Dore v Housing Guarantee Fund Ltd [2003] VSC 61

6. It is unnecessary to consider the circumstances relied upon for seeking an extension of time for bringing the application for leave to appeal because the parties have agreed that the plaintiff should have an extension of time and it will be ordered that, insofar as necessary, the time for bringing the application for leave to appeal is extended to 28 January 2003.

9. Section 148 (1) of the VCAT Act permits a party to appeal to the Trial Division from an order of VCAT on a question of law. The parties are in agreement that a question of law arises and that leave to appeal should be granted to the plaintiff in relation to that question of law. I am satisfied that leave to appeal should be granted but, having regard to the agreement of the parties, it is unnecessary to say more. The question of law is said to be constituted by a question concerning the proper construction of a provision in an insurance policy and of a like provision in a Ministerial Order -- again, as the parties agree that a question of law does arise and it so appears, it is unnecessary to analyse this aspect. A number of formulations of the question of law can be found in the material and were mentioned in argument. Although it is usual to define the question of law at the outset, it is unnecessary to do so in this case as the nature of the question will become clear in the course of these reasons. It will be ordered that the plaintiff has leave to appeal from the decision of VCAT, constituted by Deputy President Cremean, dated 12 December 2002, in proceeding No V306/2002. The parties further agreed that the appeal should be heard forthwith in the Practice Court.

13. The first defendant, Housing Guarantee Fund Ltd, is the administrator of the indemnity scheme provided by the State of Victoria pursuant to Part 6 of the House Contracts Guarantee Act 1987 as amended by the House Contracts Guarantee (HIH) Act 2001. The plaintiff entered into a domestic building work contract dated 16 October 2000 with the second defendant (a builder now in liquidation). Construction of the plaintiff's house (in Echuca) was commenced but not completed as a result of the builder's insolvency. However, the builder had arranged insurance protection for the plaintiff pursuant to section 135 of the Building Act 1993 with an insurer, HIH Casualty and General Insurance Ltd (HIH), also now in liquidation. It was common ground that, in the foregoing circumstances, the first defendant was liable to indemnify the plaintiff to the extent of the indemnity available under the HIH insurance policy in accordance with section 37 of the House Contracts Guarantee Act. It was accepted before VCAT that the plaintiff was entitled to an indemnity under the insurance policy for the loss suffered by her due to non-completion of her house by the builder save that the extent of the indemnity was the subject of dispute.

17. The term of the insurance policy, the proper construction of which is in issue, provided:

"The insurer shall bear no liability for claims arising from non-completion of domestic building work for any reason listed in Item (2) of the definition of Prescribed Cause to the extent that the cost of completing the domestic building work (excluding the cost of rectifying any defective building work) exceeds the contract price specified in the Schedule for the Major Domestic Building Contract by more than 20 %". [emphasis added]

23. Section 135 of the Building Act empowers the Minister by orders published in the Government Gazette to specify the type and amount of insurance builders are required to hold. The then current Ministerial Order (as amended) relating to Domestic Building Insurance provided, so far as relevant:

"5. A policy to be issued pursuant to clause 4.1 of this order shall contain terms and conditions, which have the following effect:

5.1 The policy shall indemnify the building owner ("insured") in respect of loss or damage, which results from:

5.1.3 non-completion of the domestic building work due to the:

5.5 ...the policy may exclude or limit claims under the policy:

5.5.6 made under the indemnity for non-completion of domestic building work required by clause 5.1.3 to the extent that the cost of completing the domestic building work (excluding the cost of rectifying any defective building work) exceeds the contract price under the relevant major domestic building contract by more than 20 %;

5.6 Subject to clauses 5.5 and 7, the policy shall not otherwise contain any exclusion or other provision which excludes, limits, avoids or modifies the requirements of this Clause 5 ".

(Clause 7 allowed a policy to limit the liability of the insurer to not less than the aggregate amount of $100,000 for all claims in respect of any one home)

40. The parties agreed that the question of construction was the same whether one considered the terms of the policy or of the Ministerial Order. In that regard, the policy provided that any term inconsistent with the current Ministerial Order should be read and be enforceable as if it complied with such Order.

