On 20 September 2024, the Full Court of the Federal Court of Australia (Full Court) handed down their judgment in Chubb Insurance Australia Limited v WSP Structures Pty Ltd [2024] FCAFC 123, dismissing the appeal from excess layer insurers, Chubb Insurance Australia Limited (Chubb) and Tokio Marine & Nichido Fire Insurance Co Ltd (Tokio) which were held liable to indemnify WSP Structures Pty Ltd (WSP) for their settlement and defence costs following legal proceedings regarding the structural damage to the infamous Opal Tower development. This article examines the judgment and its implications for insurers and insureds.
Background: Chubb Insurance Australia Limited v WSP Structures Pty Ltd
In October 2015, Icon Co (NSW) Pty Ltd (Icon) were contracted to design and construct the Opal Tower, a high-rise development in Sydney Olympic Park. In November 2015, Icon engaged WSP, a firm of consulting engineers, to undertake the engineering design work for the development. In December 2018, there was considerable structural damage to Opal Tower which resulted in three sets of legal proceedings in the NSW Supreme Court, all of which settled in 2022.
In one of the settlements, WSP accepted liability to pay an amount to Icon (WSP Payment), which was paid by holding company WSP Australia Pty Ltd (WSP Australia). WSP also paid a proportion of class action settlement costs, which was paid by WSP's professional indemnity insurers. WSP also incurred their own defence costs during the course of the NSW Supreme Court proceedings.
Icon held a third party liability insurance policy (Policy) with Liberty Mutual Insurance Company (Liberty) and excess layers on relevantly the same terms with Chubb and Tokio. Within this policy, 'Insured' was defined in the following terms (Definition):
"Insured means
- The Insured named in the Schedule and/or;
- joint ventures (incorporated or not) in which the Insured is a co-venturer and is responsible for arranging insurance; and/or
- principals and/or owners; and/or
- sub-contractors engaged by any of the above; and/or
- lender and/or financiers for their respective rights and interests; and/or
- directors, officers and employees of any of the above but only in respect of the Business and/or Activities of the Insured; and/or
- manufacturers and suppliers, but only in relation to their manual on-site activities; and/or
- architects, engineers and other professional consultants, but only in relation to their manual on-site activities and/or
Any other company for which the Insured assumes management together with all other parties for whom the Insured is required under contract or any other legally binding agreement to provide insurance protection are also included as an Insured."
Relevantly, "contractors and subcontractors" were also referenced in the defined term 'Insured' contained in the schedule to the Policy.
Key issues considered
In late 2023, WSP brought proceedings against Liberty, Chubb and Tokio, seeking a declaration that it is covered by the Policy (including the Chubb and Tokio excess layers) and that the three insurers are liable to indemnify WSP in respect of the WSP Payment and its defence costs.
In WSP Structures Pty Ltd v Liberty Mutual Insurance Company t/as Liberty Specialty Markets [2023] FCA 1157, the primary judge, Colvin J, considered four key issues:
- Whether WSP is covered for the amounts in respect of which it seeks indemnity (Issue 1);
- If WSP is covered, whether it has already been indemnified by its professional indemnity insurer such that it has no loss to claim (Issue 2);
- Whether WSP Australia, rather than WSP, is the correct applicant in respect of any claim to reimbursement of the WSP Payment (Issue 3); and
- Whether WSP has suffered loss in respect of which it may seek indemnity, where payments have been made by WSP Australia (Issue 4).
Scope of coverage for 'subcontractors'
On Issue 1, WSP acknowledged that they do not fall within item 8 of the Definition as they did not carry out manual on-site activities but relied instead on item 4 of the Definition referring to 'subcontractors'. The insurers argued that the wording of the Policy did not extend coverage to WSP, who were engineering consultants. Hence, the issue turned on the primary judge's finding of whether WSP were a 'subcontractor' for the purposes of the Policy.
The primary judge firstly highlighted the words "and/or" (appearing at the end of each item in the Definition), finding that an insured may fall within multiple items and thus WSP could be both an engineer and a subcontractor. Secondly, Colvin J considered whether item 4 was so broad as to encompass items 7 and 8, irrespective of whether they were undertaking manual on-site activities, making those provisions redundant. However, it was determined that engineering consultants who were not subcontracted by an Icon entity, but who conducted manual on-site work, would be covered by item 8 and not 4. Thus there were a distinct class of persons captured by items 7 and 8 not covered by item 4.
