Royal Sun Alliance Insurance Australia Ltd v Mihailoff & Mihailoff No. Scciv-01-858

ROYAL SUN ALLIANCE INSURANCE AUSTRALIA LTD
v MIHAILOFF AND MIHAILOFF
[2002] SASC 32
Full Court: Prior, Nyland and Gray JJ

PRIOR J: Appeal by leave from a decision of a single judge of this Court substantially affirming a magistrate’s judgment in favour of the respondents.
The respondents had contracted with a builder to carry out building work on their house property. At the same time, they entered into a contract of insurance with the appellant. The contract was entitled “Statutory Cover Policy”. It purported to comply with Div 3 of Pt 5 of the Building Work Contractors Act 1995.
The respondents succeeded in enforcing a statutory warranty identified in s 32 of the Act. Besides awarding the respondents a sum in relation to that breach of statutory warranty, an arbitrator later published a second award in relation to costs. The builder was ordered to pay the respondents’ costs and disbursements.
The builder becoming insolvent, the respondents claimed that they were unable to recover their loss from the builder by reason of its insolvency. In the Magistrates Court the appellant insurer was held liable to pay the respondents’ legal and associated costs incurred in establishing the breach of statutory warranty. Apart from an award of interest of $699, a single judge of this Court affirmed the magistrate’s decision.
The appellant’s case before the Magistrates Court and the single judge was that whilst the awards had been made and that the total of the awards was due by the builder to the respondents, that sum not being recoverable because of the builder’s insolvency, the respondents were limited to the award in respect of the breach of statutory warranty. The appellant maintained it was not liable in respect of the arbitrator’s second award made for costs. It also denied any liability to pay interest with the appellant’s liability being reduced because of an obligation to pay a deductible of $400. The award of interest is set aside. It is not disputed before this Court that the claim has to be reduced because of the valid requirement that the respondents pay the first $400 of each claim under the policy.
In the Magistrates Court, the magistrate was of the view that reg 19 of the Building Work Contractors Regulations 1996 supported the plaintiffs’ claim for costs as well as the first claim in relation to a breach of statutory warranty. The single judge was of the opinion that the regulation did not assist in the construction of a policy of insurance. In the view of the single judge the regulation, like the Act, was silent on the question of costs. The single judge’s view was that the respondents’ entitlement to recover costs under the policy of insurance had to arise from the policy itself. As to that, the single judge said:-
“The policy provides that the (appellant):
‘Will at our option make good or pay you your loss resulting from –
· non-completion of the building work because of insolvency death or disappearance of the builder or
· your inability to enforce or recover under a statutory warranty in respect of the building work because of the insolvency death or disappearance of the builder.’
In this case the (respondents)’ entitlement to costs arises if the policy requires the (appellant) to pay costs, being their loss resulting from their inability to enforce or recover under a statutory warranty in respect of the building work because of the insolvency of the builder.
The policy does not mention any costs incurred by an owner in attempting to enforce or recover under a statutory warranty or in petitioning for the insolvency of the builder.
The appellant will be obliged to pay costs if the ‘loss’ includes costs.
The policy provides for limits of indemnity, exceptions and a deductible. It provides for the limitations allowed in Regulation 19 and for the insurer’s rights of subrogation. Relevantly it provides:
‘4If we pay a claim, we are subrogated to your rights against any party in relation to the claim. You must not exclude or limit your rights against any such party. If you do, we will not pay a claim to the extent we can no longer recover from that other party because those rights are affected.
10We may conduct or take over any legal action in connection with any claim and compromise and settle it as we wish. However, we must ensure that any claim you may have against another party and to which we are not subrogated is not adversely affected.’”
The single judge was of the opinion that there were two matters that made the construction arrived at by the magistrate correct. First, condition 10 contemplated that the insurer may conduct or take over any legal action in connection with any claim the subject of an indemnity. The perils insured against were the non-completion of the building work or the inability to enforce or recover under the statutory warranty. If the insurer were to conduct or take over litigation relating to a statutory warranty it would thereby meet the costs of the insured. In the single judge’s view, that suggested that the policy contemplated the (insured’s) costs in enforcing the statutory warranty would be met.
