stated by Mason J in Codelfa at 352. His Honour expressed it (at J[57]) as “whether the requirement for ambiguity expressed by the ‘true rule’ remains good law”. Whether that was an accurate encapsulation of the debate can be left to one side. The Full Court of this Court in Stratton Finance Pty Ltd v Webb [2014] FCAFC 110; 314 ALR 166 at 173–174 [36]–[41] expressed the view that the question of ambiguity was not to be assessed by reading the words of the contract disembodied and removed from their context. See also the later Full Courts in Chubb Insurance Company of Australia Ltd v Robinson [2016] FCAFC 17; 239 FCR 300 at 326 [103(b)] plainly referring to [73] of the judgment of Beach J in Todd v Alterra at Lloyds Ltd [2016] FCAFC 15; 239 FCR 12 at 28 [73], explicated at [74]–[75], and Federal Commissioner of Taxation v The Trustee for the Michael Hayes Family Trust [2019] FCAFC 226; 273 FCR 567 at 580–582 [28]–[31]. The effect of what the primary judge stated at J[60] was that as a single judge sitting in the original jurisdiction he was entitled to ignore any apparent binding precedent of the Full Court and make up his own mind as to the content of the High Court authority and, if he disagreed with the Full Court’s view of that, not follow the Full Court. With respect, his Honour erred in that regard. The primary judge cited a number of cases as justification for that course. None was a case of a single judge in one judicial hierarchy not being obliged to follow the appellate court of that hierarchy. All concerned whether courts of one hierarchy were bound by or should follow courts of other hierarchies. In SZGME v Minister for Immigration and Citizenship [2008] FCAFC 91; 168 FCR 487 at 501, Black CJ and Allsop J quoted with approval the observations of Lord Simon of Glaisdale in Miliangos v George French (Textiles) Ltd [1976] AC 443 at 478:
It is the duty of the subordinate court to give credence and effect to the [more recent] decision of the immediately higher court, notwithstanding that it may appear to conflict with the [earlier] decision of a still higher court. The decision of the still higher must be assumed to have been correctly distinguished (or otherwise interpreted) in the decision of the immediately higher court.
See also Lord Hailsham LC in Cassell & Co Ltd v Broome [1972] AC 1027 at 1054; Jacob v Utah Construction and Engineering Pty Ltd [1966] HCA 67; 116 CLR 200 at 207; the discussion in Proctor v Jetway Aviation Pty Ltd [1984] 1 NSWLR 166 at 177–180; and Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; 165 CLR 107 at 129–130.
As it transpired, the primary judge considered there to be ambiguity in the text of condition 15. As will be seen, the construction of the policy and in particular condition 15 and its relationship with the balance of the policy, including condition 8, does not require discussion of the “true rule” as expressed by Mason J in Codelfa, or any debate concerning it.
The primary judge examined the Liberty policy “in its terms” at J[65]–[74], before his Honour turned to the “extrinsic materials of surrounding circumstances” at J[75]–[89].
The primary judge saw four aspects to condition 15 and described them in [65]:
65. Although somewhat clumsily drafted, on its face, Condition 15 contains four aspects that should be noted: first, if run off cover is obtained, the cover provided will continue past the expiry date of the Liberty Policy (being 4pm on 20 September 2016), in its then current form, for “all” incomplete contracts until their completion, including the defects, testing and/or maintenance liability periods in place for those contracts; secondly, is the requirement for “written instructions” to obtain that cover and the requirement in the second paragraph whereby “[t]he Insured is required to provide the Insurer(s) with a list of contracts requiring Run Off”; thirdly is that those instructions must be provided “prior to the expiry of the Period of Insurance” (again, being 4pm on 20 September 2016) and no further temporal element is specified; and fourthly, the “additional premium” is to be calculated on “expiring rates” applied to the value of works “declared” that are to be completed after the period of insurance.
Icon submitted to the primary judge and to this Court that these considerations collapsed into two elements: (1) written instructions prior to expiry identifying contracts requiring run off; and (2) payment of premiums on expiring rates applied to the value of works. It said it complied with both: see J[66].
Liberty submitted that the clause was never engaged and could not be engaged in the way it was. The condition did not apply for inception of individual contracts. What the clause provided for was a “list” of all unexpired contracts at the end of the policy period for run off: a single notification for all projects requiring run off. That is, the clause was intended only to operate to provide run off properly so-called. The primary judge expressed the argument of Liberty as follows, at J[68]:
… The submission was developed by reference to an attack on Icon’s interpretation of the clause, being that the only temporal limitation on the notification was that it occur “prior to expiry of the Period of Insurance”. Liberty said that such a broad construction would produce the result that it is possible to acquire run off cover even before the relevant annual policy took effect and, further, before a relevant project had even commenced. It was asserted that such a reading was “patently uncommercial”. Accordingly, it said that such a notification, “at the earliest, must occur once Icon knows with a degree of certainty all of the projects which are incomplete during the relevant policy period and for which it decides it wishes to seek run off cover”, which was said to be shortly before the expiration of the annual period of insurance.
At J[69], the primary judge rejected the argument, saying:
69. I do not find these submissions persuasive. I am bound to give the Liberty Policy a businesslike construction on the assumption that the parties intended to produce a commercial result: Woodside (at 657 [35] per French CJ, Hayne, Crennan and Kiefel JJ); Mount Bruce (at 116–7 [47]–[49] per French CJ, Nettle and Gordon JJ). Although at first glance it might appear odd that Icon could acquire run off cover before the relevant annual policy took effect, or before a relevant project had even commenced, it does not necessarily follow that, should the parties have adopted the commercial expedient of ensuring that projects “declared” to Liberty during the period of insurance were so declared for the purposes of obtaining run off cover, such declarations would have been ineffectual to obtain that cover. Such declarations would still have been written instructions, would have been provided prior to the expiry of the Liberty Policy, and would have been, after accumulation, a “list” of such contracts.
We would agree with that analysis. A business-like interpretation that gives commercial working flexibility to a clause that is not on its face textually rigid would facilitate such project insurance – whether as run off properly so-called or by the ability to give whole of project cover to all contracts begun within a policy period and which are expected to be incomplete at the end of the policy period. The way Icon expressed the two elements of the clause reflects that commercial working flexibility.
At J[70], the primary judge continued:
The nature and effect of the parties’ adoption of such declarations, however, and the endorsements provided to effect such declarations, was the heart of the issue. This principal matter is one of context and surrounding circumstances, but staying with the text for present purposes, clarity as to what Condition 15 requires is found in the other important requirement of the clause, being the calculation of “additional premium”.
