Drummond v Gordian Runoff Ltd

JUDGMENT

1. HER HONOUR: The plaintiffs seek an order that the defendant insurer indemnify them for a "delayed claim" under a "last resort" home warranty insurance policy. These policies are issued under a statutory scheme established by the Home Building Act 1989 (NSW) to provide cover in the event that a homeowner cannot recover compensation from their builder for breach of statutory warranties imposed by the Act, due to the builder's insolvency, death or disappearance.
2. Two questions arise: 1. does section 54 of the Insurance Contracts Act 1984 (Cth) prevent an insurer from refusing a "delayed claim" where the insured fails to notify the insurer in accordance with section 103BB(3) of the Home Building Act; and 2. if not, is section 103BB of the Home Building Act invalid pursuant to section 109 of the Constitution, as inconsistent with a law of the Commonwealth.
3. Similar arguments to those advanced by the plaintiffs were rejected in Foy v Calliden Insurance Limited [2017] NSWDC 33 (Hatzistergos DCJ), which the plaintiffs say was wrongly decided. For the reasons which follow, I have come to the same conclusion as Hatzistergos DCJ.

Section 54, Insurance Contracts Act

1. Section 54 of the Insurance Contracts Act provides that an insurer may not refuse to pay claims in certain circumstances. Section 54(1) provides: (emphasis added) Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into … the insurer may not refuse to pay the claim by reason only of that act, but the insurer's liability in respect of the claim is reduced by the amount that fairly represents the extent to which the Insurer's interests were prejudiced as a result of that act… A reference in the section to an "act" includes an "omission": section 54(6)(a).
2. The effect of section 54 on an insured's failure to notify circumstances or make a claim within the timeframe required by a policy is well charted territory. One need go no further than FAI General Insurance Co Limited v Australian Hospital Care Pty Ltd (2001) 204 CLR 641, which concerned a "claims made" policy with a deeming provision, similar to the structure employed in section 103BB of the Home Building Act.
3. Under a "claims made" policy, the insurer's liability is triggered by a claim being made against the insured during the policy period. "Claims made" policies may cover claims made after the insurance period if the insured notifies the insurer during the insurance period of circumstances which may give rise to a claim, where a term in the policy provides that such a claim will be deemed to have been made during the insurance period: Greg Pynt, Australian Insurance Law: A First Reference (1st ed, 2008, LexisNexis Butterworth) at par 2.16.
4. In Australian Hospital Care, a patient advised the insured hospital that he was giving consideration to bringing a claim, but did not make a claim during the period of cover. The insured did not notify the insurer of this occurrence during the period of cover. Six months after the period of cover had ended, the patient sued the hospital. Had the insured not omitted to give notice of the occurrence, the deeming provision would have operated to convert the occurrence into a claim against the insured made during the policy. That is, if the insured's omission was disregarded, then the policy provided cover against the claim eventually made against the hospital: CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd Ltd [2001] QSC 388 at [42]. As McHugh, Gummow and Hayne JJ put it in Australian Hospital Care, if the insured became aware of an occurrence during the period of cover, "an event of the type contemplated by the contract of insurance has occurred. Any subsequent claim would be for indemnity against a demand of a type covered by the contract": at [43]. The effect of the contract of insurance, but for section 54, would be that the insurer may refuse to pay the insured's claim by reason only of the omission of the insured to notify the occurrence; the section was engaged: at [46].
5. However, McHugh, Gummow and Hayne JJ also observed, "Section 54 does not permit, let alone require, the reformulation of the claim which the insured has made. … The section does not operate to relieve the insured of restrictions or limitations that are inherent in that claim [which] vary according to the type of insurance in issue": at [41]-[42]. In Maxwell v Highway Hauliers Pty Ltd [2014] HCA 33; (2014) 252 CLR 590, the Court clarified that this "is a restriction or limitation which must necessarily be acknowledged in the making of a claim, having regard to the type of insurance contract under which that claim is made": at [23]. Put another way, section 54 does not prevent an insurer from refusing to pay a claim which is not in respect of a risk insured by the policy: Prepaid Services Pty Ltd v Atradius Credit Insurance NV [2013] NSWCA 252 at [131] (Meagher JA, with whom Macfarlan and Emmett JJA agreed).
6. The application of this constraint may be observed in Gosford City Council v GIO General Ltd [2003] NSWCA 34, which concerned a "claims made" policy with no deeming provision. No claim was made against the insured during the policy period. Following Australia Hospital Care, Sheller JA (with whom Spigelman CJ and Meagher JA agreed) emphasised the distinction between a claim not of a type covered by a policy and a claim covered by the policy but not notified within the time allowed. Only in the latter case will section 54(1) operate to prevent the insurer refusing to pay the claim: at [35]. As the insured's right to indemnity depended upon a claim being made on the insured within the period of cover and no such claim was made, section 54 did not assist: at [37].

