Metricon Homes Pty Ltd v Great Lakes Insurance SE

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT
INSURANCE LIST

S ECI 2017 00001

METRICON HOMES PTY LTD	Plaintiff
v
GREAT LAKES INSURANCE SE (ABN 8 964 580 576)	Defendant

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JUDGE:	HARGRAVE J
WHERE HELD:	Melbourne
DATE OF HEARING:	7, 8 August 2017. Further written submissions filed 31 October 2017 (Plaintiff), 8 November 2017 (Defendant).
DATE OF JUDGMENT:	12 December 2017	Revised 12 December 2017 para [180]
CASE MAY BE CITED AS:	Metricon Homes Pty Ltd v Great Lakes Insurance SE
MEDIUM NEUTRAL CITATION:	[2017] VSC 749

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INSURANCE – Builder’s liability insurance – Combined cover provided for products and public liability – Insured entered into contract for design and construction of house – House sustained damage arising from the Insured’s defective design and workmanship – Insured claimed indemnity from Insurer for rectification costs, legal costs and settlement sum paid to home owners – Insurer denied liability on the basis that damage arose out of the Insured’s contractual breaches and not out of ‘damage to property’ of third parties as required by insuring clause – Whether ‘damage to property’ of third parties included house – James Longley & Co Ltd v Forest Giles Ltd [2001] EWCA Civ 1242 distinguished – Held: Damage to property included damage to house and insuring clause applied.

INSURANCE – Builder’s liability insurance – Exclusion clauses – Professional services exclusion – Whether Insured rendered a professional service – Meaning of professional service in exclusion – Insured’s responsibility for design included engineering design of concrete slab and roof trusses – Insured rendered design services through professional subcontractors – Design deficiencies were a principal cause of damage to property – Definition of Insured included subcontractors – Held: Professional services exclusion applied – Held: Claim dismissed on this basis – Chubb Insurance Company of Australia Ltd v Robinson (2016) 239 FCR 300; Speno Rail Maintenance Australia Pty Ltd v Hammersley Iron Pty Ltd (2000) 23 WAR 291 applied.
INSURANCE – Exclusion clauses – Inconsistency and overlap between applicable exclusions – Insurer contended that each exclusion clause operated independently of other exclusion clauses and should be construed in isolation – Inconsistency between overlapping exclusion clauses resolved by applying ordinary contractual interpretation principles – Held (by obiter dicta): Applicable exclusions can be given congruent operation when read as a whole – Statements in D K Derrington and R S Ashton, The Law of Liability Insurance (LexisNexis Butterworths, 3rd ed, 2013) vol 2, 1834 [10–7] not accepted – Result reached by applying ordinary contractual interpretation principles – Re Media Entertainment & Arts Alliance; ex parte Hoyts Corp Pty Ltd (1993) 178 CLR 379, 386–7; Tsolon Investments Pty Ltd v Waffle Pod Footing Systems NSW Pty Ltd [2002] NSWCA 302 [36]; Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500, 507–11 applied.

INSURANCE – Builder’s liability insurance – Products liability – Policy defined ‘Insured’s Products’ – Whether house constructed by builder fell within definition – Exclusion clause relating to ‘Insured’s Products’ – Held: house fell within ordinary meaning of definition.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr J Gleeson QC Ms G Crafti	MinterEllison
For the Defendant	Mr C Caleo QC Dr A Hanak	HWL Ebsworth

TABLE OF CONTENTS

Applicable principles of interpretation.......................................................................................... 8

Structure and material terms of the policy.................................................................................. 10

Issues for determination................................................................................................................. 15

Was the damage to the house resulting from the defects ‘damage to property’ under Section 3 of the policy?................................................................................................................................................. 16

Do any of the exclusions relied on by the Insurer apply?........................................................ 26

Exclusion 13................................................................................................................................. 26
Is the house an Insured Product?............................................................................................. 34
Exclusion 6................................................................................................................................... 39
Exclusion 7................................................................................................................................... 41
Exclusion 15(a)............................................................................................................................. 42
Exclusion 15(b)............................................................................................................................ 42
Exclusion 17................................................................................................................................. 43

What is the effect of the write back?............................................................................................. 49

Are the rectification costs, the settlement sum and/or the legal costs recoverable from the Insurer? 53

Conclusion and orders.................................................................................................................... 62

Schedule 1.......................................................................................................................................... 63

Schedule 2.......................................................................................................................................... 64

Schedule 3.......................................................................................................................................... 65

Schedule 4.......................................................................................................................................... 66

Schedule 5.......................................................................................................................................... 69

HIS HONOUR:

The plaintiff, Metricon Homes Pty Ltd, operates a business of building homes and offering for sale home and land packages in Victoria and other states in Australia. The defendant, Great Lakes Insurance SE, is the successor to the rights and obligations of Calliden Insurance Limited under insurance policies issued by Calliden.[1] I will refer to each of them as ‘the Insurer’ unless it is necessary to refer to them by name.
[1]Pursuant to a scheme confirmed by order of the Federal Court of Australia made on 23 March 2017 under s 17F of the Insurance Act 1973 (Cth).

This proceeding concerns a combined building contracts policy of insurance originally issued to Metricon by Australian Unity General Insurance Company Limited in April 2006 for the annual policy period ending 31 March 2007.[2] Australian Unity renewed the policy by a renewal schedule issued on about 16 April 2007, thus providing insurance cover to Metricon for the policy period commencing on 31 March 2007 and ending on 31 March 2008 (the policy).
[2]The pleadings refer to earlier versions of the policy from 2004, but they were not in evidence or referred to in argument.

Among other things, the renewal schedule for the policy records:

TYPE OF POLICY            : ANNUAL CONSTRUCTION INSURANCE
INSURED  : Metricon Homes Pty Ltd
THE BUSINESS               : BUILDERS OF RESIDENTIAL HOMES
CONTRACT INSURED   : All contracts commenced by the Insured during the policy period principally Domestic Homes
…

In circumstances which were not explained in the evidence, Calliden assumed the obligations of Australian Unity under the policy. An ‘alteration schedule’ was issued by Calliden to Metricon, effective from 25 February 2008 but applying to the whole of the policy period. Insofar as relevant, the alteration schedule contains the same terms as those stated in the renewal schedule.

As appears below, there are differences between the original schedule to the policy on the one hand and the renewal and alteration schedules on the other. However, counsel for both parties referred to both the original schedule (as if it remained effective during the policy period) and to the renewal and alteration schedules. For the reasons given below, the result in the case does not turn on the differences in the renewal and alteration schedules from the original schedule.

The following relevant events occurred during the policy period.

On about 7 September 2007, Ryan Mulcaire and Leah Jayde Stuart (the owners) entered into a ‘new home contract’ with Metricon (the building contract) for the ‘construction of a dwelling house’ (the house) on the land situate at 7 Natasha Court, Brookfield (the land).

The building contract included the contractual warranties required by s 8 of the Domestic Building Contracts Act 1995. In summary, Metricon warranted to the owners that:

(1) the house would be constructed in accordance with the ‘Plans’ and ‘Specifications’ set out in the building contract (which had been prepared by Metricon), and an annexed ‘Engineer’s Design’ for, among other things, the concrete slab and associated drainage;

(2) the house would be constructed in a proper and workmanlike manner using good materials which were suitable or reasonably fit for the purpose for which they were used;

(3) the house would be constructed with reasonable care and skill; and

(4) the construction works would be carried out in accordance with all applicable legal requirements.[3]

[3]Building contract, clause 11.00 and incorporated definitions.

Subsequently, on 2 November 2007, the owners became registered proprietors of the land.

Construction of the house commenced on 5 November 2007.

The concrete slab for the house was poured on about 16 November 2007.

Construction of the roof trusses forming part of the house was completed on about 13 December 2007.

After the policy period, the following relevant events occurred.

On 4 June 2008, an occupancy permit was issued in respect of the house.

Between 4 and 16 June 2008, the owners took possession of the house and land. During that period, they reported some defects, which were remedied by Metricon.

On 16 June 2008, construction of the house and rectification of the above defects was completed.

On 16 June 2008, Metricon handed over exclusive possession of the house and land to the owners under the terms of the building contract (the handover).

Between January 2011 and May 2014 Metricon and the owners investigated complaints made by the owners regarding damage to the house. In summary, the investigations revealed the following damage:

(1) in January 2011, about 2½ years after the handover, the owners or their tenant reported a leaking shower, a ‘few cracks around the house’, that the back windows of the house had ‘buckled’, and that doors were ‘not closing or locking’.

(2) in October 2011, an architect engaged by one of the owners inspected the house and prepared an investigation report ‘in regard to building defects’. The architect’s comments included that:

INSPECTORS COMMENTS
·Although the numerous faults and defects appear to be minor at this time, the movement that has occurred is much greater than would be expected for a building that is only three years old. They are indicative of a much more serious problem, which is subsidence or settlement of the foundations.[4] It is highly probable that the cracking and movement will get worse.
[4]As appears below, the defects related to ‘heave’ and not subsidence or settlement.

(3) in August 2012, a ‘distressed building report’ concerning the house was prepared for Metricon by Structural Works, Consulting Engineers. Structural Works had prepared the Engineer’s Design which was incorporated into the building contract. In their report, Structural Works considered the history of the building works for the house and gave an opinion as to the likely cause of the damage to the house caused by movement to the building. It is unnecessary to detail the extent of the damage reported by Structural Works, except to note that the cracking to plasterwork was first reported 18 months after handover and that this was followed by brickwork cracking, distortion of doorframes, cracking to the concrete slab and that, about six months beforehand, a vertical truss member near the centre of the house had snapped. The report concluded that most of the distress to the house had been caused by the ingress of water to the footing system around the house, which had been caused by re-hydration and expansion of clay soils close to the house (ie heave, not subsidence or settlement).

(4) later in 2012, expert engineering advice stated that the broken truss member was the result of a knot in the timber, and recommendations for repair and strengthening were made.

(5) in June 2013, a report prepared for one of the owners recorded some disagreement with Metricon’s advice concerning the roof trusses.

(6) in January 2014, the owners received a lengthy expert report from Bayside Building Services (the BBS report) concerning the failure of the concrete slab on which the house is built and resultant defects, failure of the roof trusses, and miscellaneous workmanship defects.

As to the concrete slab, the BBS report concluded:

(1) the slab design and associated drainage design were deficient (slab design defects);

(2) the slab had also been poorly constructed, resulting in ‘insufficient stiffness’ and differential movement of the slab which was twice that allowable in the house (slab construction defects); and

(3) the differential movement of the slab resulted in numerous movements into other parts of the works above the slab and caused defects including but not limited to floors, ceilings, plasterboard linings, brickwork, roof tiles, windows and doors, internal walls, roof trusses, drainage and tilework (slab movement consequences).