His Honour then turned to the question of premium and said the following at J[71]–[74].
71. That term, of course, cannot be construed in isolation. The whole of the policy has to be considered: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 (at 109 per Gibbs J). The “additional premium” referred to in Condition 15 was to be calculated “on expiring rates applied to value of works declared for completion of projects after expiry of the Period of Insurance”. That method of calculation for the additional premium is at odds with the way in which the Liberty Policy, on its face, determined that the premium for the policy itself was to be calculated.
72. It is first to be noticed that there was, in fact, no stipulated premium set out in the Liberty Policy. In the Schedule under the heading “Premium” were simply the words “As Agreed”. The next mention of premium is that contained in Condition 8, titled “Adjustment of Premium”. I have set out Condition 8 at [28] above. The premium is said to be “provisional (unless otherwise agreed) and is based on the estimated Turnover for the Period of Insurance” (emphasis added). Icon was obliged under this condition to declare its turnover as soon as practical after the expiry date for the preceding period of insurance. “Turnover” is defined as follows:
[T]he total value of work completed during the preceding twelve months period for the Insured’s Business to which this Policy applies, including the value of principals supplied materials where appropriate [sic].
73. After such a declaration of turnover, an “adjustment premium” was to be calculated as the difference between the provisional premium and the sum of the “agreed rate”. It is clear, therefore, that what that condition contemplated was that the final premium to be paid under the Liberty Policy was incapable of ascertainment until after the period of insurance. However, as was agreed between the parties, Icon “declared” each of their contracts at or about the time of their commencement, and the premium paid by it was calculated by reference first to a deposit premium which was then offset or deducted against the premium payable when projects were declared. This agreed position supports the conclusion that the parties did in fact “otherwise agree” to determine the premium payable otherwise than pursuant to Condition 8. Indeed, Icon expressly admitted in its reply that the parties agreed that the premium payable for the Liberty Policy would not be calculated in accordance with that condition.
74. In such circumstances, there exists an ambiguity which necessitates an examination of some of the extrinsic materials. The parties’ express agreement that Condition 8 was not to apply, and their dispute as to how, instead, the premium for the policy was to be calculated creates a difficulty in ascertaining, with precision, what “expiring rates” any such “additional premium” was to be additional to for the purposes of Condition 15.
With respect, there is a complexity in this analysis which masks a certain simplicity of operation of conditions 8 and 15 construed flexibly, as the primary judge (correctly) at J[69] construed the clauses. The premium for the policy was always “as agreed”. Additional premium for condition 15 is that which is referable to the future value of the work if a premium based on turnover for the policy year has already been paid under condition 8; or, if condition 15 is going to be the vehicle through which all projects are notified and covered, the additional premium will be referable to the values of all projects declared by instructions in addition to any deposit or provisional premium taken under condition 8 or otherwise. How those premiums are calculated will depend upon whether condition 15 is being used for some only or all projects or contracts commencing in any year and what other risks during the annual policy period need be the subject of agreed premium. There is nothing intractable about the use of condition 15 caused by the terms of condition 8.
Once one accepts the commercially flexible construction which appears available, it is then a process of understanding what the parties did to understand whether condition 15 was engaged.
The primary judge dealt with three aspects of extrinsic circumstance: the evidence of the market, the parties’ use of endorsements, and the calculation of premiums. We will examine his Honour’s treatment of them in turn. But there is a certain complexity overall in a lack of distinction between, first, the meaning and width and commercially flexible operation of condition 15 and, secondly, whether it was engaged.
The primary judge examined the market at J[77]–[80]. The primary judge accepted (at J[77]) that a reasonable person in the position of the parties would have been aware of the features of the types of policies discussed by Mr Bovington. The primary judge summarised the argument of Icon at J[78] and J[79] as follows:
78. Icon sought to rely upon this evidence in support of its contention that the parties objectively intended that the Liberty Policy was to operate as a contracts commencing policy, that such a policy was intended to cover the defects liability period, and that the machinery for enabling that cover to occur was Condition 15. Support for this contention was sought from prior policies of insurance between the parties and renewal quotations which were in evidence, and the evidence of Mr Hingston and Mr O’Reilly, which showed that Liberty agreed that it would automatically cover projects commenced by Icon with a “maximum construction period” of up to 36 months for any one project, and that such agreement was consistent with the Liberty Policy being a contracts commencing policy. I will deal with the evidence as to attribution of knowledge and intention in detail when considering the Rectification Claim.
79. The essence of Icon’s argument on the assistance to be gleaned from these materials is that, since the Liberty Policy and the parties’ conduct bear the hallmarks of a contracts commencing policy, commercially sensible parties in the position of Icon and Liberty would have expected that the Liberty Policy covered Icon during the defects liability period. Further, it was said that a commercially sensible party in Icon’s position is most unlikely to have bought cover that placed it in breach of all of its building contracts. Equally, a commercially sensible party in Liberty’s position is most unlikely to have sought to offer a product for sale that did not meet the uniform contractual requirements of its insured customers.
The argument can be simply restated: Business people familiar with the market would understand how conditions 8 and 15 were able to work together. Condition 8 provided for a “traditional” annual turnover policy with premium calculated on the basis of the value of that year’s work (originally provisionally estimated and later adjusted after year’s end). Condition 15 provided for run off cover for all uncompleted contracts at year end if that were desired, or for contracts commencing cover as run off cover for such contracts (some or all) for which the insured gave instructions during the policy year. That is, that condition 15 was to be objectively understood as the contractual machinery for enabling a form of contracts commencing cover to be issued under the policy as an alternative or in addition to annual turnover cover for which condition 8 provided for premium adjustment.
The primary judge rejected this construction at J[80]–[90], notwithstanding his Honour’s rejection (at J[69]) of some of Liberty’s arguments described at J[68] (see [51] above).
First, at J[80], the primary judge said:
But the construction task requires me to ascertain the parties’ objective intention, and having regard to the language of that provision and the Liberty Policy as a whole, I am not persuaded that the evidence pointing to similarities between various policies, and the way the parties conducted themselves, is sufficient to enable me to draw the conclusion that Condition 15 ought be construed in the manner contended for by Icon. Further, a significant barrier to accepting Icon’s contended construction is another known surrounding circumstance: the parties’ adoption of adding “endorsements” to the policies.
