Expanding roads do not result in an expansive indemnity for property damage under liability insurance policies

13 December 2022

The NSW Supreme Court found that Underwriters were not required to indemnify their Insured under its insurance policies for all of its defence costs arising from various claims against it due to use of a defective product in roadworks, as some of the claims did not trigger the insuring clause or were otherwise excluded pursuant to a product recall exclusion.

In issue

  • Whether Underwriters were required to indemnify Newcastle Resources Pty Limited (Newcastle Resources) for its defence costs in District Court proceedings, pursuant to a liability insurance policy.

The background

Between July 2006 and June 2014, Newcastle Resources supplied Lake Macquarie City Council (the Council) with a product known as 'Mix 3', used in various roadwork bases (the Product). The Council used the Product when constructing various roads and subsequently brought claims against Newcastle Resources, alleging that the Product:

  1. expanded excessively, causing damage to property adjacent to roads constructed by the Council (Council Liabilities). Additionally, roads and related infrastructure owned by the Council were damaged and required repairs (Council Repair Costs); and
  2. was unsuitable for road construction and required removal from road bases, involving substantial future road reconstruction. This was estimated to cost $124 million (Future Road Replacements). The Future Road Replacements formed the majority of the quantum of the Council’s claim.

A property owner whose property was damaged by the Council’s roadworks issued court proceedings against the Council in 2017. The Council cross-claimed against Newcastle Resources. In 2018, the Council commenced further proceedings against Newcastle Resources for the Council Liabilities in relation to claims for damages made against it by other property owners, as well as the Council Repair Costs and Future Road Replacements (Underlying Proceedings).

Underwriters provided Newcastle Resources with liability insurance cover under materially identical policies from 30 June 2011 to 30 June 2015 (the Policies), which entitled Underwriters to assume conduct of the Underlying Proceedings in Newcastle Resources’ name. Initially, they did so and incurred $1 million in costs. However, on 30 November 2021, Underwriters ceased conduct of the proceedings on behalf of Newcastle Resources and refused to pay further defence costs.

Newcastle Resources brought proceedings against Underwriters seeking a declaration that Underwriters were obliged to pay the Defence Costs incurred in the Underlying Proceedings.

The decision at trial

Ultimately, the Court found that Newcastle Resources was not entitled to the declaratory relief it sought (ie. indemnity for all Defence Costs incurred in the Underlying Proceedings) in circumstances where the Policies did not provide cover for the entirety of the Underlying Proceedings.

The Insuring Clause of the Policies provided that 'Subject to the terms of this Policy, Underwriters will pay to or on behalf of the Insured all sums which the Insured shall become legally liable to pay by way of compensation … in respect of … Property Damage first happening during the Period of Insurance as a result of an Occurrence in connection with the Insured’s Business.'

Although the parties accepted that the Council Repair Costs triggered the Insuring Clause, there was a dispute as to whether the Council Liabilities and Future Road Replacements did so. The Court considered that the key question was whether these claims could be characterised as being 'in respect of' Property Damage.

Ultimately, the Court accepted Newcastle Resources’ submissions that the Council Repair Costs were in respect of Property Damage in that they arose directly from the claims made by affected property owners for their own Property Damage that, according to the Council’s claim, is the same damage for which Newcastle Resources, if sued by those property owners, would be liable.

However, the Court did not accept that the Future Road Replacements claim was in respect of Property Damage. It agreed with Underwriters’ submissions that property is not damaged unless there is a physical alteration or change which impairs the value or usefulness of the thing that is said to have been damaged. The Court found that the roads requiring replacement due to inevitability of future damage were defective, but they had not been damaged for policy purposes and did not trigger the Insuring Clause.

Critically, the Court observed that the uninsured Future Road Replacements claim may well prove to be the most significant of all the claims.

There was also contention between the parties as to the operation of Exclusion 13.3 of the Policies which provided that the insurers did not cover liability directly or indirectly caused by, arising out of or in any way connected with 'Loss of or damage to or the costs of recall, removal, repair, alteration, reconditioning, replacement or reinstatement of any of the Insured’s Products caused or necessitated by the defective condition or unsuitability of any such Products or part of such Products.'

Underwriters argued that Exclusion 13.3 of the Policies excluded the claim for Future Road Replacements. Newcastle Resources argued that as Exclusion 13.3 did not refer to the cost of proceedings and therefore did not exclude Newcastle Resources’ claim for defence costs. Although the Court found that the Insuring Clause was not triggered for the entirety of the Future Road Replacements claim, it also determined that Exclusion 13.3 was triggered for the majority of the Council’s claim for Future Road Replacements, as it was connected with the cost of removing Newcastle Resources’ Products, and the parties cannot have intended to provide defence costs for an excluded claim.

The Court then considered whether Underwriters were obliged to pay all defence costs incurred by Newcastle Resources in relation to the Underlying Proceedings in circumstances where some, but not all, (ie, the Future Road Replacements claim) were covered under the Policies. Newcastle Resources argued that a 'material part' of the claims made by Council were within cover and therefore Underwriters were obliged to pay the entirety of Newcastle Resources’ defence costs. However, that argument was rejected with the Court concluding that, on a proper construction of the Defence Costs clause, cover was limited to costs incurred with respect to claims that, if established, would fall within cover.

Implications for you

This case serves as a reminder that for there to be Property Damage for the purposes of triggering an insuring clause in a liability policy there must be a physical alteration or change which impairs the value or usefulness of the thing that is said to have been damaged, as opposed to the presence of a mere defect.

Moreover, the Court’s finding that the parties did not intend that the Policies would provide defence costs for an excluded claim is consistent with a large number of authorities where Courts have applied a businesslike interpretation to policies and considered their commercial context when considering whether indemnity is available under an insurance policy. The Court took a pro rata approach as to what cover was available for defence costs.

Newcastle Resources Pty Ltd (formerly known as SCE Resources Pty Ltd) v Certain Underwriters at Lloyd’s Syndicate CVS 1919 subscribing to policies numbered LS00100XL, LS00100BU and STA0222BU [2022] NSWSC 1485

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