FAI GENERAL INSURANCE V GALLAGHER [2000] NSWSC 453

4 THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION ADMINISTRATIVE LAW LIST

30007/00 FAI GENERAL INSURANCE COMPANY LIMITED v ROD GALLAGHER & 2 ORS

1 HIS HONOUR: This is an appeal from a decision of the Fair Trading Tribunal instituted under the Fair Trading Act 1987, the decision being dated 2 January 2000. By that decision the Tribunal held that a provision, cl 3.1 in a Master Home Warranty Policy issued by the plaintiff, FAI General Insurance Company Limited, to a builder, General Western Homes International Pty Limited, was a limitation on liability not authorised by the provisions of the Home Building Act 1989 and the regulation made under that Act. 2 The appeal is brought pursuant to s61 of the Fair Trading Act. This is an unfortunate case. Mr and Mrs Gallagher, the defendants, entered into a building contract with Great Western Homes International on 2 April 1998 for the construction of a home to be built for them at Cecil Hills. The builder has not completed the work and is either under administration or in liquidation; it does not really matter which. From what was said by the Tribunal it is unlikely that any claim made by Mr and Mrs Gallagher by way of proof of debt would result in any large recovery by them of their loss as a result of breach of the building contract. 3 They made a claim against the plaintiff, FAI, claiming to be entitled to do so as beneficiary under an insurance contract issued to the builder by FAI dated 26 June 1998 for a period of insurance from 24 June 1998 to 24 June 1999. 4 The insurer refused indemnity on the basis that the contract between the builder and Mr and Mrs Gallagher was not contracted work in respect of which the certificate of insurance was given because the contract for that work was entered into prior to the period of insurance commencing. 5 The building contract was clearly a contract for residential building work within the meaning of the Home Building Act. Under s18B of that Act when a licensed builder carries out residential building work certain warranties are implied in any contract by that builder to do that work. 6 Section 92 of the Home Building Act provides in subs 1 that:

A person must not contract to do any residential building work unless a contract of insurance that complies with the Act is in force in relation to the proposed work. 7 While that provision might give rise to some difficulty in individual contracts in that the contract price which has to be included in the various documents would have to be arrived at prior to the insurance certificate becoming available, that difficulty does not arise in the case of a blanket policy of the type relevant to the present appeal. 8 Section 94 of the Home Building Act provides that a builder who enters into a contract in contravention of s92, namely without having in force the necessary contract of insurance, is not entitled to take any action or enforce any other remedy for breach of the contract. In other words, the builder cannot get paid if there is not in force the necessary contract of insurance. 9 Section 102 of the Home Building Act sets out the general requirements for contracts of insurance required to be in force before a contract to do residential building work is entered into. The insurance required under s102 must be of a kind approved by the Minister and provide a certain level of cover. In particular, s102(4) provides that any limitations on liability must comply with any requirements of the regulations. 10 The relevant regulation is the Home Building Regulation 1997. Clause 45 is headed "Limitations on Liability and Cover". It provides as follows:

An insurance contract may contain the following limitations on liability under the contract

and then sets out various limitations including a limitation on recovery of liquidated damages for delay, a limitation relating to owner/builder work and a limitation in respect of claims for damage resulting from reasonable fair wear and tear or failure to maintain the building work. 11 I consider that the intent of s 102(4) and cl 45 of the regulation read together is that the limitations on liability which can be included in an insurance contract are restricted to those which are set out in regulation 45. As I have said, FAI issued a policy to Great Western dated 26 June 1998 stating that the period of insurance to be 4pm 24 June 1998 until 4pm 24 June 1999. Section 2 of the policy is a definition section. "Indemnity Period" is defined so as to be that required under the provisions of the Home Building Act relating to insurance, warranties and non-completion of work. "The policy period" is "the period specified in the schedule and each succeeding period for which the insurer renews this policy". The policy period was that period which I have set out. "The owner" under the policy is the person for whom the work is to be done which in this case would be Mr and Mrs Gallagher, they and their successors in title being the insured as defined. 12 Section 3 of the policy is the indemnity section. Clause 3.1 is as follows:

In consideration of the payment of the premium for this Policy as specified in the Schedule and the premium for each succeeding period after the policy period specified in the Schedule for which the Insurer renews this Policy, and subject to the Conditions of Cover and the Exclusions, Limitations and Excess, the Insurer will indemnify the Insured against the following losses or damage arising and the subject of a claim made during the indemnity period in respect of the work (a) loss or damage resulting from noncompletion of the work because of the insolvency or death of the contractor or because, after due search and inquiry, the contractor cannot be found; and (b) loss or damage arising from a breach of the statutory warranty but only if the contract is made during the policy period. 13 The contract in question here which would otherwise be the subject of insurance was not made during the policy period because it was made in April and the policy period commenced on 24 June. The decision of the tribunal can be summarised by saying that the tribunal found that cl 3.1 of the insurance policy is an unauthorised limitation upon liability. Various reasons were given for this which it is not necessary to go into in any detail. The Tribunal considered that the clause should be construed contra proferentum but that could only be a relevant consideration if there were some doubt as to the correct interpretation. 14 The provisions of s92 and s94 of the Home Building Act require insurance cover at the time of entry into the contract for the building work. Those provisions do not refer in any way to insurance against breaches of a building contract occurring during a particular period. Once it is decided what insurance cover is required and the time at which it is required then I consider that it is not possible to say that a clause in a policy granting indemnity to the owner or successors in title but only in respect of contracts made during a policy period is a limitation on liability under a policy rather than being a provision of cover under a policy. Limitations on liability in ordinary insurance policies generally relate to knowledge of insured persons, conduct of insured persons, particular happenings and particular hazards. A common provision of all insurance policies is to provide for a period of insurance; whether the policy be for indemnity against claims made or claims arising during that period. Most contracts of insurance are annual contracts. A period of insurance is not a limitation on liability. I should point out that had the building complied with the law then the Tribunal decision would mean there was double insurance for the claim in question. 15 I have come to the clear conclusion that s102 and reg 45 do not prohibit the inclusion in the policy in question of cl 3.1 which in my view is there to give effect to the clear intention of ss 92 and 94 of the Home Building Act. I assume that the builder in question had no policy in force prior to the one in respect of which the present claim is made and it follows from what I have said that is the reason why Mr and Mrs Gallagher are left in the unfortunate position in which they will be left as a result of my decision. 16 I should say that there is in the documents attached to the affidavit of Miss Hasofer sworn 7 March 2000 a document under which Mr and Mrs Gallagher state that they asked for a copy of the insurance, saw it and were satisfied that cover had been given to them. I can understand why they would have come to that conclusion. If the builder were solvent then any loss that they suffered by relying on what might be thought to be a representation of proper insurance might have been recoverable by them. They will not be bound to pay for any work done for which they have not so far paid. But that, of course, will not satisfy the loss which they may have suffered by breach of contract by the builder. 17 The result of my determination is that the decision of the Tribunal should be set aside and, as the Court is empowered under s61(2) of the Fair Trading Tribunal Act 1998 to make such orders as it thinks appropriate in the light of its decision, a further order should be made that the application to the Tribunal be dismissed. 18 It has been agreed between the parties that no costs will be sought by the plaintiff as against Mr and Mrs Gallagher. 19 I order that the decision of the Fair Trading Tribunal in application number BU 1999/07408 between the defendants and the plaintiff be set aside. In lieu thereof I order that the said application be dismissed. No order as to costs. The exhibit can be returned.

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