Secondly, the single judge said that:
“a statutory warranty can only be enforced by arbitral or legal proceedings. An insured could not make a claim under the policy without being able to satisfy the insurer that they are unable to enforce or recover under a statutory warranty. That can only be satisfied by establishing that the insured cannot enforce the statutory warranty or cannot recover under the statutory warranty. The establishment of either claim, of course, necessarily means the insured would incur costs.”
The single judge then said that, in his opinion:
“... the policy covers all losses resulting from the breach of the statutory warranty, subject to the policy limit, arising out of the insured’s inability to enforce or recover under that statutory warranty, including those incurred in proving the breach of the statutory warranty.
In other words, in my opinion, the word ‘loss’ in the policy includes the costs incurred by the insured in establishing, first the breach of the statutory warranty and, secondly the inability to enforce or recover under it by arbitral or legal proceedings.”
The single judge’s view was that the policy contemplated the insured’s costs in establishing the breach of the statutory warranty and in attempting to enforce or recover under that warranty by arbitral or legal proceedings would also be met in circumstances where the builder became insolvent.
In this appeal the appellant says that the loss claimed by the respondents is not a loss “resulting from an inability to enforce or recover under a statutory warranty in respect of building work because of the insolvency of the builder”. The submission is that the loss resulted from an inability to recover legal costs payable under the terms of the arbitration agreement.
It is not disputed that, by the policy, the insurers undertook to make good or pay the “loss resulting from ... (the respondents) inability to enforce or recover under a statutory warranty in respect of the building work because of the insolvency of the builder”. Nevertheless, the loss claimed, being the costs of the arbitration, did not result from any inability to enforce or recover under a statutory warranty in respect of building work.
The submission was that if the award for breach of warranty had been satisfied leaving the costs outstanding it would be more readily apparent that the costs could not be characterised as a loss resulting from inability to recover under a statutory warranty. Similarly, if the dispute was resolved in a no cost jurisdiction, the respondents’ liability to their solicitors could hardly be characterised as a loss resulting from the inability to recover under a statutory warranty because of the insolvency of the builder. The policy of insurance in this case was said to be limited to loss resulting from an inability to enforce the statutory warranty. Properly understood, the insurance was building insurance not litigation insurance.
Whilst the single judge was influenced by the provisions of the policy allowing subrogation, the insurer’s liability to pay costs was said to arise from the exercise of the right of subrogation and not by reason of the term of the policy, by which the insurers undertook to make good or pay losses resulting from an inability to enforce or recover under a statutory warranty in respect of the building work because of the insolvency of the builder. The submission was that for this reason, the single judge erred in finding that conditions 4 and 10 of the policy suggested an insured’s costs in enforcing a statutory warranty are covered by the policy. The question whether costs are recoverable was not determined by the reality that costs might be incurred. A construction of the text of the policy is involved. That does not support the respondents receiving an award for costs.
The respondents’ submission was that the single judge’s approach was correct. The undertaking to make good or pay losses resulting from an inability to enforce or recover under a statutory warranty because of the insolvency of the builder was to be contrasted with the wording of the policy provided to the builder, which spoke only of rectifying or paying the cost of rectifying building work requiring rectification as a result of the builder’s breach of a statutory warranty in carrying out the building work. The submission was that the fact that the insurer, in the owner’s policy, chose to use the wider expression of paying loss resulting from an inability to enforce or recover under a statutory warranty indicated that the insurer contemplated meeting claims for costs going beyond the costs of rectifying actual building work. The concept of loss resulting from inability to enforce or recover under a statutory warranty contemplated that the insured would attempt to enforce and recover under the statutory warranty. This had occurred. The inability to recover the award for costs was said to be clearly a loss to them and a loss due to the their inability to recover under the statutory warranty.
I agree that the interpretation proposed by the respondents is consistent with the remedial nature of the legislation, which calls for insurance. Significantly, s 35 of the Building Work Contractors Act identifies it as essential for a policy of insurance in relation to building work complying with the demands of the Act to insure persons who are or may become entitled to the benefit of a statutory warranty in respect of building work, “against the risk of being unable to enforce or recover under the statutory warranty by reason of the insolvency ... of the building work contractor”. Section 35 also speaks of insuring against the risk of loss resulting from non-completion of the building work in the case of building work performed by the building work contractor on behalf of some other person.
