Absolute Tiling Solutions Pty Ltd v Certain Underwriters at Lloyds

v QBE Insurance (Aust) Ltd [2005] NSWCA 66 Legal & General Insurance Australia Limited v Eather (1986) 6 NSWLR 390 Liberty Mutual Insurance Company Australian Branch t/as Liberty Specialty Markets v Icon Co (NSW) Pty Ltd (2021) 396 ALR 193; [2021] FCAFC 126 Malamit Pty Ltd v WFI Insurance Ltd [2017] NSWCA 162 McCarthy v St Paul International Insurance Co Ltd (2007) 157 FCR 402; [2007] FCAFC 28 New Cap Reinsurance Corporation Limited (in liq) v Daya [2010] NSWSC 1226 Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (In Liq) (2003) 214 CLR 514; [2003] HCA 25 Prepaid Services Pty Ltd v Atradius Credit Insurance [2013] NSWCA 252 RAA-GIO Insurance Ltd v O'Halloran (2007) 98 Roberts v Goodwin Street Developments Pty Ltd [2023] NSWCA 5 SASR 123; [2007] SASC 245 Samways v Workcover Queensland [2010] QSC 128 Sheehan v Lloyds Names Munich Re Syndicate Ltd [2017] FCA 1340 Star Entertainment Group Ltd v Chubb Insurance Australia Ltd (2022) 400 ALR 25; [2022] FCAFC 16 State of New South Wales v Tempo Services Ltd [2004] NSWCA 4 Stealth Enterprises Pty Ltd t/as The Gentlemen's Club v Calliden Insurance Limited [2017] NSWCA 71 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8 AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65; (2014) 224 FCR 1 Todd v Alterra at Lloyd's Limited (2016) 239 FCR 12; [2016] FCAFC 15 Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corp Ltd [1974] QB 57 Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance (2018) 359 ALR 314; [2018] NSWCA 100 XL Insurance Co SE v BNY Trust Company of Australia Ltd [2019] NSWCA 215 Zurich Australian Insurance Ltd v Regal Pearl Pty Ltd [2006] NSWCA 328 Texts Cited: DK Derrington KC and RS Ashton, The Law of Liability Insurance (3rd ed, 2013, LexisNexis Butterworths) Category: Principal judgment Parties: Absolute Tiling Solutions Pty Ltd (Plaintiff) Certain Underwriters at Lloyd's subscribing to a policy of insurance (First Defendant) Coverforce Insurance Broking Pty Ltd (Second Defendant) Action Insurance Brokers Pty Ltd (Third Defendant) Sang Jo Moon aka Charles Moon (Fourth Defendant) Representation: Counsel: F C Corsaro SC with B Le Plastrier (Plaintiffs) C J Peadon with H Cooper (First Defendant) S R Donaldson SC with D Wong (Second Defendant) M S White SC with N Riordan (Third and Fourth Defendant)

Solicitors: Pinsent Masons (Plaintiff) Colin Biggers & Paisley (First Defendant) Meridian Lawyers (Second Defendant) DLA Piper Australia (Third and Fourth Defendant) File Number(s): 2021/00257066 Publication restriction: Nil

Introduction

1. These proceedings concern a claim by the Plaintiff, Absolute Tiling Pty Ltd (Absolute Tiling), on a professional indemnity policy underwritten by the First Defendant (the Underwriters) in respect of the period from 31 January 2020 to 4 May 2021 (the 2020/21 Policy).
2. The 2020/21 Policy was in substantially similar terms to two earlier professional indemnity policies held by Absolute Tiling and underwritten by the Underwriters, in respect of: 1. the period from 31 January 2018 to 31 January 2019 (the 2018/19 Policy); and 2. the period from 31 January 2019 to 31 January 2020 (the 2019/20 Policy).
3. The Second Defendant, Coverforce Insurance Broking Pty Ltd (Coverforce), was Absolute Tiling's broker and placed the 2020/21 Policy.
4. The Third Defendant, Action Insurance Brokers Pty Ltd (AIB), had acted as Absolute Tiling's broker prior to being replaced by Coverforce. AIB placed the 2018/19 Policy and the 2019/20 Policy. The Fourth Defendant, Mr Moon, was the authorised representative of AIB.
5. The dispute in these proceedings concerns whether Absolute Tiling is entitled to indemnity under the 2020/21 Policy in respect of a claim made by Toga Constructions NSW Pty Limited (Toga). That claim arose from a contract pursuant to which, relevantly, Absolute Tiling undertook to design and install sandstone cladding at a mixed-use development constructed by Toga. Following completion of the cladding works, the sandstone tiles began to detach and, despite rectification works, continued to detach. Toga subsequently made a series of demands for Absolute Tiling to rectify the works. Absolute Tiling first notified these matters to the Underwriters on 4 August 2020.
6. The Underwriters have denied indemnity. Although the denial of indemnity was put on various bases, the Underwriters relied in closing submissions principally on Absolute Tiling's failure to comply with its disclosure obligations and on certain exclusions in the 2020/21 Policy.
7. Absolute Tiling contends that the Underwriters wrongfully denied indemnity and therefore breached their obligations under the 2020/21 Policy.
8. In the event that it is found that the Underwriters were justified in denying indemnity on certain of those bases, Absolute Tiling makes claims for negligence, breach of contract and misleading conduct against Coverforce, AIB and Mr Moon (collectively, the Brokers).

Subcontract between Absolute Tiling and Toga

1. "Harbourfront Balmain" is a mixed residential and commercial development on the waterfront at 100-102 Elliott Street, Balmain, New South Wales (Harbourfront Balmain). It was built by Toga for another entity in the same corporate group, Toga Development Pty Limited.
2. On 18 June 2016, Absolute Tiling entered into a subcontract with Toga for the design and construction of floor and wall tiling systems and associated works at Harbourfront Balmain (the Subcontract).
3. Absolute Tiling is a member of a group of companies known as the Versatile Group.
4. Clause 8.14 of the Subcontract set out Absolute's design obligations. It provided, relevantly, as follows: "As part of the Subcontractor's Design Obligations, the Subcontractor shall: (a) ensure that the Design Documents (including any Design Documents which were not produced by the Subcontractor) satisfy the Main Contractor's Project Requirements; (b) ensure that the Design Documents contain sufficient detail to construct the Subcontract Works so that the Subcontract Works, when completed; satisfy the warranties in clause 2.3 and clause 2.7; (c) ensure that the details contained in any Design Documents are coordinated with the details contained in all other design documents prepared by Other Subcontractors; … (g) conduct sufficient investigations to ascertain the existence and extent of any Site conditions which may have an effect on the Subcontract Works; (h) design the Subcontract Works so that the Subcontract Works, when constructed, shall be structurally and aesthetically sound despite any Site conditions; …"
5. Clause 9.12(c) of the Subcontract required Absolute Tiling to deliver a Deed of Subcontractor Warranty. Absolute Tiling complied with this requirement. Pursuant to this Deed, Absolute Tiling warranted that it would complete the works free from defects, and was obliged to make good any defects, at no cost to Toga, within the warranty period.

Sandstone Tiling Specification

1. The Subcontract included, as part of Schedule 2, "Oculus Technical Specification Landscape Works (LA.30.0001) Draft 50% Tender Issue, dated 27 February 2015" (Oculus Technical Specification).
2. The intent of the original design for the works at Harbourside Balmain, as shown in the Oculus Technical Specification, was for sandstone tiles to be mechanically fixed. Section 3.3 of the Oculus Technical Specification provided that the construction of the sandstone walls was to be as shown on the "Drawings". The relevant drawings include "Oculus Landscaping Drawings / Date: 19.07.16 Issue for Tender / Dwg No LA. 18.300 Rev 3 Detail 3". This drawing relates to the installation of sandstone cladding on planter walls at Harbourside Balmain. It includes the following note: "20mm THICK SANDSTONE CLADDING TO BLOCKWORK … WALLS 0-1500mm ABOVE FFL [Finished Floor Level] TO BE MORTAR FIXED. WALLS 1500mm + ABOVE FFL TO BE PIN FIXED"
3. Following entry into the Subcontract, Toga suggested to Absolute Tiling that glue fixing rather than pin fixing be used for all tiles, as this would significantly reduce the cost of the cladding works. On 21 October 2016, Absolute Tiling and Toga agreed on a "Scope of Subcontract Works - Hard Landscaping: Cladding" (Cladding Scope of Works). Paragraph 5 of the Cladding Scope of Works provided that the Subcontractor shall complete the "supply and installation of sand stone cladding, capping etc. to planter walls, free standing walls, building façade, lookout etc". Paragraph 9 provided that the works in the Cladding Scope of Works comprised, but were not limited to, "the Design and Construct of the hard Landscaping works, including provision of … design, supply, installation … as indicated on the drawings". Paragraph 9 also provided that: "The subcontractor is not liable for any design associated with structure or works associated with other trades. However, they are obligated to provide a sound, fit for purpose execution and provide advice if the current design is not suitable for its intended purpose".
4. Paragraph 10 of the Cladding Scope of Works was set out in a marked-up form. The mark-up indicated the amendments which had been made as the result of moving from a system of mechanically fixing the sandstone to one relying on adhesive. Paragraph 10 relevantly stated as follows: "The Subcontractor shall complete all works listed but not limited to the following: a. Supply and installation of sandstone cladding to building façade, free standing walls, planter walls, lookouts etc. b. Walls exceeding 1,500 2,700 mm in height must have cladding mechanically will be adhesive with supporting angles every 2nd course fixed, walls not exceeding 1,500 2700mm in height to have cladding glue fixed or similar. No allowance for mechanical (pin) fixing has been made. …"

Detachment of Tiles

1. Towards the end of 2017, tiles began detaching at Harbourside Balmain. This problem continued during 2018 and 2019. I deal below, when addressing the issue of non-disclosure, with the communications between Toga and Absolute Tiling regarding this issue, and Absolute Tiling's knowledge regarding the nature and extent of the problem at various points during this period. In around October 2019, Toga engaged an independent expert, Mr Ross Taylor, in order to identify the cause of the problem.
2. On 27 July 2020, Mr Taylor issued a report, in which he expressed the following opinion: "It is our view that Duram Crystoflex waterproofing membrane on concrete block wall is not a suitable substrate for direct fix adhering sandstone tiles in an external environment. Alternative methodologies such as mechanical fastening etc would provide a more appropriate and reliable design. The fundamental unsuitability of a membrane a substrate is exacerbated by several non compliances in the method of adhering the tiles. This has heightened the risk of differential movement combined with the heavy weight of the tile units leading to extensive detachment of tiles throughout the podium areas."

Claim by Toga - Coverage Declined

1. On 4 August 2020, shortly after receiving Mr Taylor's report, Toga sent Absolute Tiling an email with the subject line "Formal notice of intention to claim". This email included the following statements: "As you know, the ongoing delamination of the sandstone cladding at Harbourside Balmain has been of concern since the project was completed in December 2017. Despite repeated attendance and reinstallation of the system put forward by Absolute Tiling under clause 8 (Subcontractor Design Obligations) … the tiles continue to delaminate and we are now of the view that the designed system is inadequate, and that: • all sandstone needs to be removed, • an alternate fixing system needs to be presented by Absolute for Toga sign off, • all walls need to be re clad with the intended finish (sandstone tiles). This position has been validated by the recent completion of Absolute Tiling's 'lap test' which has resulted in circa 70% of the remaining sandstone tiles presenting as 'drummy'. Can you please advise next steps from Absolute Tiling to address this matter asap …"
2. On the same day, Absolute Tiling forwarded Toga's email to a Coverforce representative, Mr John Angelis, who in turn forwarded it to the email address claims@ftainsurance.com.au. Mr Angelis added the following message: "Dear Claims, Please find below precautionary notification of a potential PI claim against our Insured, Versatile Group. As you will see, this is in respect of works which were carried out back in 2017. As mentioned, the Insured wishes to lodge this on a precautionary basis at this time and will continue to discuss with the third party, TOGA. Please note our claim reference above and advise us of any comments or queries you may have when you have an opportunity."
3. On 5 August 2020, Colin Biggers & Paisley wrote to Coverforce, stating that they had been appointed to deal with the claim. They advised that, based on their review of the notification, they had formed the view that the claim would be excluded by virtue of certain exclusions and endorsements in the 2020/21 Policy.
4. On 9 November 2020, Toga sent a letter of demand to Absolute Tiling, which commenced as follows: "Toga … wish to formally advise Absolute Tiling … that you are in breach of Subcontract Clause 8: Subcontractor's Design Obligations for the Harbourfront Balmain Project … with regards to the ongoing defectiveness of the Sandstone wall cladding throughout the landscaped areas of the development."