Home warranty insurance scheme

1. Whilst section 54 of the Insurance Contracts Act needs little introduction, the interstices of the home warranty insurance scheme established by Part 6 of the Home Building Act do. The scheme has changed significantly since the insureds' policy was issued until their builder went into liquidation and a claim was made on the policy 11 years later.
2. In 1997, Part 2C was added to the Home Building Act, implying statutory warranties in every contract to do residential building work. These statutory warranties protect homeowners from incomplete and defective residential building work by requiring builders to warrant that their work will be done to a certain standard; a homeowner can take action for a breach of these warranties. In conjunction with the introduction of statutory warranties, Part 6 was added to the Home Building Act, establishing the home warranty insurance scheme. By section 92(1) of the Home Building Act, a person is prohibited from carrying out residential building work under a contract unless "a contract of insurance that complies with this Act is in force in relation to that work". Section 99(1) of the Home Building Act provides: Requirements for insurance for residential building work (1) A contract of insurance in relation to residential building work required by section 92 must insure: … (b) a person on whose behalf the work is being done … against the risk of being unable, because of the insolvency, death or disappearance of the contractor: (i) to recover compensation from the contractor for a breach of a statutory warranty in respect of the work, or (ii) to recover compensation from the contractor for any such breach.
3. The insurance must have been of a kind approved by the Minister and provided by an insurer approved by the Minister: section 102(2), Home Building Act. (Initially, at least, the approved insurers were private insurance companies.) The contract of insurance must also have complied with any requirements of (then) Home Building Regulation 2004: section 102(3) to (7).
4. When the plaintiffs' policy was issued, section 103B of the Home Building Act provided for a minimum period of cover to be provided by a home warranty insurance policy: (emphasis added) 103B Period of cover (1) A contract of insurance must provide insurance cover for loss arising from non-completion of the work for a period of not less than 12 months after the failure to commence, or cessation of, the work the subject of the cover. (2) A contract of insurance must provide insurance cover for other loss insured in accordance with this Act for a period of not less than: (a) in the case of loss arising from a structural defect within the meaning of the regulations - 6 years after the completion of the work … or the end of the contract relating to the work or supply, whichever is the later, or (b) in the case of loss arising otherwise than from any such structural defect - 2 years after the completion of the work … or the end of the contract relating to the work or supply, whichever is the later. … (3) This section is subject to any limits set out in the regulations as to the period within which a claim must be made. …
5. Section 103C provided for regulations to be made with respect to requirements for home warranty insurance, including in respect of "the period within which a claim must be made": section 103C(2)(d). Clause 63 of the Home Building Regulation 2004 then provided: (emphasis added) 63 Time limits for notice of loss or damage (1) An insurance contract must contain a provision to the effect that the insurer may not reduce its liability under the contract or reduce any amount otherwise payable in respect of a claim merely because of a delay in a claim being notified to the insurer if the claim is notified within the period set out below: (a) … not later than 6 months after the beneficiary first becomes aware, or ought reasonably to be aware, of the fact or circumstance under which the claim arises … That is, claims were to be notified within six months of becoming aware of the fact or circumstance under which the claim arose.
6. The Home Building Regulation 2004 then also included clause 63A, which had been added in December 2008 as an interim measure to counter the perceived effect of SP 57504 v Building Insurers' Guarantee Corporation [2008] NSWSC 1022. According to the Minister for Fair Trading, SP 57504 v Building Insurers' Guarantee Corporation had the potential to precipitate a crisis in the availability of home warranty insurance and thus a crisis in the building industry more broadly, where it was thought that McDougall J's judgment had the effect that there was no time limit on notifying an insurance claim. Whilst section 103B specified a minimum period of insurance cover, there was no explicit statutory limit on when the claim could be made, with the consequence that, "as long as the loss was incurred in a period of insurance, a claim could be made at any time": New South Wales Legislative Assembly, Parliamentary Debates (Hansard), 6 May 2009 at 14743 (Second Reading Speech for Home Building Amendment (Insurance) Bill 2009), 14743. The plaintiffs' case is essentially based on the same premise: as long as the claim is notified within six months of becoming aware of the fact or circumstances under which the claim arises, it matters not that the period of cover expired years ago.
7. Clause 63A then provided: (emphasis added) 63A Period within which insurance claim must be made (1) A claim under a contract of insurance must be made no later than 6 months after the beneficiary first becomes aware, or ought reasonably to have become aware, of the fact or circumstance under which the claim arises or no later than 6 months after the end of the period of cover, whichever is the earlier. … (3) A claim cannot be made later than as permitted by this clause. (4) This clause applies only to a claim made after the commencement of this clause and extends to a claim made after that commencement in respect of a loss arising before that commencement. (5) In this clause: period of cover means the period for which the contract of insurance provides insurance cover as required by section 103B of the Act. That is, a claim could not be made more than six months after the end of the period of cover.

