Insurance & Reinsurance
The issue of calculating how many deductibles an insured needs to pay has again arisen, with the NSW Court of Appeal overturning the primary judge’s decision in Allianz Australia Insurance Limited v Rawson Homes Pty Ltd  NSWCA 224. The Court of Appeal determined that on the construction of the policy, one deductible was payable on each building contract, rather than each "event" and upholding Allianz Australia's argument that 122 deductibles were payable rather than 1.
Construction claims can be rife with aggregation issues and disputes over deductibles payable. The case highlights some of the difficulties in interpreting insurance policies involving large construction projects.
Clyde & Co partner Matthew Smith considers the case in detail.
On 18 February 2017, a severe hailstorm caused damage to the roofs of 122 residential houses being constructed by the plaintiff builder (Rawson Homes).
Rawson Homes sought orders for Allianz to indemnify it for the losses sustained from the hailstorm.
Allianz accepted the claim, but a dispute arose about the deductible payable under the policy. Rawson Homes argued that as the damage arose from a single event, the hailstorm, only one deductible was payable. Allianz claimed that the policy covered each building contract separately and, therefore, a deductible applied to every house.
The insuring clause in Section 1 provides:
In respect of an Insured Contract only, We will indemnify the Insured in accordance with the Basis of Settlement and subject to the other Policy terms, for the following:-
...for Contract Works against an Indemnifiable Event that occurs and is discovered both at the Contract Site and during the Insured Construction Period.
On Appeal, the critical phrase was "in respect of an Insured Contract only”. “Insured Contract” was defined as follows:
“‘Insured Contract’ means the contract or agreement entered into by the Named Insured which gives rise to the Contract Works.”
“Contract Works” was defined as follows:
“‘Contract Works’ means the whole of the works described in the Insured Contract as required for the performance of the Insured Contract.”
“Deductible” was defined as follows:
“‘Deductible’ means either the amount of money specified in the Schedule or stated in the Policy for each applicable Section or type of loss as specified, that the Insured must contribute as the first payment for all claims arising out of one event or occurrence.”
36 Under the heading “Basis of Settlement applicable to this Section” (viz Section 1) the policy provides:
“Application of Deductible
The amount of the Deductible will be subtracted from the amount payable by Us for each event giving rise to a claim under this Section. If a claim arises from a single event and the Insured can obtain cover under more than one benefit in this Section, the Insured will only be required to pay the highest single Deductible applicable regardless of the number of Deductibles applying to this Section.
Only for the purpose of the application of any Deductible, any loss, destruction or damage to the Contract Works or other insured property arising during any one period of seventy two consecutive hours caused by water, flood, cyclone, storm, tempest, earthquake or bush fire shall be deemed to be a single event and therefore to constitute one occurrence. The Insured may select the time from which any such period shall commence but no two such selected periods shall overlap."
The Court confirmed that the ambiguity in the “Application of Deductible” clause arose due to the absence of definition of “claim” in the Policy. The clause refers to a claim for an amount payable for each event which gives rise to a claim. However, it was unclear on the face of the Policy what “a claim” was in the context of the cover provided by the Policy.
Court held that the correct starting point for the construction of the policy was with the insuring clause and not at the “Application of Deductible” clause. The insuring clause provided for “Contract Works against an Indemnifiable Event". Contract Works was "the works described in each Insured Contract (our emphasis)", and therefore the deductible was payable in respect of losses arising from an Indemnifiable Event for each Insured Contract. As the cover provided for each Insured Contract there was one claim for each damaged house and one deductible was payable for each home damaged.
The decision confirms that the interpretation of insurance contracts with ambiguity is complex, and opinions can differ in situations where competing interpretations have a degree of merit. The best solution is to try and ensure that policies are written with clear intention and that key terms are defined where possible. In this case, the parties may have avoided the dispute if the term "claim" was accurately defined in the Policy to clarify that it applied to each building contract.