Issues for determination

1. The parties prepared a Joint List of Issues. The first item in that list is as follows: "Whether any 'Claim' for civil liability for compensation resulted from the conduct of 'Insured Activities'?"
2. Clause 1.1 of the 2020/21 Policy, which is headed "Insuring Clause", provides as follows: "We will pay up to the Limit of Liability on behalf of the Insured any civil liability for compensation (which includes the claimant's legal costs and expenses) arising from any Claim first made against the Insured during the Period of Insurance resulting from the conduct of the Insured Activities."
3. An "Insured" is defined as including a "Named Insured", being any person named as an the "Insured" in the Schedule to the Policy (cll 7.10.1, 7.13). Absolute Tiling is a "Named Insured".
4. A "Claim" is relevantly defined as including: "7.2.2 the positive assertion in writing or verbally of a legal entitlement to damages or other compensatory relief in connection with an alleged civil liability on the part of the Insured, in terms evincing an intention to pursue such legal entitlement."
5. In opening submissions, the Underwriters accepted that a "Claim" had been made by Toga against Absolute Tiling "during the Period of Insurance" under the 2020/21 Policy, but disputed that the Claim was one "resulting from the conduct of the Insured Activities". However, following the completion of the expert evidence, the Underwriters indicated in closing submissions that they did not press this contention.
6. Nonetheless, it is important to spend some time addressing the definition of "Insured Activities" and the reasons why the expert evidence established that the Claim was one resulting from the Insured Activities, as these are matters which are relevant to the determination of the remaining issues concerning the interpretation and application of the 2020/21 Policy.

Definition of "Insured Activities"

1. The term "Insured Activities" is defined in clause 7.11 of the 2020/21 Policy as follows: "7.11 Insured Activities Means one or more of the following services: a) design, including advice in relation to design, in accordance with all relevant laws, regulations and industry codes of practice; b) drafting; c) technical calculation; d) technical specification; e) technical advice; f) project management; g) construction management; h) feasibility studies; i) programming and time flow management; j) quantity surveying; k) surveying; l) inspection; and m) training in respect of a) to l) above, provided always that it is performed only by, or under the direct supervision of, a properly registered architect, engineer, surveyor, a quantity surveyor who is a member of the Australian Institute of Quality Surveyors or any other person providing a professional service of a skilful character according to an established discipline appropriate to the Insured Activities being performed or supervised. Insured Activities does not include: i. performance or supervision (where such supervision would normally be undertaken by a building contractor) of construction, manufacture, assembly, installation, erection, maintenance or physical alteration of buildings, goods, products or property; or ii. environmental protection, workplace health and safety or industrial relations matters which would normally by overseen by a building contractor."
2. The Insuring Clause applies in respect of a Claim "resulting from the conduct of the Insured Activities". In the law of insurance, it early became and has remained the rule to look to the proximate and not the remote cause of loss or damage in order to determine the liability of underwriters: Lasermax Engineering Pty Ltd v QBE Insurance (Aust) Ltd [2005] NSWCA 66 at [39] per McColl JA (with whom Ipp and Tobias JJA agreed). In this context, the phrases "proximate cause" and "direct cause" have come to be used interchangeably: ibid at [41]. "Proximate" in this context means proximate in efficiency rather than in time: ibid at [44]. The proximate cause rule "was not divorced in the cases from the terms of the particular policy under consideration", but was based on the inferred intention of the parties; it "would not apply if it would defeat the manifest intention of the parties": ibid at [45].
3. In Sheehan v Lloyds Names Munich Re Syndicate Ltd [2017] FCA 1340, Allsop CJ said (at [77], citations omitted): "The causal inquiry in insurance law is directed to the proximate cause of the relevant loss or damage. This means proximate in efficiency, not the last in time … A proximate cause is determined based upon a judgment as to the 'real', 'effective', 'dominant' or 'most efficient' cause... What is the proximate cause is to be decided as a matter of judgment reached by applying the commonsense knowledge of a business person or seafarer ... There does not need to be a single dominant, proximate or effective cause of loss or damage …"

Expert evidence regarding cause of detachment

1. Mr Taylor and Mr Drakakis met in conclave and prepared a joint report. This joint report indicated a significant extent of agreement between them regarding the cause of the detachment of the tiles.
2. First, the experts agreed that "a majority of the stone cladding tiles have detached from the walls due to the adhesion / cohesion failure of the waterproofing". "Adhesion" refers to the bonding of the waterproofing to the walls, while "cohesion" refers to the bonding of the waterproofing to itself. Absolute Tiling was not responsible for the waterproofing of the walls.
3. Secondly, Mr Drakakis identified that there were some deficiencies in the application of the tile adhesive to the tiles. In particular, he identified instances where the surface area of the tiles was insufficiently covered by tile adhesive and where the depth (in mm) of the adhesive was excessive. That is consistent with the view Mr Taylor reached in July 2020 (see paragraph 22 above) that there had been "several non compliances in the method of adhering the tiles". However, the experts agreed that there are "very few cases of adhesion failure of tile adhesive to the underlying waterproofing membrane substrate or to the stone cladding tile". Accordingly, any such deficiencies in the method of adhering the tiles appear to have made minimal contribution to the detachment of the tiles. In this regard, Mr Taylor noted (and Mr Drakakis did not dispute) that a number of the photographed examples of tiles with deficiencies in adhesive coverage, to which Mr Drakakis referred in his report, were tiles which had been removed by force. That is, these tiles had been removed by jackhammer or chisel, either for the purpose of "make good" works, or for the purpose of Mr Drakakis' investigations, rather than having detached without human intervention. Mr Drakakis gave evidence that he was "unable to identify the extent to which adhesion failure of the tile adhesive has occurred".
4. Thirdly, the experts agreed that the mechanical fixing of the stone tiles to the walls would have eliminated the risk of the tiles detaching due to the cohesive failure of either the waterproofing membrane or the tile adhesive.
5. Mr Taylor expressed the opinion that the tile adhesive system was not suited to the walls at Harbourfront due to deviations in the substrate. Mr Drakakis did not disagree with that view, adding that if this was correct, then a reasonably competent tiling contractor should have raised the issue so that it could be addressed by way of variation.

Issues for determination

1. Items 2 to 5(a) in the Joint List of Issues are as follows: "2. Whether the Plaintiff was aware of circumstances which might give rise to a claim of the type of the Toga Claim (as defined in the Second Further Amended Commercial List Statement) prior to entry into the 2020/2021 Policy. 3. If so, when did the Plaintiff first became aware of circumstances which might give rise to a claim of the type of the Toga Claim (as defined in the Second Further Amended Commercial List Statement)? 4. In the event that the Plaintiff was aware of circumstances which might give rise to a claim prior to entry into the 2020/2021 Policy: a. whether the Toga Claim is not covered by reason of the Plaintiff's prior knowledge of such circumstances; or b. whether Extension 2.15 Continuous Cover (Continuous Cover Extension) operates so that the Toga Claim is not excluded by reason only of the Plaintiff's prior knowledge of such circumstances. 5. Whether the Plaintiff breached its duty of disclosure under section 21 of the Insurance Contracts Act 1984 (Cth) by failing to disclose that: a. given its knowledge of the circumstances of the delamination of the sandstone cladding it was aware of a real risk that a claim may be brought against it by Toga; … and as a result the First Defendant's liability is reduced to nil under section 28 of the Insurance Contracts Act 1984 (Cth)?"
2. In order to resolve these issues, I address below: 1. the submissions made by the Underwriters concerning the evidence of Absolute Tiling's principal witness, Mr Marco Fahd; 2. the evidence regarding matters known to Absolute Tiling at various points in time from the entry into the Subcontract through to early August 2020, when it gave notification of Toga's Claim to Coverforce; 3. whether, by reason of the matters known to Absolute Tiling prior to entry into the 2018/19 Policy, clause 6.1.2 of the 2020/21 Policy operates to exclude liability for Toga's Claim; 4. whether, by reason of matters known to Absolute Tiling prior to entry into the 2020/21 Policy, ss 21 and 28 of the Insurance Contracts Act 1984 (Cth) operate to exclude or reduce any liability for Toga's Claim; 5. the significance of matters known to Absolute Tiling prior to entry into the 2020/21 Policy for the claims against Coverforce, AIB and Mr Moon.

Underwriters' submissions regarding evidence called by Absolute Tiling

1. In relation to the issue of knowledge, Absolute Tiling relied primarily upon an affidavit of Mr Marco Fahd, who was its Managing Director throughout the period from 2016 to 2019, and then its Chairman.
2. The Underwriters pointed out that Absolute Tiling did not call Mr Gotti, for whom an affidavit was served, and who was nominated as "Subcontractor's Representative" by Absolute Tiling in the June 2016 Subcontract Deed. Nor did it call Mr Leerberg, who was Project Manager for Absolute Tiling at Harbourfront Balmain and who was party to the majority of communications from 2016 onwards regarding the design and installation of the tiling system and the subsequent detachment of tiles. Nor did it call Mr Saleh, who was Mr Fahd's business partner and who, according to Mr Fahd, handled onsite delivery and oversaw all of the site managers that worked for Absolute Tiling.
3. Nonetheless, Mr Fahd's evidence was that he was "very hands-on in many regards with particular clients, Toga being one of them", and that the detachment of the tiles was directly raised with him by Toga's construction manager soon after it arose. From that point in time, he was personally involved in discussions with Toga about the issue.
4. In any case, the Underwriters did not advance a submission that I should draw any adverse inference from the failure to call Mr Gotti, Mr Leerberg or Mr Saleh, but rather that I should more confidently draw inferences from the contemporaneous records about the state of Absolute Tiling's knowledge at various points in time. As I have explained below, I have approached the issue of knowledge primarily by reference to the contemporaneous documentary evidence.
5. The Underwriters submitted that Mr Fahd was an unsatisfactory and unreliable witness whose evidence was "coloured by strategic calculations designed to advance Absolute's case", and who "did not exhibit the hallmarks of a credible and reliable witness, such as making reasonable concessions, and attending directly to the questions asked".
6. I do not accept this submission. My impression was that Mr Fahd had firm views about the causes of the detachment and that he was keen to ensure that those views were made clear to the Court, and that this led him to repeat a series of similar points in response to questions asked in cross-examination, whether or not those points were responsive to the particular question being asked. However, such behaviour is not unusual for a lay witness whose knowledge and conduct are under scrutiny, and I did not form any impression that Mr Fahd was doing anything other than stating honestly his recollection of the course of events and what he perceived to be his state of mind at the relevant time.

