R & B Directional Drilling Pty Ltd (in liq) v CGU Insurance Limited (No 2)

The applicants, R & B Directional Drilling Pty Ltd (in liquidation), sought to enforce a commercial general liability insurance policy issued by CGU Insurance Limited. The applicants, who were in liquidation, argued that the policy should cover their liability to Longfield, which arose from a construction subcontract. The dispute centred on whether the applicants were entitled to payment under the policy for the defective works performed by R & B, which resulted in significant costs to Longfield. The applicants contended that the policy should cover the costs of correcting the defective works, while CGU Insurance argued that the policy did not cover such costs.

The primary legal issues before the court were whether the policy covered the costs associated with correcting defective works, and whether the tunnel in question, which was in the physical control of the applicants, qualified as "property in physical or legal control" under the policy. Additionally, the court needed to determine whether the exclusion for faulty workmanship and the exclusion for contractual liability applied to the situation. The court had to interpret the terms of the insurance policy, including the definitions of "injury," "physical injury," and "property damage," and assess whether the applicants' liability to Longfield fell within the coverage provided by the policy.

The court found that the policy did not cover the costs associated with correcting defective works, as the tunnel in question was in the physical control of the applicants, and the policy excluded coverage for property in the physical or legal control of the insured. The court further held that the exclusion for faulty workmanship and the exclusion for contractual liability applied to the situation, as the applicants' liability to Longfield resulted from defective works performed under the subcontract, which fell within the ordinary limits of liability. The court emphasised that insurance coverage is not triggered where there is no physical injury to tangible property, and that the policy was not intended to cover the costs associated with repairing or replacing defective work.

The application was dismissed with costs. The court's decision highlights the importance of carefully interpreting insurance policies and the limitations of coverage, particularly in relation to defective works and contractual liability. The court's findings underscore the distinction between liability insurance and performance bonds, and the need for clear policy wording to avoid ambiguity.