Thirdly, his Honour also relied heavily upon the term 'Insured's Business' within the schedule to the Policy to determine the nature and extent of coverage, which included:
"… builders, engineers, construction contractors, project managers, construction managers, property developers, plant and equipment owners/operators and hirers, property owners and occupiers, lessees and lessors…" Therefore, his Honour held that "plainly the policy sought to extend the scope of those who were insured beyond those who were named as insureds." His Honour also noted that "no aspect of the policy adopts terminology which indicates that it is intended to apply only to insureds who are construction contractors as distinct from those who may take on responsibilities for development and design as well as construction."
Accordingly, Colvin J expressed that the policy was plainly intended to cover engineering activities undertaken by sub-contractors of the named insured.
Finally, his Honour also considered the "commercial interests" of Icon by acknowledging that the ability of the policy to provide effective coverage "…would be substantially compromised if it did not cover WSP Structures who had been subcontracted to undertake the engineering design obligations of Icon under its own contract." Hence, his Honour ruled that WSP were covered as a subcontractor under the Policy.
Other issues: Two insurers, same risk
On Issue 2, the primary judge considered the argument submitted by the insurers that when two insurers are covering the same risk and the loss has been met by one insurer (in this case WSP's professional indemnity insurer), then the other insurer may plead the indemnity as a valid defence to liability (see s 76(1) of the Insurance Contracts Act (ICA)). However, the primary judge ruled against the insurers on this issue as they found that the agreement between WSP and its insurers was not "an enforceable agreement" that required payment to WSP from its insurers, and further noted that "[i]t is the actual receipt of full reparation that gives rise to the discharge of the second insurer from any claim by the insured", which, in this case, had not occurred.
On Issues 3 and 4, the primary judge ruled that WSP Australia was not the correct applicant to bring a claim and WSP did have a recoverable loss, by reason of the relationship between the parent and subsidiary. His Honour found that the payments made by WSP Australia "were not made by way of indemnity", noting that "…it should be inferred that WSP Australia made the payments on the basis that WSP Structures would pursue any and all rights that it may have to recoup or recover the costs and account for those monies to WSP Australia."
In light of the above, Colvin J granted the declarations and orders sought by WSP for indemnity from Liberty, Chubb and Tokio.
Appeal pursued by the insurers
Issue 1 was the only ground of appeal pursued by the insurers. The insurers provided various submissions on this issue, criticising the reasoning of the primary judge on a number of bases.
First, the insurers presented arguments in relation to the primary judge's construction of the Policy based on the two alternate definitions of 'Insured' (i.e. items 4 and 8). However, the Full Court quickly dismissed their arguments, stating that "…while the duality of the definition of the Insured in the policy was at the forefront of the appellants’ submissions, that line of argument is consistent with the manner in which the primary judge construed the policy."
Second, the insurers argued that there was little commercial benefit for Icon to have engineers and consultants insured at their expense. This submission was dismissed by the Full Court which ruled that there was "no basis on which the Court could conclude that such a commercial judgment would be so unreasonable that it points away from the ordinary and natural meaning of the language used by the parties."
Finally, the insurers submitted that the primary judge's construction of the Policy has changed a public and product liability policy into an occurrence-based professional indemnity policy, in favour of those who would ordinarily have their own professional indemnity cover. The Full Court dismissed this point finding "…the proper construction of a particular policy is not determined by such generalised categorisations of policies. The Liberty Policy remains relevantly a policy for liability for Property Damage, which extends to subcontractors by the breadth of the definition of the Insured."
In light of the above, the Full Court ruled that no material error had been established in the primary judge's reasoning, dismissing the appeal with costs.
Implications for third party contractors
This decision sets out relevant commentary on third-party coverage and the factors which courts will consider when determining the scope of 'subcontractors' covered by a third-party liability insurance policy.
Insurers should employ care and precision when outlining classes of insureds under a policy, considering the wording of key terms including the 'Insured' and 'Insured's Business' which will both play a central role in determining whether a particular third-party is entitled to coverage. Policyholders should also bear in mind the principle restated in this case regarding the receipt of full indemnity from one insurer discharging the obligations of a second insurer from any claim by the policyholder.