Policy wording

1. In January 2009, the plaintiffs engaged a builder to build their home. A contract of insurance complying with sections 92 of the Home Building Act was issued, with a policy limit of $500,000. The policy wording, effective as at 1 December 2008, commenced with a recitation of the insureds' duty of disclosure, noting "This Policy is subject to The Insurance Contracts Act 1984.
2. The insuring clause provided: (emphasis italicised) We will provide insurance cover to you, subject to the terms, conditions and exclusions set out in this Policy, and in accordance with the Act and Regulation for: … b) Loss or damage arising from a breach of Statutory Warranty, being loss or damage in respect of which you cannot recover compensation from the Contractor, or have the Contractor rectify, because of the Insolvency, death or Disappearance of the Contractor; …
3. The words in bold were defined, including as follows: (emphasis italicised) Act means the Home Building Act 1989 as amended from time to time. Insolvency means the same as it does in the Act and the Regulation. Policy means this policy wording, any endorsements and the Certificate of Insurance. Regulation means the Home Building Regulation 2004 as amended from time to time. Statutory Warranty means a warranty established by the Act.
4. I do not read the policy as incorporating the Home Building Act and Home Building Regulation by reference, in particular, as the legislation, by and large, had nothing to do with the home warranty insurance scheme. Rather, I construe the policy as providing cover in accordance with the statutory scheme "as amended from time to time".
5. The insuring clause proceeded to define the "Period of Cover" in conformity with the periods of cover required by section 103B of the Home Building Act: see [13]. The policy then set out the "Claims Procedure", including: 1. A claim must be notified to us within the periods set out below: a) … not later than 6 months after you first become aware, or ought reasonably to be aware, of the fact or circumstance under which the claim arises … … 2. We may not reduce our liability under this Policy or reduce any amount otherwise payable in respect of a claim merely because of a delay by you in notifying us of a claim if the claim is notified to us within the period set out in paragraphs 1.a)… 3. Where the claim is not notified to us within the periods set out in paragraphs 1.a) …, we may reduce our liability under the Policy or reduce any amount otherwise payable because of the delay in the claim being notified to us. That is, the "Claims Procedure" was described consistently with clause 63 but not clause 63A, presumably because the latter was not gazetted until 19 December 2018, shortly after the policy wording was issued.
6. Finally, the policy concluded with clauses concerning "Other Matters" including: (emphasis added) Jurisdiction This Policy is governed by the law of New South Wales. The law of New South Wales includes Commonwealth legislation such as the Insurance Contracts Act 1984. Any rights to refuse to pay a claim are subject to section 54 of that Act.
7. Obviously enough, claims on the policy would be considered in the familiar regime imposed by the Insurance Contracts Act and its central tenet, section 54.

Legislative change

1. Whilst construction of the plaintiffs' home was underway, New South Wales Parliament made further changes to the home warranty insurance scheme to provide "a more enduring solution" than clause 63A: Second Reading Speech for Home Building Amendment (Insurance) Bill 2009, 14745. In May 2009, the Home Building Amendment (Insurance) Bill 2009 was introduced to make "it clear that a home warranty insurance contract does not provide open-ended coverage. An insurance contract covers loss only if the home owner becomes aware of the loss during the period of insurance specified in the insurance contract. … A home owner needs to actively enforce their rights. They cannot sit back and simply do nothing waiting for a builder to die or go out of business before making an insurance claim.": Second Reading Speech for Home Building Amendment (Insurance) Bill 2009, 14745.
2. According to the Second Reading Speech, section 103BA would be introduced retroactively to all home warranty insurance contracts entered into since the inception of the scheme in 1997. While the Government expressed the view that retroactive legislation should be made only when it is unavoidably necessary, "Retroactive legislation is certainly necessary in this instance to confirm the previously accepted coverage of the home warranty insurance scheme and to prevent any unintended and retrospective increase in the costs of home warranty insurance." Further, the transitional provisions would make clear that the period for notifying a claim was "replaced with a limitation on insurance cover, which has the effect that a loss needs to be notified within the period of insurance cover prescribed by section 103B."
3. On 19 May 2009, section 103BA was added to the Home Building Act, as follows: (emphasis added) 103BA Limitations on policy coverage - claims made and notified policy (1) A contract of insurance provides insurance cover in respect of loss only if: (b) … (i) the loss becomes apparent and is notified to the insurer within the period of insurance, or (ii) the loss becomes apparent during the last 6 months of the period of insurance and is notified to the insurer within 6 months after the loss becomes apparent. (2) A loss becomes apparent when a beneficiary under the contract first becomes aware (or ought reasonably have become aware) of the loss. (3) In this section: loss means loss indemnified by a contract of insurance. period of insurance means the period for which a contract of insurance provides cover.
4. The heading of section 103BA indicated, consistently with the extrinsic material, that the provision imposed a limit on policy coverage. Further, the heading of section 103BA also signalled the 'type' of policy being issued under the home warranty insurance scheme. A "claims made and notified" policy only covers a claim if the claim is both first made against the insured and notified to the insurer during the insurance period: Australian Insurance Law: A First Reference at par 2.15. Such policies may be contrasted with "claims made" policies, where the insurer's liability is triggered by a claim being made against the insured during the policy period, or "occurrence" policies, where the insurer's liability is triggered by the happening of an occurrence or loss during the policy period.
5. Of course, these types of policies do not precisely align with the policies being issued under the statutory scheme. Rather than the insurer providing cover in the event of a claim being made against the insured, the insurer is providing cover in the event that the insured is unable to recover their loss from their builder. Nor does the statutory scheme cover homeowners for loss caused by their builder's breach of statutory warranties per se but "against the risk of being unable, because of the insolvency … of the contractor to recover compensation from the contractor": section 99(1), Home Building Act.
6. The Home Building Amendment (Insurance) Act 2009 (NSW) added Part 15 to Schedule 4 of the Home Building Act, which contains savings and transitional provisions. Clause 83(1) of Part 15 provides that section 103BA extended to contracts of insurance entered into before commencement of the section. Clause 86 repealed clause 63A of the Home Building Regulations.
7. Further changes to the scheme were afoot. On 1 July 2010, the sole home warranty insurer for the State became the NSW Self Insurance Corporation - an arm of New South Wales Treasury - by reforms effected by the NSW Self Insurance Corporation Amendment (Home Warranty Insurance) Act 2010 (NSW). Part 17 was added to Schedule 4 to the Home Building Act, providing that the NSW Self Insurance Corporation is the only insurer authorised to issue new home warranty insurance in respect of residential building work done in New South Wales: clause 89. Existing approved insurers ceased to be authorised to issue new policies: clause 90(1). Of course, policies already issued remained in place; this case concerns one such policy.