It was conceded before this Court that the difference in language within par (a) and par (b) of s 35(1) did not generate any relevant distinction. Accepting that, it seems to me that an obligation to insure against the risk of being unable to enforce or recover under the statutory warranty by reason of the insolvency of the building work contractor necessarily extends to the insurance having to embrace costs associated with enforcing or recovering under the statutory warranty. I think the respondent is correct in the submission that the provisions within s 35 contemplate the enforcement and recovery under the statutory warranty and an insurance against the risks associated with being unable to do either.
I agree with the single judge. The failure to indemnify the insured for the costs of recovering under a statutory warranty would constitute a breach of the policy. It would also constitute a failure to have the terms of the policy meet the demands of s 35 of the Act.
I would therefore allow this appeal only to the extent necessary because of the provision in the policy requiring the respondents to pay the first $400 of each claim.
NYLAND J In my opinion the appeal should be allowed for the reasons expressed by Gray J. I agree with the orders he has proposed.
GRAY J This is an appeal from a judge of this Court, affirming a magistrate’s decision. The claim relates to a building contract and the recovery of legal costs from an insurer.
Background
At issue is the construction of an insurance policy entered into pursuant to the Building Work Contractors Act 1995 (SA) and in particular whether the definition of “loss” under the insurance policy is wide enough to include legal costs incurred by an insured in proceedings against a builder. This requires a consideration of the meaning of the legislation and of the wording of the policy.
The Facts
The respondents Victor and Dianne Mihailoff (“the insured”) were the owners of a house in Craigmore, South Australia (“the property”). In July 1998 the insured contracted with a builder Ash Home Improvements Pty Ltd “the builder”) to carry out alterations and additions to the property. The insured also entered into an insurance contract with the appellant, Royal & Sun Alliance Insurance Australia Limited (“the insurer”).[1] The insurance contract was entitled “Statutory Cover Policy” (“the policy”) and purported to comply with section 35 of the Act.
[1] The insurance was arranged by the builder.
Section 35 provides:
“(1) A policy of insurance in relation to building work complies with this Division if-
(a)    it insures each person who is, or may become, entitled to the benefit of a statutory warranty in respect of the building work against the risk of being unable to enforce or recover under the statutory warranty by reason of the insolvency, death or disappearance of the building work contractor; and
(b)    in the case of building work to be performed by the building work contractor on behalf of some other person – it insures that person against the risk of loss resulting from non-completion of the building work by reason of the insolvency, death or disappearance of the contractor; and
(c)    any limitation son the liability of the insurer under the policy conform with the regulations; and
(d)    it otherwise conforms with the requirements of the regulations.
(2) A person who is entitled to the benefit of a statutory warranty in respect of building work in relation to which a policy of insurance has been taken out under this Division (or under Part 5 of the repealed Act) is entitled to sue on the policy in his or her own right.”
The policy required that the builder make good or compensate the insured for loss resulting from an inability to enforce or recover under a statutory warranty brought about by the builder’s insolvency, death or disappearance. The definition of “statutory warranty” under the policy was the same as that in section 32 of the Act which provides:
“(2) The following warranties on the part of the building work contractor are implied in every domestic building work contract:
(a)    a warranty that the building work will be performed in a proper manner to accepted trade standards and in accordance with the plans and specifications agreed to by the parties;
(b)    a warranty that all materials to be supplied by the contractor for use in the building work will be good and proper;
(c)    a warranty that the building work will be performed in accordance with all statutory requirements;
(d)    if the contract does not stipulate a period within which the building work must be completed – a warranty that the building work will be performed with reasonable diligence;
(e)    if the building work consists of the construction of a house – a warranty that the house will be reasonably fit for human habitation;
(f)     if the building owner has expressly made known to the contractor, or an employee or agent of the contractor, the particular purpose for which the building work is required, or the result that the building owner desires the building work to achieve, so as to show that the building owner relies on the contractor’s skill and judgment – a warranty that the building work and any materials used in performing the building work will be reasonably fit for that purpose or of such a nature and quality that they might reasonably be expected to achieve that result.”