Matters known to Absolute Tiling

1. The starting point is the Subcontract and the Cladding Scope of Works. Absolute Tiling must have been aware of the terms of those documents. These include, relevantly, that Absolute Tiling had an obligation under clause 8.14 of the Subcontract to: "(g) conduct sufficient investigations to ascertain the existence and extent of any Site conditions which may have an effect on the Subcontract Works; (h) design the Subcontract Works so that the Subcontract Works, when constructed, shall be structurally and aesthetically sound despite any Site conditions;"
2. Further, the Cladding Scope of Works provided that Absolute Tiling was "obligated to provide a sound, fit for purpose execution and [to] provide advice if the current design is not suitable for its intended purpose".
3. Mr Fahd agreed that it is fundamental to any tiling job to understand the substrate to which tiles will be applied. He understood that it was Absolute Tiling's responsibility "to ensure that what we see is acceptable for us to adhere to, and prior to us making that adherence we ensure that our materials [are] compatible with the material". In that regard, Absolute Tiling was aware that the substrate to which the sandstone tiles were to be affixed by adhesive consisted of blockwork with a "Crystoflex" membrane that had been installed by a third party contractor. As noted above, Absolute Tiling had in 2017 specifically sought advice from Sika on the suitability of the A-50 adhesive for fixing sandstone tiles of specified dimensions to this membrane.
4. The detachment of tiles first appears to have come to the attention of Absolute Tiling towards the end of 2017.
5. The earliest document of Absolute Tiling which refers to the issue is an internal email chain dated 12 January 2018. The first email in this chain was sent at 11.34am by Mr Leerberg to Mr Saleh and Mr Gotti, and copied to Mr Fahd. Its subject line is "Balmain - sandstone dislodging". The email assumes existing familiarity with the fact that such detachment has occurred, as it commences by proposing a "solution" for those individual tiles which have detached: "The solution that comes to mind is only for pieces that are loose or have already fallen and that would involve mechanically fixing wire-mesh cut into 195x395mm pieces (or larger depending on the number of adjacent pieces that have fallen off) and then glue the tiles to the wire-mesh."

Clauses 6.1.2 and 2.15 - Matters known prior to 31 January 2018

1. Clause 6.1.2 of the 2020/21 Policy provides as follows: "Exclusions We shall not be liable to cover or pay on behalf of the Insured in respect of any liability, Claim, Fine or Penalty, or Privacy Breach directly or indirectly arising out of, related to, or in connection with: 6.1 Previously Known Claim or Circumstance any: … 6.1.2 fact, matter or circumstance known to the Insured, at any time prior to the inception of this policy, and which the Insured knew or a reasonable person in the Insured's profession could, in the circumstances, be expected to know or have known might give rise to a Claim against the Insured…"
2. Clause 6.1.2 has no application where the terms of clause 2.15 are satisfied. Clause 2.15 provides as follows (emphasis added): "2.15 Continuous Coverage We will cover the Insured pursuant to Insuring Clause 1.1 for any Claim arising from any fact, matter or circumstance known to the Insured, prior to the Period of Insurance, and which the Insured knew, or a reasonable person in the Insured's profession could, in the circumstances, be expected to know, might give rise to a Claim against the Insured, provided always that: 2.15.1 We were the professional liability insurer of the Insured when the Insured first became aware of such fact, matter or circumstance; 2.15.2 We continued without interruption to be the professional liability insurer of the Insured from the time mentioned in paragraph 2.15.1 above up until the time the Insured lodges a claim under this policy; 2.15.3 had We been notified by the Insured of such fact, matter or circumstance when the Insured first became aware of it, the Insured would have been covered under the policy in force at that time but is not now entitled to be covered by that policy solely because the Insured did not notify the fact, matter or circumstance; 2.15.4 there is an absence of fraudulent noncompliance with the Insured's duty of disclosure and an absence of fraudulent misrepresentation by the Insured in respect of such fact, matter or circumstance; 2.15.5 We may reduce Our liability to the extent of any prejudice We may suffer in connection with the Insured's failure to notify the fact, matter or circumstance; 2.15.6 the Limit of Liability provided for any Claim covered by this Additional Cover is the lesser available under the terms of the policy in force at the earlier time referred to in paragraph 2.15.3 above, or under this policy. The terms of this policy otherwise apply. The cover provided by this Additional Cover is not subject to Exclusion 6.1.2."

Knowledge of circumstances prior to entry into 2020/21 Policy - ss 21 and 28

1. As noted above, the Underwriters accepted that if Absolute Tiling became aware of circumstances which might give rise to a Claim after 31 January 2018, but before the inception of the 2020/21 Policy, the exclusion in clause 6.1.2 would not apply so as to deny indemnity (so long as the requirements of clause 2.15 were satisfied). However, the Underwriters contended in closing written submissions that, in such circumstances, the liability of the Underwriters in respect of Toga's Claim would be reduced to nil by reason of the operation of ss 21 and 28 of the Insurance Contracts Act.
2. Section 21 of the Insurance Contracts Act relevantly provides as follows: The insured's duty of disclosure (1) Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that: (a) the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or (b) a reasonable person in the circumstances could be expected to know to be a matter so relevant, having regard to factors including, but not limited to: (i) the nature and extent of the insurance cover to be provided under the relevant contract of insurance; and (ii) the class of persons who would ordinarily be expected to apply for insurance cover of that kind. (2) The duty of disclosure does not require the disclosure of a matter: … (d) as to which compliance with the duty of disclosure is waived by the insurer.
3. Section 28 of the Insurance Contracts Act provides as follows: General insurance (1) This section applies if a relevant failure occurs in relation to a contract of general insurance, but does not apply if the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the failure had not occurred. (2) If the relevant failure was fraudulent, the insurer may avoid the contract. (3) If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the relevant failure had not occurred.

Knowledge of circumstances prior to entry into 2020/21 Policy - Broker Claims

1. It follows from the matters outlined above that any failure by Absolute Tiling, after 31 January 2018 and prior to the inception of the 2020/21 Policy, to notify circumstances to the Underwriters cannot affect coverage in respect of Toga's Claim.
2. However, it is still necessary to determine whether Absolute Tiling became aware, prior to the inception of the 2020/21 Policy on 31 January 2020, of matters which it knew, or which a reasonable person in its profession could be expected to know, might give rise to a Claim. That is because this issue affects the claims against the Brokers.
3. If Absolute Tiling was not aware of any such matters, then clause 6.1.2 of the 2020/21 Policy cannot apply, and therefore coverage for the Toga Claim is to be determined solely by reference to the terms of the 2020/21 Policy (which Coverforce placed). However, if Absolute Tiling was aware of such matters, then the application of clause 6.1.2 would be subject to the operation of clause 2.15, which (relevantly) requires consideration of whether the claim was covered by the terms of the policy that applied in the period when Absolute Tiling became aware of those matters (on this assumption, being either the 2018/19 Policy or the 2019/20 Policy, each of which AIB placed).
4. I find, having regard to the evidence that I have summarised in paragraphs 79-108 above that, prior to 31 January 2020, Absolute Tiling was aware of matters that a reasonable person in its profession could, in the circumstances, be expected to know might give rise to a Claim. In particular, as at December 2019, Absolute Tiling was aware that: 1. the detachment of the sandstone tiles, which had commenced in late 2017, had continued in 2018 and 2019 despite repair works, and was "accelerating"; 2. Toga had retained an independent consultant, Mr Taylor, to investigate the "root cause" of the problem; and 3. Mr Taylor had expressed the view that the tiling system did not accommodate differential thermal movement between the sandstone tiles and the concrete substrate, and that this problem was exacerbated by the fact that the plastic spacers had been left in place between the tiles after the installation was complete.
5. Further, Absolute Tiling was aware of those matters in circumstances where it had assumed responsibility for the design and installation of the tiling system, including the suitability of the designed system for the site conditions (which included the substrate and membrane).

Issue for Determination

1. Item 5(b) in the Joint List of Issues is as follows: "Whether the Plaintiff breached its duty of disclosure under section 21 of the Insurance Contracts Act 1984 (Cth) by failing to disclose … b. that its business activities included undertaking external cladding work, and as a result the First Defendant's liability is reduced to nil under section 28 of the Insurance Contracts Act 1984 (Cth)?"
2. The Underwriters contended that if the Versatile Group had disclosed that the work undertaken by Absolute Tiling included the installation of tiles to external areas of buildings, and was not limited to internal building "fit out" works, the Underwriters "would not have provided professional indemnity cover on any terms to [Absolute Tiling]" (Further Amended Commercial List Response, [26], [31(a)]).
3. As a preliminary point, it is important to note that the policies in question were issued in respect of various members of the Versatile Group. It is therefore necessary to consider this issue against the background of what information was sought, and was known or disclosed, about the various entities in the Versatile Group which were insured, from the time prior to entry into the 2018/19 Policy through to the time of entry into the 2020/21 Policy.

Communications regarding prior to the 2018/19 Policy

1. A Policy Proposal Form from Brooklyn Underwriting was signed by Mr Marco Fahd on behalf of the Versatile Group on 21 December 2017. Brooklyn Underwriting was, at this time, Absolute Tiling's existing insurer.
2. The Proposal Form initially identified three companies in the Versatile Group as the entities for which cover was required: Absolute Tiling; Versatile Fitout Pty Ltd; and Versatile Interiors Pty Ltd.
3. In response to question 12, which asked the proposer to "provide a description of the 5 largest typical assignments, projects, contracts completed over the last 3 years", the Versatile Group listed various projects, each of which was said to have involved the supply of "FITOUT". The projects listed were for Sydney Airport Corporation and Westfield. One of those projects had a value of $25m. There is no evidence of any follow-up question being asked regarding the "fitout" works performed on these projects. Further, the Underwriters did not contend that the Harbourside Balmain project should have been disclosed in response to this question, which asked only for the "5 largest typical assignments". The value of the Harbourside Balmain project was $638,668.76, which was considerably less than the value of the projects listed.
4. Question 15 asked the proposer to "detail the approximate percentage" of income derived from over 40 types of specified services, including, for example, electrical, ventilation, mechanical, plumbing, sewerage and structural services, as well as "Landscape Architecture". There was no reference to tiling or cladding works in this list. There was space for the Proposer to identify "other" types of services. The Versatile Group failed to answer this question, and in those circumstances the Underwriters are deemed to have waived compliance with any duty of disclosure in relation to this matter: Insurance Contracts Act, s 21(3).
5. Question 16 asked the proposer to "detail the approximate percentage of the Proposer's fee income derived from the following specific activities", setting out a list of over 30 activities. This list included, for example, bridges, dams, harbours, jetties, mining, pipelines, modular buildings, residential dwellings, railways, sewerage/water systems, tunnels and waste disposal, treatment or management. It did not include cladding or tiling. The Versatile Group indicated, in answer to this question that 50% of the proposer's fee income was from Commercial activities, and the other 50% from Project Management or Construction Management activities. There was no follow-up question from FTA regarding the nature of those Commercial, Project Management or Construction Management activities.

Communications prior to entry into the 2019/20 Policy

1. On 14 January 2019, Mr Maualaivao of Absolute Tiling signed a proposal form for the renewal of professional liability insurance with FTA.
2. On this Proposal Form, the name of the insured was specified to be "as per last year". In response to Question 8, "Is the type of work or activities that the proposer engages in DIFFERENT to that disclosed in last year's proposal form?", the Versatile Group ticked the box "No".
3. There is no evidence of any questions being asked in response to this proposal form including any questions as to the nature of any construction work performed by Versatile Construction Solutions in the previous 12 months.
4. On 23 January 2019, Mr Moon emailed Mr Maualaivao to confirm the renewal of the insurance policy with FTA. The 2019/20 Policy incepted on 31 January 2019.