The BBS report observed the following defects in the design and construction of the roof trusses:

(1) the necessary certifications, computations and design data relating to the roof trusses were inadequate (truss design defects) thereby requiring rectification works which are substantially different to the original designed and documented works;

(2) the construction of the trusses, in particular the bottom chord, were defective (truss construction defects).

The BBS report annexes the truss layout plan for the house at Tab 6. That plan was prepared for Metricon by Timbertruss Geelong Pty Ltd and is dated 16 November 2007. I infer that Timbertruss were engaged by Metricon as a subcontractor to prepare the detailed roof truss design.[5]
[5]I note that the Timbertruss truss layout plan notes that the trusses were ‘to be erected and braced in accordance with MiTek recommendations as supplied’.

Apart from the above defects, the BBS report noted a number of workmanship defects including brickwork, plasterboard, roof tiles and insulation (miscellaneous workmanship defects).

I will refer to the defects outlined in the BBS report collectively as ‘the defects’.

The BBS report provided four options to rectify the defects, with demolition and reconstruction of the house being the cheapest option amounting to $332,046. Reading the BBS report as a whole, the conclusion that the house should be demolished and rebuilt was principally based on the slab design and construction defects and the slab movement consequences.[6] In its summary of major findings, BBS stated:

Poor slab construction, including no site drainage, porous gravel under the slab, submerged slab base below the finished ground level, filled soil, uncompacted soil in drainage trenches, and overspilled concrete is allowing water to enter the slab footprint. The water is softening the foundation soils and allowing the soil to swell and shrink, causing movement damage and numerous defects in the work above the slab.

As noted above, Structural Works had reached a similar conclusion in its distressed building report dated 7 August 2012.

[6]BBS report, [29]–[92].

Metricon has carried out some work to rectify the damage and, in doing so, incurred and paid $7,673.13 in rectification costs (the rectification costs).

On 30 May 2014, the owners commenced a proceeding in the Victorian Civil and Administrative Tribunal against Metricon (the VCAT proceeding). In summary, the owners alleged in the VCAT proceeding that Metricon breached its contractual warranties by:

(1) the defective design and construction of the concrete slab, which had caused significant movement and damage to the dwelling;

(2) the defective design and construction of the roof trusses, which had caused damage to roof trusses and resulted in movement; and

(3) various workmanship defects in breach of applicable standards including (but not limited to) brickwork defects, faulty installation of articulation joints, plasterboard defects, inadequate insulation and failure to install downpipes (collectively, the owners’ claims).[7]

The owners’ claims included damages for rent payable for alternative accommodation while the house was being demolished and rebuilt.

[7]VCAT Points of Claim dated 30 May 2014, [6], [7].

On 20 January 2015, the owners compromised their claims against Metricon in the VCAT proceeding and entered into terms of settlement with Metricon (the terms of settlement).

On about 21 January 2015, Metricon paid the sum of $190,000 to the owners, as required by the terms of settlement (the settlement sum).

In defending the VCAT proceeding and negotiating the terms of settlement, Metricon incurred and paid legal costs of $74,745 (the legal costs).

By 25 June 2015 at the latest, Metricon had notified the Insurer of the owners’ claim. The Insurer raises no defence based on the time of notification.

On 1 April 2017, all of Calliden’s insurance business in Australia was transferred to Great Lakes.

The Insurer has at all relevant times denied liability to indemnify Metricon in respect of the claim made by the owners against Metricon.

In summary, Metricon contends that the policy provides cover for the owners’ claims, with the result that it is entitled to indemnity for the rectification costs, the legal costs, and the settlement sum. The Insurer denies liability on a number of grounds. In order to understand the issues for determination, it is necessary to set out the applicable principles of interpretation to be applied to the policy, summarise the structure of the policy, and set out its material definitions and terms.

Applicable principles of interpretation

It is necessary to construe the relevant provisions of the policy in accordance with the general principles to be applied in giving commercial contracts a businesslike interpretation.[8] The principles were summarised by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd in the following terms:[9]
[8]McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579, 589 [22]; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, 528–9 [15].
[9](2015) 256 CLR 104, 116–17 [46]–[51] (citations in original).

Applicable legal principles in these appeals
The rights and liabilities of parties under a provision of a contract are determined objectively,[10] by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.[11]

In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean.[12] That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.[13]
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.[14]
However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’.[15] It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.[16]
Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties … intended to produce a commercial result’.[17] Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.[18]

[10]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656 [35].

[11]Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 350 (citing Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995–6), 352. See also Sir Anthony Mason, ‘Opening Address’ (2009) 25 Journal of Contract Law 1, 3.

[12]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656 [35].

[13]Ibid 656–7 [35].

[14]Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352. See also Sir Anthony Mason, ‘Opening Address’ (2009) 25 Journal of Contract Law 1, 3.

[15]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 657 [35], citing Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 350, in turn citing Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995–6.

[16]Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352; Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995–6.

[17]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 657 [35], citing Re Golden Key Ltd [2009] EWCA Civ 636 [28].

[18]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 657 [35], citing Zhu v Treasurer (NSW) (2004) 218 CLR 530, 559 [82].

To this summary, I would add that the Court should have regard to all of the words used in the agreement ‘so as to render them all harmonious one with another’[19] and to ensure the ‘congruent operation of the various components as a whole.’[20]
[19]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109.
[20]Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, 529 [16].

Further, the issues in this case include the interpretation of exclusion clauses. The principles stated in Darlington Futures Ltd v Delco Australia Pty Ltd[21] apply to such clauses. The High Court stated that:

the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity.[22]

[21](1986) 161 CLR 500.

[22]Ibid 510 (emphasis added). See also, Selected Seeds Pty Ltd v QBEMM Pty Ltd (2010) 242 CLR 336, 344 [29], a case involving the construction of an exclusion clause in an insurance policy.

The Court does not strain to find ambiguity in exclusion clauses.[23] It is only appropriate to apply the contra proferentem principle when ambiguity remains after applying accepted principles of contractual interpretation.[24]
[23]Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500, 507–11.
[24]Ibid 507. See also, CE Heath Underwriting & Insurance (Australia) Pty Ltd v Edwards Dunlop & Co Ltd (1993) 176 CLR 535, 548; GL Nederland (Asia) Pty Ltd v Expertise Events Pty Ltd [1999] NSWCA 62 [27]; Bank of Queensland Ltd v Chartis Australia Insurance Ltd [2013] QCA 183 [71].

In light of the above facts and legal principles, I turn to consider the structure and terms of the policy and to define the issues for determination.

Structure and material terms of the policy

The policy contains many defined words and phrases, each of which begins with a capital letter. References in these reasons to words and phrases from the policy beginning with a capital letter are intended to refer to the corresponding definition in the policy.

On its face, the policy contains insuring clauses in three sections, but not all of them applied during the policy period. Under the original policy schedule, Section 1(b) was stated to be ‘not applicable’.[25] Nor was Section 1(b) included in the renewal and alteration schedules, because the sum insured for items falling within the definition of Property Insured under that Section, namely, Metricon’s plant and equipment, was stated as ‘NIL’.[26]
[25]Original schedule, pages 5, 6.
[26]Renewal schedule, page 2; Alteration schedule, page 7.

Further, it appears that the insurance under Section 2 may not have been renewed for the policy period in issue. The original schedule expressly included cover under Section 1(a) and Section 2. The renewal and alteration schedules did not. Instead, they include cover under: ‘Section 1. Contract Works … Permanent and temporary works including all materials.’ The only reference to a ‘Section 2’ is clearly a reference to cover under Section 3,[27] as it refers to the same limits of liability under Section 3 which were previously covered under the original policy schedule.[28]
[27]Renewal schedule, page 4; Alteration schedule, page 4.
[28]Original schedule, page 6.

The Insurer’s contentions based on the structure of the policy depend on it providing cover under Section 2. Metricon did not contend that Section 2 cover was not provided by the policy. In these circumstances, I will proceed on the basis that the policy provided cover under Section 2.

By Section 1(a), the Insurer agreed to indemnify Metricon against all risks of physical loss or damage to Property Insured (as defined for the purposes of Section 1(a) of the policy) owned by Metricon or for which it may be responsible or have assumed responsibility prior to any Occurrence, and which was ‘used or to be used [by Metricon] in part of or incidental to’ its building contracts.

The full text of Section 1(a) is set out in schedule 1 to these reasons.

By Section 2, the Insurer agreed to provide indemnity in respect of Metricon’s legal liability:

(1) under the terms of any contract maintenance or defects liability clauses of any building contract ‘commenced by’ Metricon during the Period of Insurance;

(2) for loss and/or damage to Property Insured (as defined for the purposes of Section 1(a) of the policy); and

(3) occurring during any such maintenance or defects liability period or extension thereof.

The full text of Section 2 is set out in schedule 2 to these reasons.

By Section 3, the Insurer relevantly agreed to:

(1) pay on behalf of Metricon, all sums which it became ‘legally obligated to pay as compensation for:

(a) Personal Injury …;

(b)loss of and/or damage and/or destruction of property and/or the Loss of Use thereof;

in respect of and/or arising out of Occurrences … during the Period of Insurance in connection with the Business and Activities of the Insured …’;[29]
[29]Emphasis added.

(2) defend (at the Insurer’s expense) claims against Metricon ‘to recover compensation in respect of and/or arising out of Occurrences covered hereby’;[30] and
[30]Emphasis added.

(3) pay Metricon’s expenses incurred by or with the permission of the Insurer:

(a) for investigation, negotiation and defence of claims and suits; and

(b) incidental to any appeal from any judgment against Metricon.

Section 2 of the renewal and alteration schedules (which creates the cover under Section 3 for the policy period) specifies that the Section 3 cover includes both public liability and ‘Products Liability’. Reading the policy as a whole, that means that Section 3 was intended to cover Products Liability as defined in the policy wording, as set out below.

The full text of Section 3 is set out in schedule 3 to these reasons.

The definitions which are relevant to the dispute are summarised or set out below in alphabetical order:

(1) Business and Activities of the Insured is defined to include all of Metricon’s businesses, occupations and/or activities ‘stated in the [policy] schedule’. Relevantly, the policy schedule expressly covers Metricon’s business activity ‘only in respect to … construction of dwellings’.[31]
[31]Definition 2; Renewal Schedule, page 5; Alteration Schedule, page 4.

(2) Completed Operations means:

Completed Operations means Construction Operations [ie Metricon’s insured building contracts] that have been completed, handed over to the Principal/Owner and where any maintenance/defects liability periods have expired.
…[32]
[32]Definition 3 (emphasis added).

(3) Construction Operations are defined to mean all Insured Contracts [including the building contract in this case].[33]
[33]Definition 4.

(4) Insured is relevantly defined as the plaintiff, Metricon,[34] and, relevantly, subcontractors in respect of Metricon’s Business and Activities.
[34]Definition 5; Renewal Schedule, page 1; Alteration Schedule, page 1.

