As part of Clyde & Co’s continued coverage of the Opal Tower dispute, we report the recent full Federal Court decision, Liberty Mutual Insurance Company Australian Branch trading as Liberty Specialty Markets v Icon Co (NSW) Pty Ltd  FCAFC 126.
This Federal Court appeal concerned the application of two separate insurance policies, but with different issues for each insurer. For Liberty, the issue at hand concerned the expiration of coverage, and for QBE, it concerned the interpretation of the word “product”.
Clyde & Co Partner and Insurance Manager Lucinda Lyons and Special Advisor Luke O’Kane review the appeal in detail below.
Our previous update on the case provides a detailed summary of the factual circumstances and issues (see connect). In 2015, Icon Co (NSW) Pty Ltd (Icon) has entered into a contract for the design and construction of a mixed residential and commercial development known as Opal Tower, located in Sydney Olympic Park in western Sydney. The building was completed in August 2018, with the contract providing for a 12 month defect liability period.
On December 24, 2018, major cracks in the tower forced residents to be evacuated and Icon has since been required to undertake rectification work to correct structural flaws in the building. Subsequently, residents of the building brought a class action lawsuit against Icon in the NSW Supreme Court. The costs of the incident have been substantial, with Icon costs of over AUD 31 million to date.
The recent Appeal concerned a dispute between Icon and its insurers, Liberty Mutual Insurance Company Australian Branch operating as Liberty Specialty Markets (Freedom) and QBE Underwriting Limited as managing agent for the underwriting members of Lloyd’s Syndicates 386 and 299 (QBE). Both insurers refused to compensate the incident under their respective insurance policies.
Between 2012 and 2018, Icon took out Damage Works and Civil Liability insurance, the latter with Liberty. Subsequently, around September 2018, Icon obtained new insurance coverage from QBE.
With respect to its litigation, Liberty denied compensation on the grounds that compensation under its policy extended until the date of “practical completion” of projects undertaken during the insurance period, but has not provided coverage for any liability period for subsequent defects (the Freedom litigation). In the QBE dispute, QBE argued that the development of the Opal Tower did not meet Icon’s definition of a “product” and therefore did not trigger the insurance clause of its policy (the QBE litigation).
Two conditions in the Liberty policy are essential to understanding the Liberty dispute:
8. Premium adjustment
The premium for this policy is provisional (unless otherwise agreed) and is based on the estimated turnover for the insurance period. The Insured must, as soon as possible after the expiration date of this Policy, report to the Insurer (s) the Turnover (s) during the previous Insurance Period.
A regularization premium will be determined by calculating the difference between the provisional premium and the sum of the agreed rate applied to turnover.
Notwithstanding the above, the maximum authorized return premium will be 25% of the provisional premium paid.
Subject to written instructions from the insured to the insurer (s) before the expiration of the period of insurance, this policy will remain in force and full effect under the terms and conditions in effect immediately before the expiration. for all contracts incomplete on the expiration date until the completion of such contracts, including any liability for testing and / or defects and / or maintenance periods.
The Insured is required to provide the Insurer (s) with a list of contracts requiring a Run-Off and an additional premium must be calculated on the expiration rates applied to the value of the work declared for the completion of the projects. after the expiration of the Insurance Period.
With respect to the QBE dispute, the critical parts of the QBE policy concerned the extent to which product liability coverage and completed transactions extended to the circumstances of the incident and the application of the definition. of a “product”.
Liability for products and / or completed operations
Product liability and / or completed operations means the liability for compensation for and arising out of any product or completed operations.
Product means any product or object (including the packaging or labeling of containers) sold, supplied, erected, repaired, modified, processed, installed, transformed, grown, manufactured, assembled, tested, maintained, rented, stored, transported or distributed by the insured, including any container thereof (after such goods and / or products cease to be in the possession and / or control of the insured) during the [sic] The affairs of the insured in or from the territorial limits, including the liability arising from the Competition and Consumer Law (2010) or similar legislation.