Communications prior to entry into the 2020/21 Policy

1. After entry into the 2019/20 Policy, the Versatile Group changed insurance brokers, replacing AIB with Coverforce.
2. On 6 January 2020, Coverforce sent an email to Mr Felix Darius, the Accounts Officer for the Versatile Group at the time, noting that the Versatile Group's professional indemnity insurance was due for renewal, and requesting that a proposal form be completed. The email stated (emphasis in original): "Please make sure question 15 and 16 is correctly answered. The answer to these questions, it will drastically change the coverage/ price."
3. The 2020/21 Proposal Form was signed by Mr Marroun of the Versatile Group on 8 January 2020. The name of the insured was said to be "as per last year", indicating, relevantly, that each of Absolute Tiling and Versatile Construction Solutions was to be included on the policy.
4. Question 15 asked the Versatile Group to "provide [a] breakdown of the proposed insured's turnover as per the following table", which was filled out as follows: $ revenue last 12 months $ revenue next 12 months FULL DESIGN & CONSTRUCT: $375k $437.5k Total turnover derived from contracts where the PROFESSIONAL ACTIVITIES are provided by the proposer's own staff DESIGN SUBCONTRACTED TO OTHERS: $375k $437.5k Total turnover derived from contracts where the PROFESSIONAL ACTIVITIES are provided by the proposer, but the proposer subcontracted those PROFESSIONAL ACTIVITIES to a third party with their own Professional Indemnity Insurance DESIGN ONLY $375k $437.5k Total turnover derived by the proposer from providing the PROFESSIONAL ACTIVITES only, and the proposer is not involved in other aspects of the projects CONSTRUCTION ONLY (no PROFESSIONAL ACTIVITIES) $375k $437.5k

"Professional Activities" was defined in question 15 as including, relevantly, "design, including advice in relation to design, in accordance with all relevant laws, regulations and industry codes of practice".

1. FTA did not ask any questions regarding the nature of the "professional activities" or of the "construction" activities performed by members of the Versatile Group. That was despite the fact that there was no description by the Versatile Group of the work that it did perform (for example, no statement in this form that it performed "fitout" work) and there was no statement that its activities had not changed from previous years.
2. Question 16 of the Policy Proposal asked the Versatile Group to "provide a full split of the work performed into the following categories", setting out a list of around 24 different types of work. The Versatile Group identified that it performed work on high rise buildings between 5 and 10 floors; high rise buildings above 10 floors; schools, hospitals, and municipal buildings; retail shops, flats, and townhouses; and modular and industrial buildings. Its work was split equally between these five categories of work (that is, 20% each).
3. Following the provision of this Proposal Form, no question was asked by FTA regarding the nature of the work performed by the Versatile Group in respect of any of these categories of work, including high rise buildings, municipal buildings or industrial buildings, In particular, FTA did not ask whether any such work included external construction or installation (and if so, of what nature) or included any tiling or cladding work.
4. On 8 January 2020, Mr Darius emailed the completed Proposal to Coverforce, asking the Coverforce representatives to contact him with any questions. On 13 January 2020, Coverforce confirmed that the Policy had been renewed.
5. The 2020/21 Policy incepted on 31 January 2020.

The reasonable person in Absolute Tiling's circumstances: s 21(1)

1. Section 21(1) of the Insurance Contracts Act applies where the insured knows a matter to be relevant to the insurer's decision to accept the risk or where a reasonable person could be expected to know it to be a matter so relevant.
2. The Underwriters did not put to Mr Fahd that he knew that the performance of external tiling or cladding work was a matter that was relevant to the Underwriters' decision to accept the risk under the Policies.
3. The issue therefore is whether a reasonable person could be expected to know it to be a matter so relevant.
4. In CGU Insurance v Porthouse at [52]-[53], the High Court observed that: "The statutory test for disclosure now to be found in s 21 of the Insurance Contracts Act focuses on the 'reasonable insured', not the 'prudent insurer', and operates, first, by reference to the actual knowledge of the insured (s 21(1)(a)), and secondly, by reference to what 'a reasonable person in the circumstances could be expected to know' (s 21(1)(b)). That latter statutory phrase has been interpreted as meaning that one should take into account only factors which are 'extrinsic' to the insured, such as the circumstances in which the policy was entered into, rather than 'intrinsic' factors such as the individual idiosyncrasies of the insured. Whilst it is possible to take into account the circumstances of the insured, the ultimate question under s 21(1)(b) turns on consideration of a reasonable person's state of mind, not the insured's state of mind. A test of disclosure, which operates by reference to both the insured's actual knowledge and the knowledge of a reasonable person in the same circumstances, is calculated to balance the insured's duty to disclose and the insurer's right to information. The insurer is protected against claims where the insured's disclosure is inadequate because the insured is unreasonable, idiosyncratic or obtuse and the insured is protected from exclusion from cover, provided he or she does not fall below the standard of a reasonable person in the same position."
5. In Prepaid Services v Atradius Credit Insurance at [98], Meagher JA said that: "The duty of disclosure under s 21(1) is a duty to disclose what is known to the insured 'before the relevant contract of insurance is entered into'. That is the time when the contract is made (s 11(9)), ... The duty is to disclose every 'matter that is known' which the insured also 'knows to be a matter relevant' or which a reasonable person could be expected to know to be a matter relevant to the insurer. That relevance must either be to the decision of the insurer as to whether to 'accept the risk' or as to the terms on which it will do so. The word "knows" means more than believes or suspects or even strongly suspects: Permanent Trustee at [30] (McHugh, Kirby and Callinan JJ). In this context "matter" describes anything which is known to the insured which also is known to be relevant, or that could be expected to be known to be relevant, in each case in the respects described above."

Section 28(1): decision to insure

1. If, contrary to my findings, there was a breach of the duty in s 21, the issue then arises as to whether compliance with that duty of disclosure would have affected the decision of the "insurer" to enter into the 2018/19 Policy either at all or on the terms of that Policy: s 28(1) of Insurance Contracts Act. The onus is on the Underwriters to establish that they would have not offered insurance to Absolute Tiling if disclosure had been made of the fact that Absolute Tiling engaged in external tiling work: Stealth Enterprises v Calliden Insurance at [70].
2. Absolute Tiling submitted that, for the purposes of s 28, the relevant enquiry concerned what the insurer - here, the Underwriters - would have done if the relevant matters had been disclosed. In this regard, Absolute Tiling referred to the decision of White J in New Cap Reinsurance Corporation Limited (in liq) v Daya [2010] NSWSC 1226. His Honour quoted (at [16]) the following observations by McHugh, Kirby and Callinan JJ in Permanent Trustee v FAI General Insurance at [30] regarding the language of s 28(1): "It is also noteworthy, particularly if it should become necessary to deal with the other grounds of appeal, that the knowledge of which the sub-section speaks, either actual or constructive, is the knowledge of the insured, and not of any insurance intermediary, a term defined by the Act and clearly embracing an agent of the kind that Sedgwick was. This is at least to suggest that the reference to the insured is intended to be a reference to the insured personally and not to its agent or broker. However, it is not essential to our reasons to determine this point."
3. White J continued (at [20]-[22]): "Were it not for the observations of McHugh, Kirby and Callinan JJ …, I think it would be clear that Pt IV of the Act accommodates the case of an insurer who enters into contracts of insurance through an agent acting under a binder in a like manner to the way obligations are imposed by Pt IV on an insured who used an agent. That is to say, where an insurer is acting through an agent, the insured could discharge its duty of disclosure by making disclosure to the insurer's agent. … The insurer would have a right to avoid a contract of insurance if the insured fraudulently breached its duty of disclosure or made a fraudulent representation unless the insurer, or the insurer's agent, would have entered into the contract for the same premium on the same terms and conditions if the insured had not failed to comply with its duty of disclosure or had not made the misrepresentation. However, the observations of McHugh, Kirby and Callinan JJ …, although not necessary for their decision, show that there is a real question as to whether the reference to 'the insured' in Pt IV of the Act includes a reference to the insured's agent. If so, the same question arises whether the reference to "the insurer" includes the insurer's agent. These are not questions that should be decided on an interlocutory application to strike out a pleading or for the discovery of documents. …"

1. None of the specified "Underwriting considerations" refers to whether or not the insured is undertaking external tiling or cladding works. In contrast, those "considerations" do raise issues about a range of other types of works, such as piling works, works involving water (including dams, piers, wharves and jetties) and works involving mining, automation, silos, boiler and pressure vessels, cranes, railways, tunnelling or bridges.
2. As I have already addressed at paragraphs 175-205 above, none of the proposal forms for the three Policies asked any question about whether or not tiling or cladding works were undertaken, let alone about whether such works were performed internally or externally. Likewise, in the correspondence which followed the submission of those forms, there was not a single question asked of the Brokers, or conveyed to Absolute Tiling, to that effect.
3. Further, by the time of the inception of the 2018/19 Policy, the Underwriters (through Mr Garling) had agreed to add Versatile Construction Solutions as an insured on the Policy, despite Mr Garling being aware that this entity planned to do construction works. Mr Garling accepted that he understood that the construction work which was to be undertaken by the relevant insured might extend to external tiling or cladding works: "Q. FTA was conscious at that point that external cladding work could be done by this insured? A. The insured was planning on doing some ground up construction of townhouses and apartments. That could involve cladding. It mightn't involve cladding. Q. To use a word of Mr Donaldson, it's conceivable? A. It's conceivable, absolutely. I don't disagree with that in the slightest."
4. Mr Garling confirmed in cross-examination that he was willing to accept and write cover in these circumstances: "Q. I'm not sure I understand how, if they were going to do construction works or apartments and so on, and your appetite wasn't to accept the design and external tiling, why their indication to you that they would do construction would not involve the design of external tiling. A. I don't see why - well, I think, firstly, they've said they plan on doing some work; it may or may not happen. Secondly, it's a million dollars' worth of work, which is pretty much nothing. Well, it's pretty much no work. I mean, you can't get much, if any, construction done in Sydney for a million dollars. So it wasn't a material amount of work. That may … or may not have external tiling, I don't know. Q. But you were prepared to extent cover for external tiling works if they were involved in the million dollars' worth of work? A. If that's where it went. I would - I thought it was unlikely anything of that would develop. … Q. Is the answer to my question yes? You were prepared to accept the risk in connection with external work in this context for a million dollars? A. Absolutely say that we - if they had done construction work and it involved external tiling, then that would have been covered under this, and we accepted the risk, knowing that they might do ground-up construction. Q. And the design of external tiling? A. There could well be design associated with that, yes. Q. You've just said to his Honour you were prepared to accept and write a risk of right of designing external tiling in that year if they had carried on construction activities, correct? A. We would have insured them for that, yes."

Issues for determination

1. Items 6 and 7 in the Joint List of Issues are as follows: "6. Whether any of the following policy provisions operate to disentitle the Plaintiff to indemnity under the professional indemnity policy: a. Exclusion 6.11 of the policy wording (contractual liability). b. Exclusion 6.12 of the policy wording (supply of goods) and whether the application of that exclusion is affected by Clause 2.28 multiple causes of loss additional cover. c. the Non Compliant materials endorsement. d. Exclusion 6.21 of the policy wording (tender at less than economic terms). e. Exclusion 6.22 of the policy wording (costs exceeding estimate). 7. Whether liability to indemnify the Plaintiff under the policy is reduced to nil or some lesser amount by reason of the Other Insurance endorsement?"
2. The Underwriters did not, in closing submissions, press any reliance on Exclusions 6.21 or 6.22, or the Other Insurance endorsement. Accordingly, the only exclusions ultimately relied upon were clauses 6.11 and 6.12, and the Non-Compliant Materials Endorsement. I consider each in turn below. Before doing so, I briefly address the relevant principles for construing a policy of insurance, including any exclusion clause in such a policy.

