National Vulcan Engineering Insurance Group Limited & Ors v Transfield Construction Pty Limited & Ors  NSWCA 327 (11 November 2003)
In National Vulcan Engineering Insurance Group Limited & Ors v Transfield Construction Pty Limited & Ors the NSW Court of Appeal dealt with an issue of this nature in the construction of an exclusion clause in a liability policy.
The policy in question was of a familiar type, covering not only the primary insured, Transfield Holdings Limited, and its subsidiaries including the building and civil engineering contractor Transfield Construction Pty Limited (“Transfield Construction”) but also a host of other interests generically described including principals, sub-contractors, engineers, consultants and others “for their respective rights, interests and liabilities”.
Section A of the policy provided cover in respect of physical damage to the contract works and plant and equipment. Section C provided the third party liability cover.
The relevant clause excluded from cover claims for dam age to property “owned by the insured”. The main issue was whether “the insured” meant only the party seeking indemnity or some/all of the other insured parties as well.
Transfield Construction had been contracted to construct a tunnel under the Princes Highway at Tempe as part of the New Southern Railway Project. The work involved a coffer dam to enable the tunnelling to be undertaken. Connell Wagner Pty Limited (“Connell Wagner”) was the project engineer. Coffey Partners International Pty Limited (“Coffey”) was the geotechnical consultant.
On 22 October 1997 a portion of the coffer dam failed causing the works area to be flooded resulting in damage to the works, plant and equipment in the works area and personal injury to two workers. On 24 February 1998 a second incident occurred when another area of the coffer dam wall failed.
The first incident gave rise to personal injury claims by the two injured workers and property damage claims by subcontractors for damage to plant and equipment (“the subcontractors’ claims”).
The largest of the claims was Transfield Construction’s own claim against Connell Wagner and Coffey for damage to the works and consequential losses allegedly as a result of negligent under design of the coffer dam piling (“the Transfield claim).
At some point the existence of the Transfield policy became known to Connell Wagner and Coffey. They both sought indemnity under the Transfield Construction policy in respect of the claims.
With the exception of the personal injury claims the insurers rejected the claims for indemnity following which proceedings were commenced by Connell Wagner, Coffey, Transfield and others in the Supreme Court of NSW . These proceedings were heard by McClellan J who found in favour of the insured interests. The insurers appealed.
The insurers did not dispute that:-* Transfield, Connell Wagner, Coffey and the subcontractors were all insured entities under the policy.
The insurers however relied upon exclusion 3(b) which provided that the policy did not apply to liability “for damage to property owned by the insured ”. (emphasis added)
The subject matter of the Transfield and subcontractors’ claims was the contract works owned (until completion) by Transfield Construction and plant and equipment owned by the subcontractors. The insurers argued this was “property owned by the insured” and as such the claims fell squarely within the exclusion.
It was central to the insurers’ argument that “the insured” in exclusion 3(b) meant either “all of the insured parties”, or the “primary”, or “contracting”, insured ie Transfield Construction.
The insurers contended that this construction was the only one which would give the exclusion any operation. They argued that the construction favoured by the insured interests completely nullified the exclusion. How could an insured party be liable to a third party for damage to its own property?
The insured parties contended that the reference to “the insured” in exclusion 3(b) was a reference to the actual insured making the claim for indemnity under the policy. In other words the exclusion operated to deny indemnity to any insured party against whom a claim had been made for damage to that insureds’ own property. In support of this they argued:* the policy contained several instances of references to the insured parties collectively. If it had been the parties’ intention that claims for dam age to property owned by any insured be outside the scope of indemnity then this could readily have been achieved by referring to the insured in the plural as had been done by the policy drafter(s) in other contexts.
In virtually every other exclusion clause in the policy, the context made it clear that references to “the insured” were to the insured seeking indemnity under the policy, rather than Transfield itself or all of the various insured parties. If the meaning were different in this context one would expect some clear and express indication to this effect.
The policy contained a “cross liability” clause which prescribed that
each of the persons comprising the insured shall for the purposes of this policy be considered as a separate and distinct unit and the words “the insured” shall be considered as applying to each of such persons in the same manner as if a separate policy had been issued to each of them in his name alone...
The insureds argued that the exclusion clause construed in this fashion was not otiose but still had operation in the area of third party claims for consequential loss arising out of physical damage to the property of the insured seeking indemnity.
The Court of Appeal accepted the insureds’ arguments and dismissed the appeal. In doing so, Santow JA, who wrote the leading judgment, advanced policy-based reasons for rejecting the insurer’s contention that the commercial purposes of the policy required the exclusion to apply to claims for damage to property owned by any of the insureds:* There were situations in which one of the insureds might be liable for damage to its own property at the suit of another. (However the examples given by His Honour were examples of consequential loss suffered by the third party arising out of the physical damage to the coinsured’s property. The insurers had in fact been prepared to concede that such claims were outside the scope of the exclusion in any event.)
Having disposed of the policy arguments in this fashion His Honour went on to express agreement with the insureds’ contentions that, as a matter of pure interpretation of the words of the exclusion and the policy as a whole, “the insured” must refer to the insured seeking indemnity under the policy.
The decision illustrates how easily insurers’ intentions may be frustrated by inadequate attention to detail in policy drafting. It seems absurd that the parties (especially the insurers) can really have intended the exclusion clause to have the effect found by the trial judge and Court of Appeal. It is much more likely that insurers intended that the policy not provide indemnity for property damage liability claims where the damaged property would be the subject of Section A of the policy in any event.
Clearly it is necessary for policies covering multiple interests to be drafted with some care to ensure that insurers are not exposed to unintended liabilities. In particular, if it is intended that the respective rights of the primary insured and the additional insureds be different, the differences must be clearly highlighted.
Perhaps in recognition of the difficulties to which these policies give rise, underwriters in recent times appear to have moved away from indiscriminate coverage of multiple interests. In more recent policies coverage to parties other than the primary insured depends upon the existence of a contractual obligation on the insured’s part to effect insurance covering the additional interest. This approach, besides reducing the scope of underwriters’ potential exposure also promotes closer scrutiny by underwriters of precisely what, and whom, they are agreeing to cover.