At J[81]–[84] the primary judge dealt with the endorsements. His Honour rejected Icon’s submission that they were not contractual. The primary judge concluded that they were contractual in character and provided for a form of cover for the whole project, that the “estimated project period” in the endorsement and its use of a date and time (“4.00 pm local standard time”) revealed an intention to vary the period of insurance under the policy year for their contract to be “estimated”, though precise, date of practical completion. The primary judge said the following at J[84]:
Although it may be accepted that it was known to the parties that construction contracts generally required insurance to be in place to cover the defects liability period, that circumstance cannot displace the language of the endorsement in the light of the language of the Liberty Policy as a whole. Contrary to Icon’s assertion that “estimated project period” must be read only as an “estimate”, it would be commercially inconvenient to construe that phrase, with the precision with which the period is drafted (“4:00 pm local standard time”), as not marking an end point to the amended cover provided by that time period. Further, as an amendment to the Liberty Policy, the endorsement must be read with that policy. Critical to the operation of the Liberty Policy was the definition of “Insured”, which included a number of companies within the Icon Group. The endorsement adds an additional insured, being Australia Avenue Developments Pty Ltd (AAD), the other party to the Opal Tower Contract. As an additional insured, the endorsement provides cover for Icon and AAD with the “amendments detailed herein”. As Liberty correctly submitted, such additional insureds were not intended to be “added” to the Liberty Policy “at large”. It follows that the identification of a period of insurance for additional insureds is important in ensuring clear limits as to the extent of coverage offered to any additional insureds.
The primary judge therefore concluded that the policy effected by the relevant documentation, including the endorsements, was not an engagement of condition 15, contract by contract, but the variation or amendment of the policy by the issue of endorsements to provide cover for declared contracts, but only up to the date of practical completion.
With respect, it is not clear (at least up to J[84] and bearing in mind the discussion from J[65] onwards) whether this conclusion is based upon a view that condition 15 as a matter of construction and meaning was not apt for use for individual contracts (a view which J[68] and J[69] would tend against) or upon a view that condition 15 was not engaged by the parties.
The primary judge then considered the question of the calculation of premium at J[85]–[87]. At J[85], his Honour said:
In the light of the parties’ adoption of declarations under and endorsements to the Liberty Policy, further weighing against Icon’s construction that Condition 15 was engaged is the agreed fact that the premium was based on a deposit premium charged for the renewal, which was then offset against the premium payable for contracts declared during the policy period….
With respect, this introduction to the discussion about premium highlights the lack of clarity to which we just referred: Is it a question of meaning of condition 15: that it cannot be seen to provide for ad hoc life of contract cover? Or is it a question whether, by what they did, the parties did not engage condition 15?
After introducing the issue as set out above in J[85], the primary judge continued in that paragraph by setting out Icon’s argument:
… Icon submitted that its construction of Condition 15 worked harmoniously with Condition 8. It said that the “additional premium” contemplated by Condition 15 is the premium representing the difference between the “turnover” for that project during the annual policy period which would otherwise be payable under Condition 8, and the full contract value which would be earned over the entire life of the contract. Thus, Icon submitted that Condition 15 permitted it to say “I now seek cover for the full contract duration, and I will pay you a premium on the additional revenue that I will earn from this contract for the full contract duration”, and that this is in fact what happened.
The primary judge rejected the submissions at J[86] and J[87], as follows:
86. I cannot accept this submission. First, to the extent that the submission relies upon Condition 8 so as to show that, contextually, Condition 15 was objectively intended to operate in a manner consistent with the concept of turnover, it is a submission which ignores the express words of the definition of that term. That definition, in operation with Condition 8, identifies that the “agreed rate” is to be applied against the total value of work completed for the insured’s business. To the extent I follow the submission, Icon’s contention would have that defined term narrowed to a point inconsistent with its application in Condition 8. Secondly, the submission appears to be a departure from Icon’s pleaded case, and from the agreed position it adopted in the Agreed Facts. Icon admitted in its reply that the premium was calculable otherwise than in accordance with Condition 8, and it otherwise pleaded that the agreed calculation of the premium was payable for each new project commenced during the annual policy period, calculated on the value of the total contract works for that project. Nothing in that pleaded operation of how the policy machinery determined the premium to be paid relies on the concept of turnover.
87. As Liberty correctly noted, Condition 15’s “additional premium” cannot sensibly mean payment of the premium for the Liberty Policy itself. The ineluctable inference is that payment of the balance of the premium calculated under the endorsement was simply that: payment of the premium for the Liberty Policy. It cannot, therefore, have been “additional premium” for the purposes of Condition 15, that is, “additional” to what was paid for the cover provided under the annual policy. That would give no work to the word “additional”. On Icon’s characterisation of the premium paid for projects declared as “additional premium” for the purpose of run off cover, the entire premium pool collected during the course of each annual policy was “additional premium” paid for run off cover – and, necessarily, only for run off cover. It is unlikely that this was the objective intention of the parties, who were in agreement that the “deposit premium” was to be offset against the future premium paid after the declaration of each project.
With respect those considerations are somewhat opaque. “Turnover” was defined in the policy as follows:
Turnover is defined as the total value of work completed during the preceding twelve months period for the Insured’s Business to which this Policy applies, including the value of principals supplied materials where appropriate.
In circumstances where a policy year has been paid for under condition 8 by reference to estimated turnover for that year and then adjusted after the end of the policy year that is a premium by reference to the total value of work for that year. Upon instructions being given for all uncompleted contracts the total remaining value of work (the future turnover, if one likes) will form the basis of the premium calculation. So much is straightforward, as is the synonymous relationship between turnover and value of work. That, however, does not foreclose a business-like interpretation of conditions 8 and 15 to otherwise agree a premium structure by way of deposit premium for an annual policy to operate by declaration of contracts within the policy year to be covered as provided for by condition 15 for additional premiums referable to the total value of work for the life of the individual declared contracts. It can be accepted that this would alter the structure of the premium calculation and of the coverage structure of the policy. No one submitted that that could not be done. Premium was always “as agreed”. The question is whether the terms of conditions 8 and 15, and especially condition 15 permitted such an approach by engagement of the existing policy terms, or whether existing terms had to be amended to provide for such a structure. We see no reason why they would not do so.
The primary judge concluded as follows at J[90]:
It follows that on its proper construction, the Opal Declaration did not meet the requirements of Condition 15.
The “Opal Declaration” was the 2 November 2015 email which provided details of the Opal Tower Contract. It is not a question of the proper construction of the Opal Declaration; rather the question is whether condition 15 on its proper construction was wide enough to permit its use for the declaration of cover for individual contracts within a given policy year as a form of run off cover. If it was wide enough, was that effected by what the parties did?