Relevant Principles regarding construction of Policies

1. The principles applicable to the construction of policies of insurance are those governing the construction of commercial contracts: Liberty Mutual Insurance Company Australian Branch t/as Liberty Specialty Markets v Icon Co (NSW) Pty Ltd [2021] FCAFC 126 at [151]. Those principles require the language used by the parties to be interpreted objectively, in the context of the surrounding circumstances known to the parties at the time of the transaction, and the purpose or object of the transaction evident from those matters: Star Entertainment Group Ltd v Chubb Insurance Australia Ltd [2022] FCAFC 16 at [8].
2. Preference is to be given to a construction supplying a congruent operation to the various components of the whole: Todd v Alterra at Lloyd's Limited (2016) 239 FCR 12; [2016] FCAFC 15 at [42] per Allsop CJ and Gleeson J. The working out in a coherent and congruent fashion of the operation of a market specific insurance policy requires a businesslike interpretation to bring about a commercial result based on what a reasonable business person would have understood the policy to mean: Liberty Mutual Insurance v Icon at [152], citing Electricity Generation Corp v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35].
3. In Liberty Mutual Insurance v Icon at [152], the Full Federal Court observed that: "The principle that a policy is to be construed so as to avoid it 'working commercial inconvenience' … and so as to bring about commercial efficacy and reflect common sense … is to be given concrete operation, not passing lip-service. To the extent that words used in an insurance policy have the capacity for broader or narrower operation, such constructional choice or ambiguity will be resolved by appreciating the context, including the market, in which the parties are operating, and the extent to which a reading of the words may produce commercial inconvenience or commercial efficacy as part of the ascription of meaning that would be made by a reasonable businessperson considering the language used, the surrounding circumstances known to the parties and the commercial purpose or objects of the policy as a whole to be secured: ... It should always be recalled, however, that a broad or a narrow meaning of a policy may only reflect the breadth or the narrowness of cover that has been purchased by the premium …"

Exclusion 6.11: "liability assumed by the Insured"

1. Clause 6.11 of the 2020/21 Policy provides as follows: "Exclusions We shall not be liable to cover or pay on behalf of the Insured in respect of any liability, Claim, Fine or Penalty, or Privacy Breach directly or indirectly arising out of, related to, or in connection with: … 6.11 Contractual Liability any liability assumed by the Insured under any contract or agreement where such liability would not have existed in the absence of such a contract or agreement including, without limiting the foregoing, any contractual term or agreement: 6.11.1 to pay liquidated damages or any penalty; or 6.11.2 in the nature of an indemnity, release, hold harmless, warranty or guarantee."
2. In Karenlee Nominees Pty Ltd v CAN 004 312 234 Ltd (1995) 8 ANZ Ins Cas 61-236, Hedigan J considered an exclusion clause which provided as follows: "The insurance does not apply to liability … for property damage accepted by agreement unless that liability would still have arisen if the agreement had not been entered into." His Honour said (at 75,661-75,662) that: "The exclusion is intended to apply to the situation where, by an agreement, an insured extends the limits of the ordinary liability arising, such as his agreement for liability for injury without proof of fault … The exclusion is also directed to the case where the insured assumed liability beyond that which is normally incidental to the occasion, for example the degree of skill ordinarily expected of an expert."
3. These comments were quoted with approval by Spigelman CJ (with whom Beazley and Hodgson JJA agreed) in Zurich Australian Insurance Ltd v Regal Pearl Pty Ltd [2006] NSWCA 328 at [109], when considering the interpretation of a clause excluding liability for personal injury or property damage "that is accepted by any insured Person Under any contract, warranty or agreement".
4. In the present case, clause 6.11 is not triggered simply by the fact that the Insured has "assumed" a liability under a contract. Rather, it is necessary to show that "such liability would not have existed in the absence" of that contract being entered. This requires an enquiry into whether there is some other basis for liability independently of the contract in issue.
5. The Underwriters submitted that Toga's letter of demand dated 19 March 2021 "made but one allegation of breach by Absolute: alleging that it is 'in breach of Subcontract Appendix 1: Deed of Subcontractor Warranty' (emphasis in original)", and that its subsequent letter of demand dated 26 April 2021 "identified no other sources of Toga's asserted right to sue".

Exclusion 6.12

1. Clause 6.12 of the 2020/21 Policy provides as follows: "Exclusions We shall not be liable to cover or pay on behalf of the Insured in respect of any liability, Claim, Fine or Penalty, or Privacy Breach directly or indirectly arising out of, related to, or in connection with: … 6.12 Defect in Product or Good the sale, manufacture, installation, construction, alteration, repair, servicing or treating of any goods or products sold, distributed or supplied including but not limited to the sale and/or supply of hardware and/or software by the Insured."
2. There was a substantial dispute between the parties, which I address below, regarding whether it was necessary to establish a causal or consequential connection between, relevantly, the "installation" of the tiles "supplied" by Absolute Tiling and Toga's Claim. It was common ground that the heading to clause 6.12 could not be taken into account for the purposes of resolving this dispute. That was because the 2020/21 Policy provided that headings "are for information purposes only and are not to be construed as part of this insurance".
3. The Underwriters submitted that there is no need to establish any deficiency in the installation of the tiles, and no need to establish any causal or consequential connection between installation and liability, in order for the Exclusion in cl 6.12 to apply. The Underwriters pointed out that this Exclusion applies, in accordance with the terms of the Policy, where the liability or Claim is "directly or indirectly … related to, or in connection with … the … installation … of any goods or products" (here, the tiles). They contended that the clause required only a situational or circumstantial nexus (that is, the Claim arises in circumstances where installation of products supplied by Absolute Tiling has occurred).
4. The Underwriters contended that the phrase "directly or indirectly arising out of, related to or in connection with" must be read in a consistent manner when applied to each of the Exclusions in clauses 6.1 to 6.22. The Underwriters pointed, by way of example, to cl 6.7.2 which refers to "any work or activities undertaken by the Insured in the United States of America, Canada or their dominions or protectorates". They submitted that all that was required for this exclusion to apply is a situational (that is, geographical) connection.

The effect of an exception is to save the insurer from liability for a loss which but for the exception would be covered. The effect of the cover is not to impose on the insurer liability for something which is within the exception...

per Cairns LJ in Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corporation Ltd [1974] 1 QB 57 at page 69."

1. His Honour observed that it is "always essential to pay close attention to the terms of any policy and the commercial context in which it was made, for it is out of these matters that the answer to the application of the policy to the facts will be revealed" (at [104]).
2. In the present case, clause 2.28 of the 2020/21 Policy provides as follows: "2.28 Multiple Causes of Loss In the event that there are a number of causes which contribute to the loss for which a Claim is made, We will indemnify the Insured against the civil liability the Insured incurs in respect of that part of the loss which is covered under the policy irrespective of whether one or more of the other causes are excluded."
3. The Underwriters submitted, and Absolute Tiling agreed, that the effect of clause 2.28 is to displace the principle in Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corp Ltd [1974] QB 57, and to prescribe an apportionment assessment, which requires weighing the causal significance of, respectively, the covered cause and the excluded cause.
4. If clause 6.12 had not been included in the 2020/21 Policy, the position would have been that claims arising from the defective installation of products supplied by Absolute Tiling were not excluded, but were (to use the language of Allsop J in McCarthy) simply not covered by the terms of the policy, being outside the Insured Activities in clause 7.11. In those circumstances, where loss resulted both from design and from the installation of tiles, Absolute Tiling would be entitled to indemnity in respect of the whole of the loss.
5. However, when clause 6.12 is included in the 2020/21 Policy, the position changes. Now, instead of claims resulting from the activity of installing products supplied by Absolute Tiling being "simply not covered", there is an express exclusion. The exclusion of one of two concurrent proximate causes would normally engage the Wayne Tank principle to preclude any coverage, but the effect of including clause 2.28 in the Policy is to displace this principle and instead to provide that in this situation Absolute Tiling can recover "that part of the loss which is covered under the policy": that is, that part of the loss which results from the defective design of the tiling system.

Non-Compliant Materials Endorsement

1. The Non-Compliant Building Materials Endorsement in the 2020/21 Policy is in the following terms: "Non-Compliant Materials Endorsement 2 - 2017 It is declared and agreed that We shall not be liable to cover or pay on behalf of the Insured in respect of any liability, Claim, claim by an Insured, Fine or Penalty, Privacy Breach or Mitigation Costs arising out of, based upon, attributable to, or in connection with any materials or products that are; (a) not compliant with or do not conform to any legislation, regulation, standard, Building Code, or Instruction; or (b) installed, applied, repaired, maintained or utilised in such a manner that is not compliant with or does not conform to any legislation, regulation, standard, Building Code, or Instruction. For the purpose of this Endorsement, Building Code means: i. Australian Standards, as published and amended from time to time, by Standards Australia Limited; or ii. the National Construction Code, including the Building Code of Australia, or any superseding document, published and amended from time to time, by the Australian Building Codes Board; or iii. any conditions of use or application approved by a recognised, and relevant, building standards organisation; or iv. any equivalent organisations to those outlines in (i) to (iii) above, in any other relevant jurisdiction. Instruction means; i) any direction, order, specification, report or detailed information about how something should be done; or ii) the Insured minuting a meeting during which decisions are made. Without limiting the definition of Instruction, it also includes any Instruction provided (or allegedly provided) by the principal, client or any other consultant. In all other respects the Policy remains unaltered."
2. The Underwriters submitted that this Endorsement applies because there were various respects in which the materials or products used by Absolute Tiling (and, in particular, the tile adhesive) were "applied … or utilised in such a manner that is not compliant with any … standard, Building Code, or Instruction". In this regard, the Underwriters relied on the report of Mr Drakakis which identified various respects in which he considered that the application of the tile adhesive did not comply with Australian Standard AS3958.
3. A number of preliminary points should be made. First, Mr Drakakis and Mr Taylor agreed in their joint report that AS3958 is a guide only and is not referenced in the Building Code of Australia. Secondly, AS3958 is headed "Guide to the installation of ceramic tiles", and the tiles in this case were stone, not ceramic. Thirdly, Mr Taylor pointed out that AS3958 related to grouted systems, and the tiles in this case were not grouted.

Conclusion - Coverage

1. Absolute Tiling notified Toga's Claim during the period of the 2020/21 Policy. I have found that Absolute Tiling failed to disclose circumstances known to it prior to the inception of the 2020/21 Policy, which a reasonable person in its profession could be expected to know might give rise to a Claim (namely, the detachment of the tiles, which had been occurring for some time and was accelerating despite the repair works which had been undertaken, and the views expressed by Mr Taylor in December 2019 regarding the cause of the detachment).
2. Accordingly, the terms of the exclusion in cl 6.1.2 of the 2020/21 Policy are engaged in respect of Toga's Claim, which excludes coverage for any "fact, matter or circumstance known to the Insured, at any time prior to the inception of this policy, and which the Insured knew or a reasonable person in the Insured's profession could, in the circumstances, be expected to know or have known might give rise to a Claim against the Insured".
3. However, clause 6.1.2 has no application where the requirements of cl 2.15 of the 2020/21 Policy are satisfied. The only element of cl 2.15 which was in issue in this proceeding was subcl 2.15.3. Pursuant to this subclause, it is necessary to establish that: "had [the Underwriters] been notified by [Absolute Tiling] of such fact, matter or circumstance when [Absolute Tiling] first became aware of it, [Absolute Tiling] would have been covered under the policy in force at that time but is not now entitled to be covered by that policy solely because [Absolute Tiling] did not notify the fact, matter or circumstance;"
4. The "policy in force" as at December 2019 was the 2019/20 Policy.
5. The exclusion clauses in the 2019/20 Policy are in materially the same terms as the exclusion clauses in the 2020/21 Policy. I have found that none of the exclusion clauses on which the Underwriters relied operates to exclude coverage in respect of Toga's Claim.
6. It follows that the requirements of clause 2.15 of the 2020/21 Policy are met, and there is coverage in respect of Toga's Claim against Absolute Tiling under the 2020/21 Policy.

