In a dispute concerning the denial of indemnity arising from an insured’s faulty anti-fouling/painting works of the plaintiff’s vessel, the Federal Court of Australia found that the insurer was liable to pay for the costs of rectifying the resultant damage, however its liability to pay for the costs of rectifying the initial faulty work was limited.
In issue
- The Court was required to determine whether the costs of rectifying damage to the plaintiff’s vessel as a result of the insured’s faulty anti-fouling/painting works was covered under the relevant public and products liability policy.
The background
In 2015, Bradford Marine Pty Ltd (the insured) performed maintenance works (the works) on a vessel owned by Helicopter Aerial Surveys Pty Ltd (the plaintiff). The works included painting the hull below the waterline and the topside, as well as surface preparation (i.e., anti-fouling). The insured completed the works in 2016, following which, the plaintiff noticed areas that were not satisfactorily treated. Further investigations revealed that the anti-fouling of the hull below the waterline was defective.
In 2016, the plaintiff engaged another contractor, GT Mac, to rectify the hull below the waterline at a cost of $92,149.49. The plaintiff later noticed corrosion seeping to the surface of other painted areas in the topside. The plaintiff engaged GT Mac in 2019 to perform further rectification works to these areas at a cost of $148,697.36.
A previous judgment of the Federal Circuit Court of Australia (FCCA) established the insured’s liability to the plaintiff for $260,000 plus agreed costs of $320,000. The Court previously held that the insured’s faulty workmanship caused corrosion and damage to the plaintiff’s vessel, necessitating rectification and remediation works.
The insured held an insurance policy with Insurance Australia Limited (IAL) prior to its deregistration in October 2024.
The policy
Clause 3.1 of the policy provided that IAL ‘will pay to or on behalf of the insured all sums provided by the policy which the insured shall become legally liable to pay as compensation for ... property damage ... caused by an occurrence happening in connection with the business of the insured’. The parties agreed that the insuring clause was triggered.
The limit of liability for any one occurrence was stated in the schedule as $20,000,000, and in respect of optional additional covers, including the ‘faulty workmanship’ clause, there was a sublimit of $25,000 in aggregate per period of insurance.
Clause 6.6 was the relevant exclusion clause and stated that IAL ‘shall not be liable to indemnify the insured in respect of any liability for the cost of performing, completing, correcting or improving any work done or undertaken by the insured’ (the faulty workmanship exclusion).
The faulty workmanship exclusion contained a write back that IAL ‘will pay for the rectification of faulty workmanship consequent upon resultant damage, limited to the wholesale cost of any parts, the net labour cost required to perform or re-perform work, in whole or in part, on any property on which the insured had contracted to perform work, repairs, maintenance or service prior to the occurrence causing the resultant damage, and the performance or re-performance of the work is made necessary by the same occurrence causing the resultant damage’.
The plaintiff sought indemnity from IAL for the costs incurred due to the insured’s faulty workmanship under section 601AG of The Corporations Act 2001 (Cth), which allows recovery from the insurer of a deregistered company if the company had liability to the claimant and the insurance contract covered that liability immediately before deregistration.
The decision at trial
The Court examined the evidence and found it more likely than not that the remediation performed by GT Mac in 2016 was limited to the cost of correcting the work done or undertaken by the insured in 2015. The relatively short timeframe (eight or nine months after the original work) and specific reference to ‘rectification’ suggested the works consisted essentially of setting right the original defective work, rather than addressing further damage that surfaced later. Therefore, these costs fell within the scope of exclusion clause 6.6. However, due to the applicable policy limits, the plaintiff was entitled to indemnity in the amount of $25,000 (the sublimit), plus an appropriate share of interest.
The position was substantially different for the remediation performed in 2019. These works took place about four years after the original defective work. The Court found the evidence did not establish that these costs were solely for ‘correcting’ the insured’s original work. Instead, some of the costs related to remediation of further consequential property damage, beyond that which existed in 2016 which may have been caused by the insured’s original work. There was evidence that rust and corrosion not present in 2016 had worsened or appeared in new areas by 2019. The Court was not satisfied that the entirety of the 2019 works constituted ‘correction’ of original workmanship and, as such, the exclusion in clause 6.6 did not apply.
The Court ultimately held that the plaintiff was entitled to indemnity for $507,510.61, including damages, interest, and costs.
Implications for you
The decision provides a useful analysis on the interpretation of ‘faulty workmanship exclusion’, which are often found public and products liability policies. The decision also underscores the proposition that the insurer bears the burden of proof to establish that a claim falls within an exclusion, and that s 601AG of the Corporations Act does not reverse that burden.
Helicopter Aerial Surveys Pty Ltd v Insurance Australia Ltd (No 2) [2025] FCA 1360