(5) Insured Contracts are defined as ‘all building contracts commenced by [Metricon] during the policy period principally Domestic Homes’.[35]
[35]Renewal Schedule, page 1; Alteration Schedule, page 1.

(6) Loss of Use is defined as follows:

Loss of Use also includes economic loss suffered by any person or party consequent upon loss of and/or damage to and/or destruction of and/or loss of use of any other person’s or party’s property.’[36]
[36]Definition 6 (emphasis added).

(7) Occurrence is, relevantly, defined as meaning:

an event, or continuous or repeated exposure to conditions, which results in … damage to … property and/or the Loss of Use thereof.[37]
[37]Definition 8 (emphasis added).

(8) Products Liability means:

Products Liability means:
(a) Personal Injury; and/or
(b) Loss of and/or damage to and/or destruction of property and/or Loss of Use thereof

arising out of the Insured’s Products or any reliance or representation or warranty made at any time in respect thereto, including liability arising out of the Trade Practices Act, 1974 in respect of the Insured’s Products or any amendments thereof.
Insured’s Products means any goods and/or products (including food and/or drinks) manufactured, assembled, processed, grown, extracted, imported, constructed, erected, installed, altered, repaired, serviced, treated, sold, bottled, labelled, supplied, hired, leased, exchanged, and/or transport[ed] and/or distributed by the Insured including any container thereof (after such goods and/or products cease to be in the possession and/or under the control of the Insured).’[38]

(9) Property Insured Sections 1(a) and 2 is widely defined to include ‘[a]ll property of every description (unless otherwise excluded) having any connection with the Insured Contracts …’.[39]

[38]Definition 10 (emphasis added).

[39]Definition 11.

The full text of relevant definitions, other than those appearing in the policy schedule, is set out in schedule 4 to these reasons.

In contrast to Sections 1(a) and 2, there is no definition of the ‘property’ which is insured under Section 3. The word ‘property’ when used in Section 3 thus bears its ordinary meaning; but references to ‘property’ in Section 3 are to the property of a third party and do not include Metricon’s own property. This is consistent with the Loss of Use definition and exclusion 2 in Section 3.

Further, I note that the policy sometimes uses capitalised terms which are not defined. These words should be given their ordinary meaning unless the context otherwise requires.

The policy contains General Conditions applicable to all Sections, Conditions applicable only to Sections 1 and 2, and Conditions applicable only to Section 3. It is not necessary to set these out. There are also exclusions for all sections and specific exclusions applicable only to the insurance provided under either Sections 1 and 2 or Section 3.

The specific exclusions which are relied upon by the Insurer to defeat Metricon’s claim for indemnity under Section 3 are exclusions 6, 7, 13, 15(a) and 15(b). For convenience, the full text of these and other relevant exclusions are set out in schedule 5.

In summary, the relevant policy structure is as follows:[40]
[40]Some aspects have been omitted from this summary as nothing turns on them for the issues raised for determination, except in general terms.

(1) Section 1(a) provides insurance cover for all risks of physical loss or damage to all property owned by Metricon or for which it is responsible which has any connection with the Insured Contracts (Metricon’s property), provided that the property is used or to be used in connection with Insured Contracts (ie general property insurance);

(2) Section 2 provides cover for Metricon’s contractual liability ‘under the terms of any maintenance or defects liability clauses in Insured Contracts’, provided that the liability arises from loss or damage to Property Insured during the maintenance or defects liability period in the relevant building contract (ie contractual liability insurance); and

(3) Section 3 provides insurance cover for Metricon’s legal liability to pay compensation for Personal Injury, for loss or damage to property or for the Loss of Use of property, including for Products Liability (ie third party liability insurance).

Each Insuring Clause provides that the relevant loss, damage or liability must arise from an Occurrence within the Period of Insurance.

On the basis of the ordinary meaning of the three Insuring Clauses, there is clearly some overlap between the cover provided. Relevantly, the Section 2 Insuring Clause covers (subject to its limits) contractual liability which is also insured under the Section 3 Insuring Clause.

In light of the above description of the structure and relevant terms of the policy, I proceed to define the issues for determination.

Issues for determination

It is clear, and the Insurer did not contest, that:

(1) the defective design, materials and workmanship which caused damage to the house were Occurrences during the Period of Insurance. Further, the Insurer takes no point based on the damage to the house, and consequent loss to the owners, occurring outside the Period of Insurance;

(2) such Occurrences happened in respect of or arising out of Metricon’s Business and Activities; and

(3) Metricon acted reasonably in compromising the owners’ claims against it for the settlement sum. The Insurer takes no point that its consent was not sought and given before the settlement was entered into.

The Insurer contends, and Metricon denies, that the house, in the sense of the completed house when it was handed over to the owners, falls within the definition of Insured’s Products and that, as a result, some of the exclusion clauses in Section 3 apply to defeat Metricon’s claim. For the reasons explained below, the application of the exclusions does not depend upon the house falling within the definition of the Insured’s Products.

In these circumstances, the issues for determination may be generally stated as follows:

(1) Was the damage to the house resulting from the slab construction defects ‘damage to property’ under Section 3 of the policy?

(2) If yes to (1), is liability to indemnify excluded by any exclusion clause? Specifically, do any of Exclusions 6, 7, 13, 15(a) or 15(b) apply?

(3) If no to (2), are the rectification costs, the settlement sum and/or the legal costs recoverable from the Insurer?

Was the damage to the house resulting from the defects ‘damage to property’ under Section 3 of the policy?

It is first necessary to construe the ordinary meaning of the relevant words used in Section 3. On their face, the Insurer agrees to indemnify Metricon (‘pay on behalf of the Insured’) against legal liability to pay compensation to any person for ‘damage to … property’. Viewed on their own, those words unambiguously include the contractual liability of Metricon to pay compensation to the owners for damage to the house arising out of the Occurrences described above.

The Insurer contests this ordinary meaning. First, the Insurer contends that Metricon’s liability to pay compensation to the owners arose not from the damage to the house but from its failure to construct the house in accordance with its contractual obligations. This was not liability for damage to property. I do not accept that contention. Although it may be accepted that the liability arose from contractual breaches, those breaches directly caused damage to the house — and thus loss to the owners for which Metricon was liable. That liability is within the ordinary meaning of Section 3. My reasons follow.

In support of this contention, the Insurer relies on statements in textbooks concerning the law of insurance and the decision of the Court of Appeal in England in James Longley & Co Ltd v Forest Giles Ltd.[41]
[41][2001] EWCA Civ 1242.

The Insurer first relies on statements in Derrington & Ashton’s The Law of Liability Insurance (Derrington & Ashton),[42] to the effect contended for. For example:

Harm to the work may occur before it is handed over in performance of the contract or after that time. If before, the harm, even harm to non-defective parts of the work caused by defective parts, is suffered by the insured and not by the principal, since the insured must fix it in order to meet its contractual obligations, and the insured cannot be liable to himself for the loss incurred in doing so. If [the insured] tenders defective work that is not in accordance with the contract, this is not damage to property of the principal. It is simply a breach of the contract, involving only pure economic loss to the principal …[43]

[42]D K Derrington & R S Ashton, The Law of Liability Insurance (LexisNexis Butterworths, 3^rd ed, 2013).

[43]Ibid vol 1, 816 [8–37].

I do not accept that this general statement, based upon American authority, should be applied to Section 3. Under Australian law, each contract of insurance must be interpreted in accordance with the ordinary principles applicable to the interpretation of commercial contracts. This involves interpreting the words at issue in the context of the relevant policy as a whole and any discernible commercial purpose. Further, the statement relied upon by the Insurer is taken out of context when the applicable section of Derrington & Ashton is read as a whole. There are other statements in that section which support Metricon’s claim under Section 3 on the facts of this particular case. For example, when dealing with cases such as the present, where a defect in design or construction of one component of a building (in this case the concrete slab) causes damage to other parts of the building after it has been handed over to the owner, and any defects liability period has expired, the authors state:

In a literal sense, such damage at this time is ‘property damage’ within the meaning of the policy, that is, damage to the property of another, since the finished work will have been tendered and accepted by the principal and usually paid for at this time, so that when it is later damaged by the defects, it is then the property of the principal. It is that party who suffers the harm and this aspect of the harm is not merely the presence of defective work: it is the additional harm caused by the defective work. This is not a matter of defects to be remedied in accordance with the contract, but of additional and separate harm.[44]

[44]Ibid vol 1, 821–2 [8–40] (citations omitted).

The authors of Derrington & Ashton footnoted the above-quoted passage by reference to the American case of Breezewood Wilmington Condominiums Home Owners Association Inc v Amerishure Mutual Insurance Company,[45] as follows:

In Breezewood of Wilmington Condominiums Home Owners Association Inc v Amerishure Mutual Insurance Company …, it is suggested on the basis of earlier authority that this harm does not come within the description of ‘property damage’, but the reasoning then has recourse to the ‘your work’ business risk exclusion as the reason for so holding. This demonstrates that without the exclusion, the same result would not obtain.[46]

[45]335 Fed App X 268 (4^th Cir, 2009).

[46]D K Derrington & R S Ashton, The Law of Liability Insurance (LexisNexis Butterworths, 3^rd ed, 2013) vol 1, 822 n 217 (citations omitted).

The remainder of the applicable section in Derrington & Ashton notes that there are differing approaches to this issue in the United States — some authorities holding that there is no property damage in such circumstances, and others holding that there is property damage and it is for the insurer to exclude the business risk if it chooses to do so — and relevantly concludes as follows:

Damage to non-defective parts of the product or works after it has been handed over is probably ‘damage to the property of another’ within the meaning of that expression in the policy, and the next issue is usually whether any of the business risks exclusions is engaged.[47]

[47]Ibid vol 1, 826 [8–43] (citations omitted).

I conclude that the statements in Derrington & Ashton do not assist the Insurer. If anything, subject to exclusion clauses applying, they tend to support Metricon’s claim. Further, caution must be exercised in applying statements based on American cases, or on American cases themselves, as a safe guide to the interpretation of insurance policies, or other contracts, governed by Australian law. The legal principles to be applied in America vary from jurisdiction to jurisdiction and, in any event, the same words used in two or more contracts may bear different meanings, depending upon their context and purpose.[48]
[48]For example, Hird v Chubb Insurance Company of Australia [2016] VSC 174 [68]–[69].

Next, the Insurer relies on statements in MacGillivray On Insurance Law,[49] as follows:

Damage to property. While the liability section of a contractor’s policy will usually provide cover against damage to property, it will normally exclude liability in respect of damage to property belonging to the insured and damage to a defective part of any product supplied or contract works, or the costs and expenses incurred in repairing, replacing, recalling or making any refund in respect of the defective part of any product supplied or contract works.[50]

[49]John Birds, Ben Lynch and Simon Milnes, MacGillivray on Insurance Law (Sweet & Maxwell, 13^th ed, 2015).