Completion of works

1. In January 2011, the plaintiffs met with the builder and discussed various defects. On 27 January 2011, the plaintiffs moved into their new home. On 1 February 2011, an interim occupation certificate was issued. Shortly after moving in, Mr Drummond became concerned about defects. The builder continued to work onsite, rectifying defects until mid-March 2011.

Section 103BB

1. In October 2011, the Home Building Amendment Bill 2011 was presented to the New South Wales Parliament "as result of some recent unexpected court decisions" which were thought to pose a risk that the Home Building Act would no longer work in the way that it was intended to operate: New South Wales Legislative Assembly, Parliamentary Debates (Hansard), 13 October 2011 at 6186 (Second Reading Speech for Home Building Amendment Bill 2011), 6187. The bill addressed an "urgent issue" in respect of the time limits for making claims against home warranty insurance policies, particularly in respect of private insurers who had provided policies before NSW Self Insurance Corporation became the underwriter for the scheme.
2. In particular, "there is potential for a claim against home warranty insurance to be made at any time … this means that insurers face the real risk of unending liability for home warranty insurance claims." As a consequence of this perceived risk, insurers were not releasing bank guarantees provided by builders as security against their policies; this was causing problems in the building industry. The Minister for Fair Trading explained: To address this situation and avoid this possibility, the bill includes a number of amendments to the Act's home warranty insurance provisions. First, the bill clarifies that claims for a loss must be lodged within the period of insurance, except in cases where the loss becomes apparent in the last six months of the insurance period, in which case an additional six month claim period is allowed. The only other exception to lodging a claim inside the insured period arises in relation to last resort policies. These policies indemnify the homeowner for losses that cannot be recovered from the builder due to the builder's death, disappearance, insolvency or failure to comply with a money order of the court or Consumer, Trader and Tenancy Tribunal. In these situations, the bill allows homeowners to lodge a delayed claim, that is, a claim can be made outside the period of insurance but only where the insurer has been properly notified of the loss during the period of insurance. This provision protects the rights of homeowners who cannot lodge an insurance claim during the period of insurance through no fault of their own. The bill clarifies that in order for a homeowner to make a delayed claim they must lodge a notification in writing and diligently pursue the builder to recover the cost. … these amendments will remove the uncertainty around when claims can be made, and will facilitate the timely release of bank guarantees to builders.
3. On 25 October 2011, the Home Building Amendment Act 2011 (NSW) commenced. Section 103BA was omitted and replaced by sections 103BA to 103BC, which specified the time limits for insurance policies - issued either before or after 1 July 2002 - and added a 10-year "long stop" limit on claims under existing policies entered into before 1 July 2010.
4. Relevantly, section 103BB of the Home Building Act provides: (emphasis added) 103BB Time Limits for Policies issued from 1.7.2002 (1) A contract of insurance under this Part entered into on or after 1 July 2002 provides insurance cover in respect of loss only if a claim in respect of the loss is made to the insurer during the period of insurance. … (3) When a loss becomes apparent during the period of insurance but a claim cannot be made during that period because an insured event has not occurred, a claim can be made after the period of insurance (as a delayed claim) but only if - (a) the loss was properly notified to the insurer during the period of insurance … , and (b) the beneficiary under the contract of insurance making the claim diligently pursued the enforcement of the statutory warranty concerned after the loss became apparent. … (7) A loss is properly notified to an insurer only if the insurer has been given notice in writing of the loss and the notice provides such information as may be reasonably necessary to put the insurer on notice as to the nature and circumstances of the loss. …
5. Some of the defined terms in section 103BB are to be found in section 103BA(4), being: loss means loss indemnified by a contract of insurance under Part 6. period of insurance means the period for which a contract of insurance under Part 6 provides cover.
6. Viewed through the lens of general insurance law, section 103BB(3) is something of a statutory "deeming" provision. The bespoke nature of the home warranty insurance scheme renders the analogy imperfect, but presumably participants in the scheme would recognise the device sought to be deployed.

Defects

1. By May 2012, further defects had become apparent to Mr Drummond. More than four years later, in August 2016, Mr Drummond retained a building consultant to inspect the property. In December 2016, Mr Drummond sent the builder a schedule of defects. On 25 January 2017, the plaintiffs filed an application in the NSW Civil & Administrative Tribunal (NCAT) seeking damages for rectification of defective building work.