Issues do not arise on the findings that have been made

1. Items 10 and 11 in the Joint List of Issues are as follows: "10. If the Plaintiff is not entitled to indemnity under the 2020/21 Policy because of the operation of Exclusion 6.12 or because the Plaintiff failed to disclose that its business included external cladding work: a. whether the First Defendant has engaged in misleading or deceptive conduct within the meaning of one or both of section 1041H of the Corporations Act 2001 (Cth) and section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth); b. whether the Second Defendant: i. has breached its duty of care to the Plaintiff in contract and/or tort; ii. has engaged in misleading or deceptive conduct within the meaning of one or both of section 1041H of the Corporations Act 2001 (Cth) and section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth). 11. If the Plaintiff is not entitled to the benefit of the continuous coverage extension under the 2020/2021 Policy by reason of the application of Exclusion 6.12 under the 2018/2019 or 2019/2020 policies, or because the Plaintiff failed to disclose that its business included external cladding work, and that as a result the proviso in clause 2.15.3 is not satisfied: a. whether the Fourth Defendant has breached its duty of care to the Plaintiff in tort; b. whether the Third Defendant has breached its duty of care to the Plaintiff in contract and/or tort; c. whether the Third and/or Fourth Defendants have has engaged in misleading or deceptive conduct within the meaning of one or both of section 1041H of the Corporations Act 2001 (Cth) and section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth); and d. whether the Third Defendant is liable to the Plaintiff in respect of any breach of duty of care by the Fourth Defendant."
2. Absolute Tiling did not press any claim against the Underwriters for misleading or deceptive conduct (issue 10(a)).
3. As stated in the opening words of Issue 10, each of the claims against Coverforce for negligence, breach of contract and misleading conduct arises only in the event that Absolute Tiling is not entitled to indemnity under the 2020/21 Policy either by reason of the operation of Exclusion 6.12, or because Absolute Tiling failed to disclose that its business included external cladding work (see Second Further Amended Commercial List Statement, paragraphs 34 and 35).

Duty of Care

1. Dealing first with the claims for negligence and breach of contract, there was a large measure of common ground regarding issues of duty and knowledge. Coverforce admitted in its Commercial List Response that: 1. it was an implied term of Coverforce's retainer with Absolute Tiling that Coverforce would exercise reasonable care and skill of a competent insurance broker in advising with respect to, and effecting, insurance so as to avoid economic loss; 2. Coverforce owed Absolute Tiling a concurrent duty in tort to exercise reasonable care and skill of a competent insurance broker in advising with respect to, and effecting, insurance so as to avoid economic loss; 3. Coverforce knew that Absolute Tiling: 1. entered into design and construct sub-contracts for the supply and installation of tiles; 2. was exposed to the risk of negligent design, drafting, technical calculation, technical specification, or advice; and 3. relied upon Coverforce to exercise reasonable care and skill of a competent insurance broker in advising with respect to and effecting insurance so as to avoid economic loss; 1. Coverforce arranged for the 2020/21 Policy to be incepted; 2. there was a foreseeable and not insignificant risk of economic harm to Absolute Tiling if Coverforce did not take such reasonable steps as would be taken by a competent insurance broker to: 1. understand the nature of Absolute Tiling's business; 2. understand the nature and extent of Absolute Tiling's instructions for insurance cover; 3. advise Absolute Tiling about the insurance cover available to meet Absolute Tiling's instructions; 4. negotiate and obtain insurance cover to meet Absolute Tiling's instructions; 5. negotiate and obtain professional indemnity insurance for Absolute Tiling that was appropriate for it; and 6. go through with Absolute Tiling any terms of the Policy which would not be appropriate to Absolute Tiling in that it would result in the cover provided by the Policy not meeting Absolute Tiling's instructions; and 1. a reasonable person in the position of Coverforce would have taken the steps identified in (a)-(f) above.
2. Coverforce accepted in its submissions that it was aware that Absolute Tiling entered into design and construct contracts under which it carried out tiling works, and that it was obliged to take reasonable steps to ensure that the professional indemnity cover that it placed covered liability arising from the provision of design services under contracts of that kind.

Breach of Duty

1. The alleged breaches of duty fell into two main categories.

Breach regarding disclosure concerning nature of business

1. First, if it was found that there is no liability under the 2020/21 Policy because Absolute Tiling failed to disclose that it was undertaking external cladding works, Absolute Tiling submitted that Coverforce failed to exercise reasonable care "by not explaining to Absolute the fact that the Proposal did not reflect Absolute's instructions, which were to obtain cover that extended to risks associated with undertaking external cladding works".
2. This breach can be dealt with briefly.
3. For reasons I have already given in Section D above, I do not consider that a reasonable reader of the 2020/21 Proposal Form (including a broker in Coverforce's position) would have appreciated that it was material to the insurer's decision as to whether to write cover to know that Absolute Tiling was performing external tiling works.
4. In any case, the alleged breach has not been shown to have any causative effect. Absolute Tiling submitted that, if it failed to make proper disclosure such that the Underwriters were entitled to decline cover, "the losses arising from the absence of cover were caused by Coverforce's breach of duty". However, there was no explanation of how loss was caused by the conduct, or what the loss was.
5. This claim against Coverforce would arise only where there was a finding that the Underwriters were entitled to decline cover by reason of ss 21 and 28 of the Insurance Contracts Act. That would necessarily have involved a finding that, if Absolute Tiling had disclosed that it performed external cladding works, then the Underwriters would not have entered into the 2020/21 Policy.
6. If I had made such findings, it would necessarily follow that if Coverforce had advised that the Proposal Form was incomplete, and that Absolute Tiling should disclose that it engaged in external cladding and should seek cover for such work, the result would have been that the Underwriters would not have entered into the 2020/21 Policy. Accordingly, there would be no basis to award, as damages for the alleged negligence, an amount representing the cover that would have been available under the 2020/21 Policy.
7. Further, Absolute Tiling did not seek to establish that, if Coverforce had performed its duties, and Absolute Tiling had disclosed that it performed external cladding work, Absolute Tiling would have obtained equivalent cover to that under the 2020/21 Policy from another insurer.

Breach regarding cl 6.12 and Writeback

1. Secondly, in the event that clause 6.12 was found to exclude liability for Toga's Claim under the 2020/21 Policy, Absolute Tiling submitted that Coverforce failed to exercise reasonable care and skill by failing to ascertain that the presence of clause 6.12 meant that the Policy was unsuitable for Absolute Tiling, and by failing to negotiate for the insertion into the Policy of the "Professional Services Writeback to the Products Exclusion for D&C - 2017" (Writeback) which would have neutralised the operation of clause 6.12.
2. The Writeback was in the following form: "Professional Services Writeback to the Products Exclusion for D&C 1 - 2017 Exclusion 6.12 is deleted and replaced as follows: the sale, manufacture, installation, construction, alteration, repair, servicing or treating of any goods or products sold, distributed or supplied including but not limited to the sale and/or supply of hardware and/or software by the Insured unless a Claim arises out of a breach of professional duty in the provision of the Insured Activities… All other terms, conditions and exclusions remain unaltered."
3. As set out in paragraph 234 above, FTA's Underwriting Guidelines for Design & Construct Contractors identified that optional endorsements included this Writeback, which was available at "Nil Additional Premium".
4. Mr Garling confirmed that this Writeback was available and that, "if the broker had asked for it, more than likely I would have given it", and that he had a discretion whether to issue it at nil additional premium or at an additional premium. The evidence of Mr Marroun of the Versatile Group was that, if he had been advised that there was an endorsement available that would reduce the risk that cover would not be available to Absolute Tiling, then he would have agreed to pay for that endorsement.
5. However, the availability of the Writeback does not mean that Coverforce was negligent in failing to ask for it.
6. For the reasons set out in paragraphs 273-309 above, when addressing the interpretation of clause 6.12, I consider it was reasonable for a broker in the position of Coverforce to conclude that clause 6.12 should be interpreted so as to exclude cover only where the liability had some causal or consequential connection with, relevantly, the activity of installing goods or products supplied by the Insured, such that there was no need to negotiate the Writeback in respect of cl 6.12.

Misleading Conduct

1. In closing submissions, Absolute Tiling based its claim of misleading conduct against Coverforce on the following representation: "By providing Absolute with a Certificate of Insurance for the [2020/21] Policy, Coverforce represented to Absolute that the Policy: a. Covered civil liability for claims arising out of design and construct contracts for the design, supply and laying of tiles and installation of stone cladding; and b. Did in fact cover claims like the Toga Complaint."
2. Absolute Tiling's primary case was that this representation was not misleading, and that it is entitled to cover under the 2020/21 Policy in respect of Toga's Claim (as I have found). However, if this primary case was rejected because of clause 6.12, then Absolute Tiling contended that Coverforce did not have a reasonable basis for its representation, and that it thereby engaged in misleading conduct.
3. Having regard to the findings I have made, this claim may be addressed briefly. If it had arisen, I would have rejected it for the following reasons.
4. First, I would not have found that Coverforce made the alleged representation. If any representation was made by the provision of the certificate of insurance, it went no further than a representation that Absolute Tiling had cover under the 2020/21 Policy, subject to the terms of the schedule, the policy wording and any applicable endorsements. Further, Coverforce was not aware of Toga's Claim, and made no representation regarding the types of claims that would or might be covered by the terms of the Policy.
5. Secondly, it is not part of any party's case that the 2020/21 Policy covered liability "for the design, supply and laying of tiles and installation of stone cladding" (as Coverforce is alleged to have represented). It is common ground between the parties that the Policy does not provide any cover for claims arising from the supply and laying of tiles or the installation of stone cladding. That is clear from the definition of "Insured Activities". Further, as set out in paragraph 355 above, Mr Fahd never understood that there was any coverage for claims arising from the installation of tiles or cladding, and therefore any claim that Absolute Tiling was misled into thinking that such coverage was available must fail.
6. Thirdly, if I had found that Coverforce had made a representation that the 2020/21 Policy covered civil liability for claims arising out of the design of tiling or cladding systems under design and construct contracts, I would have concluded that there was a reasonable basis for such a reading of the Policy, having regard to the terms of the policies, for reasons I have already addressed at 273-309 above.

Claims against AIB and Mr Moon

1. Much of the reasoning in respect of the claims against Coverforce is applicable to the corresponding claims against AIB and Mr Moon.
2. Like Coverforce, AIB and Mr Moon accepted that they owed concurrent duties in contract and in tort to exercise reasonable care and skill when providing insurance broking services to Absolute Tiling (Commercial List Response, [25.1], [26.1]); and that they knew that Absolute Tiling's business involved the design of tiling systems and the supply and installation of tiles, and that there was a risk that Absolute Tiling may be exposed to liability for negligent design or advice with respect to tiling (Commercial List Response, [26A.1], [26A.2]).
3. As was the case in respect of Coverforce, the negligence claim in respect of AIB and Mr Moon had two main limbs.
4. First, Absolute Tiling contended that if the Court found that it failed to make adequate disclosure regarding its business activities (and, in particular, its external cladding works) and that, as a result, it was not entitled to cover for Toga's Claim under the 2018/19 Policy or the 2019/20 Policy, then "the losses that arise from being unable to invoke clause 2.15 are attributable to the failure by [AIB] and Moon to exercise reasonable care and skill".
5. I have found that there was no deficiency in the information provided in the proposal forms about Absolute Tiling's business, As I have set out above, Mr Garling agreed that he expected the person filling in the proposal form to do no more than answer the questions asked about their business, and that he had no issue with any of the responses given. Further, having regard to the content of the proposal form and their communications with FTA, I have found that that a reasonable reader of those forms (including a broker) would not have concluded that it was material to the decision whether to insure Absolute Tiling to know whether its business included the design and installation of external cladding. That is particularly so in circumstances where AIB and Mr Moon were aware that, when FTA was informed that one entity in the Versatile Group was planning to perform work involving the construction of residential buildings, FTA did not respond by asking whether this would involve cladding (nor by indicating that they would decline cover on that basis), but instead proposed the Cladding Endorsement.