[50]Ibid 1116–7 [34-019] (emphasis added).

The authors of MacGillivray then referred to the James Longley case and summarised its facts and reasons in brief terms.[51] The brevity of the summary does not, however, reveal that the result in the case flowed from either specific exclusions in the policy or from the interpretation of the relevant insuring clause in the context of the specific exclusions.
[51]Ibid 1117 [34-019].

In James Longley the Court of Appeal in England considered the interpretation of a combined insurance policy which included public liability cover. The availability of the public liability cover depended on the preliminary question of whether the insured’s defective work caused ‘damage to property’ of a third party for which the insured was liable in damages. The facts which are relevant to this case were as follows:

(1) James Longley was the ‘main contractor’ engaged by a developer to construct a building.

(2) James Longley engaged Forest Giles as a subcontractor, to supply and lay vinyl sheet flooring to specified areas of the building.

(3) Forest Giles took out a combined policy of insurance to cover it against, among other things, its potential public liability to third parties arising out of the subcontract works.

(4) Forest Giles laid the vinyl sheeting on concrete floor planks covered with two layers of screed. The vinyl sheets were applied prematurely, before the screed had sufficiently dried out, and this gave the finished floor a contractually unacceptable finish requiring remediation — by removing the defective vinyl and screed, and re-laying fresh vinyl.[52]
[52](2001) EWCA Civ 1242 [15], [18].

(5) The remediation work was done at James Longley’s expense, before completion of the building, and caused no damage to the concrete floor planks.

(6) James Longley claimed the remediation costs (and other damages) from Forest Giles.

(7) As both James Longley and Forest Giles were in receivership, it was accepted that the only money available to meet James Longley’s claims was any amount due to Forest Giles under the public liability insurance section of the policy.

(8) Section 3 of the policy relevantly indemnified Forest Giles for legal liability for damages in respect of ‘[d]amage to property … occurring during the period of Insurance and arising in connection with the [subcontract works].’[53]

[53]Ibid [10].

The trial judge and the Court of Appeal denied Forest Giles indemnity under the insurance policy. The Court of Appeal’s reasons were given by Potter LJ (Lord Mustill and Latham LJ agreeing). Potter LJ decided the case on two grounds.

First, his Honour considered two exceptions and determined that each of them applied to deny liability to Forest Giles.[54]
[54]Ibid [16].

Second, his Honour decided that, on the facts, there had been no damage to the property of a third party, and so the insuring clause did not apply. His Honour stated:

The damage was within the product supplied and works performed by Forest Giles, and no damage had been caused to other property belonging to a third party, including Longley.[55]

[55]Ibid (emphasis added).

Later, Potter LJ stated that, on the facts of the case:

no physical damage is alleged to have been caused to any adjacent or underlying works or any property of the developer. It was simply the position that the works performed by Forest Giles were defective and had to be redone. There was therefore no damage to property for the purposes of section 3.[56]

[56]Ibid [18] (emphasis added).

In the course of deciding that there was no property damage on the facts of the case, Potter LJ stated that the insuring clause should be interpreted:

bearing in mind that it is not the usual intention, in a contractor’s public liability insurance, to give cover in respect of defective workmanship which requires rectification but does not cause physical damage to the personal property of a third party or interference with a third party’s property rights, as opposed to their purely economic interests.[57]

[57]Ibid [17] (emphasis added).

I do not accept the Insurer’s reliance on the texts or the James Longley case. In my opinion, the conclusion which is ultimately reached in Derrington & Ashton, namely, that the plain words of the insuring clause should apply and be subject to alternative applicable exclusions is the preferable course. Moreover, this case is distinguishable from the facts in James Longley because it is an agreed fact that the slab design and construction defects caused significant movement and damage to other parts of the house when it was owned by the owners.

Second, the Insurer contends that Section 3 should be read down in light of the fact that the reference to ‘property’ in the Section 3 refers only to property owned by third parties and not to property owned by Metricon. The Insurer accepts that, upon Metricon affixing property previously owned by it to the land, ownership in the affixed property (the house during construction and on completion) was transferred by Metricon to the owners.[58] However, the Insurer contends that damage to property of third parties in the position of the owners is limited to property which had a ‘separate existence’ from that which Metricon supplied under the building contract — in this case, the house and all fixtures and fittings supplied by Metricon. The Insurer postulated the following examples to demonstrate its contention:

(1) After handover of a house, the owner installs carpets. As a result of Metricon’s defective workmanship, the carpets are damaged. For example, water damage caused by faulty plumbing or sealing of windows. In such a case, there would be damage to property of the third party owner (ie the carpets).

(2) After handover, the owner furnishes the house. The furniture is damaged by Metricon’s faulty workmanship. For example, by plaster or timber used in construction collapsing on the furniture. That would also be damage to the property of a third party owner (ie the furniture).

[58]Nicholas Dennys, Mark Raeside and Robert Clay, Hudson’s Building and Engineering Contracts (Sweet & Maxwell, 12^th ed, 2010) 1142 [8-080]; R J Grills Pty Ltd v Dellios [1988] VR 136, 139.

The Insurer contends that this distinction should result in reading down the meaning of ‘property’ in Section 3. I do not accept that contention. It is inconsistent with the ordinary meaning of the insuring clause and the express inclusion of Products Liability in Section 3, as stated in the renewal and alteration schedules. Moreover, it is, in any event, illogical. Why would the carpet or furniture be covered, but not other parts of the house which are damaged? So, for example, if faulty plumbing caused a flood in the house, causing significant damage to architraves, skirting boards and other fixtures and fittings installed and supplied by Metricon, there is no logical reason why damage to those items should not also be covered.

Third, the Insurer raises structural, or contextual, contentions based on the following matters:

(1) Section 2 provides limited cover for Metricon’s liability for contractual breaches arising out of defective design, workmanship or materials;

(2) the Section 2 cover:

(a) is limited to building contracts having a maximum contract price of $750,000 plus an escalation provision capped at 15 per cent;[59]
[59]Conditions 10 and 12; Renewal Schedule, page 2 and Alteration Schedule, page 2.

(b) is limited to $750,000 for any one building contract (plus amounts for specified fees and costs which may total up to $350,000;[60]
[60]Ibid.

(c) has temporal limits of 12 months for each of the estimated construction period and the ‘maintenance/defects liability period’ under any Insured Contract;[61] and

(3) in contrast, these limits do not apply to the cover under Section 3, which is limited only by a $5 million limit of liability.[62]

[61]Condition 11 applicable to Sections 1(a) and 2.

[62]Renewal Schedule, page 4; Alteration Schedule page 4. I note that the $5 million limit applies under Section 3 to ‘any one occurrence’ in respect of public liability and to all claims during ‘any one Period of Insurance’ in respect of Products Liability.

By this submission, the Insurer should be taken as contending that the whole of Section 3 should be read down to exclude property damage to houses constructed by Metricon where the damage results from defective design, products or workmanship; because Metricon’s liability for that kind of damage was intended to be covered by Section 2 only, and be subject to its limits.

On this basis, the Insurer contends that it was ‘unlikely’ that the policy was intended to provide $5 million cover in respect of defects liability under Section 3, when cover for defects liability under Section 2 is subject to the above limits. The Insurer contends that such a result would ‘not give a congruent operation to the various parts of the policy’. The Insurer’s oral submissions described as ‘curious’ the result of example situations under which: (1) Metricon’s defective work resulted in damage during a 12 month defects liability period for which it was legally liable (thus attracting cover under Section 2); and (2) Metricon’s defective work caused damage to property one day after the defects liability period, in which case Metricon would be covered for legal liability to the property owner for loss up to a $5 million limit.

I do not accept the Insurer’s structural contentions. First, the renewal and alteration schedules expressly include cover under Section 3 for Products Liability, and a separate premium has been paid for cover under that Section.

Second, as appears below, some of the exclusions to Section 3 assume that the Section covers Metricon’s contractual liability to pay compensation for damage to property where such liability arises from defective design, products or workmanship.

Third, the overlap between the cover provided under Sections 2 and 3 is not complete. In the context of the policy as a whole, Section 3 does not provide indemnity for all circumstances covered under Section 2, thus making Section 2 superfluous or redundant. There are significant differences between the whole scheme of cover provided under Sections 2 and 3. The conditions which apply to Sections 1 and 2 do not apply to Section 3, and the conditions applying to Section 3 do not apply to Sections 1 and 2. Each Section provides a separate and different limit of cover for which separate premiums were paid. Further, there are different exclusion clauses applying to Sections 1 and 2 on the one hand and Section 3 on the other.

Some example differences between the cover provided by Section 2 on the one hand, and Section 3 on the other, are set out below:

(1) The cover under Section 2 for ‘defects liability’ contains further limits than those relied upon by the Insurer as set out above. In addition, Condition 5 applicable to Sections 1 and 2 only, provides that the ‘basis of settlement of claims under Sections 1(a) and 2 shall be the full cost of repairing, reinstating or replacing the Property Insured that is lost or damaged …’. This condition operates to limit the liability for which cover is provided to those costs. In contrast, there is no such limit in Section 3, which includes indemnity for liability to pay compensation ‘for’ damage to property, including for Loss of Use. ‘For’ is a word of wide import. In the context of Section 3 of the policy when read as a whole, it should be read as ‘with regard or respect to’ or ‘because’ of property damage.[63] A meaning of this width follows from the insuring clause ‘to pay … all sums which [Metricon] shall become legally obligated to pay as compensation for’.[64]
[63]Susan Butler (ed), Macquarie Dictionary (6^th ed, 2013) 577 [8], [31].
[64]Emphasis added.

(2) Condition 6, applicable to Sections 1 and 2 only, provides cover to Metricon for a range of costs and expenses which are not covered under Section 3.

(3) Condition 7, applicable to Sections 1 and 2 only, provides cover for Metricon’s ‘overhead charges and profit applicable to repair and/or replacement’. There is no equivalent cover under Section 3.

(4) Exclusion 5, applicable to Sections 1 and 2 only, provides that no indemnity is provided for:

loss or damage caused by defective workmanship, defective construction, or defective material or defective design;
Provided that this exclusion 5 shall be limited to the smallest component part of an individual item of the Property Insured which is defective, and shall not apply to any other part or parts lost or damaged in consequence thereof.
Notwithstanding this exclusion 5, any loss or damage caused by any fault, defect, error or omission in design, plan or specification performed by a party other than the Insured is excluded.

The absence of a like exclusion, in plain terms and without the use of defined terms which apply to the exclusions in Section 3, is a significant difference; as is the fact that Section 2 does not provide Products Liability cover — which Section 3 does. As appears below, the proviso to exclusion 5 is to similar effect as the write back provision in exclusion 6.

