The house is very large and the external walls are finished with a light cream coloured render. The render material has not been painted.

3

The purchase of the property was settled just before Christmas 2001 and shortly afterwards, in January 2002, Mr De Lutis noted that the render on the exterior of two walls was bubbling.

4

On 25 January 2002 the Applicant submitted a claim to the Respondent with respect to the bubbling and blistering in the render. The claim was accepted by the Respondent and the Applicant was requested to obtain some quotations for repairing the problem. He had some contractors visit the house and one of them pointed out that, apart from the bubbles, there were numerous small rust stains in the render to all the external walls. On 30 November 2002 he wrote to the Respondent enclosing two quotes and stating:

"It obviously will be a surprise that the amounts are more than originally anticipated. The rendering has a lot of rust stains appearing throughout all external walls of the house. This will be a further claim on my original claim of render blistering to front patio brick wall and lower western wall.

I have been advised that all external walls will need total repair as the rust stains will continue to appear."

The quotations attached to this letter were for $165,280 and $187,209 respectively. The scope of works for each quotation involved re-rendering all walls. This would not have been necessary simply for the claim that the Respondent had accepted namely, the blistering in only two of the walls. It does not appear that any formal claim was made by the Applicant with respect to the rust spotting but the Respondent accepted it as a claim and on 20 March 2003 it confirmed acceptance of the claim with respect to the blistering of the render but rejected the claim with respect to the rust spotting on the ground that it would have been apparent at the time the Applicant settled the purchase of the property and that:

"...final payment is an indication of acceptance of this issue."

5

Following the rejection of the claim for rust spotting this proceeding was commenced seeking to have that decision reviewed.

6

I am satisfied from the evidence of the Applicant and his brother, who bid on his behalf at the auction, that neither of them noticed the rust spotting on the property at or before the time of purchase and that the Applicant only noticed the rust spots when the contractor who arrived to prepare the quotation for the blistering pointed them out to him.

7

Evidence was also given by one of the estate agents involved in the sale, Mr Delaney. He said that he did not notice the rust spots at the time of sale and that no one brought them to his attention. He was not aware that any intending purchaser raised the issue or took the rust spots into account in determining how much to bid for the property.

8

From the evidence of the Applicant and his brother it is clear that the Applicant paid considerably less for the property than he had been prepared to pay and that the rust spots played no part in his assessment of its value. There were a number of other bidders and competition at the auction appears to have been quite keen. It cannot be known whether any of these other bidders noticed the rust spots or took their presence into account in making their bids.

9

The auction at which the property was purchased was a mortgagee sale. The previous owner was Wong's & Sons (Property) Pty Ltd ("Wong's") which entered into a domestic building contract to construct the house with the builder, Alan Miller Constructions Pty Ltd ("the Builder"). Both companies are now in liquidation. Proceedings were taken in this Tribunal on 11 June 1999 by the Builder against Wong's for payments of monies said to be due under the contract. In October 1999 Wong's filed an amended counterclaim which included amongst the list of alleged defects, the following:

"There are some rust spots in the external render of the house. These are not yet extensive but need to be checked from time to time as they could now become more numerous. They result from moisture coming in contact with iron impurities in the render material. (If the rust spots increase the cost of rectification could rise to the order of $50,000.)"

10

Only $2,000 was claimed at that stage. A further amended counterclaim dated 9 November 2000 was later filed, alleging that the rust spotting was then "widespread" and claimed a rectification cost of $116,246. In relkated proceedings (D98/1999) issued on 30 July 1999, Wong's took proceedings against the architect alleging the same defect. Neither proceeding proceeded to a hearing on the merits. The first one was dismissed for non-compliance with interlocutory steps and the second was struck out with a right to apply for reinstatement.

11

One of the expert witnesses who had been engaged by Wong's to inspect the property was Mr John Coghlan, a well known and respected building expert. He was also instructed to carry out an inspection and report at the request of the Applicant. The relevant passages in his report are as follows:

"I inspected the render around the residence. There were rust spots evident on the surface of the render. These were quite extensive, although fairly faint in colour. The rust spots, while apparent, did not stand out against buff colour of the render. With the passing of times these rust spots - which result from moisture accessing iron impurities in the render - are likely to become more extensive and more apparent over the next two or three years."

