Full Federal Court rules on Opal Tower insurance dispute

As part of Clyde & Co’s ongoing coverage of the Opal Tower dispute, we report on the Full Federal Court’s recent decision, Liberty Mutual Insurance Company Australian Branch trading as Liberty Specialty Markets v Icon Co (NSW) Pty Ltd [2021] FCAFC 126.

This Federal Court Appeal concerned the application of two separate policies of insurance, albeit with different issues for each insurer. For Liberty, the issue under consideration concerned the expiry of cover, and for QBE, it related to the interpretation of the word ‘product’.

Clyde & Co Partner and Head of Insurance Lucinda Lyons and Special Counsel Luke O'Kane consider the appeal in detail below.

Background

Our previous update on the case provides a detailed summary of the factual circumstances and the issues (see link). In 2015, Icon Co (NSW) Pty Ltd (Icon) entered a contract to design and build a mixed residential and commercial development known as the Opal Tower, located at Sydney Olympic Park in western Sydney. The building was completed in August 2018, with the contract providing a 12-month defect liability period.

On 24 December 2018, significant cracking in the Tower forced residents to be evacuated and Icon has since been required to undertake rectification works to fix the structural defects within the building. Subsequently, the building's residents commenced class action proceedings against Icon in the Supreme Court of NSW. The costs of the incident have been substantial, with Icon’s costs to date totalling more than AUD31 million.

The recent Appeal concerned a dispute between Icon and its insurers, Liberty Mutual Insurance Company Australian Branch trading as Liberty Specialty Markets (Liberty) and QBE Underwriting Limited as Managing Agent for Underwriting Members of Lloyd’s Syndicates 386 and 299 (QBE). Both insurers denied indemnity for the incident under their respective policies of insurance.

Between 2012 and 2018, Icon obtained Material Damage Contract Works and Third-Party Liability insurance cover, the latter from Liberty. Thereafter, in or about September 2018, Icon obtained new insurance cover from QBE.

In relation to its dispute, Liberty denied indemnity on the basis that indemnity under its policy extended to the date of ‘practical completion’ of projects undertaken during the period of insurance, but did not provide cover for any subsequent defects liability period (the Liberty Dispute). In the QBE dispute, QBE contended that the Opal Tower development did not satisfy the definition of a ‘Product’ of Icon and hence did not trigger the Insuring Clause of its policy (the QBE Dispute).

Policy Wording

Liberty Dispute

Central to understanding the Liberty dispute are two conditions in the Liberty Policy:

8. Adjustment of Premium

The premium for this Policy is provisional (unless otherwise agreed) and is based on the estimated Turnover for the Period of Insurance. The Insured shall, as soon as practical after the expiry date of this Policy, declare to the Insurer(s) the Turnover during the preceding Period of Insurance.

An adjustment premium shall be determined by calculating the difference between the provisional premium and the sum of the agreed rate applied to the Turnover.

Notwithstanding the above, the maximum allowable return premium will be 25% of the provisional premium paid.

…

15. Run-Off

Subject to written instructions from the Insured to the Insurer(s) prior to expiry of the Period of Insurance, this Policy will continue in full force and effect at terms and conditions prevailing immediately prior to expiry for all incomplete contracts as at date of expiry until completion of those contracts including any testing and/or defects liability and/or maintenance periods.

The Insured is required to provide the Insurer(s) with a list of contracts requiring Run-Off and additional premium is to be calculated on expiring rates applied to value of works declared for completion of projects after expiry of the Period of Insurance.

QBE Dispute

With respect to the QBE dispute, the critical parts of the QBE Policy concerned the extent to which coverage for product liability and completed operations extended to the circumstances of the incident and the application of the definition of a "Product."

Product Liability and/or Completed Operations

Product Liability and/or Completed Operations means liability for compensation in respect of and arising out of any Product or Completed Operations.

Product

Product shall mean any product or thing (including containers packaging or labelling) sold, supplied, erected, repaired, altered, treated, installed, processed, grown, manufactured, assembled, tested, serviced, hired out, 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 under the control of the Insured) in the course the [sic] Insured’s business in or from Territorial Limits, including liability arising out the Competition and Consumer Act (2010) or similar legislation.