(5) Exclusions which limit Section 3 do not limit liability under Section 2. For example, exclusion 12 applicable to Section 3 excludes all liability in consequence of asbestos, and exclusion 13 excludes liability arising out of any professional advice or service rendered by Metricon.

For these reasons, even if the policy provided cover under Section 2, Section 3 should be given its ordinary meaning. For the reasons given above, Metricon’s liability to the owners falls within the ordinary meaning, and the cover under Section 3 is engaged unless it is excluded.

I proceed to determine whether any of the exclusions applicable to Section 3 apply to deny Metricon’s claim.

Do any of the exclusions relied on by the Insurer apply?

The Insurer relies on exclusions 6, 7, 13, 15(a) and 15(b) (the relevant exclusions).

I will deal first with exclusion 13, because it concerns a separate subject matter to the other exclusions and because, for the reasons below, I have concluded that it applies to exclude Metricon’s claims under the policy.

Exclusion 13

Exclusion 13 states that Section 3 shall not apply to liability:

13but not limited to arising out of the rendering of or failure to render professional advice or service by the Insured or any error or omission connected therewith provided that this exclusion 13 does not apply to the rendering of or failure to render professional medical advice by medical persons employed by the Insured in connection with the Business and Activities of the Insured.[65]

[65]Emphasis added.

The emphasised words make no sense in the context of the policy as a whole, and should be ignored as an obvious mistake.[66]
[66]National Australia Bank Ltd v Clowes [2013] NSWCA 179 [33]–[38].

Exclusion 13 applies to Metricon’s liability to the owners. My reasons follow.

The Insurer contends that Metricon’s liability to the owners arose out of its failure to render ‘professional service’ to the owners. The Insurer’s argument (with some elaboration) involved the following steps:

(1) Metricon provided professional services to the owners and made errors or omissions connected with those services.

(2) The meaning of the term ‘professional service’ depends upon the context in which it is used. It is not limited to the traditional learned professions. In this regard, the Insurer relies upon the decision of the Court of Appeal in Kyriackou v ACE Insurance Ltd,[67] which supports giving the term a broad meaning in the context of an insuring clause in a professional liability insurance policy by reference to the nature of the insured’s business and activities.[68]
[67][2013] VCSA 150 [62].
[68]Ibid [62]–[72] (Harper JA), [141]–[142] (Kyrou AJA).

(3) However, the Insurer acknowledges that ‘professional service’ is usually given a narrower meaning when it appears in an exclusion clause of a public liability policy. To this acknowledgment, I would add an exclusion in a products liability policy such as that contained within Section 3 of the policy in this case.

(4) The reason why ‘professional service’ is given a narrower meaning in an exclusion clause is to avoid the cover provided by the relevant policy being ‘inappropriately circumscribed’.[69] Thus, instead of the phrase applying to all of the business and activities of the Insured, it applies only to ‘services which fall within the scope of a vocational discipline which is generally regarded as a profession’.[70] In a builder’s liability policy, such as the present, this limits the professional services exclusion to ‘activities that are truly professional in nature, such as architectural design, engineering, surveying and quantity surveying’.[71] Viewed in this way, the exclusion does not apply to ‘routine activities’ of a builder.[72]
[69]Chubb Insurance Company of Australia Ltd v Robinson (2016) 239 FCR 300, 333 [149].
[70]Ibid 333 [150].
[71]Ibid 333 [152].
[72]Ibid.

(5) By their points of claim in the VCAT proceeding, relying upon the BBS report, the owners clearly alleged that the concrete slab was not designed in accordance with applicable building regulations,[73] there was not adequate site drainage design, and that the roof trusses had not been designed in accordance with applicable codes and standards.[74] The terms of settlement were entered into by Metricon as a result of these claims.
[73]Owners’ Points of Claim, para 6(a), particulars under heading (A).
[74]Ibid (B).

(6) Metricon’s liability to the owners arose out of Metricon’s rendering of professional service to the owners by its sub-contractors because there was a causal connection between:

(a) the defective engineering design of the concrete slab and associated drainage plans by Structural Works; and

(b) the defective design of the roof trusses by Timbertruss.

Metricon contends that exclusion 13 does not apply because, although the phrase ‘professional service’ is capable of capturing the engineer’s design of the slab and the design of the roof trusses, the onus is on the Insurer to establish, with particularity, the proportion of its liability to the owners arising from design defects on the one hand, and arising from defective construction (which it contends does not involve the provision of a professional service) on the other. In other words, Metricon contends that there was an onus on the Insurer to disentangle the composite loss suffered by the owners and to apportion the settlement sum between the respective causes. I do not accept those contentions. My reasons follow.

As appears above, Metricon agreed to design the house and build it in accordance with the ‘Specifications’ and ‘Plans’ which were prepared and supplied by it, and in accordance with the ‘Engineer’s Design/s’ prepared by Structural Works (Consulting Engineers) ‘for’ Metricon. By clause 11 of the building contract, Metricon warranted that the house would be constructed in accordance with the Plans, which were defined to include the Engineer’s Design. On this basis, the building contract was of the ‘design and construct’ kind, under which Metricon agreed to provide the services of both:

(1) designing the house, by preparing the Plans and Specifications and engaging Structural Works to prepare the Engineer’s Design; and

(2) building the house to those designs and specifications.

Metricon’s engagement of Structural Works to prepare the Engineer’s Design brought Structural Works within the definition of the ‘Insured’ under the policy because it acted as a sub-contractor for Metricon ‘in respect to’ its construction obligations under the building contract. Similarly, Timbertruss was also an Insured because it designed the roof trusses for Metricon as a sub-contractor.

For the purposes of the building contract, ‘Engineer’s Design’ is defined as follows:

‘Engineer’s Design’ includes a footing design or other structural design that has been prepared by a qualified Engineer for the concrete footings, stumps, piers or slab construction, or for a particular part of the Building Works that requires a structural design, drainage design where appropriate and computations accompanying the foregoing.[75]

[75]Emphasis added.

The Engineer’s Design states on its coversheet that it was prepared for Metricon as the ‘client’.

The Engineer’s Design includes a geotechnical site investigation and footing recommendations. Based on the site classification, a concrete slab comprising either a ‘stiffened raft’ slab or a ‘waffle raft’ slab was recommended. Metricon chose to use a waffle slab in constructing the house. Where a waffle raft slab was to be used, Structural Works recommended that the underlying ‘fill’ be compacted to a specified weight-bearing capacity and, where:

any soft spots are encountered where the bearing capacity cannot be achieved [that] Structural Works [should] be contracted immediately for additional requirements.[76]

[76]Engineer’s Design para 6.1.2, [2].

The Engineer’s Design noted that surface drainage at the site was:

generally poor and may result in construction difficulties due to excessive or uneven moisture content of the founding soils during wetter periods. An agricultural drain or similar may be required; install the drain prior to commencement of construction around at least two sides of the dwelling to divert surface and sub-surface water away from the building.[77]

[77]Ibid para 8.

The Engineer’s Design concluded with the statement that it was:

not to be used as a footing design. The building practitioner (designer/engineer) is responsible for the provision of a footing design appropriate for the proposed structure, the proposed site works and the given site conditions.[78]

[78]Ibid para 9(5).

Although not annexed to the building contract as part of the defined Engineer’s Design, that design report was preceded by detailed plans and specifications prepared by Structural Works and labelled ‘Drawing No 1’ and ‘Drawing No 2’. Critically, Drawing No 2 provided an option for Metricon to use ‘quarry product’ as a base material under the slab.[79] Metricon adopted that option in constructing the slab.
[79]Structural Works Drawing No 2 — ‘Typical Setdown’.

The BBS report was highly critical of both the design and construction of the slab in many respects. In particular:

(1) BBS stated that the Structural Works Drawing No 2 specified an inappropriate use of compacted soil against the edge beam of the slab, which was inappropriate for the site. In any event, Metricon did not use the site drainage methods specified on Drawing No 2 and did not install any site drainage.[80]
[80]BBS report — [38]–[42].

(2) Structural Works should have specified the type of surface and sub-surface drainage and Metricon should have installed such drainage as specified.[81]
[81]Ibid [45].

(3) Structural Works omitted to provide comprehensive references to applicable CSIRO Building Technology Files concerning prevention of damage to dwellings, including:

(a) Building Technology File 19 (which covers topics such as adequate site preparation, drainage, compaction of soil, service trenches in close proximity to dwellings, water prevention under slabs);[82] and
[82]Ibid [48].

(b) Building Technology File 22 (which highlights the potential problems associated with water entry under footings and strongly recommends ground drainage be installed on reactive clay sites [such as the present]).[83]
[83]Ibid [49].

BBS concluded that the Structural Works drainage design was so deficient that it did ‘not constitute a design’ at all.[84]
[84]Ibid [52].

(4) The specification of quarry gravel as an optional base material under the slab was a defective design option, in breach of Building Code requirements:

There is no provision for gravel in filling materials in the BCA or AS 2870.
I found a layer of 30mm thick gravel beneath the slab …
Gravel is detrimental in the foundation material under waffle raft slabs for several reasons:
(a)Porous gravel allows water to enter under the slab causing both soil softening, or facilitating swelling and shrinkage of the foundation material.
(b)Porous gravel material cannot be compacted. Thus, there are always void spaces for water to enter.
(c)When soil is deposited around the edge beams, the gravel material is permanently submerged and water can flow under the slab.
(d)Drainage design and construction becomes compromised when there is porous gravel installed under a slab. Water from drainage trenches and adjoining sites can also enter under the slab in periods of soil saturation.[85]

(5)As a result of the defective specification and use of quarry gravel:
There is no practical way to remove gravel from beneath the slab. Thus, soil softening and ongoing movement will occur and be more pronounced at extreme weather events.[86]

[85]Ibid [56]–[58].

[86]Ibid [60].

BBS prepared a table demonstrating eight design breaches associated with the slab footings.[87]
[87]Ibid [91].

BBS prepared a table listing 12 construction defects related to the slab.[88]
[88]Ibid [92].

BBS also reported on numerous design and construction defects concerning the roof trusses of the house.[89]
[89]Ibid [170]–[174].

Exclusion 13 applies where the relevant liability is one ‘arising out of the rendering of … professional … service by the Insured or any error or omission connected therewith’. These are very wide words.[90] In Speno Rail Maintenance Australia Pty Ltd v Hammersley Iron Pty Ltd,[91] Wheeler J found that conduct ‘which was one ingredient of … liability’ was sufficient to constitute conduct arising out of the relevant matter.[92] As appears above, it is clear that the design defects were a central plank in the owners’ claims. I infer that those allegations formed a significant reason why Metricon compromised the owners’ claims by the terms of settlement. In these circumstances, no disentanglement is necessary for exclusion 13 to apply.
[90]Lumley General Insurance Ltd v Port Phillip City Council [2013] VSCA 367 [109]–[115] (Santamaria JA, Nettle and Weinberg JJA agreeing) citing Horsell International Pty Ltd v Divetwo Pty Ltd [2013] NSWSCA 368 [169]–[178] and Speno Rail Maintenance Australia Pty Ltd v Hammersley Iron Pty Ltd (2000) 23 WAR 291, 298 [11]–[12] (Malcolm CJ), 308–9 [65]–[68] (Ipp J), 319 [131] (Wheeler J).
[91](2000) 23 WAR 291.
[92]Ibid 319 [131].