End of period of cover

1. The parties differ slightly as to when it is said that the period of cover under the plaintiffs' policy ended: the period of cover ended on either 1 February 2013 or 1 May 2013 for non-structural defects and on either 1 February 2017 or 1 May 2017 for structural defects. Nothing turns on the difference. Using the last of these dates, loss arising from breach of statutory warranties was apparent to the insureds by 1 May 2017. No claim was made on the insurer, nor was there any reason to do so where this was not the "loss" indemnified by a contract of insurance under Part 6. The insureds were covered for loss "which you cannot recover compensation from the Contractor … because of the Insolvency … of the Contractor": see [18].
2. That is, the period of cover came to an end without the insured risk materialising. The insureds remained entitled to make a "delayed claim" in the circumstances described in section 103BB(3). One such circumstance was that "the loss was properly notified to the insurer during the period of insurance": section 103BB(3)(a). No such notification was made on or before 1 May 2017, nor was there anything to notify. Using general insurance parlance, the insurer simply went 'off risk'.
3. Prior to commencement of the NCAT hearing on 21 May 2018, partial agreement was reached to rectify some defects. The hearing proceeded in respect of the remaining defects. On 24 May 2018, Tribunal Member D Goldstein found the builder responsible to rectify the remaining defects. A work order was issued. The builder satisfactorily completed some, but not all, of the works the subject of the work order.
4. In September 2019, the plaintiffs filed a second application with NCAT, seeking monetary compensation to rectify the remaining defects. On 25 February 2020, the second application was part-heard and stood over for further hearing on 25 June 2020. When the hearing resumed on 25 June 2020, the builder informed NCAT that his company had been placed into external administration. The proceedings were adjourned. In fact, the builder was not placed into external administration until two months' later: on 18 August 2020, the builder was placed into creditors' voluntary liquidation. As a result, the plaintiffs withdrew the second NCAT proceedings.
5. That is, the insured risk, being the insolvency of the contractor, materialised more than three years after the period of cover ended, using the last of the various dates canvassed by the parties: see [39].

Insurance claim

1. On 9 July 2020, the plaintiffs notified the insurer of a loss. On 15 December 2020, the insureds made a claim on the policy. The insurer disclaimed liability by reason of section 103BB of the Home Building Act.
2. It will be recalled that the policy wording required a claim to be notified within six months of becoming aware of the fact or circumstances under which the claim arises, being the insolvency of the builder: see [21]. The plaintiffs became aware of these facts or circumstances on 25 June 2020: see [42]. Looking at the policy wording in respect of "Claims Procedure" alone, the claim was made on 15 December 2020 and within time, albeit more than three years after the period of cover expired. Further, the insurer could not refuse to pay a claim made out of time but could only reduce its liability to the extent it was prejudiced by reason of the delay, in accordance with section 54 of the Insurance Contracts Act, which was expressly adopted in the "Jurisdiction" clause: see [22]. This is precisely the situation sought to be addressed by clause 63A, then section 103BA then 103BB.
3. The insurer does not suggest that it has suffered prejudice which warrants consideration under section 54(1) of the Insurance Contracts Act. The insurer accepts that the plaintiffs have suffered loss as a result of breaches of statutory warranties. Quantum has been agreed in the amount of $215,000, being within the limit of the policy. The insurer does not suggest that the plaintiffs failed to satisfy the requirements of section 103BB(3)(b), that is, to diligently pursue the enforcement of the statutory warranty after their loss became apparent.

SECTION 54 AND SECTION 103BB

1. The plaintiffs submitted that the effect of section 103BB of the Home Building Act was to modify the policy. Australian Hospital Care applied, where the policy was in essentially the same terms as the plaintiffs' policy as modified by section 103BB. Although the loss was not notified in accordance with section 103BB(3)(a), the policy nonetheless responded as the defendant is not entitled to refuse the claim by reason only of the failure to notify the loss by the end of the period of insurance: section 54, Insurance Contracts Act.
2. The plaintiffs submitted that whether or not section 103BB was seen as inserting an implied term or set of terms into the policy was beside the point. Section 103BB changed the "effect" of the policy and that was what section 54 of the Insurance Contracts Act fixed on. (More precisely, section 54 fixes on "the effect of a contract of insurance"). Further, section 54 must either create implied terms or do something akin to it, referring to Brennan CJ's observation in Newcastle City Council v GIO General (1997) 191 CLR 85 at 93, that the Act chiefly achieves by "statutory modification of contractual relations". (The policy expressly recognised that the parties were governed by section 54). The "effect" of the policy, after the application of section 103BB of the Home Building Act, was that that "the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into". Section 54 of the Insurance Contracts Act applied; it did not matter "[p]recisely how the Policy produced that effect": Maxwell at [27]. This case had the idiosyncrasy that the "effect" of the policy has been modified by statute, but this was said to be no reason to distinguish it. Rather, the Court should look to the "effect" of the policy after application of section 103BB, rather than the form that the legislative provision takes.
3. The plaintiffs submitted that section 103BB made no reference to section 54 of the Insurance Contracts Act, nor did sub-section (3) express itself as a limit on the scope of cover or risk insured. It was simply a provision as to when a claim could be made and was facilitative; delayed claims could be made in specified circumstances. The policy wording continued to provide that the right to refuse a claim was subject to section 54 of the Insurance Contracts Act and there was nothing in the language of section 103BB which modified the provisions of the policy wording in that respect. The New South Wales Parliament had chosen, by section 103BB(3), to make policy response dependent on notice and thus brought it within the realm of section 54 of the Insurance Contracts Act. There was no reason to think that the Parliament did not intend that section 54 would apply to the policy as modified by section 103BB, in the same way that it applies to all insurance policies throughout Australia.
4. The insurer submitted that section 103BB was intended to change the operation of existing policies to re-define the circumstances in which the home warranty insurance scheme would offer indemnity. The legislative purpose was to eliminate the difficulties posed to the home warranty insurance scheme by undefined and undeterminable liability 'tails' and to ensure the financial viability and continued operation of the scheme. Otherwise, insurers would withdraw from the scheme and the whole community stood to suffer. The extrinsic materials recognised the need for time limits on the ability to claim.
5. The insurer submitted that section 103BB changed the type of loss in respect of which the home warranty insurance scheme provides indemnity. In the case of a "delayed claim", the homeowner was indemnified for loss caused by the builder's breach of its statutory warranties, but only where the loss was the subject of a notification given within the insurance period and then only where the insured is unable to recover compensation for the loss 'because of the insolvency, death or disappearance of the contractor'. By redefining the indemnity offered by the scheme, the changes cannot be neutralised by section 54 of the Insurance Contracts Act. Where a claim does not fall within the scope of the indemnity, section 54 will not save it. Where giving notice is part of the qualification for indemnity, section 54 will not assist: Gosford.
6. The insurer submitted that the home warranty insurance scheme is a creature of statute. The New South Wales parliament can tailor the circumstances in which the scheme will provide indemnity. Changes effected to the scheme by section 103BB cannot be compared to an insurer making changes to its policy as part of its commercial arrangements. The authorities considering section 54 of the Insurance Contracts Act are directed to the latter scenario. The Home Building Act was amended in a way to remove or define cover in a way that would not attract the operation of section 54, where the section does not transform the nature of the cover provided. The Home Building Act sets out the metes and bounds of the policy cover. Section 54 does not apply to bring a claim within the policy cover.