Decision at First Instance

Liberty Dispute

The primary judge determined that the Liberty Policy was a standard turnover policy providing cover for liability during the period of insurance. He also accepted that Icon had not engaged Condition 15. Accordingly, the Liberty Policy did not respond to the Opal Tower claim as it occurred outside of the period of insurance. However, the judge accepted that there had been a mistake between Icon’s broker and Liberty's underwriting agent during policy negotiations as the parties had intended the Liberty Policy operate on a contracts commencing basis and for the 12-month defect liability period to be covered. Accordingly, the trial judge allowed rectification of the Liberty Policy to provide cover on a contracts commencing basis, and therefore, the Opal Tower claim was covered.

QBE Dispute

With respect to the QBE Policy, the primary judge accepted that the Opal Tower and its component parts satisfied 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 "moveable”. Further, it argued that the absence of the words “built” and “constructed” in the definition of Product demonstrated a clear intention to exclude completed buildings, or their constituent parts, from cover.

Ultimately, the Court held that a 'Product' was not necessarily a "tangible and moveable" object and the definition could extend to include a completed building. Accordingly, the Court held that indemnity under the QBE Policy had triggered and that cover was available.

Determination of the Full Court

Liberty Dispute

On Appeal, the Full Court disagreed with the primary judge’s interpretation of the operation of Conditions 8 and 15 of the Liberty Policy. Whereas the primary judge had focused on Condition 8 to find that the Policy was a standard turnover policy, the Full Court instead concluded that the conditions should be read together.

The result of this finding was that the Policy provided annual turnover cover, with Icon having a choice of two options of run-off cover: run-off cover to a program or a form of contracts commencing cover upon giving instructions and paying the relevant premium. The Court determined that despite Condition 15 being entitled "Run-off", the terms of the condition were wider than traditional "run-off" cover and were sufficiently wide to allow for utilisation on a contract-by-contract basis.

The Full Court also accepted that Icon had given relevant notice to Liberty’s agent of Opal Tower, and therefore Icon had triggered the operation of Condition 15. As such, the Full Court confirmed that it was strictly unnecessary to consider rectification of the Liberty Policy. However, it did confirm that it would have upheld the primary judge's determination on rectification if it were wrong on the question of construction.

QBE Dispute

With respect to the QBE Dispute, the Full Court overturned the primary judge’s determination that the Tower fell within the scope of “Product” as defined within the QBE Policy.  In coming to this conclusion, the Full Court focused on the distinction in the Insuring Clause between the terms “Product” and “Completed Operations”. The Court accepted QBE’s submission that the distinction reflected an intention to treat separately the risk of liability 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 primary judge's construction meant that any building would be a "Product", and QBE would thereby assume the risk of liability in respect of it regardless of the stage of completion and whether the defects liability period had expired. The use of the words “Completed Operations” therefore had no purpose and would have been rendered redundant in operation. The Full Court concluded that the completed building was not a “Product” but a “Completed Operation”. Therefore, pursuant to the terms of the Policy, the Court determined that Icon was only entitled to an indemnity for "Completed Operations" for damage that occurred after the defects liability period. Therefore, it was not entitled to cover for the Opal Tower claim.

Analysis

This case provides several important lessons for parties when negotiating bespoke insurance policies, especially construction projects. The Full Court acknowledged that the Liberty Dispute arose from difficulties when Icon (through its broker) wanted the Liberty Policy to operate in accordance with its commercial preferences. Further, the case confirms the importance of closely reviewing policy wordings to ensure that cover that is agreed between the parties is articulated in the relevant wording, schedules and submissions.

In addition, the judgment provides an important reminder that the interpretation of insurance policies requires parties to consider the policy as a whole and to ensure that any interpretation provides commercial efficacy and reflects common sense. The success of both Icon and QBE in their respective appeals largely came down to articulating an interpretation that better reflected the commercial efficacy of the different policies.