I turn to consider whether the design services rendered by Metricon through Structural Works and Timbertruss, or which they failed to render, constituted professional services within the meaning of exclusion 13. In my opinion, they clearly did. In Chubb Insurance Company of Australia Ltd v Robinson,[93] the Full Federal Court considered a professional services exclusion in a directors and officers liability insurance policy in the context of a group of building companies. The Full Court’s statements set out below should be applied to the professional engineering services provided by Structural Works, and the design of the roof trusses by Metricon:

149… the professional services exclusion in the present case must relate to a narrower band of activity than the work that generally comprises or supports the delivery of building and construction activities by the Reed group of companies. If this were not so, the cover provided by the D&O policy would be inappropriately circumscribed. This is what the primary judge held ...
150It seems to us that the expression ‘professional services’ in the relevant exclusion clause in the present case means services of a professional nature furnished by RBG or one of its subsidiaries involving the application of skill and judgment by the person or persons who carried out the relevant activities on behalf of RBG or one of its subsidiaries being services which fall within the scope of a vocational discipline which is generally regarded as a profession.
151Thus, in our view, the professional services exclusion in the D&O policy in the present case operates to exclude from the cover provided under that policy, cover in respect of liability incurred by an insured under the policy (viz the relevant companies and/or their executives) for loss suffered by others as a result of acts or omissions on the part of such executives which acts took place in the course of the rendering of services (which services have the requisite professional character as explained at [150] above) by one or more of the companies in the Reed group of companies or their executives to a third party.
152This interpretation is consistent with [the trial judge’s] interpretation of the clause. … her Honour held that the obvious purpose of the exclusion was to exclude activities that are truly professional in nature, such as architectural design, engineering, surveying and quantity surveying. The clause was not intended to apply to the routine activities of Reed or of its executives. The provision of progress claims under the D&C Contract were routine activities and did not constitute the rendering of a professional service to St Kilda or to anyone else.[94]

[93](2016) 239 FCR 300.

[94]Ibid 333 [149]–[152] (emphasis added).

In this case, Structural Works rendered (or failed to render) professional engineering services in relation to the slab and associated drainage, and Timbertruss rendered (or failed to render) professional design architectural or engineering services in respect of the design of the roof trusses. Metricon’s liability to the owners for damage to the completed house arose out of the professional services rendered (or not) by Structural Works and Timbertruss on its behalf as subcontractors.

I conclude that exclusion 13 applies to exclude Metricon’s claims under the policy. However, in the event this conclusion is wrong and as other relevant exclusions are relied on by the Insurer, I will also consider the applicability of those exclusions. Before doing so, it is convenient to first consider what is included in the definition of Insured’s Products, as this definition is referred to in some of the relevant exclusions.

Is the house an Insured Product?

The definition of Insured’s Products appears above, as part of the definition of Products Liability.

The Insurer relies on the text of the definition of Insured Products, which includes:

any … products … manufactured, assembled … constructed, erected … sold…supplied … [and/or] distributed … by [Metricon] …(after such goods and/or products cease to be in the possession and/or control of the Insured).

The Insurer contends that the definition of Insured’s Product gives an expansive meaning to the term ‘product’. On its ordinary meaning, from the time of the handover both the components of the house, and the house as a whole, were in the owner’s possession and thus fell within the definition. This contention is supported by the following matters:

(1) the ordinary meaning of the word ‘product’, as contained in dictionaries. For example, the Oxford English Dictionary (‘[t]hat which is produced by any action, operation, or work … that which is produced commercially for sale’)[95] and in the Macquarie Dictionary (‘a thing produced by any action or operation, or by labour’).[96]
[95]J A Simpson and E S C Weiner (eds), The Oxford English Dictionary (Clarendon Press, 2^nd ed, 1989) vol XII, 565.
[96]Susan Butler (ed), Macquarie Dictionary (6^th ed, 2013) 1171.

(2) the policy definition of Business and Activities of the Insured, which states that Metricon’s first-mentioned business activity is that of ‘construction of dwellings’.[97]
[97]Renewal Schedule, page 5; Alteration Schedule, page 4.

(3) the following Agreed Facts, known to both parties when the policy was issued:

10.At all material times during 2007 and 2008, Metricon’s business was marketing and building for members of the public homes that could be built on the customer’s own land or could be built as part of a house and land package in Victoria, New South Wales, Queensland and South Australia. Metricon marketed and built homes according to a range of designs of floorplans and facades, including floorplans and façades which could be customised if the customer wished. The customer also selected finishes for items such as bricks, tiles and taps. The finishes could be selected as a ‘collection’, which could then be further customised. In 2007 and 2008, the Metricon range of finishes was marketed under the following collections:
(a)M1;
(b)The Collection;
(c)Metricon Signature.

11.The [house] was … was constructed using a floorplan design called ‘Ashton 28’. The ‘Ashton 28’ was a floorplan design which was marketed by Metricon during 2007 and 2008 to members of the public and Metricon customers. The ‘Ashton 28’ was one of approximately 100 floorplan designs marketed and built by Metricon for members of the public during 2007 and 2008.

Metricon contends to the contrary, as follows.

First, Metricon contends that ‘in normal usage’ a house is not described as a product. In relation to a house, the normal usage of the word product is to describe the materials and parts used during and for the purposes of construction of the house, and describes neither the whole of the completed house nor its component parts — such as the concrete slab, the timber framing, or the roof trusses.

Second, Metricon points to other parts of the policy which refer to ‘residential homes’, ‘premises which are leased or rented’ and other language describing houses without using the term ‘product’.

I do not accept either of these textual contentions. The words of the definition of Insured Product make it clear that the completed house, and each of its components, was intended to be included as a product. The contextual matters within the policy support this conclusion; including the write back provision referred to below. It is unnecessary to resolve any ambiguity by referring to the agreed facts which support the conclusion.

Third, Metricon relies upon authorities which it contends support its position.

The first relevant decision is Aspen Insurance UK Ltd v Adana Construction Ltd,[98] in which the English Court of Appeal considered a case involving the construction by an insured sub-contractor of concrete works designed to support a large tower crane to be used in the principal construction works. The crane collapsed, causing serious injury to the crane driver and serious damage to the crane itself. The sub-contractor (Adana) and others involved in the construction and design were sued by the crane driver. The cause of the crane’s collapse was unresolved at the time of the relevant hearing. If the failure was in design of the concrete base, that was not something for which Adana was responsible.[99] However, the facts may have turned out differently at trial and so a preliminary issue concerning Adana’s insurance coverage was determined in advance of trial.
[98][2015] EWCA Civ 176.
[99]Ibid [15].

Metricon contends that the write back provision should lead to no reduction of its claim. The Insurer contends that the write back provision requires the Court to reduce Metricon’s claim by the cost of demolishing and rebuilding all of the slab, the roof trusses and the workmanship defects. It contends that Metricon bore the onus of proving the amount of the necessary deductions in order to bring its claim within the Section 3 cover preserved by the write back provisions, and that it has failed to do so. On that basis, it contends that Metricon’s claim should be dismissed for want of proof.

I will deal first with Metricon’s contention, that the write back provision does not operate to deprive it of the whole of the relief it seeks. This contention is based on the Insurer’s acknowledgment that Metricon acted reasonably in settling the VCAT proceeding by the terms of settlement. In this respect, Metricon’s counsel contended that the Insurer’s acknowledgment meant that there was no obligation on the Court to disentangle the components of its claim by apportioning the settlement sum between the consequential loss or damage caused by the slab design and defects (which fall within the cover preserved by the write back provision) and the cost of demolishing and rebuilding the defective slab (which falls outside the cover preserved by the write back provision). Senior Counsel summarised this contention in the following way:

once the settlement is found to be reasonable, the time for trying to retrospectively dissect it to work out what goes in and what goes out [of the insurance cover preserved by write back provision] has passed.
The question of whether you can so distinguish between the component parts informs the question of whether it’s reasonable in the first place. Once you have decided it’s reasonable, that moment has gone and for good reason, because otherwise it’s a great inhibition on settling if you thereby give up your opportunity as an insured who’s been left alone by its insurer to do its own thing; why would an insured not be inhibited from settling for fear that it might not be able to disentangle? That’s a logical, practical and commercial reason, we say, why the law has gone the way it has, which is to say once the settlement is done it’s captured.[135]

[135]Emphasis added.

In support of its principal contention on this issue, Metricon referred the Court generally to statements in paragraph [8-510] of Derrington & Ashton,[136] which were said to support this position. However, that paragraph does not support Metricon’s contention. Although it contains statements to the effect that the amount of a reasonable settlement of a claim made for a liability which is covered by the relevant policy may establish the amount which an insurer is liable to pay, the learned authors continued and stated that payment of a settlement sum does not determine whether it was paid in respect of a covered liability:

Thus, liability incurred by way of settlement of a claim against [an insured] for damages for wrongful conduct is one method of establishing [the insured’s] liability under the policy. However, the establishment of liability in this way does not characterise its nature or determine whether it is of such a kind as to fall within [the terms of the policy].[137]

[136]D K Derrington & R S Ashton, The Law of Liability Insurance (LexisNexis Butterworths, 3^rd ed, 2013) vol 1, 1451–2 [8-510].

[137]Ibid 1452 [8–510] (citations omitted).

As authority for this proposition, the learned authors cited QBE Insurance (Aust) Ltd v CGU Workers Compensation (NSW) Ltd.[138] In that case, Beech-Jones J summarised the general approach in the following way:

The general position is that an insured under a liability policy can only recover against their insurer if they were actually under a liability to a third party on a proper analysis of the law and facts. A settlement does not suffice. The insured must demonstrate that it was or would have been liable. A reasonable settlement will normally be sufficient to establish the amount of the insured’s liability but not the liability itself. As noted in Zurich v GIO where there is conduct amounting to a repudiation of the insurance contract, especially conduct in which the insurer breaches the contract by denying liability and refusing to defend or settle, it may be sufficient if the insured can prove that the settlement with the injured person was reasonable. However the conduct must amount to a repudiation of the policy.[139]

[138](2012) 83 NSWLR 589.

[139]Ibid 598 [36] (citations omitted). See also Zurich Australian Insurance Ltd v GIO General Ltd [2011] NSWCA 47 [58].

