Background
In July 2015, the Appellant, Tanwar Institute of Professional Studies Pty Ltd as trustee of Professional Studies Pty Ltd (Tanwar), was required by the NSW Environment Protection Authority (EPA) to carry out upgrade works to its petrol station at Lewisham to control vapour recovery and to be compliant with clause 69 of the Protection of the Environment Operations (Clean Air) Regulation 2010 (NSW).
The petrol station was leased by Tanwar to and operated by Tanwar Enterprises Pty Ltd (Tanwar Enterprises). Mr Ramesh Tanwar was the sole director and shareholder of Tanwar and Tanwar Enterprises. After receiving the notice, Mr Tanwar (who was also a licensed builder), with the assistance of subcontractors, commenced the necessary works. As part of the works, it was necessary to remove a portion of the concrete apron of the petrol station and replace the pipes that connected the petrol storage stanks to the bowsers.
On completion of the works, testing showed that air was getting into the pipes and the bowsers were not working properly. Further investigations revealed that the pipes had at least 24 small holes in them. There was also evidence of a drill bit embedded in one of the pipes which indicated the damage was caused maliciously. Tanwar claimed on its business insurance policy for the repair costs, business interruption and claim preparation expenses in the sum of $444,305. The insurer denied liability.
The decision at trial
At first instance, the Court found:
- The pipes were not part of the definition of 'Building' due to their location within the ground.
- The exclusion to the definition of 'Buildings' applied because the damage to the pipes occurred during the construction work and the contract value of that construction exceeded the policy threshold of $100,000 (being more than 20% of the sum insured). Tanwar argued that the construction works were complete at the time the damage occurred. However, his Honour rejected this argument -because the work was undertaken by Tanwar, the exclusion did not apply. His Honour advised that a distinction needed to be drawn between 'contact price' and 'contract value'. This meant that what was relevant was the reasonable market price for the work and not the price according to some contract.
- The insurer was entitled to refuse to pay the claim because Tanwar had failed to comply with the General Policy Condition relating to a change to the risk.
- His Honour was not satisfied that Tanwar had discharged its onus of establishing its loss. The invoices provided were unparticularised and unsubstantiated.
- A claim for lost rent was rejected by His Honour as Mr Tanwar failed to explain why Tanwar was not in receipt of rent that it otherwise would have received from the tenant as alleged in his affidavit.
- A claim for 'claim preparation' costs was rejected because the insurer was entitled to deny liability and Tanwar had failed to establish that the claim was necessarily and reasonably incurred.
Tanwar was awarded $149,021 for repairs and nothing for lost rent or claim preparation.
The issues on appeal
Tanwar’s amended notice of appeal identified nine grounds of appeal. Grounds 1 and 3 were not pressed. Ground 4 attacked the primary judge’s interpretation of the definition of 'Buildings'. Grounds 5 and 6 attacked the primary judge’s conclusions in relation to the application of the exclusion to the definition of 'Building' and 'contract value', respectively. Grounds 2 and 2A attacked the primary judge’s conclusions in relation to the change of risk clause. Ground 8 attacked the primary judge’s conclusions in relation to the business interruption element of the claim.
The decision on appeal
The insurer accepted that it was not entitled to rely on the change in risk clause. Accordingly, grounds 2 and 2A, which concerned the application of s 54 of the Insurance Contracts Act 1984 (Cth) (the ICA) to the change of risk clause, did not arise, and the appeal was allowed to the extent that the denial of the claim depended on that clause.
Contrary to the conclusions of the primary judge, the Court of Appeal found that the underground pipes fell within the definition of 'Buildings'. The Court noted that there was nothing in the definition that suggested that it only covered improvements above ground. The definition covered 'foundations' which are almost invariably underground. It also covered 'swimming pools' and 'storage tanks' which are also usually underground.
It was common ground between the parties that the insurer bore the onus of proving the facts relevant to the application of the exclusion. Therefore, it bore the onus of proving that 'the total contract value of all work' carried out by Tanwar to comply with the notice received from the EPA exceeded $100,000. In this case, the insurer made no attempt to prove the existence of any contract under which work was done to comply with the EPA notice, let alone the amount payable under that contract. Instead, the insurer sought to prove the reasonable costs of doing the work. The Court of Appeal adopted the primary judge’s reasoning that 'contract value' was not the same as the contract price and that what was critical was the value of the work.
It was concluded that Tanwar had failed to provide its claim for lost rent. Clause 10 of the lease between Tanwar and Tanwar Enterprises allowed for rent abatement or lease termination if the premises were damaged.
The lease did not permit abatement of rent in other circumstances and consequently, there was no evidence that Tanwar Enterprises was entitled to an abatement of rent.
Overall, the Court of Appeal held that the pipes were covered because the policy defined 'Buildings' broadly enough to include underground structures connected to the tanks. The Court of Appeal also held that the insurer failed to prove that the 'contract value' of the works exceeded the policy exclusion threshold, noting that 'contract works' meant work carried out under an identifiable contract and valued by reference to what was payable under that contract. The Court of Appeal also confirmed the award of $149,021 as the reasonable repair cost and the claim for lost rent was again rejected due to lack of evidence.
Implications for you
This decision emphasises the importance of keeping clear records of all costs and losses when making a claim and that the definition of 'Buildings' can include underground structures (pipes). It also illustrates that exclusion clauses must be strictly proved by insurers. The insurer in this case failed to establish the ‘Contract Value’ exclusion.