Consideration

1. Section 8(1) of the Insurance Contracts Act provides: (emphasis added) 8 Application of Act (1) Subject to section 9, the application of this Act extends to contracts of insurance … the proper law of which is or would be the law of a State or the law of a Territory in which this Act applies or to which this Act extends.
2. The policy acknowledged that the Insurance Contracts Act applied: see [17], [22]. Noteworthy, the Insurance Contracts Act applies to contracts of insurance, not to State legislation which may prescribe the circumstances in which an insurer may pay a claim under a contract of insurance.
3. The import and application of section 54 has already been described: at [5]-[9]. As the plaintiffs correctly submitted, in considering "the effect of a contract of insurance", section 54 is concerned with substance and not form. It does not matter whether the "effect" is brought about by the insuring clause or conditions, warranties, limitations or exclusions: East End Real Estate Pty Ltd v CE Health Casualty & General Insurance Limited (1991) 25 NSWLR 400 at 403-404 (Gleeson CJ), at 407 (Mahoney JA); Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652 at 673 (Dawson, Toohey, Gaudron and Gummow JJ); Prepaid Services Pty Ltd v Atradius Credit Insurance NV [2013] NSWCA 252; (2013) 302 ALR 732 at [130] (Meagher JA, with whom Macfarlan and Emmett JJA agreed). As the Court recently put it in Maxwell v Highway Hauliers, "[p]recisely how the Policy produced that effect is not to the point": at [27].
4. But what is to the point are the opening words of section 54: the section applies "where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim." None of the authorities referred to in the preceding paragraph considered, or contemplated, that the "effect" was brought about by a State law. Rather, section 54 requires the Court to consider "the effect which the contract of insurance would, apart from the section, have in the relevant factual context": East End at 407 (Mahoney JA); see also Antico at 673 ("s 54(1) refers … to the effect of the contract"). As Chesterman J observed in McInally v HTW Valuers, "s 54 is concerned with a situation where, if an omission is disregarded, a policy of insurance would provide cover": at [43] (emphasis that of his Honour).
5. Thus, in order to determine whether section 54 is enlivened, it is necessary to consider whether the contract of insurance is the source of the insurer's right to deny the claim, noting that the insurer relies on section 103BB of the Home Building Act rather than the policy. Legislation can alter, prescribe, or approve the content of a contract using various techniques, as efficiently summarised in Herzfield and Prince, Interpretation (2nd ed, 2020, Thomson Reuters) at [29.340]-[29.390]. In essence, the parties are contending that the legislature used different techniques when enacting section 103BB of the Home Building Act. The plaintiffs contend that the legislature "modified" the contract by inserting an implied term or terms. I take this to be a reference to the technique of specifying that certain statutory terms (here, section 103BB(3)) are taken to be part of a contract. Against this, the insurer contends that the legislation operates outside the parties' contract and directly alters the rights and obligations of the parties.
6. I divert briefly to illustrate each technique. An example of the legislature specifying that certain statutory terms are taken to be part of a contract is section 13(1) of the Insurance Contracts Act, which provides: (emphasis added) The duty of the utmost good faith (1) A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.
7. Section 13 expressly implies into a contract of insurance a provision requiring each party to act towards the other with the utmost good faith: Gosford City Council v GIO General Ltd [2002] NSWSC 511 at [36] (per Bergin J). As Gageler J explained in Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788 [2022] HCA 38; (2022) 97 ALJR 1, the provision spells out the duty of utmost good faith, long acknowledged at common law but of uncertain scope and "now and by force of statute … implied into the contract of insurance": at [170] (in dissent, but not on this issue).
8. Another example is Part 2C of the Home Building Act. Section 18B provides, "The following warranties … are implied in every contract to do residential building work …". An example further afield is the Retail Leases Act 1994 (NSW), which provides that a number of statutory terms are taken to form part of a retail lease.
9. As example of legislation operating outside the parties' contract and altering directly the rights and obligations of the parties is an industrial award. The right to be paid award rates is imported by statute into the employment relationship. Unless the parties agree that the award will be a term of the contract, the award simply regulates what would otherwise be governed by the contract, "[b]ut award rates are imported as a statutory right imposing a statutory obligation to pay them": Byrne v Australian Airlines Limited (1995) 185 CLR 410 at 420 (per Brennan CJ, Dawson and Toohey JJ).
10. Another example closer to home is section 40(3) of the Insurance Contracts Act. Section 40 of the Insurance Contracts Act provides: 40 Certain contracts of liability insurance (1) This section applies in relation to a contract of liability insurance the effect of which is that the insurer's liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the insurance cover provided by the contract. … (3) Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of the insurance cover provided by the contract.