The insured claimed that the statutory warranties constituted implied terms of the building contract pursuant to section 32 of the Act. They further claimed that the builder had breached the warranties. It was said that the building work was not performed in a proper manner, to acceptable trade standards or in accordance with the plans and specifications.
The insured referred the matter to arbitration. The builder denied that it was in breach of the statutory warranties and disputed the claim.
The arbitrator found in favour of the insured and made two separate awards. The first, dated 18 February 2000, related to the breach of statutory warranties and was in the amount of $11,658. The second, dated 30 March 2000, required the builder to pay the insured’s costs and disbursements in the amount of $17,379.55. In total the two awards required the builder to pay $29,037.55[2].
[2] The award carried interest
On 24 March 2000 an administrator was appointed to the builder. The insured subsequently claimed that they were unable to recover their loss as a result of the builder’s insolvency. They claimed against the insurer in respect of both awards. The insurer accepted the claim with respect to the award for breach of statutory warranties but rejected the claim with respect to the award for costs.
The insured issued proceedings in the Adelaide Magistrates Court. They claimed that the insurer was liable to provide indemnity under the terms of the policy for both the award with respect to the breach of statutory warranties and the award with respect to costs and disbursements.
The insurer admitted liability for the award in relation to the breach of statutory warranties. However, it said that it was not liable for the deductible $400.00. It denied liability for the award in relation to costs and disbursements.
At first instance, the learned magistrate (“the magistrate”) gave judgment in favour of the insured. After examining the terms of the Act, the magistrate considered that parliament had intended to provide consumer protection and indemnity in cases such as the present. The magistrate also considered the terms of the policy and concluded that it was based on the principle of indemnity under which:
“the insured must be restored, subject to the terms and conditions of the policy, to the financial position which he enjoyed immediately before the realisation of the peril insured against.”[3]
[3] Mihailoff v Royal & Sun Alliance Insurance Australia Limited [2001] SAMC at 8.
The insurer appealed to a single judge of this Court. As earlier observed in substance the appeal was dismissed.
The learned judge (“the judge”) based his decision on an interpretation of the policy. He held that it covered:
“all losses resulting from the breach of the statutory warranty… arising out of the insured’s inability to enforce or recover under that statutory warranty, including those incurred in proving the breach of the statutory warranty.”
The insurer has now appealed to this Court.[4]
[4] Leave to appeal was granted by the judge.
The Grounds of Appeal
It was complained that the judge:
-erred in finding that the insurer’s liability under the terms of the policy extended to the legal costs incurred by the insured.
-erred in reasoning that subrogation conditions of the policy suggested that an insured’s costs in enforcing a statutory warranty would be met.
-       erred in considering:
.       that a statutory warranty could only be enforced by arbitral or legal proceedings;
.       that such enforcement necessarily meant that the insured would incur costs; and
.       that these considerations assisted in the proper construction of the terms of the policy.
- erred in construing the policy to include an indemnity as to legal costs.
-       should have found that:
.       the policy cover was limited to the costs of rectification and other damages awarded in respect of a breach of the statutory warranties.
.       such cover accorded with the terms of the Act.
-erred in not reducing the liability of the insurer to bring to account the deductible of $400.00.[5]
[5] This ground of appeal was conceded.
Issues on Appeal

On appeal counsel for the insurer’s primary submission related to the scope of cover provided. It was submitted that the arbitration costs could not be characterised as loss resulting from an inability to enforce a statutory warranty but were properly described as loss resulting from an inability to recover legal costs payable under the terms of an arbitration agreement. It was said that the loss claimed by the insured was not covered by the policy as it was not loss
“resulting from an inability to enforce or recover under a statutory warranty …because of the insolvency of the builder”.
Counsel for the insured submitted that the wording of the policy, “loss resulting from your inability to enforce or recover under a statutory warranty”, raised two considerations: the policy contemplated that the insured would attempt to enforce the statutory warranty and that claims for legal costs and disbursements beyond the costs of rectifying building work would be covered.
The insured said that this construction of the policy was consistent with the scheme and remedial nature of the Act. It was contended that the intention of the Act would be frustrated unless the costs of enforcing a statutory warranty were recoverable.