12

Mr Coghlan referred to the following passage in his earlier report that he prepared for Wong's:

"There are some rust spots in the external render of the house. These are not yet extensive but need to be checked from time to time as they could now become more numerous. (They result from moisture coming in contact with iron impurities in the render material.) If the rust spots increase the cost of rectification could rise to the order of $50,000.

13

It would appear that this passage in his earlier report accounts for the original counterclaim of Wong's in the proceeding involving the Builder.

14

Mr Coghlan continues in his present report as follows:

"The existence and significance of these rust spots would not have been readily apparent to an intending purchaser if they inspected the dwelling some two years ago, particularly if that person were a lay person - not familiar with rust spotting of render. The spots are now worse than when I first saw them and are likely to have been becoming worse with the passing of time. The extent, size and intensity of the rust spots tend to increase over time as moisture has the opportunity of penetrating the render and further affecting the impurity. Commonly this can occur for 5 to 6 years. The actual time varies from unit to unit and is related to the presence of the impurities, the thickness of the render and the amount of moisture present.

This is undoubtedly rust spotting in the render and that is a building defect. Whilst there is clear evidence that the spots were noticeable in 1999, they were minor at that time and in my opinion they could well not have been noticed by a lay person not experienced with defects in render."

15

Mr Coghlan's inspection took place on 22 August 2003, that is, 22 months following the auction.

16

The property was inspected on behalf of the Respondent by Mr Stephen Zsembery. He inspected the property on 7 November 2003 and took samples of the affected render. He formed the opinion that the stains were caused by black spots containing elemental iron in the form of ironstone. He said that the spotting was caused by a reaction between the ironstone in the render and an acidic substance used in the render. He said the most likely source of the ironstone was the sand used. He said:

"Considering the age and condition of the external walls the presence of 'rust spotting' is not immediately evidence. However closer inspection reveals the presence of a reasonably uniformly distributed individual brown spots on the surface of the external wall.

On the basis (of) counting the number of spots present on the face of the piers on the east end of the house, facing the swimming pool and on a section of the west wall with dimensions of 1.8 x 1.8 metres, I estimated that on the surface of the external walls there are around 12 to 15 brown spots per square metre."

As to the likely prognosis he believed that there was a good chance that after nearly 5 years of exposure the extent of spotting was not likely to increase. His report does not appear to contradict Mr Coghlan's report.

17

The hearing before me took a little over a day and involved a site inspection. At the inspection, the rust spotting appeared generally on the external render and in most places was reasonably uniform although in some places the spots are not so numerous. They are not immediately obvious unless one is looking for them and the effect they have on the appearance of the house is subjective. It does not seem to me that they really detract from the appearance of the house unless one knows they are there and is concerned about their presence. I accept Mr Coghlan's evidence that they constitute a building defect in that it was not intended that the render would show stains of this nature and they only appear as a result of an ingredient in the render that should not be there.

18

Counsel for the Applicant, Ms Hannon, submitted that the presence of the stains was a building defect and that as a subsequent owner of the property the Applicant was entitled to indemnity with respect to them and the claim in this regard ought to have been accepted.

19

Counsel for the Respondent, Mr Stuckey, submitted that the spots were apparent at the time of the sale and that the property the Applicant purchased was a house having this characteristic. He pointed out that the price of the house was substantial and it was reasonable to assume that the price it fetched at public auction reflected its value as it then was, which would have been that of a house with these rust spots. He referred to a photograph (Exhibit "1A") taken by the Applicant in January 2002, shortly after moving in. This shows part of the wall affected by bubbling and the small area depicted in the photograph shows, on my counting, approximately 15 rust spots.