11. In McInally v HTW Valuers, it was argued that section 40(3) implied a term into the contract of insurance. Chesterman J rejected this proposition at [44]: (emphasis added) Section 40(3) does not imply into policies of insurance a term to the same effect as the subsection. Some statutes do imply terms into contracts: the Sale of Goods Act perhaps provides the best example. When it happens the legislation makes it clear that the implication is to occur. Where a statute applies a term into a contract the resulting rights and obligations created by the implied term are contractual, not statutory. In Newcastle City Council Brennan CJ referred to "the statutory alteration in an insured's rights . . . worked by subs(3)" and the imposition by the subsection of "a liability where no contractual liability exists", and a "statutory modification of contractual relations" (p91,93). To speak of the statutory alteration of the insured's contractual rights, or the imposition of a statutory liability "where no contractual liability exists" is inconsistent with s40(3) implying a term into contracts of insurance.
12. Turning then to whether section 103BB of the Home Building Act specifies that certain statutory terms are taken to be part of the contract of insurance, or whether the legislation operates outside the parties' contract and directly alters the rights and obligations of the parties, the question is one of statutory interpretation.
13. Nothing in the language of section 103BB evinces a statutory intention to insert terms into contracts of insurance through the process of statutory implication. As Chesterman J observed in McInally v HTW Valuers, when a statute implies terms into contracts "the legislation makes it clear that the implication is to occur": at [44]. Indeed, the contrast between section 103BB and section 18B of the Home Building Act - "The following warranties … are implied in every contract to do residential building work" - could not be more stark. Section 103BB does not state that the limits its prescribes are taken to be included in the contracts of insurance. The same conclusion was reached in Foy v Calliden, where Hatzistergos DCJ concluded that the Home Building Amendment Act 2011 "did not amend the policy terms": at [115].
14. Section 103BB(3) is certainly inconsistent with the policy wording in respect of "Claims Procedure". No longer can the insured simply notify a claim within six months of becoming aware of the fact or circumstance under which the loss arises. Rather, following section 103BB, the claim must be made during the period of insurance, except for "delayed claims" which can be made after the period of insurance if the requirements of sub-section (3)(a) and (b) are satisfied. Obviously enough, section 103BB changed the circumstances in which the insured was entitled to claim on the policy, and the circumstances in which the insured was obliged to pay the claim, that is, when the policy would respond. Whilst section 103BB, on its face, curtails the circumstances in which the policy will respond, the extrinsic material confirms the intention of the legislature. The legislature was concerned that the Court's interpretation of the statutory scheme departed from how the scheme was intended to operate, with the consequence that the scheme's viability was compromised and stakeholders, in particular, the building industry, may be adversely effected.
15. Having regard to the terms of section 103BB and the legislative intent, I consider that section 103BB operates outside of the parties' contract and directly alters their rights and obligations. While section 103BB presupposes the existence of a contract of insurance between the parties, the insurer's entitlement to refuse to pay a claim is sourced in the statute rather than in contract.
16. What does this mean for the application of section 54? A similar problem arose in McInally v HTW Valuers. In that case, a valuer held a "claims made and notified" professional indemnity policy. No claim was made against the valuer in the policy year. Nor did the valuer give the insurer notice under section 40(3) of the Insurance Contracts Act. The valuer sought to overcome this by a combination of section 40(3) and section 54, arguing that not giving the notice required by section 40(3) was an omission entitling the insurer to deny indemnity; section 54 was said to operate so that the insurer may not refuse to pay. Chesterman J concluded that section 54(1) did not apply to ameliorate the effect of non-compliance with section 40(3). At [43]: (emphasis in original) … Section 40(3) would have obliged [the insurer] to grant indemnity, but that indemnity would have flowed from the intervention of the statute, not the effect of the policy. In this regard the phrase, "but for this section", which appears in s 54(1) cannot be overlooked. The effect of [the insurer]'s policy, if one ignores [the insured's] omission to give notice of its negligent valuation, would not have been that [the insured] was entitled to indemnity. An insurer may not refuse to pay a claim by reason only of the fact that an insured omitted to give notice of an occurrence but, had [the insured] given notice, the insurer would still not have been obliged to indemnify. To get to that result s 40(3) must also operate. But s 54 is concerned with a situation where, if an omission is disregarded, a policy of insurance would provide cover. …
17. The same conclusion was reached by Bergin J in Gosford City Council v GIO General Ltd [2002] NSWSC 511 at [37]-[38]; upheld on appeal in Gosford City Council v GIO General Ltd [2003] NSWCA 34. In both cases, the Court's reasoning turned on the fact that section 40 provided statutory relief, rather than implied a term into the contract of insurance that would be capable of attracting the operation of section 54.
18. The same reasoning applies here. Section 54 does not apply to ameliorate the effect of section 103BB of the Home Building Act, as the insurer is prohibited by statute from paying the plaintiffs' claim. It is not the case that "the effect of a contract of insurance would, but for [section 54], be that the insurer may refuse to pay a claim." Hatzistergos DCJ reached the same conclusion, "the circumstances contemplated in s 54(1) … are not engaged": at [116]. The plaintiffs' primary contention fails.