Examination of the Issues
The Building Work Contractors Act 1995
It was accepted by counsel for both parties that the relevant clauses of the policy were directly linked to the terms of the Act. This is evidenced by the fact that the terms of section 35 were virtually mirrored in the policy:
.The policy required the insurer to “make good or pay you your loss resulting from your inability to enforce or recover under a statutory warranty…because of the insolvency death or disappearance of the builder.”
.Section 35 insured against “the risk of being unable to enforce or recover under the statutory warranty by reason of the insolvency, death or disappearance of the building work contractor.”
Given this close similarity any interpretation of the policy initially requires consideration of the proper construction of the Act. What “loss” was the Act intended to cover?
The relevant sections of the Act are section 32 (statutory warranties), section 34 (obligation to insure) and section 35 (nature of the policy). Regulation 19 provides limitations on an insurer’s liability[6].
[6] “19. (1) The following are the only permissible limitations on the liability of the insurer under a policy of insurance under Division 3 of Part 5 of the Act:
(a)a limitation under which the insurer is not liable for the first $400.00 (or some stipulated lesser amount) of each claim;
(b)a limitation under which the total amount that the insurer is liable to pay in relation to building work or the non-completion of building work at a particular site is fixed at not less than $80 000.
(2) A policy of insurance under Division 3 of Part 5 of the Act-
(a)must contain a clause allowing a claimant at least 90 days (from the date on which the claimant becomes aware of the grounds for the claim) in which to make the claim; and
(b)must not confer any right on the insurer to avoid liability on the ground of misrepresentation or non-disclosure on the part of the building work contractor or on any similar ground.”
These provisions are silent with respect to costs. As a result the extent of the cover provided must be inferred from the provisions of the Act and from the terms of the policy.
One of the aims of the Act was to minimise the number of building disputes that proceeded to court. Another evident purpose was to provide a level of consumer protection. However the second reading speech does not suggest that parliament envisaged that such protection would extend to provide an indemnity to insured parties for legal costs.[7]
[7] Footnote reference to 2nd reading speech
The scheme of the Act was to regulate the building industry and contracts of building insurance. It does not evidence an apparent intention to provide litigation insurance.
Interpreted narrowly “loss” is restricted to the costs of rectifying the building work, and does not extend to legal costs. Such an interpretation is consistent with the legislative scheme.
Additional support for this interpretation of “loss” comes from the penal nature of the Act’s provisions. Builders are exposed to pecuniary penalties. Under section 34 of the Act, a builder must not perform building work unless covered by an insurance policy that complies with the requirements set out in section 35. Failure to comply with this obligation can result in a fine of $20,000. Section 34 is in the following terms:
“A building work contractor must not perform building work to which this Division applies unless-
(a)    a policy of insurance that complies with this Division is in force in relation to that building work; and
(b)    in the case of building work to be performed by the contractor under a domestic building work contract – the building owner has been provided with a certificate that evidences the taking out of that policy of insurance and complies with the requirements of the regulations.
Maximum penalty:    $20 000.”
At common law where an Act imposes penal obligations, any ambiguity of language in the provisions of the Act “ought not to be construed as extending any penal category”.[8] If an Act is to penalise conduct, it ought to make clear the conduct that is to be penalised.[9] The provisions of the Act do not evince a clear intention that loss includes legal costs. There is ambiguity. The Act should be construed not to extend the penal category. The narrow construction of “loss” is to be preferred.