The Opal Tower Contract
At this point it is helpful to trace in a little more detail the events leading up to the taking out of the 2015/2016 policy and the insuring of the Opal Tower Contract. The initial dealings between Icon and Liberty commenced in September 2012 in the conversations between Mr O’Reilly (of Austbrokers) and Mr Burgess (of Chase). By this time, Liberty and Chase had agreed upon a wording originally put forward by Chase, accepted by Liberty, being the Third Party Liability Policy. On 4 September 2012, Mr O’Reilly sent Mr Burgess a quotation slip and company profile of Icon. The quotation slip was for “Annual Contract Works”. It was for “Material Loss and Damage” referable to the “Construction Period” and “Maintenance/Defects Liability Period”. Adjacent to the heading “Insured Operations” there appeared the following:
All Contracts or Works relating to residential and commercial building construction including all associated works undertaken by the Insured and not otherwise insured by the Principal/Owner or other parties in terms of the contract agreement, commenced and declared within the Period of Insurance.
Under “Insured Property” there was a heading “Liability” which stated the following:
The Insurer(s) shall indemnify the Insured against the legal liability of the Insured to pay damages or compensation in respect of:
(a) injury to any person;
(b) damage to property;
caused by an Occurrence during the Construction Period and/or the Maintenance/Defects Liability Period happening anywhere in the world in connection with the Contract(s) or Works.
Mr Burgess provided the quotation slip to Liberty’s underwriter, Mr Hingston. He initialled it on 6 September 2012 and communicated his assent to Mr Burgess.
On 7 September 2012, Mr Burgess sent an email to Mr O’Reilly regarding Icon, which stated:
Reference is made to the above and recent communications.
In reviewing this opportunity we have suggested some structural improvements which we hope will prove to be beneficial from an administrative and cost perspective for both yourselves and ICON.
Please review attached Quotation and I will give you a call shortly to discuss.
The enclosed quotation was on Chase letterhead. It concerned contract works and third party liability cover. The quotation stated:
POLICY TYPE: Contract Works and Third Party Liability Annual
INSURED: ICON Construction Australia Pty Ltd;
and others as per policy
PERIOD OF INSURANCE 20 September 2012 to 20 September 2013
CONTRACT LIMITATIONS Maximum Construction Period 36 months
Maximum Maintenance Period 12 months
Maximum Testing Period 1 month
....
Material Damage
Insurers will indemnify the Insured for risks of physical loss of and/or damage to Property Insured forming the Contract Works and Existing Structures (if detailed as covered herein), owned by the Insured or for which the Insured may be responsible.
Third Party Liability
Insurers will indemnify the Insured for all sums which the Insured shall become legally obligated to pay as compensation in respect of Bodily Injury and/or Property Damage happening during the Period of Insurance and arising out of or in connection with the Business and Activities of the Insured as detailed.
….
Third Party Liability
$20,000,000 any one Occurrence, unlimited in the aggregate during the Period of Insurance, but limited to $20,000,000 in the aggregate during the Period of Insurance arising from Completed Operations/Products Liability.
The quotation identified ACE Insurance Limited as the contract works/material damage insurer and Liberty as the Third Party Liability insurer. One can see that the third party liability coverage was not expressed as during the “Construction period and/or the Maintenance/Defects Liability Period”, as it was in the Austbrokers’ quotation slip (which Mr Hingston had initialled) to which the Chase quotation was a response.
Later on 7 September, Mr O’Reilly provided a renewal report to his client, Icon (to Mr Sisson) which stated adjacent to “Scope of Cover” under the heading ‘Third Party Liability’ a summary of proposed cover for third party liability identical to that in the Chase quotation above, and adjacent to “Insured Property” under the heading “Liability” a summary of the cover as in Austbrokers’ quotation: that is during the Construction Period and/or Maintenance/Defects Liability Period. Further, adjacent to “Insured Operations” there appeared:
All Contracts or Works relating to residential and commercial building construction including all associated works undertaken by the Insured and not otherwise insured by the Principal/Owner or other parties in terms of the contract agreement, commenced and declared within the Period of Insurance.
On 11 September 2012, Mr Burgess sent Mr O’Reilly the draft policy wording for both the Material Damage Contract Works policy and the Third Party Liability Policy. The former policy (that of ACE) identified the period of insurance as from 20 September 2012 at 4.00pm to 20 September 2013 at 4.00pm local standard time and that the Material Damage sections applied to:
All contracts and/or work of every description commenced by the Insured during the Period of Insurance
The premium was “as agreed”. Further, that Material Damage Contract Works policy had an extension period of risk as follows:
Period of Risk
The Property Insured shall be deemed to be insured during the Period of Insurance as set out in the Schedule and until the said Property Insured has been formally accepted by the owner as completed whichever is easier, plus the Maintenance and Defects Liability Period as set out in the Schedule.
Any work of reconstruction rectification or repair undertaken by the Insured during any Maintenance or Defects Liability Period in accordance with the provisions of any contract shall be covered hereunder subject to the terms and Conditions of this Policy.
It also had a “Run Off Cover” extension (cl 17) as follows:
Run Off Cover
Subject to written instructions from the Insured to the Insurer(s), prior to expiry of the Period of Insurance, this Policy will continue in full force and effect at terms and conditions prevailing immediately prior to expiry for all incomplete contracts as at date of expiry until completion of those contracts including any testing and/or defects liability and/or maintenance periods.
The Insured is required to provide the Insurer(s) with a list of contracts requiring Run Off and additional premium is to be calculated on expiring rates applied to value of works declared for completion of projects after expiry of the Period of Insurance.
In the Third Party Liability Policy, the period of insurance was 20 September 2012 at 4.00pm to 20 September 2013 at 4.00pm local Standard Time. The insuring clause was in relevantly the same terms as set out at [21] above. The premium was “As Agreed”. Condition 8 (Adjustment of Premium) was in relevantly the same terms as condition 8, at [20] above; and condition 16 (“Run Off”) was in the same terms as condition 15 at [20] above.
Mr O’Reilly gave evidence that about this time he had conversations with Mr Burgess. The primary judge set out these crucial conversations from his affidavit at J[163] and J[164] of the reasons as follows:
[163] …
39 At around this time in September 2012, Adam and I had a number of conversations in which I said words to the effect that I wanted to obtain a “contracts commencing” insurance program for the Icon Group for both contracts works and liability insurance in which each project was separately declared and the premium paid for each project at declaration. Adam said words to the effect that Chase could do that. …
40 On 11 September 2012, I requested the policy wordings from Chase. I received these from Adam Burgess on the same day. …
[164]…
43 I read the wordings and telephoned Adam Burgess. I said words to the effect that I did not understand the reference in Condition 8 of the proposed wordings to the premium being calculated on the basis of the Icon Group’s annual turnover. Adam Burgess said words to the effect that I did not need to worry about Condition 8 as the policy is a run-off policy and told me to look at Condition 16. I then read Condition 16 while I was on the phone with Adam Burgess. Once I had finished reading it I said words to the effect of “OK, so we are agreed that it is contracts commencing”. He said yes.