20

Mr Stuckey relied upon two decisions of this Tribunal. In Winter-v.- Housing Guarantee Fund and Gray, an insurer rejected a claim by the purchaser of a property with respect to defective brick work on the ground that the defects were "obvious and would have been noticed prior to purchase". The Tribunal stated (at page 4 of the decision):

"In the result, the Tribunal's view is that the observation or ready observability of the defect or defects prior to purchase does not of course render a defect not a defect. However, a prospective purchaser may have clearly observed the situation which constitutes a defect and not been offended by it (indeed, may have positively accepted) the situation. In those circumstances, it will be untenable for the purchasers to later attempt to establish loss - particularly loss of an aesthetic nature. Consequently, depending whether the observation or ready observability is demonstrated and accepted, it may negate the loss or damage which may otherwise be suffered and consequently the cost which the approved guarantor is obliged to meet in honouring its obligation to make good, particularly in the case of a defect giving rise to a visual or aesthetic loss."

21

In that case the Tribunal found that the Applicants had had ample opportunity to inspect the property before purchase, had obtained a pre-purchase report which referred to many items (but not the one they then complained of) and did not raise the defective brickwork as an issue until it was pointed out to them 7 years later. It found that the defect was aesthetic rather than structural but would not have been observable to any ordinary person. It concluded that no loss had been demonstrated.

22

In the other case of Cameron -v.- Housing Guarantee Fund Limited & Anor (1 July 2003 - unreported) the Applicant purchased an incomplete property at a mortgagee's auction after inspecting it with a registered builder. A number of problems were pointed out to the Applicant by the registered builder during the inspection. In particular, it was pointed out to him that the balcony tiles were drummy and the grouting was cracked. The Tribunal said:

"I accept Ms Curtin's submission that the fund is required under the Act to indemnify the Applicant against any loss. Since it was quite apparent at the time of the purchase that:

(a) there were no expansion joints between the tiles;

it is reasonable to find that the price paid by Mr Cameron for the property reflected its then apparent state and so he has suffered no loss in regard to those matters.

However if, when the tiles are removed, it should be found that there are other defects, such as a lack of a proper membrane or any other defect that was not apparent at the time of the purchase, then Ms Curtin's argument will not apply and any such defect discovered will need to be the subject of a further claim. All that is disallowed in this proceeding is the claim with respect to the matters of which Mr Cameron was aware at the time of purchase."

23

The defects of which the Applicant was aware in that second case were quite apparent to anyone inspecting the property and so could reasonably have been expected to have been reflected in the price that the successful bidder at the auction paid for it. Moreover, the applicant was aware of them and purchased the property in that condition.

24

I accept Mr Stuckey's submission that the Applicant and indeed anyone else who looked at the walls of this house at the time of the purchase must have seen these spots, although they may not have actually noticed them for what they were. I accept that there were probably not as many then as there are now but there would still have been a significant number of them and they must have been seen.

25

If I buy a damaged article knowing that it is damaged, that damage that I knew existed could not cause me any loss. I bought it knowing that it was in that condition and the price that I paid for it was the price that I was willing to pay for the article with that damage.

26

However, if I had bought the article not knowing that it was damaged, I would have suffered the loss if I had paid for an undamaged article and received a damaged one. The measure of my loss would be the cost of restoring the article if it could be restored, or if it could not, the cost of replacing it with an undamaged article of the same description.

27

Where however I buy at auction a property that has a defect so patent that it must reasonably be supposed that it would have been known to the parties bidding at the auction then the price that I pay must be expected to represent the value of the house in its apparent state that is, with the patent defect; in this case, the blemishes caused by the rust spotting. Of course, as was pointed out in Cameron's case, this argument holds only for patent defects that must be presumed to be already reflected in the price paid by the purchaser.

28

Ultimately, it is a question of fact. The duty of an insurer is to indemnify against loss. It is a question of fact whether there has or has not been a loss suffered. I am not satisfied in the evidence of this case that the Applicant has suffered any loss. It appears that the auction was well attended and the bidding was competitive and spirited. The house was a very expensive one and it might be expected that the parties bidding would have taken care to satisfy themselves as to its condition before bids of this magnitude were made.

29

For all these reasons the case must fail, since the contract of insurance is only a contract of indemnity and if there is no loss demonstrated there is nothing to indemnify. The application will therefore be dismissed.