The Policy
[8] See The King v Adams (1935) 53 CLR 563 at 567-568, per Rich, Dixon, Evatt and McTiernan JJ: “No doubt, in determining whether an offence has been created or enlarged, the Court must be guided, as in other questions of interpretation, by the fair meaning of the language of the enactment, but when that language is capable of more than one meaning, or is vague or cloudy so that its denotation is uncertain and no sure conclusion can be reached by a consideration of the provisions and subject matter of the legislation, then it ought not to be construed as extending any penal category.” This was confirmed by Gibbs J in Beckwith v R (1976-77) 12 ALR 333 at 339: “The rule formerly accepted, that statutes creating offences are to be strictly construed, has lost much of its importance in modern times. In determining the meaning of a penal statute the ordinary rules of construction must be applied, but if the language of the statute remains ambiguous or doubtful the ambiguity or doubt may be resolved in favour of the subject by refusing to extend the category of criminal offences. The rule is perhaps one of last resort.” See also Deming No 456 Pty Ltd & Ors v Brisbane Unit Development Corporation Pty Ltd (1983) 50 ALR 1 at 15; Waugh v Kippen & Anor (1985-86) 64 ALR 195 at 200; Chew v R (1992) 107 ALR 171 at 174. It was held that the same rules of construction apply to Acts imposing pecuniary penalties, as do to Acts creating criminal offences. See Trade Practices Commission v TNT Management Pty Ltd & Ors (1984-85) 58 ALR 423 at 472.
[9] See Dickenson v Fletcher LR 9 CP 1, at 7; per Brett J: “Those who contend that a penalty may be inflicted, must show that the words of the Act distinctly enact that it shall be incurred under the present circumstances. They must fail, if the words are merely equally capable of a construction that would, and one that would not, inflict the penalty.” See also Lyons v Smart (1908) 6 CLR 143 at 157; Waugh v Kippen and Another (1986) 64 ALR 195 at 200-201.
The construction of the policy is to be considered having regard to the interpretation of the legislative provision. The relevant terms of the policy are:
“…subject to the terms of the policy, we, the insurers, will at our option make good or pay you your loss resulting from -
.non-completion of the building work because of the insolvency death or disappearance of the builder or
.your inability to enforce or recover under a statutory warranty in respect of the building work because of the insolvency death or disappearance of the builder.”
In the circumstances of this case the loss must result from the insured’s inability to enforce or recover under the statutory warranty because of the insolvency of the builder.
Counsel for the insurer submitted that the insured’s loss did not result from an inability to enforce or recover under a statutory warranty, but rather from a costs order made under a separate arbitration agreement. It was said that the costs were a result of the determination of a dispute about whether there had been a breach of statutory warranty and the consequences of any breach. It was further submitted that the loss must be consequential on the builder’s insolvency. The costs were incurred during the arbitration process, before the builder became insolvent. It was said that it follows that a finding that the loss “resulted from” the insolvency of the builder could not be sustained. I accept these submissions.
The policy makes no reference to the issue of costs. Given the earlier conclusion that “loss” is to be construed narrowly under the Act, and that the policy virtually mirrors the relevant provisions of the Act, a narrow interpretation of the meaning of “loss” under the policy is to be preferred.
Common Law Considerations
There is no principle at common law that legal costs will be covered by an insurance policy. Such an obligation may arise in particular circumstances.
It was accepted by counsel for both parties that neither the Act nor policy specifically addressed the issue whether loss included legal costs incurred in pursuing a builder for recovery pursuant to a breach of statutory warranty. A perusal of the Act and policy confirm that there is no express obligation in that regard. Accordingly if such an obligation is to be cast on the insurer it must arise as an implied obligation pursuant to the terms of the policy. In BP Refinery (Westernport) Pty Ltdv The Shire of Hastings[10] Lord Simon said:
“Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”
[10] (1977-78) 16 ALR 363 at 376
The High Court has indicated that this statement can be regarded as authoritative.[11]
[11]Codelfa Construction Pty Ltd v State Rail Authority New South Wales (1981-1982) 149 CLR 337 at 347.
Although dealing with a different policy the remarks of the House of Lords in Netherlands Insurance v Ljungberg & Co[12] are of assistance. In that case the the possibility of business efficacy justifying the basis of an implied term was addressed:
“Their Lordships do not feel able to accept that, as a general proposition, the mere fact that an obligation is imposed on one party to a contract for the benefit of the other carries with it an implied term that the latter shall reimburse the former for his costs incurred in performance of the obligation.”