44 Around this time in September 2012, Adam Burgess and I discussed two projects that the Icon Group had been awarded that were due to commence at or after the expiry of the Pre-2012 QBE Policy, which we envisaged would be covered by Chase’s insurance program. Those projects were known as “Green Square” and “Tip Top”. Adam calculated a premium for those projects, which formed the basis of the premium that was to be payable under the Chase policy for that first year. … In those discussions in or around September 2012, both Adam and I said words to the effect that an additional premium would be payable for each new project commenced during the annual policy period, calculated on the total project value and paid at the time of commencement of each project. Adam said that, with respect to projects up to a value of $50 million, the pricing was as per the annual policy unless there were unusual site conditions. Above that figure, he said that the pricing could vary.
…
47 On 19 September 2012, I emailed Adam Burgess … stating:
“Following on from our many conversations, and my email on Friday confirming the binding of the Tip Top project from Tuesday the 18th, I wish to formally confirm that the terms have been accepted by the client, and our closings shall follow shortly. Tip Top bound from Tuesday 18th of September. Annual was to commence from the 20th of September (expiry of current program), but if it makes your life easier I am happy to close from the 18th to link in the Tip Top project. I confirm that the existing program that we are replacing with Chase Underwriting is ‘Contracts Commencing’, so all existing projects will be run off under the existing cover and we are a ‘Clean On’ process for the placement of the program with your office.”
We also note that “Insured” was broadly defined in the policy to include Icon, other members of the Icon Group, as well as sub-contractors, manufacturers and suppliers. “Insured’s Business” is similarly broadly defined and includes, for example, “construction contractors… and all other incidental activities thereof.” In oral submissions, consistently with the evidence of Mr Clunie, Senior Counsel for Icon noted the possibility that a sub-contractor — for example, one who supplied and erected the walls on Level 16 of the Opal Tower then exited the site and left the walls under Icon’s control — would make a claim for indemnity under the policy.
As QBE submitted, the definition included a wide range of activities and was not drafted in a way that seeks to reflect the likely scope of Icon’s activities. For example, Icon was unlikely to grow products or things in the course of its business yet the word “grown” is included. It follows that the omission of “built” or “constructed” in a definition containing seventeen other verbs is significant, albeit not determinative.
Icon submitted that if there had been such an intention to exclude a whole building, then one would expect to see a clear statement to that effect. We do not accept this submission. We do accept that the words used in the definition of “Product” are wide enough to include the Opal Tower and its component parts, each of which was a thing that was “supplied”, “erected”, “installed” or “manufactured” by Icon (or its sub-contractors, manufacturers or suppliers). However, as we have observed, we consider that the more obvious terminology to be used in relation to a building and construction process are the words “built” or “constructed”. Therefore, we are not in a position where the definition of “Product” provides a perfectly clear meaning, and the context and purpose of the policy becomes important to consider.
Context of the QBE policy as a whole
Even if the text of the definition of “Product” and the ordinary meaning of the words “product” and “thing” are apparently broad enough to encompass the Opal Tower and its component parts, it is difficult to reconcile the primary judge’s construction of “Product” with the operation of the QBE policy as a whole.
It is convenient here to briefly mention the recent case of HDI Global Speciality SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296, where Meagher JA and Ball J made the following observations about the importance of construing terms in the context of the entire policy:
22. The language is construed according to its natural and ordinary meaning: Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; (1986) 161 CLR 500 at 510-511. As Lord Mustill said in Charter Reinsurance Co Ltd v Fagan [1997] AC 313 at 384 “the inquiry will start, and usually finish, by asking what is the ordinary meaning of the words used”. Where the words are unambiguous, they cannot be ignored simply to reach a result that is apparently more commercially convenient: Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 at 109; [1973] HCA 36.
23. Nevertheless, as Mason J emphasised in Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; [1982] HCA 23 at 348, construing a written contract requires more than just assigning the words their ordinary meaning. The Court must consider the “circumstances which the document addresses, and the objects which it is intended to secure”: McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; [2000] HCA 65 per Gleeson CJ at [22]; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17 at [15], [16]; Mt Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [47]. That the court should know and have regard to the commercial purpose and object of the contract “presupposes knowledge of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”: per Lord Wilberforce in Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989 at 995-996.
[…]
27. The objective theory does not require or permit the words of a contract to be given a meaning that a reasonable person knowing all relevant facts would give them. Rather, the theory requires the court to consider what meaning a reasonable person in the position of the parties would give those words. That requires the court to consider what the parties may be taken to have known. In this context, the reference in Maggbury to facts “which would reasonably have been available to the parties” does not describe a species of constructive notice. As Allsop P (Giles and Macfarlan JJA agreeing) explained in QBE Insurance Australia Ltd v Vasic [2010] NSWCA 166 at [35]:
Constructive notice implies a degree of enquiry by reference to some external standard. Just because something is available to be found does not make it relevant, if the parties did not know of it. The reasonable person may be taken to know of things that go beyond those that the parties thought to be important or those to which there was actual subjective advertence by the parties. Further, the circumstances may include such things as the legal context to the transaction, especially if a market is involved. Nevertheless, the scope of the relevant material is necessarily bounded by the objective task of the reasonable person giving meaning to the words used by the parties in the circumstances in which the contract came to be written, by reference to what the parties knew in the sense stated by Lord Wilberforce in Reardon Smith, by Mason J in Codelfa and by the High Court in the various cases since Codelfa.
28. This approach focuses attention on the words used, and not on the subjective intentions and beliefs of the parties as to what they have agreed. But it does not do so at the expense of ignoring the fact that what the court is seeking to do is ascertain what the parties agreed.
The distinction between “Product” and “Completed Operations”
The first difficulty relates to the operation of the concepts of “Product” and “Completed Operations” in the policy. QBE submitted that the insuring clause distinguished between risks from “Products” and “Completed Operations” (and “Construction Operations”). The risk of liability for “Completed Operations” that QBE said it assumed under the policy was that arising from construction projects that were complete, in the sense that the building had been handed over and Icon’s responsibility arising from contractual terms imposing a defects liability period had expired. Contrary to this stated intention, on the primary judge’s construction of the policy, any building would be a “Product” and QBE would thereby assume risk of liability in respect of it regardless of the stage of completion and whether the defects liability period had expired.