Decision at first instance
The senior judge determined that the Liberty policy was a standard turnover policy providing liability coverage during the insurance period. He also admitted that Icon did not initiate condition 15. Therefore, the Liberty policy did not respond to the Opal Tower claim as it occurred outside of the insurance period. However, the judge admitted that there had been an error between Icon’s broker and Liberty’s underwriting agent during policy negotiations as the parties intended the Liberty policy to operate on a of the start of the contract and that the 12-month default liability period is covered. Therefore, the trial judge authorized the rectification of the Liberty policy to provide coverage on an in-contract basis and, therefore, the Opal Tower claim was covered.
Regarding the QBE policy, the Senior Judge recognized that the Opal Tower and its components met the definition of a “product” or “thing” and therefore accepted that the claim fell within the QBE policy. At first instance, QBE argued that the underwriting intention behind the word “product” was to denote something that was “tangible” and “movable”. Further, it argued that the absence of the words “constructed” and “constructed” in the product definition demonstrated a clear intention to exclude completed buildings, or their components, from coverage.
Ultimately, the Court held that a “product” was not necessarily a “tangible and movable” object and that the definition could expand to include a completed building. As a result, the court ruled that compensation under the QBE policy had triggered and that coverage was available.
Determination of the Plenary Court
On appeal, the full court disagreed with the principal judge’s interpretation of the application of conditions 8 and 15 of the Liberty Policy. While the senior judge had focused on condition 8 to conclude that the policy was a standard rotation policy, the full court instead concluded that the conditions should be read together.
The result of this finding was that the policy offered annual turnover coverage, with Icon having a choice of two liquidation coverage options:. The Court determined that although Condition 15 was titled “Extinction,” the terms of the condition were broader than traditional “extinction” coverage and were broad enough to permit contract-by-contract use.
The Plenary Court also acknowledged that Icon had given relevant notice to the Liberty agent of Opal Tower, and therefore Icon had triggered the application of Condition 15. As such, the Plenary Court confirmed that he It was strictly unnecessary to contemplate the rectification of Liberty’s policy. However, he confirmed that he would have upheld the senior judge’s decision on rectification if he was wrong on the question of interpretation.
Regarding the QBE dispute, the Full Court overturned the senior judge’s ruling that the tower fell within the scope of “product” as defined in the QBE policy. In reaching this conclusion, the Plenary Court focused on the distinction in the insurance clause between the terms “Product” and “Completed Transactions”. The Court accepted QBE’s argument that the distinction reflected an intention to treat separately the liability risk associated with the completed building and the risks associated with the supply of Products, other than the completed building.
The Court further noted that the lead judge’s construction meant that any building would be a “Product”, and QBE would thus assume the risk of liability to it, regardless of the stage of completion and whether or not the period expired. liability for defects. The use of the words “Operations completed” therefore had no purpose and would have been made superfluous in operation. The Plenary Court concluded that the completed building was not a “Product” but a “Completed Operation”. Therefore, in accordance with the terms of the policy, the court determined that Icon was only entitled to compensation for “completed operations” for damages that occurred after the liability period for defects. Therefore, she was not entitled to cover the Opal Tower claim.
This case provides several important lessons for parties when negotiating tailor-made insurance policies, especially construction projects. The Full Court recognized that the Liberty dispute arose out of difficulties when Icon (through its broker) wanted the Liberty policy to operate in accordance with its trade preferences. In addition, the case confirms the importance of closely examining the terms of the policy to ensure that the coverage agreed between the parties is articulated in the relevant text, schedules and submissions.
In addition, the judgment is an important reminder that the interpretation of insurance policies requires the parties to consider the policy as a whole and to ensure that any interpretation offers commercial efficiency and reflects common sense. Much of the success of Icon and QBE in their respective appeals came down to articulating an interpretation that better reflected the business effectiveness of the different policies.