By Daren Curry, Partner and Gabriella Janu, Lawyer 

The NSW Court of Appeal handed down its decision in Allianz Australia Insurance Limited v Rawson Homes Pty Ltd [1] on 20 September 2021. The decision serves as an important reminder of the proper construction of a contract of insurance. While an insurance contract must be read as a whole, not every clause in the contract is equal and any qualifying clauses must be understood in view of the meaning of the insuring clause.

Background

On 8 February 2017, 122 residential homes under construction by Rawson Homes Pty Ltd (Rawson Homes) in Rouse Hill and Kellyville in the State of New South Wales (the Works) sustained damage in a hailstorm.

The Works were subject to 122 separate building contracts and all were insured under an annual Contract Works policy issued by Allianz Australia Insurance Limited (Allianz) providing cover for contract works commencing during the period of insurance.

Rawson Homes made a claim to Allianz under the policy in respect of its losses arising from material damage occasioned to the 122 residential homes due to the hailstorm. Whilst there was no issue that the policy responded, a dispute arose as to the amount of the deductable.

The policy provided that there should be a deductible of $10,000 for “Any One Event” applicable to “Material Damage” claims for “Major Perils”. Rawson Homes and Allianz agreed that the claim was a “Material Damage” claim in relation to a “Major Peril”, but:

1. Allianz considered that the policy required payment of $10,000 in respect of each of the 122 building contracts it sought to be indemnified in relation to (making a total deductable of $1.22M); and
2. Rawson Homes considered there was one event (the hailstorm) and one deductible of $10,000 applied to the aggregate of the damage to all 122 homes.

Rawson Homes commenced proceedings against Allianz in the Supreme Court of NSW in relation to, among other things, the proper application of the $10,000 deductible.

Supreme Court Decision

The Supreme Court of NSW preferred Rawson Homes’ interpretation of the policy and found that only one $10,000 deductible was payable in relation to the claim.

Pursuant to the “Application of Deductible” clause, the “Deductible” was to be subtracted from the amount payable by the insurer for “each event giving rise to a claim”.

“‘Deductible’ was defined in the policy to mean “the amount of money specified in the Schedule or stated in the Policy for each applicable Section or type of loss as specified, that the Insured must contribute as the first payment for all claims arising out of one event or occurrence”

The “event”, a term not defined in the policy, was construed on its ordinary and natural meaning to refer to the hailstorm.

On this basis, in terms of “each event giving rise to the claim”, the claim arose due to only one event, the hailstorm. It followed that the policy required that only a single $10,000 deductable was the amount to be deducted from the claim in respect of all 122 sites.

For the deductible to be applicable to each “Insured Contract” as Allianz had contended, it would have been necessary for the words “Insured Contract” to appear in the definition of “Deductible” or in the “Application of Deductible” clause which was not the case.

The Supreme Court acknowledged that whilst there were other terms of the policy, including the insuring clause, that could be read as reflecting an intention that a Deductible is payable per event, per Insured Contract, those terms were “at odds with the plain meaning of the Deductible definition, the Application of Deductible clause and the Schedule”.

Appeal and Findings

Allianz appealed to the NSW Court of Appeal on the correct application of the $10,000 deductible.

The Court of Appeal overturned the Supreme Court’s decision and allowed Allianz’s appeal.

The Court determined that the starting point for the construction of the policy was not the “Application of Deductible” clause, but the insuring clause. The Court held per Leeming JA at [10]:

“The starting point is the insuring clause. Accepting as I do that the contract is to be read as a whole, that does not entail that each provision is equal. Rather, there is an inherent hierarchy between the insuring clause and other clauses which qualify that clause. That is because until and unless the insuring clause is engaged, the other clauses which qualify the indemnity granted in the insuring clause are inapplicable. Another way of making this point is that a premise of such other clauses applying is that the insuring clause is engaged”

The wording of the insuring clause made it clear that the clause turned upon each “Insured Contract” (ie, each building contract). Similarly, the basis of settlement provisions provided cover by reference to the “Sum Insured”. The “Sum Insured” was the amount specified in the Schedule for any one loss or series of losses arising out of one event covered by the policy “for any one Insured Contract …after deduction of the relevant Deductible”.

In view of this, the Court held that the “scheme of the policy was that there was a relevant Deductible for the cover provided against losses arising from an Indemnifiable Event for each Insured Contract”. Accordingly, it was necessary for the provisions of the policy, including the “Application of Deductible” clause, to be understood to apply per “Insured Contract” and be read accordingly.

The proper construction of the policy therefore permitted Allianz to apply a deductable of $10,000 in respect of each “Insured Contract”, meaning from each of the 122 building contracts.

Per Leeming JA at [12]:

“Once it is seen that the Insuring Clause operates with respect to each Insured Contract, then the other provisions of the policy, including the “Application of Deductible” which was central to Rawlinson’s construction, are to be understood as being applicable per Insured Contract and read accordingly”

Implications of the Appeal Decision

The Court of Appeal decision reinforces an important principle of policy construction, being that the starting point must be the insuring clause.

It is well established that a contract of insurance must be read as a whole, but that does not mean that all provisions of a contract of insurance are equal.

As was expressed by Justice Leeming, there is an “inherent hierarchy” between the insuring clause and the other clauses of a contract of insurance. The top of the hierarchy is the insuring clause because the clauses which qualify the insuring clause are only applicable if the insuring clause is engaged.

It follows that insurers must pay primary attention to the insuring clause when approaching the terms of the policy. Even where other qualifying clauses may appear to have a plain meaning when viewed in isolation, those clauses must be interpreted by reference to the insuring clause.

[1] [2021] NSWCA 224 (20 September 2021).