By Bronwyn Ackland, Partner and Poppy Scaife, Paralegal

The proceedings arose from maintenance works carried out in 2015 by Bradford Marine Pty Ltd, namely, the insured, on a vessel owned by the Applicant, Helicopter Aerial Surveys Pty Ltd. The maintenance works included preparation and painting of the hull below the waterline, application of anti-fouling coatings and the repainting of the topside of the vessel.

Although the works were completed in 2016, the Applicant identified several areas that had not been properly treated. Inspection confirmed that the anti-fouling coatings applied to the underwater portion of the hull was defective. In rectification, the Applicant engaged another contractor, GT Mac, later in 2016 which incurred, rectification costs of $92,149.49.

In the following years, further corrosion became apparent in the topside paintwork. In 2019, the Applicant again engaged GT Mac to remediate these affected areas, at an additional cost of $148,697.36.

A judgment of the Federal Circuit Court of Australia established the insured’s liability, finding that the deficiencies in Bradford Marine’s works caused corrosion and subsequent damage throughout the vessel, which then necessitated the extensive rectification. The Court awarded the Applicant $260,000 in damages, with costs of $320,000.

Policy

At all times before its deregistration in October 2024, Bradford Marine held a policy of insurance with Insurance Australia Limited (“IAL”).

Under Clause 3.1 of the policy, IAL undertook to indemnify the insured for all sums the insured became legally liable to pay as compensation for property damage arising from an occurrence connected with the conduct of the insured’s business. The parties did not dispute that this primary insuring clause was engaged.

The schedule set a limit of liability of $20 million for any one occurrence. For optional extensions, relevantly, the “faulty workmanship” cover, the policy imposed an aggregate sublimit of $25,000 for each period of insurance.

Clause 6.6, the central issue, provided IAL would not indemnify the insured for costs associated with performing, completing, correcting or improving work undertaken by the insured. This “faulty workmanship exclusion” was, however, qualified by a write-back. Under that provision, IAL remained liable to pay for the rectification of faulty works where that rectification was required because of resultant damage. The write-back limited recovery to the wholesale cost of parts and the net labour cost of performing or re-performing the work on property the insured had contracted to service prior to the occurrence that caused the resultant damage.

The plaintiff sought indemnity under s 601AG of the Corporations Act 2001 (Cth), asserting that, because Bradford Marine was deregistered, IAL was liable to meet the insured’s established liability, provided that the policy covered that liability, immediately before deregistration.

Decision

The Court considered the remediation works undertaken by GT Mac in 2016. His Honour found it more likely than not, that these works were confined to correcting the defective workmanship performed by the insured in 2015. The interval between the completion of the initial works and the requirement for rectification, together with the description of the works as “rectification,” indicated that the 2016 repairs set right the insured’s faulty application of anti-fouling, rather than addressing any later deterioration. As such, the costs fell within the faulty workmanship exclusion in clause 6.6. The relevant policy sublimit applied and the Applicant was entitled to indemnity in the amount of $25,000.

The position regarding the 2019 remediation works was largely different. These works occurred four years after the original works and evidence did not support a finding that the entirety of those costs represented correction of the insured’s original work. Instead, the Court accepted that additional rusting and corrosion, either not present in 2016 or worsened thereafter constituted consequential property damage, possibly arising from the insured’s initial breaches. As the 2019 works addressed subsequent damage rather than simple correction, the exclusion in clause 6.6 therefore, did not apply.

Ultimately, the Court concluded that the Applicant was entitled to indemnity totalling $507,510.61.

Relevance

The decision in Helicopter Aerial Surveys Pty Ltd v Insurance Australia Ltd reinforces the structured approach required when interpreting faulty workmanship exclusions in liability policies. It notes that, even where defective work is established, insurers must still satisfy strict evidentiary and legal thresholds before an exclusion can be applied.

The judgment confirms that the onus remains firmly on the insurer to prove that a claim falls within an exclusion, and that s 601AG of the Corporations Act 2001 (Cth) does not disturb that.

Importantly, it underscores that indemnity will not be denied simply because faulty workmanship is involved. Rather, that the insurer must demonstrate that the costs relate directly to the correction of the insured’s own work, as opposed to rectification of subsequent damage. Where that damage is established, exclusions of this kind will not operate, despite the presence of underlying defective workmanship.