[12] (1986) 3 All ER 767 at 771 per Lord Goff
Despite finding that there was no general obligation on an insurer to reimburse the insured for costs incurred, a term was implied into the contract enabling the insured to recover its costs. The term was implied in the interests of business efficacy. In Netherlands it was possible to imply such a term. The costs were incurred by the insured as a result of a further term in the contract imposing an obligation on the insured, which was for the benefit of the insurer. In the words of Lord Goff:
“…in the present case, the relevant obligation is indeed for the benefit of the insurers…and when that factor is considered together with all the other factors which their Lordships have set out, they consider that a term must be implied in the contract, in order to give business efficacy to it, that expenses incurred by an assured in performing his obligations…shall be recoverable…”
The general proposition was confirmed in Re Mining Technologies Australia Pty Ltd[13], where Pincus JA said:
“…it would in my view be going a long way to read into policies of non-marine property insurance an implied promise by the insurer to pay for any costs the insured expends to avert or minimise a loss.”
[13] (1999) 1 Qd.R. 60 at 68
In the present case, the policy did not place an obligation on the insured for the benefit of the insurer. The insured were not obliged to submit their dispute to arbitration. The decision to do so was undertaken of their own initiative for their own benefit. This action could not be considered to be for the benefit of the insurer.
Counsel for the insured sought to rely on Re Mining Technologies where it was held that expenditure necessarily and reasonably incurred in averting an imminent loss was ordinarily recoverable under a policy of insurance providing indemnity against such loss. It was submitted that the legal costs and disbursements incurred in this case could be characterised as “expenditure necessarily and reasonably incurred by an insured in averting an imminent loss”. It was said that it followed that the costs were recoverable under the policy. The facts of this case differ from Re Mining Technologies. In that case, the actions taken by the insured to avert the loss were taken to minimise the liability of the insurer. Those actions protected the insurer from further loss and were therefore for the insurer’s benefit. Accordingly, the insured was entitled to be indemnified for the costs incurred. In contrast, the actions taken by the insured in this case did not protect the insurer and were not for the benefit of the insurer. This was not to the insurer’s benefit. The reasoning in Re Mining Technologies does not assist the insured.
It is also relevant that there was no clause in the policy which required the insured to give the insurer notice of any arbitration or legal proceedings. In the absence of notice, the insurer could do nothing to protect its position with respect to such proceedings, or any costs that may be incurred. This provides an additional reason to conclude that the policy did not contemplate indemnifying the insured against legal costs. If the policy was intended to provide such cover, it might be expected that the insurer would at the very least, be entitled to notice of the proceedings that it had a responsibility to fund.
Counsel for the insured relied on the reasoning of the learned judge and submitted that the subrogation provisions in the policy carried with them an implication that “loss” should include legal costs incurred by the insured in pursuing the builder. It was submitted that the subrogation provisions allowed the insurer to take over or conduct any legal action in connection with the claim the subject of indemnity. In the event that the insurer did take over or conduct legal action it would be liable to meet the costs involved. It was said that if the insurer took over the action relating to matters arising from breach of statutory warranty then it would be liable to meet the costs of enforcing that warranty. It was then contended that this made it clear that the policy contemplated that loss would include costs incurred by an insured in attempting to enforce or recover under the statutory warranty.
I reject this submission. It is correct that the policy contains provisions providing the insurer with rights of subrogation. Subrogation allows an insurer to protect its position by conducting legal action in the name of its insured with a view to reimbursing itself with respect to indemnity paid. At common law it is well accepted that an insurer exercising rights of subrogation is required to indemnify the insured as to the costs involved in the legal action. However this principle does not assist in the interpretation of this policy. The reason why the insurer is required to meet the legal costs involved is that in substance the insurer is the real litigant in person and is pursuing the litigation for its own benefit. In these circumstances there is a clear basis for implying a term that the insurer is responsible for the costs.
It cannot be inferred from the subrogation clauses that the policy contemplates covering an insured for costs incurred in enforcing a statutory warranty. While an insured’s costs may be covered in cases where an insurer exercises its right of subrogation, these conditions do not extend that indemnity to cases other than subrogation.
Counsel for the insured submitted that arbitral and legal proceedings were inevitable and this provided a basis for implying an obligation on the insurer to meet the costs of such proceedings.
A claim arising from a breach of statutory warranty can be addressed other than by arbitral or legal proceedings. In some situations, the builder and the insured may simply agree that the statutory warranty has been breached and agree on the appropriate remedial measures to be taken.
