Insurers can deny indemnity for an insured’s failure to comply with a condition of policy, unless that condition goes to the heart of the risk the insurer has agreed to indemnify. In WFI Insurance Ltd v Manitowoq Platinum Pty Ltd [2018], the insurer was entitled to deny indemnity on the basis that the plumbing works the subject of the claim had not been carried out in accordance with relevant Australian Standards, contrary to a condition in the policy which required all works to comply with relevant standards.

Background
Boss Shop Filling Pty Ltd (Boss) was engaged by Manitowoq Platinum Pty Ltd (Manitowoq) to undertake fit-out works to Manitowoq’s restaurant business. The works required Boss to install all necessary plumbing. Boss subcontracted the plumbing work to Millstream Plumbing Pty Ltd (Millstream).

On completion of the work, Manitowoq discovered water damage and defective plumbing throughout the restaurant. After attempts to rectify the damage failed, Manitowoq was required to undertake a substantial refitting of the restaurant.

Manitowoq commenced proceedings in the District Court of Western Australia against Boss for damages it had suffered as a result of Boss’ negligence and a breach of contract to recover the cost of the rectification work.

Boss made a claim for indemnity from its insurer, WFI Insurance Ltd (WFI), under its business liability policy, in respect of its liability to Manitowoq. However, before the extent of its liability was established, Boss went into liquidation and was deregistered.

It was not disputed at the trial of first instance that the plumbing works did not comply with relevant Australian Standards and were negligently undertaken by Millstream. WFI declined indemnity to Boss on the basis that Boss had breached a general condition of its policy that required Boss to comply with Australian Standards and legislation. The same condition also stated that if Boss failed in this obligation, WFI reserved the right to deny indemnity.

Decision of the Trial Judge
The trial judge concluded that Boss was only required to take “reasonable care” when complying with the policy’s general condition. In reading down the terms of the policy, her Honour held that a breach of this condition did not entitle WFI to refuse indemnity, and that insurers must consider the terms of their policies in light of commercial efficacy.

Her Honour reasoned that there was ambiguity between the terms of the insuring clause in the policy and the consequences of Boss’ entitlement to indemnity if it did not comply with the general condition. If it was intended that the general condition was an absolute obligation which overrode the terms of the insuring clause, or was a “condition precedent” to indemnity, the policy ought to have made this abundantly clear. Because it did not, her Honour concluded that the ambiguity should be read against the interests of WFI.

On Appeal
WFI appealed to the Supreme Court, arguing that the trial judge had erred in concluding that the general condition imposed an obligation on Boss to only take “reasonable care” to comply with legislation and Australian Standards.

Manitowoq argued that construing the general condition literally would defeat the policy’s commercial purpose. It submitted that it could not have been intended that an insured be obliged to comply with every applicable Australian Standard or legislative requirement in a policy providing cover for negligence, which is dependent on the consideration of whether the negligent party had taken “reasonable care”.

The Court accepted that if non compliance with the Australian Standards was the only or predominant source of potential liability indemnified under the policy then the respondent’s argument may have force, but there was no such finding by the trial judge, and no such finding open on the limited evidence led in the case.

The Court stated that the purpose of the policy was inferred from the ambit of cover that it provided. The policy sought to indemnify Boss in respect of personal injury or damage to property. The cost of the rectification work sought by Manitowoq was expressly excluded. The Court found that the general condition referred to compliance with Australian Standards with respect to the quality and standard of work. Excluding liability for work that fell below those Standards was consistent with the exclusion relating to covering the cost of rectification work.

A construction of the policy which obliges the insured to comply with legislation and Australian Standards did not deprive the policy of meaningful cover. Consequently, for these reasons, the Court found that the general condition did not impact the policy’s commercial purpose.

The Court rejected the trial judges conclusion the policy was ambiguous, and stated that, for a clause in a policy to be ambiguous, the ambiguity must be inherent in the words used, and cannot be established by suggesting alternative wording that could have been utilised.

The Court disagreed with the trial judge’s assertion that the decision to deny indemnity was not consistent with the terms and purpose of the policy and was not a condition precedent to indemnity. The Court noted that the trial judge had erred in drawing a distinction between “serious” and “less serious” breaches. Terminology used by the policy itself supported a construction of the policy which enabled WFI to refuse indemnity in the event of a breach of condition. The Court held that the wording of the policy was consistent and unequivocal and that the consequences of non-compliance were clearly set out in terms which were entirely consistent with the operation of Section 54 of the Insurance Contracts Act 1984 (Cth).Accordingly, the appeal was upheld.

Significance
Insurers can be reassured that a condition in a policy that imposes an unqualified obligation on an insured will entitle them to deny indemnity, unless the non compliance is the only or predominant source of potential liability.