The distinction between “Product” and “Completed Operations” was said by QBE to reflect the parties’ agreement to treat separately the risk of liability associated with completed buildings and the risk of liability associated with the supply of “Products” (other than completed buildings) by Icon in the course of its activities as a building contractor. QBE said that it agreed to provide indemnity in connection with claims of either kind arising in the period of insurance (ie claims in respect of completed buildings or “Products”) but did not agree to provide indemnity of the same scope.
The commercial basis for that distinction was said to be at the heart of the claim that was successfully pursued by Icon against Liberty, being the claim we would uphold (on a different basis to the primary judge) for the reasons set out above. Icon’s case against Liberty was that at all material times the parties understood and intended that cover was being written on a contracts commencing basis such that cover would be available under the policy on foot at the time a construction project was commenced for liability in connection with that project occurring at any time prior to the expiry of the defects liability period, and that cover to that effect was indeed secured.
The cover under cl 1.2 of the QBE policy was said by QBE to be for something quite different. It was confined to liability for damage occurring during the period of insurance (20 September 2018 to 31 December 2018) for projects that were complete (in the sense that the defects liability period had expired) and for product liability. Cover under cl 1.2 was thus said to be an adjunct to the contracts commencing cover that applied under the Liberty policy regardless of when the project was undertaken or when the product was supplied (or “sold”, “erected” or “installed”, to use some of the listed past participles in the definition of “Product” in the QBE policy).
QBE submitted that it had been open to the parties to contract on a basis that provided identical cover for liability associated with completed buildings (in the sense described above) and “Products”; and, in that event, there would be no purpose to be served in separately defining those two concepts. But the fact is that they were separately defined, which (as the trial judge accepted at J[305]) demonstrates that they were separate concepts.
Turning to the words used in the QBE policy: on the primary judge’s construction of “Product”, the definition of “Completed Operations” is said to be redundant. QBE submitted that the primary judge’s finding that the purpose of the definition was to “excise construction contracts for which the defects liability has [not] expired” (emphasis added) ought not to be accepted.
As we have already observed, the primary judge emphasised that the definition of “Construction Operations” was “couched in terms of the ‘contract’ for such operations, not the resultant object created by the performance of such a contract”: at J[305]. However, the critical point (as submitted by QBE) is that where a policy provides indemnity for personal injury or property damage connected to activities associated with the business of the insured (i.e. Icon’s construction business), there does not appear to be any meaningful distinction to be drawn between personal injury or property damage arising from a contract and such injury or damage arising from the product of a contract or the resultant object of the performance of a contract.
Icon submitted that, whilst there may be some overlap between “Products Liability and/or Completed Operations” within the meaning of cl 1.2 of the insuring clause, the overlap is by no means complete. In this regard, Icon pointed to the various conditions that must be met for a completed building to be a “Completed Operation” under the policy: “Construction Operations” are defined to mean “all contracts for the construction…of…tangible property…[for] which the Insured is or was contractually obligated to effect insurance”; “Completed Operations” are defined to mean “Construction Operations” but only where they “have been completed, handed over to the Principal/Owner and where any maintenance/defects liability periods have expired”.
In contrast, Icon said that the products liability cover in the QBE policy was in respect of things meeting the definition of “Product” irrespective of whether or not any applicable defects liability period had expired and regardless of whether or not there was a contractual obligation to effect insurance, but only where such “goods and/or products cease to be in the possession and/or under the control of the Insured”.
Icon submitted that there was a meaningful distinction between “Product” and “Completed Operations” and that the latter definition was not redundant. It said that on the primary judge’s construction, so long as a contract in respect of which Icon was “contractually obligated to effect insurance” was beyond the defects liability period, Icon would obtain cover in respect of the contract as a “Completed Operation” regardless of whether the loss arose from something which met the definition of a “Product”.
Icon then submitted that there is nothing surprising about the fact that there may be some overlap between the two concepts, returning to the composite nature of the phrase “Products Liability and/or Completed Operations” and the use of “and” in that defined term, which it said clearly suggested that the two concepts are not mutually exclusive. Icon noted that the “Limit of Liability” for the two types of cover was the same and submitted that, properly construed, the intent of cl 1.2 of the insuring clause was to ensure that Icon was covered for third party liability risks in respect of its work product once that work product has passed out of Icon’s control. That is, regardless of whether the work product was under a contract containing a contractual insurance obligation for which the defects liability has expired or otherwise fell within the broad definition of “Product”.
However, we accept QBE’s submission that, where a policy provides indemnity for personal injury or property damage which is connected to activities associated with the business of the insured, there does not appear to be any meaningful distinction to be drawn between personal injury or property damage arising from a contract or the resultant object of the performance of a contract. Once this is accepted, then any apparent work to be done by the definition of “Completed Operations” (for example, as some species of contract that operates independently of the broadly defined “Product”) falls away.
If a completed building is a “Product” for the purposes of the Policy, then the definition of “Completed Operations” does not serve to confine the scope of cover for completed buildings, and claims arising in connection with completed buildings will be covered regardless of whether the defects liability has expired.
We should note that, in respect of the defined term “Products Liability and/or Completed Operations”, both QBE and Icon have made submissions about the use of “and/or”. However, we do not consider the use of this grammatical tool to be material to our construction of the QBE policy as a whole.
For these reasons, we respectfully consider the primary judge erred in finding that the definition of “Completed Operations” was not made redundant by his construction of the definition of “Product”. This error then led the primary judge to dismiss the significance of the distinct concepts of “Completed Operations” and “Products”. As we will explain, this reasoning flowed through to his analysis of other contextual considerations in the body of the policy — the exclusions.
The exclusions
As we have already observed, there are a number of exclusions in the QBE Policy, including exclusions 5 and 6.2 that apply specifically in respect of “Products”. These exclusions relate to damage directly caused by a fault or defect in the “Product”, and loss of use of tangible property resulting from the failure of a “Product” to meet warranted levels of performance, quality, fitness or durability. Conversely, there are no exclusions that apply specifically in respect of “Completed Operations” or “Construction Operations” or that expressly excise from the scope of cover under the QBE policy damage to defective buildings or parts of buildings.
QBE submitted that if a completed building or a component of a completed building is a “Product” then the scope of cover in connection with “Completed Operations” is confined by operation of these exclusions, an outcome which was said to be contrary to the parties’ clear and evident intent.
