An insurer was not required to provide indemnity for a 'delayed claim' under a 'last resort' home warranty insurance policy. Section 54 of the Insurance Contracts Act 1984 provides relief against 'the effect of a contract of insurance', not the effect of State law.
In issue
- Whether s54 of the Insurance Contracts Act 1984 (ICA) prevented an insurer from refusing a delayed claim, where the insured failed to notify the insurer per s103BB(3) of the Home Building Act 1989 (NSW) (HBA), and if not, was s103BB(3) invalid under s109 of the Constitution as inconsistent with a law of the Commonwealth.
The background
The Plaintiffs held a home warranty insurance policy (the policy) for the purchase of their new home and the period of cover ended on 1 May 2017 for structural defects. The policy was issued under a statutory scheme, (HBA) and subject to the ICA. The policy included a 'last resort' clause for loss or damage from a breach of a warranty which cannot be recovered or rectified by the builder because of insolvency, death or disappearance. The policy also provided a clause that an insurer must be notified of a claim no later than 6 months from when an insured first becoming aware of the facts and circumstances relating to the claim.
The Plaintiffs engaged a builder to build their new home in January 2009. Prior to moving in, the Plaintiffs met with their builder to discuss various defects and moved in on 27 January 2011. The Plaintiffs became concerned with further defects which the builder attended to in mid-March 2011.
Following amendments to the Home Building Act in 2011, the circumstances under which a claim under the policy could be made was relevantly amended by the inclusion of section 103BB, which stated that:
- (3) When a loss becomes apparent during the period of insurance but a claim cannot be made during that period because an insured event has not occurred, a claim can be made after the period of insurance (as a delayed claim) but only if –
- (a) the loss was properly notified to the insurer during the period of insurance ...
In contrast of course, the policy itself provided that a claim could be notified within six months of becoming aware of the fact or circumstance under which the loss arises (that is in this case, the builder’s insolvency).
Defects and insurance claim
On 25 January 2017, the Plaintiffs filed an application in the NSW Civil & Administrative Tribunal (NCAT) seeking damages for rectification of defective building work.
On 9 July 2020, the Plaintiffs notified the insurer of the loss. A claim was eventually made on 15 December 2020 after the builders were placed into creditors’ voluntary liquidation on 18 August 2020.
Although losses were apparent before the expiration of the policy, a claim was not made as the builder had not yet become insolvent (that is, the insured event had not taken place).
The insurer disclaimed liability on the basis that it was not notified of the loss during the period of insurance in accordance with s103BB(3)(a) (that is, by 1 May 2017).
The Plaintiffs submitted that s103BB of the HBA was implemented to modify the policy which responded to their claim. The insurer was not entitled to refuse the claim merely for the reason of them failing to notify it of the loss within the policy period.
The decision at trial
Whilst there have been a number of decisions that have dealt with the opening words in s54(1) on when that section is enlivened (namely, 'the effect of a contract of insurance')1, Her Honour observed that none of those cases addressed the circumstances where the 'effect' was brought by a State law.
Her Honour was therefore asked to consider whether, as the Plaintiffs put it, s103BB(3)(a) modified the contract of insurance by inserting a term to that effect.
Her Honour found against the Plaintiffs. In doing so, Her Honour referred to two provisions that explicitly amend a contract: s13 of the ICA which imposes a requirement for parties to an insurance contract to act with utmost good faith and, s18B of the HBA which implies in every contact for residential build work certain warranties.
In contrast to those provisions, Her Honour noted that s103BB did not in words say that it was implied into or modified a contract of insurance. Moreover, her Honour found no intention on the part of the legislature to modify the terms of a contract of insurance.
As such, Her Honour concluded that s103BB 'operates outside the contract of insurance' such that the insurer’s declinature was based on state legislation rather than the contract, which in turn did not enliven s54.
Her Honour also dismissed the Plaintiffs’ alternative argument that s103BB of the HBA was inconsistent with s54 of the ICA such that, pursuant to s109 of the Constitution, the Commonwealth law (i.e the ICA) should prevail.
Given Her Honour’s earlier conclusion that the HBA operates outside the contract of insurance and s54 was not engaged, Her Honour found no inconsistency which would warrant the application of s109 of the Constitution.
Implications for you
The decision confirms insurers may rely on state legislation when making indemnity decisions without the implications of the ICA, if the justification is not based on the insurance contract itself. The decision serves as a useful reminder that section 54 ICA does not operate to relieve an insured of restrictions or limitations that otherwise affect a claim. Section 54 is a remedial provision, which may, depending on the particular facts and circumstances, excuse a lack of proper notification. Insurers can take comfort from the fact that it will not cure every failure to properly notify a claim in the manner or time required.
Updated 11 October 2024: On 4 October 2024, the NSW Court of Appeal dismissed an appeal by the insureds on a number of grounds including that s 54 of the Insurance Contracts Act did not prevent the respondent insurer from denying indemnity because the relevant section of the Home Building Act was not incorporated into the policy, and it did not alter the effect of the policy so as to engage s 54.The primary judge did not err in finding that s 54 of the Insurance Contracts Act was not engaged by the respondent’s refusal to pay in reliance upon s 103BB(3) of the Home Building Act. The language of s 54, which speaks of 'the effect of a contract of insurance', focusses upon contractual not statutory effects.
Drummond v Gordian Runoff Ltd [2023] NSWSC 607
1 Example: Maxwell v Highway Hauliers Pty Ltd [2014] HCA 33