There is no evidence that the Insurer repudiated the policy in respect of the owners’ claims. The agreed facts establish only that Metricon’s broker wrote to the Insurer on 6 June 2013 about ‘a number of slab claims’ similar to the claims later made by the owners. There is no evidence that the Insurer was informed of the VCAT proceeding or the terms of settlement. The only evidence is that, some six months after the terms of settlement, Metricon notified the Insurer of the owners’ claims and their resolution. In these circumstances, it is not open to conclude that the Insurer repudiated its obligations under the policy in respect of the owners’ claims prior to the terms of settlement being entered into. Metricon was not ‘left alone by the Insurer to do its own thing’.

Indeed, even if an insurer has wrongfully repudiated an insurance policy, that does not mean that the scope of cover provided by the policy is enlarged for the purposes of a damages claim based upon a reasonable settlement.[140]
[140]General Insurance Office of New South Wales v Crowley [1975] 2 NSWLR 78, 82.

In this case, there is no repudiation, and the relationship between the scope of the cover preserved by the write back provision and the scope of the owners’ claims and Metricon’s claims falls for consideration. The learned authors of Derrington & Ashton state the position as follows:

[1] if the insurer is wrong, its wrongful repudiation cannot enlarge the scope of the cover, [2] and if the settlement contains a component that is not covered, an appropriate deduction will be made in the assessment of the damages based on the settlement …[141]

[141]D K Derrington & R S Ashton, The Law of Liability Insurance (LexisNexis Butterworths, 3^rd ed, 2013) 1466 [8–521] (emphasis added) (citations omitted). Numbering added to aid comprehension.

The first aspect of the above-quoted statement has already been considered. The second aspect, which is italicised, is supported by citation of the decisions of North J in the Federal Court in Kernaghan v Corrections Corporation of Australia Staff Superannuation Pty Ltd[142] and Kernaghan v Corrections Corporation of Australia Staff Superannuation Pty Ltd (No 2)[143] (Kernaghan No 1 and Kernaghan No 2 respectively). The Insurer relies on those decisions.
[142][2006] FCA 2.
[143][2007] FCA 1040.

In Kernaghan No 1, the applicants were ex-members of a superannuation fund. They sued the superannuation trustee, two directors of the trustee, and their employer. The trustee and its directors were insured for liability against such claims; by CGU for part of the relevant period and by Chubb Insurance for the other parts of the relevant period during which liability arose. Liability was denied under both policies, and the trustee, its directors and the employer brought a cross-claim against CGU and Chubb seeking indemnity under the trustee’s liability policies.[144] North J held that the employer was not insured under the CGU policy.[145] This finding was not challenged on appeal. His Honour’s finding that the employer was not covered under the Chubb policy,[146] was set aside on appeal,[147] but that is not relevant for present purposes.
[144]Kernaghan No 1 [2006] FCA 2 [5].
[145]Ibid [91].
[146]Ibid [98].
[147]CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Pty Ltd [2008] FCAFC 173 [69].

In this context, the trustee, its directors and the employer settled the applicants’ principal claims for $275,000 plus taxed or agreed costs. The trustee paid these amounts.[148] At the same time, the trustee, its directors and the employer settled the cross-claim against Chubb for the sum of $500,000. They then entered into an apportionment agreement to the effect that the $500,000 paid by Chubb would first be applied in payment of the employer’s costs of defending the proceeding, then in payment of the directors’ costs and, finally, in payment of the trustee’s costs of defending the proceeding.[149] They then sought to proceed with their cross-claim against CGU seeking indemnity for the settlement sum and the costs paid to the applicants.
[148]Kernaghan No 1 [2006] FCA 2 [6].
[149]Ibid [7].

CGU agreed that, as between the parties (including the employer) the quantum of the settlement sum was reasonable, as was the amount of costs paid to the applicants.[150] CGU contended, however, that the settlement as a whole had not been shown to be reasonable as between it and the insured parties, because it should not be liable in respect of that part of the applicants’ costs which was attributable to their case against the employer, who was not insured under the CGU policy.[151] That contention was left open.[152] North J accepted, however, that CGU was not liable to indemnify the trustee in respect of the proportion of the costs paid to the applicants which was attributable to the claim against the employer.[153] The trustee, the directors and the employer contended that, if such a finding were made, the applicants’ costs of suing the employer should be taxed or otherwise determined and then deducted from the amount of costs paid by the trustee as part of the settlement.[154] As CGU had not been heard on this contention, North J ordered that the proceeding be re-listed for submissions on appropriate orders which should be made consequent upon his conclusions.[155]
[150]Ibid [89].
[151]Ibid [90].
[152]Ibid [91]–[92].
[153]Ibid [91].
[154]Ibid [92].
[155]Ibid.

In Kernaghan No 2, the trustee contended that, based only on the evidence led in the completed trial resulting in the reasons in Kernaghan No 1, the Court should conclude that the settlement was reasonable. Alternatively, the trustee contended that the onus lay on CGU to prove that the settlement was not reasonable and it had not done so. However, in the event that these arguments did not succeed, the trustee applied for leave to re-open its case to adduce relevant evidence as to apportionment of the applicants’ costs between respondents.[156]
[156]Kernaghan No 2 [2007] FCA 1040 [2].

North J considered and dealt with the application for leave to re-open on the basis that it was necessary for this to happen.[157] Conditional leave was initially granted.[158]
[157]Ibid [3]–[13].
[158]Ibid [13].

North J then considered whether it was ‘unreasonable for [the trustee] to saddle CGU with a settlement which included an element [the applicants’ costs of suing the employer] which was outside the indemnity provided by the policy.’[159] His Honour found that CGU should not be saddled with such a liability.[160] In reaching this conclusion, North J accepted the reasoning of Aikens J in Enterprise Oil Limited v Strand Insurance Company Ltd,[161] in particular the statement of Aikens J that:

Therefore, on principle, I think that it is open to an insured to assert and prove, by extrinsic evidence, that it is liable to a third party for a particular sum under a settlement that has been made and that the particular sum represents a loss covered by an insured peril under the liability policy. Equally, if an insured had made a settlement which purported to identify a particular sum as representing the quantum of liability for a particular type of loss that equated to an insured peril under the liability policy, the insurer would be free to challenge the insured’s liability to the third party, the quantum of the liability and whether the particular liability identified in the settlement did, in fact, constitute a loss covered by an insured peril under the policy.[162]

[159]Ibid [14].

[160]Ibid [15]–[20].

[161][2006] EWHC 58 (Comm) [166]–[171].

[162]Ibid [171] (my emphasis); Kernaghan No 2 [2007] FCA 1040 [19]–[20].

On this basis, North J granted the application for leave to re-open.[163] His Honour permitted the trustee to lead evidence of the separate costs incurred by the applicants in suing the trustee and the directors on the one hand and the employer on the other: ‘in order to establish that the settlement agreement included a liability which attracted the indemnity provided by CGU and was reasonable’[164] as between CGU and the trustee. The trustee tendered evidence from a costs expert on this issue. Taking the evidence as a whole, North J apportioned the costs paid by the trustee to the applicants between those referrable to their claims against it and the directors (covered by the policy) and those attributable to their claims against the employer (not covered).[165] The latter amount was deducted from the trustee’s claim under the policy, and judgment recovered for the balance.
[163]Ibid [13], [21].
[164]Kernaghan No 2 [2007] FCA 1040 [20].
[165]Ibid [32], [39].

CGU appealed against this aspect of North J’s reasoning in Kernaghan No 2. That appeal was dismissed.[166] CGU did not appeal against North J’s decision to give the trustee and the directors leave to re-open.
[166]CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Pty Ltd [2008] FCAFC 173 [16], [38], [45]–[51], [89].

North J added an obiter dicta postscript to his reasons for judgment in Kernaghan No 2, as to what the result of the case would have been if leave to re-open had not been granted. His Honour reviewed the authorities and concluded that the trustee had the onus of establishing that the settlement agreement was reasonable as between the trustee, the directors and CGU.[167] I agree with this conclusion. In these circumstances, in the absence of leave to re-open, North J would have dismissed the trustee’s claim for indemnity under the policy on the basis that:

the settlement as to costs was not reasonable because it included an obligation to pay the costs of the applicants of suing [the employer] and that liability was not one against which CGU was bound to indemnify [the trustee]. Further, at that point, [the trustee] had not led evidence which would have allowed the court to determine, even on a robust approach, the amount of the settlement which represented the applicants’ costs of suing the respondents other than [the employer] … Consequently, if [the trustee] were not permitted to reopen its case, it would have failed to discharge its onus and judgment would be given for CGU on this aspect of the case.[168]

[167]Kernaghan No 2 [2007] FCA 1040 [36]–[38], citing Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603; BNP Paribas v Pacific Carriers Ltd [2005] NSWCA 72 [14], ]17], [183]–[184], [187], [249].

[168]Kernaghan No 2 [2007] FCA 1040 [39].

Similar comments can be made about the position of Metricon in this case. The evidence before the Court does not enable the Court, even by robust approach, to identify that proportion of the settlement sum which relates to the cost of demolishing and rebuilding the slab (which is not covered under Section 3) for the purposes of deducting it from Metricon’s liability for the slab movement consequences (which is covered by the policy).

If North J’s obiter dicta comments were followed and applied here, the result would be that, although the settlement is acknowledged by the Insurer to be reasonable as between Metricon and the owners, because Metricon has failed to lead evidence which quantifies the amount of its claims which fall under the write back provision its claims would be wholly dismissed, and there would be judgment for the Insurer. I respectfully disagree with that approach. If exclusion 13 did not apply, Metricon would have made out a good claim for nominal damages for the Insurer’s wrongful denial of indemnity in breach of the policy. In circumstances where it is clear that Metricon has adduced evidence from which the Court can readily infer that it has suffered significant loss by reason of the Insurer’s total refusal to indemnify, that is an inadequate remedy; but the only one which the evidence allows the Court to grant. In this respect, the statements of Hayne J in Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd are applicable:

Placer undoubtedly bore the burden of proving not only that it had suffered damage as a result of Thiess Contractors’ breach of contract, but also the amount of the loss it had sustained. It goes without saying that it had to prove these matters on the balance of probabilities and with as much precision as the subject matter reasonably permitted.
It may be that, in at least some cases, it is necessary or desirable to distinguish between a case where a plaintiff cannot adduce precise evidence of what has been lost and a case where, although apparently able to do so, the plaintiff has not adduced such evidence. In the former kind of case it may be that estimation, if not guesswork, may be necessary in assessing the damages to be allowed. References to mere difficulty in estimating damages not relieving a court from the responsibility of estimating them as best it can may find their most apt application in cases of the former rather than the latter kind. This case did not invite attention to such questions. Placer sought to calculate its damages precisely.[169]

[169]Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd [2003] HCA 10 [37]–[38](emphasis in original) (citations omitted).