Icon seemed to accept that the exclusions would apply to “Completed Operations”, contrary to the primary judge’s findings at J[306], but highlighted the following qualifications (or “write backs”) in the exclusions (emphasis being in Icon’s written submissions):
Exclusion 5: “liability for Property Damage to any Products where such damage is directly caused by a fault or defect in such Products”; but “this Exclusion shall be interpreted to apply with respect to damage to that part and only that part of such product to which the damage is directly attributable”;
Exclusion 6: “liability for ‘the loss of use of tangible property which has not been physically damaged or destroyed’ resulting from:
[…]6.2 ‘the failure of any Product to meet the level of performance, quality, fitness or durability expressly or impliedly warranted or represented by the Insured’ but ‘this exclusion does not apply to loss of use of other tangible property directly or indirectly caused by, arising out of or in any way connected with or resulting from the sudden and accidental physical damage to or destruction of the Product after such Product has been put to use by any person or organisation other than the Insured’”.
As we have already noted above, the primary judge found that the exclusions would not apply to a contract. Again, this analysis relies on a distinction between a contract (one that is, on the primary judge’s view, a “Completed Operation” but not a “Product”) and a completed building created pursuant to a contract (one that is, on the primary judge’s view, a “Completed Operation” if the defects liability period has expired, and a “Product” regardless of whether the defects liability period has expired).
QBE submitted (and we accept) that this narrow approach to the operation of, for example, exclusion 5 is difficult to accept. Clause 1.2 of the insuring clause relevantly provided for liability as a result of an “Occurrence” in connection with “Completed Operations”. If the word “Product” is treated as extending to completed buildings then, where liability in respect of a “Completed Operation” is in connection with damage to defective building work, we do not see how the exclusions could not apply. The reference to “contracts” in the definition of “Construction Operations” does not serve to quarantine “Completed Operations” from the operation of exclusions 5 and 6.2 if the completed building is a “Product”.
The potential breadth of the exclusion was illustrated by Senior Counsel for QBE at the hearing by reference to a hypothetical in the context of this case: if Icon has spent $17 million in property rectification costs, it might have difficulty recovering these costs if part of the building (such as the hobs) was defective. However, having regard to Icon’s submissions and the existence of the qualifications to exclusions 5 and 6.2 (which are referred to by Icon as “write backs”), in that situation it may be open to Icon to argue that the exclusions do not apply (e.g. because the damage was not directly attributable to a defect for the purpose of exclusion 5 or resulted from sudden and accidental physical damage for the purpose of exclusion 6.2).
We have reached a middle ground in respect of the effect of the exclusions. We accept that, on the primary judge’s construction of “Product”, the exclusions would apply to “Completed Operations” that are also “Products” (i.e. the resultant object of a construction contract where the defects liability has expired) and in this regard, a broader construction of “Product” (such as that found by the primary judge) does extend the scope of the exclusions. However, we accept that the qualifications to the exclusions do ensure that the cover in cl 1.2 of the insuring clause retains some meaningful scope, thereby weakening QBE’s contention that “Product” should be construed narrowly to avoid unduly limiting the insuring clause by operation of the exclusions.
Returning to the context of the QBE policy as a whole, the fact remains that cover for “Completed Operations” would be reduced by operation of exclusions 5 and 6.2 if “Completed Operations” are also “Products”. The parties have introduced these separate concepts and have agreed upon a different scope of cover for each of them. When regard is had to the exclusions in the context of the policy as a whole, it is evident that the parties did not intend the definition of “Products” to extend to “Completed Operations”, thereby eroding the distinction between them.
The gap in policy cover on QBE’s construction
We will now deal with whether the gap in cover arising from QBE’s construction of the policy is anomalous (or “odd” as the primary judge found at J[313]) and contrary to the parties’ commercial intentions.
Icon contended (consistently with the primary judge’s finding at J[313]) that it would be an odd result and contrary to the evident intention of the parties if there was no cover under the QBE policy for projects that had been completed and handed over but for which the maintenance or defects liability periods had not expired.
Icon said this anomalous gap supported the conclusion that QBE’s construction should not be preferred, citing Australian Broadcasting Commission v Australian Performing Right Association Ltd [1973] HCA 36; 129 CLR 99 at 109 (Gibbs J) and Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 313-314 (Kirby P). We have already made reference to Australian Broadcasting Commission, which was referred to in the above passages (at [395]) from HDI Global Speciality SE. Nevertheless, it is worth noting that in Australian Broadcasting Commission, Gibbs J (as his Honour then was) dissented from the majority but uncontroversially said at 109:
It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, “even though the construction adopted is not the most obvious, or the most grammatically accurate”….
In Hide & Skin Trading, a decision of the New South Wales Court of Appeal, Kirby P delivered a separate judgment and held (at 313–314):
Between two such substantial businesses, there are sound reasons of principle and policy for determining their respective rights and duties, if at all possible, by reference to the written terms by which they expressed those rights and duties. No other approach is as likely to command general acceptance in the commercial community. No other approach is as efficient in the containment of litigation. None is so effective in conserving the economic and entrepreneurial decisions which lie behind contract law to business people rather than lawyers. But language, including that used in commercial agreements, is often ambiguous. It may be so even in agreements between substantial parties which are well advised by lawyers. The ambiguities may arise from a deliberate decision to keep the terms of the agreement between the parties vague, because they are difficult to define and, it is hoped there will be no occasion for disagreement. It may be so because the parties, and those advising them, do not foresee the infinite variety of circumstances which later arise calling for resolution by reference to their agreement. Or it may be so for no better reason than that the inherent contradictions that lie in the words of the agreement between the parties were not recognised at the time those words were agreed to. It then falls to the parties in the first instance, and a court ultimately, to give meaning to those words.
Whoever may be the parties to the agreement, it is the fundamental rule, that a court should give the words of a written agreement the natural meaning that they bear. Subject to that rule, in giving meaning to the words of an agreement between commercial parties, courts will endeavour to avoid a construction which makes commercial nonsense or is shown to be commercially inconvenient. This is because courts will infer that commercial parties would not themselves normally agree in such a way.
It is true that the construction of the agreement urged by the appellant has the inconvenience to which Cole J referred. So construed, the agreement would mean that the liability of the respondent could extend well beyond the term of the agreement between the parties. At first glance, such an economically disadvantageous assumption of obligations would seem unlikely. It may be inferred that, for the proper control of its own financial position, the respondent would ordinarily wish to be in a position to determine the extent of the liability to provide trade finance at any given time. Subject to the requirements of notice for the termination of its facility, it should therefore be able to control, with precision, the date after which further liability under the facility would be terminated.