Further, an insured making a claim under such a policy of this nature would not necessarily have to instigate arbitration or legal proceedings to satisfy the insurer of their inability to enforce or recover under a statutory warranty. If the builder were insolvent at the time of the claim, the insurer may accept this as evidence of the insured’s inability to recover against the builder.
Even if arbitral or legal proceedings were necessary it does not follow that that fact leads to an implied term that the insurer would be obliged to meet the costs incurred. Business efficacy does not require such a construction. In my view the earlier considerations referred to militate against such a construction.
Conclusion
The loss covered by the policy does not extend to legal costs and disbursements incurred by the insured in the arbitration proceedings. This appeal must be allowed. The judgment in favour of the insured must be set aside. In lieu judgment should be entered for the insured in the amount of $11,258.00, together with a lump sum of $1,100.00 interest.
JUDGMENT CITATIONS AS THEY APPEAR IN THE JUDGMENT
1 The insurance was arranged by the builder.
2 The award carried interest
3 Mihailoff v Royal & Sun Alliance Insurance Australia Limited [2001] SAMC at 8.
4 Leave to appeal was granted by the judge.
5 This ground of appeal was conceded.
6 “19. (1) The following are the only permissible limitations on the liability of the insurer under a policy of insurance under Division 3 of Part 5 of the Act:
(a)    a limitation under which the insurer is not liable for the first $400.00 (or some stipulated lesser amount) of each claim;
(b)    a limitation under which the total amount that the insurer is liable to pay in relation to building work or the non-completion of building work at a particular site is fixed at not less than $80 000.
(2) A policy of insurance under Division 3 of Part 5 of the Act-
(a)    must contain a clause allowing a claimant at least 90 days (from the date on which the claimant becomes aware of the grounds for the claim) in which to make the claim; and
(b)    must not confer any right on the insurer to avoid liability on the ground of misrepresentation or non-disclosure on the part of the building work contractor or on any similar ground.”
7 Footnote reference to 2nd reading speech
8 See R v Adams (1935) 53 CLR 563 at 567-568, per Rich, Dixon, Evatt and McTiernan JJ: “No doubt, in determining whether an offence has been created or enlarged, the Court must be guided, as in other questions of interpretation, by the fair meaning of the language of the enactment, but when that language is capable of more than one meaning, or is vague or cloudy so that its denotation is uncertain and no sure conclusion can be reached by a consideration of the provisions and subject matter of the legislation, then it ought not to be construed as extending any penal category.” This was confirmed by Gibbs J in Beckwith v R (1976-77) 12 ALR 333 at 339: “The rule formerly accepted, that statutes creating offences are to be strictly construed, has lost much of its importance in modern times. In determining the meaning of a penal statute the ordinary rules of construction must be applied, but if the language of the statute remains ambiguous or doubtful the ambiguity or doubt may be resolved in favour of the subject by refusing to extend the category of criminal offences. The rule is perhaps one of last resort.” See also Deming No 456 Pty Ltd & Ors v Brisbane Unit Development Corporation Pty Ltd (!983) 50 ALR 1 at 1; Waugh v Kippen & Anor (1985-86) 64 ALR 195 at 200; Chew v R (1992) 107 ALR 171 at 174. It was held that the same rules of construction apply to Acts imposing pecuniary penalties, as do to Acts creating criminal offences. See Trade Practices Commission v TNT Management Pty Ltd & Ors (1984-85) 58 ALR 423 at 472.
9 See Dickenson v Fletcher (1873) LR 9 CP 1 at 7, per Brett J: “Those who contend that a penalty may be inflicted, must show that the words of the Act distinctly enact that it shall be incurred under the present circumstances. They must fail, if the words are merely equally capable of a construction that would, and one that would not, inflict the penalty.” See also Lyons v Smart (1908) 6 CLR 143 at 157; Waugh v Kippen and Another (1986) 64 ALR 195 at 200-201.
10 (1977-78) 16 ALR 363
11 Codelfa Construction Pty Ltd v State Rail Authority New South Wales (1981-1982) 149 CLR 337 at 347
12 3 All ER 767 at 771 per Lord Goff
13 (1999) 1 Qd.R. 60 at 68.

[2002] SASC 32

16 April 2002