Australia: Lane Cove Tunnel Collapse – Insurance Developments

In a recent decision the NSW Supreme Court held that the Building and Construction Industry Security of Payment Act 1999 (the Act) had no application to a Construction Risks Insurance Policy.

Background

Zurich Specialties London Limited and Swiss Re International SE (along with a number of other coinsurers)(the Insurers) are insurers of Thiess Pty Limited and John Holland Pty Limited (trading as Thiess John Holland Joint Venture(TJH)) under a Construction Risks Insurance Policy (the Policy). The Policy provided cover in relation to the planning, development, design, construction and commissioning of the Lane Cove Tunnel Project. A dispute arose between the Insurers and TJH by reason of the collapse of a portion of the Tunnel on 2 November 2005.

On 2 September 2008 TJH purported to serve a payment claim on the Insurers under the Act seeking payment of the costs TJH alleges it incurred in rectifying the collapsed portion of the Tunnel.

The Act

The Act enables a person who claims to be entitled to a progress payment to serve a payment claim on the person who, under the construction contract concerned, is or may be liable to make the payment. A person on whom the payment claim is served may reply to the claim by providing a payment schedule which identifies the amount the respondent proposes to pay to the claimant. If the respondent does not serve a payment schedule within 10 days after the payment claim is served the respondent becomes liable to pay the claimed amount.

If a payment schedule is served and there remains a dispute as to the amount claimed then the matter may be referred to an adjudicator for determination. If the respondent fails to make a payment once the adjudicator's determination has been received the claimant can request an adjudication certificate which can be filed as a judgment. The respondent has the right to commence proceedings to have the judgment set aside. However, it is obliged to pay into Court the unpaid portion of the adjudicated amount as security pending final determination of those proceedings.

The purpose of the Act was to reform payment behaviour in the construction industry by ensuring that any person who carries out construction work under a construction contract in New South Wales is provided with a statutory right to progress payments in relation to that work and has access to a fast track adjudication procedure. It has been described as a "pay now, argue later" scheme.¹

Interlocutory Application

On 16 September 2008 the Insurers sought urgent relief from the Court in relation to the payment claim. In particular the Insurers sought:

• a declaration that the Policy was not a construction contract within the meaning of the Act;

• a declaration that so much of the policy as was relied upon by TJH as being a construction contract within the meaning of the Act forms part of a contract of insurance pursuant to Section 7(2)(iii) of the Act; and

• an injunction restraining TJH from taking any steps in relation to the payment claim and exercising any entitlements pursuant to the Act.

Construction Contract

The term "construction contract" is defined in the Act to mean a contract or other arrangement under which one party undertakes to carry out construction work, or to supply related goods and services, for another party.

The Insurers argued that TJH did not perform the rectification work in relation to the collapsed tunnel for the Insurers, but pursuant to its contractual obligations to the principal contractor (the Roads and Traffic Authority of New South Wales), and that accordingly there was no "construction contract" for the purposes of the Act.

TJH looked to the terms of the Policy and, in particular, the provisions within the Policy which stipulated that TJH was required by the Insurers to take all reasonable precautions to safeguard the subject matter insured and to prevent loss and damage. TJH argued that the "reasonable precautions" provision within the Policy was a discrete construction contract which required TJH to take steps that would include construction work.

Recognised Financial Institution

The Insurers also relied on Section 7(2)(a) of the Act which provides that:

A recognised financial institution is defined in the rules to mean a body regulated by APRA. A body regulated by APRA includes a foreign general insurer authorised to carry on business in Australia.

The Insurers argued that as Swiss Re International SE was a subsidiary of a company authorised to carry on business in Australia (being Swiss Reinsurance Limited) it was a recognised financial institution within the meaning of the Act and that the carve out provided under Section 7(2)(a)(iii) applied. In addition the Insurers argued that it was sufficient that only one of the insurers was a recognised financial institution for the carve out to apply as the exclusion refers to "...a contract of insurance under which a recognised financial institution..."

Decision

The matter was heard before Bergin J on 24 September 2008. Her Honour considered that it was clear from the provisions of Section 7(2) of the Act that the Legislature envisaged that there may be contracts of insurance that include construction contracts. However, before a contractor would be entitled to recover a progress claim from an insurer there would have to be some "inclusion or incorporation" of a construction contract so that it forms part of the insurance contract.

Further, an important aspect of the definition of construction contract in the Act is that it is a contract under which one party undertakes to carry out the work for another party. The work has to be carried out for that other party.

Her Honour found that the reasonable precautions provision within the Policy was not an agreement by TJH to carry out construction work for the Insurers, but an agreement by TJH that in carrying out construction work for the principals/owners they had to do so in a particular manner, that is, by taking reasonable precautions, in order to qualify for indemnity under the Policy.

Her Honour found that the reasonable precautions clause was not a construction contract and that the Act did not apply to the Policy. As there was no construction contract it was unnecessary to decide whether the Insurers were a recognised financial institution.

Conclusion

The judgment is a significant decision for insurers which underwrite Construction Risks Insurance Policies and provides a useful authority on the types of insurance policies which may be considered construction contracts for the purposes of the Act. It is also a beneficial judgment for insurers in that it is now clear that any obligations of an insured to mitigate their loss pursuant to a "reasonable precautions" type provision in a policy of insurance will not be seen as a discrete construction contract between insurers and insureds so as to attract the operation of the Act.

Footnotes

1. See speech of Justice McDougall of the Supreme Court of New South Wales, "The Court View of Security of Payment Legislation in Operation", 31 August 2005.

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