Lumley General Insurance Limited v The Council of Penrith

Lumley General Insurance Limited (Lumley) appealed to the New South Wales Court of Appeal against a decision of the Supreme Court of New South Wales. The dispute concerned the interpretation of a public liability insurance policy issued by Lumley to the Council of Penrith (the Council), specifically in relation to the Council's liability for damage caused by a flood. The Council sought an indemnity from Lumley for claims made against it arising from the flood.

The central legal issue before the Court of Appeal was whether the damage caused by the flood was excluded from coverage under the policy. The policy contained an exclusion clause that purported to exclude liability for damage caused by "flood, inundation or storm-water". The Court was required to determine the scope and meaning of this exclusion clause in the context of the specific events that led to the damage.

The Court of Appeal, comprising Gleeson CJ, Handley JA and Cole JA, reasoned that the exclusion clause was ambiguous. They applied the principle that where an insurance policy contains an ambiguity, it should be construed contra proferentem, meaning against the insurer who drafted the policy. The Court found that the term "flood" in the exclusion clause was not sufficiently clear to encompass the particular type of water damage that occurred, which was described as a "surge of water" resulting from a combination of heavy rainfall and a failure of drainage systems. Consequently, the Court held that the exclusion clause did not apply to the damage sustained.

The appeal was allowed, and the decision of the Supreme Court was set aside. The Court of Appeal ordered that the Council was entitled to an indemnity from Lumley under the policy for the claims made against it arising from the flood.