Construction insurance is a specialised and sometimes technical area of coverage, and its interaction with the equally specialised concepts of construction law has been tested in a recent case from the Supreme Court of NSW, in which the issue was whether the “all reasonable precautions” clause in a construction risks policy led to a construction contract being “incorporated” into the policy.
The case arose out of the Lane Cove tunnel collapse in 2005. Thiess Pty Ltd and John Holland Pty Ltd had formed the Thiess John Holland Joint Venture for the purpose of constructing the tunnel project. The joint venture held a construction risks insurance policy issued by Zurich Specialties London Limited and SR International SE in relation to the project.
After the collapse, the joint venture partners made a claim on the policy in February 2007. Negotiations over the claim then commenced, but in September 2008, the joint venture partners took the unusual step of serving a payment claim under the Building and Construction Industry Security of Payment Act (BCISPA) on the insurers. The insurers sought an urgent injunction to restrain the joint venture partners from proceeding under that Act.
In the NSW Supreme Court, Justice Bergin defined the key issue as being whether the BCISPA provisions applied in the circumstances. That led to a consideration of whether there was a construction contract that was “included or incorporated” so that it formed part of the insurance contract.
In that regard, the joint venture partners pointed to clause 18 of the policy, which required them to take “all reasonable precautions” to safeguard the “subject matter insured” (i.e. the project). They argued that this clause required them to take steps that, in certain circumstances, would “obviously” include construction work as that term is defined within the Act.
Justice Bergin noted that the policy had to be given a businesslike interpretation; and that from the decided cases, the purpose of the “all reasonable precautions” condition was to “ensure that the insured will not refrain from taking precautions which he knows ought to be taken because he is covered against loss by the policy”.
Since the commercial purpose of this Policy was to provide indemnity, clause 18 represented the imposition of a condition which had to be satisfied prior to indemnity being available. It was not an agreement by the joint venture partners to carry out construction work for the insurer, but an agreement by the insured that in carrying out the construction work for the project’s owners, they had to do so in a particular manner: that is, by taking reasonable precautions.
In a judgment handed down on 3 March 2009, the NSW Court of Appeal affirmed Justice Bergin’s decision and, in effect, reiterated her Honour’s judgment. Macfarlan JA added helpfully, at para 16:
“Whether there is a promise, or to use the expression used in the definition of ‘construction contract’ in the Act, undertaking to carry out construction work can in my view be tested by asking whether the insurers could sue the insureds for damages if the insureds failed to take reasonable precautions as required by cl 18. Clearly, in my view, they could not. That would not be in conformity with the commercial purpose of the policy and is not dictated by any language used by the parties.”
As such, the “all reasonable precautions” clause did not constitute a construction contract between the insurers and the joint venture partners. The BCISPA therefore did not apply to the policy.
The lesson from this case is that, in general, insureds will not be able to use insurance policies to affect contractual rights with other parties, unless the relevant contract between those parties is specifically incorporated into the insurance policy.
Zurich Specialties London Ltd v Thiess Pty Ltd [2008] NSWSC 1010 and Thiess Pty Ltd & Anor v Zurich Specialties London Ltd & Anor [2009] NSWCA 47