Broker Claims - Causation, Proportionate Liability and Mitigation

1. The Joint List of Issues raised a number of other issues which were dependent on findings of negligence, breach of contract or misleading conduct against Coverforce or AIB/Mr Moon. These included: 1. whether Absolute Tiling suffered any loss as a result of the negligence, breach of contract or misleading conduct of Coverforce (Issues 14-15) or of AIB/Mr Moon (Issues 17-19); 2. whether any breach or contravention by Coverforce or AIB/Mr Moon was a necessary condition of the occurrence of any harm suffered by Absolute Tiling (Issues 16 and 20); 3. what amount of liability should be apportioned as between Coverforce and AIB / Mr Moon under the applicable proportionate liability regimes (Issue 21); and 4. whether Absolute Tiling had failed to mitigated its loss (Issue 25).
2. Given the findings I have made, these issues do not arise. In those circumstances, I will address these matters only briefly.
3. First, each of Coverforce and AIB/Mr Moon argued that, if the claims against them based on cl 6.12 had been established, the other would have been wholly responsible for any loss suffered by Absolute Tiling.
4. Coverforce contended that any negligence, breach of contract or misleading conduct on its part could have no causative consequence. The argument was put as follows: 1. there were circumstances known to Absolute Tiling prior to the inception of the 2020/21 Policy which ought to have been disclosed (this accords with my findings regarding the circumstances known as at December 2019); 2. where there has been a failure to notify circumstances known prior to the inception of the 2020/21 Policy, coverage will be provided under clause 2.15 ("Continuous Coverage"), so long as the terms of subclause 2.15.3 are satisfied which, relevantly, require that if the matters had been notified in December 2019, Absolute Tiling "would have been covered under the policy in force at that time [the 2019/20 Policy] but is not now entitled to be covered by that policy solely because the Insured did not notify" the relevant circumstances; 3. assuming cl 6.12 operates to exclude coverage for Toga's claim, this clause was a term of the 2019/20 Policy; 4. therefore, irrespective of whether or not cl 6.12 (or the Writeback) had been included in the 2020/21 Policy, Absolute Tiling could never obtain coverage under the 2020/21 Policy because it could not show that it "would have been covered" under the 2019/20 Policy.

Issues for determination

1. Issues 9 and 12 in the Joint List of Issues are as follows: "9. Whether the First Defendant breached the 2020/2021 Policy by failing to indemnify the Plaintiff? … 12. If the 2020/2021 Policy responds to the Toga Claim, the quantum of indemnity payable by the First Defendant to the Plaintiff under the policy."
2. The Further Amended Commercial List Summons seeks a declaration that Absolute Tiling is entitled to indemnity under the 2020/21 Policy in respect of the Toga Claim, subject to a deductible of $10,000. It does not seek, in the alternative, damages from the First Defendant for breach of the 2020/21 Policy. However, it does seek "any other order that the court sees fit".
3. Although a claim for damages against the Underwriters for breach of contract was not included in the Further Amended Commercial List Summons, such a claim was set out in the Second Further Amended Commercial List Statement which was filed on the same day. It, relevantly, pleaded as follows: "22. In breach of its obligations pursuant to the 2020/2021 Policy, the first defendant has failed to extend to the plaintiff indemnity for the Toga Claim under the 2020/2021 Policy … 23. The plaintiff has suffered damage and will continue to suffer damage as a result of the failure of the first defendant to grant indemnity for the Toga Claim under the 2020/2021 Policy. Particulars i. The costs of rectification for the Works are $4,018,481.40 plus GST; and ii. Further particulars to be provided."
4. A similar pleading was also made by paragraph 23AA(g)-(h) of the Second Further Amended Commercial List Statement. The Underwriters joined issue with those allegations.
5. The Underwriters did not open on the basis that a damages claim was unavailable to Absolute Tiling. Instead, the following was said in opening: "The other issue, just in terms of relief, [is] that the primary prayer for relief is a declaration that the plaintiff is entitled to indemnity, There's also a claim for damages apparently in the alternative. It's not entirely clear to us how those two can sit together, and what's actually being pressed, and whether quantum is truly in issue at the moment. But no doubt that will become apparent from my friend."
6. Senior Counsel for Absolute Tiling responded that, under the terms of the 2020/21 Policy, the Underwriters were required to indemnify and to keep indemnified Absolute Tiling, and, in refusing to do so, the Underwriters have thereby "breached the terms of the indemnity provisions under the policies" such that "an action for damages [is] enlivened by virtue of that breach". He also noted that the issue of quantification was addressed by the reports prepared by Mr Whyte and Mr Zakos which had been served, respectively, by Absolute Tiling and the Underwriters.

Scope of Rectification Works

1. In their joint report, Mr Taylor and Mr Drakakis agreed that, given the current condition of the waterproofing on the walls at Harbourside Balmain, it will be necessary to re-waterproof the walls prior to the installation of a new cladding system, and that a "new mechanically fixed stone cladding system with stone cladding similar in appearance to the existing stone should then be installed".
2. There were three specific points of dispute between them: 1. first, Mr Taylor was of the view that all of the existing cladding should be removed and replaced, whereas Mr Drakakis considered that there was no need to remove the coping stones (which sit on the top of walls); 2. secondly, Mr Taylor was of the view that it was necessary to remove the row of pavers next to the walls so as to allow for the mechanical fixing of tiles to the bottom of walls, while Mr Drakakis considered that a workaround could be adopted which would make it unnecessary to incur the costs of removing any pavers when performing the works; and 3. thirdly, Mr Taylor made an assumption that there would be a restriction on working hours, while Mr Drakakis was of the view that any such restriction was unjustified and unreasonable.

Coping (or Capping) Stones

1. The terms "coping stones" and "capping stones" were used interchangeably in the evidence to refer to those stone tiles which lie on the top of walls (as opposed to those tiles which "clad" the sides of walls).
2. Mr Taylor accepted that the coping stones are "not at risk of falling off" because they rest in place by gravity as well as by glue. There is no evidence that any coping stones have detached to date.
3. Mr Taylor's reason for proposing the removal of the coping stones was in order to ensure uniformity of appearance in the finished result. In the joint report, Mr Taylor expressed the view that: "It is almost impossible to match the appearance of a new stone cladding with the old stone coping. This would be unsightly and unreasonable for the building owners to accept."
4. He expanded on this view in the course of his examination: "The organic nature of sandstone is that … Stones from a different part of a quarry can look quite different, let alone, stones sourced a few years apart … for that stone on the side to match that stone at the top is extremely unlikely. Very hard to do. So that would then, because you are walking around down there at eye level a lot of the time that would be unsightly. So therefore, we would normally have that come off and rather than having 99% of the stone taken off and the trimming of the walls being different, aged differently, darker, or dirt and so forth, over time, even with a cleaner that would look unsightly compared to the wall."
5. Mr Drakakis accepted that the new stone cladding on the side of the walls would not have the same appearance as the old coping stones. Nonetheless, he did not consider that there was any need for the old coping stones to be removed. He gave the following evidence: "So I agree that they will be different. But I don't agree it needs to be removed for aesthetic purposes, and the reason I say that is because the rectification methodology that we're talking about applies to all of the sandstone on all of the walls. By changing this aspect of it, although it will appear different to the coping, it becomes an architectural feature, because it's uniform throughout the property. It's not a situation where you have to change or remove the coping stone in some parts of the property and not in others."
6. This led to the following exchange: "CORSARO: So your theory is that although it'll look different, it will look different everywhere? WITNESS DRAKAKIS: That's correct. And, that's what we do in the remedial space. CORSARO: But in the remedial space, when you do that, you get the consent of the owner, don't you? WITNESS DRAKAKIS: They need to be consulted. Yeah."

Removal of row of pavers

1. Mr Taylor identified that the need to remove a row of pavers in order to allow the mechanical fixing of tiles at the bottom of a wall arises in two distinct situations.
2. The first situation is where the cladding is to be replaced on walls at an internal boundary to residents' balconies. Mr Taylor explained that these balconies usually have pavers on support pads as the floor finish; that the wall cladding runs below the level of pavers; and that it was therefore necessary to remove the floor paving tile during the recladding works in order to allow the bottom wall tiles to be removed and replaced. Mr Drakakis agreed that, in this situation, "the pavers directly adjacent to the stone cladding on the walls would need to be temporarily removed (by hand) and reinstated after the new stone cladding is installed".
3. The second situation is where the tiles "are to be replaced adjacent to paths with pavers on sand cement mortar bed". Mr Taylor was of the view that in this situation it was necessary for the row of pavers adjacent to the wall to be removed. He explained that this was because the StoneClip system which is to be used for the mechanical fixing of the cladding "relies on a 2 screw fixed bottom support bracket", and therefore it is necessary for the paver to be removed "to enable a percussion drill preparation for mechanical fastenings".
4. Mr Drakakis did not disagree with Mr Taylor's evidence that it would be necessary to remove the adjacent row of pavers if a two-screw fixed bottom support bracket were to be installed for the lowest row of wall tiles. However, he proposed a workaround which would avoid the need to do so. This involved the bottom edge of the lowest stone tile on the wall being secured by an "L" bracket, which is mechanically fixed to the substrate. He explained that the configuration of the L bracket readily enables this fixing to be installed into the substrate without the need to remove adjacent pavers.
5. Mr Taylor did not dispute that it would be possible to fix an L bracket to the substrate without removing any adjacent pavers. His objection to the proposed workaround was that "an L bracket support to the lower tile as suggested by [Mr Drakakis] is not compliant to the stone clip system adopted" for the rectification works.
6. Mr Taylor was not challenged on his evidence that the L bracket was not compliant with the StoneClip proprietary system. Mr Drakakis confirmed that he had not made any enquiries in relation to this issue: "CORSARO: You'd agree with me, wouldn't you, that the L‑angle is not part of the proprietary system which is being posited for rectification works here. Correct? WITNESS DRAKAKIS: I'm not sure if it is or not. I will say this, I would be very surprised if they do not have an L‑angle system to accommodate that type of configuration. CORSARO: But you don't know? WITNESS DRAKAKIS: No, I don't. CORSARO: And you haven't bothered to find out? WITNESS DRAKAKIS: I've looked on their website, and that's the only information I have regarding that particular proprietary system."