43. The relevant facts are these. There is a minor dispute about the contract price but for present purposes I will take it to be the sum of $140,742. The estimated cost of finishing the uncompleted house is $128,172. The plaintiff has already paid the original builder the sum of $92,482.30, leaving $48,259.70 as the unpaid portion of the original contract price. The plaintiff's loss may be calculated by deducting from the estimated cost of finishing the house ($128,172) the sum not paid or "saved" under the original contract ($48,259.70), giving a loss of $79,912.30. The plaintiff says that that sum is recoverable under the insurance policy. The plaintiff submits that "the cost of completing the domestic building work", within the meaning of the disputed term in the policy, is the said sum of $128,172, which is less than the contract price, and she is thus entitled to be indemnified for her full loss of $79,912.30.

46. On the other hand, the first defendant submits that "the cost of completing the domestic building work" within the meaning of the policy is the total cost of the building work, that is, the total of the amount paid to the original builder and the amount required to finish the work. So, in this case, the cost of completing the domestic building work is the sum of $220,654.30 being the total of the amount paid to the original builder ($92,482.30) and the estimated cost of finishing the house ($128,172). The sum of $220,654.30 is more than 20% in excess of the contract price and the first defendant therefore submits that the policy restricts this element of the calculation of the plaintiff's loss to the sum of $168,890.40 (being the contract price plus 20%). The plaintiff's loss is consequently calculated, according to this argument, by deducting the contract price from the said sum of $168,890.40 resulting in the maximum loss which can be indemnified -- the sum of $28,148.40. This kind of calculation would be applicable in every case where the total cost of the work exceeded the contract price by more than 20%. In other words, it is an elaborate method of arriving at the result that the maximum loss for non-completion recoverable by an insured is 20% of the original contract price.

49. The argument advanced by the first defendant is the same as that which found favour in Bulboa v Royal and Sun Alliance Insurance Australia Limited [2002] VCAT 316, a decision of the Tribunal that involved the same term in a policy and which was followed in the Tribunal decision the subject of this appeal. In Bulboa, the Tribunal said that the phrase "the cost of completing the domestic building work" had two possible interpretations -- it could refer either to the cost of finishing the work or to the cost of the whole of the work (including the cost of the work done by the original builder). The Tribunal preferred the latter interpretation because it said that the former interpretation:

"...does not make much sense because the limitation would probably never come into operation except in cases where the works were at a very early stage of construction. If the object ... was to permit an insurer to limit its liability for completion claims, this interpretation would not seem to achieve that object. Further, it would reward an owner who overpaid the defaulting builder."

53. The Tribunal in Bulboa concluded that there was:

"a clear ambiguity or inconsistency in the words "cost of completion", that the second interpretation of the words used would promote the purpose or object of the provision... allowing the insurer to limit its liability for these sorts of claims, whereas the first interpretation would largely defeat the purpose. I therefore think that the second interpretation is the correct one."

57. In my opinion, the reasoning in Bulboa is incorrect because the ordinary and natural meaning of the words "the cost of completing the domestic building work" is the cost of finishing the work and not the total cost of the works including the amount paid to the original builder. I do not think that there is any ambiguity in these words or, for that matter, any resulting absurdity or failure to promote the purpose or object of the provision in adopting this interpretation. It may be that, as the first defendant argues, a comparison between the total cost of the works and the contract price would be more rational, but that is not what, in my opinion, is required by the words used. After all, the primary purpose of the legislation and of the insurance policy is the protection of the owner against the loss caused by a defaulting builder. The interpretation favoured in Bulboa and in the present decision under appeal distorts the natural sense of the words used and can result in a very drastic reduction in the right of an insured owner to anything approaching a full indemnity for a loss from non-completion. The particular provision in question is of course aimed at limiting the liability of an insurer but, in my opinion, that it would do so only in a few extreme cases does not ipso facto demonstrate that to be an unintended result nor does that call for an interpretation which is contrary to the ordinary meaning of the words used.

60. As a result, I accept the submission of the plaintiff that the Tribunal made an error of law and that the proper interpretation of the term of the policy (and of clause 5.5.6 of the Ministerial Order) is that it is only when the cost of finishing the work exceeds the contract price by more than 20% that this limit on an owner's indemnity comes into play in the calculation of the owner's loss. Prima facie the plaintiff is entitled to indemnity against a loss of $79,912.30, subject to any argument about the precise amount of the contract price.

63. The decision of the Tribunal is therefore set aside to the extent that it is inconsistent with the foregoing reasons and the matter is remitted to the Tribunal for further hearing and disposition consistent with the foregoing reasons and according to law.