In a recent decision on a separate question concerning application of a rain-impact exclusion, the Full Federal Court emphasised the importance of adopting a 'common sense' approach when interpreting ambiguous and undefined terms in insurance policies.
The Full Court held that, when faced with ambiguous exclusion clauses, an interpretation which conforms to logic and adopts business efficacy will prevail over clear expression of contrary construction. In determining the separate question on meaning of the expression 'location insured' in the exclusion, the Full Court held that 'location insured' can sensibly be understood as the location insured in respect of the particular claim, being that location where the damage occurred for which the insurance would be relevant.
- The Full Federal Court was asked to determine a separate question concerning the operation of an exclusion clause in a construction works policy which excluded damage to insured property caused by rain. Specifically, the Full Court considered whether the words 'location insured' in the exclusion referred to the whole of the project site or the location where the insured loss or damage occurred.
In July 2014, Acciona Infrastructure Australia Pty Ltd and Ferrovial Construction (Australia) Pty Ltd (Contractors) entered into a design and construction agreement with New South Wales Roads and Maritime Services (RMS) for the provision of the construction works, which included construction of a 19.5 kilometre stretch of highway between Warrell Creek and Nambucca Heads in northern New South Wales (Project Works).
The Contractors were named as additional insureds under the contract works policy issued to RMS by Zurich Australian Insurance Limited, Allianz Australia Insurance Ltd, and XL Insurance Co SE (collectively, the Insurers) (Policy). The Policy provided cover for damage to the insured property other than 'a cause specifically excluded' occurring at the project site during the construction period. Exclusion clause 3.12 in the Policy (Exclusion) excluded damage to earthwork and/or pavement materials caused by rain, however, it wrote back cover for damage caused by an event that exceeded a rainfall event with a minimum return period of 20 years (one-in-twenty-year event).
The Exclusion was in the following terms:
'… the Insurers will not indemnify [the Contractors] for loss or damage due to rain on earthwork materials and or pavement materials, except where such loss or damage is due to an event with a minimum return period of 20 years for the location insured on the basis of the 24 hour statistics prepared by the Bureau of Meteorology for the nearest station to the location insured, or such other independently operated weather station situation near or adjacent to the location insured.'
In June 2016, heavy rainfall and flooding occurred near the Project Works.
There were a number of weather stations located on and near the Project Works, including: two automatic weather stations at the southern and northern end of the Project, and two weather stations operated by the Bureau of Meteorology (BOM) nearest to parts of the Project Works located north of the Nambucca River. While the southernmost weather station recorded a one-in-twenty-year event, the northernmost and the BOM weather stations did not.
The Contractors claimed that excessive rainfall caused damage to the entirety of the Project Works and sought to recover their loss under the Policy. The Insurers contented that the Exclusion operated to exclude damage to the Project Works north of the Nambucca river.
An essential element of the dispute was a separate question that arose for determination namely, whether the expression, 'location insured', as used in the Exclusion ought to be construed to mean the entire 'Project Site' (as defined in the Policy) or the location at the Project Site where the damage occurred as a result of an event as defined in the Exclusion.
The Contractors contended that the expression 'location insured' should mean 'the situation that comprises a Project Site defined by the Policy and within which the loss or damage due to rain on earthwork materials or pavement materials occurred' such that the writeback in the Exclusion applied and damage to the entirety of the Project works was covered.
Conversely, the Insurers submitted that 'location insured', was limited to the location of the damage to earthwork materials and pavement materials the subject of the claim. On this construction, the exception to the Exclusion would not apply in respect of the damage occasioned in June 2016 because the nearest weather station to the damage did not record a one-in-twenty-year event.
The Full Court considered that the preferred construction was the one supported by logic and business efficacy and, siding with the Insurers, held that the expression 'location insured' within the meaning of the Exclusion was 'that place within the Project Site where the loss or damage in respect of which the claim is made has occurred.'
In arriving to its decision, the Full Court observed at , that in circumstances where the Project extended over a lengthy geographical area within which the intensity of a single rainfall event might vary considerably, it was 'difficult to see the logic in ascertaining the intensity of the event causing the damage, to which the insurance would apply, by reference to the intensity of the same event obtaining at some distant part of the Project Site' (which would be the effect of the Contractors submissions). Rather, it was 'much more logical to fashion the description of the degree of the relevant rainfall intensity by reference to rainfall which had been experienced at, or at least relatively near to, the location of the resulting loss or damage.'
The Full Court further observed that:
- On the Contractors’ construction, 'cover would only be available where the required rainfall event was recorded at the station nearest to the Project Site, regardless of the intensity of the rainfall at or proximate to the location where the damage was sustained. The Court held that unbusinesslike nature of that outcome tended to negate the suggestion that it was intended by the policy', at .
- The 'location insured' can sensibly be understood as the location insured in respect of the particular claim, being that location where the damage occurred for which the insurance would be relevant. 'That location would be relevant to the insurance since it would, in fact, be the occurrence of the damage there that would operate to trigger the insurance cover', at .
- If the parties had intended to refer to the area of the entire project, it would have been easy for them to do so by use of the term, 'Project Site', which was defined in the Policy. 'That, instead, a different expression was used which, in form, has a connotation of a more limited, more exact, flavour opens up an implication that it was not intended to refer to the whole area of the Project' at .
- An attempt (by the Contractors) to equate the expression 'location insured' to the defined term 'situation' was fraught with the same difficulties as the attempt to substitute the words 'Project Site' because 'it did not overcome the illogicality that results from seeking to ascertain whether damage was caused by a one-in-twenty-year event' by reference to the rainfall at a distant weather station, ignoring that which is most proximate. The adoption of that construction would still have the consequence of denying cover for damage caused by a one-in-twenty-year event.
Implications for you
The decision reaffirms well settled principles of interpretation of insurance policies. It illustrates that insurance polices must be read in their entirety and, in case of ambiguity or undefined policy terms, construed in a way that gives effect to logic and adopts business efficacy of the contract of insurance.
It also serves as a reminder that the interpretation of any exclusion clause will depend upon the precise factual circumstances surrounding the claim for coverage that has been made. An exclusion clause is more likely to apply if its language accords with the intention of the insurer and if it has causal nexus to the loss claimed.
Updated 8 September: On 7 September 2023, the High Court of Australia dismissed an application by the insured for special leave to appeal in this matter.