As can be seen from these statements, the fact that the missing evidence is within the power of a plaintiff to adduce, but has not been adduced, is a relevant factor in determining what approach the Court should adopt. In this case, it was well within Metricon’s power to adduce evidence as to the cost of both demolishing the slab (as to which it did call evidence) and the cost of re-building the slab (where it did not call evidence sufficient to enable the Court to do other than guess at the cost). In these circumstances, the authorities tend towards limiting a party in Metricon’s position to nominal damages.[170]
[170]See, eg, Aristocrat Technologies Australia Pty Ltd & Anor v DAP Services (Kempsey) Pty Ltd & Ors (2007) 157 FCR 564, 569–70 [35]–[39] (Black CJ and Jacobson J), 581–2 [100]–[103] (Rares J); TCL Airconditioner (Zhongshan) Company Ltd v Castel Electronics Pty Ltd (2014) 232 FCR 361, 405 [164] (Allsop CJ, Middleton & Foster JJ); Sklavos v Australasian College of Dermatologists [2017] FCAFC 128 [165]–[170] (Bromberg J), [179] (Griffiths J), [213] (Bromwich J).

In this case, the issue of the sufficiency of Metricon’s proof was raised during oral submissions. Unlike Kernaghan No 2, no application has been made for leave to re-open and call further evidence.

Conclusion and orders

For the above reasons, I conclude that the Section 3 insuring clause applies to Metricon’s liability to pay compensation to the owners for damage to the house, but exclusion 13 applies to defeat Metricon’s claims.

The proceeding will be dismissed. I will hear the parties as to the form of the Court’s judgment, and as to costs.

Schedule 1

Section 1

The Insurer(s) hereby agree, subject to the limitations, Exclusions, terms and Conditions hereinafter mentioned, that they will insure against all risks of physical loss or damage to:

(a)Property Insured as defined for Section 1 (a) owned by the Insured or for which the Insured may be responsible (including existing structures, but only if shown specifically as insured in the Schedule) or, prior to any Occurrence for which claim may be made hereunder, have assumed responsibility, used or to be used in part of or incidental to the Construction Operations in respect of Occurrences happening during the Period of Insurance wherever the said property may be located in the Geographical Limits or whilst in transit within and between any place or places therein;
(b)…

Schedule 2

Section 2 Applicable to Insured Property under Section 1(a) and (b) only

The lnsurer(s) hereby agree, subject to the limitations, Exclusions, terms and Conditions hereinafter mentioned, that they will indemnify the Insured in respect of their legal liability under the terms of any contract maintenance or defects liability clauses of any Insured Contract subject· to this clause, for loss and/or damage to the Property Insured as defined for Section 1(a) of this policy which may occur during any such maintenance or defects liability period, or extension thereof.

Schedule 3

Section 3 Insuring Clause

The Insurer(s) hereby agree, subject to the limitations, Exclusions, terms and Conditions hereinafter mentioned, that they will:

pay on behalf of the Insured, all sums which the Insured shall become legally obligated to pay as compensation for:

(a) Personal Injury suffered or alleged to have been suffered by any person or persons;

(b)loss of and/or damage and/or destruction of property and/or the Loss of Use thereof;

in respect of and/or arising out of Occurrences happening anywhere in the Geographical Limits during the Period of Insurance in connection with the Business and Activities of the Insured detailed in the Schedule.

defend at their expense in the name of and on behalf of the Insured, any claim or suit against the Insured to recover compensation in respect of and/or arising out of Occurrences covered hereby.

pay, in addition to the Limit of Liability expressed in the Schedule and incurred with the prior consent of the Insurer:

(a) for immediate medical and/or surgical aid and/or temporary repair and/or shoring up of property made necessary by any Occurrence covered hereby;

(b) all expenses incurred by or with the permission of Insurer(s) for investigation, negotiation and defence of claims and suits;

(c) all expenses incurred by or with the permission of Insurer(s) incidental to the appeal from any judgement against the Insured, and all costs taxed against the Insured, in any suit for damages on account of any judgement in such suits;

(d) all expenses incurred by Insurer(s) or the Insured for representation of the Insured at any Coroners Inquest or Court of Criminal Justice, plus all expenses incidental to the apply from any judgement;

Schedule 4

Relevant definitions

Business and Activities of the Insured

The Business and Activities of The Insured stated in the Schedule includes (unless specifically excluded) all the Insured’s businesses, occupations and/or activities.[171]
[171]The Schedule relevantly provides that the Business and Activities of the Insured include the business and activities of ‘residential house builders’.

...

Completed Operations

Completed Operations means Construction Operations that have been completed, handed over to the Principal/Owner and where any maintenance/defects liability periods have expired.

Completed Operations also includes contracts not designated as Insured Contracts in the Schedule provided that the contracts have been completed, handed over to the Principal/Owner and where any maintenance/defects liability periods have expired.[172]
[172]Emphasis added.

Construction Operations

Construction Operations means all Insured Contracts entered into between parties comprising the Insured (including principals and/or owners and/or Sub-Contractors) in respect of which the Contractor is contractually obligated to effect insurance and/or work of every description carried out by or for the Contractor.

Insured

Insured means:

(a) The Insured named in the Schedule and all Subsidiary Companies (referred to as the Contractor); and/or

(b) Joint Ventures (incorporated or not) in which the Contractor is a co-venturer and is responsible for arranging Insurance therefore; and/or

(c) Principals and/or owners; and/or

(d) Sub Contractors engaged by any of the above; and/or

(e) directors, officers and employees of any of the above, but only in respect of the Business and Activities of the Insured.

Any other company of which the Insured assumes management together with all other parties for whom the Insured is required under contract to provide insurance protection are also included as an Insured.

Loss of Use

Loss of Use also includes economic loss suffered by any person or party consequent upon loss of and/or damage to and/or destruction of and/or loss of use of any other person’s or party’s property.[173]
[173]Emphasis added.

Occurrence

For Sections 1 and 2, Occurrence means an event, or continuous or repeated exposure to conditions, which results in loss of and/or damage to and/or destruction of property, provided the Insured did not intend or expect that such loss would result.

For Section 3, Occurrence means an event, or continuous or repeated exposure to conditions, which results in:

(a) Personal Injury suffered or alleged to have been suffered by any person or persons;

(b) loss of and/or damage to and/or destruction of property and/or the Loss of Use thereof;

provided the Insured did not intend that such Personal Injury or loss, damage, destruction or Loss of Use would result.

All exposure to substantially the same general conditions shall be deemed one Occurrence under Sections 1, 2 & 3.[174]
[174]Emphasis added.

Products Liability

Products Liability means:

(a) Personal Injury; and/or

(b) Loss of and/or damage to and/or destruction of property and/or Loss of Use thereof

arising out of the Insured’s Products or any reliance or representation or warranty made at any time in respect thereto, including liability arising out of the Trade Practices Act, 1974 in respect of the Insured’s Products or any amendments thereof.

Insured’s Products means any goods and/or products (including food and/or drinks) manufactured, assembled, processed, grown, extracted, imported, constructed, erected, installed, altered, repaired, serviced, treated, sold, bottled, labelled, supplied, hired, leased, exchanged, and/or transport[ed] and/or distributed by the Insured including any container thereof (after such goods and/or products cease to be in the possession and/or under the control of the Insured).[175]
[175]Emphasis added.

Property Insured Sections 1(a) and 2

All property of every description (unless otherwise excluded) having any connection with the Insured Contracts including but not limited to permanent contract works, temporary works, formwork, scaffolding, props and the like, all associated and ancillary works, materials associated therewith, contract consumables and all other materials, including the complete reconstitution of contract records, media, core samples and the like, architects’, engineers’ surveyors’ and other professionals’ fees, owner supplied materials and equipment, temporary buildings, camp buildings and all other Site buildings and their contents, removal of debris, expediting expenses including all increased cost of working, employees’ effects, including any work of reconstruction, rectification or repair of any of the aforementioned Property Insured.

Where the insured is required to Insure such property and subject to declaration and an additional premium being paid, Insurer(s) will include as Property Insured:

Existing structures including all real property of every kind and description and Improvements and ancillary structures and all other structures and improvements intended to be maintained or not and all other materials including all items mentioned above.

Property Insured Section 1(b)

All plant and/or equipment (including spare parts and tools) of every kind and description owned and/or used by the Insured and/or for which the Insured may be responsible, or, prior to any Occurrence for which a claim may be made hereunder, have assumed responsibility.

Schedule 5
Section 3 Relevant exclusions

Exclusions 6, 7, 13, 15 and 17 exclude Metricon’s liability:

Exclusion 6arising out of Completed Operations and Products Liability for loss or damage to property which formed part or all of the Insured’s construction contracts or goods or products; But this exclusion 6 shall be limited to the part which is defective or deficient and shall not apply to any other part or parts of such construction contracts or goods or Products lost or damaged in consequence thereof.
Exclusion 7 for loss of use of or for the repairing or replacing or recalling of any defective product(s) or any part(s) thereof used or supplied by the Insured, except to the extent that cover is provided for in exclusion 6 of Section 3 of this policy;
Exclusion 13 but not limited to arising out of the rendering of or failure to render professional advice or service by the Insured or any error or omission connected therewith provided that this exclusion 13 does not apply to the rendering of or failure to render professional medical advice by medical persons employed by the Insured in connection with the Business and Activities of the Insured.
Exclusion 15 for claims in respect of:
(a)Property Damage to the Insured's Products, or for any costs or expenses incurred in repairing, replacing or making any refund in respect of the Insured's Products or work completed by the Insured;
(b)Personal Injury or Property Damage occurring as a consequence of the failure of any Products to cure, alleviate, prevent, monitor, detect, eliminate or retard any Personal Injury or Property Damage, or any other product guarantee as expressly or impliedly warranted or represented by the Insured, or which is imposed by law or statute;
(c)any costs or expenses arising from the recall of any Products;
(d)damages claimed for the recall, inspection, repair, replacement or loss of use of Insured Products or work completed by or for the Insured or of any property of which the Insured Products or work form a part, if such Products, work or property are recalled from the market or from use because of any known or suspected defect or deficiency therein;
(e)Personal Injury or Property Damage caused by or arising out of Products exported to the United States of America or the Dominion of Canada or any territory coming within the jurisdiction of the courts of the United States of America or the Dominion of Canada.

Exclusion 17 for any obligation assumed by the insured under any agreement or contract, except to the extent that:
(a)the liability would have been implied by law;
(b)the liability arises from a provision in a contract for lease of real or personal property, other than a provision which obliges the Insured to effect insurance or provide indemnity in respect of the subject matter of the contract;
(c)the liability is assumed by the Insured under a warranty of fitness or quality as regards the Insured’s Products;
(d)the obligation is assumed under a construction contract in the normal course of the Business and Activities of the Insured, under agreements specified in the Schedule.

[2017] VSC 749

12 December 2017