SECTION 109

1. In the alternative, the plaintiffs submitted that section 103BB of the Home Building Act was inconsistent with section 54 of the Insurance Contracts Act. The insurer submitted that section 109 does not arise for consideration. Section 103BB does not attempt to 'restrict' or impair section 54; to the contrary, the home warranty insurance scheme acknowledges it. Section 103BB limits the offer of indemnity. Section 54 does not mean that indemnity can be sought for losses that are not insured in the first place. Section 103BB is part of the legislative structure under which indemnity is given, unlike private insurance. Section 54 does not attempt to re-write or alter the effect of legislation.

Consideration

1. The Commonwealth parliament has power to make laws with respect to "insurance, other than State insurance …": section 51(xiv) of the Constitution. "State insurance" is something of a term of art which has been used to encompass instrumentalities established by State governments to write insurance: Norsworthy v SGIC [1999] SASC 496 at [35] (Olsson J). This exception has no application here, where the relevant insurers were private insurers.
2. In the event of inconsistency between a Federal and State enactment, section 109 of the Constitution provides: Inconsistency of laws. When a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid.
3. The applicable principles in respect of section 109 of the Constitution were summarised In Jemena Asset Management (3) Pty Ltd v Coinvest Ltd (2011) 244 CLR 508 at [39]. Direct inconsistency may arise when a State law alters, impairs or detracts from the operation of Commonwealth law. Indirect inconsistency arises if it appears from the terms, nature or the subject matter of the Commonwealth law that it was intended as a complete statement of the law governing a particular matter or set of rights and duties.
4. Indirect inconsistency is unlikely to arise here, where section 7 of the Insurance Contracts Act provides: 7 Effect of Act on other laws It is the intention of the Parliament that this Act is not, except in so far as this Act, either expressly or by necessary intendment, otherwise provides, to affect the operation of any other law of the Commonwealth, the operation of law of a State or Territory or the operation of any principle or rule of the common law (including the law merchant) or of equity.
5. That is, section 7 confirms that the statute is not a code of insurance contract law and relates only to certain aspects of the law relating to insurance contracts: Akai Pty Ltd v People's Insurance Co Ltd (1996) 188 CLR 418 at 432 (Toohey, Gaudron and Gummow JJ). As Gummow J explained in Momcilovic v The Queen (2011) 245 CLR 1, such a provision requires the Commonwealth law to be read and construed in a particular fashion, as not disclosing a subject matter or purpose with which it deals exhaustively and exclusively, and not immunising the rules of conduct it creates from qualification by State law; to the Commonwealth law so read and construed, section 109 then applies and operates to render inoperative any State law inconsistent with it, such that there will be greater likelihood of a concurrent operation of the two laws: at [272].
6. That said, section 57 of the Insurance Contracts Act, "Interest on claims", does lay down a code for the payment of interest on insurance claims such that State legislation on the subject is invalid. In NRMA Insurance Ltd v Tatt (1989) 94 FLR 339, McHugh JA (with whom Hope and Samuels JJA agreed) considered that section 57 "states completely, exhaustively and conclusively the law on the subject of interest payable for periods during which a person has been kept out of insurance moneys to which he is entitled. … a State law purporting to authorise the fixing of a different rate of interest is invalid" at 355. NRMA v Tatt was followed in Fruehauf Finance Corporation Pty Ltd v Zurich Australian Insurance Ltd (1993) 32 NSWLR 735, where Giles J considered that, as a matter of construction, section 57 also governed the position in respect of interest after judgment, such that State legislation was void to the extent of inconsistency: at 743. The plaintiffs did not suggest, however, that section 54 is a code. There is no indirect inconsistency.
7. Turning to direct inconsistency, the Court explained in Jemena at [41]-[42]: … any alteration or impairment of, or detraction from, a Commonwealth law must be significant and not trivial … All tests of inconsistency which have been applied by this Court for the purpose of s 109 are tests for discerning whether a "real conflict" exists.
8. The extent of any inconsistency depends on the text and operation of the respective laws, where a proper understanding of the policy and purpose of the State Act underpins the task of construing it and identifying its operation: Jemena at [45]. Statements of legislative intention made by a Minister do not overcome the need to consider the text of a statute to ascertain its meaning: Jemena at [50]. The task always at hand is to apply section 109 of the Constitution only after careful analysis of the particular laws in question to discern their true construction: Momcilovic v The Queen (2011) 245 CLR 1 at [245] (Gummow J).
9. As I have construed section 103BB, the statute operates outside the contract of insurance and directly alters the rights and obligations of the parties. Section 54 of the Insurance Contracts Act is not engaged as the "effect" in question is not "the effect of a contract of insurance" but of State law. There is no direct inconsistency as section 54 does not apply; nor does section 109 of the Constitution. Hatzistergos DCJ reached the same conclusion: section 103BB does not attempt to restrict or impair section 54 of the Insurance Contracts Act, where section 103BB "does not define or regulate the effect of the contract of insurance": at [123].

ORDERS

1. For these reasons, I make the following orders: 1. Dismiss the Amended Summons filed on 5 August 2022. 2. Order the plaintiffs to pay the defendant's costs.

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DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 09 June 2023