The Full Court of the Federal Court of Australia was asked to determine a rather unique dispute as to whether the Opal Tower was a “Product” for the purposes of a policy of insurance. Having regard to the context of the policy as a whole, the Court said no.
Most readers have heard of the Opal Tower, a 37-storey mixed residential and commercial building in Sydney Olympic Park, built by Icon Co (NSW) Pty Ltd (Icon).
In December 2018, some 4 months after the building was completed, and during the defects liability period, residents heard loud cracks and were subsequently evacuated.
That cracking has spawned a number of legal proceedings, including a class action, concerning not only the existence and cause of the defects in the Opal Tower, but also Icon's entitlement to indemnity under separate insurance policies issued to it by Liberty Specialty Markets (Liberty) and QBE Underwriting Limited (QBE).
The policy issued by QBE, for the period September to December 2018, provided cover to Icon for "Property Damage happening during the Period of Insurance as a result of an Occurrence in connection with [Icon's] Product Liability and/or Completed Operations."
QBE denied cover (as did Liberty on different grounds). Icon commenced proceedings, seeking certain declarations regarding the respective policies issued by QBE and Liberty.
The issue in dispute as between QBE and Icon was deceptively simple: Was the Opal Tower a "Product"?
On 19 October 2020, the Federal Court handed down a decision in which it declared the Opal Tower, including its constituent parts, was a "Product" for the purposes of the QBE Policy. It also declared that the Liberty Policy should be rectified to give effect to the common intention of the parties that for projects notified to Liberty, cover would extend to not only the construction period, but also during any defects liability period (even though Icon failed to notify Liberty of the defects liability period for the Opal Tower project).
Those declarations cleared some of the hurdles for Icon in obtaining cover under the two policies.
QBE and Liberty each appealed the Federal Court’s decision.
On 20 July 2021, the Full Court of the Federal Court allowed QBE’s appeal, overturning the declaration that the Opal Tower, including its constituent parts, was a “Product”.
The Full Court otherwise dismissed Liberty’s appeal referrable to the declarations made in respect of the Liberty Policy.
The definition of Product
QBE submitted that the Opal Tower was not a "Product" because a completed building did not fit in with the words used to define a "Product".
QBE said that Icon, as a builder, "built" or "constructed" the Opal Tower. Of the 17 different verbs used to define "Product", "built" or "constructed" were not used. That, QBE said, was to give effect to the mutual intention that a completed building was not a "Product".
Icon, however, pointed to the words "erected", "supplied", "installed" and "manufactured", which were deployed in the definition of "Product", and submitted that Icon, as a construction company, did each of those things in building the Opal Tower.
Whilst the Court accepted that "built" or "constructed" are "the most apt descriptors of what a construction company does in relation to a building" (at ), it ultimately concluded that the definition alone did not provide a clear enough answer, and turned its attention to the context and purpose of the QBE Policy.
The context of the policy
The relevant clause under which Icon sought indemnity provided cover to Icon for two distinct risks, associated with "Products" and "Completed Operations", with the latter defined to mean construction projects where the building had been handed over and the defects liability had expired.
QBE submitted that if the Opal Tower (or any completed building) was a "Product", then that would render the definition of "Completed Operations" redundant and it followed that the parties could not have intended for completed buildings to be "Products" given the distinct scope of cover provided for Completed Operations.
The Court agreed. It said, at , that:
"Contrary to this stated intention, on the primary judge’s construction of the policy, any building would be a “Product” and QBE would thereby assume risk of liability in respect of it regardless of the stage of completion and whether the defects liability period had expired."
The Court also considered two specific exclusion clauses in coming to its decision.
The QBE Policy excluded liability for:
- Property Damage to Products (exclusion 5); and
- loss of use of tangible property resulting from a failure of a Product to meet performance levels (exclusion 6.2).
QBE submitted that if a completed building or any of its components was a "Product", then the two exclusions would apply to "Products" that are also "Completed Operations", which is contrary to the parties' clear and evident intent given the exclusion clauses do not refer to "Completed Operations".
Whilst there was some dispute on the scope of the exclusion clauses, the Court agreed with QBE and concluded, at , that:
"…the fact remains that cover for “Completed Operations” would be reduced by operation of exclusions 5 and 6.2 if “Completed Operations” are also “Products”. The parties have introduced these separate concepts and have agreed upon a different scope of cover for each of them. When regard is had to the exclusions in the context of the policy as a whole, it is evident that the parties did not intend the definition of “Products” to extend to “Completed Operations”, thereby eroding the distinction between them."
Finally, the Court dismissed Icon's submission that it would be odd if the QBE Policy covered completed buildings where the defects liability period had expired (pursuant to the definition of "Completed Operations"), but afforded no cover for completed buildings where the defects liability period had not expired.
The Court found that the suggestion that the scope of cover under the QBE Policy was odd was founded on assumptions without proper context and that there would only be a gap in cover if construction contracts commenced before the QBE Policy were not covered by some other insurer. The Court concluded, at , that:
"It is inappropriate and unjustified to assume that there would be no such earlier entered contracts commencing cover that would make the “gap” odd, anomalous or commercially inconvenient."
Implications for you
There is no doubt that interpreting a policy (or any contract) can be challenging. There are rules and guidelines, but they can be difficult to implement and a nuanced approach is required. Reasonable minds may differ.
With that in mind, it is perhaps useful to consider the remarks made in this case (and cases cited by the Full Court) on contract interpretation (citations omitted):
- the language is construed according to its natural and ordinary meaning;
- where the words are unambiguous, they cannot be ignored simply to reach a result that is apparently more commercially convenient;
- construing a written contract requires more than just assigning the words their ordinary meaning. The Court must consider the circumstances which the document addresses, and the objects which it is intended to secure;
- it may be necessary in identifying the commercial purpose or objects of the contract to understand the genesis of the transaction, the background, the context and the market in which the parties are operating;
- the objective theory requires the court to consider what meaning a reasonable person in the position of the parties would give those words. That requires the court to consider what the parties may be taken to have known;
- even a literal meaning of a word in a definition provision must not be permitted to prevail where it would produce a result not consistent with the object and purpose of the policy.
This decision is otherwise unlikely to determine what is a product for the purposes of any other policy (unless, of course, the same words are used). As the Court remarked when assessing the assistance gained by an earlier decision, that assistance “can only be regarded as very modest.”
Liberty Mutual Insurance Company Australian Branch trading as Liberty Specialty Markets v Icon Co (NSW) Pty Ltd  FCAFC 126
* Barry.Nilsson. acted for QBE in these proceedings.