Limits on hours of rectification work

1. Mr Taylor made an assumption that rectification works would only be able to be performed during the hours of 9am to 1pm from Mondays to Fridays. Mr Whyte has adopted this assumption in his report on the quantification of the rectification works. Mr Whyte expresses the view that this will result in "disruption and lost productivity". He has added an amount of some $588,246.84 to the cost of the rectification works, which he estimates as being the costs of this lost productivity. The basic premise is that even though the workers will only do 4-hour days, the contractor performing the works should be paid on the basis of 8-hour days in recognition of the fact that they cannot, on the days when they perform work on the Harbourside Balmain site, perform work elsewhere. Mr Whyte put the position as follows in his expert report: "From the Total estimate of the billable hour cost, I added the Extra cost of non-productive costs as the crews would still be paid a full day's wages and likely unable to relocate to another worksite for the remaining hours per day".
2. Mr Whyte accepted in the course of his examination that this added a "very significant sum to the cost" of the works and that the proposed restriction on hours was a "very unusual" restriction.
3. In his report, Mr Drakakis expressed the following views regarding the working hours restriction that was assumed by Mr Taylor: "Work Time Restrictions 18.4. In my experience, work time restrictions for remedial building work is regulated by Local Council. To be more specific, when I prepare contracts and tenders for remedial building work, I routinely obtain information from Local Councils which set out the time restrictions on the use of 'power tools', 'equipment' and 'machinery'. By reference to information derived from the Inner West Council website, 'power tools and equipment' are not permitted to be used before 8am and after 8pm on Sundays and public holidays and before 7am and after 8pm on any other day. 18.5. In light of the above, I am of the opinion that the work hour restrictions in the Taylor Report (which is limited to between 9am and 1pm - Monday to Friday) is unjustified and unreasonable. 18.6. In my opinion, having regard to the time restrictions derived from Inner West Council, I am of the opinion that the relevant rectification work may be undertaken within the usual working hours that are typically used for this type of remedial work, namely, between 7am and 4pm (Monday to Saturday)."

Cost of Rectification Works

1. Absolute Tiling and the Underwriters were both of the view that, given the matters which needed to be resolved before a figure for the quantum of the indemnity could be determined, the Court should determine those issues of principle and then give the parties an opportunity to confer, with the assistance of their respective experts (Mr Whyte and Mr Zakos), to see whether a figure for quantum can be agreed without the need for further argument. I agree that this is the appropriate course.
2. One issue of principle that separates the experts on quantum is whether there should be any allowance for lost productivity by reason of restricted working hours. For reasons given above, I do not consider that any such allowance should be made.
3. Otherwise, as set out above, I consider that the cost of the rectification works should be determined on the basis of Mr Taylor's proposed scope of works, including the need for coping stones to be removed and replaced, and the need to remove the row of pavers adjacent to walls in the two situations identified by Mr Taylor.
4. In addition, there are a number of matters which Mr Zakos has excluded from the costs of the rectification works on the basis of certain conclusions that he drew when he made site visits to Harbourfront Balmain on 15 December 2022 and 16 March 2023. In particular, Mr Zakos concluded that: 1. as at the date of his visits, works which were described as "make safe" works had commenced, and had progressed to approximately 30-40% completion; 2. the works being undertaken were not actually "make safe" works, but were instead the "recladding works", that is, the rectification works; and 3. the recladding works were not being performed in accordance with the scope of works proposed by Mr Taylor, with Mr Zakos identifying in his report around a dozen elements of Mr Taylor's scope of works which were not in fact implemented as part of the recladding works. As a result, Mr Zakos excluded from his calculations all those items within Mr Taylor's scope of work which Mr Zakos identified as not in fact being performed.
5. However, this reasoning proceeded on a mistaken assumption. The works which Mr Zakos witnessed were not the rectification works, which have not yet commenced, but were instead temporary works which are described in Mr Moore's affidavit, which have been undertaken in order to improve the aesthetics of the development and to make it safe pending the commencement of the planned rectification works. Accordingly, each of the elements within Mr Taylor's scope of work which was excluded by Mr Zakos on the basis of this mistaken assumption should be included when determining the cost of the rectification works.

GST

1. Each of Mr Whyte and Mr Zakos has included 10% GST in his calculations. Mr Zakos noted that "this percentage may not be applicable if the appropriate parties are registered for GST". Mr Whyte did not, in his report in reply, dispute this proposition.
2. Clause 5.6 of the 2020/21 Policy provides that where the Underwriters "are required to cover or pay on behalf of [Absolute Tiling] and the [Absolute Tiling] is entitled to claim an input tax credit in relation to GST the amount of such input tax credit will be deducted from any amount payable by [the Underwriters]".
3. Absolute Tiling is registered for GST. Appendix 8 to the Subcontract is a "Form of Recipient Created Tax Invoice Agreement". In paragraph 4 of this document, Absolute Tiling "acknowledges that it is registered for GST at the date of this agreement and that it will notify [Toga] if it ceases to be registered". Further, by clause 42.5 of the Subcontract, Absolute Tiling gave a warranty that it is, and will continue to be, registered for GST. There is no evidence that this position has changed.
4. Having regard to those matters, no allowance should be made for GST in the calculation of the amount payable by way of indemnity under the 2020/21 Policy.

Builder's Overhead and Profit

1. Each of Mr Whyte and Mr Zakos has applied a 10% uplift for "Builders Overhead and Profit". Mr Whyte explained that this uplift was based on his "own experience in preparing tenders and estimates over the years" and that, having regard to this experience, "10% is a fair and reasonable percentage for Overhead and Profit on this type of work, where there is little risk to the builder". Mr Zakos did "not cavil" with Mr Whyte's assessment in this regard and also adopted the 10% uplift.
2. In his report, Mr Whyte indicated that the Overhead element of this uplift related to "offsite Overheads". In cross-examination, he described this element as relating to "the running of the office" and indicated that, of the 10% figure, an uplift of 2.5% was allowed for those costs and an uplift of 7.5% was allowed for the "profit element that you'd hope to get out of every job".
3. While the experts agreed that the inclusion of a 10% uplift for profit and overheads is appropriate when preparing a tender or estimate for work of this type, their agreement on this matter is not determinative of whether such an uplift should be included in the calculation of the quantum of indemnity payable under the 2020/21 Policy.
4. The Underwriters' obligation under the 2020/21 Policy is to indemnify Absolute Tiling for loss suffered by a Claim. The Insuring Clause (cl 1.1) refers to "civil liability for compensation (which includes the claimant's legal costs and expenses) arising from any Claim". Absolute Tiling is obliged to perform the rectification works at no cost to Toga. Mr Fahd has indicated to Toga that Absolute Tiling will commence this rectification work when its entitlement to indemnity under the 2020/21 Policy is resolved. If an amount is included in the indemnity for Overhead and Profit, Absolute Tiling will receive a windfall amount from the Underwriters, namely, a profit and a contribution to its overheads (amounting, on Mr Whyte's calculations, to some $0.58m), which does not represent either any amount that Absolute Tiling is liable to pay Toga or any cost that Absolute Tiling will incur as a result of Toga's claim.
5. Absolute Tiling did not advance any submissions as to why it should be entitled to such an uplift. It did not point to anything in the 2020/21 Policy to support the contention that the Underwriters are obliged to pay an amount representing a profit margin and a contribution to overheads in respect of rectification work performed by Absolute Tiling.

Rise & Fall

1. Each of Mr Whyte and Mr Zakos included amounts for "Rise and Fall": that is, for increases over time in the price of the components of their estimates. Mr Whyte's initial report was prepared in June 2022 and estimated the cost of works as at that date. Mr Whyte added a 5.8% uplift for cost escalation for 2022 and 2023, and a further 4% uplift for cost escalation up to 31 December 2024. Mr Zakos agreed that these percentage uplifts were appropriate when determining the cost of performing the rectification works in 2024.
2. The Underwriters advanced several arguments against any such uplift.
3. First, the Underwriters noted that Absolute Tiling was obliged to rectify the cladding works "promptly" and that, despite Toga demanding in early 2021 that this rectification work be undertaken, Mr Fahd told Toga that Absolute Tiling would not do so "until the insurer pays the claim". The Underwriters argued that the inclusion of an allowance for price increases from 2022 onwards would, in effect, indemnify Absolute Tiling "for its own failure to perform its contractual obligations".
4. This submission ignores that, prior to these demands being made in early 2021, the Underwriters had rejected Absolute Tiling's claim for indemnity in late 2020. I have found that this was in breach of their obligations under the 2020/21 Policy. If the Underwriters had not breached their obligations, Absolute Tiling would likely have promptly performed the rectification work in early 2021. In those circumstances, any increase in the costs of the rectification works which has resulted from the time taken to establish Absolute Tiling's right to indemnity under the 2020/21 Policy represents a cost that will have been incurred as a result of the Underwriters' breach of the terms of the 2020/21 Policy and should be borne by the Underwriters.
5. Secondly, the Underwriters referred to the terms of Schedule 3A to the Subcontract, headed "General Preliminaries Specification". Paragraph 8.1 of that Schedule provided as follows (emphasis in original): "The Subcontract Amount shall not be subject to adjustment for rise and fall. All prices are fixed for the duration of the project (i.e. until the last stage of the Works under the Head Contract)". The Underwriters submitted that, in light of that provision, "it would be a strange result if Absolute [Tiling] were nonetheless able to claim an amount for rise and fall from its insurer for performing rectification works under the Subcontract".

Contingency

1. Each of Mr Whyte and Mr Zakos has applied a 2.5% uplift as a "Contingency". Neither of the experts addressed this element of the costing in their reports.
2. In the course of their examination, Mr Whyte and Mr Zakos explained the basis of this uplift. Mr Whyte gave evidence that "Contingency is always applied … in pricing work, because there are always some unknowns, and builders like to have a little bit of leeway I suppose you'd call it, when you price a job". He noted that if this was an "open site", the contingency factor might drop to zero, but "where there are walls hidden behind facings, as they are at the moment, you don't know really what confronts you once you start to open it up". He agreed that the Contingency was, in effect, an amount intended to compensate the tenderer for assuming the risk of those unforeseen matters.
3. Similarly, Mr Zakos explained that any contractor quoting for this work would add an element for contingency, explaining that: "the sort of contingency we're talking about is like if you're doing these sort of walls, block walls, you may have a part where you're trying to nail a stone slip on and you puncture the wall; you've got to go back and patch that or if you're grinding the wall too hard, you break a bit of the block work". Mr Zakos agreed with Mr Whyte that this uplift should be included for the purpose of determining the reasonable cost of the rectification works.
4. The Underwriters argued that such an allowance was "evidently a convention of risk allocation in commercial tender agreements", but that it was not appropriate to include any such allowance when determining the quantum of the indemnity under the 2020/21 Policy. I do not accept this submission. The experts have agreed that there is, in the rectification work under consideration, a real risk of there being a need for additional work as a result of unforeseen events, and have agreed on the appropriate uplift to allow for such additional work in respect of this particular project. Having regard to their evidence, it is necessary to include an allowance for contingency in making a determination of the cost of rectification works and in order to ensure that the contractor is compensated for the cost of those works.
5. For those reasons, the quantification of the costs of the rectification works should include the agreed Contingency allowance.

Remaining Issues

1. There were a number of other issues separating Mr Whyte and Mr Zakos, about which the parties did not make any submissions in closing addresses.
2. For example, there was a dispute about whether the stone clips would cost around $6 each or around $8 each, and whether the time to install each clip would be around 3 minutes or 5 minutes.
3. I will give the parties an opportunity to confer, in the light of these reasons, to see whether the outstanding issues in relation to quantum can be agreed. If not, it will be necessary to give consideration to the steps required to resolve any outstanding dispute. Depending on the nature and scope of such dispute, it may be appropriate to make orders for a reference of the outstanding matters to a referee appointed by the Court for inquiry and report.

orders

1. None of the parties made any submissions about costs. Unless any different or other order is sought, it would be appropriate in respect of each claim for costs to follow the event. I will give the parties an opportunity to be heard on whether any other form of order should be made.
2. For the reasons given above, I make the following orders. The Court: 1. Directs the parties to bring in short minutes of order, by 5pm on 8 May 2024, to give effect to these reasons for judgment, including orders that deal with quantum and costs, insofar as those matters can be agreed. 2. Directs that insofar as orders to give effect to these reasons for judgment, including orders dealing with quantum and costs, cannot be agreed: 1. the parties exchange, by 5pm on 8 May 2024, and provide to my Associate, the orders which each party proposes for the resolution of any outstanding issues; and 2. the matter be stood over for directions at 9.30am on 13 May 2024, or on such other date as may be arranged with my Associate.

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