By Adrian Papaianni, Partner and Victor Hoang, Senior Associate

Until recently it was a long-established approach by insurers to interpret “Property Damage” within the meaning of a Public and Products Liability Policy or Contract Works Liability Policy to occur when there has been consequential damage arising from defective work and/or defective products. Most liability policies will exclude the cost to rectify defective work or replace defective products.

Two recent Federal Court of Australia authorities threatened to displace the traditional approach which include the Federal Court case of AAI Limited v The Owners – Strata Plan No 91086 and Fairview Architectural Pty Limited [2025] FCAFC 6 (‘Fairview’) and the Federal Court of Appeal in Insurance Australia Limited t/as CGU Insurance v Capral Limited and Fairview Architectural Pty Limited [2025] FCAFC 46 (‘Capral’).

In Fairview, the Federal Court held that it was reasonably arguable that a Liability Policy was triggered at the time allegedly defective cladding was installed into a building because “Property Damage” (within the definition of the subject policy) occurs at the time of installation due the nature of the rectification works immediately required.   In Capral, the Federal Court of Appeal determined that “Property Damage” similarly occurs when defective aluminium plates were affixed to marine vessels because, amongst other things, the defective product affected the usefulness and value of the vessels.

The question has now also been considered by the Supreme Court of New South Wales.

The decision of The Star Entertainment Sydney Properties Pty Ltd v Buildcorp Group Pty Ltd trading as “Buildcorp Interiors” [2026] NSWSC 27 (‘Buildcorp’) is consistent with the Federal Court’s approach in Capral and Fairview.

This decision incorporates into NSW law the premise that “Property Damage” occurs when a defective product or material is affixed to a building (such as by being screwed in), as that affixation creates a physical alteration that: firstly, requires damage to the building when it is rectified, and secondly, impairs the value or usefulness of the building.

Background

From 2014 to 2016, the plaintiffs (Star Casino) undertook three projects to refurbish parts of their casino complex in Pyrmont. In the course of these works, aluminium composite panels (ACPs) were installed on the external façade of two buildings. The works spanned a period when the risks involved in so using ACPs were becoming known in Australia, including after a fire at the Lacrosse building in the Docklands, Melbourne in November 2014. Warnings by building regulators gradually followed.

In 2017, after the catastrophic fire at the Grenfell Tower in London, the NSW Government required Star Casino to remove the ACPs, and it did.

Star Casino sought damages from the head building contractor, its architect, and the builder’s subcontractor who installed the ACP. Given the subcontractor’s insolvency, its insurers were joined under the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW).

Prior Claims

All parties involved in each project were contractually obliged to ensure that the building work complied with the Building Code of Australia (BCA).

Star Casino failed in its claim against the builder in respect of its first project and second project for contractual reasons (amongst other things) However, Star Casino succeeded in its claim against the builder in respect of the third project. The builder was prima facie entitled to be indemnified by its subcontractor under the terms of the subcontract, which is what the Court was examining in the Buildcorp decision including policy defences available by the subcontractor’s insurer.

Argument on Insurer’s Liability

The builder contended that the subcontractor had an “insured liability” to the builder within the meaning of section 3 of the Civil Liability (Third Party Claims Against Insurers) Act and the builder was entitled to recover that amount from the insurers. To succeed, the builder had to establish that there was “Property Damage” within the meaning of the subject policy and that no other exclusions applied in part or wholly.

The builder submitted that the subcontractor’s policy responded as:

1. the installation of the ACP caused “Property Damage”, specifically, damage to the building as a consequence of affixing defective material; and
2. there was a physical alteration of the tangible property when the ACP was installed as installation involved insertion of nails and screws in the walls of the building (and the same could be said for the removal and rectification process as that would damage the elements of the building.

The subcontractor’s insurer submitted that the insuring clause of the subject policy was not triggered as:

1. there was no alteration of the physical state of the building by the installation of the ACP;
2. there was no evidence of any “damage” caused by their removal, which was carried out by Star Casino’s remediation contractor;
3. further or in the alternative, the recent decision of Fairview was interlocutory; and
4. further or in the alternative, the liability was limited to just the damage to the building caused by the affixation.

The Court’s Reasoning

Having regard to the available evidence and a long line of authorities, the Court in Buildcorp was satisfied that affixing of non-compliant ACP gave rise to “Property Damage” within the meaning of the policy in two ways:

1. The building had a combustible external façade that creates a fire safety risk and potential liability for those responsible for ensuring that the building complied with the law (i.e. the increased cost of fixing the ACP and that the presence of non-compliant ACP reduced its fire resistance or safety).
2. The nature of the defect meant the affixed products had to be removed, which would damage the building.

The Court also analysed and held that the standard “Contractual Liability” exclusion in the subject policy did not apply.

Implications

Capral and Fairview decisions paved the way for the Courts apply a broad interpretation to whether “Property Damage” has occurred at the time of installation.  The question of whether any consequential physical damage manifested is no longer the sole criteria (if at all).

The Buildcorp decision incorporates Capral into NSW law for the first time. It creates a risk that ‘Property Damage’ may be argued to occur at the time of defective workmanship, rather than when physical damage manifests.  There remains the risk that this approach will extend to Material Damage and other occurrence-based policies.

It is significant that none of these cases have closely considered whether defective workmanship / product exclusions apply once a Policy’s Insurance Clause has been triggered. These remain standard Policy exclusions that would continue to apply to limit insurers’ exposure that remain applicable and is an area that will likely continue to evolve and must be closely monitored.