Icon sought to sustain that characterisation by suggesting that the terms of Liberty policy and the parties’ understanding as to the terms of that cover should be ignored. As we have already noted, Icon said it was not open to QBE to refer to the terms of the Liberty policy or the intentions of Liberty and Icon in relation to the operation and effect of the Liberty policy, and submitted that these matters were wholly irrelevant to the proper construction of the QBE policy.
We accept that there is no evidence to warrant treating the entry into the Liberty policy and the material assumption or intentions of Icon and Liberty as legitimate context in which to construe the QBE policy. Nevertheless, the suggestion that the scope of the cover under the QBE policy is odd, anomalous or commercially inconvenient is founded on assumptions without proper context.
There would only be a gap in cover from the acceptance of QBE’s construction, if one assumes that contracts commenced before the beginning of the period of insurance would not be covered by any other insurer during the defects liability period. That assumption may or may not be correct. Whether or not projects being contracts commenced before the period of insurance were covered during their defects liability periods would depend upon whether an earlier contracts commencing insurance policy or policies covered Icon up to the expiry of the defects liability periods.
In Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13; 267 CLR 514, the majority of the High Court (Kiefel CJ, Gageler, Nettle and Gordon JJ, with whom Edelman J agreed on this point) held at 641 [26]:
As the Full Court concluded: “[c]ontext will almost always tell one more about the objectively intended reach of such phrases than textual comparison of words of a largely relational character”. There may be causes which have to be resolved largely, if not entirely, by reference to the language of the arbitral clause in question. But this is not such a case. The background to and the purposes of the Deeds, as reflected in their terms, point clearly to arbitral clauses of wide coverage with respect to what was to be the subject of confidential processes of dispute resolution.
(Footnotes omitted.)
It is inappropriate and unjustified to assume that there would be no such earlier entered contracts commencing cover that would make the “gap” odd, anomalous or commercially inconvenient. There may or there may not have been such earlier contracts. Such earlier contracts would also have to be mutually known to Icon and QBE for their existence to assist in any conclusion that the “gap” created an oddity, anomaly or commercial inconvenience. One cannot make any assumption one way or another.
If, as Mr Bovington made clear, annual contracts commencing cover was a common form of cover and that such cover commonly extended up to the end of the defects liability period, there was no oddity in insuring cl 1.2 not duplicating cover that one could not assume was absent. The obtaining of such cover was a circumstance that was for Icon and QBE to consider in the light of any mutually known context.
The lack of oddity in the cover can be illustrated by the facts in this case. Icon’s case against Liberty was premised on there being a mutual intention expressed in the terms of the Liberty policy either as it stood or as rectified in the manner sought by Icon, that cover would be available under each annual contracts commencing policy for liability arising from contracts commenced during the policy period, whether or not that liability arose from an occurrence during the policy period. Icon’s case below was that Icon and Liberty understood and intended that cover was being written on a “contracts commencing” basis. Icon sought cover from QBE for the period from September to December 2018 on the understanding that cover had already been placed, under prior policies, for any liability for property damage or personal injury that might arise in connection with projects then on hand, up to the expiry of the defects liability period.
We do not say that this mutual intention and what Icon sought from QBE were somehow legitimate contextual material for construing the QBE policy. But existence of such matters illuminates why it is wrong to assume circumstances (without evidence) that there was no cover during the defects liability period in respect of contracts commenced before the period of insurance as part of reasoning to support a conclusion that the cover offered by QBE and the “gap” was odd, anomalous or created commercial inconvenience.
Other decisions as to the meaning of “product”
Icon submitted that the primary judge was correct to find that Metricon provided assistance in identifying the proper construction of the definition of “Product” in the QBE policy. However, as the primary judge observed himself, the extent of that assistance can only be regarded as very modest. We note in particular that the relevant observations in Metricon were obiter, that the definition of “Insured’s Products” included the verb “constructed”, and that Hargrave J’s observations were based upon other contextual features that do not arise from the terms of the QBE policy.
The component parts?
There is an outstanding question as to whether a different conclusion could be reached in respect of the entire building and its component parts. In its third further amended originating application Icon sought a declaration that “the Opal Tower; and/or” its various component parts was a “Product” within the meaning of the QBE policy, although the primary judge made the first declaration using “and”.
Mr Coombes in his evidence (referred to above at [365]) addressed the elements of the concrete structure of the Opal Tower which were separately manufactured, assembled and installed by various sub-contractors. Mr Coombes gave evidence that:
The Icon Group is in the business of designing, constructing, and delivering buildings. When we are engaged, we supply to the client a completed building which we construct and erect on the developer’s land. This includes sub-contracting various works packages to third party sub-contractors. Icon arranges for all of the materials and component parts to be manufactured in accordance with the requirements of the contract, supplied to the site, and erected and installed into the building at the site. Icon is also responsible for testing the work under the contract to ensure it complies with the contract, and repairing any defects.
This issue rose again at the hearing of the appeal, at which time Senior Counsel for QBE was asked by the Court to confirm whether QBE’s approach was “all or nothing”: that is, whether building must be treated as a totality or the components can be looked at individually. QBE submitted that this was of no import: if there is a scope of cover for “Completed Operations” that is confined by the terms of the policy, then the scope is so confined for the building and for each and every part of it. We agree with this submission. In any event, whilst the third further amended originating application may have raised this issue, no real attention was given to it during the trial or in the appeal, and the parties in debating the question of the ambit of the definition of “Product” focused on the composite items of the building itself and its component parts. Further, as Senior Counsel for QBE pointed out, Icon entered into a contract to construct a building, and it is not a realistic approach to break down Icon’s activities by reference to component parts that are eventually incorporated into the fabric of the structure of the building.
For these reasons, we would allow the appeal. The orders we would propose to make are:
(1)The appeal be allowed.
(2)Order 8 of the orders of the Court made on 26 October 2020 in VID781/2019 be set aside by consent.
(3)Orders 4 and 7 of the orders of the Court made on 26 October 2020 in VID781/2019 be set aside and in lieu thereof it be ordered that:
(a)the third further amended originating application by the applicant (Icon) as against the second respondent (QBE) be dismissed; and
(b)Icon pay QBE’s costs of the proceeding to be agreed or assessed.
(4)Icon pay QBE’s costs of the appeal as agreed or assessed.
I certify that the preceding four hundred and thirty-five (435) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Chief Justice Allsop and Justices Besanko and Middleton. Associate:
Dated: 20 July 2021
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